SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-23740
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INNOTRAC CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-1592285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6655 Sugarloaf Parkway Duluth, Georgia 30097
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at August 3, 1999
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Common Stock at $.10 par value 11,209,995 Shares
<PAGE>
<PAGE>
Part I - Financial Information
- ------------------------------
Item 1 - Financial Statements
- ------------------------------
INNOTRAC CORPORATION
BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(IN 000S)
<TABLE>
<CAPTION>
ASSETS JUNE 30 1999 DECEMBER 31, 1998
------ ------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 361 $ 3,379
Accounts Receivable, net ....................... 53,035 44,354
Inventories .................................... 29,218 14,381
Deferred tax assets ............................ 1,157 2,866
Prepaid expenses and other current assets ...... 1,855 1,436
------- -------
Total current assets ................. 85,626 66,416
------- -------
Property and equipment:
Rental equipment ............................... 6,035 6,891
Computer, machinery and transportation equipment 6,362 4,949
Furniture, fixtures and leasehold improvements . 1,677 1,390
------- -------
14,074 13,230
Less accumulated depreciation and amortization . 6,885 5,767
------- -------
7,189 7,463
------- -------
Other assets, net .................................... 427 113
------- -------
$ 93,242 $ 73,992
======= =======
LIABILITIES AND PARTNERS', MEMBERS',
AND SHAREHOLDERS' EQUITY JUNE 30, 1999 DECEMBER 31, 1998
------------------------------------ ------------------ -----------------
(UNAUDITED)
Current liabilities:
Current portion of long-term debt ................. $ 68 $ 68
Line of credit .................................... 32,902 15,736
Accounts payable .................................. 11,929 9,387
Distributions payable ............................. 0 70
Accrued expenses .................................. 5,461 12,336
Other ............................................. 1,985 1,966
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Total current liabilities ............... 52,345 39,563
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Total noncurrent liabilities ............................ 52 135
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Total liabilities ....................... 52,397 39,698
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Partners', members' and shareholders' equity:
Common stock ...................................... 900 900
Additional paid-in capital ........................ 24,838 24,838
Retained earnings ................................. 15,107 8,556
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Total shareholders' equity ............... 40,845 34,294
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Total liabilities and shareholders' equity $ 93,242 $ 73,992
======= =======
The accompanying condensed notes to financial statements are an integral part of these balance sheets
</TABLE>
<PAGE>
<PAGE>
Financial Statements-Continued
INNOTRAC CORPORATION
INCOME STATEMENTS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues, net ................................. $ 57,496 $ 36,346 $ 124,816 $ 58,911
Cost of revenues .............................. 48,304 26,515 107,021 42,926
--------- --------- --------- ---------
Gross Profit ................... 9,192 9,831 17,795 15,985
--------- --------- --------- ---------
Operating expenses:
Selling, general and
administrative expenses ............ 2,916 5,103 5,357 8,531
Depreciation and amortization .......... 407 234 786 373
--------- --------- --------- ---------
Total operating expenses ...... 3,323 5,337 6,143 8,904
--------- --------- --------- ---------
Operating income .............................. 5,869 4,494 11,652 7,081
--------- --------- --------- ---------
Other (income) expense:
Interest expense, net .................. 472 241 845 556
Other .................................. -- 32 (20) 38
--------- --------- --------- ---------
Total other expenses .......... 472 273 825 594
--------- --------- --------- ---------
Income before income taxes .................... 5,397 4,221 10,827 6,487
Income tax provision .......................... (2,131) (1,143) (4,276) (1,082)
--------- --------- --------- ---------
Net income .................... $ 3,266 $ 3,078 $ 6,551 $ 5,405
========= ========= ========= =========
Proforma net income ........... $ 3,266 $ 2,596 $ 6,551 $ 3,989
========= ========= ========= =========
Proforma net income per share:
Basic .................................. $ 0.36 $ 0.33 $ 0.73 $ 0.54
========= ========= ========= =========
Diluted ................................ $ 0.36 $ 0.33 $ 0.72 $ 0.54
========= ========= ========= =========
Shares used for computing net income per share:
Basic .................................. 9,000 7,889 9,000 7,328
========= ========= ========= =========
Diluted ................................ 9,170 7,922 9,144 7,345
========= ========= ========= =========
The accompanying condensed notes to financial statements are an integral part of these statements
</TABLE>
<PAGE>
<PAGE>
Financial Statements-Continued
INNOTRAC CORPORATION
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 6,551 $ 5,405
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization ............................................. 786 373
Depreciation-rental equipment ............................................. 1,020 1,598
Loss on disposal of rental equipment ...................................... 302 1,035
Deferred income taxes ..................................................... 1,302 236
(Increase) in accounts receivable ......................................... (8,681) (16,973)
(Increase) decrease in inventories ........................................ (14,837) 835
(Increase) in prepaid expenses and other assets ........................... (464) (145)
Increase in accounts payable .............................................. 2,542 6,043
(Decrease) increase in accrued expenses ................................... (6,875) 1,702
Other ..................................................................... 45 318
-------- --------
Net cash (used in) provided by operating activities ................. (18,309) 427
-------- --------
Cash flows from investing activities:
Purchase of property and equipment .............................................. (1,803) (2,924)
-------- --------
Net cash used in investing activities ............................... (1,803) (2,924)
-------- --------
Cash flows from financing activities:
Net borrowing (repayment) under lines of credit ................................. 17,166 (6,330)
Repayment of long-term debt ..................................................... (2) (1,064)
Repayment of subordinated debt .................................................. 0 (3,500)
Proceeds from initial public offering, net ...................................... 0 26,928
Redemption of redeemable capital stock .......................................... 0 (388)
Distributions to shareholders, members and partners ............................. (70) (9,647)
-------- --------
Net cash (used in) provided by financing activities ................. 17,094 5,999
-------- --------
Net (decrease) increase in cash and cash equivalents ................................. (3,018) 3,502
Cash and cash equivalents, beginning of period ........................................ 3,379 554
-------- --------
Cash and cash equivalents, end of period .............................................. $ 361 $ 4,056
======== ========
Supplemental cash flow disclosures:
Cash paid for interest .......................................................... $ 797 $ 695
======== ========
Cash paid for income taxes, net of refunds received ............................. $ 2,955 $ 528
======== ========
Non cash transactions:
Accreted dividends on redeemable capital stock .................................. $ 0 $ 34
======== ========
The accompanying condensed notes to financial statements are an integral part of these statements
</TABLE>
<PAGE>
<PAGE>
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
Article 10 of Regulation S-X of the Securities and Exchange
Commission. The accompanying unaudited condensed financial
statements reflect, in the opinion of management, all adjustments
necessary to achieve a fair statement of financial position and
results for the interim periods presented. All such adjustments are
of a normal and recurring nature. It is suggested that these
condensed financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's
10-K filing and annual report.
2. On July 30, 1999, the Company completed a secondary offering of its
common stock. The Company issued 2.2 million shares at a public
offering price of $17.00 per share. The total proceeds of the
offering, net of underwriting discounts and offering expenses, were
approximately $35.3 million. Additionally, certain shareholders sold
an additional 675,000 shares in the same offering.
3. The pro forma net income and earnings per share reflect the
Company's results on a fully taxed basis to reflect consolidation of
the various affiliated pass-through entities into a C corporation in
conjunction with the initial public offering.
4. Basic earnings per share is computed by dividing pro forma net
income by the weighted average number of common shares outstanding.
Diluted earnings per share includes the effect of the Company's
stock options (using the treasury stock method). The following table
shows the computation of the number of shares outstanding:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Basic Shares 9,000 7,889 9,000 7,328
Stock Options 170 33 144 17
--------------- --------------- --------------- ---------------
Diluted Shares 9,170 7,922 9,144 7,345
=============== =============== =============== ===============
</TABLE>
<PAGE>
<PAGE>
ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion may contain certain forward-looking statements that are
beyond the control of the Company. Actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ include, but are not limited to, the
reliance on a small number of major clients; risks associated with oral
contracts; risks associated with buying, warehousing and renting products to
customers; risks of entering new lines of businesses; reliance on the
telecommunications industry; ability to continue and manage growth; the impact
of the trend toward outsourcing; dependence on labor force; risks associated
with rapidly changing technology and the Company's conversion to new software;
risks associated with competition; risks associated with fluctuations in
operating and quarterly results; dependence on key personnel; risks associated
with Year 2000 compliance; compliance with government regulation; control by
management; difficulties of completing and integrating acquisitions and other
factors discussed in Innotrac's S-1 Registration Statement, Commission File No.
333-79929 that is on file with the Securities and Exchange Commission.
OVERVIEW
Innotrac provides customized, technology-based marketing support and
distribution services to large corporations that outsource these functions.
Since 1994, we have focused on the telecommunications industry because of its
high growth characteristics and increasing marketing needs. We provide marketing
support services and distribution of Caller ID units, Caller ID telephones and
other telecommunications products to BellSouth, Pacific Bell, Southwestern Bell
and US West and their customers. Recently, we began providing services to
customers of Ameritech Services Inc., Cincinnati Bell Inc. and Bell Atlantic
Corporation.
In 1991, we initiated a fulfillment program to sell or rent Caller ID
stand-alone devices to BellSouth customers. Customers paid us for these products
by check or credit card. In 1993, we began billing the charges on BellSouth
customers' telephone bills in interest-free installments. As part of that
program, we acquired Caller ID and other telecommunications equipment from third
party manufacturers, while assuming collections risk on customer payments. In
November 1998, we entered into a new contract with BellSouth pursuant to which
we continue to provide Caller ID hardware and other equipment, including corded
and cordless telephones with built-in Caller ID, to BellSouth customers. We now
bill BellSouth, rather than BellSouth customers, for these products.
Upon receipt of an order, we ship the product, track inventory levels and sales
and marketing data and maintain call center operations to handle customer
service and technical support. From time to time, rather than acquiring units
and selling or leasing them to BellSouth customers, we distribute, for a fee,
Caller ID hardware that BellSouth has purchased from various third-party
manufacturers.
Under our programs with Southwestern Bell and Pacific Bell, like our new
contract with BellSouth, we bill the respective telecommunications clients
directly for the telecommunications units that are sold to their end users. The
clients are then responsible for billing and collecting from their customers. As
a result of this change in our payment model, unit prices and our gross margin
are lower than historical levels (See "Results of Operations" "Revenue" and
"Gross Profit" below). We generally experience lower bad debt expenses, which
are included in selling, general and administrative expenses, because
telecommunications clients, rather than their end user customers, pay us for the
equipment. These lower expenses substantially offset the decline in gross
margin. The change in our payment model has had little effect on our operating
margin to date.
We have experienced significant growth in revenue in recent years. This growth
stems primarily from growth in Caller ID market penetration and Innotrac's
consultative selling with respect to product-based marketing support services.
According to industry sources, market penetration of Caller ID services in the
United States as of December 31, 1998 was approximately 30% and is expected to
reach approximately 75% by 2007. BellSouth indicates that through the end of
first quarter 1999 its Caller ID penetration was 38%. We believe that
opportunities exist, for example, in the market areas served by Pacific Bell,
where market penetration for Caller ID lags behind the national average because
regulatory issues delayed the release of Caller ID. Caller ID equipment sales
may eventually level off as the Caller ID market matures. We believe that by
distributing other telecommunications products for existing customers, growing
our telecommunications company client base and expanding customer distribution
channels through e-commerce, we will be able to offset any eventual maturity in
our Caller ID business.
The following table sets forth the percentage of total net revenues derived from
services provided to each of the following clients for the years ended December
31, 1998, 1997 and 1996 and the six months ended June 30, 1999 and 1998.
Percentages may not sum due to rounding.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- ------------------------------
1998 1997 1999 1998 1996
-------- --------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BellSouth .............. 59% 85% 34% 82% 70%
Southwestern Bell....... 11 -- -- 26 --
Pacific Bell ........... 25 8 5 33 24
US West ................ 2 2 2 4 2
-------- --------- ---------- -------------- -------------
Total........... 97% 95% 89% 97% 96%
======== ========= ========== ============== =============
</TABLE>
The decline in revenues from BellSouth customers as a percentage of total
revenues for the six months ended June 30, 1999 results from the diversification
of our client base and the impact of the new pricing model with BellSouth.
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped (including installment sales). Revenues are
reduced for estimated product returns and allowances, which are based on our
historical experience.
The largest component of our expenses is our 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,
* information technology support,
* materials and freight charges and
* directly allocable facilities costs.
Most of these costs are variable in nature.
A second component of our expenses includes selling, general and administrative,
or SG&A, expenses. This expense item is comprised of (1) financial, human
resources, administrative and marketing functions that are not allocable to
specific client services and (2) bad debt expense.
Bad debt expense represents a provision for installments and rentals that will
be deemed uncollectible based on Innotrac'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 expense, which is related to
revenues.
<PAGE>
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth unaudited summary operating data, expressed as a
percentage of revenues, for the three months and six months ended June 30, 1999
and 1998, respectively. The data has been prepared on the same basis as the
annual financial statements. In the opinion of the Company's management, it
reflects all adjustments, consisting only of normal and recurring adjustments,
necessary for a fair presentation of the information for the periods presented.
Operating results for any period are not necessarily indicative of results for
any future period. The rounded percentages below are calculated using the
detailed information contained in the financial statements in order to simplify
its presentation. However, the percentages below are calculated using the
detailed information contained in the financial statements included in Item 1 of
this filing.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30 Ended June 30
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of revenues ................................ 84.0% 73.0% 85.7% 72.9%
Gross profit .................................... 16.0 27.0 14.3 27.1
Selling, general and administrative expenses..... 5.1 14.0 4.3 14.5
Operating income ................................ 10.2 12.4 9.3 12.0
Interest expense ................................ 0.8 0.7 0.7 1.0
Income before income taxes ...................... 9.4% 11.6% 8.7% 11.0%
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES. Net revenues increased 58.2% to $57.5 million for the three months
ended June 30, 1999 from $36.3 million for the three months ended June 30, 1998.
The increase in revenue was primarily due to a 114.4% increase in Caller ID
units distributed to 1.4 million units, which included a 65.5% increase in units
sold over the same period in 1998. For the three months ended June 30, 1999 the
percentage of units sold was 59.5% versus 77.2% for the same period in 1998. The
percentage of units fulfilled for promotional giveaway programs for which we are
paid a fee was 40.5% versus 22.8% for the same period in 1998, due to an
increase in promotional giveaway programs by certain clients. Net revenues was
partially offset by a decrease in average per unit prices of Caller ID units due
to the impact of our new pricing model where we reduced unit prices to reflect
the low credit risks as described above in the "Overview". Our reserve for
returns and allowances decreased from $3.6 million (9.9% of net revenues) for
the three months ended June 30, 1998 to $2.0 million (3.5% of net revenues) for
the three months ended June 30, 1999.
COST OF REVENUES. Cost of revenues increased 82.2% to $48.3 million for the
three months ended June 30, 1999 compared to $26.5 million for the three months
ended June 30, 1998. Cost of revenues increased primarily due to an increase in
cost of equipment associated with the increase in units we sold.
GROSS PROFIT. Gross profit for the three months ended June 30, 1999 decreased
6.5% to $9.2 million compared to $9.8 million for the three months ended June
30, 1998 and gross margin decreased from 27.0% of revenues to 16.0% of revenues,
respectively. The decrease in gross profit and gross margin was primarily due to
the increased percentage of business derived from Southwestern Bell, Pacific
Bell and BellSouth where the Company does not assume the bad debt risk, as
described under "-Overview." Therefore it is able to charge lower unit prices
and, as a result, experiences lower gross margins. This decline is offset by
lower bad debt expense, which is included in selling, general and administrative
expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses for the three months
ended June 30, 1999 decreased 42.8% from $5.1 million or 14.0% of revenues
compared to $2.9 million or 5.1% of revenues for the three months ended June 30,
1998. The Company's bad debt expense was $712,000 (1.2% of net revenues) for the
three months ended June 30, 1999 as compared to $3.2 million (8.7% of net
revenues) for the three months ended June 30, 1998. The decrease in bad debt
expense as a percentage of revenue is due primarily to the increasing percentage
of business derived from Southwestern Bell, Pacific Bell and BellSouth, which
generally pay the Company directly for telecommunications equipment sold to
end-users. The increase in other SG&A expenses is due to increased sales and
marketing efforts and increased administrative costs to support the Company's
growth.
INCOME TAXES. Our effective tax rates for the three months ended June 30, 1999
and 1998 were 39.5% and 27.1%, respectively. The effective tax rates are lower
than statutory rates for the three months ended June 30, 1998 due to the amount
of income attributable to the pass-through entities involved in the combination
of Innotrac and related pass-through entities at the same time as consummation
of our initial public offering in May 1998. We expect our effective tax rate in
future periods to approximate the level for the three months ended June 30,
1999.
<PAGE>
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED 1998
REVENUES. Net revenues increased 111.9% to $124.8 million for the six months
ended June 30, 1999 from $58.9 million for the six months ended June 30,1998.
Consistent with the quarter's results, the increase in revenue was due primarily
to increased Caller ID volume. Total Caller ID units sold and fulfilled during
the first half of 1999 increased 149.2% to 3.7 million units from 1.5 million
units for the first six months of 1998. The percentage of units sold was 51.1%
versus 53.7% for the six months ended June 30, 1999 and 1998, respectively. The
percentage of units fulfilled for promotional giveaway programs for which we are
paid a fee was 48.9% versus 46.3% for the same period in 1998, due to an
increase in promotional giveaway programs by certain clients. The increase in
unit volume was partially offset by a decrease in average per unit price of
Caller ID units due to the impact of the new pricing model where we have reduced
our unit prices to reflect the lower credit risk as described above in the
"Overview". The Company's reserve for returns and allowances decreased from $5.5
million (9.4% of net revenues) for the six months ended June 30, 1998 to $4.2
million (3.3% of net revenues) for the six months ended June 30, 1999.
COST OF REVENUES. Cost of revenues increased 149.3% to $107.0 million for the
six months ended June 30, 1999 compared to $42.9 million for the six months
ended June 30, 1998. This increase was due to increased unit volume described
above.
GROSS PROFIT. Gross profit for the six months ended June 30, 1999 increased
11.3% to $17.8 million or 14.3% of revenues as compared to $16.0 million or
27.3% of revenues for the six months ended June 30, 1998. The increase in gross
profit was due primarily to the increase in revenue. Gross margins declined for
several reasons. First, for strategic reasons, in the first quarter the Company
conducted a promotional program that resulted in $11.0 million in revenues and
$11.0 million in cost of sales. The Company chose to conduct the program in
order to strengthen its relationship with the client. In addition, gross margins
were impacted by the increased percentage of business derived from Southwestern
Bell, Pacific Bell and BellSouth where the Company does not assume the bad debt
risk, as described under "-Overview." Therefore it is able to charge lower unit
prices and as a result, experiences lower gross margins. This decline is offset
by lower bad debt expense, which is included in selling, general and
administrative expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses for the six months
ended June 30, 1999 were $5.4 million or 4.3% of revenues compared to $8.5
million or 14.5% of revenues for the six months ended June 30, 1998. The
Company's bad debt expense was $1.1 million (0.9% of net revenues) for the six
months ended June 30, 1999 as compared to $4.9 million (8.3% of net revenues)
for the six months ended June 30, 1998. Consistent with the results for the
quarter, the decrease in bad debt expense as a percentage of revenue is due
primarily to the increasing percentage of business derived from Southwestern
Bell, Pacific Bell and BellSouth, which generally pay the Company directly for
telecommunications equipment sold to end-users. The increase in other selling,
general and administrative expenses is due to increased sales and marketing
efforts and increased administrative costs to support the Company's growth.
INCOME TAXES. Our effective tax rates for the six months ended June 30, 1999
and 1998 were 39.5% and 16.7%, respectively. The effective tax rates are lower
than statutory rates for the six months ended June 30, 1998 due to the amount of
income attributable to the pass-through entities involved in the combination of
Innotrac and related pass-through entites at the same time as consummation of
our initial public offering in May 1998. We expect our effective tax rate in
future periods to approximate the level for the six months ended June 30, 1999.
<PAGE>
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We fund our operations and capital expenditures primarily through cash flow from
operations, borrowings from banks, and, from time to time, offerings of equity
and debt. We had cash and cash equivalents of approximately $361,000 at June 30,
1999. We maintain a $40.0 million revolving line of credit with a bank, maturing
in June 2002, which was increased from $35.0 million in April 1999. Borrowings
under the line of credit bear interest at our option at the bank's base rate, as
adjusted from time to time, or LIBOR, subject to adjustment in certain
circumstances at the lender's option, plus up to 200 basis points. At June 30,
1999, the interest rate on the line of credit was 6.25%, and the weighted
average interest rate for the six months ended June 30, 1999 was 6.24%. At June
30, 1999, $32.9 million was outstanding under the line of credit. In June, we
entered into a lease for a new call center and distribution facility. As a
result of that lease, rental expense will increase approximately $550,000 a year
through 2004.
During the six months ended June 30, 1999, the Company used $18.3 million in
cash flow from operating activities compared to the generation of $427,000 in
cash flow from operating activities in the same period in 1998. The decrease in
cash flow from operating activities in 1998 was due to higher working capital
requirements resulting from increases in accounts receivable (principally
receivables from Pacific Bell, Southwestern Bell and BellSouth) due to the
increased sales volume and similar increases in inventory, offset by increased
payables during the first six months of 1999 as compared to the same period in
1998.
During the six months ended June 30, 1999, net cash used in investing activities
was $1.8 million in 1999 as compared to $2.9 million in 1998. This decrease was
primarily due to a decrease in the number of purchases of Caller ID units for
rent plus reductions in the level of expenditures associated with the Company's
computer and software additions to handle growth in business.
During the six months ended June 30, 1999, the net cash provided by financing
activities was $17.1 million compared to $6.0 million used in financing
activities in the same period in 1998. This increase was primarily due to
increased borrowings on its line of credit. The increased borrowings supported
working capital requirements resulting from increases in accounts receivable due
to the increased sales volume and similar increases in inventory during the
first six months of 1999 as compared to the same period in 1998. In July 1999,
we completed a public offering of 2.2 million shares (the "July Offering") of
common stock for net proceeds of approximately $35.3 million. The proceeds of
this offering will principally be used to reduce borrowings outstanding under
our line of credit facility.
We estimate that our cash and financing needs through 1999 will be met by cash
flows from operations, proceeds from the July Offering, and our line of credit
facility. However, any increase 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. Any of these might 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. These opportunities could include
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 our business is dependent in part on our 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. Management believes that our information
technology, or IT, systems, and other non-IT systems are either Year 2000
compliant or substantially compliant. The cost of the upgrades is expected to be
approximately $120,000, approximately $110,000 of which has been incurred
through July 1999. We do not anticipate additional material expenditures for
Year 2000 compliance issues.
Our Year 2000 compliance efforts for both IT and non-IT systems include three
major phases: (1) inventory all systems, assess whether there are any Year 2000
issues and develop a compliance plan for all systems; (2) remediate any Year
2000 problems and (3) test systems subsequent to remediation. The chart below
shows the estimated completion status of each of these phases expressed as a
percentage of completion as of June 30, 1999:
PHASE: I II III
----- ---- --- ---
IT Systems................. 97% 95% 50%
Non-IT Systems............. 100% 95% 95%
<PAGE>
<PAGE>
The assessment phase and the remediation phase is substantially complete and
testing will continue into the third quarter of 1999.
We are in the process of obtaining documentation from our suppliers, clients,
financial institutions and others as to the status of their Year 2000 compliance
programs and the possibility of any interface difficulties relating to Year 2000
compliance that may affect us. To date, no significant concerns have been
identified; however, there is a risk that Year 2000-related operating problems
or expenses will arise with our computer systems and software or in connection
with our interface with the computer systems and software of our suppliers,
clients, financial institutions and others. Because these third-party systems or
software may not be Year 2000 compliant, we are in the process of developing
contingency plans to address Year 2000 failures of these entities with which we
interface. Our contingency plans are being developed to address issues like: (1)
the inability to receive customer order information electronically from our
major clients and (2) the inability of one or more of the manufacturers of the
Caller ID products we sell to produce products due to that company's Year 2000
failure. If the first scenario were to happen, we would be required to receive
and enter this information manually into our order processing system, which
could increase our labor costs. If the second scenario were to occur, we would
be required to find alternate vendors and potentially incur additional costs to
do so. We could be required to incur unanticipated expenses to remedy any
problems, which could have a material adverse effect on our business, results of
operations and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which must be
adopted by the year 2000. In June 1999, the FASB issued Statement No. 137,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE
EFFECTIVE DATE OF FASB STATEMENT NO. 133, which amends Statement 133 to be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000 (that is, January 1, 2001 for companies with calendar-year fiscal year).
This statement establishes accounting and reporting standards for derivative
instruments--including certain derivative instruments embedded in other
contracts--and for hedging activities. Adoption of this statement is not
expected to have a material impact on our financial statements.
In March 1998, the American Institute of Certified Public Accountants issued a
new Statement of Position, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement requires capitalization
of certain costs of internal-use software. Innotrac adopted this statement in
January 1999, and it did not have a material impact on the financial statements.
Item 3 - Quantitative and Qualitative Disclosure About Market Risks
We believe our exposure to market risks is immaterial. We hold no market risk
sensitive instruments for trading purposes. At present, we do not employ any
derivative financial instruments, other financial instruments or derivative
commodity instruments to hedge any market risks and we do not currently plan to
employ them in the future. To the extent that we have borrowings outstanding
under our credit facility, we have market risk relating to the amounts of our
borrowings because interest rates under the credit facility are variable. Our
exposure is immaterial due to the short-term nature of these borrowings.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 11, 1999 the Company held its annual meeting of shareholders. A quorum
of 8,737,572 out of 8,999,995 shares eligible to be voted (97%) were represented
at the meeting either in person or in proxy. The purpose of the meeting was to
re-elect two directors whose terms expired in 1999. At the meeting, Messrs.
Larry C. Hanger and Bruce V. Benator were both re-elected for a three-year term,
which expires 2002. For both nominees, the number of votes cast in favor was
8,735,272, against or withheld was 2,300, and the number of abstentions and
broker non-votes was zero.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
(a) 27. Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - There were no Form 8-K filings.
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INNOTRAC CORPORATION
---------------------------
(Registrant)
Date: August 12, 1999 By: /s/ Scott D. Dorfman
Scott D. Dorfman
President and Chief Executive
Officer and Chairman of the Board
Date: August 12, 1999 By: /s/ John H. Nichols III
John H. Nichols III
Senior Vice President, Chief
Financial Officer and Secretary
(Principal Financial Officer)
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
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