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, 2000
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 ParkwayDuluth, 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 7, 2000
-----------------------------
Common Stock at $.10 par value 11,204,995 Shares
<PAGE>
<TABLE>
INDEX
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 30, 2000 (Unaudited) and December 31, 1999 2
Condensed Consolidated Statements of Operations (Unaudited) for the
Three Months Ended June 30, 2000 and 1999 3
Condensed Consolidated Statements of Operations (Unaudited) for the
Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows (Unaudited) for the
Six Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosure About Market Risk 11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
1
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS JUNE 30 2000 DECEMBER 31, 1999
------ ---------------- -----------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 3,554 $ 894
Accounts receivable, net................................................... 58,402 52,431
Inventories, net........................................................... 13,262 39,503
Prepaid expenses and other current assets.................................. 10,981 1,982
---------- -----------
Total current assets 86,199 94,810
---------- -----------
Property and equipment:
Rental equipment........................................................... 4,123 4,986
Computer, machinery and transportation equipment........................... 14,785 8,711
Furniture, fixtures and leasehold improvements............................. 3,380 2,830
---------- -----------
22,288 16,527
Less accumulated depreciation and amortization............................. 8,217 7,605
---------- -----------
14,071 8,922
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Other assets, net............................................................... 239 486
---------- -----------
$ 100,509 $ 104,218
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY June 30, 2000 December 31, 1999
------------------------------------- ---------------- -----------------
(Unaudited)
Current liabilities:
Current portion of long-term debt.......................................... $ 3 $ 8
Accounts payable........................................................... 19,878 10,530
Accrued expenses........................................................... 8,441 7,384
---------- -----------
Total current liabilities........................................ 28,322 17,922
---------- -----------
Total noncurrent liabilities.................................................... 2,350 7,083
---------- -----------
Total liabilities................................................ 30,672 25,005
---------- -----------
Minority interest in subsidiary................................................. 954 -
---------- -----------
Shareholders' equity:
Common stock............................................................... 1,121 1,121
Additional paid-in capital................................................. 59,701 59,701
Retained earnings.......................................................... 8,061 18,391
---------- -----------
Total shareholders' equity........................................ 68,883 79,213
---------- -----------
Total liabilities and shareholders' equity........................ $ 100,509 $ 104,218
========== ===========
The accompanying notes are an integral part of these condensed consolidated statements.
</TABLE>
2
<PAGE>
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended June 30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues, net................................................................... $ 50,352 $ 57,496
Cost of revenues................................................................ 42,240 45,776
Special charges................................................................. 7,477 -
----------- -----------
Gross margin..................................................... 635 11,720
----------- -----------
Operating expenses:
Selling, general and administrative expenses............................. 6,568 4,960
Special charges.......................................................... 8,472 -
Depreciation and amortization............................................ 932 891
----------- -----------
Total operating expenses........................................ 15,972 5,851
----------- -----------
Operating (loss) income......................................................... (15,337) 5,869
----------- -----------
Other expenses, net............................................................. 109 472
----------- -----------
(Loss) income before income taxes............................................... (15,446) 5,397
Income tax benefit (provision) ................................................. 6,240 (2,131)
----------- -----------
Net (loss) income............................................... $ (9,206) $ 3,266
=========== ===========
Earnings per share:
Basic and diluted earnings per share (See Note 4):
Basic.................................................................... $ (0.82) $ 0.36
============ ===========
Diluted.................................................................. $ (0.82) $ 0.36
============ ===========
Weighted average shares outstanding:
Basic.................................................................... 11,215 9,000
============ ===========
Diluted.................................................................. 11,215 9,170
============ ===========
The accompanying notes are an integral part of these condensed consolidated statements.
</TABLE>
3
<PAGE>
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---------- -----------
<S> <C> <C>
Revenues, net................................................................... $ 98,202 $ 124,816
Cost of revenues................................................................ 83,334 101,814
Special charges................................................................. 7,477 -
---------- -----------
Gross margin..................................................... 7,391 23,002
---------- -----------
Operating expenses:
Selling, general and administrative expenses............................. 14,144 9,544
Special charges.......................................................... 8,472 -
Depreciation and amortization............................................ 1,727 1,806
---------- -----------
Total operating expenses........................................ 24,343 11,350
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Operating (loss) income......................................................... (16,952) 11,652
---------- -----------
Other expenses, net............................................................. 353 825
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(Loss) income before income taxes............................................... (17,305) 10,827
Income tax benefit (provision) ................................................. 6,975 (4,276)
---------- -----------
Net (loss) income............................................... $ (10,330) $ 6,551
========== ===========
Earnings per share:
Basic and diluted earnings per share (See Note 4):
Basic.................................................................... $ (0.92) $ 0.72
========== ===========
Diluted.................................................................. $ (0.92) $ 0.72
========== ===========
Weighted average shares outstanding:
Basic.................................................................... 11,215 9,000
========== ===========
Diluted.................................................................. 11,215 9,144
========== ===========
The accompanying notes are an integral part of these condensed consolidated statements.
</TABLE>
4
<PAGE>
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income........................................................... $ (10,330) $ 6,551
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation and amortization........................................... 1,727 1,806
Loss on disposal of property and equipment.............................. 451 302
Minority interest in subsidiary......................................... (46) -
Deferred income taxes................................................... 372 1,302
Increase in accounts receivable......................................... (5,971) (8,681)
Decrease (increase) in inventories...................................... 26,241 (14,837)
Increase in prepaid expenses and other.................................. (8,584) (464)
Increase in accounts payable............................................ 9,348 2,542
Increase (decrease) in accrued expenses................................. 1,082 (6,830)
----------- -----------
Net cash provided by (used in) operating activities................ 14,290 (18,309)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment......................................... 7,313) (1,803)
Other....................................................................... (32) -
----------- -----------
Net cash used in investing activities.............................. (7,345) (1,803)
----------- -----------
Cash flows from financing activities:
Net (repayments) borrowings under line of credit............................ (5,278) 17,166
Repayment of long-term debt................................................. (7) (2)
Proceeds from issuance of stock in subsidiary............................... 1,000 -
Distributions to shareholders, members and partners......................... - (70)
----------- -----------
Net cash (used in) provided by financing activities................ (4,285) 17,094
----------- -----------
Net increase (decrease) in cash and cash equivalents............................. 2,660 (3,018)
Cash and cash equivalents, beginning of period................................... 894 3,379
----------- -----------
Cash and cash equivalents, end of period......................................... $ 3,554 $ 361
=========== ===========
Supplemental cash flow disclosures:
Cash paid for interest...................................................... $ 430 $ 797
=========== ===========
Cash paid for income taxes, net of refunds received......................... $ 77 $ 2,955
=========== ===========
The accompanying notes are an integral part of these condensed consolidated statements.
</TABLE>
5
<PAGE>
Financial Statements-Continued
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
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 consolidated financial statements
reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of financial position and the results of its
operations for the interim periods presented. All such adjustments are of
a normal and recurring nature except those specified otherwise. The
results of operations for the three months ended June 30, 2000 are not
indicative of the results to be expected for the balance of the year
ending December 31, 2000. It is suggested that these condensed financial
statements be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 10-K filing and
annual report.
2. Some balances relating to the three and six months ended June 30, 1999
have been reclassified to conform with the three and six months ended June
30, 2000 presentation.
3. Basic earnings per share is computed by dividing 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) for 1999. For 2000, such effects are excluded as
their effect is antidilutive. The following table shows the computation of
the number of shares outstanding:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Basic Shares 11,215 9,000 11,215 9,000
Stock Options - 170 - 144
----------- ----------- ----------- ----------
Diluted Shares 11,215 9,170 11,215 9,144
=========== =========== =========== ==========
</TABLE>
4. During the quarter ended June 30, 2000, the Company incurred special
charges of $15.9 million. The majority of the charge was associated with
the Company's migration towards fee for service business and included
charges for inventory, accounts receivable and other items. This charge
equated to ($0.85) loss per share. On a pro forma basis, excluding these
special charges, the Company's earnings per share was $0.03.
6
<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
subject to conditions 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 buying, warehousing and renting products to customers; risks
associated with the term of our contracts; risks of entering new lines of
businesses, particularly e-commerce; reliance on the telecommunications
industry; the impact of the trend toward outsourcing; dependence on qualified
managers and labor force; risks associated with changing technology; risks
associated with competition; risks associated with fluctuations in operating and
quarterly results; compliance with government regulation; and other factors
discussed in more detail under "Business" in the Company's annual report on Form
10-K for the year ended December 31, 1999.
OVERVIEW
Innotrac provides customized, technology-based marketing support and fulfillment
services to large corporations that outsource these functions. Since 1994, we
have had a high focus on the telecommunications industry because of its growth
characteristics and increasing marketing needs. We provide marketing support
services and fulfillment of Caller ID equipped telephones and other
telecommunications products to BellSouth, Pacific Bell, Southwestern Bell,
Ameritech Services, Inc., Bell Atlantic and US West and their customers. For the
six months ended June 30, 2000 and 1999, the Company's three largest
telecommunications clients represented 66% and 93% of total revenues
respectively. During 1999, we began distributing Digital Subscriber Line Modems
(DSL modems) for BellSouth and other internet service providers (ISPs). During
2000, the Company began to expand its e-commerce business with the Coca-Cola
Company, Kodak, Haggar and others. This continues to be a major initiative of
the Company and will help further reduce reliance on its telecommunications
clients.
We have begun to convert our clients to a fee for service model. For a majority
of our clients, the Company will no longer purchase and sell Caller ID equipped
phones and other telecommunications equipment from third party manufacturers.
Instead the Company will warehouse products on a consignment basis and fulfill
equipment on behalf of our customers for a fee. Management believes that this
new model will substantially reduce revenue, however, since the Company will no
longer have inventory risk or cost of equipment, gross margins, and more
importantly, operating cash flows should improve.
The Company receives most of its orders either through electronic data exchange
(EDI) or the internet. On a same day basis, depending on product availability,
the Company picks, packs and ships the item, tracks inventory levels through an
automated, integrated perpetual inventory system, warehouses data and handles
customer support and level one technical inquiries.
Historically, the Company experienced significant growth in units and revenues.
This growth stemmed primarily from growth in Caller ID market penetration and
our consultative selling with respect to product-based marketing support
services. Due to the conversion to our fee for service inventory consignment
model, management believes that in the future revenues will decline but unit
growth should continue, although at a more modest pace. According to industry
sources, market penetration of Caller ID services in the United States as of
December 31, 1999 was approximately 36.4% and is expected to reach approximately
75% by 2007. Caller ID equipment sales have begun to level off as the Caller ID
market has matured. We believe that by distributing other telecommunications
products such as DSL modems for new and existing customers and expanding
customer distribution channels through e-commerce, we will be able to offset the
maturity in our Caller ID business.
7
<PAGE>
On May 17, 2000, the Company invested in a new venture, Return.com Online, Inc.
(Return.com) with its equity partner, Mail Boxes Etc. (MBE), to process product
returns for online and catalog retailers. Return.com is the first full-service
returns portal supported by the convenience of 3,400 physical locations.
Customers returning merchandise purchased online, or by catalog or phone, can
simply take the item to any participating MBE location in the U.S. for packaging
and shipping. Return.com's Instacredit (TM) service, available later this year,
will allow many customers to receive authorization for an immediate merchandise
credit on their credit card--rather than waiting weeks for the return to be
processed by the merchant.
Return.com operates a Web portal that will leverage MBE's locations and
Innotrac's customer care centers and reverse logistics operations. Information
from all these entities will be entered into Return.com's database, enabling
quick, accurate and informative customer service. When buyers wish to return
merchandise, they simply click on the Return.com icon on the merchant's Web
site, go directly to the Return.com portal or call a toll-free number.
Return.com will then verify the information about the merchandise to be
returned, and direct the customer to a MBE location where an Instacredit will be
authorized and the returned merchandise will be dropped off for shipping. The
merchant can then have the return sent to either its warehouse, Innotrac or to
the manufacturer, or sold through the Return.com disposition network.
Innotrac has invested $3.0 million in this subsidiary and has committed to fund
an additional $3.0 million when needed. MBE has invested $1.0 million and has
the right to invest an additional $3.0 million through December 31, 2000.
Currently, Innotrac owns 86% of this subsidiary. However, should MBE elect to
further invest, the Company's ownership position could be diluted down to as low
as 60%. We anticipate that the further investment by MBE will occur, but there
are no guarantees or requirements. As a result of this ownership structure, the
Company has consolidated the results of operations and financial position of
Return.com in the attached condensed consolidated financial statements. We
expect Return.com to generate significant operating losses for the balance of
2000 and into 2001.
In the quarter ended June 30, 2000, the Company incurred special charges of
$15.9 million. The majority of the charges were associated with the Company's
migration towards fee for service business and included charges for inventory,
accounts receivable and other items.
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 are
primarily variable in nature and which includes the following:
o the product costs of telecommunications equipment;
o the costs of labor associated with marketing support services;
o telecommunications services costs;
o materials and freight charges; and
o directly allocable facilities costs.
A second component of our expenses includes selling, general and administrative,
or SG&A, expenses. This expense item is comprised of information technology,
financial, human resources, administrative and marketing functions that are not
allocable to specific client services. SG&A expenses tend to be fixed in nature.
A significant investment, beyond normal levels, is being expended on information
technology during 2000 to complete the Company's migration to a new fully
integrated warehouse management, procurement, inventory, billing and general
ledger system. This migration should be completed in 2000 and therefore
management expects such expenditures to return to normal levels in 2001.
8
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth unaudited summary operating data, expressed as a
percentage of revenues, for the three and six months ended June 30, 2000 and
1999, respectively. The data has been prepared on the same basis as the annual
consolidated financial statements. In the opinion of the Company's management,
it reflects all adjustments, consisting of both a $15.9 million special charge
recorded in the quarter ended June 30, 2000 and normal and recurring
adjustments, necessary for a fair presentation of the information for the
periods presented. Operating results for any period are not necessarily
indicative of results for any future period.
The financial information provided below has been rounded in order to simplify
its presentation. However, the percentages below are calculated using the
detailed information contained in the condensed consolidated financial
statements.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................................... 83.9 79.6 84.9 81.6
Special charges...................................... 14.8 0.0 7.6 0.0
------ ------ ------ ------
Gross margin......................................... 1.3 20.4 7.5 18.4
Selling, general and administrative expenses......... 13.0 8.6 14.4 7.7
Special charges...................................... 16.9 0.0 8.6 0.0
Depreciation and amortization........................ 1.9 1.6 1.8 1.4
------ ------ ------ ------
Operating (loss) income.............................. (30.5) 10.2 (17.3) 9.3
Other expense, net................................... 0.2 0.8 0.3 0.7
------ ------ ------ ------
(Loss) income before income taxes.................... (30.7) 9.4 (17.6) 8.7
Income tax benefit (provision)....................... 12.4 (3.7) 7.1 (3.4)
------ ------ ------ ------
Net (loss) income.................................... (18.3)% 5.7% (10.5)% 5.3%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. The Company's net revenues decreased 12.4% to $50.4 million for the
three months ended June 30, 2000 from $57.5 million for the three months ended
June 30, 1999. The decrease in revenue was primarily due to a decrease in Caller
ID units distributed plus a decrease in average per unit prices of Caller ID
units offset by an increase in our e-commerce business, which included sales or
fulfillment of approximately 37,000 DSL modems.
COST OF REVENUES. The Company's cost of revenues decreased 7.7% to $42.2 million
for the three months ended June 30, 2000 compared to $45.8 million for the three
months ended June 30, 1999. Cost of revenues decreased primarily due to the
decrease in units sold or fulfilled by the Company.
SPECIAL CHARGES. The Company recorded special charges of $7.5 million for
inventory writedowns and write-offs during the three months ended June 30, 2000.
GROSS MARGIN. For the three months ended June 30, 2000, the Company's gross
margin decreased 94.6% to $635,000 compared to $11.7 million for the three
months ended June 30, 1999. The decrease in gross margin was due primarily to
special charges of $7.5 million plus the decrease in units sold or fulfilled.
Exclusive of the special charges, gross margins decreased to 16.1% of net
revenues from 20.4% of net revenues, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses for the three months
ended June 30, 2000 increased 32.4% to $6.6 million or 13.0% of revenues
compared to $5.0 million or 8.6% of revenues for the three months ended June 30,
1999. This increase is due to significant investments, beyond normal levels,
9
<PAGE>
being expended on information technology during 2000 to complete the Company's
migration to a new fully integrated warehouse management, procurement,
inventory, billing and general ledger system.
SPECIAL CHARGES. The Company recorded special charges of $8.4 million for
accounts receivable and other write-offs during the six months ended June 30,
2000. The majority of these special charges were related to the fee for service
conversion.
INCOME TAXES. The Company's effective tax rate for the three months ended June
30, 2000 and 1999 was 39.5%, respectively.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED 1999
REVENUES. The Company's net revenues decreased 21.3% to $98.2 million for the
six months ended June 30, 2000 from $124.8 million for the six months ended June
30, 1999. The decrease in revenue was primarily due to a 45.2% decrease in
Caller ID units distributed plus a decrease in average per unit prices of Caller
ID units offset by an increase in our e-commerce business, which included sales
and fulfillment of approximately 72,000 DSL modems.
COST OF REVENUES. The Company's cost of revenues decreased 18.2% to $83.3
million for the six months ended June 30, 2000 compared to $101.8 million for
the six months ended June 30, 1999. Cost of revenues decreased primarily due to
the decrease in units sold by the Company.
SPECIAL CHARGES. The Company recorded special charges of $7.5 million for
inventory writedowns and write-offs during the three months ended June 30, 2000.
GROSS MARGIN. For the six months ended June 30, 2000, the Company's gross margin
decreased 67.9% to $7.4 million compared to $23.0 million for the six months
ended June 30, 1999. The decrease in gross margin was due primarily to special
charges of $7.5 million plus the decrease in units sold and fulfilled. Exclusive
of the special charges, gross margins decreased to 15.1% of net revenues from
18.4% of net revenues, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses for the six months
ended June 30, 2000 increased 48.2% to $14.1 million or 14.4% of revenues
compared to $9.5 million or 7.7% of revenues for the six months ended June 30,
1999. This increase is due to a significant investment, beyond normal levels,
being expended on information technology during 2000 to complete the Company's
migration to a new, fully integrated warehouse management, procurement,
inventory, billing and general ledger system. This migration should be completed
in 2000 and therefore such expenditures will return to normal levels in 2001.
SPECIAL CHARGES. The Company recorded special charges of $8.4 million for
accounts receivable and other write-offs during the six months ended June 30,
2000. The majority of the special charges were related to the fee for service
conversion.
INCOME TAXES. The Company's effective tax rate for the three months ended June
30, 2000 and 1999 was 39.5%, respectively.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations and capital expenditures primarily through cash
flow from operations and borrowings under a credit facility with a bank and,
from time to time, equity offerings. The Company had cash and cash equivalents
of approximately $3.6 million at June 30, 2000, including $3.0 million, which is
committed to the startup and development of Return.com. The Company maintains a
$40.0 million revolving line of credit with a bank, maturing in June 2002.
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 June 30, 2000, the interest rate on the line of credit was 7.93%, and
the weighted average interest rate for the six months ended June 30, 2000 was
6.29%. At June 30, 2000, $1.7 million was outstanding under the line of credit.
During the six months ended June 30, 2000, the Company generated $14.3 million
in cash flow from operating activities compared to the use of $18.3 million in
cash flow from operating activities in the same period in 1999. The generation
of cash flow from operating activities for the six months ended June 30, 2000
compared to the use of cash flow from operating activities in the same period in
1999 was due primarily to the decrease in inventory levels attributable to the
Company's migration towards a fee for service business model.
During the six months ended June 30, 2000, net cash used in investing activities
was $7.3 million in 2000 as compared to $1.8 million in 1999. This increase was
primarily due to an increase in technology purchases for our e-commerce
applications and internal systems development.
During the six months ended June 30, 2000, the net cash used in financing
activities was $4.3 million compared to $17.1 million provided by financing
activities in the same period in 1999. This use of cash was primarily due to
repayments of borrowings under the Company's line of credit.
The Company estimates that its cash and financing needs through 2000 will be met
by cash flows from operations and its line of credit facility. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by Statement No. 138, which must be adopted by
January 1, 2001. 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 will not
have a material impact on our consolidated 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.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 17, 2000 the Company held its annual meeting of shareholders. A quorum of
10,977,089 out of 11,214,995 shares eligible to be voted (97.9%) were
represented at the meeting either in person or by proxy. The purpose of the
meeting was to re-elect two directors whose terms expired in 2000, approve the
Company's 2000 Stock Option and Incentive Award Plan and approve the Company's
Senior Executive Compensation Plan. At the meeting, Messrs. William H. Scott,
III and Martin J. Blank were both re-elected for a three-year term, which
expires 2003, and both the 2000 Stock Option and Incentive Award Plan and the
Senior Executive Compensation Plan were approved. For both nominees, the number
of votes cast in favor was 10,352,819, against was 624,270, and the number of
abstentions and broker non-votes was zero. With respect to the 2000 Stock option
and Incentive Plan, 9,485,392 shares were voted in favor, 1,460,407 shares were
voted against and 31,290 shares abstained. With respect to the Senior Executive
Compensation Plan, 10,167,934 shares were voted in favor, 771,905 shares were
voted against and 37,250 shares abstained.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Descripton
------ ----------
10.1 Return.com Online, Inc. Shareholder Agreement
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - There were no Form 8-K filings during the quarter
ended June 30,2000.
12
<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 14, 2000 By: /s/ Scott D. Dorfman
Scott D. Dorfman
President and Chief Executive
Officer and Chairman of the Board
Date: August 14, 2000 By: /s/ David L. Gamsey
David L. Gamsey
Senior Vice President , Chief
Financial Officer and Secretary
(Principal Financial Officer)
13
<PAGE>
EXHIBIT INDEX
-------------
Exhibit
Number Descripton
------ ----------
10.1 Return.com Online, Inc. Shareholder Agreement
27 Financial Data Schedule (for SEC use only)
