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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from ---- to ----
Commission file number 000-23740
INNOTRAC CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1592285
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6655 Sugarloaf Parkway Duluth, Georgia 30097
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes ( ) No (X).
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at November 5, 2003
-------------------------------
Common Stock at $.10 par value 11,662,030 Shares
INNOTRAC CORPORATION
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements: 2
Condensed Consolidated Balance Sheets - September 30, 2003 (Unaudited) and
December 31, 2002 3
Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 2003 and 2002 (Unaudited) 4
Condensed Consolidated Statements of Operations for the Nine Months
Ended September 30, 2003 and 2002 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risks 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The following condensed consolidated financial statements of Innotrac
Corporation, a Georgia corporation (the "Company"), have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles
in the United States of America. In the opinion of management, all adjustments
are of a normal and recurring nature, except those specified otherwise, and
include those necessary for a fair presentation of the financial information for
the interim periods reported. Results of operations for the three and nine
months ended September 30, 2003 are not necessarily indicative of the results
for the entire year ending December 31, 2003. These financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in the Company's 2002 Annual Report on Form 10-K.
2
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 1,185 $ 961
Accounts receivable (net of allowance for doubtful accounts of $1,222 at
September 30, 2003 and $1,169 at December 31, 2002) ................. 14,999 14,203
Inventory ............................................................... 15,638 24,098
Deferred income taxes ................................................... 634 552
Prepaid expenses and other .............................................. 2,372 2,357
-------- --------
Total current assets .......................................... 34,828 42,171
-------- --------
Property and equipment:
Rental equipment ........................................................ 1,022 1,372
Computer software and equipment ......................................... 27,259 26,315
Furniture, fixtures and leasehold improvements .......................... 4,658 4,585
-------- --------
32,939 32,272
Less accumulated depreciation and amortization .......................... (17,073) (13,357)
-------- --------
15,866 18,915
-------- --------
Goodwill ..................................................................... 25,169 24,988
Deferred income taxes ........................................................ 8,907 7,940
Other assets, net ............................................................ 1,220 1,485
-------- --------
Total assets .................................................. $ 85,990 $ 95,499
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 4,969 $ 13,517
Accrued expenses and other .............................................. 3,309 6,626
Line of credit .......................................................... 16,991 -
-------- --------
Total current liabilities ..................................... 25,269 20,143
-------- --------
Noncurrent liabilities:
Line of credit .......................................................... - 14,372
Other noncurrent liabilities ............................................ 1,075 1,125
-------- --------
Total noncurrent liabilities .................................. 1,075 15,497
-------- --------
Commitments and contingencies (see Note 6)
Shareholders' equity:
Preferred stock: 10,000,000 shares authorized, $0.10 par value,
no shares issued or outstanding ................................. - -
Common stock: 50,000,000 shares authorized, $0.10 par value,
11,674,595 shares issued, 11,635,530 (2003) and 11,417,780 (2002)
shares outstanding .............................................. 1,167 1,167
Additional paid-in capital .............................................. 63,338 62,614
Accumulated deficit ..................................................... (4,753) (3,219)
Treasury stock: 39,065 (2003) and 256,815 (2002) shares held ........... (106) (703)
-------- --------
Total shareholders' equity .................................... 59,646 59,859
-------- --------
Total liabilities and shareholders' equity .................... $ 85,990 $ 95,499
======== ========
See notes to condensed consolidated financial statements.
3
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- --------
Revenues, net .................................................................. $ 18,545 $ 20,064
Cost of revenues ............................................................... 8,548 11,629
-------- --------
Gross margin .................................................. 9,997 8,435
-------- --------
Operating expenses:
Selling, general and administrative expenses .............................. 8,819 12,422
Special charges, net ...................................................... - 3,123
Depreciation and amortization ............................................. 1,358 1,352
-------- --------
Total operating expenses ............................................ 10,177 16,897
-------- --------
Operating loss ................................................ (180) (8,462)
-------- --------
Other (income) expense:
Interest expense .......................................................... 180 99
Other expense (income) .................................................... 1 (33)
-------- --------
Total other expense ................................................. 181 66
-------- --------
Loss before income taxes ....................................................... (361) (8,528)
Income tax benefit ............................................................. 112 3,220
-------- --------
Net loss ...................................................... $ (249) $ (5,308)
======== ========
Loss per share:
Basic ..................................................................... $ (0.02) $ (0.46)
======== ========
Diluted ................................................................... $ (0.02) $ (0.46)
======== ========
Weighted average shares outstanding:
Basic ..................................................................... 11,584 11,506
======== ========
Diluted ................................................................... 11,584 11,506
======== ========
See notes to condensed consolidated financial statements.
4
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- --------
Revenues, net .................................................................. $ 54,510 $ 60,464
Cost of revenues ............................................................... 25,706 33,644
Special credits ................................................................ - (293)
-------- --------
Gross margin .................................................. 28,804 27,113
-------- --------
Operating expenses:
Selling, general and administrative expenses .............................. 26,362 27,760
Special (credits) charges, net ............................................ (30) 1,802
Depreciation and amortization ............................................. 4,289 3,841
-------- --------
Total operating expenses ............................................ 30,621 33,403
-------- --------
Operating loss ................................................ (1,817) (6,290)
-------- --------
Other (income) expense:
Interest expense ......................................................... 581 232
Other income ............................................................. (5) (122)
-------- --------
Total other expense ................................................ 576 110
-------- --------
Loss before income taxes ....................................................... (2,393) (6,400)
Income tax benefit ............................................................. 859 2,371
-------- --------
Net loss ...................................................... $ (1,534) $ (4,029)
======== ========
Loss per share:
Basic ................................................................... $ (0.13) $ (0.35)
======== ========
Diluted ................................................................. $ (0.13) $ (0.35)
======== ========
Weighted average shares outstanding:
Basic ................................................................... 11,498 11,548
======== ========
Diluted ................................................................. 11,498 11,548
======== ========
See notes to condensed consolidated financial statements.
5
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net loss .................................................................. $ (1,534) $ (4,029)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization ......................................... 4,289 3,841
Impairment and loss on fixed assets ................................... 1 3,563
Deferred income taxes ................................................. (1,049) (5,109)
Amortization of deferred compensation ................................. 54 54
Changes in operating assets and liabilities:
Increase in accounts receivable ....................................... (796) (3,016)
Decrease in inventory ................................................. 8,460 7,273
Decrease in prepaid expenses and other assets ......................... 58 1,812
(Decrease) increase in accounts payable ............................... (8,549) 639
Decrease in accrued expenses and other ................................ (3,008) (1,700)
-------- --------
Net cash (used in) provided by operating activities .............. (2,074) 3,328
-------- --------
Cash flows from investing activities:
Capital expenditures ...................................................... (1,018) (11,592)
Earn-out payment .......................................................... - (13,727)
Payment for business acquired ............................................. (181) (360)
Sale of marketable securities ............................................. - 435
-------- --------
Net cash used in investing activities ............................ (1,199) (25,244)
-------- --------
Cash flows from financing activities:
Borrowings under line of credit ........................................... 2,619 13,407
Repayment of capital lease and other obligations .......................... (100) (208)
Loan fees paid ............................................................ (31) (50)
Purchase of treasury stock ................................................ - (448)
Exercise of employee stock options ........................................ 1,009 -
-------- --------
Net cash provided by financing activities ........................ 3,497 12,701
-------- --------
Net increase (decrease) in cash and cash equivalents ........................... 224 (9,215)
Cash and cash equivalents, beginning of period ................................. 961 9,413
-------- --------
Cash and cash equivalents, end of period ....................................... $ 1,185 $ 198
======== ========
Supplemental cash flow disclosures:
Cash paid for interest .................................................... $ 610 $ 215
======== ========
Cash refunds received for income taxes .................................... $ (1,565) $ (18)
======== ========
Noncash transactions:
Stock issued for business acquired ........................................ $ - $ 1,550
======== ========
See notes to condensed consolidated financial statements.
6
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for quarterly financial reporting are
the same as those disclosed in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December
31, 2002, except as discussed below. Certain of the Company's more
significant accounting policies are as follows:
Accounting Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Goodwill and Other Acquired Intangibles. Goodwill represents the cost
of an acquired enterprise in excess of the fair market value of the net
tangible and identifiable intangible assets acquired. The Company
accounts for goodwill and other acquired intangibles in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets". The Company tests
goodwill annually for impairment as of January 1 or sooner if
circumstances indicate.
Under SFAS No. 142, goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. Upon
completion of its analysis for impairment in the second quarter of 2002
and again in the first quarter of 2003 in accordance with SFAS No. 142,
no impairment was determined to exist at those times. Innotrac's
goodwill carrying amount as of September 30, 2003 is $25.2 million.
Stock-Based Compensation Plans. The Company accounts for its
stock-based compensation plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
Since the exercise price for all options granted under those plans was
equal to the market value of the underlying common stock on the date of
grant, no compensation cost is recognized in the accompanying condensed
unaudited consolidated statements of operations. Had compensation cost
for stock options been determined under a fair value based method, in
accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", as amended by Statement of
Financial Accounting Standards No. 148, the Company's net loss and net
loss per share would have been the following pro forma amounts (in
000's, except per share data):
7
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Net loss $ (249) $ (5,308) $ (1,534) $ (4,029)
Pro forma net loss $ (450) $ (5,558) $ (2,093) $ (4,789)
Diluted net loss per share $ (0.02) $ (0.46) $ (0.13) $ (0.35)
Pro forma net loss per share $ (0.04) $ (0.48) $ (0.18) $ (0.41)
Under the fair value based method, compensation cost, net of tax is
$201,000 and $250,000 for the three months ended September 30, 2003 and
2002, respectively and $559,000 and $760,000 for the nine months ended
September 30, 2003 and 2002, respectively.
During the three and nine months ended September 30, 2003, options
representing 101,700 and 217,750 shares were exercised, respectively.
The option shares were issued out of treasury stock.
Deferred Tax Asset. Innotrac utilizes the liability method of
accounting for income taxes. Under the liability method, deferred taxes
are determined based on the difference between the financial and tax
bases of assets and liabilities using enacted tax rates in effect in
the years in which the differences are expected to reverse. A valuation
allowance is recorded against deferred tax assets if the Company
considers it is more likely than not that deferred tax assets will not
be realized (see Note 5).
Revenue Recognition. Innotrac derives its revenue primarily from two
sources: (1) fulfillment operations and (2) the delivery of business
services. Innotrac's fulfillment services operations record revenue at
the conclusion of the material selection, packaging and shipping
process. Innotrac's call center services business recognizes revenue
according to written pricing agreements based on number of calls,
minutes or hourly rate basis. All other revenues are recognized as
services are rendered. As required by the consensus reached in Emerging
Issue Task Force ("EITF") Issue No. 99-19, revenues have been recorded
net of the cost of the equipment for all fee-for-service clients.
2. SPECIAL CHARGES AND SPECIAL CREDITS
At September 30, 2003 and December 31, 2002, the Company had
approximately $47,000 and $277,000, respectively, in accruals related
to the special charges recorded during the year ended December 31,
2000. The remaining accruals at September 30, 2003 relate to exiting
the front-end e-commerce and web hosting business. Cash payments
relating to these accruals for the three and nine months ended
September 30, 2003 were approximately $104,000 and $229,000,
respectively. The Company recognized a credit of approximately $50,000
and $1.7 million during the three and nine months ended September 30,
2002, related to gains realized on sales of inventory items and cash
collected for accounts receivable, both of which were written off as
special charges in previous periods. These amounts were recorded as a
8
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
reduction of the special charges line item in the accompanying
condensed unaudited consolidated statements of operations. We expect
that the remaining accrual, which is associated with one specific
client, will be fully utilized by the end of 2003.
During the third quarter of 2002, the Company recorded an additional
$3.1 million in special charges. This special charge was primarily
related to the impairment of capitalized hardware and software costs,
the write-down to net realizable value of specified fixed assets and
severance costs.
During the nine months ended September 30, 2003, the Company recognized
a credit of approximately $30,000 related to the favorable settlement
of a severance accrual recorded as part of the third quarter 2002
special charge. This amount was recorded as a reduction of the special
charges line item in the accompanying condensed unaudited consolidated
statements of operations.
3. FINANCING OBLIGATIONS
The Company has a revolving credit agreement (the "Agreement") with a
bank for borrowings up to $40 million that matures in June 2005. The
Company and its subsidiary have granted a security interest in their
assets and the subsidiary has provided a guarantee to the lender as
collateral under this revolving credit agreement. At September 30, 2003
and December 31, 2002, the Company had approximately $17.0 million and
$14.4 million, respectively, outstanding in borrowings under the line
of credit. The revolving line of credit agreement contains various
restrictive financial and change of ownership control covenants.
Noncompliance with any of the covenants allows the lender to declare
any outstanding borrowing amounts to be immediately due and payable.
The Company entered into an amended and restated Agreement with its
lenders on April 3, 2003. As amended, the Agreement requires the
Company to maintain a lockbox arrangement with the lenders and contains
provisions limiting borrowings under the Agreement to a specified
percentage of eligible accounts receivable and inventory, which totaled
$21.1 million at September 30, 2003 and $31.5 million at December 31,
2002. At September 30, 2003 and December 31, 2002, the Company had $4.1
million and $17.1 million, respectively, available under the Agreement.
The financial covenants require the Company to maintain tangible net
worth, as defined in the Agreement, which includes deferred taxes, of
at least $33.0 million at September 30, 2003, a debt to tangible net
worth ratio of not more than 1.5 to 1 at September 30, 2003 and a fixed
charge coverage ratio of 1.75 to 1 by December 31, 2003. The Company
believes that it may not attain the fixed charge coverage ratio
requirement at December 31, 2003. However, although there is no
guarantee, management has discussed this item with its lender and
currently believes that a waiver will be granted at year end. The
quarterly tangible net worth requirement escalates to $34.0 million at
December 31, 2003 and escalates by $250,000 for each fiscal quarter
thereafter. At September 30, 2003, the Company was in compliance with
all covenants under the Agreement.
Due to the provisions of the Agreement, which 1) requires that the
Company maintain a lockbox arrangement with the lender, and 2) allows
the lender to declare any outstanding borrowing amounts to be
immediately due and payable as a result of noncompliance with any of
the covenants, the outstanding borrowings under the Agreement have been
classified as a current liability at September 30, 2003.
9
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Interest on borrowings is payable monthly at rates equal to the prime
rate, or at the Company's option, LIBOR plus up to 225 basis points. On
August 13, 2003, the Company fixed $10.0 million of its $17.0 million
of borrowings at a 90-day LIBOR rate of 2.63%. During the three months
ended September 30, 2003 and 2002, the Company incurred interest
expense related to the line of credit of approximately $161,000 and
$53,000, respectively, resulting in a weighted average interest rate of
3.54% and 3.06%, respectively. During the nine months ended September
30, 2003 and 2002, the Company incurred interest expense related to the
line of credit of approximately $562,000 and $102,000, respectively,
resulting in a weighted average interest rate of 3.93% and 3.08%,
respectively. The Company also incurred unused revolving credit
facility fees of approximately $14,000 and $21,000 during the three
months ended September 30, 2003 and 2002, respectively, and $37,000 and
$88,000 during the nine months ended September 30, 2003 and 2002,
respectively.
Interest expense disclosed in the accompanying condensed unaudited
consolidated statements of operations includes capital lease interest
of approximately $5,000 and $17,000 for the three and nine months ended
September 30, 2003, respectively, and is net of interest income of
approximately $0 and $36,000 for the three and nine months ended
September 30, 2003.
As of September 30, 2003, the Company had outstanding letters of credit
totaling approximately $420,000 issued in connection with routine
business requirements.
4. EARNINGS PER SHARE
The following table shows the shares (in 000's) used in computing
diluted earnings per share ("EPS") in accordance with Statement of
Financial Accounting Standards No. 128:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------
2003 2002 2003 2002
---------------------------------------------
Diluted earnings per share:
Weighted average shares outstanding 11,584 11,506 11,498 11,548
Employee and director stock options - - - -
------ ------ ------ ------
Weighted average shares assuming dilution 11,584 11,506 11,455 11,548
====== ====== ====== ======
Options and warrants outstanding to purchase 1.9 million shares of the
Company's common stock for both the three and nine months ended
September 30, 2003 and 2.3 million for both the three and nine months
ended September 30, 2002 were not included in the computation of
diluted EPS because their effect was anti-dilutive.
5. INCOME TAXES
Innotrac's net deferred tax asset as of September 30, 2003 is
approximately $9.5 million. This net deferred tax asset was generated
by net operating loss carryforwards created primarily by the special
charge of $34.3 million recorded in 2000 and the net losses generated
in 2002 and the first nine months of 2003. Innotrac has a tax net
operating loss carryforward of $27.6 million at December 31, 2002 that
expires between 2018 and 2020. Although the Company has generated
financial reporting and tax losses in 2000, 2002 and the first nine
10
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
months of 2003, the Company was profitable in 2001 and prior to 2000.
Management believes that its net operating loss carryforwards will be
utilized through future earnings before their expiration. This
assessment is based on management's expectations of increased revenues,
lower selling, general and administrative expenses, reduced capital
expenditures and no impairment losses related to goodwill in the
future.
Innotrac's ability to generate the expected amounts of taxable income
from future operations is dependent upon general economic conditions,
competitive pressures on sales and margins and other factors beyond
management's control. Management considered the above factors in
reaching the conclusion that it is more likely than not that future
taxable income in the carryforward period will be sufficient to fully
realize the net deferred tax asset recorded at September 30, 2003. The
amount of the net deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.
6. COMMITMENTS AND CONTINGENCIES
Shareholder Rights Plan. In December of 1997, the Company's Board of
Directors approved a Shareholder Rights Plan (the "Rights Plan"). The
Rights Plan provides for the distribution of one Right for each
outstanding share of the Company's Common Stock held of record as of
the close of business on January 1, 1998 or that thereafter becomes
outstanding prior to the earlier of the final expiration date of the
Rights or the first date upon which the Rights become exercisable. Each
Right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A Participating Cumulative Preferred
Stock, par value $.10 per share, at a price of $60.00 (the "Purchase
Price"), subject to adjustment. The Rights are not exercisable until
ten calendar days after a person or group (an "Acquiring Person") buys,
or announces a tender offer for, 15% or more of the Company's Common
Stock. Such ownership level has been increased to 25% for a particular
shareholder that owned approximately 20.57% of the shares outstanding
on August 13, 2003. In the event the Rights become exercisable, each
Right will entitle the holder to receive that number of shares of
Common Stock having a market value equal to the Purchase Price. If,
after any person has become an Acquiring Person (other than through a
tender offer approved by qualifying members of the Board of Directors),
the Company is involved in a merger or other business combination where
the Company is not the surviving corporation, or the Company sells 50%
or more of its assets, operating income, or cash flow, then each Right
will entitle the holder to purchase, for the Purchase Price, that
number of shares of common or other capital stock of the acquiring
entity which at the time of such transaction have a market value of
twice the Purchase Price. The Rights will expire on January 1, 2008,
unless extended, unless the Rights are earlier exchanged, or unless the
Rights are earlier redeemed by the Company in whole, but not in part,
at a price of $0.001 per Right.
Legal Proceedings. The Company is subject to various legal proceedings
and claims that arise in the ordinary course of business. There are no
material pending legal proceedings to which the Company is a party.
11
ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion may contain certain forward-looking statements
that are subject to conditions that are beyond the control of the
Company. Actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause
actual results to differ include, but are not limited to, the Company's
reliance on a small number of major clients; risks associated with the
terms and pricing of our contracts; reliance on the telecommunications
industry; risks associated with changing technology and supporting
existing technology; risks associated with competition and other
factors discussed in more detail under the heading "Certain Factors
Affecting Forward-Looking Statements" in Part I, Item 1 of our Annual
Report on Form 10-K for the year ended December 31, 2002.
OVERVIEW
Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and
headquartered in Atlanta, Georgia, provides order processing, order
fulfillment and call center services to large corporations that
outsource these functions. In order to perform call center and
fulfillment functions in-house, a company may be required to develop
expensive, labor-intensive infrastructures, which may divert its
resources and management's focus from its principal or core business.
By assuming responsibility for these tasks, Innotrac strives to improve
the quality of the non-core operations of their clients and to reduce
their overall operating costs. Innotrac enables their clients to manage
their sales channels efficiently by utilizing their core competencies,
which include:
- Fulfillment Services:
- sophisticated warehouse management technology
- automated shipping solutions
- real-time inventory tracking and order status
- purchasing and inventory management
- channel development
- zone skipping for shipment cost reduction
- product sourcing and procurement
- packaging solutions
- back-order management
- returns management
- Customer Support Services:
- inbound call center services
- technical support and order status
- returns and refunds processing
- call centers integrated into fulfillment platform
- cross-sell/up-sell services
- collaborative chat
- intuitive e-mail response
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company fulfills products that include Digital Subscriber Line and
Cable Modems ("Modems") and consumer phones and wireless pager
equipment ("Telecommunications products") for clients such as BellSouth
Corporation ("BellSouth"), Qwest Communications International, Inc.
("Qwest") and Comcast Corporation ("Comcast") and their customers.
During the quarters ended September 30, 2003 and 2002, approximately
26.2% and 28.1% of revenues, respectively, were generated from
Telecommunications product clients and 19.8% and 18.1% of revenues,
respectively, were from Modems clients. During the nine months ended
September 30, 2003 and 2002, approximately 24.3% and 27.4% of revenues,
respectively, were generated from Telecommunications product clients
and 19.9% and 20.6% of revenues, respectively, were from Modems
clients.
The Company also provides a variety of these services for a significant
number of retail, catalog and direct marketing companies such as
Nordstrom, Inc., Ann Taylor Stores Corporation, Smith & Hawken, Ltd.,
The Coca-Cola Company, Tactica International, Inc., Porsche Cars North
America, Inc., Wilsons Leather and Martha Stewart Living Omnimedia,
Inc. During the quarters ended September 30, 2003 and 2002, 25.4% and
21.8% of revenues, respectively, were from retail and catalog clients
and 17.5% and 23.5% of revenues, respectively, were from direct
marketing clients. During the nine months ended September 30, 2003 and
2002, 26.4% and 16.7% of revenues, respectively, were from retail and
catalog clients and 17.1% and 28.3% of revenues, respectively, were
from direct marketing clients.
The Company also provides these services for business-to-business
("B2B") clients including Books are Fun (a division of Readers' Digest)
and The Walt Disney Company. During the quarters ended September 30,
2003 and 2002, 11.0% and 8.3% of revenues, respectively, were from B2B
clients. During the nine months ended September 30, 2003 and 2002,
12.4% and 5.5% of revenues, respectively, were from B2B clients.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth unaudited summary operating data, expressed as a
percentage of revenues, for the three and nine months ended September 30, 2003
and 2002. The data has been prepared on the same basis as the annual
consolidated financial statements. In the opinion of management, it reflects
normal and recurring adjustments necessary for a fair presentation of the
information for the periods presented. Operating results for any period are not
necessarily indicative of results for any future period.
The financial information provided below has been rounded in order to simplify
its presentation. However, the percentages below are calculated using the
detailed information contained in the condensed unaudited consolidated
statements of operations.
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues ................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ........................... 46.1 58.0 47.2 55.7
Special credits ............................ - - - (0.5)
----- ----- ----- -----
Gross margin ............................ 53.9 42.0 52.8 44.8
Selling, general and administrative expenses 47.6 61.9 48.3 45.9
Special credits ............................ - 15.6 (0.1) 3.0
Depreciation and amortization .............. 7.3 6.7 7.9 6.3
----- ----- ----- -----
Operating loss .......................... (1.0) (42.2) (3.3) (10.4)
Other expense, net ......................... 0.9 0.3 1.1 0.2
----- ----- ----- -----
Loss before income taxes ................ (1.9) (42.5) (4.4) (10.6)
Income tax benefit ......................... 0.6 16.0 1.6 3.9
----- ----- ----- -----
Net loss ................................ (1.3)% (26.5)% (2.8)% (6.7)%
===== ===== ===== =====
SPECIAL CHARGES AND SPECIAL CREDITS
At September 30, 2003 and December 31, 2002, the Company had approximately
$47,000 and $277,000, respectively, in accruals related to the special charges
recorded during the year ended December 31, 2000. The remaining accruals at
September 30, 2003 relate to exiting the front-end e-commerce and web hosting
business. Cash payments relating to these accruals for the three and nine months
ended September 30, 2003 were approximately $104,000 and $229,000, respectively.
The Company recognized a credit of approximately $50,000 and $1.7 million during
the three and nine months ended September 30, 2002, related to gains realized on
sales of inventory items and cash collected for accounts receivable, both of
which were written off as special charges in previous periods. These amounts
were recorded as a reduction of the special charges line item in the
accompanying condensed unaudited consolidated statements of operations. We
expect that the remaining accrual, which is associated with one specific client,
will be fully utilized by the end of 2003.
During the third quarter of 2002, the Company recorded an additional $3.1
million in special charges. This special charge was primarily related to the
impairment of capitalized hardware and software costs, the write-down to net
realizable value of specified fixed assets and severance costs.
During the nine months ended September 30, 2003, the Company recognized a credit
of approximately $30,000 related to the favorable settlement of a severance
accrual recorded as part of the third quarter 2002 special charge. This amount
was recorded as a reduction of the special charges line item in the accompanying
condensed unaudited consolidated statements of operations.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Revenues. Net revenues decreased 7.6% to $18.5 million for the three months
ended September 30, 2003 from $20.1 million for the three months ended September
30, 2002. The decrease in revenues is primarily due to a decrease in volumes
from our direct marketing clients along with a substantial decline in associated
pass-through freight revenues.
Cost of Revenues. Cost of revenues decreased 26.5% to $8.5 million for the three
months ended September 30, 2003 compared to $11.6 million for the three months
ended September 30, 2002. Cost of revenues decreased primarily due to the
reduction in fulfillment labor costs and pass-through freight costs associated
with the decline in volumes from our direct marketing clients.
Gross Margin. For the three months ended September 30, 2003, the Company's gross
margin increased by $1.6 million to $10.0 million, or 53.9% of revenues,
compared to $8.4 million, or 42.0% of revenues, for the three months ended
September 30, 2002. This increase was due primarily to the decrease in
reimbursable freight costs, which have a low margin, during the three months
ended September 30, 2003 and the reduction of low margin revenue related to one
customer, Warranty Corporation of America.
Selling, General and Administrative Expenses. S,G&A expenses for the three
months ended September 30, 2003 decreased to $8.8 million, or 47.6% of revenues,
compared to $12.4 million, or 61.9% of revenues, for the same period in 2002.
The decrease in expenses primarily relates to a reduction in information
technology costs incurred during the third quarter of 2002 associated with the
implementation of two new clients and contract penalty fees recorded during the
third quarter of 2002 related to two clients.
Special Credits. During the three months ended September 30, 2002, the Company
recorded special charges of $3.1 million primarily related to the impairment of
capitalized hardware and software costs, the write-down to net realizable value
of specified fixed assets and severance costs.
Income Taxes. The Company's tax benefit for the three months ended September 30,
2003 and 2002 was determined based on an effective tax rate of 31.0% and 37.8%,
respectively. The decrease in the absolute rate was principally due to the
greater impact of certain items not deductible for tax purposes in 2003.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002
Revenues. Net revenues decreased 9.8% to $54.5 million for the nine months ended
September 30, 2003 from $60.5 million for the nine months ended September 30,
2002. The decrease in revenues is primarily due to a decrease in volumes from
our direct marketing clients along with a substantial decline in associated
pass-through freight revenues. This decline in revenues was offset by the
commencement of the Smith & Hawken, Ann Taylor and Books Are Fun contracts in
the third quarter of 2002.
Cost of Revenues. Cost of revenues decreased 23.6% to $25.7 million for the nine
months ended September 30, 2003 compared to $33.6 million for the nine months
ended September 30, 2002. Cost of revenues decreased primarily due to the
reduction in fulfillment labor costs and pass-through freight costs associated
with the decline in volumes from our direct marketing clients. This decline in
cost of revenues was offset by additional fulfillment labor costs incurred to
support the new clients mentioned above, which commenced operations during the
third quarter of 2002.
Special Credits. The Company recognized approximately $293,000 related to gains
realized on sales of inventory items previously written off as part of the 2000
special charge during the nine months ended September 30, 2002.
Gross Margin. For the nine months ended September 30, 2003, the Company's gross
margin increased by $1.7 million to $28.8 million, or 52.8% of revenues,
compared to $27.1 million, or 44.8% of revenues, for the nine months ended
September 30, 2002. This increase was due primarily to the decrease in
reimbursable freight costs, which have a low margin, during the nine months
ended September 30, 2003 and the reduction of low margin revenue related to one
customer, Warranty Corporation of America.
Selling, General and Administrative Expenses. S,G&A expenses for the nine months
ended September 30, 2003 decreased to $26.4 million, or 48.3% of revenues,
compared to $27.8 million, or 45.9% of revenues, for the same period in 2002.
The decrease in expenses primarily relates to a reduction in information
technology costs incurred during the third quarter of 2002 associated with the
implementation of two new clients and contract penalty fees recorded during the
third quarter of 2002 related to two clients, offset by expenses associated with
the addition of two new fulfillment facilities located near Chicago and
Cincinnati which were opened during the second half of 2002.
Special Credits. During the nine months ended September 30, 2003, the Company
recognized approximately $30,000 related to the favorable settlement of a
severance accrual recorded as part of the third quarter 2002 special charge.
During the nine months ended September 30, 2002, the Company recorded special
charges of $3.1 million primarily related to the impairment of capitalized
hardware and software costs. This special charge was offset by $1.3 million cash
collected on accounts receivable which were previously fully reserved for as
part of the 2000 special charge. The special charge reserve was reversed as a
credit to income and netted with the special charge within the special charges
(credits) line item on the accompanying condensed unaudited consolidated
statements of operations in an amount equal to the cash received.
Income Taxes. The Company's tax benefit for the nine months ended September 30,
2003 and 2002 was determined based on an effective tax rate of 35.9% and 37.0%,
respectively. The decrease in the absolute rate was principally due to the
greater impact of certain items not deductible for tax purposes in 2003.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations and capital expenditures primarily through cash
flow from operations and borrowings under a credit facility with a bank. The
Company had cash and cash equivalents of approximately $1.2 million at September
30, 2003 as compared to $961,000 at December 31, 2002. Additionally, the Company
had borrowings under its revolving credit facility (discussed below) of $17.0
million outstanding at September 30, 2003 as compared to $14.4 million at
December 31, 2002. The primary use of cash was to reduce accounts payable during
the first half of 2003.
The Company has a revolving credit agreement (the "Agreement") with a bank for
borrowings up to $40 million that matures in June 2005. The Company and its
subsidiary have granted a security interest in all of their assets and the
subsidiary has provided a guarantee to the lender as collateral under this
revolving credit agreement. At September 30, 2003 and December 31, 2002, the
Company had approximately $17.0 million and $14.4 million, respectively,
outstanding in borrowings under the line of credit. The revolving line of credit
agreement contains various restrictive financial and change of ownership control
covenants. Noncompliance with any of the covenants allows the lender to declare
any outstanding borrowing amounts to be immediately due and payable.
The Company amended and restated the Agreement with its lender on April 3, 2003.
As amended, the Agreement requires the Company to maintain a lockbox arrangement
with the lenders and contains provisions limiting borrowings under the Agreement
to a specified percentage of eligible accounts receivable and inventory, which
totaled $21.1 million at September 30, 2003 and $31.5 million at December 31,
2002. At September 30, 2003 and December 31, 2002, the Company had $4.1 million
and $17.1 million, respectively, available under the Agreement. The financial
covenants require the Company to maintain tangible net worth, as defined in the
Agreement, which includes deferred taxes, of at least $33.0 million at September
30, 2003, a debt to tangible net worth ratio of not more than 1.5 to 1 at
September 30, 2003 and a fixed charge coverage ratio of 1.75 to 1 by December
31, 2003. The Company believes that it may not attain the fixed charge coverage
ratio requirement at December 31, 2003. However, although there is no guarantee,
management has discussed this item with its lender and currently believes that a
waiver will be granted at year end. The quarterly tangible net worth requirement
escalates to $34.0 million at December 31, 2003 and escalates by $250,000 for
each fiscal quarter thereafter. At September 30, 2003, the Company was in
compliance with all covenants under the Agreement.
Due to the provisions of the Agreement, which 1) requires that the Company
maintain a lockbox arrangement with the lender, and 2) allows the lender to
declare any outstanding borrowing amounts to be immediately due and payable as a
result of noncompliance with any of the covenants, the outstanding borrowings
under the Agreement have been classified as a current liability at September 30,
2003.
Interest on borrowings is payable monthly at rates equal to the prime rate or,
at the Company's option, LIBOR plus up to 225 basis points. On August 13, 2003,
the Company fixed $10.0 million of its $17.0 million of borrowings at a 90-day
LIBOR rate of 2.63%. During the three months ended September 30, 2003 and 2002,
the Company incurred interest expense related to the line of credit of
approximately $161,000 and $53,000, respectively, resulting in a weighted
average interest rate of 3.54% and 3.06%, respectively. During the nine months
ended September 30, 2003 and 2002, the Company incurred interest expense related
to the line of credit of approximately $562,000 and $102,000, respectively,
resulting in a weighted average interest rate of 3.93% and 3.08%, respectively.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Interest expense disclosed in the accompanying condensed unaudited consolidated
statements of operations includes capital lease interest of approximately $5,000
and $17,000 for the three and nine months ended September 30, 2003,
respectively, and is net of interest income of approximately $0 and $36,000 for
the three and nine months ended September 30, 2003.
During the nine months ended September 30, 2003, the Company used approximately
$2.1 million in cash flows from operating activities compared to generating $3.3
million in cash flows from operating activities in the same period in 2002. The
decrease in cash flows from operating activities was primarily the result of a
decrease of $8.5 million in accounts payable along with a decrease of $3.0
million in accrued expenses offset by a decrease of $2.5 million in net loss and
a decrease of $8.5 million in inventory.
During the nine months ended September 30, 2003, net cash used in investing
activities was $1.2 million as compared to $25.2 million in 2002. This
difference was due to a $13.7 million earn-out payment made in February 2002
resulting from a prior acquisition and $11.6 million in capital expenditures in
2002, primarily for capitalized technology costs, compared with $1.0 million in
2003.
During the nine months ended September 30, 2003, net cash provided by financing
activities was $3.5 million as compared to $12.7 million in the same period in
2002. The $9.2 million decrease was primarily due to additional borrowings in
2002 under the credit facility which were mainly used for capital expenditures.
The Company's primary long-term contractual commitments consist of capital and
operating leases. See the discussion of "Liquidity and Capital Resources" in our
Annual Report on Form 10-K for the year ended December 31, 2002 and Note 7 to
the consolidated financial statements therein. The Company has no long-term
purchase commitments.
The Company estimates that its cash and financing needs through 2003 will be met
by cash flows from operations and its credit facility. The Company may need to
raise additional funds in order to take advantage of unanticipated
opportunities. There can be no assurance that the Company will be able to raise
any such capital on terms acceptable to the Company or at all.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those policies that can have a significant
impact on the presentation of our financial position and results of operations
and demand the most significant use of subjective estimates and management
judgment. Because of the uncertainty inherent in such estimates, actual results
may differ from these estimates. Specific risks inherent in our application of
these critical policies are described below. For all of these policies, we
caution that future events rarely develop exactly as forecasted, and the best
estimates routinely require adjustment. These policies often require difficult
judgments on complex matters that are often subject to multiple sources of
authoritative guidance. Additional information concerning our accounting
policies can be found in Note 1 of this Form 10-Q and in Note 2 included in the
Company's Annual Report on 10-K for the year ended December 31, 2002. The
policies we believe are most critical to an investor's understanding of our
financial results and condition and require complex management judgment are
discussed below:
Goodwill and Other Acquired Intangibles - Goodwill represents the cost of an
acquired enterprise in excess of the fair market value of the net tangible and
identifiable intangible assets acquired. Goodwill and other acquired intangibles
related to business combinations prior to July 1, 2001 were being amortized over
5-20 years on a straight-line basis, which represented management's estimation
of the related benefit to be derived from the
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
acquired business. However, goodwill and other acquired intangibles from
business combinations occurring after June 30, 2001, including the Company's
acquisition of iFulfillment, Inc. in July 2001, are accounted for under the
transition provisions for business combinations of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". The
Company adopted SFAS No. 142 effective January 1, 2002, which changed the
accounting for goodwill and other indefinite life intangibles from an
amortization method to an impairment only approach. Under SFAS No. 142, goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds
its estimated fair value. Upon completion of its analysis for impairment in the
first quarter of 2003 in accordance with SFAS No. 142, no impairment was
determined to exist at that time.
Innotrac's goodwill carrying amount as of September 30, 2003 was $25.2 million.
This asset relates to the goodwill associated with the Company's acquisition of
Universal Distribution Services ("UDS") in December 2000 (including the earnout
payment made to the former UDS shareholders in February 2002), and the
acquisition of iFulfillment, Inc. in July 2001. In accordance with SFAS No. 142,
the Company contracted with an independent third party valuation firm to perform
a valuation in the first quarter of 2003. The third party valuation supported
the determination that the fair value of the reporting unit at January 1, 2003
exceeded the carrying amount of the net assets, including goodwill, and thus no
impairment existed. Management has reviewed and concurs with the major
assumptions used in the third party's valuation at January 1, 2003. The Company
will perform this impairment test annually as of January 1 or sooner if
circumstances indicate. There can be no assurance however that future valuations
will continue to support this determination, or that goodwill will not be found
to be impaired in the future.
Deferred Tax Asset - Innotrac utilizes the liability method of accounting for
income taxes. Under the liability method, deferred taxes are determined based on
the difference between the financial and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. A valuation allowance is recorded against deferred tax
assets if the Company considers it is more likely than not that deferred tax
assets will not be realized. Innotrac's net deferred tax asset as of September
30, 2003 was approximately $9.5 million. This net deferred tax asset was
generated by net operating loss carryforwards created primarily by the special
charge of $34.3 million recorded in 2000 and the net losses generated in 2002
and the first nine months of 2003. Innotrac has a tax net operating loss
carryforward of $27.6 million at December 31, 2002 that expires between 2018 and
2020. Although the Company has generated financial reporting and tax losses in
2000, 2002 and during the first nine months of 2003, the Company was profitable
in 2001 and prior to 2000. Management believes that its net operating loss
carryforwards will be utilized principally through future earnings before their
expiration. This assessment is based on management's expectations of increased
revenues, lower selling, general and administrative expenses, reduced capital
expenditures and no impairment losses related to goodwill in the future.
Innotrac's ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions, competitive
pressures on sales and margins and other factors beyond management's control.
Management considered the above factors in reaching the conclusion that it is
more likely than not that future taxable income in the carryforward period will
be sufficient to fully realize the net deferred tax asset recorded at September
30, 2003. The amount of the net deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
during the carryforward period are reduced. If it is determined that the
deferred tax asset is not realizable, the Company would then be required to
review recorded goodwill and other intangibles for impairment in accordance with
the provisions of SFAS No. 142.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement requires recording costs
associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The Company adopted SFAS No. 146 on
January 1, 2003; the adoption did not have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment to FASB Statement No. 123,"
which is effective for fiscal years beginning after December 15, 2002. SFAS No.
148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company accounts for stock-based compensation
under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees". The Company intends to continue to account for stock-based
employee compensation under APB No. 25. The additional disclosure requirements
of SFAS No. 148 are included in Note 1 of the Notes to Condensed Consolidated
Financial Statements within this 10-Q.
20
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Management believes the Company's exposure to market risks is immaterial.
Innotrac holds no market risk sensitive instruments for trading purposes. At
present, the Company does not employ any derivative financial instruments, other
financial instruments or derivative commodity instruments to hedge any market
risks and does not currently plan to employ them in the future. To the extent
that the Company has borrowings outstanding under its credit facility, the
Company will have market risk relating to the amount of borrowings due to
variable interest rates under the credit facility. The Company's exposure is
immaterial due to the short-term nature of these borrowings. Additionally, all
of the Company's lease obligations are fixed in nature as discussed in our
Annual Report on Form 10-K for the year ended December 31, 2002 and other
filings on file with the Securities and Exchange Commission.
ITEM 4 - CONTROLS AND PROCEDURES
Our management, with the participation of the chief executive and chief
financial officers, evaluated our disclosure controls and procedures (as defined
in federal securities rules) as of the end of the fiscal quarter covered in this
report. Based on that evaluation, our CEO and CFO have concluded that our
disclosure controls and procedures were effective as of the date of that
evaluation.
21
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a).
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. Section 1350.
(b) Reports on Form 8-K:
On July 28, 2003, the Company furnished to the Commission pursuant
to Items 9 and 12 of Form 8-K its press release announcing the
Company's financial results for the second quarter of 2003.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOTRAC CORPORATION
------------------------------------
(Registrant)
Date: November 7, 2003 /s/ Scott D. Dorfman
--------------------------
Scott D. Dorfman
President, Chief Executive Officer and Chairman
of the Board (Principal Executive Officer)
Date: November 7, 2003 /s/ David L. Gamsey
--------------------------
David L. Gamsey
Senior Vice President , Chief Financial Officer
and Secretary (Principal Financial and Accounting
Officer)
23