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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, 2002
/ / 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 or organization) (I.R.S.Employer 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.
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Name of each exchange on which registered: The Nasdaq National Market.
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.10 Per Share.
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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 executive officers and
directors) of the Registrant as of June 28, 2002, the last business day of the
Registrant's most recently completed second fiscal quarter was $29,097,113 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 18, 2003, there were 11,674,595 shares of Common Stock, par
value $0.10 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2002 Annual Report to Shareholders, filed
as an exhibit hereto, are incorporated by reference into Part II of this Annual
Report on Form 10-K for the year ended December 31, 2002 (the "Report").
Portions of the Registrant's Proxy Statement for the 2003 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
Report.
INNOTRAC CORPORATION
TABLE OF CONTENTS
PAGE
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PART I .......................................................................................................... 2
ITEM 1. BUSINESS................................................................................... 2
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS....................................... 8
EXECUTIVE OFFICERS OF REGISTRANT........................................................... 14
ITEM 2. PROPERTIES................................................................................. 15
ITEM 3. LEGAL PROCEEDINGS.......................................................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 15
PART II ......................................................................................................... 16
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.................. 16
ITEM 6. SELECTED FINANCIAL DATA.................................................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 17
PART III ........................................................................................................ 18
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 18
ITEM 11. EXECUTIVE COMPENSATION..................................................................... 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER
MATTERS.................................................................................... 18
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 18
ITEM 14. CONTROLS AND PROCEDURES.................................................................... 18
PART IV ......................................................................................................... 19
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................ 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES................................... S-1
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............................................ S-2
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, we strive to improve the quality of
the non-core operations of our clients and to reduce their overall operating
costs. We enable our clients to efficiently manage their logistics, distribution
and call center services by leveraging our technology platform and our core
competencies:
- 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
- Call Center 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
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.
During the 1990s, we had a high focus on the telecommunications industry because
of its growth characteristics and increasing marketing needs. These
characteristics have changed quite dramatically in the last several years as
growth in the telecommunications industry has slowed and the industry has
contracted. However, we continue to provide customer support services and
fulfillment of telephones, Caller ID equipment, Digital Subscriber Line ("DSL")
and Cable Modems and other telecommunications products to companies such as
BellSouth Corporation ("BellSouth"), Warranty Corporation of America ("WACA")
and Qwest Communications International, Inc. ("Qwest") and their customers.
During the year ended December 31, 2002, approximately 26.5% of our revenues
were generated from telecommunications clients and 19.3% of revenues were from
DSL and cable modem clients. Approximately 59.6% of our 2001 revenues were from
telecommunications and DSL clients. We anticipate that the percentage of our
revenues attributable to telecommunications and DSL clients will continue to
decrease during 2003 due to the addition of more retail clients.
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During 2002, 54.2% of revenues were from retail, catalog and direct marketing
clients which include such companies as Coca-Cola, Ann Taylor, Smith & Hawken,
Tactica, Porsche, Nordstrom.com, Wilsons Leather, Martha Stewart Omnimedia,
Books are Fun (a division of Readers' Digest) and Thane International. We take
orders for our retail, catalog and direct marketing clients via the internet,
through a customer service representative at our Pueblo and Reno call centers or
through direct electronic transmission from our clients. These orders are
processed through one of our order management systems and then transmitted to
one of our seven fulfillment centers located across the country and are shipped
to the end consumer typically within 24 hours of when the order is received.
Inventory is held on a consignment basis, with minor exceptions, and includes
items such as shoes, clothing, accessories, books and outdoor furniture.
With the conversion of a majority of our clients to a fee-for-service model
during 2000 and 2001, we generally no longer purchase and sell products from
third party manufacturers for our clients. Instead, we provide fulfillment and
warehousing services for our clients on a fee for service basis. We continue to
purchase and own inventory for certain clients (primarily BellSouth), but on a
significantly reduced risk basis as a result of client guarantees and
contractual indemnifications. This model substantially reduces revenues as the
pass through cost of purchased equipment is no longer included in revenues. This
was the primary reason for decreased revenues in 2000 and 2001 as compared to
prior years.
During 2002, the Company began applying the consensus reached in Emerging Issues
Task Force ("EITF") No. 01-14, "Income Statement Characterization of
Reimbursements Received for Out-of-Pocket Expenses Incurred" which requires the
presentation of reimbursed out-of-pocket expenses on a gross basis as revenues
and expenses. As required, the Company reclassified the prior period financial
information presented herein to comply with the guidance in EITF 01-14.
Accordingly, freight and postage charges in the Company's fulfillment business
during the years ended December 31, 2002, 2001 and 2000 totaling $13.5 million,
$27.1 million and $28.9 million, respectively, have been presented as revenues
and cost of revenues in the corresponding Consolidated Statements of Operations.
The 2001 and 2000 reclassification had no impact on net income.
In an effort to reduce our industry and client concentration and to expand our
national presence, we acquired iFulfillment, Inc. ("iFulfillment") in July 2001
and Universal Distribution Services, Inc. ("UDS") in December 2000. Our
iFulfillment subsidiary specializes in fully integrated, automated, order
fulfillment services for multi-channel retailers and catalogers including such
clients as Nordstrom.com, Wilsons Leather and Martha Stewart Omnimedia. It is
located in a 354,000 square foot leased facility in Bolingbrook, Illinois. Due
to the addition of a sizable new client, in September 2002 we leased an
additional 150,204 square feet in a nearby facility. This new facility has
expansion space of an additional 105,357 square feet that we expect to utilize
in 2003. Our UDS division provides integrated order processing, order
management, fulfillment and customer relationship management services. UDS's
customer base comprises traditional direct marketing companies including Thane
International and Tactica. It is located in a 275,000 square foot facility in
Reno, Nevada. During 2001, we expanded UDS's business by taking advantage of our
East Coast capabilities. Under the terms of Innotrac's merger agreement with
UDS, the former shareholders of UDS may receive, as part of the consideration
paid for their shares, annual contingent payments based on the operating income
generated by our UDS division over a three-year period that commenced December
1, 2000. For the first year of the earn-out period, UDS's stockholders received
approximately $13.7 million in cash and 310,000 shares of our common stock
pursuant to this arrangement. No earnout amounts were earned in the second year.
We do not currently believe any additional contingent payments will be due.
In August 2002 we leased a 396,000 square foot fulfillment center near
Cincinnati, in Hebron, Kentucky. This facility provides fulfillment for Smith &
Hawken. Capital expenditures associated with this facility were approximately
$4.6 million and were funded through our bank line of credit.
With our national footprint virtually complete, we are committed to 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.
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FULFILLMENT SERVICES
Providing effective turnkey fulfillment solutions for our clients' products is
one of our core competencies. 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, accessories, books and outdoor furniture for
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. We are
dedicated to providing quality service to our clients at every step in the
fulfillment process. To ensure order accuracy we have implemented procedures
that require three out of every 100 boxes to be randomly reopened and inspected
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 2002 order accuracy rate exceeded
99%.
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.
INVENTORY MANAGEMENT. An integral part of our fulfillment services is the
monitoring and control of a client's inventory. We provide automated inventory
management and reporting to assure real-time stock counts of a client's
products, literature, signage 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. In addition, we
complete bin validations on a quarterly basis. 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.
PRODUCT CONSIGNMENT AND WAREHOUSING. For a majority of our clients, we no longer
purchase and sell products from third party manufacturers. Instead, 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, telephone company services and extended warranties
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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 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
interactive voice response ("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
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, which utilize a UNIX-based open architecture, comprised of multiple
networked computers and anchored by two Hewlett-Packard HP9000 K460
multiprocessing systems. We also have multiple Sun Enterprise 6500 servers
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 two primary warehouse management systems depending on our business
line and our locations. In 2002, we continued the implementation of PKMS, 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.
We completed implementation of PKMS for clients at our Pueblo, Atlanta and
Chicago-Romeoville warehouses. 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
facility utilizes an internally developed, customized order management,
warehouse management and customer relationship management system suitable for
its direct
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marketing customer base. We believe that these systems allow us to effectively
and efficiently manage our warehouse operations to secure a competitive
advantage in the fulfillment industry.
As part of our UDS acquisition in December 2000 we acquired their
internally-developed, customized order management system ("OMS") that is fully
integrated with a customized warehouse management solution and includes
front-end customer relationship management ("CRM") capabilities. In addition to
existing Reno clients, in 2002, we added Martha Stewart 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 upswing in
IT costs in 2002.
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, 2002 was supporting approximately 300 representatives.
Additionally, the ACD system is integrated with software designed to enable
management to automatically 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 with the capacity to handle over
1,000 call center representatives and is currently supporting approximately 50
representatives. Our integrated systems allow the customer service
representatives to enter orders received via telephone into their computer which
transmits the data over T1 lines to one of our seven 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 or given additional
training. 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, 2003, we had over 800 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. Although we consider our relationship with our
employees to be good, we have experienced occasional unionization initiatives,
particularly among our call center personnel.
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.
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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
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 Innotrac does
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 client are in
compliance with these regulations. We cannot predict
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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 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 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, then 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. The expansion of our
business with retailers and catalogers in 2002 adds an element of risk in these
areas. 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 term expires. If a client terminates
their contract suddenly, we will still have an obligation under our leasing
contracts.
OUR BUSINESS HAS HISTORICALLY BEEN CONCENTRATED IN THE TELECOMMUNICATIONS, DSL
AND CABLE INDUSTRIES. IF WE CANNOT CONTINUE TO DIVERSIFY OUTSIDE OF THESE
INDUSTRIES, OUR STRATEGY MAY NOT BE SUCCESSFUL AND OUR BUSINESS COULD SUFFER.
Approximately 46% of our revenues in 2002 and more than half of our revenues in
2001 were attributable to telecommunications, DSL and cable 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
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our business. To ameliorate this risk, our strategy depends on diversifying our
client base across more industries, including through selective acquisitions. We
cannot guarantee, however, that we will be successful in expanding into new
industries, or that our services will be as attractive to clients in different
industries as they have been historically to telecommunications companies.
Success in diversifying the industry base of our clients depends on a number of
factors, such as our sales and marketing efforts, the compatibility of our
systems and processes with non-telecommunications clients' and the cost of
integrating or customizing our services to suit those clients. If we fail to
expand our business into new industries, we may not be able to implement our
strategy, and our future prospects could be negatively impacted.
IF THE MARKET FOR TELECOMMUNICATIONS PRODUCTS OR SERVICES CHANGES, OR THE DSL
AND WIRELESS PRODUCTS WE ARE DISTRIBUTING DO NOT ACHIEVE MARKET SUCCESS, OUR
BUSINESS COULD BE ADVERSELY AFFECTED.
Our success depends upon our ability to fulfill advanced telecommunications
equipment. Currently, we rely heavily upon the fulfillment of Caller ID equipped
telephones, DSL modems and wireless pagers to the end user customers of our
telecommunications clients for our revenues. We also depend upon these clients
to promote Caller ID, DSL and wireless services. Our business, results of
operations and financial condition could be materially adversely affected if:
- the telecommunications products we fulfill and the related
services offered by our clients do not gain or sustain
marketplace acceptance;
- our telecommunications clients fail to adequately promote
these products and services; or
- our telecommunications clients lose market share.
IF THE INTERNET FAILS TO CONTINUE TO GROW, SOME OF OUR CLIENTS MAY NOT SUCCEED
AND OUR BUSINESS MAY BE HARMED.
Commercial use of the internet is relatively new. Internet and e-commerce usage
may be inhibited for a number of reasons, including:
- increased government regulation;
- security and authentication concerns;
- difficulty of access; and
- inconsistent service quality.
We view e-commerce as another channel of distribution. Some of our clients are
dependent on the success of the internet either because they use e-commerce as a
channel for distribution or they distribute products that facilitate internet
usage. If the internet develops as a commercial medium more slowly than we
expect, it could adversely affect our business.
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.
9
IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
We believe there has recently been a significant increase in businesses
outsourcing services not directly related to their principal business
activities. Our business, results of operations and financial condition could be
materially adversely affected if the outsourcing trend declines or 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.
IF WE ARE NOT ABLE TO RETAIN OR EMPLOY QUALIFIED EMPLOYEES, INCLUDING KEY
EXECUTIVES, OUR EMPLOYMENT-RELATED COSTS MAY RISE AND OUR RESULTS OF OPERATIONS
COULD SUFFER.
WE MAY NOT BE ABLE TO RETAIN OR EMPLOY QUALIFIED MANAGERS.
We depend in large part on the abilities and continuing efforts of our executive
officers and senior management. Our business and prospects could be materially
adversely affected if (1) current officers and managers do not continue in their
key roles and we cannot attract and retain qualified replacements or (2) we
cannot attract and retain additional qualified personnel to sustain growth. We
have employment agreements with our key executive officers. We cannot assure you
that we will be able to retain them. We only maintain key man life insurance on
Scott D. Dorfman, in the amount of $3.5 million. In order to support growth, we
must effectively recruit, develop and retain additional qualified management
personnel. We cannot assure you that in the future we will be able to recruit
and retain additional qualified managers.
WE MAY NOT BE ABLE TO RETAIN OR EMPLOY OTHER QUALIFIED EMPLOYEES.
Our success depends largely on our ability to recruit, hire, train and retain
qualified employees. If we cannot do so, our business, results of operations or
financial condition could be materially adversely affected. Our industry is very
labor-intensive and has experienced high personnel turnover. If our employee
turnover rate increases significantly, our recruiting and training costs could
rise and our operating effectiveness and productivity could decline.
New clients or new large-scale fulfillment or customer support programs may
require accelerated recruiting, hiring and training. We cannot assure you that
we will be able to continue to hire, train and retain sufficient qualified
personnel to adequately staff new programs or clients.
Currently, we are not a party to any collective bargaining agreements. None of
our employees are unionized. Although we consider our relationship with our
employees to be good, there have been occasional unionization initiatives at
Innotrac, particularly among our call center personnel. If our employees were to
join unions, we could incur increased wages, employee benefits and
employment-related administrative costs. A significant portion of our operating
expenses relates to labor costs. Therefore, an increase in wages or employee
benefits could materially adversely affect our business, results of operations
or financial condition.
COMPETITION MAY HURT OUR BUSINESS.
We operate in highly competitive markets and expect this environment to persist
and intensify in the future. Because our services comprise marketing and product
consultation, sales channel 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
10
existing or potential clients' in-house operations are also significant
competitors. Our performance and growth could be negatively impacted if:
- 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. In 2002,
negotiations of contract renewals with BellSouth, Warranty Corporation of
America and Nordstrom.com have resulted in price concessions due to increased
competitive pressures. 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:
- enhance existing services;
- develop applications to focus on 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 house several of our largest clients, are completely
customized and therefore not supported by third party providers. We are heavily
reliant on a few developers. If these developers leave, it could materially
adversely affect our business. Furthermore, if our clients require additional
enhancements to the system as they did in 2002, our business could be materially
adversely affected. 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;
- pricing pressure;
- increased competition; and
- 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.
11
OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES
OR INCREASE OUR COSTS.
In connection with any 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. If 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.
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 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
recently increased. We are currently involved in litigation associated with
several employee related matters. Management believes this litigation is
currently immaterial, though it could become material in the future.
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.
12
IF ESTIMATES OF FUTURE TAXABLE INCOME THAT ARE EXPECTED TO ALLOW FOR REALIZATION
OF OUR NET DEFERRED TAX ASSET ARE REDUCED DURING THE CARRYFORWARD PERIOD, THE
AMOUNT OF OUR NET DEFERRED TAX ASSET CONSIDERED REALIZABLE COULD BE REDUCED.
We have a tax net operating loss carryforward of $27.6 million at December 31,
2002 that expires between 2018 and 2020. Our ability to generate the expected
amounts of taxable income in excess of this amount from future operations is
dependent upon general economic conditions, competitive pressures on sales and
margins and other factors beyond our control. We can not assure that we will
meet our expectations for future taxable income in the carryforward period. If
estimates of future taxable income during the carryforward period are reduced,
the amount of our net deferred tax asset considered realizable could be reduced;
this would require us to record a valuation allowance for this asset and would
result in a decrease in our 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. Our minimum tangible net worth requirement is our
most restrictive covenant under the revolving credit agreement. Our tangible net
worth, as defined in the credit agreement, exceeded the covenant requirement by
approximately $100,000 at December 31, 2002. Tangible net worth is defined as
shareholders' equity less goodwill, other intangible assets and certain deferred
costs. Included in the tangible net worth calculation is the carrying amount of
the Company's deferred tax asset (discussed immediately above).
In addition, in February 2003, the Company and its lender agreed to modify the
credit agreement, including relaxing the tangible net worth requirement. This
agreement was to have been reflected in an amendment to the credit agreement,
which has not yet been finalized. Unless the credit agreement is so amended, the
Company may not comply with this covenant in the near term.
13
EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of Innotrac are as follows:
NAME AGE POSITION
---- --- --------
Scott D. Dorfman.................. 45 Chairman of the Board, President and Chief
Executive Officer
David L. Gamsey................... 45 Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
David L. Ellin.................... 44 Senior Vice President--Sales
Larry C. Hanger................... 48 Senior Vice President--Client Services
Robert J. Toner................... 39 Vice President--Logistics
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. Gamsey has served as Senior Vice President, Chief Financial Officer and
Secretary since May 2000. In 2001, Mr. Gamsey was appointed to Innotrac's Board
of Directors. Prior to joining Innotrac, from September 1995 to May 2000, he
served as Chief Financial Officer of AHL Services, Inc., a provider of contract
staffing and outsourcing solutions. From 1988 to September 1995, Mr. Gamsey was
a Managing Director of Investment Banking at the accounting firm Price
Waterhouse LLP (now PricewaterhouseCoopers LLP). From 1987 to 1988, he served as
Chief Financial Officer of Visiontech, Inc., a manufacturer of contact lenses,
and from 1979 to 1987, he was a Senior Audit Manager for the accounting firm
Arthur Andersen LLP. Mr. Gamsey is a certified public accountant.
Mr. Ellin joined Innotrac in 1986 and currently serves as Senior Vice
President--Sales. He has been a Director since December 1997. 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--Client Services since April 1999 and as a Director since December
1997. 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 of 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 Webvan Group
Inc., an Internet retailer, where he held the position of General Manager for
East Coast operations.
14
ITEM 2. PROPERTIES
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 is fulfillment
space. This site also includes approximately 3.5 acres that will be available
for Innotrac's expansion requirements, 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 to 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. The facility
provides approximately 87,000 square feet of floor space. Approximately 45,000
square feet is used as a call center, as well as quality assurance,
administrative, training and management space. This call center supports 370
workstations and utilized 300 of the workstations at December 31, 2002. It
currently operates twenty-four hours a day, seven days a week. The remaining
42,000 square feet is used for fulfillment services.
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 extension has a four-year term.
With the acquisition of UDS, located in Reno, Nevada, in December 2000, we
operate a facility 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. UDS 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.
The call center operates twenty-four hours a day, seven days a week.
With the acquisition of iFulfillment, 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
commencing January 1, 2003. This lease contains one additional five-year renewal
option. This facility is used exclusively for fulfillment services.
In August 2002, we entered into a lease for a new facility in Hebron, Kentucky
with 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.
In September 2002, we entered into a lease for a new facility in Romeoville,
Illinois with an initial term of five years and two months with two five-year
renewal options. The facility provides approximately 150,204 square feet of
fulfillment and warehouse space.
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 there can be no guarantee that it
will not 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.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
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
---- ---
2002
First Quarter................................................... $7.220 $3.400
Second Quarter.................................................. $6.350 $4.119
Third Quarter................................................... $5.719 $2.200
Fourth Quarter.................................................. $3.140 $1.800
Fiscal Year Ended December 31, 2002............................. $7.220 $1.800
2001
First Quarter................................................... $6.250 $3.250
Second Quarter.................................................. $7.510 $6.130
Third Quarter................................................... $8.920 $5.550
Fourth Quarter.................................................. $8.000 $5.000
Fiscal Year Ended December 31, 2001............................. $8.920 $3.250
The approximate number of holders of record of Common Stock as of March 18, 2003
was 72. The approximate number of beneficial holders of our Common Stock as of
that date was 2,000.
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.
Item 12 of Part III contains information concerning the Company's equity
compensation plan.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "Selected Financial Data" in the
Company's 2002 Annual Report to Shareholders, filed as an exhibit hereto, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 2002
Annual Report to Shareholders, filed as an exhibit hereto, is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quantitative and
Qualitative Disclosures About Market Risk" in the Company's 2002 Annual Report
to Shareholders, filed as an exhibit hereto, is incorporated herein by
reference.
16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the headings "Report of Independent Public
Accountants" and "Consolidated Financial Statements and Notes to the
Consolidated Financial Statements" in the Company's 2002 Annual Report to
Shareholders, filed as an exhibit hereto, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 22, 2002 the Board of Directors, upon the recommendation of the Audit
Committee, dismissed its independent accountants, Arthur Andersen LLP, and
appointed Deloitte & Touche LLP as its new independent accountants, effective
April 22, 2002. This matter was previously reported on a Form 8-K filed April
24, 2002.
17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the heading "Election of Directors" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 2003 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 contained under the heading "Executive Compensation" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 2003 Annual Meeting of Shareholders, to be filed with the
Commission, is hereby incorporated herein by reference. The information
contained in the Proxy Statement under the headings "Compensation Committee
Report on Executive Compensation" and "Stock Performance Graph" shall not be
deemed incorporated herein by such reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED SHAREHOLDER MATTERS
The information contained under the headings "Voting Securities and Principal
Shareholders" and "Equity Compensation Plan" in the definitive Proxy Statement
used in connection with the solicitation of proxies for the Company's 2003
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 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Related Party Transactions" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 2003 Annual Meeting of Shareholders, to be filed with the
Commission, is hereby incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
Our management, including the Chief Executive and Chief Financial Officers,
supervised and participated in an evaluation of our disclosure controls and
procedures (as defined in federal securities rules) within the 90 days before we
filed this report. Based on that evaluation, our CEO and CFO have concluded that
our disclosure controls and procedures were effective as of the date of that
evaluation as defined in Exchange Act Rules 13a-14(c) and 15d-14(c).
There were no significant changes in our internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
last evaluation.
18
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 incorporated
herein by reference in Item 8 of this Report.
Reports of Independent Public Accountants Consolidated Balance Sheets
as of December 31, 2002 and 2001 Consolidated Statements of Operations
for the years ended December 31, 2002, 2001 and 2000 Consolidated
Statements of Shareholders' Equity for the years ended December 31,
2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants 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 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)
19
(b) First Amendment to the Rights Agreement dated as of November
30, 2000 between the Company, Reliance Trust Company and
SunTrust Bank, dated as of November 30, 2000
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 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)
(b)* Lease, dated March 23, 2000 by and between Dermody Industrial
Group and Universal Distribution Services, Inc.
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 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)
(b) First Amendment to Master Lease Agreement dated June 8, 2000,
by and between Computer Sales International, Inc. 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)
(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 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)
(d)* Third Amendment to Master Lease Agreement dated October 9,
2002, by and between Computer Sales International, Inc. and
the Registrant
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 (Commission File No. 0-23741),
filed with the Commission on November 13, 2000)
20
(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 (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 (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 (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
10.5+ 2002 Senior Executive Incentive Compensation Plan
(incorporated by reverence 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 (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 (Commission File No. 0-23741), filed with the Commission
on November 13, 2000)
10.8+ Employment Agreement dated August 30, 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 (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 (Commission File No. 0-23741), filed with the Commission
on November 13, 2000)
10.10 Operating Agreement dated December 28, 2000, by and among the
Registrant, Return.com Online, LLC, and Mail Boxes Etc., USA,
Inc. (incorporated by reference to Exhibit 10.22 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
21
Commission on March 30, 2001)
10.11 Agreement to Discharge Debt, dated April 17, 2001, between
Return.com Online LLC and Mail Boxes Etc., USA, Inc.
(Incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q (Commission File No. 0-23741),
filed with the Commission on May 14, 2001)
10.12 Agreement to Terminate Services and Marketing Agreement, dated
April 17, 2001, between Return.com Online LLC, Mail Boxes
Etc., USA, Inc. and the Registrant (Incorporated by reference
to Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q (Commission File No. 0-23741), filed with the Commission
on May 14, 2001)
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
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)
10.15+ Employment Agreement dated December 8, 2000, by and between
Patrick J. West 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 (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
10.17* Lease, dated September 17, 2002, by and between The Prudential
Insurance Company of America and the Registrant
13.1* Portions of the Registrant's Annual Report to Shareholders for
2002 incorporated into this Form 10-K
21.1* List of Subsidiaries
23.1* Consent of Deloitte & Touche LLP
23.2* Notice Regarding Consent of Arthur Andersen LLP
24.1* Power of Attorney (included on signature page)
99.1* Certification of Chief Executive Officer Pursuant to 18
U.S.C.ss.1350
99.2* Certification of Chief Financial Officer Pursuant to 18
U.S.C.ss.1350
22
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the fourth quarter of
the Registrant's 2002 fiscal year.
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 2-02 OF REGULATION S-X, THE
FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP,
WHICH HAS CEASED OPERATIONS, AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
ARTHUR ANDERSEN LLP REPORTED ON SUCH FINANCIAL STATEMENTS PRIOR TO THE
RECLASSIFICATIONS AND REVISIONS DISCUSSED IN NOTE 2 AND NOTE 16 OF THE NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
We have audited in accordance with auditing standards generally accepted in the
United States, the financial statements of INNOTRAC CORPORATION AND SUBSIDIARY
included in this Form 10-K and have issued our report thereon dated February 8,
2002. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 8, 2002
S-1
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 uncollectible accounts
Year ended December 31,
2002 .................. $ 3,263 $ (1,329) $ -- $ (975) $ 959
2001 .................. $ 3,416 $ 3,813 $ 50 $ (4,016) $ 3,263
2000 .................. $ 1,177 $ 3,325 $ 1,254 $ (2,340) $ 3,416
Provisions for returns and allowances
Year ended December 31,
2002 .................. $ 193 $ 52 $ -- $ (235) $ 10
2001 .................. $ 725 $ 211 $ 843 $ (1,586) $ 193
2000 .................. $ 297 $ 5,697 $ 12,428 $(17,697) $ 725
Provisions for restructuring charge
Year ended December 31,
2002 .................. $ 1,831 $ (807) $ -- $ (747) $ 277
2001 .................. $ 2,831 $ -- $ (100) $ (900) $ 1,831
2000 .................. $ -- $ 4,618 $ -- $ (1,787) $ 2,831
S-2
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,
2003.
INNOTRAC CORPORATION
/s/ Scott D. Dorfman
----------------------------------------------
Scott D. Dorfman
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ David L. Gamsey
----------------------------------------------
David L. Gamsey
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary (Principal
Financial and Accounting Officer)
CERTIFICATIONS
I, Scott D. Dorfman, certify that:
1. I have reviewed this annual report on Form 10-K of Innotrac
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ Scott D. Dorfman
--------------------------
Scott D. Dorfman
President, Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)
CERTIFICATIONS
I, David L. Gamsey, certify that:
1. I have reviewed this annual report on Form 10-K of Innotrac
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003 /s/ David L. Gamsey
-------------------
David L. Gamsey
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
(Principal Financial and Accounting
Officer)