<PAGE>
PROSPECTUS
FILED PURSUANT TO
RULE 424 (b)(4)
FILE NO: 333-42373
2,500,000 SHARES
[LOGO OF INNOTRAC APPEARS HERE]
INNOTRAC CORPORATION
COMMON STOCK
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by Innotrac Corporation (the "Company"). Prior to this offering
(the "Offering"), there has been no public market for the Common Stock. See
"Underwriting" for information relating to the factors to be considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on The Nasdaq Stock Market's National Market ("Nasdaq
National Market") under the symbol "INOC."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $12.00 $0.84 $11.16
- --------------------------------------------------------------------------------
Total(3).................................. $30,000,000 $2,100,000 $27,900,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $850,000.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 375,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $34,500,000, the total
Underwriting Discount will be $2,415,000 and the total Proceeds to Company
will be $32,085,000. See "Underwriting."
----------------
The shares of Common Stock are offered subject to receipt and acceptance by
the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part, and to withdraw, cancel or modify the offer without
notice. It is expected that certificates for the shares of Common Stock will
be available for delivery on or about May 12, 1998.
----------------
J.C.Bradford&Co. Wheat First Union
May 6 , 1998
<PAGE>
GRAPHIC: The Company's name with stylized design.
In the last decade, quality customer relationships have become an
important determinant of long-term success.
SUPPORTING
TEXT: At Innotrac, the future looks bright.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
GATE
- ----
TITLE: Marketing Support Services
GRAPHIC: Fibre optic cable bundle
SUPPORTING
TEXT: ADVANCED TECHNOLOGY
Investments in advanced technology, including sophisticated computer
integration, telephone systems and software, deliver fast, easy
access to service and information.
GRAPHIC: Account services team meeting
SUPPORTING
TEXT: MARKETING AND MANAGEMENT SUPPORT SERVICES
Account services team operates as an extension of the client's
internal marketing department.
GRAPHIC: Customer service representative talking on telephone
SUPPORTING
TEXT: ORDER PROCESSING AND CUSTOMER SERVICE
Representatives are trained to understand each client's products,
services and technology. From the moment they answer the phone with
the client's greeting, they operate as a seamless extension of the
client company.
GRAPHIC: View of the company's call center
SUPPORTING
TEXT: TELESERVICES
Advanced technology, combined with personal service in multiple
languages, means that making inquiries, placing orders, or getting
technical support is both efficient and professional for our client's
customers.
GRAPHIC: View of company's warehouse
SUPPORTING
TEXT: INVENTORY MANAGEMENT SERVICES
Automated inventory management tracks client materials to assure
accurate stock counts and provide the client with detailed management
information.
GRAPHIC: Example of products distributed by the company
SUPPORTING
TEXT: PRODUCT PARTNERSHIPS
Innotrac works in partnership with clients by purchasing
inventory and products that support its clients' services
and programs.
GRAPHIC: View of company's shipping department
SUPPORTING
TEXT: DISTRIBUTION AND FULFILLMENT
Dedicated account teams assure that each client's orders are entered,
picked, packed and shipped efficiently and accurately.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Prior to the Offering, the business of Innotrac was conducted
through the Company and eight affiliated companies (the "Affiliated Companies")
as an integrated business unit. Simultaneously with, and as a condition to, the
Offering, each of the Affiliated Companies will be either merged or
consolidated with the Company (the "Consolidation"). See "The Consolidation."
All share numbers in this Prospectus reflect a 70.58823-for-one stock split
effected on December 12, 1997. Unless the context otherwise requires, all
references herein to the "Company" or "Innotrac" shall mean Innotrac
Corporation and the Affiliated Companies taken as a whole, and assume that the
Consolidation has been consummated. Unless otherwise indicated, the information
in this Prospectus does not give effect to the Underwriters' over-allotment
option.
THE COMPANY
Innotrac is a full-service provider of customized, technology-based marketing
support services to large corporations, primarily in the telecommunications
industry. The Company's marketing support services provide its clients with an
efficient means of delivering products or information to their customers, and
include product and literature distribution, computerized inventory and
database management and customer-initiated ("inbound") teleservices. Innotrac
works with its clients on a consultative basis to create customized turnkey
solutions to meet its clients' needs, which range from small, specialty
projects to larger integrated fulfillment, teleservicing and database tracking
programs. The majority of Innotrac's growth over the past five years has come
from telecommunications companies and, specifically, from services related to
Caller ID equipment. Although 95% of its 1997 revenues came from BellSouth
Telecommunications, Inc. ("BellSouth"), Pacific Bell ("Pacific Bell"), and US
West Communications Services, Inc. ("US West"), the Company has a broad range
of clients, including Home Depot U.S.A., Inc. ("Home Depot"), National
Automotive Parts Association ("NAPA"), Siemens Energy & Automation Inc.
("Siemens E&A") and Turner Broadcasting System, Inc.
Since its formation in 1984, the Company has expanded its capabilities in
response to the needs of clients and to capitalize on market opportunities. In
1987, the Company began providing marketing support services to BellSouth. In
1991, these services were expanded to include fulfillment services related to
Caller ID telecommunications equipment. This program provides for Innotrac to
(i) sell or rent to BellSouth customers Caller ID hardware, phone sets and
other equipment (branded with BellSouth's logo), (ii) ship ("fulfill")
customers' orders, (iii) track inventory levels and sales and marketing data
regarding such items and (iv) maintain teleservicing operations to handle
customer service and technical support for Caller ID units and other products.
In conjunction with this program, in 1993 Innotrac pioneered a billing option
(the "billing options program") to allow customers to pay for the equipment
through their phone bills, on an interest free installment basis. The addition
of the billing options program was well received in the marketplace, and, as a
result, the fulfillment services for BellSouth have been the primary force
behind the Company's rapid sales growth. Innotrac has continued to capitalize
on its fulfillment expertise in the telecommunications sector, as evidenced by
its additional contractual arrangements with Pacific Bell and US West.
The Company has positioned itself to capitalize on the trend towards
outsourcing of marketing support services by investing in the technology and
infrastructure necessary to offer additional and more advanced services to its
clients. The Company believes that large corporations are increasingly focusing
on their primary businesses and turning to outside service companies to perform
marketing support functions. By outsourcing these functions, companies seek to
(i) replace fixed warehouse, information technology and labor costs with
variable costs, (ii) improve their reaction to business cycles, (iii) improve
customer service and technical support, (iv) manage capacity to meet
fluctuations in demand for products and customer service, (v) create economies
of scale by sharing the costs of advanced telecommunications and fulfillment
systems, and (vi) reduce working capital needs. As the trend toward outsourcing
continues, the Company believes that businesses will increasingly
3
<PAGE>
seek to reduce the number of vendors they utilize and may prefer single-source
providers of integrated, customized marketing support services. The Company
believes that its "one-stop" approach, combined with its use of advanced
technology, provides a competitive advantage in attracting and retaining
clients on a long-term basis.
BUSINESS STRATEGY
The Company's strategy is to take advantage of market trends towards
outsourcing by leveraging its core expertise, reputation for quality and timely
service and strong client relationships. The following are the key elements of
this strategy:
MAXIMIZE CALLER ID BUSINESS. The Company currently distributes Caller ID
units for three of the six regional bell operating companies ("RBOCs"):
BellSouth, Pacific Bell and US West. Management believes that significant
growth opportunities exist with these three clients as the market penetration
of Caller ID services increases and as consumer demand for additional and/or
more advanced Caller ID units grows. Additionally, the Company believes it is
well positioned to obtain similar contracts with other RBOCs and independent
local exchange carriers.
LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand
its customer base in the telecommunications industry by leveraging the
expertise it has developed and the results it has achieved through long-
standing relationships with several clients in the industry. The Company is
also seeking to expand the level of marketing support services provided to
existing telecommunications clients by cross-selling its other services to such
clients.
EXPAND OUTSIDE OF TELECOMMUNICATIONS. Innotrac's full service capabilities
provide it with the flexibility to manage small specialty projects or large
integrated projects whereby the Company becomes a new and distinct channel of
distribution for clients. The Company believes that its infrastructure will
allow it to develop clients in a variety of industries that have numerous
and/or geographically diverse subsidiary or affiliate operations, extensive
marketing needs or complex point-of-distribution requirements. Management
believes that these capabilities will make its services attractive to companies
in the manufacturing and retailing industries, in which it currently has
clients, as well as companies engaged in electronic commerce.
CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a
commitment to the use of advanced technology and intends to continue to upgrade
and enhance its computer hardware and software applications to enable it to
continue to provide flexible and powerful services to its clients. The Company
believes that the use of advanced technology provides a competitive advantage
and results in greater capacity and reduced labor costs. The Company also
believes that continued technological advances, particularly those utilizing
the Internet, will provide new opportunities for the Company to tailor its
services to meet each client's needs. The Company intends to address the labor-
intensive nature of fulfillment services by developing more efficient automated
systems that distribute literature via electronic media directly to the
customer. The Company also plans to expand its Internet-related capabilities
for (i) automated inventory management, (ii) access to order and database
information and (iii) virtual warehousing of literature so that such materials
no longer need to be maintained in physical form in the Company's warehouses.
EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored,
value-added solutions that achieve each client's intended marketing results.
The Company devotes considerable resources to assessing and understanding a
client's industry, products, services, processes and culture, then works with
the client to design programs to reduce the costs and investment required to
deliver the client's marketing support programs. The Company believes that this
consultative partnership approach encourages long-term client relationships, as
evidenced by the fact that the Company has serviced its 10 largest clients for
an average of six years and its five
4
<PAGE>
oldest clients for an average of 11 years. The Company believes that this
approach also creates substantial opportunities to expand relationships with
existing clients by cross-selling the full range of its services.
SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take advantage
of the fragmented nature of the marketing support services industry by
selectively acquiring complementary companies that extend its presence into new
geographic markets or industries, expand its client base, add new product or
service applications or provide substantial operating synergies. While the
Company has made no acquisitions to date, management believes that there are a
variety of such potential acquisition opportunities.
THE OFFERING
Common Stock offered by the
Company..................... 2,500,000 shares
Common Stock to be
outstanding after the
Offering.................... 9,000,000 shares(1)
Use of Proceeds............. To pay certain distributions in connection with
the Consolidation, repay certain indebtedness
of the Company, including indebtedness to a
shareholder, and for general corporate
purposes, including for working capital and
potential acquisitions. See "Use of Proceeds"
and "Certain Transactions."
Nasdaq National Market
symbol................. INOC
- --------
(1) Excludes 383,000 shares of Common Stock issuable upon exercise of stock
options outstanding under the Company's Stock Option and Incentive Award
Plan (the "Stock Option Plan"). See "Management."
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully a number of factors that could
affect the Company's business, results of operations and financial condition.
See "Risk Factors" beginning on page 8 for a discussion of such factors.
----------------
The Company was incorporated in Georgia on August 19, 1984 under the name
Video Catalog Operations, Inc. On September 5, 1985, the name was changed to
Innotrac Corporation. The Company's principal executive offices are located at
1828 Meca Way, Norcross, Georgia, where its telephone number is (770) 717-2000.
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary historical and pro forma financial data set forth below should be
read in conjunction with "The Consolidation," "Use of Proceeds," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the combined financial statements and notes thereto
and the other financial data contained elsewhere in this Prospectus. The pro
forma statements of operations data for the year ended December 31, 1997 and
the three months ended March 31, 1998 and the pro forma balance sheet data at
March 31, 1998 give effect to the Consolidation and the Offering as well as the
use of the net proceeds of the Offering, as if the transactions had occurred on
January 1, 1997 (for the statements of operations) and March 31, 1998 (for the
balance sheet). The pro forma financial information does not purport to
represent what the Company's consolidated results of operations would have been
if these transactions had in fact occurred on these dates, nor does it purport
to indicate the future consolidated financial position or consolidated results
of future operations of the Company. The pro forma adjustments are based on
currently available information and certain assumptions that management
believes to be reasonable.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
CONSOLIDATED CONSOLIDATED
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(1)
------ ------- ------- ------- ------- ------------ ------- ------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net........... $5,586 $17,380 $44,886 $71,297 $87,978 $87,978 $22,388 $22,565 $22,565
Cost of revenues........ 3,495 11,274 30,658 55,520 67,986 67,986 18,113 16,412 16,412
------ ------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 2,091 6,106 14,228 15,777 19,992 19,992 4,275 6,153 6,153
------ ------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative
expenses.............. 1,538 2,289 6,510 10,391 12,572 12,572 2,714 3,428 3,428
Depreciation and
amortization.......... 157 214 293 429 631 631 190 138 138
------ ------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 1,695 2,503 6,803 10,820 13,203 13,203 2,904 3,566 3,566
------ ------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 396 3,603 7,425 4,957 6,789 6,789 1,371 2,587 2,587
------ ------- ------- ------- ------- ------- ------- ------- -------
Other (income) expense:
Interest expense....... 123 622 1,090 1,456 1,788 46 494 315 1
Other.................. (6) 67 (73) 94 118 118 (291) 6 6
------ ------- ------- ------- ------- ------- ------- ------- -------
Total other expense.... 117 689 1,017 1,550 1,906 164 203 321 7
------ ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 279 2,914 6,408 3,407 4,883 6,625 1,168 2,266 2,580
Income tax benefit
(provision)............ (30) (356) (793) (211) 77 (2,717) 44 61 (1,026)
------ ------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,960 $ 3,908 $ 1,212 $ 2,327 $ 1,554
====== ======= ======= ======= ======= ======= ======= ======= =======
Weighted average
shares................. 9,000(2) 9,000(2)
Net income per share.... $ 0.43(3) $ 0.17(3)
======= =======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
---------------------------------------- -------------------
PRO FORMA
CONSOLIDATED
AS ADJUSTED
1993 1994 1995 1996 1997 1998 1998(4)
------ ------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,521 $2,174 $20,470
Property and equipment,
net.................... 1,465 5,059 9,099 10,939 7,609 7,931 7,931
Total assets............ 3,457 13,548 30,414 49,037 32,496 38,993 47,649
Long term obligations... 708 4,278 4,729 4,779 3,944 3,752 239
Shareholders'
equity(5).............. 409 1,624 3,195 4,540 4,827 5,967 27,776
</TABLE>
- --------
(1) Pro forma adjustments include (i) the elimination of interest expense
related to the line of credit, the term loan and subordinated debt
borrowings assumed to be repaid with the proceeds of the Offering, (ii) an
income tax provision to reflect the pro forma tax effects as if the Company
were taxed as a C corporation and (iii) the tax effect of the interest
expense adjustment.
(2) Adjusted to reflect the Consolidation and the Offering (assuming the shares
were outstanding for the entire period). Pursuant to Staff Accounting
Bulletin No. 98, the impact of any options are excluded as the shares are
not considered nominal. Accordingly, basic and diluted earnings per share
are the same.
(3) Excludes the dividend accretion on redeemable capital stock of a subsidiary
of approximately $87,000 and $17,000 for the year ended December 31, 1997
and the three months ended March 31, 1998, respectively.
(4) Assumes an increase to working capital equal to the aggregate estimated net
proceeds less repayment of borrowings under the line of credit facility,
the term loan, the subordinated debt, and the redeemable capital stock of a
subsidiary. Reflects the recording of deferred tax assets and liabilities
associated with the change in tax status to a C corporation of certain of
the entities that are parties to the Consolidation and distribution of $7.5
million of undistributed earnings of certain of the entities that are
parties to the Consolidation. See "The Consolidation" and "Use of
Proceeds."
(5) Includes capital stock, partners' capital, members' deficit and retained
earnings.
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered hereby.
This Prospectus contains certain forward-looking statements (as such term is
defined in the Securities Act of 1933, as amended (the "Securities Act"))
concerning the Company's operations, performance and financial condition,
including, in particular, the likelihood of the Company's success in
developing and expanding its business. These statements are based upon a
number of assumptions and estimates which are inherently subject to
significant uncertainties, many of which 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 materially include, but are not limited to, those set forth below.
RELIANCE ON A SMALL NUMBER OF MAJOR CLIENTS
As a result of the Company's focus on developing long-term relationships
with large corporations, a significant portion of the Company's revenues are
derived from a relatively small number of clients. The Company's three largest
clients, BellSouth, Pacific Bell and US West, accounted for an aggregate of
90%, 95%, and 95% of net revenues for 1996, 1997 and the three months ended
March 31, 1998, respectively, of which BellSouth accounted for 82%, 85% and
70%, respectively. Although the Company has written agreements with most of
its telecommunications clients, they generally are terminable upon certain
events after the giving of notice and failure to cure and the lapse of 30 to
90 days. In addition, the Company's agreement with BellSouth may be terminated
for any reason upon two years' notice. Moreover, the Company's contracts do
not assure the Company a specific level of revenues and they generally do not
designate the Company as the client's exclusive service provider. Further, the
Company does not have written agreements with many clients. There can be no
assurance that the Company will be able to retain any of its largest clients,
or that the Company will be able to replace such clients with others that
generate a comparable amount of revenues or profits. Further, except in the
product-based marketing support and fulfillment services it performs for
BellSouth and Pacific Bell, the Company does not believe that it is the sole
or primary source for most of the services rendered to its clients. The loss
of one or more of its largest clients could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--General."
RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES
In connection with certain of its fulfillment services, the Company
purchases Caller ID and other telecommunications equipment from third party
vendors and, therefore, assumes the risks of inventory obsolescence, damage to
leased units, theft and creditworthiness of purchasers. The ability of the
Company to receive payment for sales or rentals of such equipment is dependent
on the transmittal of correct customer invoices and remittance on a timely
basis by BellSouth and Pacific Bell. If the Company is unable to manage these
risks, it could have a material adverse effect on the Company's business,
results of operations and financial condition. The credit risk assumed by the
Company is particularly significant because of the large number of customers,
each of which owes a relatively small amount. The Company's allowance for bad
debt was approximately $5.7 million at December 31, 1997 and approximately
$4.1 million at March 31, 1998. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--General."
RELIANCE ON TELECOMMUNICATIONS INDUSTRY
Caller ID is a relatively recent offering by telecommunications companies
and there can be no assurance that it will gain or sustain wide acceptance in
the marketplace. In addition, the provision of Caller ID services by
telecommunications companies is regulated at both the federal and state level.
Such regulations may have the effect of delaying the offering or market
acceptance of Caller ID service in a market of one of the Company's clients.
See "Business--Government Regulation."
8
<PAGE>
The Company is also dependent on the level of resources (financial and
otherwise) expended by its clients to promote Caller ID service. There can be
no assurance that the Company's telecommunications clients will sufficiently
promote, or continue to promote, Caller ID service in their areas.
Furthermore, there can be no assurance that the Company's telecommunications
clients will achieve their estimated "market penetration" (the percentage of
consumer telephone lines capable of receiving Caller ID services that actually
receive such services) goals, upon which the Company, in part, plans its
operations. In addition, at some time in the future, peak market penetration
for Caller ID service may be achieved by the Company's clients or Caller ID
service or equipment may be replaced by a different service or hardware. The
occurrence of any of these factors could have a material adverse effect on the
Company's business, results of operations and financial condition.
ABILITY TO CONTINUE AND MANAGE GROWTH
Innotrac has recently experienced significant growth in its operations. The
Company's success will depend upon its ability to initiate, develop and
maintain existing and new client relationships; respond to competitive
developments; develop its sales infrastructure; attract, train, motivate and
retain management and other personnel; and maintain the high quality of its
services. In addition, the Company recently entered into a long-term lease for
a new facility, which will increase lease expenses by approximately $400,000
per year. The Company's continued rapid growth can be expected to place a
significant strain on the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to maintain
or accelerate its current growth, effectively manage its expanding operations
or achieve planned growth on a timely or profitable basis. If the Company is
unable to manage its growth effectively, its business, results of operations
and financial condition could be materially adversely affected. See
"Business."
IMPACT OF TREND TOWARD OUTSOURCING
The Company believes that outsourcing by businesses of an increasing number
of services not directly related to their core competencies has increased
significantly in the past several years. There can be no assurance that this
trend will continue or not be reversed or that corporations will not decide to
bring previously outsourced functions in-house. Particularly during general
economic downturns, continued outsourcing of services could result in layoffs
of employees, and businesses may bring in-house previously outsourced
functions to avoid or delay layoffs of employees. An adverse development with
respect to the trend toward outsourcing could have a material adverse effect
on the business, results of operations and financial condition of the Company.
See "Business--Strategy."
DEPENDENCE ON LABOR FORCE
The Company's success is largely dependent on its ability to recruit, hire,
train and retain qualified employees. The Company's industry is very labor-
intensive and has experienced high personnel turnover. A significant increase
in the Company's employee turnover rate could increase the Company's
recruiting and training costs and decrease operating effectiveness and
productivity. Also, the addition of significant new clients or the
implementation of new large-scale marketing support programs may require the
Company to recruit, hire and train qualified personnel at an accelerated rate.
Some of the Company's operations, particularly its technical support and
customer service, require specially trained personnel. There can be no
assurance that the Company will be able to continue to hire, train and retain
sufficient qualified personnel to adequately staff new marketing support
programs. Because a significant portion of the Company's operating expenses
are related to labor costs, an increase in wages, costs of employee benefits
or employment taxes could have a material adverse effect on the Company's
business, results of operations or financial condition. In addition, the
Company's facilities are located in an area with a relatively low unemployment
rate, potentially making it more difficult and costly to hire and train
qualified personnel. The inability of the Company to recruit, hire, train and
retain qualified employees could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
RISKS OF BUSINESS INTERRUPTION; NEW FACILITY
The Company's operations are dependent upon its ability to protect its
distribution facilities, call center, computer and telecommunications
equipment and software systems against damage from fire, power loss,
9
<PAGE>
telecommunications interruption or failure, natural disaster and other similar
events. In the fourth quarter of 1998, the Company expects to move its
corporate offices and four distribution facilities into a new facility. In the
event the Company experiences a temporary or permanent interruption of its
business, through casualty, operating malfunction, as a result of the move or
otherwise, the Company's business, results of operations or financial
condition could be materially adversely affected. The Company's property and
business interruption insurance may not adequately compensate the Company for
all losses that it may incur.
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW SOFTWARE
The Company's business is highly dependent on its computer and
telecommunications equipment and software systems. The Company intends to use
a portion of the net proceeds of the Offering to upgrade certain computer
hardware and software, and, as a result, will convert certain existing
programs to the new system. There can be no assurance that the Company can
effectively or efficiently convert its programs to the new system. In
addition, the Company's failure to maintain its technological capabilities or
to respond effectively to technological changes could have a material adverse
effect on the Company's business, results of operations and financial
condition. The Company's future success also will be highly dependent upon its
ability to enhance existing services and develop applications to focus on its
clients' needs and introduce new services and products to respond to changing
technological developments. There can be no assurance that the Company can
select, invest in and develop new and enhanced technology on a timely basis in
the future in order to meet clients' needs and to maintain its own
competitiveness, and the Company's failure to do so could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Technology."
COMPETITION
The markets in which the Company competes are highly competitive. The
Company expects competition to persist and intensify in the future. The
Company's competitors include the in-house operations of the Company's current
and potential clients, small firms offering specific services and large
marketing support services firms. A number of competitors have or may develop
financial and other resources greater than those of the Company. There can be
no assurance that additional competitors with greater name recognition and
resources than the Company will not enter the Company's markets. Because the
in-house operations of the Company's existing or potential clients are
significant competitors of the Company, the Company's performance and growth
could be negatively impacted if its existing clients decide to provide, in-
house, services that currently are outsourced or if potential clients retain
or increase their in-house capabilities. Further, a decision by a large client
to consolidate its outsourced services with a company other than Innotrac
would have a material adverse effect on the Company. In addition, competitive
pressures from current or future competitors could result in significant price
erosion, which could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business--
Competition."
FLUCTUATIONS IN OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results have fluctuated in the past and will
fluctuate in the future based on many factors. These factors include, among
other things, fluctuations in the general economy, increased competition,
changes in operating expenses, expenses related to acquisitions and the
potential adverse effect of acquisitions. Due to these and any unforeseen
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and
investors. In such an event, the price of the Common Stock would likely be
materially adversely affected. In view of the Company's recent significant
growth, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in large part on the abilities and
continuing efforts of its executive officers and senior management. In order
to support its growth the Company will be required to effectively recruit,
develop and retain additional qualified management personnel. There can be no
assurance that the
10
<PAGE>
Company will be able to (i) retain the services of its executive officers and
key management, with whom the Company has no employment agreements or (ii)
recruit, develop and retain additional qualified management personnel. The
Company does not maintain key man life insurance on any of its executive
officers, although two of the parties to the Consolidation maintain such
policies in the aggregate amount of $4.5 million on the life of Scott D.
Dorfman, the beneficiaries of which are one of the parties to the
Consolidation and the father of Scott D. Dorfman, respectively, the proceeds
of which would be used to repay debt owed to them by the Company. After the
Consolidation, the Company intends that one of the policies, in the amount of
$3.5 million, will be converted to name the Company as beneficiary. The
business and prospects of the Company could be materially adversely affected
if these persons do not continue in their key roles and the Company is unable
to attract and retain qualified replacements. See "Management."
YEAR 2000 COMPLIANCE
The Company is discussing with its suppliers, clients, financial
institutions and others the possibility of any interface difficulties relating
to Year 2000 compliance that may affect the Company. To date, no significant
concerns have been identified; however, there can be no assurance that there
will not be any Year 2000-related operating problems or expenses that will
arise with the Company's computer systems and software or in connection with
the Company's interface with the computer systems and software of its
suppliers, clients, financial institutions and others. Because such third-
party systems or software may not be Year 2000 compliant, the Company could be
required to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on the Company's business, results of
operations and financial condition.
COMPLIANCE WITH GOVERNMENT REGULATION
Because the Company's current teleservicing business consists primarily of
responding to inbound telephone calls, as opposed to outbound calls, it is not
highly regulated. However, in connection with the limited amount of outbound
telemarketing services that it provides, the Company is required to comply
with 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 the Company expands its
outbound telemarketing services, such rules and regulations would apply to a
larger percentage of the Company's business. Furthermore, there may be
additional federal and state legislation, or changes in regulatory
implementation, including interpretations under the Telecommunications Act of
1996 restricting the ability of telecommunications companies to use consumer
proprietary network information ("CPNI"), that limit the activity of the
Company or its clients in the future or significantly increase the costs of
compliance. Additionally, the Company could be responsible for its failure to
comply with regulations applicable to its clients. The adoption of unfavorable
federal or state legislation or regulations affecting Caller ID service could
have a material adverse effect upon the Company's business, financial
condition and results of operations. See "--Risks Associated with Product-
Based Marketing Support Services" and "Business--Government Regulation."
CONTROL BY MANAGEMENT; USE OF PROCEEDS TO BENEFIT MANAGEMENT
Following the Offering, Scott D. Dorfman, the Company's Chairman, President
and Chief Executive Officer, will beneficially own approximately 68% of the
outstanding Common Stock (approximately 65% if the Underwriters' over-
allotment option is exercised in full). See "Principal Shareholders." As a
result, Mr. Dorfman would control the Company's Board of Directors and,
therefore, the business, policies and affairs of the Company. Such voting
concentration may also have the effect of discouraging, delaying or preventing
a change in control of the Company. A portion of the net proceeds of the
Offering will be used to make distributions to Mr. Dorfman, his children and a
shareholder of the Company of accumulated earnings of certain entities that
are parties to the Consolidation and an amount to pay taxes on the 1997 and
1998 earnings of certain Affiliated Companies, to repay certain indebtedness
to a shareholder of the Company and to repay certain indebtedness which is
guaranteed by Mr. Dorfman. See "Use of Proceeds" and "Certain Transactions."
DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS
One component of the Company's strategy is to pursue strategic acquisitions
of companies that have services, products, technologies, industry
specializations or geographic coverage that extend or complement the
11
<PAGE>
Company's existing business. There can be no assurance that the Company will
be able to successfully identify, acquire on favorable terms or integrate such
companies. If any acquisition is completed, there can be no assurance that
such acquisition will enhance the Company's business, results of operations or
financial condition. The Company may in the future face increased competition
for acquisition candidates, which may inhibit the Company's ability to
consummate suitable acquisitions on terms favorable to the Company. A portion
of the Company's capital resources and proceeds of this Offering could be used
for acquisitions. The Company may require additional debt or equity financing
for future acquisitions, which financing may not be available on terms
favorable to the Company, if at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws may
make a change in control of the Company more difficult to effect, even if a
change in control were in the shareholders' interests. Provisions in the
Company's Articles of Incorporation allow the Board to determine the terms of
preferred stock that may be issued by the Company without approval of the
holders of the Common Stock. The ability of the Company to issue preferred
stock in such manner could enable the Board to prevent changes in management
and control of the Company. The Articles also provide for three classes of
directors as nearly equal in size as possible. Each class holds office until
the third annual meeting following election except that the initial terms
expire in 1998, 1999 and 2000. This provision may have an anti-takeover effect
because a third party would be unable to acquire immediate control of the
entire Board. In addition, the Company's Board of Directors has adopted a
Rights Agreement (as defined herein) pursuant to which holders of Common Stock
will be entitled to purchase a fraction of a share of the Company's Series A
Participating Cumulative Preferred Stock if a third party acquires beneficial
ownership of 15% or more of the Common Stock and will be entitled to purchase
the stock of a Principal Party (as defined in the Rights Agreement) at a
discount upon the occurrence of certain triggering events. These provisions of
the Company's Articles of Incorporation, Bylaws and the Rights Agreement could
have the effect of discouraging tender offers or other transactions that would
result in shareholders receiving a premium over the market price for the
Common Stock. See "Description of Capital Stock."
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop or
continue after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public
offering price of the Common Stock has been determined by negotiation between
the Company, J.C. Bradford & Co. and Wheat First Securities, Inc. as
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), and may bear no relationship to the market price for the
Common Stock after the Offering. See "Underwriting."
From time to time after the Offering, there may be significant volatility in
the market price of the Common Stock. Quarterly operating results of the
Company, changes in earnings estimates by analysts, changes in general
conditions in the economy or the financial markets, or other developments
affecting the Company or its industry or competitors could cause the market
price of the Common Stock to fluctuate substantially. In addition, recently
the stock market has experienced extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating performance.
Therefore, the Company cannot predict the market price for the Common Stock
subsequent to the Offering.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience an immediate and
substantial dilution of $8.84 per share in the net tangible book value of
their shares of Common Stock immediately following the Offering. Current
shareholders will receive a material increase in the book value of their
shares. If the Company issues additional Common Stock in the future, including
shares that may be issued in connection with acquisitions, purchasers of
Common Stock in the Offering may experience further dilution in net tangible
book value per share of the Common Stock. See "Dilution."
12
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. Upon consummation of the Offering, the Company will have a total of
9,000,000 shares of Common Stock outstanding (9,375,000 if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,500,000
shares offered hereby (2,875,000 if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restrictions under the
Securities Act. All of the remaining shares are "restricted securities" as
that term is defined by Rule 144 promulgated under the Securities Act and will
be eligible for sale in compliance with Rule 144 volume and other
requirements. The number of outstanding shares of Common Stock available for
sale in the public market will be limited by lock-up agreements under which
the Company, its officers, directors and shareholders have agreed not to sell
or otherwise dispose of any of their shares for a period of 180 days after the
date of this Prospectus without the prior written consent of J.C. Bradford &
Co., on behalf of the Underwriters, and applicable restrictions under the
Securities Act. The Company intends to register for issuance or resale the
800,000 shares of Common Stock reserved for issuance under the Stock Option
Plan on a registration statement on Form S-8. Following the Offering, sales of
substantial amounts of Common Stock in the public market, pursuant to Rule 144
or otherwise, or even the potential of such sales, could adversely affect the
prevailing market price of the Common Stock or impair the Company's ability to
raise additional capital through equity issuances. See "Management--Stock
Option Plan," "Shares Eligible for Future Sale" and "Underwriting."
POLICY TO PAY NO DIVIDENDS
The Company presently intends to retain its earnings to finance its growth
and expansion and for general corporate purposes. Consequently, it does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's financing agreements contain limitations on the payment of cash
dividends and other distributions of assets. See "Dividend Policy."
13
<PAGE>
THE CONSOLIDATION
Prior to the Offering, the business of the Company, a C corporation for tax
purposes, was conducted through the Company and the Affiliated Companies,
including three corporations that had elected S corporation tax status, one
limited partnership, two limited liability companies and three C corporations.
Ninety percent or more of the equity of each of the Affiliated Companies was
owned by Scott D. Dorfman, the Chairman, President and Chief Executive Officer
of the Company, his family and affiliated entities. The Consolidation will be
effected simultaneously with, and as a condition to, the Offering. In
conjunction with the Consolidation, the Company performed a valuation of the
Affiliated Companies prior to the Offering, which was based on, among other
things, historical and projected revenue and net income streams of the various
entities that are parties to the Consolidation. As a result of the valuation,
the 6,500,000 shares to be outstanding after the Consolidation (without giving
effect to the Offering) were distributed to the owners of the Affiliated
Companies based on each Affiliated Company's value relative to the whole as
follows:
<TABLE>
<CAPTION>
ENTITY SHARES
------ ------
<S> <C>
HomeTel Providers Partners, L.P.................................. 3,833,333
HomeTel Systems, Inc............................................. 1,012,617
Innotrac Corporation............................................. 1,080,000
SellTel #1, Inc.................................................. 241,267
RenTel #1, Inc................................................... 158,072
SellTel #2, L.L.C................................................ 124,793
RenTel #2, L.L.C................................................. 41,598
IELC, Inc........................................................ 8,321
---------
Total.......................................................... 6,500,000
=========
</TABLE>
Such amounts exclude the minority interests of one entity that is a party to
the Consolidation which is reflected as redeemable capital stock in the
combined financial statements and notes included elsewhere in this Prospectus
and will be repurchased based on a previously determined arrangement which
approximates fair market value. HomeTel Providers Partners, L.P. ("Providers
L.P.") is the acquiring entity for accounting purposes and its balance sheet
will carry over at historical cost. Since the other entities that are parties
to the Consolidation are wholly-owned by the sole shareholder of the corporate
general partner of Providers L.P., Scott D. Dorfman, or his wife or children,
those entities are considered to be under common control, and the balance
sheets of such entities will also carry over at historical cost. In connection
with the Consolidation, certain affiliated entities that are parties to the
Consolidation will make distributions to their principals, Mr. Dorfman, his
children and ITC Service Company ("ITC"), a shareholder of the Company,
reflecting a portion of accumulated earnings and an amount equal to the
estimated tax payments to be made by such principals with respect to such
entities' estimated income for 1997 and 1998. See "Use of Proceeds," "Certain
Transactions" and Notes 7 and 11 of the financial statements.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby are estimated to be approximately $27.1 million
(approximately $31.2 million if the Underwriters' over-allotment option is
exercised in full) after deduction of the underwriting discount and estimated
Offering expenses payable by the Company.
The Company intends to use approximately $7.5 million of the net proceeds of
the Offering to distribute a portion of the earnings of certain entities that
are parties to the Consolidation to the equity holders thereof, including Mr.
Dorfman, his children and ITC. In addition, the Company intends to repay the
estimated outstanding indebtedness as of the date of the consummation of the
Offering with certain of the net proceeds of the Offering as follows: (i)
approximately $13.7 million to repay indebtedness under its line of credit
facility, (ii) approximately $800,000 to repay a term loan and (iii) $3.5
million to repay indebtedness to ITC. Such indebtedness currently bears
interest per annum at rates equal to (i) at the Company's option, LIBOR plus
225 basis points (8.25%) or the lender's prime rate (8.5%), (ii) 8.95% per
annum and (iii) the prime rate plus 8.0% (16.5%), respectively, and, if not
repaid, will mature in November, July and April 1999, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The remainder of the net proceeds is expected to be used for general
corporate purposes, including (i) approximately $1.0 million to develop the
Company's sales infrastructure, which entails hiring new sales personnel,
forming relationships with independent sales organizations and developing
sales and marketing materials, (ii) approximately $1.5 million to upgrade the
Company's computer software, (iii) approximately $500,000 to purchase computer
hardware for the Company's call center, (iv) approximately $1.5 million for
equipment and fixtures for the Company's new distribution facility and
corporate headquarters expected to be completed in the fourth quarter of 1998,
and (v) for general working capital needs. The Company may from time to time
consider possible acquisitions of related businesses and the use of net
proceeds from the Offering to finance such acquisitions. The Company does not
have any present agreements or commitments for, and is not presently engaged
in active negotiations with respect to, any particular prospects.
Pending application of the net proceeds as described above, the Company will
invest the net proceeds in short-term, interest-bearing investment grade or
government securities.
DIVIDEND POLICY
Innotrac has never paid any cash dividends on its Common Stock. The Company
currently intends to retain its future earnings, if any, to finance the
growth, development, and expansion of the Company's business and, accordingly,
does not currently intend to declare or pay any dividends on the Common Stock
for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of the Company's Board of
Directors and will depend upon the future earnings, results of operations,
financial condition and capital requirements of the Company, among other
factors. In addition, the Company's revolving credit agreement with a bank
prohibits the payment of cash dividends and other distributions of assets in
excess of 40% of the Company's net income. See "The Consolidation" for a
description of distributions to equity holders, including shareholders of the
Company, made by affiliated companies that are parties to the Consolidation.
15
<PAGE>
DILUTION
At March 31, 1998, the combined net tangible book value of the Company was
approximately $6.0 million, or $0.90 per share. After giving effect to the
exercise of 95,000 presently exercisable options, the distribution of $7.5
million by certain entities that are parties to the Consolidation, and the
Consolidation, as if they had occurred at March 31, 1998, the pro forma net
tangible book value of the Company before the Offering would have been
approximately $1.7 million, or $0.26 per share. Net tangible book value per
share represents the amount of the Company's shareholders' equity less
intangible assets, divided by the number of shares of Common Stock
outstanding, including presently exercisable options. Dilution per share to
new investors represents the difference between the price per share of Common
Stock in the Offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of the Offering. After giving effect
to the presently exercisable options, the distribution of $7.5 million, the
Consolidation and the sale of 2,500,000 shares of Common Stock offered hereby
and after deducting the underwriting discount and estimated Offering expenses
payable by the Company, the pro forma net tangible book value of the Company
would have been approximately $28.9 million, or $3.16 per share. This
represents an immediate increase in pro forma net tangible book value of $2.90
per share to existing shareholders and an immediate dilution of $8.84 per
share to new investors purchasing the shares of Common Stock in the Offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................... $12.00
Historical net tangible book value per share................. $0.90
Effect of currently exercisable options...................... 0.16
Proposed shareholder distribution per share.................. (1.14)
Pro forma tax effect of Consolidation........................ 0.34
-----
Pro forma net tangible book value per share before the
Offering.................................................... 0.26
Increase in net tangible book value per share attributable to
new investors............................................... 2.90
-----
Pro forma net tangible book value after the Offering......... 3.16
------
Dilution per share to new investors.......................... $ 8.84
======
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Consolidation as of March 31, 1998, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and
the average price per share paid by existing shareholders and the new
investors.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)....... 6,595,000 73% $ 1,042,000 3% $ 0.16
New investors.................. 2,500,000 27 30,000,000 97 $12.00
--------- --- ----------- ---
Total........................ 9,095,000 100% $31,042,000 100%
========= === =========== ===
</TABLE>
- --------
(1) Does not include 288,000 shares of Common Stock reserved for issuance
pursuant to stock options granted under the Company's Stock Option Plan
that are not currently exercisable.
16
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the actual
combined capitalization of the Company and (ii) the pro forma consolidated
capitalization of the Company giving effect to the Consolidation and to the
application of the net proceeds from the Offering. The data set forth below
should be read in conjunction with "The Consolidation," "Use of Proceeds,"
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the financial statements and notes
thereto and the other financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
PRO FORMA
CONSOLIDATED
ACTUAL AS ADJUSTED
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Indebtedness:
Line-of-credit facility................................ $ 8,915 $ --
Long term debt(1)...................................... 970 21
Subordinated debt...................................... 3,500 --
Redeemable capital stock(2)............................ 546 546
------- -------
Total indebtedness................................... 13,931 567
------- -------
Shareholders' equity:
Partners' capital...................................... 2,983 --
Members' deficit....................................... (490) --
Preferred Stock, $0.10 par value, 10,000,000 shares
authorized; none issued and outstanding............... -- --
Common Stock, $0.10 par value; 50,000,000 shares
authorized, 6,500,000 shares issued and outstanding,
9,000,000 shares issued and outstanding as
adjusted(3)........................................... 5 900
Additional paid-in capital(3).......................... 14 22,383
Retained earnings...................................... 3,455 4,493
------- -------
Total shareholders' equity........................... 5,967 27,776
------- -------
Total capitalization............................... $19,898 $28,343
======= =======
</TABLE>
- --------
(1) Includes current portion of related indebtedness.
(2) Represents redeemable capital stock of a subsidiary to be repurchased in
the fourth quarter of 1998. See "Certain Transactions."
(3) Excludes 383,000 shares of Common Stock reserved for issuance pursuant to
stock options granted under the Stock Option Plan.
17
<PAGE>
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, 1995, 1996 and 1997 and the selected historical balance sheet
data for the periods then ended have been derived from the combined financial
statements that have been audited by Arthur Andersen LLP, independent public
accountants. The selected historical statements of operations data for the
three months ended March 31, 1998 and 1997 have been derived from the
Company's unaudited combined financial statements and include, in the opinion
of management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the data for such periods. Operating
results for interim periods are not necessarily indicative of results for the
full fiscal year. The pro forma statements of operations data for the year
ended December 31, 1997 and the three months ended March 31, 1998 and the pro
forma balance sheet data at March 31, 1998 give effect to the Consolidation
and the Offering as well as the use of the net proceeds of the Offering, as if
the transactions had occurred on January 1, 1997 (for the statements of
operations) and March 31, 1998 (for the balance sheet). The pro forma
financial information does not purport to represent what the Company's
consolidated results of operations would have been if these transactions had
in fact occurred on these dates, nor does it purport to indicate the future
consolidated financial position or consolidated results of future operations
of the Company. The pro forma adjustments are based on currently available
information and certain assumptions that management believes to be reasonable.
The selected financial data should be read in conjunction with "The
Consolidation," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the combined financial
statements and notes thereto and other financial data included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------- -----------------------------
PRO FORMA PRO FORMA
CONSOLIDATED CONSOLIDATED
AS ADJUSTED AS ADJUSTED
1993 1994 1995 1996 1997 1997(1) 1997 1998 1998(1)
------ ------- ------- ------- ------- ------------ ------- ------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues, net........... $5,586 $17,380 $44,886 $71,297 $87,978 $ 87,978 $22,388 $22,565 $22,565
Cost of revenues........ 3,495 11,274 30,658 55,520 67,986 67,986 18,113 16,412 16,412
------ ------- ------- ------- ------- -------- ------- ------- -------
Gross profit............ 2,091 6,106 14,228 15,777 19,992 19,992 4,275 6,153 6,153
------ ------- ------- ------- ------- -------- ------- ------- -------
Operating expenses:
Selling, general and
administrative
expenses.............. 1,538 2,289 6,510 10,391 12,572 12,572 2,714 3,428 3,428
Depreciation and
amortization.......... 157 214 293 429 631 631 190 138 138
------ ------- ------- ------- ------- -------- ------- ------- -------
Total operating
expenses.............. 1,695 2,503 6,803 10,820 13,203 13,203 2,904 3,566 3,566
------ ------- ------- ------- ------- -------- ------- ------- -------
Operating income........ 396 3,603 7,425 4,957 6,789 6,789 1,371 2,587 2,587
------ ------- ------- ------- ------- -------- ------- ------- -------
Other (income) expense:
Interest expense....... 123 622 1,090 1,456 1,788 46 494 315 1
Other.................. (6) 67 (73) 94 118 118 (291) 6 6
------ ------- ------- ------- ------- -------- ------- ------- -------
Total other expense.... 117 689 1,017 1,550 1,906 164 203 321 7
------ ------- ------- ------- ------- -------- ------- ------- -------
Income before income
taxes.................. 279 2,914 6,408 3,407 4,883 6,625 1,168 2,266 2,580
Income tax benefit
(provision)............ (30) (356) (793) (211) 77 (2,717) 44 61 (1,026)
------ ------- ------- ------- ------- -------- ------- ------- -------
Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,960 $ 3,908 $ 1,212 $ 2,327 $ 1,554
====== ======= ======= ======= ======= ======== ======= ======= =======
Weighted average
shares................. 9,000(2) 9,000(2)
Net income per share.... $ 0.43(3) $ 0.17(3)
======== =======
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
--------------------
PRO FORMA
AS OF DECEMBER 31, CONSOLIDATED
---------------------------------------- AS ADJUSTED
1993 1994 1995 1996 1997 1998 1998(4)
------ ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,521 $ 2,174 $20,470
Property and equipment,
net.................... 1,465 5,059 9,099 10,939 7,609 7,931 7,931
Total assets............ 3,457 13,548 30,414 49,037 32,496 38,993 47,649
Long-term obligations... 708 4,278 4,729 4,779 3,944 3,752 239
Shareholders'
equity(5).............. 409 1,624 3,195 4,540 4,827 5,967 27,776
</TABLE>
- --------
(1) Pro forma adjustments include (i) the elimination of interest expense on
the line of credit, the term loan and subordinated debt borrowings assumed
to be repaid with the proceeds of the Offering, (ii) an income tax
provision to reflect the pro forma tax effects as if the Company were
taxed as a C corporation and (iii) the tax effect of the interest expense
adjustment.
(2) Adjusted to reflect the Consolidation and the Offering (assuming the
shares were outstanding for the entire period). Pursuant to Staff
Accounting Bulletin No. 98, the impact of any options are excluded as the
shares are not considered nominal. Accordingly, basic and diluted earnings
per share are the same.
(3) Excludes the dividend accretion on redeemable capital stock of a
subsidiary of approximately $87,000 and $17,000 for the year ended
December 31, 1997 and the three months ended March 31, 1998, respectively.
(4) Assumes an increase to working capital equal to the aggregate estimated
net proceeds less repayment of borrowings under the line-of-credit
facility, the term loan the subordinated debt and the redeemable capital
stock of a subsidiary. Reflects the recording of deferred tax assets and
liabilities associated with the change in tax status to a C corporation of
certain of the entities as a result of the Consolidation, and distribution
of $7.5 million of a portion of undistributed earnings of certain of the
entities that are parties to the Consolidation. See "The Consolidation"
and "Use of Proceeds."
(5) Includes capital stock, partners' capital, members' deficit and retained
earnings.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
Since its formation in 1984, the Company has expanded its business and
facilities to offer distribution and management services, and inbound
teleservices in response to the needs of clients in a variety of industries
and to capitalize on market opportunities. In 1987, the Company began
providing marketing support services to BellSouth. In 1991, the Company
initiated a fulfillment program to sell or rent to BellSouth customers Caller
ID hardware, phone sets and other equipment, and in 1993, began billing the
charges on customers' telephone bills. As part of this program, Innotrac
acquires the Caller ID and other telecommunications equipment from third party
manufacturers, thereby assuming inventory and credit risk. Upon receipt of an
order, the Company ships the product, tracks inventory levels and sales and
marketing data and maintains teleservicing operations to handle customer
service and technical support. From time to time, rather than acquiring units
and selling or leasing them to BellSouth customers, the Company distributes,
for a fee, Caller ID hardware that BellSouth has purchased from various third-
party manufacturers.
At a customer's option, the Company sells one of its various models of
Caller ID units generally in four to six installments or rents certain models
for an open-ended term (which the Company estimates has averaged 1.5 years).
If a rental customer chooses to purchase a Caller ID unit, the customer must
return the old unit (approximately 93% of the returned units are refurbished
and rented again by the Company) and purchase a new one. The Company writes
off rental units at net book value that are not returned and includes such
amounts in its cost of revenues. See "--Results of Operations." The Company's
margins on installment sales and rentals of Caller ID units are similar.
Rentals of Caller ID units accounted for approximately 16% and 19% of the
Company's net revenues for the three months ended March 31, 1998 and the year
ended December 31, 1997, respectively, while sales of Caller ID units
accounted for approximately 76% and 77% of the Company's net revenues for the
three months ended March 31, 1998 and the year ended December 31, 1997,
respectively.
To leverage its experience and infrastructure investment related to the
BellSouth marketing support program, in June 1996 the Company entered into an
agreement with Pacific Bell to sell Pacific Bell's Caller ID equipment. The
Company also provides marketing support services to US West and seeks other
telecommunications companies for whom it can provide similar marketing support
services.
The Company has experienced significant growth in revenue in recent years
primarily due to the growth in Caller ID market penetration and service
improvements by the Company with respect to product-based marketing support
services. Industry sources indicate that at the end of 1995 BellSouth's Caller
ID penetration was approximately 13%. BellSouth indicates that through the end
of December 1997 its Caller ID penetration had increased to approximately 29%.
In 1993 the Company began billing on the telephone bill and in mid-1995,
changed the method of selling BellSouth equipment from taking referrals in the
Company's call center from BellSouth representatives to having a BellSouth
representative negotiate sales on behalf of the Company and send order
information to the Company by electronic data interchange ("EDI"). This change
in process increased sales and decreased order processing time. Also, in
January 1997 the Company implemented an interactive voice response ("IVR")
system to handle some of the BellSouth customer service calls, which generally
reduced response time and lowered operating costs. Services provided to
BellSouth and its customers accounted for 70%, 85%, 82% and 82% of the
Company's net revenues for the three months ended March 31, 1998 and for the
years ended December 31, 1997, 1996 and 1995, respectively.
20
<PAGE>
Management believes that growth in revenues from Caller ID marketing support
services will remain constant for the next several years as market penetration
increases and new Caller ID services that require enhanced equipment are
introduced. Sales are expected to level off as the market matures. According
to industry sources, market penetration of Caller ID services in the U.S. as
of December 1, 1997 is approximately 18% and is expected to peak at
approximately 75% by 2007. Management intends to offset the eventual maturity
of its Caller ID business by diversifying its client base and expanding the
scope of marketing support services it renders to its clients by cross-selling
its other services to existing clients. The Company has also contacted
previous purchasers of Caller ID products to promote higher priced products
and may do so in the future. The Company intends to use a portion of the net
proceeds from the Offering to develop a sales infrastructure to aggressively
promote its marketing support services. See "Use of Proceeds" and "Business--
Business Strategy."
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped (including installment sales) or rentals are
provided. Revenues are reduced for an estimate of product returns and
allowances. This provision is calculated based on the Company's historical
experience applied to current sales.
The largest component of the Company's expenses is its cost of revenues,
which includes the product costs of telecommunications equipment, depreciation
on Caller ID rental equipment, the costs of labor associated with marketing
support services for a particular client, telecommunications services costs,
materials and freight charges, and directly allocable facilities costs. Most
of these costs are variable in nature. A second component of the Company's
expenses includes selling, general and administrative ("SG&A") expenses. This
expense item is comprised of labor and other costs associated with marketing,
financial, information technology support, human resources and administrative
functions that are not allocable to specific client services, as well as bad
debt expense. Bad debt expense represents a provision for installments and
rentals that will be deemed to be uncollectible based on the Company's
historical experience as well as billing adjustments from telecommunications
providers. SG&A expenses tend to be fixed in nature, with the exception of bad
debt, which is related to revenues.
RESULTS OF OPERATIONS
The following table sets forth summary operating data, expressed as a
percentage of revenues, for the years ended December 31, 1995, 1996 and 1997,
and the three months ended March 31, 1997 and 1998. Operating results for any
period are not necessarily indicative of results for any future period.
The financial information provided below has been rounded in order to
simplify its presentation. However, the percentages below are calculated using
the detailed information contained in the financial statements, the notes
thereto and the other financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
YEARS ENDED ENDED
DECEMBER 31, MARCH 31,
------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues, net.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................... 68.3 77.9 77.3 80.9 72.7
Gross profit............................... 31.7 22.1 22.7 19.1 27.3
Selling, general and administrative
expenses.................................. 14.5 14.6 14.3 12.1 15.2
Operating income........................... 16.5 7.0 7.7 6.1 11.5
Interest expense........................... 2.4 2.0 2.0 2.2 1.4
Income before income taxes................. 14.3% 4.8% 5.6% 5.2% 10.0%
</TABLE>
21
<PAGE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues. The Company's net revenues increased to $22.6 million for the three
months ended March 31, 1998 from $22.4 million for the three months ended March
31, 1997. The primary reason for this increase was a seasonal promotional
campaign for BellSouth under which the Company was paid a fee to distribute
Caller ID units to BellSouth's customers, rather than purchase the units for
resale, which increased revenue from 1997 by approximately $700,000. The 1998
promotion accounted for approximately 5% of revenues as well as reduced the
amount of inventory that the Company had to acquire during the period. This
increase in revenues was partially offset by lower prices on units sold
(approximately $300,000). The Company's reserve for returns and allowances
increased from $1.2 million (5.4 % of net revenues) for the three months ended
March 31, 1997 to $2.0 million (8.8% of net revenues) for the three months
ended March 31, 1998. The reserve for the three months ended March 31, 1998 as
a percentage of net revenues was relatively consistent with the percentage for
the year ended December 31, 1997.
Cost of Revenues. The Company's cost of revenues decreased 9.4% to $16.4
million for the three months ended March 31, 1998 compared to $18.1 million for
the three months ended March 31, 1997. This was primarily due to lower
equipment costs due to an increase in the units distributed by the Company in
conjunction with the BellSouth promotional campaign for which the Company did
not purchase such units for resale, and a $1.2 million decrease in rental
equipment losses due to lower rental cancellations and larger average carrying
values. In addition, labor costs associated with the Company's call center were
lower due to improved controls over staffing.
Gross Profit. For the three months ended March 31, 1998, the Company's gross
profit increased 44.2% to $6.2 million or 27.3% of revenues as compared to $4.3
million or 19.1% of revenues for the three months ended March 31, 1997. The
increase in gross profit was primarily due to the impact of the promotional
campaign for BellSouth and the decrease in rental cancellations improved
margins on Caller ID units and lower labor costs associated with the call
center.
Selling, General and Administrative Expenses. SG&A expenses for the three
months ended March 31, 1998 increased 25.9% to $3.4 million or 15.2% of
revenues compared to $2.7 million or 12.1% of revenues for the three months
ended March 31, 1997. The increase was primarily due to increased marketing
expenses, increased insurance and employee benefit expenses and increased
administrative costs associated with the Company's currently anticipated
growth. The Company's bad debt expense, most of which is associated with sales
of Caller ID and other telecommunications equipment to BellSouth and Pacific
Bell customers, was $1.7 million (7.6% of net revenues) for the three months
ended March 31, 1998 as compared to $1.6 million (7.0% of net revenues) for the
three months ended March 31, 1997. The increase in bad debt expense and the
allowance for doubtful accounts (inclusive of the reserve for returns and
allowances) (13.6% of gross accounts receivable) was primarily due to higher
Caller ID market penetration which the Company believes results in an increase
in sales of Caller ID units to consumers having higher credit risks. The
allowance for doubtful accounts (inclusive of the reserve for returns and
allowances) decreased from 22.1% of gross accounts receivable at December 31,
1997 to 13.6% of gross accounts receivable at March 31, 1998, as write-offs for
the three months ended March 31, 1998 were $5.2 million and the provision and
reserve for returns and allowances was $3.7 million combined. The current
period provision was lower due to the results from enhanced collection efforts
on current period receivables combined with lower reserve requirements as a
result of the fulfillment nature of the seasonal promotion versus actual
purchase for resale. These factors, combined with the impact of a large portion
of the first quarter revenues being recorded late in the quarter, resulted in
the significant increase in accounts receivable over year-end 1997 amounts.
Interest Expense. Interest expense decreased to $315,000 for the three months
ended March 31, 1998 from $494,000 for the three months ended March 31, 1997.
This was primarily due to lower borrowings under the Company's line of credit
due to lower working capital requirements.
22
<PAGE>
Income Taxes. The Company's effective tax rates for the three months ended
March 31, 1998 and 1997 were 2.7% and 3.8%, respectively. The effective tax
rates are lower than statutory rates due to the amount of income attributable
to the pass-through entities involved in the Consolidation. As a result of the
Consolidation, the Company expects its effective tax rate in future periods to
increase to statutory levels. See "The Consolidation."
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. The Company's net revenues increased 23.4% to $88.0 million for the
year ended December 31, 1997 from $71.3 million for the year ended December 31,
1996, primarily due to increased sales of Caller ID units to BellSouth and
Pacific Bell customers. The growth was partially offset by a decrease in net
revenues during the year ended December 31, 1997 compared to the prior year
resulting from the conclusion of a fulfillment program performed by the Company
in connection with the 1996 Olympic Games and an increase in the Company's
reserve for returns and allowances from $3.5 million (5.5% of net revenues) for
the year ended December 31, 1996 to $6.3 million (8.4% of net revenues) for the
year ended December 31, 1997. In addition, the Company's sales to Pacific Bell
customers during 1997 and 1996 were less than expected due to regulatory issues
affecting Pacific Bell that delayed the rollout of Caller ID services by
Pacific Bell and a low level of promotion of Caller ID services by Pacific
Bell. See "Business--Government Regulation."
Cost of Revenues. The Company's cost of revenues increased 22.5% to $68.0
million for the year ended December 31, 1997 compared to $55.5 million for the
year ended December 31, 1996. This increase was due to increased revenue volume
including a $1.9 million increase from 1996 in rental equipment losses to $4.5
million and a $1.6 million write-down on Caller ID equipment purchased for the
start-up of the Pacific Bell program that could not be sold above their cost
due to Pacific Bell's regulatory delays that resulted in product obsolescence
issues. The increase in cost of revenues was also associated with the Company's
new call center.
Gross Profit. For the year ended December 31, 1997, the Company's gross
profit increased 26.6% to $20.0 million or 22.7% of revenues as compared to
$15.8 million or 22.1% of revenues for the year ended December 31, 1996. The
increase in gross margin was due to increased sales along with the impact of a
price increase for Caller ID units with enhanced features. This was partially
offset by the $1.6 million inventory writedown and the costs associated with
the new call center, along with the impact of introductory promotional prices
on certain Caller ID units which were lower than regular prices.
Selling, General and Administrative Expenses. SG&A expenses for the year
ended December 31, 1997 were $12.6 million or 14.3% of revenues compared to
$10.4 million or 14.6% of revenues for the year ended December 31, 1996. The
decrease in SG&A expenses as a percentage of revenues was due to improved
economies of scale. This was slightly offset by an increase in the Company's
bad debt expense, most of which was associated with sales of Caller ID and
other telecommunications equipment to BellSouth and Pacific Bell customers. Bad
debt expense was $7.8 million (8.8% of net revenues) for the year ended
December 31, 1997 as compared to $5.8 million (8.1% of net revenues) for the
year ended December 31, 1996. The increase in bad debt expense and the
allowance for doubtful accounts (inclusive of the reserve for returns and
allowances) (22.1% of gross accounts receivable) was primarily due to the
Company's higher revenue volume and higher Caller ID market penetration, which
the Company believes results in an increase in sales of Caller ID units to
consumers having higher credit risks. The Company believes that higher credit
risk customers result in larger write-offs for nonpayment due to increased
chargebacks by telecommunications companies to suppliers of nonregulated
services when customers do not pay for these services.
Interest Expense. Interest expense increased to $1.8 million for the year
ended December 31, 1997 from $1.5 million for the year ended December 31, 1996.
The increase was primarily due to increased borrowings under the Company's line
of credit to fund working capital, consisting primarily of accounts receivable
and inventory necessary to support increases in revenues. This increase was
slightly offset by lower interest on the Company's subordinated debt in 1997
compared to 1996 due to a repayment of such debt by the Company in September
1996.
23
<PAGE>
Income Taxes. The Company's effective tax rates for the years ended December
31, 1997 and 1996 were (1.6%) and 6.2%, respectively. The change from 1996 to
1997 was primarily the result of a higher level of income attributable to the
pass-through entities involved in the Consolidation. As a result of the
Consolidation, the Company expects its effective tax rate in future periods to
increase to statutory levels. See "The Consolidation."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. The Company's net revenues increased 58.8% to $71.3 million for the
year ended December 31, 1996 from $44.9 million for the year ended December 31,
1995, primarily due to increased sales of Caller ID units to BellSouth
customers. Revenues for 1996 are net of a reserve for returns and allowances of
$3.5 million (5.5% of net revenues) due to a significant increase in the amount
of returns the Company was unable to bill in 1996. In management's opinion, no
such provision was necessary in 1995.
Cost of Revenues. The Company's cost of revenues increased 80.8% to $55.5
million for the year ended December 31, 1996 from $30.7 million for the year
ended December 31, 1995, primarily due to increased revenue volume including an
$800,000 million increase from 1995 in rental equipment losses to $2.5 million,
as well as costs associated with the Company's new call center, which opened in
June 1996.
Gross Profit. The Company's gross profit for the year ended December 31, 1996
increased 11.2% to $15.8 million or 22.1% of revenues from $14.2 million or
31.7% of revenues for the year ended December 31, 1995. The decrease in gross
margin was primarily due to costs associated with the call center that opened
in June 1996, along with the impact of introductory promotional prices on
certain Caller ID units sold during the last six months of 1996.
Selling, General and Administrative Expenses. SG&A expenses for the year
ended December 31, 1996 were $10.4 million or 14.6% of revenues compared to
$6.5 million or 14.5% of revenues for the year ended December 31, 1995. The
increase in the 1996 period over the 1995 period was primarily due to the fixed
costs associated with the Company's new call center and an increase in the
Company's bad debt expense. The bad debt expense, which was associated with
sales of Caller ID and other telecommunications equipment, was $5.8 million
(8.1% of net revenues) for the year ended December 31, 1996, compared to $3.0
million (6.8% of net revenues) for the year ended December 31, 1995. The
increase in bad debt expense and allowance for doubtful accounts (inclusive of
the reserve for returns and allowances) (14.3% of gross accounts receivable)
was primarily due to the Company's higher revenue volume and Caller ID market
penetration, which the Company believes results in an increase in sales of
Caller ID units to consumers having higher credit risks.
Interest Expense. Interest expense increased to $1.5 million for the year
ended December 31, 1996 from $1.1 million for the year ended December 31, 1995.
The increase was primarily due to additional borrowings in the 1996 period
under the Company's line of credit to fund working capital, consisting
primarily of accounts receivable and inventory required to support increased
revenue. The increase was partially offset by lower interest on the Company's
subordinated debt in the 1996 period compared to the 1995 period due to a
repayment of such debt made by the Company in September 1996.
Income Taxes. The Company's effective tax rates for the years ended December
31, 1996 and 1995 were 6.2% and 12.3%, respectively. This change was primarily
the result of a higher level of income attributable to the pass-through
entities involved in the Consolidation. See "The Consolidation."
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations and capital expenditures
primarily through cash flow from operations and borrowings from banks and
shareholders. The Company had cash and cash equivalents of approximately
$40,000, $2.0 million, $554,000 and $593,000 at December 31, 1995, December 31,
1996, December 31, 1997 and March 31, 1998, respectively. The Company maintains
a $25.0 million revolving line of
24
<PAGE>
credit with a bank, maturing in November 1999, which was increased from $18.0
million in December 1997. Borrowings under the line of credit bear interest at
the Company's option at the bank's prime rate, as adjusted from time to time,
or LIBOR plus up to 225 basis points. At March 31, 1998, the interest rate was
8.5%. The Company also has a term loan with the same bank that matures in July
1999 and bears interest at 8.95% per annum. In addition, the Company has a
subordinated note payable to a shareholder, which matures in April 1999 and
bears interest at a particular bank's prime rate, as adjusted from time to
time, plus 8.0% per annum. At March 31, 1998, the interest rate was 16.5%. At
March 31, 1998, $8.9 million, $889,000 and $3.5 million were outstanding under
the line of credit, the term loan and the subordinated note, respectively. The
Company anticipates that all outstanding indebtedness under the line of credit,
term loan and subordinated note will be repaid from the net proceeds of this
Offering. The Company will be able to continue to draw on the line of credit
from time to time. See "Use of Proceeds."
As of March 31, 1998, the Company had entered into various operating leases
in the ordinary course of business and an operating lease for a new
distribution facility and corporate offices expected to be ready for occupancy
in the third quarter of 1998. As a result of the new facility lease, rental
expense will increase approximately $400,000 per year through 2008. In
addition, the Company entered into an agreement with a related party to acquire
from him by the end of 1998 all of his interest in a subsidiary of the Company
and one entity involved in the Consolidation for an aggregate of $980,000. As a
part of the agreement, during the three months ended March 31, 1998, the
Company acquired the interest in the entity involved in the Consolidation for
$388,000. The Company will acquire the interest in the subsidiary in December
1998. See "Certain Transactions."
During the three months ended March 31, 1998, the Company generated cash flow
from operating activities of $2.3 million compared to $2.9 million in the same
period in 1997. The Company generated cash flow from operating activities of
$18.9 million, $88,000 and $6.4 million for the years ended December 31, 1997,
1996 and 1995, respectively. The increase in cash flow from operating
activities in 1997 was due to lower working capital requirements resulting from
decreased accounts receivable due to shorter installment periods as the Company
changed the length of its installment sales from generally one year to four to
six months and reduced inventory as the Company utilized inventory purchased in
1996 as part of the build-up for the rollout of the Pacific Bell program, which
was delayed for various regulatory issues. Commencing in 1997, the Company's
inventory situation improved as a result of revised processes with vendors
which focused on more just-in-time deliveries. The lower cash flow from
operating activities for the year ended December 31, 1996 was due to lower net
income and increased working capital requirements needed to support the
expansion of the Company's Caller ID programs, along with the impact of the
delay in the Pacific Bell Caller ID program.
During the three months ended March 31, 1998, net cash used in investing
activities was $1.8 million compared to $2.3 million in the same period in
1997. This decrease was primarily due to a decrease in the number of purchases
of Caller ID units for rent, partially offset by expenditures associated with
the Company's software upgrade. Net cash used in investing activities was $6.9
million for the year ended December 31, 1997 compared to $8.0 million for the
year ended December 31, 1996. This decrease was primarily due to decreased
purchases of telecommunications rental equipment. Net cash used in investing
activities was $8.0 million for the year ended December 31, 1996 compared to
$7.8 million for the year ended December 31, 1995. This increase was primarily
due to increased purchases of telecommunications equipment and capital costs
associated with the build-out and opening of the Company's call center.
During the three months ended March 31, 1998, the net cash used for financing
activities was $453,000 compared to $2.3 million in the same period in 1997.
This change was primarily due to repayments on the term loan in 1997 and the
redemption of an interest in one of the entities involved in the Consolidation
in 1998. Net cash (used in) provided from financing activities was ($13.4
million) for the year ended December 31, 1997 compared to $9.8 million for the
year ended December 31, 1996 and $588,000 for the year ended December 31, 1995.
The use of cash for financing activities for the year ended December 31, 1997
reflects repayments under the line of credit and term loan. The increase in
cash provided by financing activities for the year ended December 31, 1996 was
due to increased borrowings under the line of credit to fund increased accounts
25
<PAGE>
receivable and inventory, partially offset by repayments on the term loan and
subordinated debt and distributions to equity holders of entities involved in
the Consolidation.
The Company estimates that its cash and financing needs through 1998 will be
met by cash flows from operations, its line of credit facility, and the net
proceeds from the Offering. However, any increases in the Company's growth
rate, shortfalls in anticipated revenues, increases in anticipated expenses, or
significant acquisitions could have a material adverse effect on the Company's
liquidity and capital resources and would require the Company to raise
additional capital from public or private equity or debt sources in order to
finance operating losses, anticipated growth and contemplated capital
expenditures. If such sources of financing are insufficient or unavailable, the
Company will be required to modify its growth and operating plans in accordance
with the extent of available funding. The Company may need to raise additional
funds in order to take advantage of unanticipated opportunities, such as
acquisitions of complementary businesses or the development of new products, or
otherwise respond to unanticipated competitive pressures. 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.
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent in part on its
computer software programs and operating systems. These programs and systems
are used in inventory management, pricing, sales, shipping and financial
reporting, as well as in various administrative functions. Recognizing the
importance and need for an integrated information systems solution, the Company
has developed an implementation plan for upgrading its systems architecture.
This plan also addresses the functionality of its systems beyond December 31,
1999 ("Year 2000 compliance") as the majority of the internal information
systems are being replaced with new systems that the systems vendor represents
will be Year 2000 compliant. The Company does not anticipate additional
material expenditures for Year 2000 compliance issues. This new systems
implementation is expected to be completed by December 31, 1998. The Company is
discussing with its suppliers, clients, financial institutions and others the
possibility of any interface difficulties relating to Year 2000 compliance that
may affect the Company. To date, no significant concerns have been identified;
however, there can be no assurance that there will not be any Year 2000-related
operating problems or expenses that will arise with the Company's computer
systems and software or in connection with the Company's interface with the
computer systems and software of its suppliers, clients, financial institutions
and others. Because such third-party systems or software may not be Year 2000
compliant, the Company could be required to incur unanticipated expenses to
remedy any problems, which could have a material adverse effect on the
Company's business, results of operations and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires companies that do not choose to
account for stock-based compensation as prescribed by the statement to disclose
the pro forma effects on earnings and earnings per share as if SFAS 123 had
been adopted. The Company has chosen the disclosure method, but for all periods
presented herein the Company did not have any stock option plans. Subsequent to
September 30, 1997, the Company adopted the Stock Option Plan. Therefore, in
subsequent periods the Company will have additional disclosures related to SFAS
123.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"), which redefines how entities
compute earnings per share. SFAS 128 requires presentation of "basic earnings
per share" and "diluted earnings per share," as defined. Primary earnings per
share will be replaced by basic earnings per share which will be computed
exclusively based on the weighted average number of common shares outstanding.
This statement is effective for periods ending after December 15, 1997 and will
require restatement of all prior period earnings per share data presented. The
adoption of SFAS 128 is not expected to have a material impact on the Company's
earnings per share data.
26
<PAGE>
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards
for reporting and presentation of comprehensive income and its components in a
full set of general purpose financial statements. This statement is effective
for periods beginning after December 15, 1997. The adoption of SFAS 130 is not
expected to have an impact on the Company's financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement is effective for
financial statements for periods beginning after December 15, 1997. The
adoption of SFAS 131 is not expected to have a material impact on the Company's
financial statements.
27
<PAGE>
BUSINESS
GENERAL
Innotrac is a full-service provider of customized, technology-based marketing
support services to large corporations, primarily in the telecommunications
industry. The Company's marketing support services provide its clients with an
efficient means of delivering products or information to their customers, and
include product and literature distribution, computerized inventory and
database management and customer-initiated ("inbound") teleservices. Innotrac
works with its clients on a consultative basis to create customized turnkey
solutions to meet its clients' needs, which range from small, specialty
projects to larger integrated fulfillment, teleservicing and database tracking
programs. The majority of Innotrac's growth over the past five years has come
from telecommunications companies and, specifically, from services related to
Caller ID equipment. Although 95% of its 1997 revenues came from BellSouth,
Pacific Bell, and US West, the Company has a broad range of clients, including
Home Depot, NAPA, Siemens E&A and Turner Broadcasting System, Inc.
Since its formation in 1984, the Company has expanded its capabilities in
response to the needs of clients in a variety of industries and to capitalize
on market opportunities. In 1987, the Company began providing marketing support
services to BellSouth. In 1991, these services were expanded to include
fulfillment services related to Caller ID telecommunications equipment. This
program provides for Innotrac to (i) sell or rent to BellSouth customers Caller
ID hardware, phone sets and other equipment (branded with BellSouth's logo),
(ii) ship ("fulfill") customers' orders, (iii) track inventory levels and sales
and marketing data regarding such items and (iv) maintain teleservicing
operations to handle customer service and technical support for Caller ID units
and other products. In conjunction with this program, in 1993 Innotrac
pioneered a billing option (the "billing options program") to allow customers
to pay for the equipment through their phone bills on an interest free
installment basis. The addition of the billing options program was well
received in the marketplace, and, as a result, the fulfillment services for
BellSouth have been the primary force behind the Company's rapid sales growth.
Innotrac has continued to capitalize on its fulfillment expertise in the
telecommunications sector, as evidenced by its additional contractual
arrangements with Pacific Bell and US West.
The Company has positioned itself to capitalize on the trend towards
outsourcing of marketing support services by investing in the technology and
infrastructure necessary to offer additional and more advanced services to its
clients. The Company believes that large corporations are increasingly focusing
on their primary businesses and turning to outside service companies to perform
marketing support functions. By outsourcing these functions, companies seek to
(i) replace fixed warehouse, information technology and labor costs with
variable costs, (ii) improve their reaction to business cycles, (iii) improve
customer service and technical support, (iv) manage capacity to meet
fluctuations in demand for products and customer service, (v) create economies
of scale by sharing the costs of advanced telecommunications and fulfillment
systems, and (vi) reduce working capital needs. As the trend toward outsourcing
continues, the Company believes that businesses will increasingly seek to
reduce the number of vendors they utilize and may prefer single-source
providers of integrated, customized marketing support services. The Company
believes that its "one-stop" approach, combined with its use of advanced
technology, provides a competitive advantage in attracting and retaining
clients on a long-term basis.
BUSINESS STRATEGY
The Company's strategy is to take advantage of market trends towards
outsourcing by leveraging its core expertise, reputation for quality and timely
service and strong client relationships. The following are the key elements of
this strategy:
MAXIMIZE CALLER ID BUSINESS. The Company currently distributes Caller ID
units for three of the six RBOCs: BellSouth, Pacific Bell and US West.
Management believes that significant growth opportunities exist with these
three clients as the market penetration of Caller ID services increases and as
consumer demand for
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additional and/or more advanced Caller ID units grows. Additionally, the
Company believes it is well positioned to obtain similar contracts with other
RBOCs and independent local exchange carriers.
LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand
its customer base in the telecommunications industry by leveraging the
expertise it has developed and the results it has achieved through long-
standing relationships with several clients in the industry. The Company is
also seeking to expand the level of marketing support services provided to
existing telecommunications clients by cross-selling its other services to such
clients.
EXPAND OUTSIDE OF TELECOMMUNICATIONS. Innotrac's full service capabilities
provide it with the flexibility to manage small specialty projects or large
integrated projects whereby the Company becomes a new and distinct channel of
distribution for clients. The Company believes that its infrastructure will
allow it to develop clients in a variety of industries that have numerous
and/or geographically diverse subsidiary or affiliate operations, extensive
marketing needs or complex point-of-distribution requirements. Management
believes that these capabilities will make its services attractive to companies
in the manufacturing and retailing industries, in which it currently has
clients, as well as companies engaged in electronic commerce.
CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a
commitment to the use of advanced technology and intends to continue to upgrade
and enhance its computer hardware and software applications to enable it to
continue to provide flexible and powerful services to its clients. The Company
believes that the use of advanced technology provides a competitive advantage
and results in greater capacity and reduced labor costs. The Company also
believes that continued technological advances, particularly those utilizing
the Internet, will provide new opportunities for the Company to tailor its
services to meet each client's needs. The Company intends to address the labor-
intensive nature of fulfillment services by developing more efficient automated
systems that distribute literature via electronic media directly to the
customer. The Company also plans to expand its Internet-related capabilities
for (i) automated inventory management, (ii) access to order and database
information and (iii) virtual warehousing of literature so that such materials
no longer need to be maintained in physical form in the Company's warehouses.
EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored,
value-added solutions that achieve each client's intended marketing results.
The Company devotes considerable resources to assessing and understanding a
client's industry, products, services, processes and culture, then works with
the client to design programs to reduce the costs and investment required to
deliver the client's marketing support programs. The Company believes that this
consultative partnership approach encourages long-term client relationships, as
evidenced by the fact that the Company has serviced its 10 largest clients for
an average of six years and its five oldest clients for an average of 11 years.
The Company believes that this approach also creates substantial opportunities
to expand relationships with existing clients by cross-selling the full range
of its services.
SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take advantage
of the fragmented nature of the marketing support services industry by
selectively acquiring complementary companies that extend its presence into new
geographic markets or industries, expand its client base, add new product or
service applications or provide substantial operating synergies. While the
Company has made no acquisitions to date, management believes that there are a
variety of such potential acquisition opportunities.
CLIENTS
The flexibility of its services allows the Company to attract clients in a
broad range of industries. Innotrac targets companies that have developed a
large customer base, numerous and/or geographically diverse subsidiary or
affiliate operations, extensive marketing needs, or complex point-of-
distribution requirements. Companies with these characteristics tend to need
customer support, product or literature distribution, inventory warehousing and
management, or tracking and reporting capabilities. Although a company may
elect to perform these functions in-house, it will require the development of
expensive, labor intensive infrastructures, which may divert a
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company's focus from its core competencies. Outsourcing these functions to a
company such as Innotrac may result in a lower cost and higher quality level
than such companies can achieve on an in-house basis. The following are some
examples of the Company's clients and the marketing support services the
Company performs for them:
BELLSOUTH
Since 1987, the Company has provided many marketing support services for
BellSouth, including the Caller ID display unit distribution program, which
began in 1991. A transaction generally begins when a customer calls BellSouth
and speaks with one of over 4,000 BellSouth service representatives to obtain
Caller ID service. On behalf of Innotrac, the representative may offer to sell
or rent to the customer one of several models of Caller ID and telephone
products that can be paid for through the customer's phone bill, on an interest
free installment basis. If the representative makes the sale, the order is sent
via EDI to Innotrac. Occasionally, if more detailed information is required,
the customer's call is transferred directly to Innotrac. Innotrac generally
ships the order the next day and electronically submits monthly to BellSouth
the appropriate charges to be included on the customer's telephone bill.
Innotrac also provides the BellSouth customer with order status, billing
information and technical product support through its call center by IVR or
representative. Innotrac does not charge BellSouth for its services but instead
derives its fees from the difference in the price of the Caller ID display unit
charged to the customer and the wholesale cost of the product.
The Company has also been selected by BellSouth to sell telephone network
services such as voice mail and upgraded Caller ID service, starting in the
second quarter of 1998. When one of Innotrac's thousands of daily customer
service calls for BellSouth is received, Innotrac's computer system will be
able to determine if the customer's telephone system can support the enhanced
services. If the customer and its existing system meet certain parameters, the
Innotrac representative will be prompted by the computer to offer the new
features. Innotrac will be paid by BellSouth on a per sale basis under this
program, and the program is expected to require minimal additional cost to
Innotrac.
SIEMENS ENERGY AND AUTOMATION
Starting with the provision of marketing support services for just one
business unit in 1986, Innotrac currently provides marketing support services
for more than 20 business units of Siemens E&A. One component of these services
is the storage of technical literature, product catalogs and brochures. Siemens
E&A sales offices, dealers and distributors may order, via telephone, fax or
Innotrac's Internet gateway, various types of literature stored in the
Company's distribution facilities. Innotrac processes the order, packs and
ships the product using the least expensive carrier for the time frame
requested. Innotrac provides Siemens E&A with detailed inventory management and
charge back reports to allow Siemens E&A to allocate costs appropriately to
each business unit. Innotrac also distributes literature and information from
Siemens E&A's corporate office to its sales offices, dealers and distributors.
Siemens E&A frequently provides various other projects that require Innotrac to
assemble, collate, print and distribute information contained in various
databases maintained by Innotrac.
HOME DEPOT
Home Depot purchases in-store signage from various vendors and warehouses the
inventory in one of Innotrac's distribution facilities. For new store openings,
promotions or replacement, Home Depot orders signs from Innotrac to ship to one
or several of its stores in the United States and Canada. Innotrac does not own
the inventory, but manages it and provides cost and inventory reports directly
to Home Depot. As requested, Innotrac may assemble special signs or products
for distribution to Home Depot stores. In addition, Innotrac provides Home
Depot with cost accounting for each store's usage of signs so that Home Depot
can allocate those costs directly to the appropriate stores. The Company
invoices Home Depot monthly for order processing, consultative account
services, fulfillment and other expenses (such as freight and supplies).
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MARKETING SUPPORT SERVICES
Innotrac designs flexible marketing support solutions that range from small,
specialty projects to large integrated fulfillment, teleservicing and database
tracking project from among the following service options:
DISTRIBUTION SERVICES
TRADITIONAL PRODUCT AND LITERATURE FULFILLMENT. Innotrac is committed to
making its clients' products and services available to its customers on a
timely and accurate basis. Innotrac personnel process, pack and ship from the
Company's warehouses product orders and requests for promotional, technical and
educational literature, signage and point of sale materials for clients.
Clients may order such inventory by e-mail, through customized Internet
applications, EDI, telephone or facsimile. The Company ships orders so that the
product or literature reaches the client or its customer as it is needed
("just-in-time"). Additional fulfillment services offered by the Company
include (i) customized product assembly, (ii) kit assembly, (iii) binder
collation, (iv) manifest delivery service systems, (v) shrink wrapping, (vi)
weight verification of materials and (vii) preparing, addressing, coordinating,
sorting and mailing materials. The Company streamlines and customizes the
fulfillment procedures for each client based upon the product and literature
request, and the tracking, reporting and inventory controls necessary to
implement the marketing support program.
VIRTUAL DISTRIBUTION. Innotrac can provide literature and publishing
fulfillment services through advanced delivery systems, such as fax-on-demand,
print-on-demand and virtual warehousing, which management believes will be the
industry norm in the near future. Management believes these services will speed
the delivery of important documents to a client or a client's customer at a
much lower cost than traditional literature fulfillment, and that increasing
advances in facsimile and printer technology will enable the quality of
documents provided through these services to equal or surpass current quality.
With fax-on-demand, a client or a client's customer calls a toll-free
number to reach the Company's call center. Using the IVR system, the caller
then searches for a particular publication from a menu of choices, or from a
catalog of publications already in his or her possession, and instructs the
system to deliver such publication. The desired literature or marketing
materials are then quickly faxed to the customer.
Print-on-demand solutions enable customers to cost-effectively produce and
distribute small or large volumes of a document on short notice. As part of
this service, the client supplies the Company with either an electronic file
containing the document or a hard copy of the document, in black and white or
in color, which the Company converts to an electronic file and stores in its
computer system. The client or the client's customer can then use its own
computer system or telephone to place a print order, including production
amount and distribution method and location. The Company then completes the
print and distribution process, thereby avoiding the costs of maintaining a
warehouse for storage of the documents and personnel to pick and pack the
documents for shipment.
Virtual warehousing solutions take the print-on-demand program to a more
efficient level of operation. With these services, the client provides Innotrac
with copies of its technical, educational or marketing literature for transfer
onto Innotrac's computer system. The Company then stores and organizes the
materials on a customized system designed to facilitate the client's retrieval
needs. Instead of placing orders with Innotrac to print and ship literature
requirements (as in print-on-demand), utilizing virtual warehousing, the client
can print the materials directly to its printers or its customer's printers,
thereby reducing warehousing, labor and shipping costs.
Other components of the Company's virtual distribution services include
broadcast fax and broadcast e-mail, which enable an Innotrac client to send
literature to a database of fax numbers or e-mail addresses. These services
allow a client to communicate with customers or sales personnel quickly,
efficiently and cost effectively.
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MANAGEMENT SERVICES
INVENTORY MANAGEMENT. An integral part of Innotrac's marketing support
services is the on-line tracking and control of a client's inventory. The
Company provides automated inventory management to assure real-time stock
counts of a client's products, sales, educational and technical literature,
signage and other items. These inventory management systems allow Innotrac and
the client to maintain consistent and timely reorder levels and supply
capabilities and also allow the client to assess quickly (i) current stock
balances, (ii) year-to-date receipts, (iii) monthly and yearly usage, (iv)
reorder levels, (v) pricing information and (vi) dollar value of inventory. The
Company offers this information to the client on a real-time basis via direct
dial-up, through its Internet gateway, or through EDI. Inventory management
data is also utilized in the Company's reporting services. See "--Management
Services--Reporting." Innotrac also utilizes bar coding equipment in its
inventory management systems, which improves the efficiency of stock management
and selection.
DATABASE MANAGEMENT. Innotrac can manage a client's databases independently
or in conjunction with other marketing support programs. Independent database
management begins with the client providing Innotrac with the information to
establish the database, which the Company then customizes, manages, uses to
provide reports to the client, and updates based upon information supplied by
the client. In addition, Innotrac's integrated marketing support programs
generate information about customers, demographics, recurring technical
problems and other matters. Innotrac compiles this information into customized
databases that evolve in conjunction with its on-going marketing support and
customer service programs. This data is a source of valuable information to
Innotrac and its clients in evaluating ongoing programs and planning and
designing future programs.
REPORTING. Innotrac provides reporting to support most of its services,
such as inventory analysis, program results and detailed order processing
information. Innotrac has developed flexible technologies and reporting
procedures that effectively convert raw data gathered during the course of a
marketing support program into useful, customized reports upon which clients
and Innotrac can base strategic decisions and more effectively respond to
customer needs and inquiries. For example, information obtained during a
customer telephone call is captured by the Company's database marketing and
management systems and is then incorporated into broader reports. These reports
also are used by Innotrac to ensure high quality performance. On-line functions
allow clients to monitor their programs in real-time to obtain comprehensive
trend analyses and modify program parameters as necessary. Innotrac provides
clients with customized reports in printed form, via the Internet, electronic
mail, computer-to-computer transmission, disk and magnetic tape. Innotrac also
provides cost-center based accounting reports for clients who utilize
Innotrac's services for subsidiary and intra-company fulfillment transactions.
LEAD MANAGEMENT. The Company offers lead management services as a means for
clients to identify, communicate with and sell their products to new customers.
For example, clients often place advertisements in magazines and newspapers
with toll-free numbers for prospective customers to call to receive more
information. Innotrac can answer these requests for information, establish a
database of prospective customers, send information, questionnaires or surveys
to the prospective customers (which helps to further screen the prospective
customer for a possible sales contact by Innotrac's client), and, once properly
screened, Innotrac can issue a sales lead to the appropriate sales
representative of the client. During this process, the Company tracks, analyzes
and provides full reporting to the client so that modifications or alterations
in the program can be made at any time.
PAYMENT PROCESSING. Innotrac manages client programs in which the Company
distributes invoices on behalf of its clients and collects, tracks and reports
for its clients amounts due to them. In addition, the Company provides services
for clients in connection with credit card, coupon and rebate processing.
INBOUND TELESERVICES
PRODUCT ORDERS. The Company's representatives in its call center process
orders with respect to items such as Caller ID display units and phone sets,
literature, signage, point-of-purchase materials, promotional items
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(caps, shirts, pens, etc.) and video and audio tapes. Inbound teleservices are
generally commenced by a toll-free call from a client's customer that is
received by the Company, identified and routed to an Innotrac service
representative, who generally answers using the client's name. Orders for
Caller ID and other telecommunication products also occur as a result of an
Innotrac service representative offering products in connection with a
customer service or technical support call. To properly handle the call,
Innotrac's automated call distributors and digital switches identify each
inbound call by the toll-free number dialed and immediately route the call to
an Innotrac representative trained for that client's program and possessing
the language capabilities to deal with the customer. In some cases
teleservices are offered by IVR systems, which allow customers to route their
calls by selecting from a menu of offerings, and text to speech systems, which
allow the IVR system to "read" specific, real-time data from the client's
databases and convert it into speech based on cues from a caller. Such
systems, which the Company expects increasingly to utilize in the future,
generally reduce personnel and physical plant expenses associated with a call
center and expand the operating capabilities of the center.
Whether a customer's call is answered by a representative or one of the
Company's automated systems, the customer's needs are generally resolved with
a single call. The information and results of the call are then communicated
to appropriate personnel for order or additional processing and fulfillment
or, if Innotrac does not manage the client's inventory, the Company transmits
the customer's request directly to the client. Once an order is received,
Innotrac's automated systems allow representatives to track and update the
disposition of the order at any time through receipt by the customer.
TECHNICAL SUPPORT; CUSTOMER SERVICE. Innotrac service representatives
resolve complaints, diagnose and resolve product or service problems, and
answer technical questions for its client's customers. Technical support
inquiries are generally driven by a customer's purchase of a product or by a
customer's need for ongoing assistance. Customers of Innotrac's clients dial a
support number and are either connected with a trained Innotrac representative
or an IVR system. Innotrac's service representatives receiving a call can
enter customer information into the Company's call-tracking system, listen to
a question, and quickly access a proprietary network database via computer to
answer a customer's question. The IVR system attempts to resolve support
issues by guiding the customer through a series of interactive questions. If
automatic resolution by IVR cannot solve the problem, the call can be routed
to one of Innotrac's service representatives who is specially trained in the
applicable product. A senior representative is available to provide additional
assistance for complex or unique customer questions. As additional product
information becomes available over the course of the program, the Company
promptly integrates such information into its database, thereby ensuring that
IVR and representatives' answers are based upon the latest product
information. Frequently asked questions can also be integrated into IVR
systems to bypass representatives.
DEALER LOCATOR. Dealer locator services are offered both by IVR and
customer service representatives. Customers of Innotrac's clients, such as
NAPA, call a toll-free number to locate the closest dealer, store or
distributor office. By using the customer's zip code, Innotrac's software will
search the client database and offer the customer the address, phone number
and directions to the nearest location.
TECHNOLOGY
Innotrac's use of advanced technology enables it to design and efficiently
deliver services for each client's marketing support needs. The Company's
information technology group ("IT Group") has developed the Company's database
marketing support and management systems, which utilize a UNIX-based open
architecture comprised of multiple networked computers and anchored by a
Hewlett-Packard HP9000 K420 multiprocessing system. The Company plans to
utilize a portion of the net proceeds of the Offering to install an Oracle
database system and specialized order processing and inventory management
applications software, which features a 4GL (4th Generation Language)
technology that will allow for quick and efficient changes to programs,
systems and reports. This system will standardize the Company's computer
services and allow for even greater flexibility and capacity. See "Use of
Proceeds."
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The open architecture of the Company's computer system permits the Company
to seamlessly interact with many different types of client systems. The 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, the IT Group works with the client to modify the program on an
ongoing basis. Information can also be exchanged via EDI, Internet access and
direct-dial applications. The Company believes that its technology platform is
and will be among the most advanced in the industry and provides the Company
with the resources to continue to offer leading edge services to current and
new clients. The Company believes that the integrity of client information is
adequately protected by its data security system and its off-site disaster
back-up storage facilities.
The Company's call center utilizes a sophisticated Rockwell Spectrum
Automatic Call Distributor ("ACD") switch to handle the Company's call
management functions. This ACD system has the capacity to handle 2,400
teleservice representatives simultaneously, and is currently supporting over
200 representatives simultaneously. Additionally, the ACD system is integrated
with software designed to enable management to automatically schedule
teleservices representatives based on call length and call volume data
compiled by the ACD system.
PERSONNEL AND TRAINING
Innotrac's success in recruiting, hiring and training large numbers of
skilled employees and obtaining large numbers of hourly employees during peak
periods for distribution and teleservice operations is critical to the
Company's ability to provide high quality marketing support services.
Teleservice 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, the Company offers competitive
pay, hires primarily full-time employees who are eligible to receive a full
range of employee benefits, and provides employees with clear, visible career
paths.
As of March 31, 1998, the Company had 513 employees, of which approximately
85% were full-time and 15% were part-time. Management believes that the
demographics surrounding its facilities, and its reputation, stability,
compensation and benefit plans should allow the Company to continue to attract
and retain qualified employees. The Company considers its employee relations
to be good.
FACILITIES
Innotrac's headquarters are located in 63,000 square feet of leased space in
Norcross, Georgia. The Company's corporate offices occupy 20,000 square feet
of this facility and the remaining 43,000 square feet is distribution space.
The Company leases an additional 16,000 square feet of space adjacent to its
corporate offices and operates another distribution center in Norcross with
42,000 square feet of space. The Company is combining its corporate offices
and distribution facilities into a 250,000 square foot facility, which is
within two miles of its call center. Construction on this facility has
commenced, and the Company expects to move into this new facility in the
fourth quarter of 1998. The new site also includes approximately 3.5 acres
that will be available for the Company's expansion requirements. The Company
has entered into a lease for the new facility with a term of 10 years and two
five year renewal options. The lease provides for an option to purchase the
facility prior to occupancy, at the end of the first five years of the term or
at the end of the first 10 years of the term. The Company has not yet
determined whether to exercise such purchase option.
Innotrac provides teleservices through its call center located in Duluth,
Georgia, which opened in June 1996. The call center is currently configured
with 325 workstations and has room to expand to approximately 700
workstations. It also contains approximately 18,000 square feet of
distribution space. It currently operates from 8:00 a.m. until midnight Monday
through Friday and from 9:00 a.m. to 8:00 p.m. on Saturday.
The Company believes that its facilities, after the move to the new
corporate offices and distribution facilities, will be adequate for its needs
for the foreseeable future.
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COMPETITION
Innotrac competes on the basis of quality, reliability of service,
efficiency, technical superiority, speed, flexibility and price in tailoring
services to client needs. Management believes its comprehensive and integrated
services differentiate it from many of its competitors who may only be able to
provide one or a few of the services that Innotrac provides. The Company
continuously explores new outsourcing service opportunities, typically in
circumstances where clients are experiencing inefficiencies in non-core areas
of their businesses and management believes it can develop a superior
outsourced solution to such inefficiency on a cost-effective basis. The
Company primarily competes with the in-house operations of its current and
potential clients and also competes with certain companies that provide
similar services on an outsourced basis, many of whom have greater resources
than the Company.
GOVERNMENT REGULATION
The Caller ID services offered by the Company's 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 (the "ECPA") and several state statutes. In March 1994, a Federal
Communications Commission ("FCC") report preempted certain state regulation of
interstate calling party number parameter ("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 ("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 a 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 CPUC
has approved the education plan of Pacific Bell, whose Caller ID market
includes California.
The Telecommunications Act of 1996 introduced restrictions on
telecommunications carriers' usage of CPNI. CPNI includes information that is
personal to customers, such as to whom, to where and when a customer places a
call, as well as the types of telecommunications services to which the
customer subscribes and the extent such services are used. The FCC interprets
the CPNI restrictions to permit telecommunications carriers, such as
BellSouth, Pacific Bell and US West, 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 such customer's existing service relationships, the carrier
must obtain express customer permission. Because the Company is dependent upon
the efforts of its clients to promote and market their equipment and services,
laws and regulations inhibiting those clients' ability to market such
equipment and services to their existing customers could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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Telephone sales practices are regulated at both the federal and state level
and primarily relate to outbound teleservices, which Innotrac generally does
not provide. To the extent that Innotrac offers outbound teleservices, such
operations are regulated by the rules of the FCC under the Federal Telephone
Consumer Protection Act of 1991 (the "TCPA"), the Federal Telemarketing and
Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") and various
state regulations regarding telephone solicitations. The Company believes that
it is in compliance with the TCPA, the TCFAPA and the FCC rules thereunder and
the various state regulations and that it would operate in compliance with
those rules and regulations if it were to engage in more substantial outbound
teleservice operations in the future.
The Company works closely with its clients and their advisors to ensure that
the Company and the client are in compliance with such regulations. The
Company cannot predict whether the status of the regulation of Caller ID
services will change and what effect, if any, such change would have on the
Company or its industry.
INTELLECTUAL PROPERTY
The Company has used the service mark "Innotrac" since 1985 and has filed
applications for federal registration of this service mark in multiple
classes. The "innotrac.com" domain name has been a registered domain name
since 1995. Due to the possible use of identical or phonetically similar
service marks by other companies in different businesses, there can be no
assurance that the United States Patent and Trademark Office will grant the
Company's registration of its service mark, or that such service mark will not
be challenged by other users. The Company does not believe that it owns or
utilizes any other service marks that are material to its business. The
Company's operations, however, frequently incorporate proprietary and
confidential information. In accordance with industry practice, the Company
relies upon a combination of contract provisions and trade secret laws to
protect the proprietary technology it uses and to deter misappropriation of
its proprietary rights and trade secrets.
LEGAL PROCEEDINGS
The Company may be involved from time to time in litigation arising in the
normal course of business. The Company is not a party to any material legal
proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE POSITION EXPIRES
---- --- -------- -------------
<S> <C> <C> <C>
Executive Officers and
Directors:
Scott D. Dorfman(1)(3). 40 President, Chief Executive Officer 2000
and Chairman of the Board
David L. Ellin(1)...... 39 Senior Vice President, Chief 2000
Operating Officer, Secretary and
Director
Donald L. Colter, Jr... 37 Vice President--Operations
Larry C. Hanger........ 43 Vice President--Business Development 1998
and Director
John H. Nichols, III... 43 Vice President and Chief Financial
Officer
Bruce V. Benator(1)(2). 40 Director 1998
Martin J. Blank(2)(3).. 51 Director 1999
Campbell B. Lanier,
III(2)................ 47 Director 1999
William H. Scott,
III(3)................ 51 Director 1999
Key Employees:
Nancy C. Bergeron...... 46 Director of Marketing
Robert C. Covington,
III................... 42 Director of Information Technology
Robert Jackson, Jr..... 47 Director of Fulfillment Operations
Melissa B. Ohlson...... 33 Director of Human Resources
Robert W. Seitz........ 51 Director of Client Services
J. Mark Tobin.......... 39 Director of Call Center Operations
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Mr. Dorfman is the founder of Innotrac and has served as President, Chief
Executive Officer and Chairman of the Board of the Company since its inception
in 1984. Prior to founding the Company, Mr. Dorfman was employed by Paymaster
Checkwriter Company, Inc. ("Paymaster"), an equipment distributor, where he
developed and managed Paymaster's mail order catalog and developed proprietary
software to track and analyze marketing programs. Prior to his employment with
Paymaster, Mr. Dorfman co-founded and served as President of Features Mail
Order Catalog, where he gained experience in distribution, tracking and
inventory control.
Mr. Ellin joined Innotrac in 1986, was appointed Secretary of the Company in
December 1997 and has served as Senior Vice President and Chief Operating
Officer of the Company since November 1997. He served as the Company's 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. Colter joined Innotrac in 1995 and has served as Vice President-
Operations since November 1997. He served as the Company's Chief Financial
Officer from 1995 to November 1997. Prior to joining Innotrac, Mr. Colter was
from 1993 to 1995 the corporate controller of Gay & Taylor/Thomas Howell
Group, an international insurance adjusting company. From 1991 to 1993, Mr.
Colter was corporate controller of Outdoor
37
<PAGE>
West, Inc., an outdoor advertising company. Mr. Colter is a certified public
accountant and has over 15 years of experience in the financial and accounting
industry.
Mr. Hanger joined Innotrac in 1994, and has served as Vice President-
Business Development since November 1997. He served as the Company's
Department 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, 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. Nichols joined Innotrac in November 1997 as Vice President and Chief
Financial Officer. From 1993 until November 1997 he served as Vice President
and Chief Financial Officer for Storehouse, Inc., a furniture retailer. From
1982 until 1993, Mr. Nichols was employed by Contel Corporation and GTE
Corporation in various senior financial management positions in both the
telephone and cellular telephone business units. Mr. Nichols is a certified
public accountant.
Mr. Benator is a partner of Williams Benator and Libby, LLP, certified
public accountants. He has been affiliated with the firm since 1984 and is the
firm's Director of Accounting and Auditing Services. He has been associated
with the Company since its inception, serving as a financial advisor and its
outside accountant. From 1979 to 1984, Mr. Benator was employed by Ernst &
Young, LLP.
Mr. Blank has been a director since December 1997 and is a co-founder of
Automobile Protection Corporation ("APCO"), a publicly held corporation
engaged in the marketing of extended vehicle service contracts and warranty
programs. Mr. Blank has served as Secretary and Director of APCO since its
inception in 1984 and as Chairman of the Board and Chief Operating Officer
since 1988. Mr. Blank's experiences prior to co-founding APCO include the
practice of law and the representation of and financial management for
professional athletes. Mr. Blank is admitted to the bar in the States of
Georgia and California.
Mr. Lanier has been a director since December 1997 and is Chairman of the
Board and Chief Executive Officer of ITC Holding Company, Inc. ("ITC
Holding"), the parent company of ITC. He has served as a director of ITC
Holding since its inception in 1989. In addition, Mr. Lanier is an officer and
director of several ITC Holding subsidiaries. He also is a director of KNOLOGY
Holdings, Inc. ("KNOLOGY"), a broadband telecommunications services company
currently operating in Alabama, Florida and Georgia (formerly known as
CyberNet Holding, Inc.); MindSpring Enterprises, Inc., an Internet service
provider; National Vision Associates, Ltd., a full service optical retailer;
K&G Men's Center, Inc., a discount retailer of men's clothing; Vice Chairman
of the Board of AvData Systems, Inc. ("AvData"), a company providing data
communications networks; Chairman of the Board of Powertel, Inc. (formerly
InterCel, Inc.) ("Powertel"), a wireless telecommunications services company
operating in the southeastern United States, and Chairman of the Board of ITC
DeltaCom, Inc. ("ITC DeltaCom") a full service telecommunications provider to
business customers in the southeastern United States. He has served as a
Managing Director of South Atlantic Private Equity Fund IV, Limited
Partnership since 1997.
Mr. Scott has been a director since December 1997 and has served as
President and Chief Operating Officer of ITC Holding since 1991. He has been a
director of ITC Holding since 1989. From 1989 to 1991, he served as Executive
Vice President of ITC Holding. Mr. Scott is a director of Powertel, AvData,
KNOLOGY, ITC DeltaCom and MindSpring.
Ms. Bergeron joined Innotrac in April 1997 as Director of Marketing. From
1994 to 1996, Ms. Bergeron was Director of Marketing of Chemtronics, Inc., a
chemical manufacturer, and from 1992 until 1994 she served as Director of
Communications of Diversified Products, a home fitness equipment manufacturer.
Mr. Covington joined Innotrac in 1995 as Director of Information Technology.
From February 1995 to October 1995, Mr. Covington was a Technical Services
Manager at Alexander Howden North America, Inc., an
38
<PAGE>
insurance broker, where he managed the company's information technology
services. From 1985 to 1994, Mr. Covington was the Director of MIS Operations
at Digital Communications Associates, Inc., a computer hardware and software
manufacturer.
Mr. Jackson joined Innotrac in June 1997 as Director of Fulfillment
Operations. Prior to joining Innotrac, Mr. Jackson was from 1996 to 1997 a
Manufacturing Team Leader and Quality Engineer at Prestolite Wire Corporation.
From 1995 to 1996, Mr. Jackson was a Strategic Business Unit Manager at
Heatcraft Refrigeration and from 1993 to 1995 he engaged in independent
consulting with Total Quality Management. From 1976 to 1993, Mr. Jackson
served in various management roles at Digital Equipment Corporation.
Ms. Ohlson joined Innotrac in 1994 as Director of Human Resources. Prior to
joining Innotrac, Ms. Ohlson was from May to October 1994 engaged on a short-
term assignment as a human resource generalist with GEC Marconi Avionics, Inc.
From 1992 to May 1994, Ms. Ohlson was the Personnel Director at Star
Manufacturing, Inc.
Mr. Seitz joined Innotrac in December 1997 as Director of Client Services.
Prior to joining Innotrac, Mr. Seitz was from 1996 until November 1997 a
Principal and Senior Consultant at Weisser, Fitzpatrick & Greene Marketing.
From 1995 until 1996, Mr. Seitz was Manager of Market Development and
Communications at Boehringer Mannheim Corporation. From 1992 until 1995, Mr.
Seitz was a Principal and Senior Consultant at Winston, Greene Assoc. and from
1991 to 1992, he was Corporate Manager of Marketing Communications at Coulter
Corporation. Mr. Seitz also has 15 years of marketing communications
experience at Baxter Healthcare Corporation.
Mr. Tobin joined Innotrac in June 1997 as Director of Call Center
Operations. Prior to joining Innotrac, Mr. Tobin was from 1996 to April 1997
engaged in independent consulting in the telemarketing field. From 1995 to
1996, Mr. Tobin was the Call Center Director at ICT Global Enterprises, Inc.,
a telemarketing company. From 1985 to 1995, Mr. Tobin served as Area Manager-
Financial Management at SBC Communications, a telecommunications company.
BOARD COMMITTEES
The Company's Board of Directors has established three committees, an Audit
Committee, a Compensation Committee and an Executive Committee.
The Audit Committee presently consists of three independent directors and is
responsible for reviewing and monitoring the Company's financial reports and
accounting practices. The Audit Committee is also responsible for reviewing
related party transactions and potential conflicts of interest involving
officers, directors, employees or affiliates of the Company.
The Compensation Committee presently consists of three directors (including
two independent directors) and is responsible for determining the compensation
of the Company's directors and officers. The Compensation Committee is also
authorized to make specific grants under the Company's Stock Option Plan.
The Executive Committee presently consists of three directors (including the
President, Chief Executive Officer and Chairman, the Senior Vice President,
Chief Operating Officer and Secretary, and one independent director) and is
authorized to consider any matter that may be brought before a meeting of the
full Board of Directors, subject to restrictions under Georgia law.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual
compensation for services in all capacities to the Company for the year ended
December 31, 1997 with respect to the Company's Chairman, President and Chief
Executive Officer and each of the Company's two other executive officers who
earned more than $100,000 in salary and bonus during such fiscal year (the
"Named Executive Officers"):
39
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY OPTIONS COMPENSATION
- --------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Scott D. Dorfman....................... $226,180 -- $8,686(1)
President, Chief Executive Officer and
Chairman
David L. Ellin......................... 197,692 155,000 --
Senior Vice President, Chief Operating
Officer, Secretary and Director
Larry C. Hanger........................ 114,343 25,000 --
Vice President--Business Development
and Director
</TABLE>
- --------
(1) Represents the full dollar amount of premiums paid by the Company with
respect to split-dollar life insurance on the life of Mr. Dorfman.
The Company anticipates that the amount of salaries to be paid during 1998
to each of the Named Executive Officers will not be materially different from
the salaries paid in 1997, except that Mr. Dorfman is expected to be paid
$350,000 in salary for 1998. The amount of bonuses to be paid for 1998 to the
Named Executive Officers is presently unknown because the Company will make
decisions regarding bonuses based on a combination of the Company's and the
individuals' performances during the year.
The following table sets forth certain information regarding the options
granted to the Named Executive Officers during the fiscal year ended December
31, 1997.
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
------------------------------------------------------ ASSUMED RATES OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERMS
UNDERLYING EMPLOYEES IN BASE EXPIRATION -------------------
NAME OPTION GRANTED(#) FISCAL YEAR PRICE($/SH) DATE 5%($) 10%($)
- ---- ----------------- ------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott D. Dorfman........ -- -- -- -- -- --
David L. Ellin.......... 100,000(1) 27.55% $9.10 11/24/07 $572,294 $2,360,305
55,000(2) 15.15 9.10 11/24/07 314,762 1,298,168
Larry C. Hanger......... 25,000(1) 6.89 9.10 11/24/07 143,073 590,076
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
- --------
(1) The option becomes exercisable with respect to 50% of the underlying
shares on November 24, 1999; with respect to an additional 25% of the
underlying shares on November 24, 2000; and with respect to the remaining
25% of the underlying shares on November 24, 2001.
(2) The option is immediately exercisable.
None of the Named Executive Officers exercised any options during the fiscal
year ended December 31, 1997.
The following table sets forth certain information regarding the value at
fiscal year end of unexercised options held by the Named Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT FY-
OPTIONS AT FY-END END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
Scott D. Dorfman............ -- --
David L. Ellin.............. 0/100,000 N/A/$0(1)
55,000/0 $0(1)/N/A
Larry C. Hanger............. 0/25,000 N/A/$0(1)
</TABLE>
- --------
(1) Exercise price is equal to fair market value at fiscal year end.
40
<PAGE>
None of the Company's executive officers or key personnel has an employment
agreement with the Company.
DIRECTORS COMPENSATION
The Company pays its outside directors an annual fee of $10,000, and
additional fees of $250 and $100, respectively, for each Board meeting and
committee meeting attended. The Company reimburses all directors for their
travel and other expenses incurred in connection with attending Board or
committee meetings. In addition, on December 11, 1997, the Company granted
options to purchase 20,000 shares of Common Stock to Mr. Benator at a price of
$9.10. The Company has granted each outside director options to purchase
10,000 shares of Common Stock at the initial public offering price, effective
as of the date of this Prospectus.
STOCK OPTION PLAN
In November 1997, the Company adopted the Stock Option Plan to provide key
employees, officers, directors, contractors and consultants an opportunity to
own Common Stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under the Stock Option
Plan 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
("IRC"), 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, including its
subsidiaries. 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 Stock Option Plan provides for the issuance of options and
awards for up to 800,000 shares of Common Stock.
Incentive stock options are also subject to certain limitations prescribed
by the IRC, 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, may be exercised
for no more than five years from the grant date. The Compensation Committee
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 Stock Option Plan, including to executive
officers and directors of the Company. Scott D. Dorfman, Chairman and
President of the Company, is a member of the Compensation Committee, but will
not participate in decisions regarding his own compensation. He may not
participate in certain decisions regarding the compensation of certain other
executive officers if the Board of Directors, in its discretion, determines
that he should not do so for reasons related to Section 162(m) of the IRC or
for other reasons.
As of the date of this Prospectus, options to purchase an aggregate of
383,000 shares of Common Stock have been granted under the Stock Option Plan,
including options for 155,000 and 25,000 shares of Common Stock issued to
Messrs. Ellin and Hanger, respectively, having an exercise price of $9.10 per
share, which is based on the fair market value of the Common Stock on the date
of grant, as determined by the Board.
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock, as of the date of this Prospectus and giving
effect to the Consolidation and to the Offering, by (i) each person known to
the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group. Unless otherwise indicated, each of the shareholders listed below
has sole voting and investment power with respect to the shares beneficially
owned.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
NUMBER OF SHARES ------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------- --------------------- --------------- --------------
<S> <C> <C> <C>
Scott D. Dorfman(2)...... 6,116,667(3) 94.1% 67.9%
ITC Service Company(4)... 383,333 5.9 4.3
David L. Ellin........... 87,500(5) 1.3 *
Larry C. Hanger.......... -- -- --
Bruce V. Benator......... 10,000(6) * *
Martin J. Blank.......... 10,000(6) * *
Campbell B. Lanier,
III(4).................. 393,333(6)(7) 6.1 4.4
William H. Scott,
III(4).................. 393,333(6)(7) 6.1 4.4
All directors and
executive officers as a
group (9 persons)....... 6,595,000 100.0% 72.5%
</TABLE>
- --------
* Denotes less than 1%
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares that such person or group has the
right to acquire within 60 days after the date of this Prospectus or with
respect to which such person has or shares voting or investment power. For
purposes of computing the percentages of outstanding shares held by each
person or group of persons, shares which such person or group has the
right to acquire within 60 days after such date are deemed to be
outstanding for purposes of computing the percentage for such person or
group but are not deemed to be outstanding for the purpose of computing
the percentage of any other person or group. Options for 95,000 shares
granted under the Company's Stock Option Plan are exercisable within 60
days from the date of this Prospectus.
(2) Mr. Dorfman's address is 1828 Meca Way, Norcross, Georgia 30093.
(3) Includes an aggregate of 148,037 shares owned by Mr. Dorfman's wife
individually, as custodian for the benefit of his children and through
trusts for the benefit of Mr. Dorfman's children and 32,500 shares subject
to presently exercisable purchase options granted to Mr. Ellin.
(4) ITC's and Messrs. Lanier's and Scott's address is 1239 O.G. Skinner Drive,
West Point, Georgia 31833.
(5) Consists of 32,500 shares subject to presently exercisable options to
purchase such shares from Mr. Dorfman and 55,000 shares subject to
presently exercisable options from the Company.
(6) Includes options for 10,000 shares of Common Stock.
(7) Includes the shares owned of record by ITC, with respect to which Messrs.
Lanier and Scott, as principal shareholders and officers of such entity,
may be deemed the beneficial owner. Messrs. Lanier and Scott disclaim
beneficial ownership of such shares.
42
<PAGE>
CERTAIN TRANSACTIONS
Scott D. Dorfman, President, Chief Executive Officer, Chairman, and majority
shareholder of the Company, has guaranteed the Company's obligations under its
credit facility with a bank, which consists of a $25,000,000 revolving line of
credit and a $2,000,000 term loan, and the subordinated note in the principal
amount of $3.5 million payable to ITC described below. The bank guarantee will
terminate upon the completion of the Offering, and the subordinated note will
be repaid with a portion of the proceeds from the Offering.
In connection with the Consolidation, Mr. Dorfman, together with his
children, and ITC, will receive distributions of $7.1 million and $400,000,
respectively, from certain pass-through entities that are parties to the
Consolidation, which distributions represent a portion of these entities'
accumulated earnings. In addition, each of the entities will reimburse Mr.
Dorfman and ITC for estimated tax payments with respect to their earnings for
1997 and 1998. Two directors of the Company, Messrs. Lanier and Scott, are
officers, directors and principal shareholders of ITC. See "Use of Proceeds."
As a result of the Consolidation, and as consideration for their respective
interests in the affiliated entities that are parties to the Consolidation,
shares of Common Stock of the Company will be owned as follows: Mr. Dorfman--
6,116,667 shares (including 148,037 shares owned individually by his wife, as
custodian for the children and through trusts for the benefit of his children
and ITC--383,333 shares. The shares of Common Stock received by ITC in the
Consolidation are equal to 10% of $46.0 million divided by the initial public
offering price. See "The Consolidation" for a discussion regarding the
determination of the number of shares to be issued in the Consolidation.
In February 1998, the Company redeemed for approximately $390,000 from
Arnold Dorfman, the father of Scott D. Dorfman, all of his shares in one of
the entities that is a party to the Consolidation. In December 1998, the
Company intends to redeem for approximately $590,000 from Arnold Dorfman all
of his shares in a second affiliated entity that is a party to the
Consolidation. These amounts represent the scheduled redemption values under
the terms of agreements reached between the parties in 1993 that were
memorialized in late 1997 and early 1998. See Note 7 of the financial
statements.
The Company leases a single engine aircraft from a company wholly-owned by
Scott D. Dorfman pursuant to a three-year lease that will provide for annual
rent of $72,000. The Company will be responsible for maintenance, insurance,
taxes, fuel and other expenses associated with the aircraft.
ITC is a creditor of the Company with respect to a certain subordinated note
in the principal amount of $3.5 million. The note bears interest at the prime
rate plus 8.0% per annum and matures in April 1999. Upon the completion of the
Offering, the Company intends to repay such note, plus accrued interest, in
full. See "Use of Proceeds."
From January 1, 1996 through March 31, 1998, the Company paid $232,918 in
fees to Williams Benator & Libby, LLP, certified public accountants, for
accounting and consulting services. Bruce V. Benator, a director of the
Company, is a partner of Williams Benator & Libby, LLP. After consummation of
the Offering, it is expected that Williams Benator & Libby, LLP will continue
to provide accounting and consulting services for the Company.
On December 11, 1997, the Board of Directors adopted a policy that any
transactions between the Company and any of its officers, directors, or
principal shareholders or affiliates must be on terms no less favorable than
those that could be obtained from unaffiliated parties in comparable
situations and must be approved by the Audit Committee of the Board of
Directors.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 9,000,000
shares of Common Stock (9,375,000 shares if the Underwriters' over-allotment
option is exercised in full). Of such shares, the 2,500,000 shares sold in the
Offering (2,875,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restrictions or further
registration under the Securities Act, unless acquired by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act ("Rule
144"), in which case these shares will be subject to the resale limitations of
Rule 144.
The outstanding shares of Common Stock not sold in the Offering were issued
and sold by the Company in a private transaction in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act
and are restricted securities under Rule 144. These shares may not be sold
unless they are registered under the Securities Act or are sold pursuant to an
applicable exemption from registration, including the exemption pursuant to
Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days
after the Offering, a person who has beneficially owned any such shares for at
least one year, which will occur on the first anniversary of the
Consolidation, including "affiliates" of the Company, would be entitled to
sell in broker's transactions or to market makers within any three-month
period a number of shares that does not exceed the greater of one percent of
the then outstanding shares of Common Stock (estimated to be 90,000 shares
after completion of this Offering, or 93,750 shares if the Underwriters' over-
allotment option is exercised in full) or the average weekly trading volume of
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale restrictions
and notice requirements and to the availability of current public information
concerning the Company. A person (or persons whose shares are aggregated) who
is not an "affiliate" of the Company at any time during the 90 days preceding
a sale, and who has beneficially owned such shares for at least two years,
would be entitled to sell such shares under Rule 144(k) without regard to the
availability of current public information, volume limitations, manner of sale
provisions, or notice requirements. The above is a summary of Rule 144 and is
not intended to be a complete description thereof.
The Company, its officers and directors, and all shareholders of the Company
have agreed that they will enter into lock-up agreements generally providing
that they will not, directly or indirectly, offer, pledge, sell, contract to
sell, or otherwise dispose of or grant any options or other rights with
respect to, any shares of Common Stock or any securities that are convertible
into or exchangeable or exercisable for Common Stock owned by them for a
period of 180 days after the date of this Prospectus, without the prior
written consent of J.C. Bradford & Co. on behalf of Underwriters. If a
shareholder should request J.C. Bradford & Co. to waive the 180 day lock-up
period, J.C. Bradford & Co., consistent with past practice with regard to
other issuing companies, would take into consideration the number of shares as
to which such request relates, the identity of the requesting shareholder, the
relative demand for additional shares of Common Stock in the market, the
period of time since the completion of the Offering and the average trading
volume and price performance of the Common Stock during such period. See
"Underwriting."
Prior to the Offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that sales of Common Stock by
existing shareholders in reliance upon Rule 144 or otherwise will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock in the public market, or the perception that such
sales could occur, could adversely affect the prevailing market price. Such
sales may also make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
it deems appropriate.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $0.10 par value per share, and 10,000,000 shares of preferred
stock, $0.10 par value per share (the "Preferred Stock"), having such rights
and privileges as the Board of Directors may from time to time determine.
Giving effect to the Consolidation, 6,500,000 shares of Common Stock and no
shares of Preferred Stock will be issued and outstanding immediately prior to
the Offering.
The following summary of the Company's capital stock does not purport to be
complete and is qualified in its entirety by reference to the Amended and
Restated Articles of Incorporation (the "Articles of Incorporation") and the
Amended and Restated Bylaws (the "Bylaws") of the Company that are included as
exhibits to the Registration Statement of which this Prospectus forms a part,
and the applicable provisions of the Georgia Business Corporation Code.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on any issue
submitted to a vote of the shareholders and do not have cumulative voting
rights in the election of directors. Accordingly, the holders of a majority of
the outstanding shares of Common Stock voting in an election of directors can
elect all of the directors then standing for election, if they choose to do
so. All shares of Common Stock are entitled to share equally in such dividends
as the Board of Directors of the Company may, in its discretion, declare out
of sources legally available therefor. See "Dividend Policy." Upon
dissolution, liquidation, or winding up of the Company, holders of Common
Stock are entitled to receive on a ratable basis, after payment or provision
for payment of all debts and liabilities of the Company and any preferential
amount due with respect to outstanding shares of Preferred Stock, all assets
of the Company available for distribution, in cash or in kind. Holders of
shares of Common Stock do not have preemptive or other subscription rights,
conversion or redemption rights, or any rights to share in any sinking fund.
All currently outstanding shares of Common Stock are, and the shares offered
hereby (when sold in the manner contemplated by this Prospectus) will be,
fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board of Directors,
from time to time, may authorize the issuance of shares of Preferred Stock in
one or more series, may establish the number of shares to be included in any
such series, and may fix the designations, powers, preferences and rights
(including voting rights) of the shares of each such series and any
qualifications, limitations, or restrictions thereon. No shareholder
authorization is required for the issuance of shares of Preferred Stock unless
imposed by then applicable law. Shares of Preferred Stock may be issued for
any general corporate purposes, including acquisitions. The Board of Directors
may issue one or more series of Preferred Stock with rights more favorable
with regard to dividends and liquidation than the rights of holders of Common
Stock. Any such series of Preferred Stock also could be used for the purpose
of preventing a hostile takeover of the Company that is considered to be
desirable by the holders of the Common Stock, could otherwise adversely affect
the voting power of the holders of Common Stock, and could serve to perpetuate
the Board of Directors' control of the Company under certain circumstances.
Other than the issuance of the series of Preferred Stock previously authorized
by the Board of Directors in connection with the Shareholder Rights Plan,
described below, no transaction is now contemplated that would result in the
issuance of any such shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
Staggered Board of Directors; Removal; Filling Vacancies. The Articles of
Incorporation provide that the Board of Directors will consist of between five
and eleven directors. The Board currently consists of seven directors, four of
whom are not employees of the Company. The Board of Directors is divided into
three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
shareholders to change the composition of the Board of Directors. The Company
believes, however,
45
<PAGE>
that the longer time required to elect a majority of a classified Board of
Directors will help to ensure the continuity and stability of the Company's
management and policies. The classification provisions could also have the
effect of discouraging a third party from accumulating large blocks of the
Company's stock or attempting to obtain control of the Company, even though
such an attempt might be beneficial to the Company and its shareholders.
Accordingly, shareholders could be deprived of certain opportunities to sell
their shares of Common Stock at a higher market price than might otherwise be
the case. See "Risk Factors--Certain Anti-Takeover Provisions." The
shareholders will be entitled to vote on the election or removal of directors,
with each share entitled to one vote.
The Bylaws provide that, unless the Board of Directors otherwise determines,
any vacancies will be filled by the affirmative vote of a majority of the
remaining directors, even if less than a quorum. A director may be removed
only with cause by the vote of the holders of a majority of the shares
entitled to vote for the election of directors at a meeting of the
shareholders called for the purpose of removing such director. A vacancy
resulting from an increase in the number of directors may be filled by action
of the Board of Directors.
Shareholder Rights Plan. On December 11, 1997, the Company's Board of
Directors declared a dividend of one preferred share purchase right (a
"Right") for each share of Common Stock of the Company. Each Right entitles
the registered holder to purchase from the Company one one-hundredth (1/100)
of a share of Series A Participating Cumulative Preferred Stock, par value
$0.10 per share (the "Preferred Shares"), of the Company at a price of $60.00
per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to
adjustments to the exercise price and the number of Preferred Shares issuable
upon exercise from time to time to prevent dilution. The Rights are not
exercisable until the earlier to occur of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") have acquired beneficial ownership of 15% or more of the
outstanding Common Stock or (ii) 10 business days following the commencement
of, or announcement of an intention to make, a tender offer or exchange offer
the consummation of which would result in the beneficial ownership by a person
or group of 15% or more of the outstanding shares of Common Stock (the earlier
of such dates being called the "Distribution Date").
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times
the exercise price of the Right. In the event that any person or group of
affiliated or associated persons becomes an Acquiring Person, proper provision
shall be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive upon exercise that number of shares of Common Stock
having a market value of two times the exercise price of the Right.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of the Preferred Shares will
be entitled to a minimum preferential liquidation payment of $100.00 per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of Common Stock. Each Preferred Share will have 100 votes, voting
together with the shares of Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each Preferred Share will be entitled to receive 100 times the
amount received per share of Common Stock. These rights are protected by
customary antidilution provisions.
Prior to the Distribution Date, the Rights may not be detached or
transferred separately from the Common Stock. The Rights will expire on
January 1, 2008 (the "Final Expiration Date"), unless the Final Expiration
Date is extended or unless the Rights are earlier redeemed or exchanged by the
Company, in each case, as described below. At any time prior to the
acquisition by a person or group of affiliated or associated
46
<PAGE>
persons of beneficial ownership of 15% or more of the outstanding Common
Stock, the Board of Directors of the Company may redeem the Rights in whole,
but not in part, at a price of $0.001 per Right (the "Redemption Price").
Immediately upon any redemption of the Rights, the right to exercise the
Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price. A more detailed description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between
the Company and Reliance Trust Company as Rights Agent (the "Rights Agent").
Ability to Consider Other Constituencies. The Articles of Incorporation
permit the Board of Directors, in determining what is believed to be in the
best interest of the Company, to consider the interests of the employees,
customers, suppliers and creditors of the Company, the communities in which
offices or other establishments of the Company are located and all other
factors the directors consider pertinent, in addition to considering the
effects of any actions on the Company and its shareholders. Pursuant to this
provision, the Board of Directors may consider numerous judgmental or
subjective factors affecting a proposal, including certain non-financial
matters, and on the basis of these considerations may oppose a business
combination or other transaction which, viewed exclusively from a financial
perspective, might be attractive to some, or even a majority, of the Company's
shareholders.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Bylaws provide for indemnification of directors to the fullest
extent permitted by Georgia law. The Articles of Incorporation, to the extent
permitted by Georgia law, eliminate or limit the personal liability of
directors to the Company and its shareholders for monetary damages for certain
breaches of fiduciary duty and the duty of care. Such indemnification may be
available for liabilities arising in connection with this Offering. Insofar as
limitation of liability or indemnification for liabilities under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been
informed that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable. Pursuant to its Bylaws, the Company may also indemnify its
officers, employees, agents and other persons to the fullest extent permitted
by Georgia law. The Company's Bylaws obligate the Company, under certain
circumstances, to advance expenses to its directors and officers in defending
an action, suit or proceeding for which indemnification may be sought. The
Company has entered into Indemnification Agreements with its directors and
executive officers.
The Company's Bylaws also provide that the Company shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of the Company's subsidiaries or, at
the request of the Company, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
where the Company would have the power to indemnify such person against such
liability under Georgia law. The Company intends to purchase and maintain
insurance on behalf of all of its directors and executive officers.
OTHER MATTERS
The Common Stock has been approved for quotation on The Nasdaq National
Market under the symbol "INOC."
The transfer agent and registrar for the Company's Common Stock is Reliance
Trust Company, Atlanta, Georgia.
47
<PAGE>
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford
& Co. and Wheat First Union, a division of Wheat First Securities, Inc., as
representatives of the several underwriters (the "Representatives"), have
severally agreed to purchase from the Company the number of shares of Common
Stock set forth below opposite their respective names:
<TABLE>
<CAPTION>
NAME OF UNDERWRITER NUMBER OF SHARES
------------------- ----------------
<S> <C>
J.C. Bradford & Co. ........................................... 875,000
Wheat First Securities, Inc. .................................. 875,000
Robert W. Baird & Co. Incorporated............................. 50,000
Dain Rauscher Wessels.......................................... 50,000
Everen Securities, Inc......................................... 50,000
Hoak Breedlove Wesneski & Co................................... 50,000
Interstate/Johnson Lane Corporation............................ 50,000
JW Charles Securities, Inc..................................... 50,000
Kenny Securities Corp.......................................... 50,000
Legg Mason Wood Walker Incorporated............................ 50,000
McDonald & Company Securities, Inc............................. 50,000
Morgan Keegan & Company, Inc................................... 50,000
Needham & Company, Inc......................................... 50,000
Edgar M. Norris & Co. Inc...................................... 50,000
Piper Jaffray Inc.............................................. 50,000
The Robinson-Humphrey Company, LLC............................. 50,000
Southwest Securities, Inc...................................... 50,000
---------
Total........................................................ 2,500,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all shares of Common Stock
offered hereby, if any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $0.50
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After
the initial public offering, the public offering price and such concessions
may be changed. The Representatives have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Offering of the shares of Common Stock is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days from the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any. To the
extent that the Underwriters exercise such option, each of them will have a
firm commitment to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased by it shown in the table
above bears to the total number of shares in such table, and the Company will
be obligated, pursuant to the option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of the 2,500,000 shares of Common Stock offered
hereby. If purchased, the Underwriters will sell such additional shares on the
same terms as those on which the 2,500,000 shares are being offered.
48
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price has been determined by negotiation between
the Company and the Representatives. In determining such price, consideration
was given to, among other things, the financial and operating history and
trends of the Company, the experience of its management, the position of the
Company in its industry, the Company's prospects and the Company's financial
results. In addition, consideration was given to the status of the securities
markets, market conditions for new offerings of securities and the prices of
similar securities of comparable companies.
The Company, its executive officers and directors and all of its
shareholders have agreed with the Representatives not to offer, sell or
otherwise dispose of any shares of Common Stock, any securities exercisable
for or convertible into Common Stock or any options to acquire Common Stock
owned by them prior to the expiration of 180 days from the date of this
Prospectus, without the prior written consent of J.C. Bradford & Co., except
that the Company may issue shares in connection with the exercise of stock
options granted or to be granted under the Company's Stock Option Plan. See
"Shares Eligible for Future Sale."
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil
liabilities, including liabilities under the Securities Act, or will
contribute to payments that the Underwriters or any such controlling persons
may be required to make in respect thereof.
In connection with the Offering, the Underwriters and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to
an underwriter or a dealer for distributing Common Stock in the Offering, if
the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short position, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of
Common Stock in market making transactions. These activities may stabilize or
maintain the market price of Common Stock above market levels that may
otherwise prevail. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Kilpatrick
Stockton LLP, Atlanta, Georgia. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Nelson Mullins Riley &
Scarborough, L.L.P., Atlanta, Georgia.
EXPERTS
The financial statements of the Company at December 31, 1995, 1996 and 1997
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon such reports and upon the authority of said firms as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which is a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock, reference is made to the
49
<PAGE>
Registration Statement, including the exhibits thereto. Statements contained
in this Prospectus concerning the contents of any contract or any other
document are not necessarily complete. With respect to each such contract or
document filed as an exhibit to the Registration Statement, reference is made
to such exhibit for a more complete description of the matters involved, and
each statement shall be deemed qualified in its entirety by such reference to
the copy of the applicable document filed with the Commission. A copy of the
Registration Statement, including the exhibits thereto, may be inspected
without charge at the Public Reference section of the commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following regional offices of the Commission: New York Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of the Registration Statement and the exhibits and schedules thereto can be
obtained from the Public Reference Section of the Commission upon payment of
prescribed fees. The Commission maintains an Internet web site that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission. The address of that site
is http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement, the Company will
become subject to the informational and periodic reporting requirements of the
Exchange Act, and in accordance therewith, will file periodic reports, proxy
statements, and other information with the Commission. Such periodic reports,
proxy statements, and other information will be available for inspection and
copying at the public reference facilities and other regional offices referred
to above. The Company intends to register the securities offered by the
Registration Statement under the Exchange Act simultaneously with the
effectiveness of the Registration Statement and to furnish its shareholders
with annual reports containing audited financial statements and such other
reports as may be required from time to time by law or the Nasdaq National
Market.
50
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
OF INNOTRAC CORPORATION
<TABLE>
<S> <C>
COMBINED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................. F-2
Combined Balance Sheets as of March 31, 1998 (unaudited), December 31,
1997 and 1996............................................................ F-3
Combined Statements of Operations for the Three Months Ended March 31,
1998 and 1997 (unaudited) and the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-4
Combined Statements of Partners', Members' and Shareholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995......................... F-5
Combined Statements of Cash Flows for the Three Months Ended March 31,
1998 and 1997 (unaudited), and the Years Ended December 31, 1997, 1996
and 1995................................................................. F-6
Notes to Combined Financial Statements.................................... F-7
Unaudited Pro Forma Financial Data........................................ F-20
Unaudited Consolidated Pro Forma Statement of Operations for the Year
Ended December 31, 1997.................................................. F-21
Unaudited Consolidated Pro Forma Statement of Operations for the Three
Months Ended March 31, 1998.............................................. F-22
Unaudited Consolidated Pro Forma Balance Sheet as of March 31, 1998....... F-23
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Innotrac Corporation, IELC, Inc.,
RenTel #1, Inc., SellTel #1, Inc.,
HomeTel Systems, Inc.,
HomeTel Providers, Inc., RenTel #2, LLC,
SellTel #2, LLC and HomeTel Providers Partners, L.P.:
We have audited the accompanying combined balance sheets of INNOTRAC
CORPORATION (a Georgia corporation), IELC, INC. (a Georgia corporation),
RENTEL #1, INC. (a Georgia corporation), SELLTEL #1, INC. (a Georgia
corporation), HOMETEL SYSTEMS, INC. (a Georgia corporation), HOMETEL
PROVIDERS, INC. (a Georgia corporation), RENTEL #2, LLC (a Georgia limited
liability company), SELLTEL #2, LLC (a Georgia limited liability company) and
HOMETEL PROVIDERS PARTNERS, L.P. (a Georgia limited partnership) (collectively
referred to as the "Companies") as of December 31, 1997 and 1996 and the
related combined statements of operations, partners', members' and
shareholders' equity and cash flows for the years ended December 31, 1997,
1996 and 1995. These combined financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Innotrac
Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems,
Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel
Providers Partners, L.P. as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for the years ended December 31, 1997,
1996 and 1995 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
January 26, 1998
(except with respect to Note 11, as to which the date is April 7, 1998)
F-2
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------
ASSETS 1998 1997 1996
------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................. $ 592,853 $ 553,746 $ 2,004,746
Accounts receivable, net (Note 3)......... 26,047,294 20,081,229 25,460,016
Inventories............................... 3,313,658 2,935,611 10,020,635
Deferred tax assets (Note 6).............. 331,000 386,000 15,000
Prepaid expenses and other current
assets................................... 617,027 372,605 344,951
----------- ----------- -----------
Total current assets...................... 30,901,832 24,329,191 37,845,348
----------- ----------- -----------
Property and equipment:
Rental equipment.......................... 9,866,878 10,432,645 13,005,802
Computer, machinery and transportation
equipment................................ 3,011,344 1,557,765 1,368,471
Furniture, fixtures and leasehold
improvements............................. 729,084 720,097 732,182
----------- ----------- -----------
13,607,306 12,710,507 15,106,455
Less accumulated depreciation and
amortization............................. 5,675,986 5,101,992 4,167,937
----------- ----------- -----------
7,931,320 7,608,515 10,938,518
----------- ----------- -----------
Other assets, net ......................... 159,427 557,537 252,656
----------- ----------- -----------
Total assets.............................. $38,992,579 $32,495,243 $49,036,522
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
EQUITY AT DECEMBER 31,
MARCH 31, MARCH 31, ------------------------
1998 1998 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(NOTE 11)
LIABILITIES AND PARTNERS',
MEMBERS',
AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Current portion of long-
term debt (Note 4)...... $ 736,053 $ 737,687 $ 787,523
Line of credit (Note 4).. 8,915,200 8,545,200 17,230,621
Accounts payable......... 9,127,637 4,765,772 15,420,211
Distributions payable
(Note 2)................ 1,914,361 1,007,395 300,229
Accrued expenses......... 8,034,754 7,433,611 5,083,672
Other.................... 0 318,088 65,173
----------- ----------- -----------
Total current
liabilities............. 28,727,996 22,807,753 38,887,429
----------- ----------- -----------
Noncurrent liabilities:
Subordinated debt (Note
4)...................... 3,500,000 3,500,000 3,500,000
Long-term debt (Note 4).. 233,714 403,779 1,060,720
Deferred tax liabilities
(Note 6)................ 18,000 40,000 206,000
Other.................... -- 0 12,300
----------- ----------- -----------
Total noncurrent
liabilities............. 3,751,714 3,943,779 4,779,020
----------- ----------- -----------
Total liabilities........ 32,479,710 26,751,532 43,666,449
----------- ----------- -----------
Commitments and
contingencies (Note 5)...
Redeemable capital stock
(Note 7)................. 545,537 916,949 830,033
----------- ----------- -----------
Partners', members' and
shareholders' equity
(Note 8):
Partners' capital........ 2,983,221 (1,016,779) 1,758,896 1,902,038
Members' deficit......... (490,036) (990,036) (489,701) (272,381)
Common stock............. 4,590 4,590 4,590 4,590
Additional paid-in
capital................. 14,370 14,370 14,370 14,370
Retained earnings........ 3,455,187 455,187 3,538,607 2,891,423
----------- ---------- ----------- -----------
Total partners', members'
and shareholders'
equity.................. 5,967,332 (1,532,668) 4,826,762 4,540,040
----------- ---------- ----------- -----------
Total liabilities and
partners', members' and
shareholders' equity.... $38,992,579 $32,495,243 $49,036,522
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, net........... $22,564,944 $22,388,155 $87,978,487 $71,297,170 $44,886,334
Cost of revenues........ 16,411,644 18,113,616 67,986,434 55,519,503 30,658,112
----------- ----------- ----------- ----------- -----------
Gross profit........ 6,153,300 4,274,539 19,992,053 15,777,667 14,228,222
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative
expenses............. 3,427,888 2,713,785 12,571,947 10,390,817 6,510,069
Depreciation and
amortization......... 138,394 190,154 630,824 429,170 292,609
----------- ----------- ----------- ----------- -----------
Total operating
expenses........... 3,566,282 2,903,939 10,819,987 6,802,678 6,802,678
----------- ----------- ----------- ----------- -----------
Operating income........ 2,587,018 1,370,600 4,957,680 7,425,544 7,425,554
----------- ----------- ----------- ----------- -----------
Other (income) expense:
Interest expense...... 315,010 493,698 1,788,003 1,456,508 1,089,853
Other................. 5,850 (291,472) 118,341 94,367 (72,645)
----------- ----------- ----------- ----------- -----------
Total other
expense............ 320,860 202,226 1,906,344 1,550,875 1,017,208
----------- ----------- ----------- ----------- -----------
Income before income
taxes.................. 2,266,158 1,168,374 4,882,938 3,406,805 6,408,336
Income tax provision.... 61,000 44,000 76,700 (211,494) (793,629)
----------- ----------- ----------- ----------- -----------
Net income.......... $ 2,327,158 $ 1,212,374 $ 4,959,638 $ 3,195,311 $ 5,614,707
=========== =========== =========== =========== ===========
Unaudited Pro Forma Data
(Note 11):
Income tax provision... $(1,026,000) $(2,716,917)
=========== ===========
Net income............. $ 1,554,000 $ 3,908,024
=========== ===========
Net income per share... $ 0.17 $ 0.43
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-4
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
COMBINED STATEMENTS OF PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED
CAPITAL DEFICIT STOCK CAPITAL EARNINGS TOTAL
----------- --------- ------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994...................... $ 406,275 $ 0 $4,590 $14,370 $1,199,057 $ 1,624,292
Net income................. 2,032,545 0 0 0 3,582,162 5,614,707
Distributions to
shareholders, members and
partners.................. (1,331,028) 0 0 0 (2,607,242) (3,938,270)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (105,608) (105,608)
----------- --------- ------ ------- ---------- -----------
BALANCE, DECEMBER 31,
1995...................... 1,107,792 0 4,590 14,370 2,068,369 3,195,121
Member contributions....... 0 2,000 0 0 0 2,000
Net income (loss)............. 1,323,246 (39,381) 0 0 1,911,446 3,195,311
Distributions to
shareholders, members and
partners.................. (529,000) (235,000) 0 0 (977,000) (1,741,000)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (111,392) (111,392)
----------- --------- ------ ------- ---------- -----------
BALANCE, DECEMBER 31,
1996...................... 1,902,038 (272,381) 4,590 14,370 2,891,423 4,540,040
Net income (loss).......... 3,540,858 (232,320) 0 0 1,651,100 4,959,638
Distributions to
shareholders, members and
partners.................. (3,684,000) 15,000 0 0 (917,000) (4,586,000)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (86,916) (86,916)
----------- --------- ------ ------- ---------- -----------
BALANCE, DECEMBER 31,
1997...................... $ 1,758,896 $(489,701) $4,590 $14,370 $3,538,607 $ 4,826,762
=========== ========= ====== ======= ========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-5
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $2,327,158 $1,212,374 $ 4,959,638 $ 3,195,311 $ 5,614,707
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization.......... 138,394 191,262 630,824 429,170 292,609
Depreciation--rental
equipment............. 829,087 909,932 3,711,330 3,004,699 1,763,028
Loss on disposal of
rental equipment...... 542,153 1,711,998 4,478,785 2,538,129 1,755,956
Subordinated debt
accretion............. 0 0 0 163,781 179,776
Deferred income taxes.. 33,000 (122,000) (537,000) (107,000) 227,000
Decrease (increase) in
accounts receivable... (5,966,065) (5,311,953) 5,378,787 (6,753,077) (12,594,156)
Decrease (increase) in
inventories........... (378,047) 3,042,080 7,085,024 (7,683,173) (1,092,926)
Increase (decrease) in
prepaid expenses and
other assets.......... 128,266 164,787 (484,466) (327,074) 44,466
(Decrease) increase in
accounts payable...... 4,361,865 (2,318,838) (8,959,441) 3,610,642 8,814,933
Increase in accrued
expenses.............. 757,173 3,630,684 2,249,939 2,484,253 1,397,043
Other.................. (474,127) (177,451) 368,845 (468,149) 12,119
---------- ---------- ----------- ----------- ------------
Net cash provided by
(used in) operating
activities........... 2,298,857 2,932,875 18,882,265 87,512 6,414,555
---------- ---------- ----------- ----------- ------------
Cash flows from
investing activities:
Accrued equipment
purchases............. 0 (399,000) (1,595,000) (272,000) 0
Purchases of property
and equipment......... (1,807,017) (1,946,967) (5,342,233) (7,699,769) (7,812,510)
---------- ---------- ----------- ----------- ------------
Net cash used in
investing
activities........... (1,807,017) (2,345,967) (6,937,233) (7,971,769) (7,812,510)
---------- ---------- ----------- ----------- ------------
Cash flows from
financing activities:
Net (repayments)
borrowings under lines
of credit............. 370,000 (2,230,621) (8,685,421) 13,168,781 3,164,848
Proceeds from long-term
debt.................. 0 0 0 2,096,000 0
Repayment of long-term
debt.................. (171,699) (162,748) (702,027) (327,766) (397,401)
Repayment of
subordinated debt..... 0 0 0 (1,000,000) 0
Loan commitment fees... 0 0 (125,000) (200,000) 0
Proceeds from members'
contributions......... 0 0 0 2,000 0
Redemption of redeem-
able capital stock.... (388,000) 0 0 0 0
Distributions to
shareholders, members
and partners.......... (263,034) 56,582 (3,883,584) (3,890,244) (2,179,797)
---------- ---------- ----------- ----------- ------------
Net cash (used in)
provided by financing
activities........... (452,733) (2,336,787) (13,396,032) 9,848,771 587,650
---------- ---------- ----------- ----------- ------------
Net increase (decrease)
in cash and cash
equivalents............ 39,107 (1,749,879) (1,451,000) 1,964,514 (810,305)
Cash and cash
equivalents, beginning
of period.............. 553,746 2,004,746 2,004,746 40,232 850,537
---------- ---------- ----------- ----------- ------------
Cash and cash
equivalents, end of
period................. $ 592,853 $ 254,867 $ 553,746 $ 2,004,746 $ 40,232
========== ========== =========== =========== ============
Supplemental cash flow
disclosures:
Cash paid for
interest.............. $ 366,080 $ 493,525 $ 1,787,975 $ 1,207,483 $ 846,010
========== ========== =========== =========== ============
Cash paid for income
taxes, net of refunds
received.............. $ 380,127 $ 255,451 $ 84,675 $ 891,552 $ 523,134
========== ========== =========== =========== ============
Non cash transactions:
Accreted dividends on
Redeemable Capital
Stock................. $ 16,588 $ 20,925 $ 86,916 $ 111,392 $ 105,608
========== ========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-6
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Innotrac Corporation ("Innotrac"), IELC, Inc., RenTel #1, Inc. ("RenTel"),
SellTel #1, Inc. ("SellTel"), HomeTel Systems, Inc., HomeTel Providers, Inc.,
RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P.
("Providers L.P.") are collectively referred to herein as the "Companies".
Each of these entities provides various types of marketing support services.
The Companies are all owned 100% by one shareholder or his immediate family
except for RenTel, SellTel, and Providers L.P. (which each have a 10% minority
interest owned by one party). The minority interests of RenTel and SellTel are
owned by a related party of the shareholder. In conjunction with Innotrac's
planned initial public offering (the "Offering"), the Companies will
reorganize as one consolidated entity. See Note 11 for a description of the
Companies' planned consolidation.
Innotrac provides direct marketing services, including fulfillment, order
processing, data processing and teleservices. IELC, Inc. ("IELC") provides
employee-leasing services. RenTel rents caller identification display devices
("Caller I.D. units") and SellTel sells Caller I.D. units and other
telecommunications equipment on an installment basis to consumers in Tennessee
and South Carolina. RenTel #2, LLC ("RenTel #2") rents Caller I.D. units and
SellTel #2, LLC ("SellTel #2") sells Caller I.D. units and other
telecommunications equipment on an installment basis to consumers in
California. HomeTel Systems, Inc. ("HomeTel") rents and sells various types of
telecommunications equipment to consumers in the southeastern and western
United States. HomeTel Providers, Inc. ("Providers Inc.") is the general
partner of Providers, L.P. which rents and sells on an installment basis
Caller I.D. units and other telecommunications equipment to consumers in
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, and North
Carolina.
See Note 7 for a discussion of RenTel and SellTel debt and equity
arrangements.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Innotrac, IELC, RenTel, SellTel, HomeTel, Providers Inc., RenTel #2, SellTel
#2 and Providers, L.P. and are prepared on the accrual basis of accounting.
Significant intercompany accounts and transactions have been eliminated in the
combination. Combined financial statements are presented since the Companies
have similar ownership and interrelated activities.
The financial information included herein may not necessarily reflect the
financial position, results of operations, or cash flows of the Companies in
the future or what the financial position, results of operations, or cash
flows of the Companies would have been if they were combined as a separate,
stand-alone company during the periods presented.
Quarterly Information
The combined balance sheet as of March 31, 1998 and the combined statements
of operations and cash flows for the three months ended March 31, 1998 and
1997 are unaudited and have been prepared by management of the Companies in
accordance with the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements contain all
adjustments (consisting of only normal recurring items) necessary for the fair
presentation of the financial position and results of operations for the
F-7
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
interim periods. The results of operations for the three months ended March
31, 1998 are not necessarily indicative of the results to be expected for the
entire year.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Sources of Supplies
In accordance with their agreements with certain telecommunications
companies, the Companies primarily use two providers for the supply of
telecommunications equipment. However, if these vendors were unable to meet
the Companies' needs, management believes that other sources for this
equipment exist on commensurate terms and that operating results would not be
adversely affected.
Concentration of Revenues
Revenues earned under the Companies' agreement with a major
telecommunications company to sell and rent certain telecommunications
equipment to the customers of this company accounted for approximately 70%,
85%, 82% and 82% of total revenues for the three months ended March 31, 1998
(unaudited) and the years ended December 31, 1997, 1996 and 1995,
respectively. If this agreement were terminated, it could have a material
adverse affect on the future operating results and liquidity of the Companies
(Note 5).
Cash and Cash Equivalents
The Companies consider all short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories, consisting primarily of telecommunications equipment, are
stated at the lower of cost or market, with cost determined by the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is determined using
straight-line methods over the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment................................................... 3-4 years
Computers.......................................................... 3 years
Machinery and transportation equipment............................. 5-7 years
Furniture and fixtures............................................. 7 years
</TABLE>
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.
F-8
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Prior to January 1, 1996, depreciation for rental equipment was computed
using the straight-line method over a four-year period. As a result of a
review of its rental equipment, management decreased the useful lives of its
rental equipment to three years. The effect of this change was not material to
the results of operations.
Rental equipment is written off at its net book value when it is no longer
generating revenues or is not returned by the customer. Provisions are made
for estimated equipment losses that have not yet been reported. Equipment
rental losses were approximately $542,000, $1,712,000, $4,479,000, $2,538,000
and $1,756,000 for the three months ended March 31, 1998 and 1997 (unaudited)
and the years ended December 31, 1997, 1996 and 1995 respectively, and are
included in "Cost of revenues" on the accompanying statements of operations.
Long-Lived Assets
The Companies periodically review the values assigned to long-lived assets
such as property and equipment to determine if any impairments are other than
temporary. Management believes that the long-lived assets on the accompanying
balance sheets are appropriately valued.
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"). The Company has adopted the disclosure option of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS 123"). SFAS 123 requires that companies which do not
choose to account for stock-based compensation as prescribed by this
statement, shall disclose the pro forma effects on earnings and earnings per
share as if SFAS 123 had been adopted. Additionally, certain other disclosures
are required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.
Income Taxes
Innotrac, IELC and SellTel, as C corporations, utilize the liability method
of accounting for income taxes. Under the liability method, deferred taxes are
determined based on the difference between the financial and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
The shareholders of RenTel, Providers Inc. and HomeTel have elected to have
the Companies treated as S corporations. The Internal Revenue Code of 1986, as
amended (the "Code") and certain applicable state statutes provide that the
income and expenses of an S corporation are not taxable separately to the
corporation but rather accrue directly to the shareholders. Accordingly, no
provisions for federal and certain state income taxes related to these
entities have been made in the accompanying financial statements.
The Code and certain applicable state statutes provide that the income and
expenses of a partnership are not separately taxable to the partnership, but
rather accrue directly to the partners. Accordingly, no provision for federal
and certain state income taxes related to Providers, L.P. have been made in
the accompanying financial statements.
As limited liability companies, RenTel #2 and SellTel #2 are not subject to
federal and state income taxes. The taxable income or loss of these entities
are included in the federal and state income tax returns of their
F-9
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
members. Accordingly, no provisions for income taxes have been reflected in
the accompanying financial statements related to these entities.
It is the policy of management to pay and accrue distributions primarily for
income taxes that are required to be paid by the shareholders, members and
partners due to the flow through of income of RenTel, RenTel #2, SellTel #2,
HomeTel, Providers Inc., and Providers, L.P. During the years ended December
31, 1997, 1996 and 1995, distributions of approximately $4,586,000, $1,741,000
and $3,938,000, respectively, were recorded, of which approximately $1,007,000
and $300,000 were accrued and unpaid as of December 31, 1997 and 1996,
respectively. Additionally, in conjunction with the reorganization (Note 11),
management anticipates distributing approximately $7,500,000 of the
undistributed earnings of approximately $9,000,000 to the owners of certain
pass-thru entities.
Revenue Recognition
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped or rentals are provided. Revenues are
reduced for an estimate of product returns and allowances (Note 3).
Fair Value of Financial Instruments
The carrying values of the Companies' financial instruments approximate
their fair values.
Advertising Costs
The Companies expense all advertising costs as incurred.
3. ACCOUNTS RECEIVABLE
The Companies' accounts receivable include amounts that are billed in
installments over a five to twelve month period. Accounts receivable were
composed of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Billed receivables................................. $15,812,276 $16,857,463
Unbilled installment receivables................... 9,976,198 12,844,916
----------- -----------
Total receivables.................................. 25,788,474 29,702,379
Less allowances.................................... (5,707,245) (4,242,363)
----------- -----------
$20,081,229 $25,460,016
=========== ===========
</TABLE>
Management believes that the allowances for doubtful accounts and returns
reduce the gross accounts receivable to net amounts that will be collected.
F-10
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. FINANCING OBLIGATIONS
Financing obligations as of December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Borrowings under revolving credit agreement (up to
$25,000,000 individually or in aggregate, except as to
Providers, L.P., which borrowings cannot exceed
$12,000,000; the revolving advances owing by any one
borrower cannot exceed an amount equal to the sum of
80% of the eligible accounts receivable plus 70% of
the eligible installment receivables); interest
payable monthly at rates equal to the prime rate (8.5%
and 8.25% at December 31, 1997 and 1996,
respectively), or at the Company's option, LIBOR plus
a margin, expires on November 15, 1999, secured by all
assets of the Companies and a personal guarantee of
the sole shareholder of Innotrac...................... $8,545,200 $17,230,621
Subordinated note payable to the limited partner of
Providers, L.P., due April 1999; interest payable
monthly at a variable rate of prime plus 8% (16.5% as
of December 31, 1997) and a fixed rate of 14% as of
December 31, 1996; secured by accounts receivable,
inventories, rental equipment and the personal
guarantee of the sole shareholder of the general
partner of Providers, L.P.; subordinated to the line
of credit............................................. 3,500,000 3,500,000
Note payable, due in monthly installments of principal
of $55,556, plus interest at 8.95%, through July 1999;
secured by accounts receivable, inventories, equipment
and the personal guarantee of Innotrac's sole
shareholder........................................... 1,055,555 1,722,222
Other.................................................. 85,911 126,021
---------- -----------
13,186,666 22,578,864
Current portion........................................ 9,282,887 18,018,144
---------- -----------
$3,903,779 $ 4,560,720
========== ===========
</TABLE>
Scheduled maturities of financing obligations are as follows:
<TABLE>
<S> <C>
1998............................................................. 9,282,887
1999............................................................. 3,903,779
-----------
Total.......................................................... $13,186,666
===========
</TABLE>
The revolving line of credit agreement and the term note contain various
restrictive financial and change of ownership control covenants. The Companies
were in compliance with all covenants as of December 31, 1997.
F-11
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. 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 and accrues the differences each
month between the amount expensed and the amount actually paid.
Aggregate future minimum lease payments under noncancellable operating
leases with original periods in excess of one year as of December 31, 1997 are
as follows:
<TABLE>
<S> <C>
1998............................................................ $ 1,229,870
1999............................................................ 1,187,745
2000............................................................ 908,750
2001............................................................ 908,750
2002............................................................ 908,750
Thereafter...................................................... 4,998,125
-----------
Total minimum lease payments.................................... $10,141,990
===========
</TABLE>
Rent expense under all operating leases totaled approximately $1,121,000,
$770,000 and $393,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
Marketing Support Agreement
The Companies have entered into a six-year agreement, which expires in March
2000, with a major telecommunications company to sell and rent certain
telecommunications equipment to the customers of this company. The
telecommunications company has agreed to provide billing, collection and
referral services for the Companies. This agreement can be terminated upon 24
months written notice; however, in the event of termination, the
telecommunications company must continue to provide billing and collections
services for existing customers for four years after the termination of the
agreements.
Legal Proceedings
The Companies are subject to legal proceedings and claims that arise in the
ordinary course of business. There are no material pending legal proceedings
to which the Companies are a party.
6. INCOME TAXES
Details of the income tax benefit (provision) for the years ended December
31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current..................................... $(460,300) $(318,494) $(566,629)
Deferred.................................... 537,000 107,000 (227,000)
--------- --------- ---------
$ 76,700 $(211,494) $(793,629)
========= ========= =========
</TABLE>
F-12
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 Companies' deferred tax assets and liabilities as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Noncurrent deferred tax (liabilities) assets:
Property, plant, equipment basis differences....... $ 43,000 $ 16,000
Conversion from cash to accrual taxpayer method--
long term......................................... (83,000) (227,000)
Other.............................................. 0 5,000
--------- ---------
(40,000) (206,000)
--------- ---------
Current deferred tax (liabilities) assets:
Reserves for uncollectable accounts................ 524,000 131,000
Conversion from cash to accrual taxpayer method--
current........................................... (143,000) (143,000)
Other.............................................. 5,000 27,000
--------- ---------
386,000 15,000
--------- ---------
Net deferred tax asset (liability)................... $ 346,000 $(191,000)
========= =========
</TABLE>
Innotrac converted from the cash basis to the accrual basis for income tax
purposes effective August 1995, with the accumulated difference to be added
back to taxable income over a four-year period.
A reconciliation of the income tax (benefit) provision computed at statutory
rates to the income tax provision for the years ended December 31, 1997, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate............................... 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit......... 1.4 3.6 3.1
Income taxable directly to shareholders, partners
and members (Notes 1 and 2)....................... (37.9) (31.8) (24.9)
Other................................................ 0.9 0.4 0.1
----- ----- -----
(1.6)% 6.2% 12.3%
===== ===== =====
</TABLE>
7. REDEEMABLE CAPITAL STOCK
In September 1993, the Companies obtained $1,000,000 of financing from a
related party in the form of subordinated debt both in RenTel and SellTel. The
subordinated debt required monthly payments of interest with principal
maturing at 36 months. The subordinated debt was repaid in full in September
1996. Additionally, the related party received callable common stock
representing 10% of the common stock in Rentel and SellTel. The terms of the
callable common stock provide each of Rentel and SellTel the option to call
the common stock at predetermined amounts on or before September 30, 1998
beginning in September 1996. If the Companies do not call the common stock
interests, the Companies are obligated to issue the related party an
additional 10% common stock interest to redeem the common stock. Due to the
related party nature of the transaction, the Companies are accounting for the
callable common stock as redeemable equity.
F-13
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Companies allocated the capital raised between "Subordinated Debt" and
"Redeemable Capital Stock" on the accompanying balance sheets at the
respective fair market values based on discounted cash flow analyses
(approximately $500,000 each to "Subordinated Debt" and "Redeemable Capital
Stock") and then accreted to their redemption values over 36 months using the
effective interest rate method (an approximate 30% return on both the
subordinated debt and the callable common stock). The portion of the accretion
attributable to Subordinated Debt is reflected as interest expense in the
accompanying statements of operations. For the equity portion, the Companies
have accreted through the recording of dividends to the estimated redemption
amounts at each balance sheet date and reflected such redemption amounts as
"Redeemable Capital Stock" on the accompanying balance sheets. These dividends
represent a 16% effective rate through September 1996 (the first trigger date
as defined) and 10% thereafter. In conjunction with the Offering (see Note
11), the Companies anticipate redeeming the RenTel shares prior to or on the
effective date of the Offering for $390,000 and the SellTel shares for
$590,000 subsequent to the effective date.
8. PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
Common stock and paid-in capital consisted of the following at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
COMMON PAID-IN
STOCK CAPITAL
------ -------
<S> <C> <C>
Innotrac Corporation, $0.10 par value, 100,000 shares
authorized, 15,300 shares issued and outstanding............................. $1,530 $13,470
IELC, Inc., no par value, 1,000 shares authorized, 10 shares issued
and outstanding.............................................................. 100 0
RenTel #1, Inc., no par value, 1,000 shares authorized, 100
shares issued and outstanding................................................ 900 0
SellTel #1, Inc., no par value, 1,000 shares authorized,
100 shares issued and outstanding............................................ 900 0
HomeTel Systems, Inc., no par value, 10,000 shares
authorized, 100 shares issued and outstanding................................ 1,060 0
HomeTel Providers Inc., $0.10 par value, 10,000 shares
authorized, 1,000 shares issued and outstanding.............................. 100 900
------ -------
$4,590 $14,370
====== =======
</TABLE>
See Note 11 for a description of the Companies' plan of consolidation.
9. EMPLOYEE RETIREMENT PLAN
Employees of Innotrac may participate in an employee retirement defined
contribution plan. The plan covers all employees of the participating entities
who have at least one year of service (six months if hired before January 1,
1997) and are 18 years of age. Participants may elect to defer 15% of
compensation up to a maximum amount determined annually pursuant to IRS
regulations. Innotrac has elected 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. Total matching contributions made to the plan and
charged to expense by Innotrac for the years ended December 31, 1997, 1996 and
1995 were not material.
F-14
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCK BASED COMPENSATION
In November 1997, the Company adopted a stock option plan (the "Stock Option
Plan") to provide key employees, officers, directors, contractors, and
consultants an opportunity to own Common Stock of the Company and to provide
incentives for such persons to promote the financial success of the Company.
Awards under the Stock Option Plan 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 (the "Code"), 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 and its subsidiaries. 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 Stock Option Plan provides for the issuance
of options to purchase up to an aggregate of 800,000 shares of Common Stock.
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 Stock Option Plan.
As of December 31, 1997, stock options to purchase an aggregate of 343,000
shares at $9.10 per share of Common Stock have been granted under the Stock
Option Plan. 55,000 of these options vested immediately at the date of grant;
the remaining options vest 50%, 25% and 25% at two, three and four years,
respectively, after the grant date and expire 10 years from the grant date.
Additionally, the Company plans on granting 40,000 shares on the effective
date of the Offering to four non-employee members of the Board of Directors at
a price equal to the initial public offering price which will vest immediately
upon grant. At December 31, 1997, all of the 343,000 options granted were
outstanding with a weighted average contractual life of 9.9 years. 55,000
options were exercisable at December 31, 1997 at $9.10 per share.
The Company has elected to account for its option plans under APB 25;
however, the Company has computed for pro forma disclosure purposes the value
of all options granted during 1997 using the Black-Scholes option-pricing
model as prescribed by SFAS 123 using the following weighted average
assumptions used for grants in 1997:
<TABLE>
<S> <C>
Risk-free interest rate......................................... 5.3%
Expected dividend yield......................................... 0%
Expected lives.................................................. 2.7 Years
Expected volatility............................................. 49%
</TABLE>
The total value of options granted during 1997 was computed as approximately
$2,172,000 which would be amortized on a pro forma basis over the four year
vesting period of the options. If the Company had accounted for these plans in
accordance with SFAS 123, the Company's net income and net income per share
(see Note 11
F-15
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
for a discussion of pro forma earnings per share) for the year ended December
31, 1997 would have decreased by the following unaudited pro forma amounts:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTED
FOR THE
IMPACT OF
PRO FORMA SFAS 123
---------- ----------
<S> <C> <C>
Net income.......................................... $3,874,507 $3,666,972
Net income per share................................ $ 0.43 $ 0.40
</TABLE>
11. SUBSEQUENT EVENTS
Initial Public Offering
In the second quarter of 1998, Innotrac is planning an initial public
offering of common stock. Innotrac plans to issue 2,500,000 shares (2,875,000
if the underwriters overallotment is exercised in full) at an estimated
initial public offering price of between $12.00 and $14.00 per share. There
can be, however, no assurance that the Offering will be completed at a per
share price within the estimated range or at all. There are significant
potential risks associated with this Offering as well as Innotrac's ability to
compete profitability in this industry including, but not limited to, the
following:
RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES
In connection with certain of its fulfillment services, the Company
purchases the Caller ID and other equipment from third party vendors and,
therefore, assumes the risks of inventory obsolescence, damage to leased
units, theft and creditworthiness of purchasers. The ability of the Company
to receive payment for sales or rentals of such equipment is dependent on
the transmittal of correct customer invoices and remittance on a timely
basis by BellSouth and Pacific Bell. The occurrence of any of these events
could have a material adverse effect on the Company's business, results of
operations and financial condition. The credit risk assumed by the Company
is particularly significant because of the large number of customers, each
of which owes a relatively small amount. The Company's allowance for bad
debt was approximately $4.1 million at March 31, 1998.
RELIANCE ON TELECOMMUNICATIONS INDUSTRY
Caller ID is a relatively recent offering by telecommunications companies
and there can be no assurance that it will gain or sustain wide acceptance
in the marketplace. In addition, the provision of Caller ID services by
telecommunications companies is regulated at both the federal and state
level. Such regulations may have the effect of delaying the offering of
Caller ID service in a market of one of the Company's clients.
The Company is also dependent on the level of resources (financial and
otherwise) expended by its clients to promote Caller ID service. There can
be no assurance that the Company's telecommunications clients will
sufficiently promote, or continue to promote, Caller ID service in their
areas. Furthermore, there can be no assurance that the Company's
telecommunications clients will achieve their estimated "market
penetration" (the percentage of consumer telephone lines capable of
receiving Caller ID services that actually receive such services) goals,
upon which the Company, in part, plans its operations. In addition, at some
time in the future, peak market penetration for Caller ID service may be
achieved by the Company's
F-16
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
clients or Caller ID service may be replaced by a different service or
hardware. The occurrence of any of these factors could have a material
adverse effect on the Company's business, results of operations and
financial condition.
RISKS OF BUSINESS INTERRUPTION; NEW FACILITY
The Company's operations are dependent upon its ability to protect its
distribution facilities, call center, computer and telecommunications
equipment and software systems against damage from fire, power loss,
telecommunications interruption or failure, natural disaster and other
similar events. In the third quarter of 1998, the Company expects to move
its corporate offices and four distribution facilities into a new facility.
In the event the Company experiences a temporary or permanent interruption
of its business, through casualty, operating malfunction, as a result of
the move or otherwise, the Company's business, results of operations or
financial condition could be materially adversely affected. The Company's
property and business interruption insurance, may not adequately compensate
the Company for all losses that it may incur.
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW
SOFTWARE
The Company's business is highly dependent on its computer and
telecommunications equipment and software systems. The Company intends to
use a portion of the net proceeds of the Offering to upgrade certain
computer hardware and software, and, as a result, will convert certain
existing programs to the new system. There can be no assurance that the
Company can effectively or efficiently convert its programs to the new
system. In addition, the Company's failure to maintain its technological
capabilities or to respond effectively to technological changes could have
a material adverse effect on the Company's business, results of operations
and financial condition. The Company's future success also will be highly
dependent upon its ability to enhance existing services and develop
applications to focus on its clients' needs and introduce new services and
products to respond to changing technological developments. There can be no
assurance that the Company can select, invest in and develop new and
enhanced technology on a timely basis in the future in order to meet
clients' needs and to maintain its own competitiveness, and the Company's
failure to do so could have a material adverse effect on the Company's
business, results of operations and financial condition.
ABILITY TO CONTINUE AND MANAGE GROWTH
Innotrac has recently experienced significant growth in its operations.
The Company's success will depend upon its ability to initiate, develop and
maintain existing and new client relationships; respond to competitive
developments; develop its sales and marketing forces; attract, train,
motivate and retain management and hourly personnel; and maintain the high
quality of the services and products that it provides to its clients. In
addition, the Company has entered into a long-term lease for a new
facility, which will increase lease expenses by approximately $400,000 per
year. The Company's continued rapid growth can be expected to place a
significant strain on the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to
maintain or accelerate its current growth, effectively manage its expanding
operations or achieve planned growth on a timely or profitable basis. If
the Company is unable to manage its growth effectively, its business,
results of operations and financial condition could be materially adversely
affected.
F-17
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in large part on the abilities and
continuing efforts of its executive officers and senior management. In
order to support its growth the Company will be required to effectively
recruit, develop and retain additional qualified management personnel.
There can be no assurance that the Company will be able to (i) retain the
services of its executive officers and key management, with whom the
Company has no employment agreements or (ii) recruit, develop and retain
additional qualified management personnel. The Company does not maintain
key man life insurance on any of its executive officers, although two of
the parties to the Consolidation maintain such policies in the aggregate
amount of $4.5 million on the life of Scott D. Dorfman, the beneficiaries
of which are one of the parties to the Consolidation and the father of
Scott D. Dorfman, respectively, the proceeds of which would be used to
repay debt owed to them by the Company. After the Consolidation the Company
intends that one of the policies, in the amount of $3.5 million, will be
converted to name the Company as beneficiary. The business and prospects of
the Company could be adversely affected if these persons do not continue in
their key roles and the Company is unable to attract and retain qualified
replacements.
Consolidation
In conjunction with the proposed Offering, Innotrac plans to consolidate the
eight affiliated entities (the "Consolidation") that had previously conducted
the business of the Company as an integrated business unit. The Consolidation
will be effected simultaneously with, and as a condition to, the Offering.
Innotrac has authorized 50,000,000 shares of Common Stock, $0.10 par value,
and 10,000,000 shares of Preferred Stock, $0.10 par value. After the
Consolidation, there will be an aggregate of 6,500,000 shares outstanding. On
December 12, 1997, Innotrac effected a 70.58823 -for- 1 stock split resulting
in 1,080,000 shares outstanding. Additionally, in exchange for their previous
ownership interests, 5,420,000 shares of $0.10 par value common stock will be
issued to the remaining entity owners pari-passu based on their relative value
to the consolidated group except for the minority stockholder of SellTel,
whose ownership interests will be repurchased as scheduled in the fourth
quarter of 1998. The redeemable capital stock of RenTel was redeemed in
February 1998. As noted below, certain of the entities will make certain
distributions of undistributed accumulated earnings (approximately $7,500,000)
to their principals in conjunction with the Consolidation.
Pro Forma Shareholders' Equity
The pro forma shareholders' equity at March 31, 1998 gives effect to the
proposed distribution of undistributed accumulated earnings of HomeTel
($3,000,000), Providers LP ($4,000,000), and RenTel ($500,000) in conjunction
with the Consolidation. Because Providers LP is a partnership, this
distribution is reflected as a reduction in Partners' Capital, whereas
HomeTel's is reflected as a reduction in Retained Earnings as it is a
corporation. RenTel's is reflected as a reduction in members' deficit.
Pro Forma Statements of Operations
The pro forma statements of operations for the year ended December 31, 1997
and the three months ended March 31, 1998 gives effect to the Consolidation
and the Offering as if they occurred on January 1, 1997. In conjunction with
the Consolidation, HomeTel Providers, Inc., Providers LP, RenTel, RenTel #2,
and SellTel #2 will lose their non C corporation status for tax purposes.
Accordingly, the pro forma income taxes reflect income
F-18
<PAGE>
taxes applied to pro forma earnings which give effect to the elimination of
interest expense on certain borrowings assumed to be repaid with the net
proceeds of the Offering at statutory rates. Pro forma net income reflects the
impact of the aforementioned adjustments and pro forma earnings per share
reflects the shares issued in conjunction with the Consolidation and the stock
split (aggregate 6,500,000) and the Offering (2,500,000). Pursuant to Staff
Accounting Bulletin No. 98, the impact of any options are excluded as these
shares are not considered nominal. Accordingly, basic and diluted earnings per
share are the same.
F-19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
As discussed in Note 1 to the combined financial statements, the historical
combined financial statements include the financial statements of Innotrac,
IELC, RenTel #1, SellTel #1, HomeTel, Providers Inc., RenTel #2, SellTel #2
and Providers L.P. Effective simultaneously with the Offering, the Companies
will be reorganized and consolidated. For accounting purposes, Providers, L.P.
will be deemed to be the acquiring entity. See "The Consolidation."
The pro forma adjustments to the statements of operations for the year ended
December 31, 1997 and the three months ended March 31, 1998 reflect (i) the
Consolidation and (ii) the Offering and the use of net proceeds thereof, as if
each of such transactions had occurred on January 1, 1997. The pro forma
adjustments to the balance sheet reflect (i) the Consolidation and (ii) the
Offering and the use of net proceeds thereof, as if each of such transactions
had occurred on March 31, 1998.
The pro forma financial information does not purport to represent what the
Company's consolidated results of operations would have been if these
transactions had in fact occurred on these dates, nor does it purport to
indicate the future consolidated financial position or consolidated results of
future operations of Innotrac. The pro forma adjustments are based on
currently available information and certain assumptions that management
believes to be reasonable.
F-20
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Revenues net............................ $87,978 $ -- $87,978
Cost of revenues........................ 67,986 -- 67,986
------- ------- -------
Gross profit............................ 19,992 -- 19,992
------- ------- -------
Operating expenses:
Selling, general and administrative
expenses.............................. 12,572 -- 12,572
Depreciation and amortization.......... 631 -- 631
------- ------- -------
Total operating expenses............ 13,203 -- 13,203
------- ------- -------
Operating income........................ 6,789 -- 6,789
------- ------- -------
Other (income) expense:
Interest expense...................... 1,788 (1,742)(a) 46
Other................................. 118 -- 118
------- ------- -------
Total other expense................. 1,906 (1,742) 164
------- ------- -------
Income before income taxes.............. 4,883 1,742 6,625
Income tax benefit (provision).......... 77 (2,794)(b) (2,717)
------- ------- -------
Net income.............................. $ 4,960 $(1,052) $ 3,908
======= ======= =======
Weighted average number of shares....... 2,500 (c)
6,500 (d) 9,000
Net income per share.................... $ 0.43 (e)
=======
</TABLE>
__________
(a) Reflects the elimination of interest expense on the line of credit, bank
note, and subordinated debt borrowings assumed to be repaid with the net
proceeds of the Offering.
(b) Reflects the tax effect of HomeTel, Providers Inc., Providers, L.P.,
RenTel, RenTel #2 and SellTel #2 losing their non-C corporation status in
conjunction with the Consolidation as well as the tax effects of (a)
above.
(c) Reflects 2,500,000 shares being offered hereby.
(d) Reflects 1,080,000 shares of Innotrac (after the stock split) and
5,420,000 shares of the Company issued in conjunction with the
Consolidation. Pursuant to Staff Accounting Bulletin No. 98, the impact of
any options are excluded as the shares are not considered nominal.
Accordingly, basic and diluted earnings per share are the same.
(e) Excludes the dividend accretion on redeemable capital stock of a
subsidiary of approximately $87,000.
F-21
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Revenues net.............................. $22,565 $ -- $22,565
Cost of revenues.......................... 16,412 -- 16,412
------- ------ -------
Gross profit.............................. 6,153 -- 6,153
------- ------ -------
Operating expenses:
Selling, general and administrative
expenses................................ 3,428 -- 3,428
Depreciation and amortization............ 138 -- 138
------- ------ -------
Total operating expenses.............. 3,566 -- 3,566
------- ------ -------
Operating income.......................... 2,587 -- 2,587
------- ------ -------
Other (income) expense:
Interest expense........................ 315 (314)(a) 1
Other................................... 6 -- 6
------- ------ -------
Total other expense................... 321 (314) 7
------- ------ -------
Income before income taxes................ 2,266 314 2,580
Income tax benefit (provision)............ 61 (1,087)(b) (1,026)
------- ------ -------
Net income................................ $ 2,327 $ (773) $ 1,554
======= ====== =======
Weighted average number of shares......... 2,500 (c)
6,500 (d) 9,000
Net income per share...................... $ 0.17
=======
</TABLE>
_________
(a) Reflects the elimination of interest expense on the line of credit, bank
note, and subordinated debt borrowings assumed to be repaid with the net
proceeds of the Offering.
(b) Reflects the tax effect of HomeTel, Providers Inc., Providers, L.P.,
RenTel, RenTel #2 and SellTel #2 losing their non-C corporation status in
conjunction with the Consolidation as well as the tax effects of (a)
above.
(c) Reflects 2,500,000 shares being offered hereby.
(d) Reflects 1,080,000 shares of Innotrac (after the stock split) and
5,420,000 shares of the Company issued in conjunction with the
Consolidation. Pursuant to Staff Accounting Bulletin No. 98, the impact of
any options are excluded as the shares are not considered nominal.
Accordingly, basic and diluted earnings per share are the same.
(e) Excludes the dividend accretion on redeemable capital stock of a
subsidiary of approximately $17,000.
F-22
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-----------------------
CONSOLIDATION PRO FORMA
HISTORICAL AND CONSOLIDATED
COMBINED DISTRIBUTION OFFERING AS ADJUSTED
---------- ------------- -------- ------------
<S> <C> <C> <C> <C>
ASSETS
------
Cash and cash equiva-
lents.................... $ 593 $ -- $ 1,517 (d) $ 2,110
Restricted cash........... -- -- 4,669 (d) 4,669
Accounts receivable, net.. 26,047 -- -- 26,047
Inventory................. 3,314 -- -- 3,314
Prepaids and other........ 948 2,470 (c) -- 3,418
------- ------- -------- -------
Total current assets.. 30,902 2,470 6,186 39,558
------- ------- -------- -------
Property and equipment,
net...................... 7,931 -- -- 7,931
------- ------- -------- -------
Other assets, net......... 160 -- -- 160
------- ------- -------- -------
Total assets.......... $38,993 $ 2,470 $ 6,186 $47,649
======= ======= ======== =======
LIABILITIES AND PARTNERS',
- --------------------------
MEMBERS', AND
-------------
SHAREHOLDERS' EQUITY
--------------------
Accounts payable.......... $ 9,128 $ -- $ -- $ 9,128
Accrued expenses.......... 9,949 -- -- 9,949
Current portion of debt... 736 -- (725)(d) 11
Line of credit............ 8,915 7,500 (a) (16,415)(d) --
------- ------- -------- -------
Total current
liabilities.......... 28,728 7,500 (17,140) 19,088
------- ------- -------- -------
Subordinated debt......... 3,500 -- (3,500)(d) --
Long-term debt............ 234 -- (224)(d) 10
Deferred income taxes..... 18 211 (c) 0 229
------- ------- -------- -------
Total long-term
liabilities.......... 3,752 211 (3,724) 239
------- ------- -------- -------
Total liabilities..... 32,480 7,711 (20,864) 19,327
------- ------- -------- -------
Redeemable capital stock.. 546 -- -- 546
------- ------- -------- -------
Shareholders' equity:
Partners' capital....... 2,983 (4,000)(a) -- --
1,017 (b) --
Members' deficit........ (490) (500)(a) -- --
990 (b) --
Common stock............ 5 645 (b) 250 (d) 900
Additional paid-in capi-
tal.................... 14 (4,431)(b) 26,800 (d) 22,383
Retained earnings....... 3,455 (3,000)(a) -- 4,493
1,779 (b) --
2,259 (c) --
------- ------- -------- -------
Total shareholders'
equity............... 5,967 (5,241) 27,050 27,776
------- ------- -------- -------
Total liabilities and
shareholders'
equity............... $38,993 $ 2,470 $ 6,186 $47,649
======= ======= ======== =======
</TABLE>
- --------
(a) Reflects a distribution of $7.5 million of the undistributed earnings of
HomeTel and Providers L.P.
(b) Reflects the Consolidation of the Company as described in "The
Consolidation" including the reclassification of the portion of retained
earnings attributable to the S corporations, and to additional paid-in-
capital and the issuance of 5,420,000 shares of Common Stock as well as
the 1,080,000 shares of Common Stock after the stock split.
(c) Reflects the recording of deferred tax assets and liabilities associated
with the change in tax status to C corporation of HomeTel, Providers Inc.,
Providers L.P., RenTel, RenTel #2, and SellTel #2 in conjunction with the
Consolidation. See "The Consolidation" for discussion.
(d) Reflects the issuance of 2,500,000 shares of common stock at the initial
public offering price and an increase in cash equal to the net proceeds
less repayment of the borrowings under the line-of-credit facility
("LOC"), bank note, and the subordinated debt as well as the redemption of
the redeemable capital stock of a subsidiary. Restricted cash represents
the difference between borrowings under the LOC and the term note at March
31, 1998 and the anticipated amounts outstanding at closing. Remaining
portion represents redeemable capital stock of a subsidiary (SellTel) to
be redeemed in the fourth quarter of 1998.
F-23
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, ANY OF THE COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
The Consolidation........................................................ 14
Use of Proceeds.......................................................... 15
Dividend Policy.......................................................... 15
Dilution................................................................. 16
Capitalization........................................................... 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 28
Management............................................................... 37
Principal Shareholders................................................... 42
Certain Transactions..................................................... 43
Shares Eligible for Future Sale.......................................... 44
Description of Capital Stock............................................. 45
Underwriting............................................................. 48
Legal Matters............................................................ 49
Experts.................................................................. 49
Additional Information................................................... 49
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL JUNE 1, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 SHARES
[LOGO OF INNOTRAC APPEARS HERE]
INNOTRAC
CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
J.C. Bradford & Co.
Wheat First Union
MAY 6, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
