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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-23741
INNOTRAC CORPORATION
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1592285
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
6655 SUGARLOAF PARKWAY, DULUTH, GEORGIA 30097
------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
Securities registered pursuant to Section 12(b) of the Act: None.
Name of each exchange on which registered: The Nasdaq National Market.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.10 Per Share.
Series A Participating Cumulative Preferred Stock Purchase Rights
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 checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates
(which for purposes hereof are all holders other than directors, executive
officers and holders of 10% or more of the Registrant's outstanding Common
Stock) of the Registrant as of June 30, 2004, the last business day of the
Registrant's most recently completed second fiscal quarter was $25,955,361 based
on the closing sale price of the Common Stock as reported by the Nasdaq National
Market on such date. See Item 12.
At March 21, 2005, there were 12,037,994 shares of Common Stock, par value
$0.10 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2005 Annual Meeting
of Shareholders, to be filed with the Securities and Exchange Commission (the
"Commission" or the "SEC"), are incorporated by reference into Part III of this
Annual Report on Form 10-K for the year ended December 31, 2004.
INNOTRAC CORPORATION
TABLE OF CONTENTS
PAGE
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PART I........................................................................................................ 3
ITEM 1. BUSINESS................................................................................ 3
CERTAIN FACTORS AFFECTING FORWARD-LOOKING
STATEMENTS.............................................................................. 8
EXECUTIVE OFFICERS OF THE REGISTRANT.................................................... 12
ITEM 2. PROPERTIES.............................................................................. 13
ITEM 3. LEGAL PROCEEDINGS....................................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 14
PART II....................................................................................................... 15
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.............................................................................. 15
ITEM 6. SELECTED FINANCIAL DATA................................................................. 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................................... 17
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.................................................................................... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................................. 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................................... 44
ITEM 9A. CONTROLS AND PROCEDURES................................................................. 44
ITEM 9B. OTHER INFORMATION....................................................................... 44
PART III...................................................................................................... 45
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................... 45
ITEM 11. EXECUTIVE COMPENSATION.................................................................. 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.............................................. 45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................... 46
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.................................................. 46
PART IV....................................................................................................... 46
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.............................................. 46
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS......................................... S-1
PART I
ITEM 1. BUSINESS
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 our clients and to reduce their overall
operating costs.
Innotrac receives most of our clients' orders either through inbound call center
services, electronic data interchange ("EDI") or the internet. On a same day
basis, depending on product availability, the Company picks, packs, verifies and
ships the item, tracks inventory levels through an automated, integrated
perpetual inventory system, warehouses data and handles customer support
inquiries.
Innotrac's core competencies 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
The Company is a major provider of fulfillment and customer support services to
the telecommunications industry. In spite of a significant contraction and
consolidation in this industry in the past several years, the Company continues
to provide customer support services and fulfillment of consumer telephones and
caller ID equipment ("Telecommunications products") and Digital Subscriber Line
Modems ("Modems") for clients such as BellSouth Corporation ("BellSouth"), Qwest
Communications International, Inc. ("Qwest") and their customers.
The Company also provides a variety of these services for a significant number
of retail, catalog and direct marketing companies such as The Coca-Cola Company,
Ann Taylor Retail, Inc., Smith & Hawken, Ltd., Porsche Cars North America, Inc.,
Nordstrom.com LLC, Martha Stewart Living Omnimedia, Inc., and Thane
International. We take orders for our retail, catalog and direct marketing
clients via the internet, through customer service representatives at our Pueblo
and Reno call centers or through direct electronic
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transmissions from our clients. The orders are processed through one of our
order management systems and then transmitted to one of our eight fulfillment
centers located across the country, and are shipped to the end consumer or
retail store location, as applicable, typically within 24 hours of when the
order is received. Inventory is held on a consignment basis, with certain
exceptions, and includes items such as shoes, clothing, accessories, books and
outdoor furniture.
The Company also provides these services for business-to-business ("B2B")
clients including Books are Fun, Ltd. (a subsidiary of Readers' Digest), NAPA
and The Walt Disney Company.
The following table sets forth the percentage of revenues generated by the
Company's various business lines during 2004 and 2003:
2004 2003
----- -----
Telecommunications products 18.7% 23.0%
Modems 19.5 19.4
Retail/Catalog 30.7 27.4
Direct Marketing 20.5 18.0
B2B 10.6 12.2
----- -----
100.0% 100.0%
===== =====
In August 2002, we leased a 396,000 square foot fulfillment center near
Cincinnati, in Hebron, Kentucky. This facility provides fulfillment for Smith &
Hawken, Ltd. Capital expenditures associated with this facility were
approximately $4.6 million and were funded through our bank line of credit.
In August 2004, we leased a 75,000 square foot fulfillment center in New Castle,
Delaware. This new facility provides fulfillment services for a new direct
marketing client. Capital expenditures associated with this facility were
approximately $260,000.
With facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada,
Bolingbrook, Illinois, Hebron, Kentucky and New Castle, Delaware, our national
footprint is virtually complete. We are committed to deeper penetration within
our existing business lines and continued diversification of our client base.
Our long-term goal is to have our business mix spread evenly across a higher
number of clients in diverse industries. We will continue to seek new clients
and may open additional facilities in other geographic locations to service
these needs.
FULFILLMENT SERVICES
Providing effective turnkey fulfillment solutions for our clients' products is
our primary business. Our capabilities in this area are described below:
FULFILLMENT. We are committed to delivering our clients' products to their
customers on a timely and accurate basis. Our personnel pick, pack, verify and
ship product orders and requests for promotional, technical and educational
literature, shoes, clothing, electronic equipment, accessories, books and
outdoor furniture for our clients. We use several custom-designed,
semi-automated packaging and labeling lines to pack and ship products as well as
highly automated, conveyorized systems utilizing RF scanning and pick-to-light
technologies. By utilizing these technologies, we are able to reduce labor costs
and provide more timely shipments to our clients' customers. We streamline and
customize the fulfillment procedures for each client based upon the client
request and the tracking, reporting and inventory controls necessary to
implement that client's marketing support program. We also offer comprehensive
product return services whereby our personnel receive, log, test, repackage and
dispose of products that are returned from end-users.
Our Atlanta operations earned ISO 9001:2000 certification in 2002, our Hebron,
Kentucky operations earned ISO 9001:2000 certification in 2003 and our Pueblo
operations earned ISO 9001:2000 certification in 2004. We are dedicated to
providing quality service to our clients at every step in the fulfillment
process.
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To ensure order accuracy, shipment inspection and system driven validation are
performed to prove the contents exactly match the order prior to shipment. In
addition, we have highly sensitive scales at the end of our packaging lines that
also assist in ensuring the accuracy of every order. Our 2004 order accuracy
rate exceeded 99.5%.
INVENTORY MANAGEMENT. An integral part of our fulfillment services is the
monitoring and control of our clients' inventories. We provide automated
inventory management and reporting to assure real-time stock counts of our
client's products, literature and other items. Our inventory systems enable us
to provide management information to maintain consistent and timely reorder
levels and supply capabilities and also enable the client to quickly assess
stock balances, pricing information, reorder levels and inventory values. We
offer this information to the client on a real-time basis through our internet
gateway or direct system integration. Inventory management data is also utilized
in our reporting services. We utilize bar coding equipment in our inventory
management systems, which improves the efficiency of stock management and
selection. We also perform cycle counts throughout the year to check
system-maintained item balances against physical item balances. Our facilities
have several layers of security. When necessary, we dispose of clients' products
utilizing established guidelines. Disposal procedures vary depending on the
product and client business rules.
PURCHASING MANAGEMENT. For certain clients, we place orders for products we
fulfill with vendors chosen by those clients. Our purchasing management services
include assisting a client in negotiating product pricing with the vendor,
arranging returns and credits as well as forecasting product quantities required
for normal business programs or promotions.
PRODUCT CONSIGNMENT AND WAREHOUSING. For substantially all of our clients, we
warehouse products on a consignment basis and fulfill orders on behalf of our
customers for a fee.In certain cases (primarily BellSouth), we may purchase and
own inventory, but on a significantly reduced risk basis as a result of client
guarantees and contractual indemnifications.
CUSTOMER SUPPORT SERVICES
Another of our core competencies is providing customer support services. We
believe these services are critical to a comprehensive order processing and
order fulfillment solution. Our customer support services are described below.
INBOUND CALL CENTER SERVICES. Our customer service representatives take orders
for certain clients and resolve questions regarding shipping, billing and order
status as well as a variety of other questions. From time to time they may sell
equipment, other products and telephone company services to customers who call
us. To properly handle the call, Innotrac's automated call distributor
identifies each inbound call by the toll-free number dialed and immediately
routes the call to the interactive voice response ("IVR") system or an Innotrac
customer service representative. If the caller is placing an order they are
immediately transmitted to a customer service representative trained to take the
order and enter it into our systems for transmittal to the appropriate
fulfillment center. If the customer has a question, complaint or needs return
information, the IVR system attempts to resolve these issues by guiding the
customer through a series of interactive questions. If IVR automatic resolution
cannot solve the problem, the call is routed to one of our customer service
representatives who are specially trained in the applicable client's business
and products and answer using the client's name. Our customer service
representatives can enter customer information into our call-tracking system,
listen to a question and quickly access a proprietary network database using a
graphical interface to answer a customer's question. A senior representative is
available to provide additional assistance for complex or unique customer
questions. Customer service representatives are also trained to handle
introductory level technical support issues. Customer requests are generally
resolved with a single call, whether answered by a trained representative or our
automated systems.
RETURNS AND REFUNDS PROCESSING. The representatives respond to customer calls
about product returns and refunds and obtain information about customer service
problems. They facilitate a customer's return of a product by providing a
bar-coded label to the customer. When the returned item is processed and entered
5
into our system, it automatically triggers a pre-set action for reshipment of a
product or refund to the customer.
TECHNOLOGY
Our use of technology enables us to design and deliver services for each
client's fulfillment and customer support needs. Our information technology
group, or IT Group, has developed our database marketing support and management
systems. Innotrac has a technical integration platform written in Java over an
Oracle database, which contains a complete web interface and XML-based APIs that
allows clients to transact with us electronically. We deploy the solution
running on Sun Solaris and utilizing Veritas cluster server software, which
provides a high availability computing environment. Veritas backup software, DLT
tape libraries and Oracle Hot backup capabilities allow us to backup our
production Oracle databases online without interruption to the business unit.
Our burstable bandwidth allows us to quickly increase data capacity. Our EMC
storage solutions provide rapid access to data and the ability to scale quickly
depending on business demands. Network connectivity is achieved with Cisco
routers and local directors.
The open architecture of our computer system permits us to seamlessly interact
with many different types of client systems. Our IT Group uses this platform to
design and implement application software for each client's program, allowing
clients to review their programs' progress on-line to obtain real-time
comprehensive trend analysis, inventory levels and order status and to instantly
alter certain program parameters. As the needs of a client evolve, our IT Group
works with our client services team to modify the program on an ongoing basis.
Information can be exchanged via direct system integration, EDI, internet access
and direct-dial applications. We believe that our technology platform provides
us with the resources to continue to offer leading edge services to current and
new clients and to integrate our systems with theirs. We believe that the
integrity of client information is adequately protected by our data security
system and our off-site disaster back-up facilities.
We utilize three primary warehouse management systems depending on our business
line and our locations. In 2002, we completed the implementation of PKMS for
clients at our Pueblo, Atlanta and Chicago-Romeoville warehouses. PKMS is an
advanced fulfillment warehouse management system designed to support large
volumes of transactions and users, which enable the effective management of high
levels of throughput, from receiving through shipping. PKMS provides
efficiencies in inventory management, outbound distribution and task management.
Our Chicago-Bolingbrook and Cincinnati-Hebron facilities utilize an Optum
warehouse management system, which is a highly configurable fulfillment solution
for fast-moving, high volume, piece-pick operations suitable for our
multi-channel retailers and catalogers.
Our Reno and Delaware facilties utilize an internally-developed, customized
order management system ("OMS") that is fully integrated with a customized
warehouse management solution and includes front-end customer relationship
management capabilities, which we believe is suitable for direct marketing
clients. In 2002, we added Martha Stewart Living Omnimedia and Smith & Hawken to
that system. As part of the migration of those two new clients onto the system
we added the requisite functionality and customization. The customized nature of
the system required significant resources to properly scale the system to meet
our clients' needs and resulted in a considerable increase in IT costs in 2002.
These costs returned to normalized levels in 2003 and 2004.
We believe that our use of different systems for different types of clients and
products allow us to effectively and efficiently manage our warehouse operations
to secure a competitive advantage in the fulfillment industry.
Our Pueblo call center utilizes the Rockwell Spectrum Automatic Call
Distributor, or ACD, switch to handle call management functions. The ACD system
has the capacity to handle approximately 1,200 call center representatives and
as of December 31, 2004 was supporting approximately 275 representatives.
Additionally, the ACD system is integrated with software designed to enable
management to staff and supervise the call center based on call length and call
volume data compiled by the ACD system. Our call center in Reno employs an
Aspect ACD Enterprise System switch and is currently supporting approximately 90
representatives. Our integrated systems allow the customer service
representatives to
6
enter orders received via telephone into their computer which transmits the data
over T1 lines to one of our eight fulfillment centers' order management systems
where it is processed. Shortly thereafter the product is picked, packed,
verified and shipped to the customer.
PERSONNEL AND TRAINING
Our success in recruiting, hiring and training large numbers of employees and
obtaining large numbers of hourly employees during peak periods for fulfillment
and call center operations is critical to our ability to provide high quality
fulfillment and customer support services. Call center representatives and
fulfillment personnel receive feedback on their performance on a regular basis
and, as appropriate, are recognized for superior performance. Additional
training is provided to all fulfillment center employees quarterly and to our
call center representatives on an as-needed basis. To maintain good employee
relations and to minimize employee turnover, we offer competitive pay and hire
primarily full-time employees who are eligible to receive a full range of
employee benefits.
As of March 1, 2005, we had over 890 full-time employees supported by part-time
staff on an as-needed basis. Management believes that the demographics
surrounding our facilities and our reputation, stability, compensation and
benefit plans should allow us to continue to attract and retain qualified
employees. Currently, we are not a party to any collective bargaining
agreements. None of our employees are unionized.
COMPETITION
In tailoring services to client needs, we compete on the basis of quality,
reliability of service, scope of locations, efficiency, technical capabilities,
speed and price. We compete with many companies, some of which have greater
resources than us, with respect to various portions of our business. Those
companies include fulfillment businesses and call center operations. We believe
that our comprehensive and integrated services differentiate us from many of
those competitors. We continuously explore new outsourcing service
opportunities, typically in circumstances where clients are experiencing
inefficiencies in non-core areas of their businesses and management believes we
can develop a superior outsourced solution on a cost-effective basis. We
primarily compete with the in-house operations of our current and potential
clients and also compete with certain companies that provide similar services on
an outsourced basis.
GOVERNMENT REGULATION
The Caller ID services offered by our telecommunications clients are subject to
various federal and state regulations. The legality of Caller ID has been
challenged in cases decided under the Electronic Communications Privacy Act, or
the ECPA, and several state statutes. In March 1994, a Federal Communications
Commission, or FCC, report preempted certain state regulation of interstate
calling party number parameter, or CPN, based services, the technology
underlying Caller ID. This report requires certain common carriers to transmit
CPN and its associated privacy indicator (which allows telephone callers to
block the display of their phone numbers on Caller ID display units) on an
interstate call to connecting carriers without charge (the "Free Passage" rule).
In connection with this report, the Department of Justice issued a memorandum
which concluded that the installation or use of interstate Caller ID service is
not prohibited by any federal wiretap statute and that, in general, the FCC has
authority to preempt state laws that the FCC finds would hinder federal
communications policy on Caller ID services. Court decisions since the FCC
issued its March 1994 report have consistently held that Caller ID does not
violate any state or federal wiretap statute.
In May 1995, the FCC narrowed its March 1994 preemption of state public
utilities blocking regulations by permitting subscribers to choose per-line
blocking or per-call blocking on interstate calls, provided that all carriers
were required to adopt a uniform method of overriding blocking on any particular
call. At the same time, the FCC specifically preempted a California Public
Utilities Commission, or CPUC, per-line blocking default policy, which required
that all emergency service organizations and subscribers with nonpublished
7
numbers, who failed to communicate their choice between per-call blocking and
per-line blocking, be served with per-line blocking.
The FCC's revised rules and regulations also require carriers to explain to
their subscribers that their telephone numbers may be transmitted to the called
party and that there is a privacy mechanism (i.e., the "blocking" feature)
available on interstate calls, and explain how the mechanism can be activated.
The CPUC, seeking to protect the caller's privacy, has ruled that a carrier can
offer Caller ID or transmit CPN to interconnecting carriers only upon CPUC
approval of its customer notification and education plan.
The Telecommunications Act of 1996 introduced restrictions on telecommunications
carriers' usage of customer proprietary network information, or CPNI. CPNI
includes information that is personal to customers, including where, when and to
whom a customer places a call, as well as the types of telecommunications
services to which the customer subscribes and the extent these services are
used. The FCC interprets the CPNI restrictions to permit telecommunications
carriers, including BellSouth and Qwest, to use CPNI without customer approval
to market services that are related to the customer's existing service
relationship with his or her carrier. Before carriers may use CPNI to market
services outside a customer's existing service relationships, the carrier must
obtain express customer permission. Because we are dependent upon the efforts of
our clients to promote and market their equipment and services, laws and
regulations inhibiting those clients' ability to market these equipment and
services to their existing customers could have a material adverse effect on our
business, results of operations and financial condition.
Telephone sales practices are regulated at both the federal and state level.
These regulations primarily relate to outbound teleservices, which, in most
cases, we outsource to another company. The few cases where we do conduct
outbound teleservices are related solely to the support of our clients with
catalog sales programs, and thus are exempt from the regulations most commonly
associated with outbound teleservices. Outbound teleservices are regulated by
the rules of the FCC under the Federal Telephone Consumer Protection Act of
1991, the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 as amended and various state regulations regarding telephone solicitations.
We believe that we are in compliance with these federal statutes and the FCC
rules thereunder and the various state regulations, and that we would operate in
compliance with those rules and regulations if we were to engage in outbound
teleservice operations in the future.
We work closely with our clients, companies we outsource outbound teleservices
to and their respective advisors to ensure that we and our clients are in
compliance with these regulations. We cannot predict whether the status of the
regulation of Caller ID services or e-commerce will change and what affect, if
any, this change would have on us or our industry.
INTELLECTUAL PROPERTY
We have used the service mark "Innotrac" since 1985 and have registered it and
other marks used by us in our business through the US Patent and Trademark
Office. The "innotrac.com" domain name has been a registered domain name since
1995. We also own several other internet domain names. Due to the possible use
of identical or phonetically similar service marks by other companies in
different businesses, there can be no assurance that our service marks will not
be challenged by other users. Our operations frequently incorporate proprietary
and confidential information. We rely upon a combination of contract provisions
and trade secret laws to protect the proprietary technology we use and to deter
misappropriation of our proprietary rights and trade secrets.
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements (as
such term is defined in the Private Securities Litigation Reform Act of 1995).
These statements concern the Company's operations, performance and financial
condition, including, in particular, the likelihood that Innotrac will succeed
in developing and expanding its business, among other things. They are based
upon a number of
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assumptions and estimates that are inherently subject to significant
uncertainties. Many of these uncertainties are beyond Innotrac's control.
Consequently, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those set forth
below.
WE RELY ON A SMALL NUMBER OF LARGE CLIENTS. IF WE LOSE ONE OR MORE OF OUR
LARGEST CLIENTS, OR IF REVENUES FROM OUR LARGEST CLIENTS DECLINE, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
Innotrac focuses on developing long-term contractual relationships with large
corporations. A relatively small number of our clients account for a significant
portion of our revenues. If we lose one or more of our largest clients, or if
revenues from our largest clients decline, our business, results of operations
and financial condition could be materially adversely affected. Additionally, if
one of these large clients is lost, or revenues from our largest clients
decline, we cannot assure you that we will be able to replace or supplement that
client with others that generate comparable revenues or profits.
OUR WRITTEN CONTRACTS GENERALLY DO NOT GUARANTEE SPECIFIC VOLUME LEVELS AND CAN
USUALLY BE TERMINATED ON LITTLE NOTICE.
Although we have written agreements with most of our clients, our agreements
generally do not assure specific volume or revenue levels. In addition, some
agreements provide for termination for any reason on short notice. Our current
agreement with BellSouth may be terminated by BellSouth for any reason upon 90
days notice. Furthermore, we are contractually bound to our facility leases
until their terms expire. If a client terminates its contract suddenly, we will
still have obligations under our leases.
A SIGNIFICANT PORTION OF OUR BUSINESS IS CONCENTRATED IN THE TELECOMMUNICATIONS
INDUSTRY, INCLUDING DSL MODEMS.
Approximately 38% of our revenues in 2004 and approximately 42% of our revenues
in 2003 were attributable to Telecommunications products and Modems clients.
Consequently, we are particularly susceptible to negative changes affecting
these industries in general. The telecommunications industry has suffered a
material downturn since mid-2000, which has had a significant negative impact on
our business. To ameliorate this risk, we have been diversifying our client base
across more industries and clients, including through selective acquisitions. We
cannot guarantee, however, that the telecommunications industry will strengthen
in 2005 or not deteriorate further, or that our diversification strategy will be
successful.
A SIGNIFICANT PORTION OF OUR BUSINESS IS CONCENTRATED IN THE DIRECT RESPONSE
INDUSTRY.
Approximately 21% of our revenues in 2004 and approximately 18% of our revenues
in 2003 were attributable primarily to clients in the direct response industry.
Consequently, we are particularly susceptible to negative changes that impact
this industry and our clients in particular, including potential false
advertising product claims and Federal Trade Commission regulation and
enforcement. The direct response industry has suffered a material downturn since
the third quarter of 2001, which has had a significant negative impact on our
business. This general downturn has significantly weakened the financial
strength and wherewithal of companies in this sector which increases our risk
pertaining to future business, growth and the collectibility of accounts
receivable from our existing clients. If any of our existing direct response
clients were to default on their amounts due Innotrac, this would result in a
material charge against earnings. One of these clients, Tactica, has a material
past due balance for which a reserve has been recorded.
COMPETITION MAY HURT OUR BUSINESS.
We operate in highly competitive and price sensitive markets and expect this
environment to persist and intensify in the future. Because our services
comprise marketing and product consultation, sales channel
9
management, fulfillment and back-end support, including our call center
operations and returns processing, we have many competitors who offer one or
more of these services. Our competitors include:
- in-house marketing support operations of our current and potential
clients;
- other firms offering specific services, like fulfillment and call
center operations; and
- large marketing support services firms.
A number of our competitors have developed or may develop financial and other
resources greater than ours. Additional competitors with greater name
recognition and resources may enter our markets. Our existing or potential
clients' in-house operations are also significant competitors. Our performance
and growth could be negatively impacted if:
- existing clients demand and receive pricing concessions;
- existing clients decide to provide, in-house, services they
currently outsource;
- potential clients retain or increase their in-house capabilities; or
- existing clients consolidate their outsourced services with other
companies.
In addition, competitive pressures from current or future competitors could
result in significant price erosion, which could in turn materially adversely
affect our business, financial condition and results of operations. For more
information about our competition, see "Business -- Competition" in this Item 1.
IF WE ARE NOT ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.
Our success depends significantly upon our ability to:
- integrate new clients in a timely and cost efficient manner;
- enhance existing services;
- develop applications to meet our clients' needs; and
- introduce new services and products to respond to technological
developments.
If we fail to maintain our technological capabilities or respond effectively to
technological changes, our business, results of operations and financial
condition could be materially adversely affected. We cannot assure you that we
will select, invest in and develop new and enhanced technology on a timely basis
in the future in order to meet our clients' needs and maintain competitiveness.
Our Reno systems, which provide service to several of our largest clients, are
completely customized and therefore not supported by third party providers. We
are heavily reliant on a small number of developers. If these developers leave,
it could materially adversely affect our business. We provide details about our
technology in "Business -- Technology" in this Item 1.
OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY CAUSE SIGNIFICANT SWINGS IN THE
MARKET PRICE FOR OUR COMMON STOCK.
Our operating results may fluctuate in the future based on many factors. These
factors include, among other things:
- changes in the telecommunications industry;
- changes in the retail industry;
- changes in the fulfillment and call center services industries;
- changes in the timing and level of client-specific marketing
programs, including the timing and nature of promotions;
- changes in our existing client base;
- pricing pressure or concessions;
- increased competition; and
10
- changes in customer purchasing patterns for products we fulfill.
Due to these and any other unforeseen factors, it is possible that in some
future quarter our operating results may be below the expectations of public
market analysts and investors. If that variance occurs, our common stock price
would likely decline materially.
OUR COMMON STOCK LACKS LIQUIDITY AND IS HELD BY A SMALL NUMBER OF INVESTORS.
As of December 31, 2004, Innotrac officers and directors owned approximately
47.7% of the outstanding common stock. Two institutional shareholders, IPOF
Fund, L.P. and Dimensional Fund Advisors, Inc., and their affiliates held 28.3%
and 4.59%, respectively. These ownership positions have resulted in a lack of
liquidity in our common stock. Additionally, if any of Innotrac's significant
shareholders decided to liquidate its position, our common stock price would
likely decline materially.
IF OUR GOODWILL IS DEEMED IMPAIRED AS PART OF OUR ANNUAL (OR EARLIER) IMPAIRMENT
TEST, THE IMPAIRMENT CHARGE WOULD RESULT IN A DECREASE IN OUR EARNINGS AND NET
WORTH.
Current accounting rules require that goodwill no longer be amortized but be
tested for impairment at least annually. We have a significant amount of
goodwill which, based upon a negative outcome of any impairment test in the
future, could result in the write-down of all or a portion of goodwill and a
corresponding reduction in earnings and net worth.
NONCOMPLIANCE WITH ANY OF THE COVENANTS UNDER OUR REVOLVING CREDIT AGREEMENT
ALLOWS THE LENDER TO DECLARE ANY OUTSTANDING BORROWING AMOUNTS TO BE IMMEDIATELY
DUE AND PAYABLE.
Our 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.
DUE TO THE NATURE OF OUR BUSINESS WE HAVE A SIGNIFICANT AMOUNT OF UNSKILLED
LABOR AND A HIGH TURNOVER RATE THEREBY INCREASING OUR EXPOSURE TO
EMPLOYEE-RELATED LITIGATION.
Our fulfillment and call centers employ a sizable amount of unskilled labor and
generate a high turnover rate. Furthermore, due to the downturn in the economy
and its adverse effects on our business, we have had to terminate employees from
time to time. Our exposure to litigation as a result of employee matters has
recently increased.
IF WE ARE NOT ABLE TO CONTINUE TO MANAGE OUR INFRASTRUCTURE AND VOLUME GROWTH,
OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Our operations, number of facilities and volume of packages shipped have grown
significantly in recent years. Our business, results of operations and financial
condition could be materially adversely affected if we cannot effectively manage
our growth. Our continued success depends upon our ability to:
- initiate, develop and maintain existing and new client
relationships;
- respond to competitive developments;
- maintain pricing and margins;
- continue to develop our sales infrastructure;
- attract, train, motivate and retain management and other personnel;
and
- maintain the high quality of our services.
IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
Our business, results of operations and financial condition could be materially
adversely affected if the trend of businesses outsourcing services not directly
related to their principal business activities declines or
11
reverses, or if corporations bring previously outsourced functions back
in-house. Particularly during general economic downturns, businesses may bring
in-house previously outsourced functions in order to avoid or delay layoffs.
OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES
OR INCREASE OUR COSTS.
In connection with the limited amount of outbound telemarketing services that we
provide, we must comply with federal and state regulations. These include the
Federal Communications Commission's rules under the Federal Telephone Consumer
Protection Act of 1991 and the Federal Trade Commission's regulations under the
Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both
of which govern telephone solicitation. When we conduct outbound telemarketing
services, these rules and regulations would apply to that portion of our
business.
Furthermore, there may be additional federal and state legislation or changes in
regulatory implementation. These changes could include interpretations under the
Telecommunications Act of 1996 restricting the ability of telecommunications
companies to use consumer proprietary network information, or CPNI. New
legislation or regulatory implementation in the future may significantly
increase compliance costs or limit our activities, our clients' activities or
the activities of companies to which we outsource outbound telemarketing
functions. Additionally, we could be responsible for failing to comply with
regulations applicable to our clients or companies to which we outsource
telemarketing.
If unfavorable federal or state legislation or regulations affecting Caller ID
service, internet service or other technology related to products we fulfill and
provide customer support for are adopted, our business, financial condition and
results of operations could be materially adversely affected. See "Business --
Government Regulation" in this Item 1 for further information about government
regulation of our business.
IF WE ARE UNABLE TO INTEGRATE ACQUIRED BUSINESSES SUCCESSFULLY AND REALIZE
ANTICIPATED ECONOMIC, OPERATIONAL AND OTHER BENEFITS IN A TIMELY MANNER, OUR
PROFITABILITY MAY DECREASE.
If we are unable to integrate acquired businesses successfully, we may incur
substantial costs and delays in increasing our customer base. In addition, the
failure to integrate acquisitions successfully may divert management's attention
from Innotrac's existing business and may damage Innotrac's relationship with
its key customers and suppliers. Integration of an acquired business may be more
difficult when we acquire a business in a market in which we have little or no
expertise, or with a corporate culture different from Innotrac's.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Innotrac are as follows:
NAME AGE POSITION
---- --- --------
Scott D. Dorfman.................. 47 Chairman of the Board, President and Chief
Executive Officer
David L. Ellin.................... 46 Senior Vice President
Larry C. Hanger................... 50 Senior Vice President
Robert J. Toner................... 41 Vice President -- Logistics
James R. McMurphy................. 45 Vice President -- Information Technology
12
Mr. Dorfman founded Innotrac and has served as Chairman of the Board, President
and Chief Executive Officer since its inception in 1984. Prior to founding
Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc.
(Paymaster), an equipment distributor. At Paymaster, Mr. Dorfman gained
experience in distribution, tracking and inventory control by developing and
managing Paymaster's mail order catalog.
Mr. Ellin joined Innotrac in 1986 and currently serves as Senior Vice President.
He served as a Director from December 1997 through May 2004. He held the
position of Senior Vice President and Chief Operating Officer from November 1997
to December 2001 and served as Vice President from 1988 to November 1997. From
1984 to 1986, Mr. Ellin was employed by the Atlanta branch of WHERE Magazine,
where he managed the sales and production departments. From 1980 to 1984, Mr.
Ellin was employed by Paymaster, where he was responsible for Paymaster's sales
and collections.
Mr. Hanger joined Innotrac in 1994 and has served as Senior Vice President since
April 1999 and as a Director from December 1997 through February 2004. He served
as Vice President -- Business Development from November 1997 through April 1999.
He served as Innotrac's Manager of Business Development from 1994 to November
1997, and was responsible for the management of the telecommunication equipment
marketing and service business. From 1979 to 1994, Mr. Hanger served as Project
Manager -- Third Party Marketing at BellSouth Telecommunications, Inc., a
regional telecommunications company, where he managed the marketing program for
BellSouth's network services and was involved in implementing the billing
options program for BellSouth with Innotrac.
Mr. Toner joined Innotrac in June 2001 as Vice President -- Logistics. He brings
16 years of distribution, logistics, and transportation experience; 14 of those
years were with McMaster-Carr Supply Company, a distributor of industrial
supplies. Most recently, Mr. Toner was the General Manager for East Coast
Operations for Webvan Group Inc., an Internet retailer.
Mr. McMurphy joined Innotrac in April 2003 as Vice President and Chief
Information Officer.Prior to joining Innotrac, Mr. McMurphy was with Capital One
Financial Corporation, a leading credit card issuer and consumer lender, from
March 2002 to April 2003, where he served as Chief Information Officer for one
of their divisions. Prior to Capital One, from December 1996 through December
2001, he was Chief Information Officer for Pleasant Company, a division of
Mattel Toys and makers of American Girl Dolls. In addition, prior to Mattel
Toys, he served as a consultant for Price Waterhouse LLP (now
PricewaterhouseCoopers LLP).
ITEM 2. PROPERTIES
Currently, the Company leases all of its facilities. Our headquarters and
fulfillment facilities are located in 250,000 square feet of leased space in
Duluth, Georgia. Our corporate offices occupy 50,000 square feet of this
facility and the remaining 200,000 square feet are used as fulfillment space.
This site also includes approximately 3.5 acres that will be available for
Innotrac's expansion, if required. The lease for our Duluth facility commenced
in October 1998 and has a term of 10 years with two five-year renewal options.
The lease provides for an option to purchase the facility at the end of the
first five years of the term or at the end of the first 10 years of the term. We
have not yet determined whether we will exercise this purchase option.
In June 1999, we entered into a lease for a facility in Pueblo, Colorado with an
initial term of five years with two five-year renewal options. In June 2004, we
exercised the first renewal option to extend the lease for five years. The
facility provides approximately 87,000 square feet of floor space. Approximately
45,000 square feet are used as a call center, as well as quality assurance,
administrative, training and management space. This call center supports 370
workstations of which we utilized 275 at December 31, 2004. It currently
operates from 5:00am MST to 11:00pm MST seven days per week. The remaining
42,000 square feet are used for fulfillment services.
13
In October 1999, we entered into a lease for an additional fulfillment facility
in Duluth, Georgia with an initial term of five years with one three-year
renewal option. In August 2000, the Company entered into a lease extension and
modification that expanded the facility space from approximately 52,000 square
feet to 82,000 square feet. This lease expired in January 2005 however we are in
the process of negotiating the renewal of the lease and are currently leasing
the space on a month-to-month basis.
We operate a facility in Reno, Nevada that consists of over 275,000 square feet
and includes administrative office space, a 250,000 square foot fulfillment
center and a call center that can support 200 workstations. Our UDS division
leases this facility through two lease agreements, which were initiated in
October 2002 and October 2000. These agreements have lease terms of five years
and seven years, respectively. Currently, the call center is configured with
approximately 120 workstations, of which 90 were being utilized at December 31,
2004. The call center operates from 5:00 am PST to 10:00 pm PST Monday through
Friday and 6:00 am PST to 8:00 pm PST Saturday and Sunday.
We operate a 354,000 square foot facility in Bolingbrook, Illinois. The lease
for this facility was initiated at the date of acquisition in July 2001, and we
renewed for an additional five years, at a lower monthly rental rate, commencing
January 1, 2003. This lease contains one additional five-year renewal option.
This facility is used exclusively for fulfillment services and contains
approximately 40,000 square feet of administrative office space.
We operate a facility in Hebron, Kentucky for an initial term of five years with
two renewal options; the first for one year and the second for three years. The
facility provides approximately 396,000 square feet of fulfillment and warehouse
space. This facility is fully occupied by inventory for our client, Smith &
Hawken.
We operate a facility in Romeoville, Illinois for an initial term of five years
and two months with two five-year renewal options. The facility provides
approximately 204,307 square feet of fulfillment and warehouse space, and we
have an option to lease an additional 51,254 square feet in the future.
In August 2004, we entered into a three year lease for a new facility in New
Castle, Delaware. This new facility provides 75,000 square feet of fulfillment
and warehouse space for a new direct marketing client.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceeding. We are, from time to time,
a party to litigation arising in the normal course of our business. Our
fulfillment and call centers employ a sizable amount of unskilled labor and
generate a high turnover rate. Furthermore, due to the downturn in the economy
and its adverse affects on our business, we have had to terminate employees from
time to time. Our exposure to litigation as a result of employee matters has
increased. Although management believes that none of these actions, individually
or in the aggregate, will have a material adverse effect on our financial
position or results of operations, it is possible that such litigation and the
related cost could become material in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year covered by this Report.
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's Common Stock trades on the Nasdaq National Market under the symbol
"INOC".The following table sets forth for the periods indicated the high and low
sales prices of the Common Stock on the Nasdaq National Market.
High Low
---- ---
2004
First Quarter...................................................... $12.000 $10.450
Second Quarter..................................................... $11.830 $ 6.800
Third Quarter...................................................... $ 9.550 $ 7.400
Fourth Quarter..................................................... $ 9.280 $ 7.630
Fiscal Year Ended December 31, 2004................................ $12.000 $ 6.800
2003
First Quarter...................................................... $ 4.600 $ 2.150
Second Quarter..................................................... $ 6.659 $ 3.950
Third Quarter...................................................... $ 8.340 $ 5.760
Fourth Quarter..................................................... $10.490 $ 7.750
Fiscal Year Ended December 31, 2003................................ $10.490 $ 2.150
The approximate number of holders of record of Common Stock as of March 30, 2005
was 67. The approximate number of beneficial holders of our Common Stock as of
that date was 1,400.
The Company has never declared cash dividends on the Common Stock. The Company
intends to retain its earnings to finance the expansion of its business and does
not anticipate paying cash dividends in the foreseeable future. Any future
determination as to the payment of cash dividends will depend upon such factors
as earnings, capital requirements, the Company's financial condition,
restrictions in financing agreements and other factors deemed relevant by the
Board of Directors. The payment of dividends by the Company is restricted by its
revolving credit facility.
PURCHASES OF EQUITY SECURITIES BY THE REGISTRANT
(d) Maximum
Number (or
(c)Total Number of Approximately Dollar
Shares (or Units) Value) of Shares (or
Purchased as Part Units) that May Yet
(a) Total Number (b) Average Price of Publicly Be Purchased Under
of Shares(or Units) Paid per Share(or Announced Plans the Plans or
Period Purchased Unit) or Programs Programs
March 1, 2004 -
March 31, 2004(1) 24,498(2) $11.69 0 0
(1) There were no other issuer purchases during the year ended December 31,
2004.
(2) In March 2004, the Company reacquired stock to settle employee stock bonus
withholding tax obligations.
Item 12 of Part III contains information concerning the Company's equity
compensation plans.
15
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company. The
selected historical statements of operations data for each of the years ended
December 31, 2004, 2003, 2002, 2001 and 2000 and the selected historical balance
sheet data for the periods then ended have been derived from the Company's
audited Consolidated Financial Statements for the years ended December 31, 2004,
2003, 2002, 2001 and 2000. This information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and notes
thereto included elsewhere in this Report.
RESULTS FOR YEAR ENDED DECEMBER 31: 2004 2003 2002 2001 2000
(IN 000'S, EXCEPT PER SHARE AMOUNTS) ------- -------- -------- --------- ---------
Revenues $78,322 $ 74,740 $ 82,420 $ 121,859 $ 202,975
Cost of revenues 37,925 35,157 46,444 68,153 161,972
Special (credits) charges - - (293) - 16,462
------- -------- -------- --------- ---------
Gross profit 40,397 39,583 36,269 53,706 24,541
------- -------- -------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative 34,800 36,444 37,332 43,329 38,209
Special (credits) charges - (30) 404 - 17,801
Depreciation and amortization 5,202 5,622 5,336 4,864 4,168
------- -------- -------- --------- ---------
TOTAL OPERATING EXPENSES 40,002 42,036 43,072 48,193 60,178
------- -------- -------- --------- ---------
Operating income (loss) 395 (2,453) (6,803) 5,513 (35,637)
------- -------- -------- --------- ---------
Interest expense (income) , net 285 741 318 (532) 80
Other expense (income) - 15 (124) (20) 141
------- -------- -------- --------- ---------
TOTAL OTHER EXPENSE (INCOME) 285 756 194 (552) 221
------- -------- -------- --------- ---------
Income (loss) before income taxes
and minority interest 110 (3,209) (6,997) 6,065 (35,858)
Income tax (provision) benefit - (8,772) 2,578 (2,573) 14,084
------- -------- -------- --------- ---------
Net income (loss) before minority 110 (11,981) (4,419) 3,492 (21,774)
interest
Minority interest, net of income taxes - - - (893) (199)
------- -------- -------- --------- ---------
NET INCOME (LOSS) $ 110 $(11,981) $ (4,419) $ 4,385 $ (21,575)
======= ======== ======== ========= =========
Net income (loss) per share-basic $ 0.01 $ (1.04) $ (0.38) $ 0.39 $ (1.92)
Net income (loss) per share-diluted $ 0.01 $ (1.04) $ (0.38) $ 0.38 $ (1.92)
COMMON STOCK INFORMATION:
Average number of common shares
outstanding-basic 11,865 11,542 11,516 11,318 11,212
Book value per common share(1) $ 4.23 $ 4.25 $ 5.13 $ 5.57 $ 5.16
YEAR-END FINANCIAL POSITION:
Current assets $24,430 $ 29,721 $ 41,619 $ 58,093 $ 76,150
Current liabilities 11,716 20,117 20,143 35,717 34,175
Property and equipment, net 12,499 14,750 18,915 14,500 13,717
Total assets 63,373 70,962 95,499 99,393 97,145
Long-term obligations 1,098 1,083 15,497 393 166
Total liabilities 12,814 21,200 35,640 36,110 34,341
Total shareholders' equity $50,559 $ 49,762 $ 59,859 $ 63,283 $ 58,635
(1) Book value per common share is calculated by dividing total shareholders'
equity at year end by the number of common shares outstanding at year end.
16
ITEM 7. 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 and direct marketing industries and the effect on the Company
of the downturns, consolidation and changes in those industries in the past
three years; risks associated with the fluctuations in volumes from our clients;
risks associated with upgrading, customizing, migrating or supporting existing
technology; risks associated with competition; and other factors discussed in
more detail in Item 1 of this Annual Report on Form 10-K, under
"Business--Certain Factors Affecting Forward-Looking Statements".
OVERVIEW
Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and
headquartered in Atlanta, Georgia, is a full-service fulfillment and logistics
provider serving enterprise clients and world-class brands. The Company employs
sophisticated order processing and warehouse management technology and operates
eight fulfillment centers and two call centers in six cities spanning all time
zones across the continental United States.
We receive most of our clients' orders either through inbound call center
services, electronic data interchange ("EDI") or the Internet. On a same-day
basis, depending on product availability, the Company picks, packs, verifies and
ships the item, tracks inventory levels through an automated, integrated
perpetual inventory system, warehouses data and handles customer support
inquiries.
Our core service offering includes the following:
- 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
17
Prior to 2000, the Company was primarily focused on the telecommunications
industry, with over 90% of its revenues being derived through this vertical.
Today, the Company is primarily focused on five diverse lines of business, or
industry verticals. This is a result of a significant effort made by the Company
to diversify both its industry and client base over the past several years.
BUSINESS MIX
Business Line/Vertical 2004 2003
- --------------------------- ----- -----
Telecommunications products 18.7% 23.0%
Modems 19.5 19.4
Retail/Catalog 30.7 27.4
Direct Marketing 20.5 18.0
B2B 10.6 12.2
----- -----
100.0% 100.0%
===== =====
Telecommunications and Modems. The Company continues to be a major provider of
fulfillment and customer support services to the telecommunications industry. In
spite of a significant contraction and consolidation in this industry in the
past several years, the Company continues to provide customer support services
and fulfillment of telephones, Caller ID equipment, Digital Subscriber Line
Modems ("DSL") and other telecommunications products to companies such as
BellSouth Corporation ("BellSouth") and Qwest Communications International, Inc.
("Qwest") and their customers. Inventory for our telecommunications and DSL
clients is held on a consignment basis, with the exception of certain BellSouth
inventory, for which we are contractually indemnified, and includes items such
as telephones, Caller ID equipment and DSL modems and ancillary equipment.
Despite the termination in the third quarter of 2004 of two programs with one of
our telecommunication clients, which contributed $2.4 million in revenue for the
year ended December 31, 2004, we anticipate that the percentage of our
revenues attributable to telecommunications and DSL clients will remain fairly
constant during 2005 due mainly to increased volumes (but lower margins as
compared to 2004) from our DSL modem business, which is still in a strong growth
mode. The telephone and Caller ID equipment business is mature, yet steady.
Retail, Catalog and Direct Marketing. The Company also provides a variety of
these services for a significant number of retail, catalog and direct marketing
clients which include such companies as The Coca-Cola Company, Ann Taylor
Retail, Inc., Smith & Hawken, Ltd., Porsche Cars North America, Inc.,
Nordstrom.com LLC, Martha Stewart Living Omnimedia, Inc., and Thane
International. We take orders for our retail, catalog and direct marketing
clients via the internet, through customer service representatives at our Pueblo
and Reno call centers or through direct electronic transmissions from our
clients. The orders are processed through one of our order management systems
and then transmitted to one of our eight fulfillment centers located across the
country and are shipped to the end consumer or retail store location, as
applicable, typically within 24 hours of when the order is received. Inventory
for our retail, catalog and direct marketing clients is held on a consignment
basis, with minor exceptions, and includes items such as shoes, dresses,
accessories, books and outdoor furniture. Our revenues are sensitive to the
number of orders and customer service calls received. Our client contracts do
not guarantee volumes.Despite the end of the Tactica International, Inc.
business, which represented 3.0% of total revenues for the year ended December
31, 2004 and the end of the Martha Stewart Living Omnimedia business in March
2005, which represented 4.7% of total revenues for the year ended December 31,
2004, we anticipate that the percentage of our revenues attributable to our
retail and catalog clients will remain fairly consistent during 2005 due to the
anticipated additions of new channels, product lines and divisions for existing
clients, along with internal growth and a strengthening of the overall economy.
Revenues attributable to our direct marketing clients increased in the first
half of 2004 due to a highly successful new product introduced by one of our
newer direct marketing clients, but weakened considerably in the second half as
that product matured and the client's advertising for that product was reduced.
The direct marketing vertical was weak throughout all of 2003.
On October 21, 2004, Tactica International, Inc. ("Tactica"), one of the
Company's direct response clients, filed a voluntary petition for relief under
Chapter 11 in U.S. Bankruptcy Court. On October 25, 2004 the
18
Bankruptcy Court approved, on an interim basis, a Stipulation and Consent Order
("Stipulation") entered into between Tactica and Innotrac, whereby Tactica has
acknowledged the validity of Innotrac's claim and Innotrac's first priority
security interest in and warehouseman's lien on Tactica's inventory held by
Innotrac. This Stipulation allowed Tactica to continue to sell its inventory
while reducing the receivables owed by Tactica to Innotrac. The Stipulation
required that the proceeds from the sale of such inventory be split with
Innotrac 55%/45% on the first $1.6 million in customer orders and 60%/40%
thereafter upon receipt of Tactica customer payments. Additionally, Tactica was
required to prepay Innotrac for any services prior to its inventory being
shipped. Tactica defaulted on the Stipulation and on January 18, 2005, Innotrac
issued a Notice of Default to Tactica. In March 2005, Innotrac and Tactica
reached a verbal agreement that would permit Innotrac to liquidate the Tactica
inventory in order to pay down the receivable balance, with any excess proceeds
to be remitted to Tactica. Innotrac is currently negotiating with the Creditor's
Committee on the terms of the liquidation and an additional amount of proceeds
to be remitted to unsecured creditors.
For the year ended December 31, 2004, this client represented 3.0% of total
revenues. As of March 7, 2005, Tactica owed $2,781,357 in principal to Innotrac
for past fulfillment and call center services. The Company has recorded a
reserve associated with this receivable. Based on the Stipulation and an
appraisal performed by a third party independent appraiser, the reserve was
decreased from $2.1 million at June 30, 2004 to $1.5 million at September 30,
2004. The reserve was further reduced to $1.2 million at December 31, 2004 based
on the agreement reached with Tactica regarding the liquidation of their
inventory.
Business-to-Business. The Company also provides these services for
business-to-business ("B2B") clients including Books Are Fun, Ltd. (a subsidiary
of Reader's Digest), NAPA and The Walt Disney Company. This is a small, but
growing area of our business.
FACILITIES
In August 2002 we leased a 396,000 square-foot fulfillment center near
Cincinnati, in Hebron, Kentucky. This facility is used exclusively to provide
fulfillment services for Smith & Hawken, which is the Company's single largest
retail client, under the terms specified in a contract with Smith & Hawken,
which is for a term of six years. Capital expenditures associated with this
facility were approximately $4.6 million and were funded through our bank line
of credit.
In August 2004 we leased a 75,000 square foot fulfillment center in New Castle,
Delaware. This new facility provides fulfillment and warehouse space for a new
direct marketing client. Capital expenditures associated with this facility were
approximately $260,000.
With facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada,
Bolingbrook, Illinois, Hebron, Kentucky and New Castle, Delaware, our national
footprint is virtually complete. We are committed to deeper penetration within
our existing business lines and continued diversification of our client base.
Our long-term goal is to have our business mix spread evenly across a higher
number of clients in diverse industries. We will continue to seek new clients
and may open additional facilities in other geographic locations to service
these needs.
RESULTS OF OPERATIONS
During 2002, the Company incurred significant start-up and associated technology
costs for new client implementations. We added Martha Stewart Living Omnimedia
and Smith & Hawken to our Reno system. As part of the migration of those two new
clients onto the system, we added the requisite functionality and customization.
The customized nature of the system required significant resources to properly
scale the system to meet our client's needs and resulted in a considerable
increase in IT costs in 2002. Approximately $2.6 million of these costs were
eliminated in 2003.
The following table sets forth summary operating data, expressed as a percentage
of revenues, for the years ended December 31, 2004, 2003 and 2002. Operating
results for any period are not necessarily indicative of results for any future
period.
19
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 Consolidated Financial Statements and
notes thereto.
YEAR ENDED DECEMBER 31,
2004 2003 2002
----- ----- -----
Revenues, net 100.0% 100.0% 100.0%
Cost of revenues 48.4 47.0 56.4
Special charges (credits), net - - (0.4)
----- ----- -----
Gross profit 51.6 53.0 44.0
Selling, genera l and administrative 44.4 48.8 45.3
Special charges, net - - 0.5
Depreciation and amortization 6.7 7.5 6.5
----- ----- -----
Operating income (loss) 0.5 (3.3) (8.3)
Other expense (income) 0.4 1.0 0.2
----- ----- -----
Income (loss) before taxes and minority interest 0.1 (4.3) (8.5)
Income tax (provision) benefit - (11.7) 3.1
----- ----- -----
Net income (loss) 0.1% (16.0)% (5.4)%
===== ===== =====
SPECIAL CHARGES
The Company recorded special charges of $34.3 million during the year ended
December 31, 2000. At December 31, 2003 and 2002, the Company had approximately
$0 and $277,000, respectively, in remaining accruals related to the special
charges recorded during the year ended December 31, 2000. Cash payments relating
to the special charge accruals for the years ended December 31, 2003 and 2002
were approximately $277,000 and $716,000, respectively.
The Company recognized approximately $3.0 million of special credits during the
year ended December 31, 2002, related to gains realized on sales of inventory
items which were previously written off as special charges in previous periods,
cash collected for accounts receivable that were written off as special charges
in previous periods, redeployment of leased computer hardware for which the
leases were fully accrued for as special charges in previous periods, and client
contract amendments which resulted in reduced liabilities. These amounts were
recorded as a reduction in the special charge line items in the Consolidated
Statements of Operations.
During 2002, the Company also recognized an additional $3.1 million in special
charges. Approximately $2.4 million of these charges were related to capitalized
hardware and software costs for systems purchased specifically for a potential
new client which were subsequently not utilized as originally planned. The loss
of the potential customer indicated that the carrying value of the asset group
was potentially not recoverable, and therefore, an impairment test under the
provisions of SFAS No. 144 was performed. As the fair market value of the asset
group was not readily determinable, a discounted, probability weighted cash flow
model was utilized as a basis to determine fair value. As a result of the cash
flow analysis, a $2.4 million impairment charge was recorded. Of the remaining
charges, approximately $500,000 related to the write-down to net realizable
value of specified fixed assets obtained as part of our December 2000
acquisition of UDS (our Reno operations) which were being utilized for one
specific customer who ceased conducting business with UDS. The balance of
approximately $200,000 was related to severance costs for positions which were
eliminated.
20
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Revenues. The Company's net revenues increased 4.8% to $78.3 million for the
year ended December 31, 2004 from $74.7 million for the year ended December 31,
2003. The increase in revenues is primarily due to the addition of four new
retail/catalog clients and three new direct marketing clients, primarily during
the fourth quarter of 2004, which contributed $3.3 million in revenue. In
addition, there was an increase of approximately $1.0 million from our existing
retail clients, an increase of $770,000 from DSL clients and an increase of $1.7
million from our direct marketing clients, offset by a decrease of $2.6 million
and $754,000 from our telecom and B2B businesses, respectively.
Cost of Revenues. The Company's cost of revenues, which include labor costs for
the fulfillment and call centers, telephone minute fees and freight and
packaging material costs, increased 7.9% to $37.9 million for the year ended
December 31, 2004 compared to $35.2 million for the year ended December 31,
2003. Cost of revenues increased primarily due the overall increase in revenues,
the implementation and start-up costs associated with several new clients in the
second half of 2004 and a change in the business mix.
Gross Profit. For the year ended December 31, 2004, the Company's gross profit
increased to $40.4 million, or 51.6% of revenues, compared to $39.6 million, or
53.0% of revenues, for the year ended December 31, 2003. This increase in gross
profit dollars was due primarily to greater operating efficiencies throughout
our facilities offset by the implementation and start-up costs associated with
several new clients in the second half of 2004. The decrease in gross profit as
a percentage of revenues was primarily attributable to a change in the business
mix.
Selling, General and Administrative Expenses. S,G&A expenses, which include
facility and equipment costs, account services and information technology costs,
management salaries, bad debt expense and legal and accounting fees, decreased
4.5% to $34.8 million or 44.4% of revenues for the year ended December 31, 2004
compared to $36.4 million or 48.8% of revenues for the year ended December 31,
2003. The decrease in expenses in 2004 as compared to 2003 was primarily
attributable to $1.1 million accounts receivable reserve recorded in the fourth
quarter 2003 for Tactica as compared to $78,000 recorded in 2004, and a
reduction in costs from management's efforts to control expenses resulting in
$860,000 lower account services related costs, $294,000 lower equipment costs
and $285,000 lower information technology related costs, offset by $960,000
higher facility costs in 2004 as compared to 2003. There was also a reduction of
approximately $400,000 in general and administrative costs, including management
salaries and legal and accounting fees, during 2004 as compared to 2003.
Additionally, the twelve months ended December 31, 2003 included one-time
credits relating to contract penalty fee reversals, property tax refunds and
coupon accrual reversal, totaling approximately $485,000. The decrease in S,G&A
expense as a percentage of revenues was primarily due to the overall increase in
revenues.
Special (Credits)/Charges. There were no special charges or credits during 2004.
During 2003, the Company recorded a special credit of $30,000 associated with
the settlement of a severance claim at an amount lower then previously reserved
for in 2002.
Income Taxes. The Company's effective tax rate for the year ended December 31,
2004 and 2003 was 0% and 273%, respectively. At December 31, 2003, a valuation
allowance of approximately $9.9 million was recorded against the Company's net
deferred tax assets as losses in recent years created uncertainty about the
realization of tax benefits in future years, resulting in an overall tax
provision of approximately $8.8 million. Income taxes associated with taxable
income for the year ended December 31, 2004 were offset by a reduction of this
valuation allowance resulting in an effective tax rate of 0% for the year ended
December 31, 2004.
21
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Revenues. The Company's net revenues decreased 9.3% to $74.7 million for the
year ended December 31, 2003 from $82.4 million for the year ended December 31,
2002. The decrease in revenues is primarily due to a $3.6 million reduction in
business with Warranty Corporation of America ("WACA"), which lost one of its
significant clients in the fourth quarter of 2002, a significant $10.5 million
decrease in revenues from our two primary direct marketing clients, Thane and
Tactica, and a decision by BellSouth to exit their wireless pager business,
which resulted in a decrease of revenues of approximately $1.4 million. The
reduction in the WACA business began in the fourth quarter of 2002 and as of
December 31, 2003, we were no longer providing any services for WACA.
Additionally, the direct marketing industry remained soft in 2003. This decline
in revenues was offset by growth in our retail and B2B businesses with Smith &
Hawken and Books Are Fun with revenues increasing by approximately $8.3 million
in 2003.
Cost of Revenues. The Company's cost of revenues decreased 24.3% to $35.2
million for the year ended December 31, 2003 compared to $46.4 million for the
year ended December 31, 2002. Cost of revenues decreased primarily due to a
30.8% decrease in freight costs associated with lower volumes, a lower revenue
base as discussed above and more efficient operations. The year ended December
31, 2002 also included some inefficiencies associated with startup operations
for Smith & Hawken, Books Are Fun, Martha Stewart and Ann Taylor. All of these
accounts commenced operations with Innotrac during 2002.
Special Credits. There were no special charges or credits during 2003. During
the year ended December 31, 2002, the Company recognized approximately $293,000
related to gains realized on sales of inventory items previously written down as
part of the 2000 special charge.
Gross Profit. For the year ended December 31, 2003, the Company's gross profit
increased to $39.6 million, or 53.0% of revenues, compared to $36.3 million, or
44.0% of revenues, for the year ended December 31, 2002. The increase in gross
profit was due primarily to a reduction in freight costs, improved operating
efficiencies in the call centers and fulfillment centers and elimination of
significant new client startup costs.
Selling, General and Administrative Expenses. S,G&A expenses for the year ended
December 31, 2003 decreased 2.4% to $36.4 million or 48.8% of revenues compared
to $37.3 million or 45.3% of revenues for the year ended December 31, 2002. The
decrease in expenses in 2003 was mainly attributable to a reduction in
information technology personnel and the conversion of information technology
consultants to employees at lower rates, which resulted in a $2.6 million
reduction. This was offset by higher facility costs of $2.2 million associated
with full year rents in our Cincinnati-Hebron and Chicago-Romeoville facilities
and an increase of approximately $700,000 in our accounts receivable reserve.
Start-up expenses associated with new client implementations were also included
in the 2002 results. The increase in S,G&A expense as a percentage of revenues
was primarily due to a reduced revenue base.
Special (Credits)/Charges. During 2003, the Company recorded a special credit of
$30,000 associated with the settlement of a severance claim at an amount lower
then previously reserved for in 2002. During 2002, the Company recorded special
charges of $3.1 million primarily related to the impairment of capitalized
hardware and software costs for systems not being utilized as originally
planned. This was offset by the reversal of a portion of the 2000 special
charges totaling approximately $2.7 million related to accounts receivable
reserves that were no longer required, the redeployment of leased computer
hardware which were previously fully reserved for as special charges, and client
contract amendments which resulted in decreased future obligations to the
Company.
Income Taxes. During 2003, a valuation allowance was recognized for the full
amount of the deferred tax asset as losses in recent years created uncertainty
about the realization of the tax benefits in future years. The valuation
allowance of approximately $9.9 million resulted in an overall tax provision of
approximately $8.8 million.
22
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 $1.4 million at December
31, 2004 as compared to $2.2 million at December 31, 2003. Additionally, the
Company reduced its borrowings under its revolving credit facility (discussed
below) to $3.1 million outstanding at December 31, 2004 as compared to $11.8
million at December 31, 2003. The Company generated positive cash flow from
operations of $9.9 million during the year ended December 31, 2004. The Company
also generated positive cash flow from operations for 2003. We anticipate
positive cash flows from operations again in 2005. One of the primary
contributors to generating cash in 2004 was the further reduction in inventory
of approximately $8.2 million, of which $5.5 million related to the liquidation
of wireless pager inventory as a result of our client exiting this business.
This contributed to reductions in borrowings under our revolving credit facility
of approximately $8.7 million.
The Company currently has a revolving credit agreement with a bank maturing in
June 2005. Although the facility has a maximum borrowing limit of $25.0 million,
the credit facility limits borrowings to a specified percentage of eligible
accounts receivable and inventory, which totaled $15.6 million at December 31,
2004. The maximum borrowing amount of this facility was reduced from $40.0
million to $25.0 million in the third quarter of 2004 as the Company does not
anticipate a need for the larger amount. The Company has granted a security
interest in all of its assets to the lender as collateral under this revolving
credit agreement.
The revolving credit agreement contains various restrictive financial and change
in ownership control covenants. The provisions of the revolving credit agreement
require that the Company maintain a lockbox arrangement with the lender, and
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.
Accordingly, in the event of noncompliance, these amounts could be accelerated.
The lender agreed to increase the limit on annual capital expenditures under the
agreement from $2.0 million to $3.0 million for fiscal 2004. Capital
expenditures were $2.8 million for the year ended December 31, 2004. We
anticipate capital expenditures of approximately $2.0 million in 2005. This
estimate is subject to various contingencies, including the possible need to
incur additional capital expenditures related to new clients or significant new
initiatives by existing clients.
The financial covenants require the Company to maintain a minimum fixed charge
coverage ratio of 1.30 to 1.00. The Company's fixed charge ratio at December 31,
2004 was 1.57 to 1.00. Additionally, the revolving credit agreement contains a
minimum tangible net worth requirement of $24.0 million. The Company's tangible
net worth at December 31, 2004 was $25.2 million. Compliance with the minimum
tangible net worth covenant and other financial covenants is determined on a
quarterly basis.
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 November 13,
2004, the Company fixed $2.0 million of its $3.1 million of borrowings at a
90-day LIBOR rate of 3.78%. Interest expense of approximately $99,000 related to
the 90-day LIBOR was incurred for the year ended December 31, 2004.
During the years ended December 31, 2004, 2003 and 2002 the Company also
incurred interest expense related to the variable portion of the line of credit
of approximately $111,000, $704,000 and $266,100, respectively, resulting in a
weighted average interest rate of 3.48%, 3.80% and 3.75%, respectively. At
December 31, 2004, the Company had $12.5 million of additional availability
under the revolving credit agreement.
During the year ended December 31, 2004, the Company generated $9.9 million in
cash flow from operating activities compared to $3.8 million in cash flow from
operating activities in the same period in 2003. The increase in cash provided
from operating activities was primarily the result of net income in 2004
compared to net loss in 2003, the reduction of $8.2 million in inventory in 2004
compared to a $13.2 million reduction in inventory in 2003 offset by a net
increase in accounts receivable of $2.7 million in 2004 compared to an increase
of $1.5 million in 2003. In addition, there was a reduction of $11.5 million in
accounts payable and accrued expenses in 2003, which consisted of a decrease of
$7.8 million in accounts
23
payable associated with a large inventory purchase made in December 2002 and
paid in January 2003 and a reduction in accrued expenses of $3.8 million
primarily attributable to a reduction in outstanding credits due customers, the
settlement of various legal claims and a reduction in accrued severance.
During the year ended December 31, 2004, net cash used in investing activities
was $2.8 million as compared to $1.4 million in 2003. The increase in net cash
used in investing activities was primarily attributable to additional computer
hardware, software and warehouse equipment for new client and facility
implementations. These expenditures were funded through existing cash on hand,
cash flow from operations and borrowings under the Company's credit facility.
During the year ended December 31, 2004, the net cash used in financing
activities was $8.0 million compared to $1.2 million in the same period in 2003.
The primary difference between years is attributable to a reduction in
outstanding borrowings of $8.7 million in 2004 compared to a reduction in
outstanding borrowings of $2.6 million in 2003. Additionally, during 2003, the
Company generated cash of $1.6 million through the exercise of previously
granted employee stock options, compared to $1.1 million generated in 2004.
The Company estimates that its cash and financing needs through 2005 will be met
by cash flows from operations and its credit facility. The Company has generated
positive cash flows from operations in each of the last three years and
anticipates doing so again in 2005. The Company may need to raise additional
funds in order to take advantage of unanticipated opportunities, such as
acquisitions of complementary businesses or the opening of new facilities. 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.
The Company's primary long-term contractual commitments consist of capital and
operating leases. As of December 31, 2004, the Company did not have any off
balance sheet arrangements that have or are reasonably likely to have a current
or future effect on the financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources. In addition, as of December 31, 2004 the Company did not
participate in any guarantees of other entities' obligations, structured finance
arrangements, synthetic leases, repurchase obligations or similar commercial or
financing commitments. Additionally, the Company does not trade in commodity
contracts.
The following table sets forth the Company's contractual commitments by period.
For additional information, see Note 6 to the Consolidated Financial Statements
(in 000's).
Payments Due by Period
-------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
------- ---------------- --------- --------- -------------
Capital leases $ 56 $ 56 $ - $ - $ -
Operating leases 25,339 8,022 14,879 2,438 -
Line of credit (1) 3,063 3,063 - - -
(1) The provisions of the revolving line of credit agreement require that the
Company maintain a lockbox arrangement with the lender and allow the lender to
declare any outstanding borrowing amounts to be immediately due and payable as a
result of noncompliance with any of the covenants. Accordingly, in the event of
noncompliance, these amounts could be accelerated.
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 forecast, 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
24
concerning our accounting policies can be found in Note 2 to our Consolidated
Financial Statements. The policies that we believe are critical to an investor's
understanding of our financial results and condition and require complex
management judgment are discussed below:
Reserve for Uncollectible Accounts. The Company makes estimates each reporting
period associated with its reserve for uncollectible accounts. These estimates
are based on the aging of the receivables and known specific facts and
circumstances.
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 adopted SFAS No. 142,
"Goodwill and Other Intangible Assets," 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.
Innotrac's goodwill carrying amount as of December 31, 2004 and 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 2005. The third
party valuation supported that the fair value of the reporting unit at January
1, 2005 exceeds the carrying amount of the net assets, including goodwill, and
thus no impairment currently exists. Management has reviewed and concurs with
the major assumptions used in the third party's valuation at January 1, 2005.
The Company will perform this impairment test annually as of January 1 or sooner
if circumstances dictate.
Accounting for Income Taxes. 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 basis 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 December 31, 2004 is $9.7 million. This deferred tax asset was generated
primarily 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 2003. Innotrac has a tax net operating loss carryforward of $31.5 million at
December 31, 2004 that expires between 2020 and 2024.
Innotrac's ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions, collection of
existing outstanding accounts receivable, competitive pressures on sales and
margins and other factors beyond management's control. These factors, combined
with losses in recent years, create uncertainty about the ultimate realization
of the gross deferred tax asset in future years. Therefore, a valuation
allowance of approximately $9.7 million and $9.9 million has been recorded as of
December 31, 2004 and 2003, respectively. Income taxes associated with future
earnings will be offset by a reduction in the valuation allowance. For the year
ended December 31, 2004, the deferred income tax provision of $202,000 was
offset by a corresponding reduction of the deferred tax asset valuation
allowance. When, and if, the Company can return to consistent profitability and
management determines that it will be able to utilize the deferred tax assets
prior to their expiration, the valuation allowance can be reduced or eliminated.
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.
25
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS" No. 123(R), "Share-Based
Payment," which revises SFAS No. 123, "Accounting for Stock-Based Compensation."
The revised Statement clarifies and expands SFAS No. 123's guidance in several
areas, including measuring fair value, classifying an award as equity or as a
liability, and attributing compensation cost to reporting periods. The revised
statement supercedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and its related implementation guidance.
Under the provisions of SFAS 123(R), the alternative to use APB 25's intrinsic
value method of accounting that was provided in SFAS No. 123, as originally
issued, is eliminated, and entities are required to measure liabilities incurred
to employees in share-based payment transactions at fair value. The Company
currently accounts for its stock-based compensation plans under 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. Under the provisions of SFAS No. 123(R) the
Company is permitted to continue the application of APB 25 until the reporting
period ended June 30, 2005, at which time the Company will adopt the provisions
of FAS No. 123(R) and expense the unvested awards issued.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 invest in any derivative financial instruments,
other financial instruments or derivative commodity instruments to hedge any
market risks and does not currently plan to invest in 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 believes its
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
noted in Note 6 to the Consolidated Financial Statements, and the Company has no
long-term purchase commitments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Innotrac Corporation
We have audited the accompanying consolidated balance sheet of Innotrac
Corporation and subsidiaries as of December 31, 2004 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. We have also audited the schedule listed in the Index at
Item 15 as Schedule II as of and for the year ended December 31, 2004. These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audit. The
consolidated financial statements and schedule of Innotrac Corporation and
subsidiaries as of December 31, 2003 and 2002, were audited by other auditors
whose report dated March 30, 2004, expressed an unqualified opinion on those
statements and schedule.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no
26
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and schedule,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial
statements and schedule. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Innotrac Corporation
and subsidiaries at December 31, 2004, and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related schedule present fairly, in all material respects, the information set
forth therein as of and for the year ended December 31, 2004.
/s/ BDO Seidman, LLP
Atlanta, Georgia
March 25, 2005
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Innotrac Corporation:
We have audited the accompanying consolidated balance sheets of Innotrac
Corporation and its subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the years then ended. Our audits also included the 2003 and 2002
financial statement schedule listed in the Index at Item 15 as Schedule II.
These financial statements and financial statement schedule are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on the 2003 and 2002 financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the 2003 and 2002 consolidated financial statements present
fairly, in all material respects, the financial position of Innotrac Corporation
and its subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, the 2003 and 2002 financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 30, 2004
28
INNOTRAC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN 000's)
DECEMBER 31,
ASSETS 2004 2003
------ ------- --------
CURRENT ASSETS:
Cash and cash equivalents $1,377 $ 2,228
Accounts receivable, net of allowance of $1,624 (2004) and $1,696 (2003) 18,405 15,682
Inventories, net 2,662 10,896
Prepaid expenses and other 1,986 915
------- --------
TOTAL CURRENT ASSETS 24,430 29,721
------- --------
PROPERTY AND EQUIPMENT:
Rental equipment 556 895
Computers, machinery and equipment 29,034 27,320
Furniture, fixtures and leasehold improvements 4,957 4,682
------- --------
34,547 32,897
Less accumulated depreciation and amortization (22,048) (18,147)
------- --------
12,499 14,750
------- --------
Goodwill 25,169 25,169
Other assets, net 1,275 1,322
------- --------
TOTAL ASSETS $63,373 $ 70,962
======= ========
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2004 2003
------------------------------------ ------- --------
CURRENT LIABILITIES:
Accounts payable $ 6,023 $ 5,738
Line of credit 3,063 11,802
Accrued expenses and other 2,630 2,577
------- --------
TOTAL CURRENT LIABILITIES 11,716 20,117
------- --------
NONCURRENT LIABILITIES:
Deferred compensation 875 733
Other noncurrent liabilities 223 350
------- --------
TOTAL NONCURRENT LIABILITIES 1,098 1,083
------- --------
Commitments and contingencies (see Note 6) - -
SHAREHOLDERS' EQUITY:
Preferred stock: 10,000,000 shares authorized,
$0.10 par value, no shares outstanding - -
Common stock: 50,000,000 shares authorized, $0.10 par value,
11,948,743 (2004) and 11,715,280 (2003) shares issued and outstanding 1,195 1,171
Additional paid-in capital 64,644 63,791
Accumulated deficit (15,280) (15,200)
------- --------
TOTAL SHAREHOLDERS' EQUITY 50,559 49,762
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $63,373 $ 70,962
======= ========
The accompanying notes are an integral part of these consolidated
balance sheets.
29
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000's, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
2004 2003 2002
------- -------- --------
Revenues, net $78,322 $ 74,740 $ 82,420
Cost of revenues 37,925 35,157 46,444
Special (credits), net - - (293)
------- -------- --------
TOTAL COST OF REVENUES 37,925 35,157 46,151
------- -------- --------
GROSS PROFIT 40,397 39,583 36,269
------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative 34,800 36,444 37,332
Special (credits) charges, net - (30) 404
Depreciation and amortization 5,202 5,622 5,336
------- -------- --------
Total operating expenses 40,002 42,036 43,072
------- -------- --------
OPERATING INCOME (LOSS) 395 (2,453) (6,803)
------- -------- --------
OTHER EXPENSE (INCOME):
Interest expense (income), net 285 741 318
Other - 15 (124)
------- -------- --------
TOTAL OTHER EXPENSE 285 756 194
------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 110 (3,209) (6,997)
INCOME TAX (PROVISION) BENEFIT - (8,772) 2,578
------- -------- --------
NET INCOME (LOSS) $ 110 $(11,981) $ (4,419)
======= ======== ========
EARNINGS (LOSS) PER SHARE:
Basic $ 0.01 $ (1.04) $ (0.38)
======= ======== ========
Diluted $ 0.01 $ (1.04) $ (0.38)
======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,865 11,542 11,516
======= ======== ========
Diluted 12,522 11,542 11,516
======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
30
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(IN 000's)
Accumulated
Retained Other
Common Stock Earnings Comprehensive Treasury
------------------ Paid in (Accumulated
Shares Amount Capital Deficit Income Stock Total
------ ------- -------- ------------ ------------- -------- --------
BALANCE AT DECEMBER 31, 2001 11,365 $ 1,136 $ 61,023 $ 1,201 $ 178 $(255) $ 63,283
Issuance of common stock 310 31 1,519 - - - 1,550
Restricted stock grant, net - - 72 - - - 72
Purchase of treasury stock - - - - - (448) (448)
Comprehensive income:
Net loss - - - (4,419) - - (4,419)
Reclassification adjustment for
realized gain included in
Consolidated Statement of
Operations - - - - (178) - (178)
------ ------- -------- -------- ----- ----- --------
BALANCE AT DECEMBER 31, 2002 11,675 $ 1,167 $ 62,614 $ (3,219) $ - $(703) $ 59,859
Issuance of common stock 40 4 264 - - - 268
Restricted stock grant, net - - 328 - - - 328
Issuance of treasury stock - - 304 - - 703 1,007
Tax benefit for stock options
exercised - - 281 - - - 281
Net loss - - - (11,981) - - (11,981)
------ ------- -------- -------- ----- ----- --------
BALANCE AT DECEMBER 31, 2003 11,715 $ 1,171 $ 63,791 $(15,200) $ - $ - $ 49,762
Issuance of common stock 258 26 1,133 - - - 1,159
Restricted stock grant, net - - (186) - - - (186)
Shares retired (24) (2) (94) (190) - - (286)
Net income - - - 110 - - 110
------ ------- -------- -------- ----- ----- --------
BALANCE AT DECEMBER 31, 2004 11,949 $ 1,195 $ 64,644 $(15,280) $ - $ - $ 50,559
====== ======= ======== ======== ===== ===== ========
The accompanying notes are an integral part of these consolidated statements.
31
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
YEAR ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 110 $(11,981) $ 4,419)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 5,202 5,622 5,336
(Decrease) increase in allowance for doubtful accounts (72) 737 (2,304)
Impairment and/or loss on disposal of fixed assets 106 22 3,638
Deferred income taxes - 8,492 (5,317)
Amortization of deferred compensation 84 72 72
Changes in working capital, net of effect of businesses acquired:
(Increase) decrease in accounts receivable, gross (2,651) (2,216) 1,763
Decrease in inventories 8,234 13,202 3,165
(Increase) decrease in prepaid expenses and other assets (1,304) 1,338 1,248
Increase (decrease) in accounts payable 285 (7,780) 4,936
(Decrease) increase in accrued expenses and other (93) (3,714) (4,248)
------- -------- --------
Net cash provided by operating activities 9,901 3,794 3,870
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,762) (1,182) (12,830)
Acquisition of businesses, net of cash acquired - (181) (13,502)
Sale (purchase) of available-for-sale securities - - 436
------- -------- --------
Net cash used in investing activities (2,762) (1,363) (25,896)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under line of credit (8,740) (2,570) 14,372
Repayment of capital lease and other obligations (82) (119) (250)
Exercise of employee stock options 1,133 1,556 -
Stock reacquired to settle employee stock bonus withholding tax obligation (286) - -
Purchase of treasury stock - - (448)
Loan fees paid (15) (31) (100)
------- -------- --------
Net cash (used in) provided by financing activities (7,990) (1,164) 13,574
------- -------- --------
Net (decrease) increase in cash and cash equivalents (851) 1,267 (8,452)
Cash and cash equivalents, beginning of period 2,228 961 9,413
------- -------- --------
Cash and cash equivalents, end of period $ 1,377 $ 2,228 $ 961
======= ======== ========
Supplemental cash flow disclosures:
Cash paid for interest $ 321 $ 794 $ 355
======= ======== ========
Cash income tax refunds received, net of taxes paid $ - $ (1,565) $ (18)
======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
32
1. ORGANIZATION
Innotrac Corporation ("Innotrac" or the "Company"), a Georgia corporation,
provides order processing, order fulfillment and call center services. The
Company offers inventory management, inbound call center, pick/pack/ship
services, order tracking, transaction processing and returns handling from its
leased facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada,
Bolingbrook, Illinois, Hebron, Kentucky and New Castle, Delaware.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement Presentation. The consolidated financial statements
include the accounts of the Company and its subsidiary (which was merged into
the Company effective January 1, 2005). The financial statements have been
prepared on the accrual basis of accounting in conformity with accounting
principles generally accepted in the United States of America. All significant
intercompany transactions and balances have been eliminated in consolidation.
Reclassifications have been made to prior year consolidated statements of cash
flows to conform to the 2004 presentation.
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.
Concentration of Revenues. Revenues earned under the Company's contracts with
its telecommunication clients to provide fulfillment of telecommunications
equipment and related order processing and call center support services,
including DSL modems and wireless pagers, accounted for approximately 38%, 42%
and 46% of total revenues for the years ended December 31, 2004, 2003 and 2002,
respectively. Revenues generated from the fulfillment of DSL and cable modem
equipment accounted for 20%, 19%, and 19% of the aforementioned totals.
The following table sets forth the percentage of total revenues derived from
each of the Company's largest clients for the years ended December 31, 2004,
2003 and 2002. Except for the major clients noted in the following table, no
other single customer provided more than 10% of consolidated revenues during
these years.
2004 2003 2002
---- ---- ----
BELLSOUTH - TELECOM EQUIPMENT 14.5% 18.5% 18.7%
- DSL EQUIPMENT 12.5 13.0 9.7
SMITH & HAWKEN 12.9 13.2 5.6
TACTICA 3.0 10.2 16.8
Cash and Cash Equivalents. The Company considers all short-term, highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Fair Value of Financial Instruments. The carrying value of the Company's
revolving credit facility approximates fair value given that interest rates
under the facility are based on prevailing market rates. The book value of the
Company's accounts receivable and accounts payable approximate fair value.
33
Inventories. Inventories, consisting primarily of telephones and interactive
wireless pagers are stated at the lower of cost or market, with cost determined
by the first-in, first-out method. Substantially all inventory at December 31,
2004 and 2003 is for the account of one client who has indemnified the Company
from substantially all risk associated with such inventory.
Property and Equipment. Property and equipment are stated at cost. Depreciation
is determined using straight-line methods over the following estimated useful
lives:
Rental equipment 3 years
Computers and software 3-5 years
Machinery and equipment 5-7 years
Furniture and fixtures 7 years
Leasehold improvements are amortized using the straight-line method over the
shorter of the service lives of the improvements or the remaining term of the
lease. Depreciation expense for the years ended December 31, 2004, 2003 and 2002
were $4.9 million, $5.3 million and $5.0 million, respectively. Maintenance and
repairs are expensed as incurred.
Goodwill and Other Acquired Intangibles.Goodwill represents the cost of acquired
enterprises in excess of the fair market value of the net tangible and
identifiable intangible assets acquired. The Company adopted SFAS No. 142,
"Goodwill and Other Intangible Assets" effective January 1, 2002, which changed
the accounting for goodwill and other indefinite life intangibles from an
amortization method to an impairment only approach. The Company tests goodwill
annually for impairment at 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 as of January 1, 2005 in accordance with SFAS No. 142,
no impairment was determined to exist at that time. Innotrac's goodwill carrying
amount as of December 31, 2004 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.
The Company has intangible assets that continue to be subject to amortization
under the provisions of SFAS No. 142. The intangible assets consist of acquired
customer contracts, which are included in other assets in the Company's
Consolidated Balance Sheets and which are amortized over a period of 1 to 5
years on a straight-line basis.At December 31, 2004 and 2003, the Company had
intangible assets, consisting primarily of customer contracts, of approximately
$187,000 and $387,000, net of accumulated amortization of approximately $1.1
million and $873,000, respectively. Amortization expense of these intangible
assets amounted to approximately $202,000, $202,000 and $369,000 during the
years ended December 31, 2004, 2003 and 2002, respectively.
Impairment of Long-Lived Assets. The Company reviews long-lived assets and
certain intangible assets for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Impairment
would be measured based on a projected cash flow model. If the projected
undiscounted cash flows for the asset are not in excess of the carrying value of
the related asset, the impairment would be determined based upon the excess of
the carrying value of the asset over the projected discounted cash flows for the
asset.
Accounting for Income Taxes. 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 basis 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. A valuation allowance has been
recorded against deferred tax assets at December 31, 2004 (see Note 7).
34
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. As required by the consensus
reached in EITF No. 01-14, "Income Statement Characterization of Reimbursements
Received for Out-of Pocket Expenses Incurred," the Company records
reimbursements received from customers for out-of pocket expenses, primarily
freight and postage fees, as revenue and the associated expense as cost of
revenue.
Cost of Revenues. The primary components of cost of revenues include labor costs
for the fulfillment and call centers, telephone minute fees, and freight and
packaging material costs. Costs related to facilities, equipment, account
services and information technology are included in selling, general and
administrative expense along with other operating costs. As a result of the
Company's policy to include facility, account services and information
technology costs in selling, general and administrative expense, our gross
margins may not be comparable to other fulfillment companies.
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 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):
YEAR ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
------- ---------- ---------
Net income (loss) as reported $ 110 $ (11,981) $ (4,419)
Pro forma net loss $ (677) $ (12,699) $ (5,074)
Basic net income (loss) per share as reported $ 0.01 $ (1.04) $ (0.38)
Diluted net income (loss) per share as reported $ 0.01 $ (1.04) $ (0.38)
Pro forma net loss per share $ (0.06) $ (1.10) $ (0.44)
Under the fair value based method, compensation cost, net of tax is $787,000,
$718,000 and $655,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
35
The Company has computed for pro forma disclosure purposes the value of all
options granted using the Black-Scholes option-pricing model as prescribed by
SFAS No. 123 using the following weighted average assumptions:
2004 2003 2002
---- ---- ----
Risk-free interest rate 4.23% 4.27% 4.05%
Expected dividend yield 0% 0% 0%
Expected lives 2.3 Years 2.6 Years 3.1 Years
Expected volatility 75.1% 80.4% 86.6%
Earnings Per Share. Basic earnings per share is computed by dividing net income
by the weighted average number of common shares outstanding. In the computation
of diluted earnings per share, the weighted average number of common shares
outstanding is adjusted for the effect of all potential common stock equivalent
shares.
Recent Accounting Pronouncements. In December 2004, the FASB issued SFAS No.
123(R), "Share-Based Payment" which revises SFAS No. 123, "Accounting for
Stock-Based Compensation." The revised Statement clarifies and expands SFAS No.
123's guidance in several areas, including measuring fair value, classifying an
award as equity or as a liability, and attributing compensation cost to
reporting periods. The revised statement supercedes Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and its
related implementation guidance. Under the provisions of SFAS 123(R), the
alternative to use APB 25's intrinsic value method of accounting that was
provided in Statement No. 123, as originally issued, is eliminated, and entities
are required to measure liabilities incurred to employees in share-based payment
transactions at fair value. The Company currently accounts for its stock-based
compensation plans under 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. Under the
provision of SFAS No. 123(R) the Company is permitted to continue the
application of APB 25 until the reporting period ended June 30, 2005, at which
time the Company will adopt the provisions of FAS No. 123(R) and expense the
unvested awards issued.
3. SPECIAL CHARGES AND SPECIAL CREDITS
The Company recorded special charges of $34.3 million during the year ended
December 31, 2000. At December 31, 2003 and 2002, the Company had approximately
$0 and $277,000, respectively, in remaining accruals related to the special
charges recorded during the year ended December 31, 2000. Cash payments relating
to the special charge accruals for the years ended December 31, 2003 and 2002
were approximately $277,000 and $716,000, respectively.
The Company recognized approximately $3.0 million of special credits during the
year ended December 31, 2002, related to gains realized on sales of inventory
items which were written off as special charges in previous periods, cash
collected for accounts receivable that were written off as special charges in
previous periods, redeployment of leased computer hardware for which the leases
were fully accrued for as special charges in previous periods, and client
contract amendments which resulted in reduced liabilities. These amounts were
recorded as a reduction in the special charge line item in the consolidated
statements of operations.
During 2002, the Company also recognized an additional $3.1 million in special
charges. Approximately $2.4 million of these charges were related to capitalized
hardware and software costs for systems purchased specifically for a potential
new client which were subsequently not utilized as originally planned. The loss
of the potential customer indicated that the carrying value of the asset group
was potentially not recoverable, and therefore, an impairment test under the
provisions of SFAS No. 144 was performed. As fair market value of the asset
group was not readily determinable, a discounted, probability weighted cash flow
model was utilized as a basis to determine fair value. As a result of the cash
flow analysis, a $2.4
36
million impairment charge was recorded. Of the remaining charges, approximately
$500,000 related to the write-down to net realizable value of specified fixed
assets obtained as part of the December 2000 acquisition of UDS which were being
utilized for one specific customer who ceased conducting business with UDS. The
balance of approximately $200,000 was related to severance costs for positions
which were eliminated.
4. ACCOUNTS RECEIVABLE
Accounts receivable were composed of the following at December 31, 2004 and 2003
(in 000's):
2004 2003
---- ----
Billed receivables $19,449 $17,231
Unbilled receivables 580 147
------- -------
20,029 17,378
Less: Allowance for doubtful accounts (1,624) (1,696)
------- -------
$18,405 $15,682
======= =======
5. FINANCING OBLIGATIONS
The Company currently has a revolving credit agreement with a bank maturing in
June 2005. Although the facility has a maximum borrowing limit of $25.0 million,
the credit facility limits borrowings to a specified percentage of eligible
accounts receivable and inventory, which totaled $15.6 million at December 31,
2004. The maximum borrowing amount of this facility was reduced from $40.0
million to $25.0 million in the third quarter of 2004 as the Company does not
anticipate a need for the larger amount. The Company has granted a security
interest in all of its assets to the lender as collateral under this revolving
credit agreement.
The revolving credit agreement contains various restrictive financial and change
in ownership control covenants. The provisions of the revolving credit agreement
require that the Company maintain a lockbox arrangement with the lender, and
allow the lender to declare any outstanding borrowing amounts to be immediately
due and payable as a result of noncompliance with any of the covenants.
Accordingly, in the event of noncompliance, these amounts could be accelerated.
The lender agreed to increase the limit on annual capital expenditures under the
agreement from $2.0 million to $3.0 million for fiscal 2004. Capital
expenditures were $2.8 million in the twelve months ended December 31, 2004.
The financial covenants require the Company to maintain a minimum fixed charge
coverage ratio of 1.30 to 1.00. The Company's fixed charge ration at December
31, 2004 was 1.57 to 1.00. Additionally, the revolving credit agreement contains
a minimum tangible net worth requirement of $24.0 million. The Company's
tangible net worth at December 31, 2004 was $25.2 million. Compliance with the
minimum tangible net worth covenant and other financial covenants is determined
on a quarterly basis.
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 November 13,
2004, the Company fixed $2.0 million of its $3.1 million of borrowings at a
90-day LIBOR rate of 3.78%. Interest expense of approximately $99,000 related to
the 90-day LIBOR was incurred for the year ended December 31, 2004. During the
years ended December 31, 2004, 2003 and 2002 the Company also incurred interest
expense related to the variable portion of the line of credit of approximately
$111,000, $704,000 and $266,100, respectively, resulting in a weighted average
interest rate of 3.48%, 3.80% and 3.75%, respectively. At December 31, 2004, the
Company had $12.5 million of additional availability under the revolving credit
agreement.
37
6. COMMITMENTS AND CONTINGENCIES
Operating Leases. Innotrac leases office and warehouse space and equipment under
various operating leases. The primary office and warehouse operating leases
provide for escalating payments over the lease term. Innotrac recognizes rent
expense on a straight-line basis over the lease term. The Company also has
capital lease obligations that expire over the next year primarily for warehouse
equipment and computer hardware.
Aggregate future minimum lease payments under noncancellable operating and
capital leases with original periods in excess of one year as of December 31,
2004 are as follows (in 000's):
CAPITAL OPERATING
LEASES LEASES
------- ---------
2005.......................................... $56 $ 8,022
2006.......................................... - 8,060
2007.......................................... - 6,819
2008.......................................... - 1,800
2009.......................................... - 638
----- --------
Total minimum lease payments.................. $56 $25,339
Amount related to interest (2)
-----
Capital lease obligations 54
-----
Current portion (54)
-----
Long-term portion $ -
=====
Rent expense under all operating leases totaled approximately $8.6 million, $8.1
million and $6.1 million during the years ended December 31, 2004, 2003 and
2002, respectively.
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.
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 40% for a particular shareholder that owned approximately 28.3% of
the shares outstanding on December 31, 2004. 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.
Employment Commitment. In June 1999, in conjunction with the opening of a new
call center facility, the Company entered into an Employment Commitment
Agreement with the City of Pueblo, Colorado,
38
whereby the Company received cash incentives of $968,000. These funds were
accounted for as a reduction in the basis of the assets acquired. In return for
this consideration, the Company is obligated to employ a minimum number of
full-time employees at its Pueblo facility, measured on a quarterly basis. This
obligation, which became effective June 2002, will continue through June 2009.
During 2002, 2003 and 2004, the Company had substantially met the minimum
employee requirements of 359 full-time employees, as measured on a quarterly
basis. In the event that the number of full-time employees fails to meet the
minimum requirement, the Company will incur a quarterly penalty of $96.30 for
each employee less than the minimum required amount.
7. INCOME TAXES
Details of the income tax benefit (provision) for the years ended December 31,
2004, 2003 and 2002 are as follows (in 000's):
2004 2003 2002
---- -------- -------
Current $ - $ (232) $3,312
---- ------- ------
Deferred - (8,540) (734)
---- ------- ------
$ - $(8,772) $2,578
==== ======= ======
Deferred income taxes reflect the net effect of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 2004 and 2003 are as follows (in 000's):
2004 2003
------- -------
Deferred tax assets:
Net operating loss carryforwards $12,120 $11,541
Allowance for doubtful accounts 619 604
Reserves 2 230
Other 9 451
------- -------
Total deferred tax assets 12,750 12,826
Valuation allowance (9,680) (9,882)
------- -------
Net deferred tax assets 3,070 2,944
Deferred tax liabilities:
Depreciation (3,070) (2,944)
------- -------
Net deferred taxes - -
Net deferred taxes:
Current deferred tax assets - -
Noncurrent deferred tax assets - -
------- -------
$ - $ -
======= =======
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 basis 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 gross deferred tax asset as of December 31, 2004 is
approximately $12.8 million. This deferred tax asset was generated primarily by
net operating loss carryforwards created primarily by the special charge of
$34.3 million recorded in 2000 and the net losses
39
generated in 2002 and 2003. Innotrac has a tax net operating loss carryforward
of $31.5 million at December 31, 2004 that expires between 2020 and 2024.
Innotrac's ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions, collection of
existing outstanding accounts receivable, competitive pressures on sales and
margins and other factors beyond management's control. These factors, combined
with losses in recent years, creates uncertainty about the ultimate realization
of the gross deferred tax asset in future years. Therefore, a valuation
allowance of approximately $9.7 million and $9.9 million has been recorded as of
December 31, 2004 and 2003, respectively. Income taxes associated with future
earnings will be offset by a reduction in the valuation allowance. For the year
ended December 31, 2004, the deferred income tax provision of $202,000 was
offset by a corresponding reduction of the deferred tax asset valuation
allowance. When, and if, the Company can return to consistent profitability and
management determines that it will be able to utilize the deferred tax assets
prior to their expiration, the valuation allowance can be reduced or eliminated.
The difference between the provision for income taxes (benefit) and the amount
computed by applying the U.S. federal income tax rate for the years ended
December 31, 2004, 2003 and 2002 is as follows:
2004 2003 2002
---- ---- ----
Statutory federal income tax (benefit) $ 37 $(1,091) $ (2,379)
State income taxes, net of federal effect 4 (106) (280)
Items not deductible for tax purposes 69 109 77
Valuation allowance for deferred tax assets (110) 9,882 -
Other - (22) 4
----- ------- ---------
Income tax provision (benefit) $ - $ 8,772 $ (2,578)
===== ======= =========
8. EARNINGS PER SHARE
The following table shows the shares used in computing diluted earnings per
share ("EPS") in accordance with Statement of Financial Accounting Standards No.
128 (in 000's):
2004 2003 2002
------ ------ ------
Diluted earnings per share:
Weighted average shares outstanding 11,865 11,542 11,516
Employee and director stock options 657 - -
------ ------ ------
Weighted average shares
assuming dilution 12,522 11,542 11,516
====== ====== ======
Options and warrants outstanding to purchase shares of the Company's common
stock aggregating 87,500, 1.9 million and 2.2 million were not included in the
computation of diluted EPS for the years ended December 31, 2004, 2003 and 2002,
respectively, because their effect was anti-dilutive. This includes a warrant
with registration rights issued to Thane International in December 2000 to
purchase 150,000 shares of Innotrac common stock at the exercise price of $6.50,
which vests 20% annually, which expires December 8, 2010.
40
9. OTHER COMPREHENSIVE LOSS
SFAS No. 130, "Reporting Comprehensive Income," established standards for
reporting and display of comprehensive income and its components in financial
statements. For the years ended December 31, 2004, 2003 and 2002, the components
of the Company's comprehensive loss are as follows (in 000's):
Year Ended
December 31,
----------------------------
2004 2003 2002
---- -------- -------
Other comprehensive loss:
Net income (loss) $110 $(11,981) $(4,419)
Unrealized gain - - -
Reclassification adjustment for realized gains included in - - (76)
consolidated statement of operations
---- -------- -------
Comprehensive loss $110 $(11,981) $(4,495)
==== ======== =======
10. SHAREHOLDERS' EQUITY
In June 2000, the Company's Board of Directors authorized the repurchase, at the
direction of senior management, of up to $5.0 million of the Company's common
stock. The stock repurchase program was extended for an additional twelve months
by the Board of Directors in February 2002. During the years ended December 31,
2004, 2003 and 2002, the Company repurchased approximately 0, 0 and 205,400
shares at a total cost of $0, $0 and $448,000, respectively.
At December 31, 2003, all treasury shares previously repurchased had been
reissued for stock options exercised during 2003, and accordingly no treasury
stock remains.
11. EMPLOYEE RETIREMENT PLANS
Innotrac employees may participate in a 401(k) defined contribution plan. The
plan covers all employees who have at least six months of service and are 18
years of age or older. Participants may elect to defer up to 15% of compensation
up to a maximum amount determined annually pursuant to IRS regulations. Prior to
July 1, 2004, Innotrac's policy was to provide matching employer contributions
equal to 15% of contributions for less than five years of service, 25% of
contributions for five to nine years of service, and 35% of contributions for
over nine years of service. However, this match was suspended from January 1,
2002 through June 30, 2002, reinstituted from July 1, 2002 through December 31,
2002 and was temporarily suspended thereafter. Effective July 1, 2004 and
through December 31, 2004, Innotrac reinstituted a matching employer
contribution equal to 5% of contributions for less than five years of service,
10% of contributions for five to nine years of service and 15% of contributions
for over nine years of service. These rates were adjusted effective January 1,
2005 to 5% of contributions for less than four years of service and 10% of
contributions for over four years of service. Total matching contributions made
to the plan and charged to expense by Innotrac for the years ended December 31,
2004, 2003 and 2002 were approximately $16,000, $0 and $49,000, respectively.
The Company has an executive deferred compensation plan for certain employees,
as designated by the Company's Board of Directors. Participants may elect to
defer up to 30% of compensation. Innotrac's policy is to provide matching
employer contributions ranging from 20% to 100% of employee contributions based
on years of service. However, this match was suspended for 2004, 2003 and 2002,
but reinstated effective January 1, 2005 at a match of 5% of contributions for
less than four years of service and 10% of contributions for over four years of
service. The Company invests these contributions in employee-directed marketable
equity securities which are recorded as trading securities at fair-market value
on the accompanying consolidated balance sheet (in other assets) and aggregated
$874,865 and $733,446 at December 31, 2004 and 2003, respectively. The monies
held by the plan are subject to general creditors of the Company in the event of
a Company bankruptcy filing.
41
12. STOCK BASED COMPENSATION
The Company has adopted two stock option plans: the 1997 and 2000 Stock Option
and Incentive Award Plans ("The Plans"). The Plans provide key employees,
officers, directors, contractors and consultants an opportunity to own shares of
common stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under The Plans may be
structured in a variety of ways, including as "incentive stock options," as
defined in Section 422 of the Internal Revenue Code, as amended, non-qualified
stock options, restricted stock awards, and stock appreciation rights ("SARs").
Incentive stock options may be granted only to full-time employees (including
officers) of the Company. Non-qualified options, restricted stock awards, SARs,
and other permitted forms of awards may be granted to any person employed by or
performing services for the Company, including directors, contractors and
consultants. The 1997 Stock Option Plan and 2000 Stock Option Plan, as amended,
provide for the issuance of options to purchase up to an aggregate of 800,000
shares and 2,800,000 shares of common stock, respectively. At December 31, 2004,
there were 1,581,100 shares available to be issued under The Plans.
Incentive stock options are also subject to certain limitations prescribed by
the Code, including the requirement that such options may not be granted to
employees who own more than 10% of the combined voting power of all classes of
voting stock of the Company, unless the option price is at least 110% of the
fair market value of the common stock subject to the option. The Board of
Directors of the Company (or a committee designated by the Board) otherwise
generally has discretion to set the terms and conditions of options and other
awards, including the term, exercise price and vesting conditions, if any; to
select the persons who receive such grants and awards; and to interpret and
administer The Plans.
A summary of the options outstanding and exercisable by price range as of
December 31, 2004 is as follows (shares in 000's):
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
As of Weighted Average Weighted Average
Range of December 31, Remaining Average As of Exercise
Exercise Prices 2004 Contractual Life Exercise Price December 31, 2004 Price
- --------------- ------------ ---------------- -------------- ----------------- --------
$1.77 - $3.54 456 6.9 $ 3.34 261 $ 3.29
$3.54 - $5.31 216 7.0 4.29 96 4.35
$5.31 - $7.07 227 5.8 6.44 199 6.37
$7.07 - $8.84 188 5.5 7.24 173 7.20
$8.84 - $10.61 340 5.3 9.22 221 9.10
$10.61 - $12.38 63 7.3 11.89 20 12.00
$12.38 - $14.15 5 4.8 12.63 5 12.63
$15.92 - $17.68 20 4.2 16.87 20 16.87
----- --- ------ --- -------
1,515 6.2 $ 6.30 995 $6.46
===== === ====== === =======
42
A summary of activity in the Company's two stock option plans is as follows
(shares in 000's):
Weighted
Shares Average Price
------ -------------
Outstanding at December 31, 2001 1,808 6.23
Granted 559 3.41
Forfeited (330) 5.96
----- -----
Outstanding at December 31, 2002 2,037 5.50
Granted 120 4.31
Exercised (306) 4.35
Forfeited (209) 5.79
----- -----
Outstanding at December 31, 2003 1,642 5.59
Granted 213 10.45
Exercised (186) 4.53
Forfeited (154) 6.63
----- -----
Outstanding at December 31, 2004 1,515 6.30
===== =====
Options exercisable at December 31, 2004, 2003 and 2002 were 995,000, 764,000
and 790,000 respectively, with a weighted average price of $6.46, $7.07 and
$6.81, respectively.
13. RELATED PARTY TRANSACTIONS
The Company leases a single engine aircraft from a company wholly-owned by our
Chairman and Chief Executive Officer, pursuant to an agreement that provides for
Innotrac to pay for 86% of all expenses associated with this aircraft. This
allocation is determined annually based on actual business usage. The Company
paid approximately $205,000 during 2004. For the years ended December 31, 2003
and 2002, the Company paid $133,656 and $60,000, respectively.
The Company paid approximately $29,000, $82,500 and $63,000 during 2004, 2003
and 2002, respectively, in fees to an accounting firm for tax and consulting
services. One of the directors of the Company is the Managing Partner and part
owner of that firm.
The Company paid approximately $527,000, $863,000 and $744,000 during 2004, 2003
and 2002, respectively, in fees to a print broker for services related to the
printing of marketing, client, inter-company and other materials. The broker is
owned by the brother of the Company's Chairman and Chief Executive Officer.
In 2003, the Company and the IPOF Group (consisting of IPOF Fund, LP and its
general partner, David Dadante), which as of December 31, 2004 beneficially
owned approximately 3.4 million shares of Common Stock, entered into an amended
Agreement to permit the IPOF Group to acquire up to 40% of the Common Stock on
the terms set forth in that Agreement without becoming an "Acquiring Person"
under the Company's Rights Agreement with SunTrust Bank. The Agreement with the
IPOF Group contains various restrictions on the IPOF's Group right to vote and
take certain other shareholder actions. Among these restrictions, the IPOF Group
agreed to vote all shares in excess of 15% proportionately with vote(s) cast by
the other shareholders of the Company and not seek to place a representative on
the Company's Board or seek to remove any member of the Board.The IPOF Group
further acknowledged that it is an "affiliate," as defined under applicable
federal securities law.
During 2004, the Company became aware of possible IPOF Group violations of the
short-swing profit rules under Section 16(b) of the Securities and Exchange Act
of 1934. Upon conclusion of the investigation of this matter, the Company and
IPOF Group, on March 3, 2004, entered into a Settlement Agreement regarding the
potential Section 16(b) liability issues that provides for the Company's
recovery in 2006 of $301,957.
43
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(000's, except per share data) First Second Third Fourth (1)
------- ------- ------- ----------
2004 Quarters:
Revenues, net $19,994 $19,808 $17,631 $20,889
Operating (loss) income 320 302 (339) 112
Net (loss) income 227 225 (402) 60
Net (loss) income per share-basic 0.02 0.02 (0.03) 0.00
Net (loss) income per share-diluted $ 0.02 $ 0.02 $ (0.03) $ 0.00
2003 Quarters:
Revenues, net $18,334 $17,631 $18,545 $20,230
Operating income (loss) (1,165) (472) (180) (636)
Net income (892) (393) (249) (10,447)
Net income per share-basic (0.08) (0.03) (0.02) (0.89)
Net income per share-diluted $ (0.08) $ (0.03) $ (0.02) $ (0.89)
(1) Results for the fourth quarter of 2003 include valuation allowances for the
deferred tax asset and for one specific account receivable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note 7 for further explanation
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 8, 2004 the Audit Committee of the Board of Directors dismissed its
independent registered public accounting firm, Deloitte & Touche LLP, and
appointed BDO Seidman LLP as its new independent registered public accounting
firm. This matter was previously reported on a Form 8-K filed July 13, 2004. As
previously reported, there were no disagreements of the type described in
paragraph (a)(1)(iv) or any reportable events as described in paragraph
(a)(1)(v) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
Our management, with the participation of the Chief Executive Officer and
principal financial officer, evaluated our disclosure controls and procedures
(as defined in federal securities rules) as of December 31, 2004. No system of
controls, no matter how well designed and operated, can provide absolute
assurance that the objectives of the system of controls are met, and no
evaluation of controls can provide absolute assurance that the system of
controls has operated effectively in all cases. Our disclosure controls and
procedures however are designed to provide reasonable assurance that the
objectives of disclosure controls and procedures are met. Based on the
evaluation discussed above, our CEO and principal financial officer have
concluded that our disclosure controls and procedures were effective as of the
date of that evaluation to provide reasonable assurance that the objectives of
disclosure controls and procedures are met.
There were no changes in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, Innotrac's
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On March 14, 2005, the Compensation Committee approved a discretionary increase
in salary up to 3-1/2% for Robert J. Toner and James R. McMurphy.
44
On March 28, 2005, the Compensation Committee approved bonuses with respect to
service during 2004 for the following executive officers for the following
amounts:
Scott D. Dorfman........................ $75,000
Larry C. Hanger......................... 30,000
Robert J. Toner......................... 45,000
James R. McMurphy....................... 50,000
On March 28, 2004, the Compensation Committee approved an officer retention plan
pursuant to which David Ellin, Larry C. Hanger, James R. McMurphy and Robert J.
Toner would receive certain cash payments if there were a change in control
transaction involving the Company, so long as such officer continued to be
employed by the Company until the time of any such transaction. The plan is
intended to promote continuity of management by giving certain senior management
incentives to increase the long-term value of the Company. Payments would be
made under the plan only if the Company received total consideration in a change
of control transaction of at least $90 million. Maximum payments under the plan
would equal $5.0 million if the Company were sold for at least $90 million but
less than $100 million, and for each additional $10 million in consideration
received the pool would be increased by $1 million, with a maximum bonus pool of
$16 million at a purchase price of $200 million. The percentage interest of each
participant in the plan will be determined by the Compensation Committee at a
later date. Payments to participants would consist of cash bonus payments,
grants of restricted stock that may be made at a later date, and payments for
restrictive covenant agreements with the officers that would be entered into at
the time of any change of control. In no event will payments to any participant
exceed the applicable limits on excess parachute payments in Section 280G of the
Internal Revenue Code.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 contained under the headings "Board
Matters," "Election of Directors" and "Voting Securities and Principal
Shareholders -- Section 16(a) Beneficial Ownership Reporting Compliance" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 2005 Annual Meeting of Shareholders, to be filed with the
Commission, is hereby incorporated herein by reference. Pursuant to Instruction
3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the
executive officers of the Company is included in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 contained under the heading "Executive
Compensation" and Board Matters -- Directors' Compensation" in the definitive
Proxy Statement used in connection with the solicitation of proxies for the
Company's 2005 Annual Meeting of Shareholders, to be filed with the Commission,
is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item 12 contained under the headings "Voting
Securities and Principal Shareholders" and "Equity Compensation Plans" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 2005 Annual Meeting of Shareholders, to be filed with the
Commission, is hereby incorporated herein by reference.
For purposes of determining the aggregate market value of the Company's voting
stock held by nonaffiliates, shares held by all current directors and executive
officers of the Company and holders of 10% or more of the Company's Common Stock
have been excluded. The exclusion of such shares is not intended to, and shall
not, constitute a determination as to which persons or entities may be
"affiliates" of the Company as defined by the Commission.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 contained under the heading "Related
Party Transactions" in the definitive Proxy Statement used in connection with
the solicitation of proxies for the Company's 2005 Annual Meeting of
Shareholders, to be filed with the Commission, is hereby incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item 14 contained under the heading
"Independent Registered Public Accounting Firm" in the definitive Proxy
Statement used in connection with the solicitation of proxies for the Company's
2005 Annual Meeting of Shareholders, to be filed with the Commission, is hereby
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
The following financial statements and notes thereto are included in
Item 8 of this Report. Reports of Independent Registered Public
Accounting Firms Consolidated Balance Sheets as of December 31, 2004
and 2003 Consolidated Statements of Operations for the years ended
December 31, 2004, 2003 and 2002 Consolidated Statements of
Shareholders' Equity for the years ended December 31, 2004, 2003 and
2002
Consolidated Statements of Cash Flows for the years ended December
31, 2004, 2003 and 2002
2. FINANCIAL STATEMENT SCHEDULES
Reports of Independent Registered Public Accounting Firms as to
Schedules Schedule II - Valuation and Qualifying Accounts
3. EXHIBITS
The following exhibits are required to be filed with this Report by
Item 601 of Regulation S-K:
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
- -------------- -----------------------
2.1 Agreement and Plan of Merger dated December 8, 2000, by
and among the Registrant, UDS, Patrick West, Daniel
Reeves and The Estate of John R. West (incorporated by
reference to Exhibit 10.24 to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
2001 (Commission File No. 000-23741), filed with the
commission on March 28, 2002)
3.1 Amended and Restated Articles of Incorporation of the
Registrant, (incorporated by reference to Exhibit 3.1
to the Registrant's Amendment No. 1 to Registration
Statement on Form S-1 (Commission File No. 333-42373),
filed with the Commission on February 11, 1998)
3.2 Amended and Restated By-laws of the Registrant
(incorporated by reference to
46
Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1/A (Commission File No. 333-79929), filed
with the Commission on July 22, 1999)
4.1 Form of Common Stock Certificate of the Registrant
(incorporated by reference to Exhibit 4.1 to the
Registrant's Amendment No. 1 to Registration Statement
on Form S-1 (Commission File No. 333-42373), filed with
the Commission on February 11, 1998)
4.2 (a) Rights Agreement between Company and Reliance Trust
Company as Rights Agent, dated as of December 31, 1997
(incorporated by reference to Exhibit 4.2 to the
Registrant's Amendment No. 1 to Registration Statement
on Form S-1 (Commission File No. 333-42373), filed with
the Commission on February 11, 1998)
(b) First Amendment to the Rights Agreement dated as of
November 30, 2000 between the Company, Reliance Trust
Company and SunTrust Bank (incorporated by reference to
Exhibit 4.2(b) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000
(Commission File No. 000-23741), filed with the
Commission on March 30, 2001)
(c) Second Amendment to the Rights Agreement dated as of
August 14, 2003 between the Company and SunTrust Bank
(incorporated by reference to Exhibit 4.2 to Amendment
No. 1 to the Registrant's Quarterly Report on Form
10-Q/A for the quarterly period ended June 30, 2003
(Commission File No. 000-23741), filed with the
Commission on August 20, 2003)
(d) Third Amendment to the Rights Agreement dated as of
November 24, 2003 between the Company and SunTrust Bank
(incorporated by reference to Exhibit 4.2(d) to
Amendment No. 2 to the Registrant's Registration of
Securities on Form 8-A/A (Commission File No.
000-23741), filed with the Commission on November 25,
2003)
10.1+ 2000 Stock Option and Incentive Award Plan and
amendment thereto (incorporated by reference to Exhibit
4.3 and 4.4 to the Registrant's Form S-8 (Commission
File No. 333-54970) filed with the Commission on
February 5, 2001)
10.2 (a) Sublease Agreement, dated May 26, 1999, by and
between HSN Realty LLC and Universal Distribution
Services, Inc. (incorporated by reference to Exhibit
10.8 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2000 (Commission File No.
000-23741), filed with the Commission on March 30,
2001)
(b) Lease, dated March 23, 2000 by and between Dermody
Industrial Group and Universal Distribution Services,
Inc. (incorporated by reference to Exhibit 10.2(b) to
the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002 (Commission File No.
000-23741), filed with the Commission on March 31,
2003)
10.3(a) Master Lease Agreement and Addendums, dated March
20, 2000, by and between Computer Sales International,
Inc. and the Registrant (incorporated by reference to
Exhibit 10.9(a) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000
(Commission File No. 000-23741), filed with the
Commission on March 30, 2001)
(b) First Amendment to Master Lease Agreement dated June 8,
2000, by and between
47
Computer Sales International, Inc. and the Registrant
(incorporated by reference to Exhibit 10.9(b) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000 (Commission File No.
000-23741), filed with the Commission on March 30,
2001)
(c) Second Amendment to Master Lease Agreement dated
September 28, 2000, by and between Computer Sales
International, Inc. and the Registrant (incorporated by
reference to Exhibit 10.9(c) to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
2000 (Commission File No. 000-23741), filed with the
Commission on March 30, 2001)
(d) Third Amendment to Master Lease Agreement dated October
9, 2002, by and between Computer Sales International,
Inc. and the Registrant (incorporated by reference to
Exhibit 10.3(d) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2002
(Commission File No. 000-23741), filed with the
Commission on March 31, 2003)
10.4(a) Amended and Restated Loan and Security Agreement
between the Registrant and SouthTrust Bank, N.A., dated
January 25, 1999 (incorporated by reference to Exhibit
10.14 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 (Commission File
No. 0-23741), filed with the Commission on March 26,
1999)
(b) First Amendment to Amended and Restated Loan and
Security Agreement by and between the Registrant and
SouthTrust Bank, N.A., dated April 29, 1999
(incorporated by reference to Exhibit 10.14(b) to the
Registrant's Registration Statement on Form S-1
(Commission File No. 333-79929), filed with the
Commission on June 3, 1999)
(c) Letter Modification/Waiver to Amended and Restated Loan
and Security Agreement, as amended, effective August
14, 2000 (incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000 (Commission
File No. 0-23741), filed with the Commission on
November 13, 2000)
(d) Letter of Amendment to Amended and Restated Loan and
Security Agreement by and between the Registrant and
SouthTrust Bank, N.A. effective September 10, 2001
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2001 (Commission
File No. 0-23741) filed with the Commission on November
13, 2001)
(e) Letter Modification/Waiver to Amended and Restated Loan
and Security Agreement, as amended, effective May 31,
2002 (incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 (Commission File
No. 000-23740) filed with the Commission on August 13,
2002)
(f) Letter Modification/Waiver to Amended and Restated Loan
and Security Agreement, as amended, effective November
13, 2002 (incorporated by reference to Exhibit 10.2 to
the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002 (Commission
File No. 000-23740) filed with the Commission on
November 19, 2002)
(g) Letter Modification to Amended and Restated Loan and
Security Agreement, dated February 18, 2003, as
amended, effective January 1, 2003 (incorporated by
48
reference to Exhibit 10.4(g) to the Registrant's Annual
Report on Form 10-K for the year ended December 31,
2002 (Commission File No. 000-23741), filed with the
Commission on March 31, 2003)
(h) Second Amended and Restated Loan and Security Agreement
by and between the Registrant and SouthTrust Bank,
N.A., dated April 3, 2003 (incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2003
(Commission File No. 000-23740), filed with the
Commission on May 14, 2003)
(i) Letter Modification/Waiver to Second Amended and
Restated Loan and Security Agreement, as amended,
effective February 6, 2004 (incorporated by reference
to Exhibit 10.4(i) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2003
(Commission File No. 000-23741), filed with the
Commission on March 30, 2004)
(j) Letter Modification to Second Amended and Restated Loan
and Security Agreement, as amended, effective February
26, 2004 (incorporated by reference to Exhibit 10.4(j)
to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2003 (Commission File No.
000-23741), filed with the Commission on March 30,
2004)
(k) Letter Modification/Wavier to Second Amended and
Restated Loan and Security Agreement, as amended,
effective March 26, 2004 (incorporated by reference to
Exhibit 10.4(k) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2003
(Commission File No. 000-23741), filed with the
Commission on March 30, 2004)
(l) Loan Documents Modification Agreement between Innotrac
Corporation and SouthTrust Bank, dated May 10, 2004
(incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2004 (Commission File
No. 000-23740), filed with the Commission on May 14,
2004)
10.5+ 2002 Senior Executive Incentive Compensation Plan
(incorporated by reference to Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No.
000-23741), filed with the Commission on March 28,
2002)
10.6(a)+ Amended and Restated Employment Agreement dated August
21, 2000, by and between David L. Gamsey and the
Registrant (incorporated by reference to Exhibit 10.2
to the Registrant's Quarterly Report on Form 10Q/A for
the quarterly period ended June 30, 2000 (Commission
File No. 0-23741), filed with the Commission on August
21, 2000)
(b)+ Amendment to Amended and Restated Employment Agreement
dated February 14, 2001, by and between David L. Gamsey
and the Registrant (incorporated by reference to
Exhibit 4.2(b) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000
(Commission File No. 000-23741), filed with the
Commission on March 30, 2001)
10.7+ Employment Agreement dated August 31, 2000, by and
between Scott D. Dorfman and the Registrant
(incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000 (Commission
File No. 0-23741), filed with the Commission on
November 13, 2000)
49
10.8+ Employment Agreement dated August 31, 2000, by and
between David L. Ellin and the Registrant (incorporated
by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2000 (Commission File No. 0-23741),
filed with the Commission on November 13, 2000)
10.9+ Employment Agreement dated August 31, 2000, by and
between Larry C. Hanger and the Registrant
(incorporated by reference to Exhibit 10.4 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2000 (Commission
File No. 0-23741), filed with the Commission on
November 13, 2000)
10.13(a) Lease, dated July 23, 2001, by and between The Lincoln
National Life Insurance Company and iFulfillment, Inc.
(incorporated by reference to Exhibit 10.23 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No.
000-23741), filed with the Commission on March 28,
2002)
(b) Lease, dated August 5, 2002, by and between The Lincoln
National Life Insurance Company and the Registrant
(incorporated by reference to Exhibit 10.13(b) to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2002 (Commission File No.
000-23741), filed with the Commission on March 31,
2003)
10.14+ Employment Agreement dated December 31, 2001, by and
between Robert J. Toner, Jr. and the Registrant
(incorporated by reference to Exhibit 10.24 to the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No.
000-23741), filed with the Commission on March 28,
2002)
10.16(a) Lease, dated April 23, 2002, by and between ProLogis
Development Services Incorporated and the Registrant
(incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002 (Commission
File No. 000-23740) filed with the Commission on
November 19, 2002)
(b) First Amendment to Lease Agreement dated October 15,
2002 by and between ProLogis Development Services
Incorporated and the Registrant (incorporated by
reference to Exhibit 10.16(b) to the Registrant's
Annual Report on Form 10-K for the year ended December
31, 2002 (Commission File No. 000-23741), filed with
the Commission on March 31, 2003)
10.17(a) Lease, dated September 17, 2002, by and between The
Prudential Insurance Company of America and the
Registrant (incorporated by reference to Exhibit 10.17
to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002 (Commission File No.
000-23741), filed with the Commission on March 31,
2003)
(b) First Amendment to Lease Agreement dated April 4, 2003
by and between The Prudential Insurance Company of
America and the Registrant (incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2003
(Commission File No. 000-23740), filed with the
Commission on May 14, 2003)
50
10.18+ Employment Agreement dated April 7, 2003, by and
between James McMurphy and the Registrant (incorporated
by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2003 (Commission File No. 000-23741),
filed with the Commission on August 14, 2003)
10.19(a) Agreement dated August 14, 2003 by and between IPOF
Fund, LP, an Ohio limited partnership ("IPOF"), David
Dadante, an individual resident of Ohio and the general
partner of IPOF and the Registrant (incorporated by
reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q/A for the quarterly period ended
June 30, 2003 (Commission File No. 000-23740), filed
with the Commission on August 20, 2003)
(b) First Amendment dated November 24, 2003 to the
Agreement by and between IPOF Fund, LP, an Ohio limited
partnership ("IPOF"), David Dadante, an individual
resident of Ohio and the general partner of IPOF and
the Registrant (incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K
(Commission File No. 000-23740), filed with the
Commission on November 24, 2003)
10.20 Lease, dated August 16, 2004, by and between
Centerpoint 800 LLC and the Registrant (incorporated by
reference to Exhibit 10.20 to the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2004 (Commission File No.
000-23740), filed with the Commission on November 12,
2004)
21.1* List of Subsidiaries
23.1* Consent of BDO Seidman, LLP
23.2* Consent of Deloitte & Touche LLP
24.1* Power of Attorney (included on signature page)
31.1* Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a)
31.2* Certification of principal financial officer Pursuant
to Rule 13a-14(a)/15d-14(a)
32.1* Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350
32.2* Certification of principal financial officer Pursuant
to 18 U.S.C.ss.1350
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
51
INNOTRAC CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Charged to Other End of
Description of Period Expenses Accounts Deductions Period
- -------------------------------------- ---------- ---------- ---------- ---------- ----------
(in 000's)
Provision for uncollectble accounts
Year ended December 31,
2004....................... $1,696 $ 221 $ - $ (293) $1,624
2003....................... $ 959 $ 1,571 $ - $ (834) $1,696
2002....................... $3,263 $ (1,329) $ - $ (975) $ 959
Provisions for returns and allowances
Year ended December 31,
2004....................... $ 12 $ 5 $ - $ (12) $ 5
2003....................... $ 10 $ 29 $ - $ (27) $ 12
2002....................... $ 193 $ 52 $ - $ (235) $ 10
Provisions for restructuring charge
Year ended December 31,
2004....................... $ - $ - $ - $ - $ -
2003....................... $ 277 $ - $ - $ (277) $ -
2002....................... $1,831 $ (807) $ - $ (747) $ 277
S-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 31st day of March,
2005.
INNOTRAC CORPORATION
/s/ Scott D. Dorfman
--------------------------
Scott D. Dorfman
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this Report has been signed below by the following persons on
behalf of the Registrant in the capacities indicated on the 31st day of March
2005.
Know all men by these presents, that each person whose signature appears below
constitutes and appoints Scott D. Dorfman and Christine A. Herren, or either of
them, as attorneys-in-fact, with power of substitution, for him in any and all
capacities, to sign any amendments to this Annual Report on Form 10-K, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact may do or cause to be done by virtue
hereof.
Signature Title
- --------- -----
/s/ Scott D. Dorfman Chairman of the Board, President and Chief
- ---------------------------------------- Executive Officer (Principal Executive Officer)
Scott D. Dorfman
/s/ Christine A. Herren Senior Director and Controller (Principal
- ---------------------------------------- Financial Officer and Principal Accounting Officer)
Christine A. Herren
Director
________________________________________
J. Alston Gardner
/s/ Bruce V. Benator Director
- ----------------------------------------
Bruce V. Benator
/s/ Martin J. Blank Director
- ----------------------------------------
Martin J. Blank
/s/ Joel E. Marks Director
- ----------------------------------------
Joel E. Marks