-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NdPZuh2cJuXkSwXUWiSrjeIf0opggQY9x0a/Wf0nrWiE2oC9ktvvgGBiwi7SyzfK 9XRU79FWDR+1qo0G/+EoGQ== 0000912057-00-014704.txt : 20000331 0000912057-00-014704.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014704 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOTRAC CORP CENTRAL INDEX KEY: 0001051114 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 581592285 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23741 FILM NUMBER: 585036 BUSINESS ADDRESS: STREET 1: 6655 SUGARLOAF PARKWAY CITY: DULUTH STATE: GA ZIP: 30097 BUSINESS PHONE: 678-584-4000 MAIL ADDRESS: STREET 1: 1828 MECA WAY CITY: NORCROSS STATE: GA ZIP: 30093 10-K405 1 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File No. 000-23741 INNOTRAC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) GEORGIA 58-1592285 - ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 6655 SUGARLOAF PARKWAY, DULUTH, GEORGIA 30097 -------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) Registrant's telephone number, including area code: (678) 584-4000 Securities registered pursuant to Section 12(b) of the Act: NONE. ---- Name of each exchange on which registered: THE NASDAQ NATIONAL MARKET. -------------------------- Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.10 PER SHARE. -------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10K. /X/ The aggregate market value of the voting stock held by nonaffiliates (which for purposes hereof are all holders other than executive officers and directors) of the Registrant as of March 17, 2000 was $46,775,691, based on the closing sale price of the Common Stock as reported by the Nasdaq National Market on such date. See Item 12. At March 17, 2000, there were 11,214,545 shares of Common Stock, par value $0.10 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1999 Annual Report to Shareholders, filed as an exhibit hereto, are incorporated by reference into Part II of this Annual Report on Form 10-K for the year ended December 31, 1999 (the "Report"). Portions of the Registrant's definitive Proxy Statement for the 2000 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission (the "Commission" or the "SEC"), are incorporated by reference into Part III of this Report. ii TABLE OF CONTENTS
PAGE ---- PART I.........................................................................................1 ITEM 1. BUSINESS....................................................................1 CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS.......................................................7 EXECUTIVE OFFICERS OF REGISTRANT...................................12 ITEM 2. PROPERTIES.................................................................14 ITEM 3. LEGAL PROCEEDINGS..........................................................14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................14 PART II.......................................................................................14 ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS........................................................15 ITEM 6. SELECTED FINANCIAL DATA....................................................15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................................15 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES...................................15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................15 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................16 PART III......................................................................................16 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................16 ITEM 11. EXECUTIVE COMPENSATION.....................................................16 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................................................16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................16 PART IV.......................................................................................16 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES....................................16 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES............................S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS.....................................S-2
1 PART I ITEM 1. BUSINESS Innotrac provides customized, technology-based marketing support and distribution services to large corporations that outsource these functions. We target companies that have (1) a large customer base, (2) numerous and/or geographically diverse subsidiary or affiliate operations, (3) extensive marketing needs or (4) complex point-of-distribution requirements. Our integrated services provide clients a more efficient and comprehensive means of delivering products and information to their end user customers. We enable our clients to manage their sales channels efficiently by utilizing our core competencies, which include: - - consultative services - channel management, marketing and product strategy - customized and flexible billing options - promotions - sales and marketing information and forecasting - - technology services - electronic data interface, or EDI, integration - interactive voice response, or IVR - database management - - distribution services - product ownership, consignment and warehousing - fulfillment - purchasing management - inventory management - - end user customer support services - inbound call center services and technical support - returns and refunds processing Since 1994, we have focused on the telecommunications industry because of its high growth characteristics and increasing marketing needs. The majority of our growth during this time period has come from sales and services related to telecommunications products, specifically Caller ID equipment, including corded and cordless telephones with built-in Caller ID and stand-alone devices. Approximately 90% of our 1999 revenues came from sales to BellSouth Telecommunications, Inc., Pacific Bell and Southwestern Bell Telephone Co. and their customers, and an additional 7% was from sales to US West Communications Services, Inc., Bell Atlantic Corporation and Ameritech Services Inc. Pacific Bell, Southwestern Bell and Ameritech are all subsidiaries of SBC Communications, Inc. We intend to apply our existing core competencies to help our clients sell their products through the internet. We expect our e-commerce solution to provide our clients with an additional distribution channel for offering their products and services to their end user customers. We believe that our "one stop shop" approach appeals to large corporations that seek to reduce the expense and management of outsourcing to numerous service providers. In order to perform marketing support and distribution functions in-house, a company may be required to develop expensive, labor intensive infrastructures, which may divert its resources and management's focus from its 1 principal business. By assuming responsibility for these tasks, we strive to improve the quality of the non-core operations of our clients and to reduce their operating costs. We believe that the flexibility of our services allows us to attract clients in many industries. We have provided technical literature and point-of-sale distribution for a number of years to companies in other industries, including Home Depot U.S.A., Inc., Siemens Energy and Automation Inc. and National Automotive Parts Association, or NAPA. In 1999, we began to sell and distribute cable modems to customers of Tele-Communications, Inc., or TCI, and digital subscriber line modems, or DSL, for BellSouth.net and other internet service providers, or ISPs. MARKETING SUPPORT SERVICES We design customized, technology-based marketing support solutions for our clients. We act as an extension of our clients in reaching their end user customers. Our full range of services are described below and can be offered to clients who sell products and services through the traditional sales channels or the e-commerce channel. CONSULTATIVE SERVICES We offer consultative services to our clients regarding their sales, marketing and distribution channels, which include: CHANNEL MANAGEMENT, MARKETING AND PRODUCT STRATEGY. We strive to create strategic relationships with our clients. We assist our clients in managing their sales channels by assigning a client services team to each client to understand the client's operations, customer service processes, culture, requirements and goals. We are often in the field to train our clients' sales staffs and promote product sales. To the extent requested by a client, we will assist in formulating its marketing strategy and address product forecasting, pricing, sourcing and promotional opportunities. We also consult with clients about the products they sell to their customers. In addition, we seek new revenue sources for our clients and address process and product improvements. For clients who seek e-commerce solutions, we can provide internet marketing and product strategy. We believe our value-added channel management and strategy services integrate us into our clients' sales channels and increase our value to our clients. CUSTOMIZED AND FLEXIBLE BILLING OPTIONS. We believe that one of the key services we offer is convenient payment options for end users to pay for products. For example, we offer our clients product billing solutions, like the billing option program we pioneered for BellSouth in 1993 in which customers could pay for Caller ID equipment and telephones through interest-free installments on their phone bill. We can implement payment alternatives for clients, like billing in installments on credit cards. As part of our e-commerce strategy, we offer universal payment processing software in conjunction with shopping cart software for sales through the e-commerce channel. We design the payment method to fit the needs of our client, its customers and the distribution channel. PROMOTIONS. We design and manage targeted promotional activities for our clients. We consult with clients to determine which products to promote and how to increase sales through coupons, rebate and other programs. We work with our clients to determine how much rebate or discount will be given to the end user and the manner in which an end user can access a program. Once established, we implement and manage the promotion, providing such services as creative design, verification, database management, results tracking, check printing and disbursement and the program's back-end customer support. SALES AND MARKETING INFORMATION AND FORECASTING. As a supplement to our services, we provide sales reports and inventory analysis, program results and detailed order processing information. We have developed flexible technologies and reporting procedures that convert raw data gathered during the course of a marketing support program into useful, customized reports. These reports provide a basis for our client's responses to customer needs and inquiries. For example, information obtained during a customer telephone call is captured by our database marketing and management systems and is then incorporated into customized reports. We use this information to help our clients prepare and update forecasted sales information. These reports also are used by us and our clients to monitor performance of various marketing programs. On-line functions allow clients to monitor their programs in 2 real-time to obtain comprehensive trend analyses and modify program parameters as necessary. We provide clients with customized reports via computer-to-computer transmission, disk, magnetic tape and the internet. We also provide cost-center based accounting reports for clients who utilize our services for subsidiary and intra-company fulfillment transactions. TECHNOLOGY SERVICES Our technology helps us provide marketing support services to our clients. We provide the following technology-based services: ELECTRONIC DATA INTERFACE INTEGRATION. We use EDI to link our systems to our clients' systems, which permits the automatic exchange of information. Our telecommunications clients generally transmit sales orders for Caller ID equipment and other products to us via EDI. We can also provide sales, billing and individual customer order status updates to our clients through EDI links. The open architecture of our systems facilitates adapting our EDI capabilities to new clients and new marketing programs. We also develop methods to allow clients without EDI capabilities to transmit their order files to us through other methods. INTERACTIVE VOICE RESPONSE. In many cases, our call center services are offered through IVR systems. These menu driven systems allow customers to route their calls by selecting from several offerings. Our IVR systems include text to speech capabilities, which allow the IVR systems to "read" specific, real-time data from the client's databases and convert it into speech based on cues from a caller. These systems generally reduce personnel and physical plant expenses associated with a call center while expanding the operating capabilities of the center. Technical support is also integrated into our IVR systems, so that an end user can obtain answers to technical questions, from an automated system rather than a call center representative, regarding the products they purchased. DATABASE MANAGEMENT. We can manage client databases independently or in conjunction with other marketing support programs. Independent database management begins with the client providing the information to establish the database or our obtaining the data from information generated through a client's web site. We then customize and manage this data to provide client reports. In addition, our integrated marketing support programs generate information about customers, demographics, recurring technical problems and other useful marketing data. We are then able to create customized databases that evolve with our ongoing marketing support and customer service programs. This data is a source of valuable information as we evaluate ongoing programs and plan and design future programs with our clients. DISTRIBUTION SERVICES Effective distribution of our clients' products and services is another of our core competencies and has been a key component in our revenue growth. Our capabilities in this area are described below. PRODUCT OWNERSHIP, CONSIGNMENT AND WAREHOUSING. As a part of our comprehensive approach, we often acquire products that our clients offer and warehouse them in our distribution facility. At a client's option, we can also hold its inventory on consignment, in which case we distribute consigned client products to the client's end user customers for a per-unit fee. We believe that our flexibility in product ownership models gives us a competitive advantage in maintaining and building client relationships. FULFILLMENT. We are committed to offering our clients' products and services to their customers on a timely and accurate basis. Our personnel process, pack and ship product orders and requests for promotional, technical and educational literature, signage and point of sale materials for clients. We use several custom-designed semi-automated packaging and labeling lines to pack and ship products. By utilizing this technology, we are able to reduce labor costs and provide more timely shipments to our clients' customers. We streamline and customize the distribution procedures for each client based upon the product request and the tracking, reporting and inventory controls necessary to implement that client's marketing support program. 3 PURCHASING MANAGEMENT. We place orders for products we distribute with vendors selected by us or our clients. Our purchasing management services include assisting a client in negotiating product pricing with the vendor, as well as forecasting product quantities required for normal business programs or promotions. By managing the timing of purchases, we are better able to control the inventory risk that we incur when we own the products our clients offer, while providing a value-added service to our clients. INVENTORY MANAGEMENT. An integral part of our marketing support services is the on-line monitoring and control of a client's inventory. We provide automated inventory management to assure real-time stock counts of a client's products, literature, signage and other items. These inventory systems enable us to provide management information to maintain consistent and timely reorder levels and supply capabilities and also enable the client to assess quickly stock balances, pricing information, reorder levels and inventory values. We offer this information to the client on a real-time basis through our internet gateway or direct dial-up. Inventory management data is also utilized in our reporting services. We utilize bar coding equipment in our inventory management systems which improves the efficiency of stock management and selection. END USER CUSTOMER SUPPORT SERVICES Our fourth core competency relates to support services we provide to our clients' customers. We believe this is critical to a comprehensive marketing solution. These customer support services are described below. INBOUND CALL CENTER SERVICES AND TECHNICAL SUPPORT. Our call center representatives resolve questions regarding shipping, billing and technical support as well as a variety of other questions. From time to time they may sell advanced equipment and extended warranties to customers who call us. Inquiries generally relate to a customer's purchase of a product or a customer's need for ongoing assistance. These end users dial a support number printed on the product or in the documentation accompanying the product. To handle the call properly, Innotrac's automated call distributor identifies each inbound call by the toll-free number dialed and immediately routes the call to the IVR system or an Innotrac representative. The IVR system attempts to resolve support issues by guiding the customer through a series of interactive questions. If IVR automatic resolution cannot solve the problem, the call is routed to one of our service representatives who is specially trained in the applicable client's business and products. Our call center representatives can enter customer information into our call-tracking system, listen to a question and quickly access a proprietary network database using a graphical interface to answer a customer's question. A senior representative is available to provide additional assistance for complex or unique customer questions. Customer requests are generally resolved with a single call, whether answered by a trained representative or our automated systems. As additional product information becomes available over the course of a marketing program, we promptly integrate this information into our database to ensure that IVR and representatives' answers are based upon the latest product information. RETURNS AND REFUNDS PROCESSING. The representatives respond to customer calls about product returns and refunds and obtain information about customer service problems. They facilitate a customer's return of a product by providing a bar-coded label to the customer for return of a product. When the returned item is processed and entered into our system, it automatically triggers a pre-set action for reshipment of a product or refund to the customer. TECHNOLOGY Our use of technology enables us to design and deliver services for each client's marketing support needs. Our information technology group, or IT Group, has developed our database marketing support and management systems, which utilize a UNIX-based open architecture comprised of multiple networked computers and anchored by two Hewlett-Packard HP9000 K460 multiprocessing systems. In 1999, we deployed an Oracle-based enterprise resource planning software system, which features a fourth generation language technology that will allow for quick and efficient changes to programs, systems and reports. This system will standardize our computer services and allow for even greater flexibility and capacity. 4 The open architecture of our computer system permits us 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, our IT Group works with our client services team to modify the program on an ongoing basis. Information can be exchanged via EDI, internet access and direct-dial applications. We believe that our technology platform provides us with the resources to continue to offer leading edge services to current and new clients and to integrate our systems with theirs. We believe that the integrity of client information is adequately protected by our data security system and our off-site disaster back-up storage facilities. Our call center utilizes a sophisticated Rockwell Spectrum Automatic Call Distributor, or ACD, switch to handle call management functions. This ACD system has the capacity to handle 2,400 call center representatives simultaneously, and is currently supporting over 480 representatives simultaneously. Additionally, the ACD system is integrated with software designed to enable management to automatically staff and supervise the call center based on call length and call volume data compiled by the ACD system. PERSONNEL AND TRAINING Our success in recruiting, hiring and training large numbers of skilled employees and obtaining large numbers of hourly employees during peak periods for distribution and call center operations is critical to our ability to provide high quality marketing support services. Call center representatives and fulfillment personnel receive feedback on their performance on a regular basis and, as appropriate, are recognized for superior performance or given additional training. To maintain good employee relations and to minimize employee turnover, we offer competitive pay, hire primarily full-time employees who are eligible to receive a full range of employee benefits, and provide employees with clear, visible career paths. As of January 31, 2000, we had over 850 employees, of which approximately 98% were full-time and 2% were part-time. Management believes that the demographics surrounding our facilities and our reputation, stability, compensation and benefit plans should allow us to continue to attract and retain qualified employees. Currently, we are not a party to any collective bargaining agreements. None of our employees is unionized. Although we consider our relationship with our employees to be good, we have experienced occasional unionization initiatives, particularly among our call center personnel. COMPETITION In tailoring services to client needs, we compete on the basis of quality, reliability of service, efficiency, technical superiority, speed, flexibility and price. We compete with many companies, some of which have greater resources than us, with respect to various portions of our business. Those companies include fulfillment businesses, call center operations, database management firms, web developers and e-commerce service providers. We believe that our comprehensive and integrated services differentiate us from many of those competitors. We continuously explore new outsourcing service opportunities, typically in circumstances where clients are experiencing inefficiencies in non-core areas of their businesses and management believes we can develop a superior outsourced solution on a cost-effective basis. We primarily compete with the in-house operations of our current and potential clients and also compete with certain companies that provide similar services on an outsourced basis, many of whom have greater resources than Innotrac. GOVERNMENT REGULATION The Caller ID services offered by our telecommunications clients are subject to various federal and state regulations. The legality of Caller ID has been challenged in cases decided under the Electronic Communications Privacy Act, or the ECPA, and several state statutes. In March 1994, a Federal Communications Commission, or FCC, report preempted certain state regulation of interstate calling party number parameter, or CPN, based services, 5 the technology underlying Caller ID. This report requires certain common carriers to transmit CPN and its associated privacy indicator (which allows telephone callers to block the display of their phone numbers on Caller ID display units) on an interstate call to connecting carriers without charge (the "Free Passage" rule). In connection with this report, the Department of Justice issued a memorandum which concluded that the installation or use of interstate Caller ID service is not prohibited by any federal wiretap statute and that, in general, the FCC has authority to preempt state laws that the FCC finds would hinder federal communications policy on Caller ID services. Court decisions since the FCC issued its March 1994 report have consistently held that Caller ID does not violate any state or federal wiretap statute. In May 1995, the FCC narrowed its March 1994 preemption of state public utilities blocking regulations by permitting subscribers to choose per-line blocking or per-call blocking on interstate calls, provided that all carriers were required to adopt a uniform method of overriding blocking on any particular call. At the same time, the FCC specifically preempted a California Public Utilities Commission, or CPUC, per-line blocking default policy, which required that all emergency service organizations and subscribers with nonpublished numbers, who failed to communicate their choice between per-call blocking and per-line blocking, be served with 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 customer proprietary network information, or CPNI. CPNI includes information that is personal to customers, including where, when and to whom a customer places a call, as well as the types of telecommunications services to which the customer subscribes and the extent these services are used. The FCC interprets the CPNI restrictions to permit telecommunications carriers, including BellSouth, 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 a customer's existing service relationships, the carrier must obtain express customer permission. Because we are dependent upon the efforts of our clients to promote and market their equipment and services, laws and regulations inhibiting those clients' ability to market these equipment and services to their existing customers could have a material adverse effect on our business, results of operations and financial condition. Telephone sales practices are regulated at both the federal and state level. These regulations primarily relate to outbound teleservices, which we currently outsource to another company. Outbound teleservices are regulated by the rules of the FCC under the Federal Telephone Consumer Protection Act of 1991, the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and various state regulations regarding telephone solicitations. We believe that we are in compliance with these federal statutes and the FCC rules thereunder and the various state regulations and that we would operate in compliance with those rules and regulations if we were to engage in outbound teleservice operations in the future. Our new e-commerce business may be subject to many of the same laws and regulations. It is uncertain how some of these existing laws and regulations will be applied to our e-commerce business, if at all. Unfavorable interpretations or applications of these laws in the e-commerce context, particularly with respect to privacy issues, could impede our e-commerce business. New laws and regulations specifically addressing e-commerce could also affect us. We work closely with our clients, companies we outsource outbound teleservices to and their respective advisors to ensure that we and our client are in compliance with these regulations. We cannot predict whether the status of the regulation of Caller ID services or e-commerce will change and what effect, if any, this change would have on us or our industry. 6 INTELLECTUAL PROPERTY We have used the service mark "Innotrac" since 1985 and have filed applications for federal registration of this service mark and other marks used by us in our business. The "innotrac.com" domain name has been a registered domain name since 1995. We also own several other internet domain names. Due to the possible use of identical or phonetically similar service marks by other companies in different businesses, there can be no assurance that the United States Patent and Trademark Office will grant our registration of our service mark "Innotrac" or the other marks we are seeking to register, or that our service marks will not be challenged by other users. Our operations frequently incorporate proprietary and confidential information. In accordance with industry practice, we rely upon a combination of contract provisions and trade secret laws to protect the proprietary technology we use and to deter misappropriation of our proprietary rights and trade secrets. CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995). THESE STATEMENTS CONCERN THE COMPANY'S OPERATIONS, PERFORMANCE AND FINANCIAL CONDITION, INCLUDING, IN PARTICULAR, THE LIKELIHOOD THAT INNOTRAC WILL SUCCEED IN DEVELOPING AND EXPANDING ITS BUSINESS, AMONG OTHER THINGS. THEY ARE BASED UPON A NUMBER OF ASSUMPTIONS AND ESTIMATES THAT ARE INHERENTLY SUBJECT TO SIGNIFICANT UNCERTAINTIES. MANY OF THESE UNCERTAINTIES ARE BEYOND INNOTRAC'S CONTROL. CONSEQUENTLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH BELOW. WE RELY ON A SMALL NUMBER OF CLIENTS. IF WE LOSE ONE OR MORE OF OUR LARGEST CLIENTS, OR IF REVENUES FROM OUR LARGEST CLIENTS DECLINE, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Innotrac focuses on developing long-term relationships with large corporations. In recent years, this focus has been on telecommunications companies. A relatively small number of our clients account for a significant portion of our revenues. Our three largest clients, BellSouth, Pacific Bell and Southwestern Bell, accounted for an aggregate of approximately 93%, 95% and 90% of net revenues for 1997, 1998 and 1999. Pacific Bell, Southwestern Bell and Ameritech, which are all subsidiaries of SBC, accounted for an aggregate of 52% in 1999. If we lose one or more of our largest clients, or if revenues from our largest clients decline, then our business, results of operations and financial condition could be materially adversely affected. Internal issues at BellSouth and SBC did in fact slow Caller ID sales in the fourth quarter of 1999. We believe that sales of Caller ID for BellSouth will continue to be slower in 2000. If one of these large clients is lost, or revenues from our largest clients decline further, we cannot assure you that we will be able to replace or supplement that client with others that generate comparable revenues or profits. WE ASSUME RISKS ASSOCIATED WITH BUYING, WAREHOUSING AND RENTING PRODUCTS TO CUSTOMERS, AND OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE MISMANAGE THESE RISKS. We purchase Caller ID equipment and other telecommunications products from third party vendors in connection with some of our distribution services. Consequently, we assume the risks of inventory obsolescence, damage to units and theft. Our business, results of operations and financial condition could be materially adversely affected if we cannot manage these risks. We in fact experienced increased inventory risks in late 1999 due to unexpectedly slow Caller ID sales to BellSouth and SBC. Our inventory risk could increase in the future because our e-commerce strategy contemplates our owning products offered by e-commerce clients. OUR WRITTEN CONTRACTS GENERALLY DO NOT GUARANTEE SPECIFIC VOLUME LEVELS AND CAN USUALLY BE TERMINATED ON LITTLE NOTICE. Although we have written agreements with our telecommunications clients, those agreements are generally terminable for cause. In addition, some agreements provide for termination without cause on short notice. Our 7 agreement with BellSouth, which does not expire until September 2003, may be terminated by BellSouth for any reason after March 15, 2000 upon 120 days notice. Our agreement with SBC may be terminated for any reason upon 60 days notice prior to July 1, 2004 and upon 120 days notice thereafter. BellSouth commits to a minimum monthly Caller ID sales volume in its agreement with us. However, most of our agreements do not assure specific volume or revenue levels. In addition, our contracts generally do not provide that we will be the client's exclusive service provider. IF THE MARKET FOR TELECOMMUNICATIONS PRODUCTS OR SERVICES CHANGES, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our success depends upon our ability to distribute advanced telecommunications equipment. We cannot assure you that we will be able to continue to distribute state-of-the-art telecommunications equipment. Our business, results of operations and financial condition could be materially adversely affected if: - the telecommunications products we distribute, and the related services offered by our clients, do not gain or sustain marketplace acceptance, - our telecommunications clients fail to adequately promote these products and services or - our telecommunications clients lose market share. Currently, we rely heavily upon the distribution of Caller ID equipment to the end user customers of our telecommunications clients for our revenues. We also depend upon these clients to promote Caller ID service. We plan our operations partly based on estimates of "market penetration," which represents the percentage of customers with telephone lines capable of receiving Caller ID service that actually subscribe for the service. Our business, results of operations and financial condition could be materially adversely affected if: - actual Caller ID market penetration rates are lower than estimated, - market saturation is reached or - new technologies replace Caller ID. THE NEW TELECOMMUNICATIONS PRODUCTS WE ARE DISTRIBUTING MAY NOT ACHIEVE MARKET SUCCESS AND MAY COMPETE WITH PRODUCTS WE ALREADY DISTRIBUTE FOR OTHER CLIENTS. We distribute orders for telecommunications products other than Caller ID. These include cable modems and digital subscriber line, or DSL, modems. Both products are relatively new technologies that facilitate high-speed data transmission over the internet. We cannot assure you that these products or other new products will achieve widespread acceptance or market penetration. There is also a risk that competing technologies will replace these products. Some of the products we distribute compete with each other. Many of these technologies and services are offered by our current telecommunications clients. Potential competing services and technologies include telephone company-related wireline technologies like traditional analog modems and integrated services digital network modems. We cannot assure you that we will be able to obtain, or retain, distribution service business from telecommunications companies with competing products and technologies. IF OUR NEW E-COMMERCE INITIATIVE FAILS, OUR BUSINESS COULD BE NEGATIVELY IMPACTED. We are seeking to expand the range of distribution channels we offer by developing the ability to sell services and products via the internet (electronic, or e-commerce). The success of this new initiative depends upon, among other things, our ability to: - recruit, hire and retain qualified personnel to assist in this new service, - integrate our new e-commerce service into our existing marketing support services and - finance growth of our e-commerce service during its developmental stage. 8 Even if we successfully address these risks, we cannot assure you that our new e-commerce initiative will succeed. Our e-commerce services, when fully developed, may not be attractive to existing or new clients. If demand for them does arise, they may not be quickly profitable, if at all. Because e-commerce is a new business for us, we cannot predict the products or clients that may use our e-commerce business or the other services we may offer. If our e-commerce initiative fails, our business, financial condition or results of operations could be materially adversely affected, particularly if significant financing costs are not recouped. The decision to implement our e-commerce solutions presents a potential e-commerce client with significant enterprise-wide implications and involves a substantial commitment of its management's attention. Sales cycles for our e-commerce services, therefore, are longer than for our traditional marketing support business as a result of lengthy client evaluation and approval processes over which we have little or no control. Unpredictable sales cycles in the developmental phase of our e-commerce business could hamper timely evaluation of its success or failure. Unpredictable sales cycles could also contribute to significant fluctuations in our operating results on a quarterly basis. OUR NEW E-COMMERCE BUSINESS WILL DEPEND ON CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE INTERNET. IF THE INTERNET FAILS TO CONTINUE TO GROW, OUR E-COMMERCE BUSINESS MAY NOT SUCCEED, AND OUR BUSINESS MAY BE HARMED. Commercial use of the internet is relatively new. Internet and e-commerce usage may be inhibited for a number of reasons, including: - increased government regulation, - insufficient availability, reliability or capacity of telecommunications services, - security and authentication concerns, - difficulty of access and - inconsistent service quality. If the internet develops as a commercial medium more slowly than we expect, it will adversely affect our e-commerce business. Alternatively, if internet and e-commerce usage grows too quickly, the internet may not be able to support this growth or its performance and reliability may decline. If internet outages or delays occur frequently in the future, web usage--including usage of our clients' e-commerce web sites--could grow more slowly or decline. IF WE ARE NOT ABLE TO CONTINUE OR MANAGE OUR GROWTH, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our operations have grown significantly in recent years. Our business, results of operations and financial condition could be materially adversely affected if we cannot effectively manage our growth. Our continued success depends upon our ability to: - initiate, develop and maintain existing and new client relationships, - respond to competitive developments, - continue to develop our sales infrastructure, - attract, train, motivate and retain management and other personnel and - maintain the high quality of our services. We expect that our continued rapid growth will significantly strain our management, operations, employees and resources. We cannot assure you that we will be able to: - maintain or accelerate our current growth, - effectively manage our expanding operations or - achieve planned growth on a timely or profitable basis. IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE ADVERSELY AFFECTED. 9 We believe there has recently been a significant increase in businesses outsourcing services not directly related to their principal business activities. Our business, results of operations and financial condition could be materially adversely affected if the outsourcing trend declines or reverses, or if corporations bring previously outsourced functions back in-house. Particularly during general economic downturns, businesses may bring in-house previously outsourced functions in order to avoid or delay layoffs. IF WE ARE NOT BE ABLE TO RETAIN OR EMPLOY QUALIFIED EMPLOYEES, INCLUDING KEY EXECUTIVES, OUR EMPLOYMENT-RELATED COSTS MAY RISE AND OUR RESULTS OF OPERATIONS COULD SUFFER. WE MAY NOT BE ABLE TO RETAIN OR EMPLOY QUALIFIED MANAGERS. We depend in large part on the abilities and continuing efforts of our executive officers and senior management. Our business and prospects could be materially adversely affected if (1) current officers and managers do not continue in their key roles and we cannot attract and retain qualified replacements or (2) we cannot attract and retain additional qualified personnel to sustain growth. We do not have employment agreements with our executive officers. We cannot assure you that we will be able to retain them. We only maintain key man life insurance on Scott D. Dorfman, in the amount of $3.5 million. In order to support growth, we must effectively recruit, develop and retain additional qualified management personnel. We cannot assure you that in the future we will be able to recruit and retain additional qualified managers. WE MAY NOT BE ABLE TO RETAIN OR EMPLOY OTHER QUALIFIED EMPLOYEES. Our success depends largely on our ability to recruit, hire, train and retain qualified employees. If we cannot do so, our business, results of operations or financial condition could be materially adversely affected. Our industry is very labor-intensive and has experienced high personnel turnover. If our employee turnover rate increases significantly, our recruiting and training costs could rise and our operating effectiveness and productivity could decline. New clients or new large-scale marketing support programs may require accelerated recruiting, hiring and training. We cannot assure you that we will be able to continue to hire, train and retain sufficient qualified personnel to adequately staff new marketing support programs. Some of our operations, particularly our technical support and customer service, require specially trained personnel. In addition, the unemployment rate in the geographic area where our facilities are located is relatively low. Our need for specially trained personnel and low unemployment rates may make it more difficult and costly to hire and retain qualified personnel. Currently, we are not a party to any collective bargaining agreements. None of our employees is unionized. Although we consider our relationship with our employees to be good, there have been occasional unionization initiatives at Innotrac, particularly among our call center personnel. If our employees were to join unions, we could incur increased wages, employee benefits and employment-related administrative costs. We could also experience an increased risk of work stoppages. A significant portion of our operating expenses relates to labor costs. Therefore, an increase in wages or employee benefits could materially adversely affect our business, results of operations or financial condition. COMPETITION MAY HURT OUR BUSINESS. We operate in highly competitive markets and expect this environment to persist and intensify in the future. Because our marketing support services comprise marketing and product consultation, sales channel management, distribution and back-end support, including our call center operations, we have many competitors who offer one or more of these services. Our competitors include: - in-house marketing support operations of our current and potential clients, 10 - other firms offering specific services, like fulfillment and call center operations, and - large marketing support services firms. In addition, our new e-commerce business is in a relatively new and highly competitive industry. Our potential competitors could be located anywhere in the world. They range in size and sophistication from the smallest niche companies, and even individuals, to large corporations. A number of our competitors have developed or may develop financial and other resources greater than ours. Additional competitors with greater name recognition and resources may enter our markets. Our existing or potential clients' in-house operations are also significant competitors. Our performance and growth could be negatively impacted if: - existing clients decide to provide, in-house, services they currently outsource, - potential clients retain or increase their in-house capabilities or - existing clients consolidate their outsourced services with other companies. In addition, competitive pressures from current or future competitors could result in significant price erosion, which could in turn materially adversely affect our business, financial condition and results of operations. For more information about our competition, see "Business--Competition" in this Item 1. IF WE ARE NOT ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY, OUR BUSINESS WILL BE MATERIALLY ADVERSELY AFFECTED. Our success depends significantly upon our ability to: - enhance existing services, - develop applications to focus on our clients' needs and - introduce new services and products to respond to technological developments. If we fail to maintain our technological capabilities or respond effectively to technological changes, our business, results of operations and financial condition could be materially adversely affected. We cannot assure you that we will select, invest in and develop new and enhanced technology on a timely basis in the future in order to meet our clients' needs and maintain competitiveness. We provide details about our technology in "Business--Technology" in this Item 1. OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY CAUSE SIGNIFICANT SWINGS IN THE MARKET PRICE FOR OUR COMMON STOCK. Our operating results may fluctuate in the future based on many factors. These factors include, among other things: - changes in the telecommunications industry, - changes in the marketing support services industry, - changes in the timing and level of client-specific marketing programs, including the timing and nature of promotions, - unpredictable sales cycles for our e-commerce business, - increased competition and - changes in customer purchasing patterns for products we distribute. Due to these and any unforeseen factors, it is possible that in some future quarter our operating results may be below the expectations of public market analysts and investors. If that variance occurs, our common stock price would likely decline materially. In view of our recent significant growth, we believe that period-to-period comparisons of our financial results are not necessarily meaningful or indicative of future performance. 11 BECAUSE PROFIT MARGINS HAVE NARROWED, OUR PROFITS MAY FLUCTUATE MORE IN THE FUTURE THAN THEY HAVE IN THE PAST. Our gross profit as a percentage of our gross revenues has declined recently from historical levels, primarily because we are now billing our largest telecommunications clients and our ISP clients directly for products sold to their customers, or end users, rather than billing their customers directly for the products. Because we do not currently assume the credit risk of these clients' customers, we charge lower unit prices for the products we distribute, resulting in lower gross profit margins on these products. We expect these lower gross profit margins to continue under our direct client billing model. With a narrowed gross profit margin, we must rely on increased gross revenues to maintain or increase our net profit. We also expect that our operating profits in the future will be more sensitive to decreases in revenues and increases in operating costs than in the past. We will have less capacity to absorb increased operating expenses and still maintain profitability. Our gross profit as a percentage of gross revenues for the year ended December 31, 1999 was 14.0% compared to 22.1% for the year ended December 31, 1998. Some of the newer products we distribute, such as DSL modems, may have lower gross margins than products we have traditionally distributed, such as Caller ID equipment. Moreover, declining per-unit prices for the products we distribute also contribute to narrowing gross margins. As competition and other factors force prices down for Caller ID and other telecommunications equipment, there is a risk that our cost of products sold will not decline at the same rate. OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES OR INCREASE OUR COSTS. In connection with any outbound telemarketing services that we provide, we must comply with federal and state regulations. These include the Federal Communications Commission's rules under the Federal Telephone Consumer Protection Act of 1991 and the Federal Trade Commission's regulations under the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both of which govern telephone solicitation. If we conduct outbound telemarketing services, these rules and regulations would apply to that portion of our business. Furthermore, there may be additional federal and state legislation or changes in regulatory implementation. These changes could include interpretations under the Telecommunications Act of 1996 restricting the ability of telecommunications companies to use consumer proprietary network information, or CPNI. New legislation or regulatory implementation in the future may significantly increase compliance costs or limit our activities, our clients' activities or the activities of companies to which we outsource outbound telemarketing functions. Additionally, we could be responsible for failing to comply with regulations applicable to our clients or companies to which we outsource telemarketing. Our new e-commerce business may be subject to many of the same laws and regulations. It is uncertain how these existing laws and regulations will be applied to our e-commerce business, if at all. There is a risk that unfavorable interpretations or applications of these existing laws, or the implementation of new laws and regulations specifically addressing e-commerce, particularly with respect to privacy issues, could impede our e-commerce business. If unfavorable federal or state legislation or regulations affecting Caller ID service, e-commerce or other technology or products we sell or distribute are adopted, our business, financial condition and results of operations could be materially adversely affected. See "Business -- Government Regulation" in this Item 1 for further information about government regulation of our business. EXECUTIVE OFFICERS OF REGISTRANT The executive officers of the Company are as follows: 12
NAME AGE POSITION ---- --- -------- Scott D. Dorfman.................. 42 President, Chief Executive Officer and Chairman of the Board David L. Ellin.................... 41 Senior Vice President; Chief Operating Officer and Secretary Larry C. Hanger................... 45 Senior Vice President--Business Development Donald L. Colter, Jr. ............ 39 Vice President--Operation and Interim Chief Financial Officer Joel Holtzman..................... 42 Vice President--Electronic Commerce Will Hendrick..................... 43 Vice President--Telecommunications John Bryant....................... 37 Vice President--Information Technology
MR. DORFMAN founded Innotrac and has served as President, Chief Executive Officer and Chairman of the Board since its inception in 1984. Prior to founding Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc., an equipment distributor. At Paymaster, Mr. Dorfman gained experience in distribution, tracking and inventory control by developing and managing Paymaster's mail order catalog. MR. ELLIN joined us in 1986 and has served as Senior Vice President and Chief Operating Officer since November 1997 and as a director since December 1997. He also serves as Secretary of Innotrac. He served as Vice President from 1988 to November 1997. From 1984 to 1986, Mr. Ellin was employed by the Atlanta branch of WHERE Magazine, where he managed the sales and production departments. From 1980 to 1984, Mr. Ellin was employed by Paymaster, where he was responsible for Paymaster's sales and collections. MR. HANGER joined Innotrac in 1994 and has served as Vice President-Business Development since November 1997 and as a director since December 1997. He was promoted to Senior Vice President in April 1999. He served as Innotrac'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. COLTER joined Innotrac in 1995 and has served as Vice President--Operations since November 1997, and as Interim Chief Financial Officer since February 2000. He previously served as Innotrac's Chief Financial Officer from 1995 to November 1997. Prior to joining Innotrac, from 1993 to 1995, Mr. Colter was 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 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. HOLTZMAN joined Innotrac in 1999 as Vice President--Electronic Commerce. Mr. Holtzman joined us in 1999 and has served as Vice President Electronic-Commerce. From 1995 to 1999 he served as Vice President of Internet Business Development in the Digital and Applied Imaging Division of Kodak and he was Vice President and General Manager of Worldwide Channel Marketing and Distribution for the Document Imaging division of Kodak. From 1993 to 1995 he was Vice President of Sales and Marketing with Rexon Corporation. From 1981 to 1993 he held senior sales and marketing positions with Seagate Technologies, Digital Communications and NCR Corporation. 13 MR. HENDRICK joined Innotrac in April 1999 as Vice President- Telecommunications. Prior to joining Innotrac, from November 1997 to February 1999 he served as Vice President and General Manager for the former telecommunications division of InteliData Technologies Corp., which designed and distributed consumer telephone products. He also served as Vice President--Sales at InteliData and its predecessor from August 1995 to November 1997. He held the position of Senior Director--Product Management with BellSouth from January 1993 to July 1995, and has also served as Director--Product Development for that company. Mr. Hendrick has 20 years experience in the telecommunications industry. MR. BRYANT joined Innotrac in 1999 as Assistant Vice President- Information Technology. He was promoted to Vice President-Information Technology in January 2000. From 1998 to 1999 he served as Senior Director of IT Operations and Technical Services with the Carlson Companies. From 1996 to 1998 he was General Manager, IT Operations and Telecommunications for the Tennessee Valley Authority. From 1993 to 1996 he was Director of Network/Systems for Holiday Inn Worldwide. From 1985 to 1993 Mr. Bryant held management positions within General Electric Corporation and Schlumberger Technologies. ITEM 2. PROPERTIES Our headquarters and distribution facilities are located in 250,000 square feet of leased space in Duluth, Georgia. Our corporate offices occupy 50,000 square feet of this facility and the remaining 200,000 square feet is distribution space. This site also includes approximately 3.5 acres that will be available for Innotrac's expansion requirements. The lease for our Duluth facility commenced in October 1998 and has a term of 10 years with two five year renewal options. The lease provides for an option to purchase the facility at the end of the first five years of the term or at the end of the first 10 years of the term. We have not yet determined whether to exercise this purchase option. We provide teleservices through our call center located in Duluth, Georgia. We renewed the lease for the center in May 1999 for a term of three years. The call center is currently configured with approximately 460 workstations and has room to expand to approximately 700 workstations. It currently operates from 8:00 a.m. until midnight Monday through Friday and from 9:00 a.m. to 6:00 p.m. on Saturday. In June 1999, we entered into a lease for a new facility in Pueblo, Colorado with an initial term of five years with two five year renewal options. The facility provides approximately 87,000 square feet of floor space. Approximately 45,000 square feet is used as a second call center, including quality assurance, administrative, training and management space. This call center will eventually support over 350 workstations. The second call center has been in operation since the third quarter of 1999. The remaining 42,000 square feet is available for future development as distribution space. In October 1999, we entered into a lease for a facility in Duluth, Georgia with an initial term of five years with one three-year renewal option. The facility provides approximately 52,000 square feet of floor space for our literature distribution business. ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceeding. We are, from time to time, a party to litigation arising in the normal course of our business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered by this Report. PART II 14 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock began trading on the Nasdaq National Market under the symbol "INOC" on May 7, 1998. Prior to that time, there was no trading market for the Common Stock. The following table sets forth for the periods indicated the high and low sales prices of the Common Stock on the Nasdaq National Market.
HIGH LOW ---- --- 1998 First Quarter (beginning May 7, 1998)............... $13.250 $8.875 Third Quarter....................................... $13.500 $6.750 Fourth Quarter...................................... $24.375 $5.750 Fiscal Year Ended December 31, 1998................. $24.375 $5.750 1999 First Quarter....................................... $19.000 $10.000 Second Quarter...................................... $21.000 $12.500 Third Quarter....................................... $26.750 $14.500 Fourth Quarter...................................... $17.875 $10.250 Fiscal Year Ended December 31, 1999................. $26.750 $10.000
The approximate number of holders of record of Common Stock as of March 17, 2000 was 43. The approximate number of beneficial holders of our Common Stock as of that date was 3,700. The Company has never declared cash dividends on the Common Stock. The Company intends to retain its earnings to finance the expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon such factors as earnings, capital requirements, the Company's financial condition, restrictions in financing agreements and other factors deemed relevant by the Board of Directors. The payment of dividends by the Company is restricted by its revolving credit facility. ITEM 6. SELECTED FINANCIAL DATA The information contained under the heading "Selected Financial Data" in the Company's 1999 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1999 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quantitative and Qualitative Disclosures About Market Risk" in the Company's 1999 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15 The information contained under the headings "Report of Independent Public Accountants" and "Consolidated Financial Statements and Notes to the Consolidated Financial Statements" in the Company's 1999 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the heading "Election of Directors" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2000 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Company is included in Item 1 of this Report. ITEM 11. EXECUTIVE COMPENSATION The information contained under the heading "Executive Compensation" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2000 Annual Meeting of Shareholders, filed with the Commission, is hereby incorporated herein by reference. The information contained in the Proxy Statement under the headings "Compensation Committee Report on Executive Compensation" and "Stock Performance Graph" shall not be deemed incorporated herein by such reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the heading "Voting Securities and Principal Shareholders" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2000 Annual Meeting of Shareholders, filed with the Commission, is hereby incorporated herein by reference. For purposes of determining the aggregate market value of the Company's voting stock held by nonaffiliates, shares held by all current directors and executive officers of the Company have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be "affiliates" of the Company as defined by the Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the heading "Related Party Transactions" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2000 Annual Meeting of Shareholders, filed with the Commission, is hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS 1. FINANCIAL STATEMENTS 16
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 3.1 - Amended and Restated Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 3.2 - Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929), filed with the Commission on July 22, 1999) 4.1 - Form of Common Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 4.2 - Rights Agreement between Company and Reliance Trust Company as Rights Agent, dated as of December 31, 1997 (incorporated by reference to Exhibit 4.2 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.1 - Acquisition Agreement by and among the Registrant, SellTel #1, Inc., RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers Inc., RenTel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman and Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997 (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) 17 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 10.2+(a) - Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) (b) - Amendment No. 1 to Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2(b) to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.3** - 2000 Stock Option and Incentive Award Plan 10.4 - Purchase Agreement for Services between BellSouth Telecommunications, Inc. and the Registrant, effective November 1, 1998 (incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.5 (a) - Form of Indemnification Agreements entered into as of December 11, 1997, by and between the Registrant and each of Messrs. Scott D. Dorfman, David L. Ellin, Larry C. Hanger, Donald L. Colter, Jr., John H. Nichols III, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III and William H. Scott, III (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) (b) - Form of Indemnification Agreements by and between the Registrant and each of Stephen J. Walden and Will Hendrick (incorporated by reference to Exhibit 10.5(b) to the Registrant's Form S-1 (Commission File No. 333-79929)) 10.6 - Lease, dated June 16, 1999, between Lockheed Martin Corporation and the Registrant (incorporated by reference to Exhibit 10.6 to the Registrant's Form S-1 (Commission File No. 333-79929)) 10.7 - Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) 10.8 - Lease, dated December 8, 1997, by and between Weeks Development Partnership and the Registrant (incorporated by reference to Exhibit 10.8 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.9+ - Split Dollar Life Insurance Agreement, dated July 10, 1997, by and between the Registrant, Bruce V. Benator, as Trustee of The Scott David Dorfman Family Trust #2, and Scott David Dorfman (incorporated by reference to Exhibit 10.9 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.10+ - Innotrac Corporation Deferred Compensation Plan, effective as of October 16, 1997 (incorporated by reference to Exhibit 10.10 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 18 EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 10.11+ - Grantor Trust Agreement dated October 16, 1997, by and between the Registrant and Wachovia Bank, N.A. (incorporated by reference to Exhibit 10.11 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.12(a) - Amended and Restated Loan and Security Agreement between the Registrant and SouthTrust Bank, N.A., dated January 25, 1999 (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) (b) - First Amendment to Amended and Restated Loan and Security Agreement by and between the Registrant and SouthTrust Bank, N.A., dated April 29, 1999 10.15+(a) -- 1999 Senior Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.13** - 2000 Senior Executive Incentive Compensation Plan 10.14 - Aircraft Lease by and between SD Holdings, Inc. and the Registrant, dated February 19, 1998 (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.15(a) - Contract by and between Market Reps, Inc. And the Registrant, dated June 26, 1998 (incorporated by reference to Exhibit 10.18 to the Registrant's Form 10-Q for the quarter ended June 30, 1999) (b) - Letter Amendment to Contract by and between Market Reps, Inc. and the Registrant, dated August 10, 1998 (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929)) 10.16* - Master Agreement for Products and Services between the Company and SBC Operations, Inc. effective July 1, 1999 (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929)) 13.1** - Portions of the Registrant's Annual Report to Shareholders for 1999 incorporated into this Form 10-K 21.1** - List of Subsidiaries 23.1** - Consent of Arthur Andersen LLP 24.1** - Power of Attorney (included on signature page) 27.1** - Financial Data Schedule (for Commission use only) 99.1** - Proxy Statement for the 2000 Annual Meeting of Shareholders
- -------------- * Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Commission. **Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit. 19 (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Registrant during the fourth quarter of the Registrant's 1999 fiscal year. 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of INNOTRAC, CORPORATION included in this Form 10-K and have issued our report thereon dated January 27, 2000. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP ARTHUR ANDERSEN LLP Atlanta, Georgia January 27, 2000 S-1 INNOTRAC CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning Charged to Other End of Description of Period Expenses Accounts Deductions Period - -------------------------------------------- ---------- ---------- ---------- ---------- ---------- (in thousands) Provision for uncollectible accounts Year ended December 31, 1999............................ $4,506 $3,314 -- $6,972 $848 1998............................ 5,058 8,245 -- (8,797) 4,506 1997............................ 4,141 7,750 -- (6,833) 5,058 1996............................ 2,552 5,841 -- (4,252) 4,141 Provisions for returns and allowances Year ended December 31, 1999............................ $1,031 $8,539 -- $(6,606) $626 1998............................ 649 11,104 -- (10,722) 1,031 1997............................ 101 6,327 -- (5,779) 649 1996............................ -- 3,536 -- (3,435) 101
S-2 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of March, 2000. INNOTRAC CORPORATION By: /s/ Scott D. Dorfman ---------------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Scott D. Dorfman and Donald L. Colter, Jr. and either of them, as attorneys-in-fact, with power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 23rd day of March, 2000.
SIGNATURE TITLE - --------- ----- /s/ Scott D. Dorfman President, Chief Executive Officer and Chairman of - ----------------------------------- the Board (principal executive officer) Scott Dorfman /s/ David L. Ellin Senior Vice President, Chief Operating Officer and - ----------------------------------- Director David L. Ellin /s/ Larry C. Hanger Senior Vice President--Business Development and - ----------------------------------- Director Larry C. Hanger /s/ Don L. Colter, Jr. Vice President--Operations, Interim Chief Financial - ----------------------------------- Officer and Secretary Don L. Colter, Jr. (principal financial and accounting officer) /s/ Bruce V. Benator Director - ----------------------------------- Bruce V. Benator /s/ Martin J. Blank Director - ----------------------------------- Martin J. Blank /s/ William H. Scott, III Director - ----------------------------------- William H. Scott, III
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 3.1 - Amended and Restated Articles of Incorporation of the Registrant, as amended (incorporated by reference to Exhibit 3.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 3.2 - Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929), filed with the Commission on July 22, 1999) 4.1 - Form of Common Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 4.2 - Rights Agreement between Company and Reliance Trust Company as Rights Agent, dated as of December 31, 1997 (incorporated by reference to Exhibit 4.2 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.1 - Acquisition Agreement by and among the Registrant, SellTel #1, Inc., RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers Inc., RenTel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman and Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997 (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) 10.2+(a) - Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) (b) - Amendment No. 1 to Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2(b) to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.3** - 2000 Stock Option and Incentive Award Plan 10.4 - Purchase Agreement for Services between BellSouth Telecommunications, Inc. and the Registrant, effective November 1, 1998 (incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.5 (a) - Form of Indemnification Agreements entered into as of December 11, 1997, by and between the Registrant and each of Messrs. Scott D. Dorfman, David L. Ellin, Larry C. Hanger, Donald L. Colter, Jr., John H. Nichols III, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III and William H. Scott, III (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) (b) - Form of Indemnification Agreements by and between the Registrant and each of Stephen J. Walden and Will Hendrick (incorporated by reference to Exhibit 10.5(b) to the Registrant's Form S-1 (Commission File No. 333-79929)) 10.6 - Lease, dated June 16, 1999, between Lockheed Martin Corporation and the Registrant (incorporated by reference to Exhibit 10.6 to the Registrant's Form S-1 (Commission File No. 333-79929)) 10.7 - Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997)
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.8 - Lease, dated December 8, 1997, by and between Weeks Development Partnership and the Registrant (incorporated by reference to Exhibit 10.8 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.9+ - Split Dollar Life Insurance Agreement, dated July 10, 1997, by and between the Registrant, Bruce V. Benator, as Trustee of The Scott David Dorfman Family Trust #2, and Scott David Dorfman (incorporated by reference to Exhibit 10.9 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.10+ - Innotrac Corporation Deferred Compensation Plan, effective as of October 16, 1997 (incorporated by reference to Exhibit 10.10 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.11+ - Grantor Trust Agreement dated October 16, 1997, by and between the Registrant and Wachovia Bank, N.A. (incorporated by reference to Exhibit 10.11 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.12(a) - Amended and Restated Loan and Security Agreement between the Registrant and SouthTrust Bank, N.A., dated January 25, 1999 (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) (b) - First Amendment to Amended and Restated Loan and Security Agreement by and between the Registrant and SouthTrust Bank, N.A., dated April 29, 1999 10.15+(a) -- 1999 Senior Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.13** - 2000 Senior Executive Incentive Compensation Plan 10.14 - Aircraft Lease by and between SD Holdings, Inc. and the Registrant, dated February 19, 1998 (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.15(a) - Contract by and between Market Reps, Inc. And the Registrant, dated June 26, 1998 (incorporated by reference to Exhibit 10.18 to the Registrant's Form 10-Q for the quarter ended June 30, 1999) (b) - Letter Amendment to Contract by and between Market Reps, Inc. and the Registrant, dated August 10, 1998 (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929)) 10.16* - Master Agreement for Products and Services between the Company and SBC Operations, Inc. effective July 1, 1999 (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929)) 13.1** - Portions of the Registrant's Annual Report to Shareholders for 1999 incorporated into this Form 10-K 21.1** - List of Subsidiaries 23.1** - Consent of Arthur Andersen LLP 24.1** - Power of Attorney (included on signature page) 27.1** - Financial Data Schedule (for Commission use only) 99.1** - Proxy Statement for the 2000 Annual Meeting of Shareholders
- -------------- * Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Commission. ** Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit. EX-10.3 2 EXHIBIT 10.3 EXHIBIT 10.3 INNOTRAC CORPORATION 2000 STOCK OPTION AND INCENTIVE AWARD PLAN (Effective as of March 28, 2000) TABLE OF CONTENTS ----------------- ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION..................................................................1 1.1 Establishment of the Plan..................................................................1 1.2 Purpose of the Plan........................................................................1 1.3 Duration of the Plan.......................................................................1 ARTICLE 2. DEFINITIONS...........................................................................................1 ARTICLE 3. ADMINISTRATION........................................................................................5 3.1 The Committee..............................................................................5 3.2 Authority of the Committee.................................................................5 3.3 Decisions Binding..........................................................................5 ARTICLE 4. SHARES SUBJECT TO THE PLAN............................................................................5 4.1 Number of Shares...........................................................................5 4.2 Lapsed Awards..............................................................................6 4.3 Adjustments In Authorized Shares...........................................................6 ARTICLE 5. ELIGIBILITY AND PARTICIPATION.........................................................................6 ARTICLE 6. STOCK OPTIONS.........................................................................................7 6.1 Grant of Options...........................................................................7 6.2 Agreement..................................................................................7 6.3 Option Price...............................................................................7 6.4 Duration of Options........................................................................7 6.5 Exercise of Options........................................................................7 6.6 Payment....................................................................................8 6.7 Limited Transferability....................................................................8 6.8 Shareholder Rights.........................................................................9 ARTICLE 7. STOCK APPRECIATION RIGHTS.............................................................................9 7.1 Grants of SARs.............................................................................9 7.2 Duration of SARs...........................................................................9 7.3 Exercise of SAR............................................................................9 7.4 Determination of Payment of Cash and/or Common Stock Upon Exercise of SAR..................9 7.5 Nontransferability.........................................................................9 7.6 Shareholder Rights........................................................................10 ARTICLE 8. RESTRICTED STOCK; STOCK AWARDS.......................................................................10 8.1 Grants....................................................................................10 8.2 Restricted Period; Lapse of Restrictions..................................................10 8.3 Rights of Holder; Limitations Thereon.....................................................10 8.4 Delivery of Unrestricted Shares...........................................................11 8.5 Nonassignability of Restricted Stock......................................................12 i ARTICLE 9. PERFORMANCE SHARE AWARDS.............................................................................12 9.1 Award.....................................................................................12 9.2 Earning the Award.........................................................................12 9.3 Payment...................................................................................12 9.4 Shareholder Rights........................................................................12 ARTICLE 10. BENEFICIARY DESIGNATION.............................................................................13 ARTICLE 11. DEFERRALS...........................................................................................13 ARTICLE 12. RIGHTS OF PARTICIPANTS..............................................................................13 12.1 Employment...............................................................................13 12.2 Participation............................................................................13 ARTICLE 13. CHANGE IN CONTROL...................................................................................13 13.1 Definition...............................................................................13 ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION.............................................................14 14.1 Amendment, Modification and Termination..................................................14 14.2 Awards Previously Granted................................................................15 14.3 Compliance With Code Section 162(m)......................................................15 ARTICLE 15. WITHHOLDING.........................................................................................15 15.1 Tax Withholding..........................................................................15 15.2 Share Withholding........................................................................15 ARTICLE 16. INDEMNIFICATION.....................................................................................15 ARTICLE 17. SUCCESSORS..........................................................................................16 ARTICLE 18. LEGAL CONSTRUCTION..................................................................................16 18.1 Gender and Number........................................................................16 18.2 Severability.............................................................................16 18.3 Requirements of Law......................................................................16 18.4 Regulatory Approvals and Listing.........................................................16 18.5 Securities Law Compliance................................................................16 18.6 Governing Law............................................................................16
ii INNOTRAC CORPORATION 2000 STOCK OPTION AND INCENTIVE AWARD PLAN ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1 ESTABLISHMENT OF THE PLAN. Innotrac Corporation, a Georgia corporation (hereinafter referred to as the "Company"), hereby establishes a stock option and incentive award plan known as the "Innotrac Corporation 2000 Stock Option and Incentive Award Plan" (the "Plan"), as set forth in this document. The Plan permits the grant of Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Stock Awards, Performance Share Awards and Stock Appreciation Rights. The Plan shall become effective on the date it is approved by the Board of Directors, March 28, 2000 (the "Effective Date"), subject to approval of the Plan by the Company's shareholders within the 12-month period immediately thereafter, and shall remain in effect as provided in Section 1.3. 1.2 PURPOSE OF THE PLAN. The purposes of the Plan are to promote greater stock ownership in the Company by key employees, directors, consultants, or other persons who perform services for the Company and its subsidiaries, who are responsible for its future growth and continued success; to more closely link the personal interests of Participants (as defined below) to those of the Company's shareholders; and to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants upon whose judgment, interest and special effort the successful conduct of its operation largely depends. 1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective Date, and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 14, until the day prior to the tenth (10th) anniversary of the Effective Date. ARTICLE 2. DEFINITIONS Whenever used in the Plan, the following terms shall have the meanings set forth below: (a) "AGREEMENT" means an agreement entered into by each Participant and the Company, setting forth the terms and provisions applicable to Awards granted to Participants under this Plan. (b) "AWARD" means, individually or collectively, a grant under this Plan of Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Stock Awards, Performance Share Awards or Stock Appreciation Rights. (c) "BENEFICIAL OWNER" or "BENEFICIAL OWNERSHIP" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. (d) "BOARD" or "BOARD OF DIRECTORS" means the Board of Directors of the Company. -1- (e) "CAUSE" means: (i) with respect to the Company or any Subsidiary which employs the Participant or for which the Participant primarily performs services, the commission by the Participant of an act of fraud, embezzlement, theft or proven dishonesty, or any other illegal act or practice (whether or not resulting in criminal prosecution or conviction), or any act or practice which the Committee shall, in good faith, deem to have resulted in the Participant's becoming unbondable under the Company's or the Subsidiary's fidelity bond; (ii) the willful engaging by the Participant in misconduct which is deemed by the Committee, in good faith, to be materially injurious to the Company or any Subsidiary, monetarily or otherwise; or (iii) the willful and continued failure or habitual neglect by the Participant to perform his duties with the Company or the Subsidiary substantially in accordance with the operating and personnel policies and procedures of the Company or the Subsidiary generally applicable to all their employees. For purposes of this Plan, no act or failure to act by the Participant shall be deemed to be "willful" unless done or omitted to be done by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interest of the Company and/or the Subsidiary. Notwithstanding the foregoing, if the Participant has entered into an employment agreement that is binding as of the date of employment termination, and if such employment agreement defines "Cause," then the definition of "Cause" in such agreement shall apply to the Participant in this Plan. "Cause" under either (i), (ii) or (iii) shall be determined by the Committee. (f) "CHANGE IN CONTROL" has the meaning set forth in Article 13 of this Plan. (g) "CODE" means the Internal Revenue Code of 1986, as amended from time to time, or any successor act thereto. (h) "COMMITTEE" means (i) the committee appointed by the Board to administer the Plan with respect to grants of Awards, as specified in Article 3; or (ii) in the absence of such appointment, the Board itself. (i) "COMMON STOCK" means the common stock of the Company, par value $.10 per share. (j) "COMPANY" means Innotrac Corporation, a Georgia corporation, or any successor thereto as provided in Article 17. (k) "CORRESPONDING SAR" means an SAR that is granted in relation to a particular Option and that can be exercised only upon the surrender to the Company, unexercised, of that portion of the Option to which the SAR relates. (l) "DIRECTOR" means any individual who is a member of the Board of Directors of the Company. (m) "DISABILITY" shall have the meaning ascribed to such term in the Company's long-term disability plan covering the Participant, or in the absence of such plan, a meaning consistent with Section 22(e)(3) of the Code. -2- (n) "EMPLOYEE" means any employee of the Company or the Company's Subsidiaries. Directors who are not otherwise employed by the Company or the Company's Subsidiaries are not considered Employees under this Plan. (o) "EFFECTIVE DATE" shall have the meaning ascribed to such term in Section 1.1. (p) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (q) "FAIR MARKET VALUE" shall be determined as follows: (i) If, on the relevant date, the Shares are traded on a national or regional securities exchange or on The Nasdaq National Market System ("Nasdaq") and closing sale prices for the Shares are customarily quoted, on the basis of the closing sale price on the principal securities exchange on which the Shares may then be traded or, if there is no such sale on the relevant date, then on the last previous day on which a sale was reported; (ii) If, on the relevant date, the Shares are not listed on any securities exchange or traded on Nasdaq, but nevertheless are publicly traded and reported on Nasdaq without closing sale prices for the Shares being customarily quoted, on the basis of the mean between the closing bid and asked quotations in such other over-the-counter market as reported by Nasdaq; but, if there are no bid and asked quotations in the over-the-counter market as reported by Nasdaq on that date, then the mean between the closing bid and asked quotations in the over-the-counter market as reported by Nasdaq on the immediately preceding day such bid and asked prices were quoted; and (iii) If, on the relevant date, the Shares are not publicly traded as described in (i) or (ii), on the basis of the good faith determination of the Committee. (r) "INCENTIVE STOCK OPTION" OR "ISO" means an option to purchase Shares granted under Article 6 which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (s) "INITIAL VALUE" means, with respect to a Corresponding SAR, the Option Price per share of the related Option, and with respect to an SAR granted independently of an Option, the Fair Market Value of one share of Common Stock on the date of grant. (t) "INSIDER" shall mean an Employee who is, on the relevant date, an officer or a director, or a beneficial owner of ten percent (10%) or more of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act or any successor provision, all as defined under Section 16 of the Exchange Act. (u) "NAMED EXECUTIVE OFFICER" means, if applicable, a Participant who, as of the date of vesting and/or payout of an Award is one of the group of "covered employees," as -3- defined in the regulations promulgated under Code Section 162(m), or any successor statute. (v) "NONQUALIFIED STOCK OPTION" OR "NQSO" means an option to purchase Shares granted under Article 6, and which is not intended or otherwise fails to meet the requirements of Code Section 422. (w) "OPTION" means an Incentive Stock Option or a Nonqualified Stock Option. (x) "OPTION PRICE" means the price at which a Share may be purchased by a Participant pursuant to an Option, as determined by the Committee. (y) "PARTICIPANT" means an Employee, Director, consultant or other person who performs services for the Company or a Subsidiary, who has been determined by the Committee to contribute significantly to the profits or growth of the Company and who has been granted an Award under the Plan which is outstanding. (z) "PERFORMANCE SHARE AWARD" means an Award, which, in accordance with the terms of Article 9 and the other provisions of the Plan and subject to an Agreement, will entitle the Participant, or his estate or beneficiary in the event of the Participant's death, to receive cash, Common Stock or a combination thereof. (aa) "PERSON" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. (bb) "RETIREMENT" shall mean retiring from employment with the Company or any Subsidiary on or after attaining age sixty five (65). (cc) "RESTRICTED STOCK" means an Award of Common Stock granted in accordance with the terms of Article 8 and the other provisions of the Plan, and which is nontransferable and subject to a substantial risk of forfeiture. Shares of Common Stock shall cease to be Restricted Stock when, in accordance with the terms hereof and the applicable Agreement, they become transferable and free of substantial risk of forfeiture. (dd) "SAR" means a stock appreciation right that entitles the holder to receive, with respect to each share of Common Stock encompassed by the exercise of such SAR, the amount determined by the Committee and specified in an Agreement. In the absence of such specification, the holder shall be entitled to receive in cash, with respect to each share of Common Stock encompassed by the exercise of such SAR, the excess of the Fair Market Value on the date of exercise over the Initial Value. References to "SARs" include both Corresponding SARs and SARs granted independently of Options, unless the context requires otherwise. -4- (ee) "SHARES" means the shares of Common Stock of the Company (including any new, additional or different stock or securities resulting from the changes described in Section 4.3). (ff) "STOCK AWARD" means a grant of Shares under Article 8 that is not generally subject to restrictions and pursuant to which a certificate for the Shares is transferred to the Employee. (gg) "SUBSIDIARY" means any corporation, partnership, limited liability company, joint venture or other entity in which the Company has a majority voting interest, either direct or indirect. ARTICLE 3. ADMINISTRATION 3.1 THE COMMITTEE. The Plan shall be administered by the Board of Directors or by the Compensation Committee of the Board (or a subcommittee thereof), or by any other committee or subcommittee appointed by the Board that is granted authority to administer the Plan. The members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. In the absence of any such appointment, the Plan shall be administered by the Board. 3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have full and exclusive power to select the Participants who shall participate in the Plan (who may change from year to year); determine the size and types of Awards; determine the terms and conditions of Awards in a manner consistent with the Plan (including conditions on the exercisability of all or a part of an Option or SAR, restrictions on transferability, vesting provisions on Restricted Stock or Performance Share Awards and the duration of the Awards); construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 14) amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan, including accelerating the time any Option or SAR may be exercised and establishing different terms and conditions relating to the effect of the termination of employment or other services to the Company. Further, the Committee shall make all other determinations which may be necessary or advisable in the Committee's opinion for the administration of the Plan. All expenses of administering this Plan shall be borne by the Company. 3.3 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders and resolutions of the Board shall be final, conclusive and binding on all Persons, including the Company, the shareholders, Participants and their estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3, the total number of Shares available for grant of Awards under the Plan shall be one million three hundred -5- thousand (1,300,000) Shares. The Shares may, in the discretion of the Company, be either authorized but unissued Shares or Shares held as treasury shares, including Shares purchased by the Company, whether on the market or otherwise. The following rules shall apply for purposes of the determination of the number of Shares available for grant under the Plan: (a) The grant of an Option, SAR, Stock Award, Restricted Stock Award or Performance Share Award shall reduce the Shares available for grant under the Plan by the number of Shares subject to such Award. (b) While an Option, SAR, Stock Award, Restricted Stock Award or Performance Share Award is outstanding, it shall be counted against the authorized pool of Shares, regardless of its vested status. 4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled, terminates, expires or lapses for any reason, or if Shares are withheld in payment of the Option Price or for withholding taxes, any Shares subject to such Award or that are withheld shall again be available for the grant of an Award under the Plan. However, in the event that prior to the Award's cancellation, termination, expiration or lapse, the holder of the Award at any time received one or more "benefits of ownership" pursuant to such Award (as defined by the Securities and Exchange Commission, pursuant to any rule or interpretation promulgated under Section 16 of the Exchange Act), the Shares subject to such Award shall not again be made available for regrant under the Plan. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any change in corporate capitalization, such as a stock split or stock dividend; a reclassification of stock; a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company; any reorganization (whether or not such reorganization comes within the definition of such term in Code Section 368); or any partial or complete liquidation of the Company, such adjustment shall be made in the number and class of Shares which may be delivered under the Plan, and in the number and class of and/or price of Shares subject to outstanding Awards granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; provided, however, that the number of Shares subject to any Award shall always be a whole number and the Committee shall make such adjustments as are necessary to insure Awards of whole Shares. ARTICLE 5. ELIGIBILITY AND PARTICIPATION Any Director or Employee of the Company or of any Subsidiary, or any independent contractor, adviser or consultant to the Company or any Subsidiary, whose judgment, initiative and efforts contribute or may be expected to contribute materially to the successful performance of the Company or any Subsidiary shall be eligible to receive an Award under the Plan. In determining the individuals to whom such an Award shall be granted and the number of Shares which may be granted pursuant to that Award, the Committee shall take into account the duties of the respective individual, his or her present and potential contributions to the success of the Company or any Subsidiary, and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of the Plan. -6- ARTICLE 6. STOCK OPTIONS 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Participants at any time and from time to time as shall be determined by the Committee. The Committee shall have sole discretion in determining the number of Shares subject to Options granted to each Participant. An Option may be granted with or without a Corresponding SAR. No Participant may be granted ISOs (under the Plan and all other incentive stock option plans of the Company and any Subsidiary) which are first exercisable in any calendar year for Common Stock having an aggregate Fair Market Value (determined as of the date an Option is granted) that exceeds One Hundred Thousand Dollars ($100,000). The preceding annual limit shall not apply to NQSOs. The Committee may grant a Participant ISOs, NQSOs or a combination thereof, and may vary such Awards among Participants. The maximum number of Shares subject to Options which can be granted under the Plan during any calendar year to any individual is 500,000 Shares. 6.2 AGREEMENT. Each Option's grant shall be evidenced by an Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains and such other provisions as the Committee shall determine. The Option Agreement shall further specify whether the Award is intended to be an ISO or an NQSO. Any portion of an Option that is not designated as an ISO or otherwise fails or is not qualified as an ISO (even if designated as an ISO) shall be a NQSO. If the Option is granted in connection with a Corresponding SAR, the Agreement shall also specify the terms that apply to the exercise of the Option and Corresponding SAR. 6.3 OPTION PRICE. The Option Price for each grant of an ISO shall not be less than one hundred percent (100%) of the Fair Market Value of a Share on the date the Option is granted. In no event, however, shall any Participant who owns (within the meaning of Section 424(d) of the Code) stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company be eligible to receive an ISO at an Option Price less than one hundred ten percent (110%) of the Fair Market Value of a share on the date the ISO is granted. The Option Price for each grant of a NQSO shall be established by the Committee and, in its discretion, may be less or more than the Fair Market Value of a Share on the date the Option is granted. The Committee is authorized to issue Options, whether ISOs or NQSOs, at an Option Price in excess of the Fair Market Value on the date the Option is granted (the so-called "Premium Price" Option) to encourage superior performance. 6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant; provided, further, however, that any ISO granted to any Participant who at such time owns (within the meaning of Section 424(d) of the Code) stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, shall not be exercisable later than the fifth (5th) anniversary date of its grant. 6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, including conditions related to the employment of the Participant with the Company or -7- any Subsidiary, which need not be the same for each grant or for each Participant. Each Option shall be exercisable for such number of Shares and at such time or times, including periodic installments, as may be determined by the Committee at the time of the grant. The Committee may provide in the Agreement for automatic accelerated vesting and other rights upon the occurrence of a Change in Control (as defined in Section 13.1) of the Company. Except as otherwise provided in the Agreement and Article 13, the right to purchase Shares that are exercisable in periodic installments shall be cumulative so that when the right to purchase any Shares has accrued, such Shares or any part thereof may be purchased at any time thereafter until the expiration or termination of the Option. The exercise or partial exercise of either an Option or its Corresponding SAR shall result in the termination of the other to the extent of the number of Shares with respect to which the Option or Corresponding SAR is exercised. 6.6 PAYMENT. Options shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full, either: (a) in cash, (b) cash equivalent approved by the Committee, (c) if approved by the Committee, by tendering previously acquired Shares (or delivering a certification of ownership of such Shares) having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for the period required by the Committee, if any, prior to their tender to satisfy the Option Price), or (d) by a combination of (a), (b) and (c). The Committee also may allow cashless exercises as permitted under Federal Reserve Board's Regulation T, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan's purpose and applicable law. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s), and may place appropriate legends on the certificates representing such Shares. 6.7 LIMITED TRANSFERABILITY. If permitted by the Committee in the Agreement, a Participant may transfer an Option granted hereunder, including, but not limited to, transfers to members of his or her Immediate Family (as defined below), to one or more trusts for the benefit of such Immediate Family members, or to one or more partnerships where such Immediate Family members are the only partners, if (i) the Participant does not receive any consideration in any form whatsoever for such transfer, (ii) such transfer is permitted under applicable tax laws, and (iii) the Participant is an Insider, such transfer is permitted under Rule 16b-3 of the Exchange Act as in effect from time to time. Any Option so transferred shall continue to be subject to the same terms and conditions in the hands of the transferee as were applicable to said Option immediately prior to the transfer thereof. Any reference in any such Agreement to the employment by or performance of services for the Company by the Participant shall continue to refer to the employment of, or performance by, the transferring Participant. For purposes hereof, "Immediate Family" shall mean the Participant and the Participant's spouse, children and grandchildren. Any Option that is granted pursuant to any Agreement that did not initially expressly allow the transfer of said Option and that has not been amended to expressly permit such transfer, shall not be transferable by the Participant other than by will or by the laws of descent and distribution and such Option thus shall be exercisable in the Participant's lifetime only by the Participant. -8- 6.8 SHAREHOLDER RIGHTS. No Participant shall have any rights as a shareholder with respect to Shares subject to his Option until the issuance of such Shares to the Participant pursuant to the exercise of such Option. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 GRANTS OF SARS. The Committee shall designate Participants to whom SARs are granted, and will specify the number of Shares of Common Stock subject to each grant. An SAR may be granted with or without a related Option. All SARs granted under this Plan shall be subject to an Agreement in accordance with the terms of this Plan. A payment to the Participant upon the exercise of a Corresponding SAR may not be more than the difference between the Fair Market Value of the Shares subject to the ISO on the date of grant and the Fair Market Value of the Shares on the date of exercise of the Corresponding SAR. The maximum number of SARs which can be granted under the Plan during any calendar year to any individual is 500,000 SARs. 7.2 DURATION OF SARS. The duration of an SAR shall be set forth in the Agreement as determined by the Committee. An SAR that is granted as a Corresponding SAR shall have the same duration as the Option to which it relates. An SAR shall terminate due to the Participant's termination of employment at the same time as the date specified in Article 6 with respect to Options, regardless of whether the SAR was granted in connection with the grant of an Option. 7.3 EXERCISE OF SAR. An SAR may be exercised in whole at any time or in part from time to time and at such times and in compliance with such requirements as the Committee shall determine as set forth in the Agreement; provided, however, that a Corresponding SAR that is related to an Incentive Stock Option may be exercised only to the extent that the related Option is exercisable and only when the Fair Market Value of the Shares exceeds the Option Price of the related ISO. An SAR granted under this Plan may be exercised with respect to any number of whole shares less than the full number of shares for which the SAR could be exercised. A partial exercise of an SAR shall not affect the right to exercise the SAR from time to time in accordance with this Plan and the applicable Agreement with respect to the remaining shares subject to the SAR. The exercise of either an Option or Corresponding SAR shall result in the termination of the other to the extent of the number of Shares with respect to which the Option or its Corresponding SAR is exercised. 7.4 DETERMINATION OF PAYMENT OF CASH AND/OR COMMON STOCK UPON EXERCISE OF SAR. At the Committee's discretion, the amount payable as a result of the exercise of an SAR may be settled in cash, Common Stock, or a combination of cash and Common Stock. A fractional share shall not be deliverable upon the exercise of an SAR, but a cash payment shall be made in lieu thereof. 7.5 NONTRANSFERABILITY. Each SAR granted under the Plan shall be nontransferable except by will or by the laws of descent and distribution. During the lifetime of the Participant to whom the SAR is granted, the SAR may be exercised only by the Participant. No right or interest of a Participant in any SAR shall be liable for, or subject to any lien, obligation or liability of such Participant. A Corresponding SAR shall be subject to the same restrictions on transfer as the ISO to which it relates. Notwithstanding the foregoing, if the Agreement so provides, a Participant may -9- transfer an SAR (other than a Corresponding SAR that relates to an Incentive Stock Option) under the same rules and conditions as are set forth in Section 6.7. 7.6 SHAREHOLDER RIGHTS. No Participant shall have any rights as a shareholder with respect to Shares subject to an SAR until the issuance of Shares (if any) to the Participant pursuant to the exercise of such SAR. ARTICLE 8. RESTRICTED STOCK; STOCK AWARDS 8.1 GRANTS. The Committee may from time to time in its discretion grant Restricted Stock and Stock Awards to Participants and may determine the number of Shares of Restricted Stock or Stock Awards to be granted. The Committee shall determine the terms and conditions of, and the amount of payment, if any, to be made by the Participant for such Shares or Restricted Stock. A grant of Restricted Stock may, in addition to other conditions, require the Participant to pay for such Shares of Restricted Stock, but the Committee may establish a price below Fair Market Value at which the Participant can purchase the Shares of Restricted Stock. Each grant of Restricted Stock shall be evidenced by an Agreement containing terms and conditions not inconsistent with the Plan as the Committee shall determine to be appropriate in its sole discretion. The maximum number of Shares of Restricted Stock or Stock Awards which can be granted under the Plan during any calendar year to any individual is 500,000 Shares. 8.2 RESTRICTED PERIOD; LAPSE OF RESTRICTIONS. At the time a grant of Restricted Stock is made, the Committee shall establish a period or periods of time (the "Restricted Period") applicable to such grant which, unless the Committee otherwise provides, shall not be less than one year. Subject to the other provisions of this Article 8, at the end of the Restricted Period all restrictions shall lapse and the Restricted Stock shall vest in the Participant. At the time a grant is made, the Committee may, in its discretion, prescribe conditions for the incremental lapse of restrictions during the Restricted Period and for the lapse or termination of restrictions upon the occurrence of other conditions in addition to or other than the expiration of the Restricted Period with respect to all or any portion of the Restricted Stock. Such conditions may, but need not, include the following: (a) The death, Disability or Retirement of the Employee to whom Restricted Stock is granted, or (b) The occurrence of a Change in Control (as defined in Section 13.1). The Committee may also, in its discretion, shorten or terminate the Restricted Period, or waive any conditions for the lapse or termination of restrictions with respect to all or any portion of the Restricted Stock at any time after the date the grant is made. 8.3 RIGHTS OF HOLDER; LIMITATIONS THEREON. Upon a grant of Restricted Stock, a stock certificate (or certificates) representing the number of Shares of Restricted Stock granted to the Participant shall be registered in the Participant's name and shall be held in custody by the Company or a bank selected by the Committee for the Participant's account. Following such registration, the Participant shall have the rights and privileges of a shareholder as to such Restricted Stock, including the right to receive dividends, if and when declared by the Board of -10- Directors, and to vote such Restricted Stock, except that the right to receive cash dividends shall be the right to receive such dividends either in cash currently or by payment in Restricted Stock, as the Committee shall determine, and except further that, the following restrictions shall apply: (a) The Participant shall not be entitled to delivery of a certificate until the expiration or termination of the Restricted Period for the Shares represented by such certificate and the satisfaction of any and all other conditions prescribed by the Committee; (b) None of the Shares of Restricted Stock may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period and until the satisfaction of any and all other conditions prescribed by the Committee; and (c) All of the Shares of Restricted Stock that have not vested shall be forfeited and all rights of the Participant to such Shares of Restricted Stock shall terminate without further obligation on the part of the Company, unless the Participant has remained an employee of (or non-Employee Director of or active consultant providing services to) the Company or any of its Subsidiaries, until the expiration or termination of the Restricted Period and the satisfaction of any and all other conditions prescribed by the Committee applicable to such Shares of Restricted Stock. Upon the forfeiture of any Shares of Restricted Stock, such forfeited Shares shall be transferred to the Company without further action by the Participant and shall, in accordance with Section 4.2, again be available for grant under the Plan. If the Participant paid any amount for the Shares of Restricted Stock that are forfeited, the Company shall pay the Participant the lesser of the Fair Market Value of the Shares on the date they are forfeited or the amount paid by the Participant. With respect to any Shares received as a result of adjustments under Section 4.3 hereof and any Shares received with respect to cash dividends declared on Restricted Stock, the Participant shall have the same rights and privileges, and be subject to the same restrictions, as are set forth in this Article 8. 8.4 DELIVERY OF UNRESTRICTED SHARES. Upon the expiration or termination of the Restricted Period for any Shares of Restricted Stock and the satisfaction of any and all other conditions prescribed by the Committee, the restrictions applicable to such Shares of Restricted Stock shall lapse and a stock certificate for the number of Shares of Restricted Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions except any that may be imposed by law, a shareholders' agreement or any other agreement, to the holder of the Restricted Stock. The Company shall not be required to deliver any fractional Share but will pay, in lieu thereof, the Fair Market Value (determined as of the date the restrictions lapse) of such fractional Share to the holder thereof. Concurrently with the delivery of a certificate for Restricted Stock, the holder shall be required to pay an amount necessary to satisfy any applicable federal, state and local tax requirements as set out in Article 16 below. -11- 8.5 NONASSIGNABILITY OF RESTRICTED STOCK. Unless the Committee provides otherwise in the Agreement, no grant of, nor any right or interest of a Participant in or to, any Restricted Stock, or in any instrument evidencing any grant of Restricted Stock under the Plan, may be assigned, encumbered or transferred except, in the event of the death of a Participant, by will or the laws of descent and distribution. ARTICLE 9. PERFORMANCE SHARE AWARDS 9.1 AWARD. The Committee may designate Participants to whom Performance Share Awards will be granted from time to time for no consideration and specify the number of shares of Common Stock covered by the Award. 9.2 EARNING THE AWARD. A Performance Share Award, or portion thereof, will be earned, and the Participant will be entitled to receive Common Stock, a cash payment or a combination thereof, only upon the achievement by the Participant, the Company, or a Subsidiary of such performance objectives as the Committee, in its discretion, shall prescribe on the date of grant. The Committee may in determining whether performance targets have been met adjust the Company's financial results to exclude the effect of unusual charges or income items or other events, including acquisitions or dispositions of businesses or assets, restructurings, reductions in force, currency fluctuations or changes in accounting, which are distortive of financial results (either on a segment or consolidated basis). In addition, the Committee will adjust its calculations to exclude the effect on financial results of changes in the Code or other tax laws, or the regulations relating thereto. 9.3 PAYMENT. In the discretion of the Committee, the amount payable when a Performance Share Award is earned may be settled in cash, by the grant of Common Stock or a combination of cash and Common Stock. The aggregate Fair Market Value of the Common Stock received by the Participant pursuant to a Performance Share Award, together with any cash paid to the Participant, shall be equal to the aggregate Fair Market Value, on the date the Performance Shares are earned, of the number of Shares of Common Stock equal to each Performance Share earned. A fractional Share will not be deliverable when a Performance Share Award is earned, but a cash payment will be made in lieu thereof. 9.4 SHAREHOLDER RIGHTS. No Participant shall have, as a result of receiving a Performance Share Award, any rights as a shareholder until and to the extent that the Performance Shares are earned and Common Stock is transferred to such Participant. If the Agreement so provides, a Participant may receive a cash payment equal to the dividends that would have been payable with respect to the number of Shares of Common Stock covered by the Award between (a) the date that the Performance Shares are awarded and (b) the date that a transfer of Common Stock to the Participant, cash settlement, or combination thereof is made pursuant to the Performance Share Award. A Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of a Performance Share Award or the right to receive Common Stock thereunder other than by will or the laws of descent and distribution. After a Performance Share Award is earned and paid in Common Stock, a Participant will have all the rights of a shareholder with -12- respect to the Common Stock so awarded; provided that the restrictions of Section 19.4 or any shareholders' agreement or other agreement shall, if applicable, continue to apply. ARTICLE 10. BENEFICIARY DESIGNATION To the extent applicable, each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company and shall be effective only when filed by the Participant, in writing, with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. If required, the spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of a beneficiary or beneficiaries other than the spouse. ARTICLE 11. DEFERRALS The Committee may permit a Participant to defer to another plan or program such Participant's receipt of Shares or cash that would otherwise be due to such Participant by virtue of the exercise of an Option, the vesting of Restricted Stock, or the earning of a Performance Share Award. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. ARTICLE 12. RIGHTS OF PARTICIPANTS 12.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company or a Subsidiary to terminate any Participant's employment by, or performance of services for, the Company at any time, nor confer upon any Participant any right to continue in the employ or service of the Company or a Subsidiary. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) shall not be deemed a termination of employment. 12.2 PARTICIPATION. No Employee shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. ARTICLE 13. CHANGE IN CONTROL 13.1 DEFINITION. For purposes of the Plan, a "Change in Control" shall be deemed to have occurred if: (a) the Company consolidates or merges with or into another company, or is otherwise reorganized, if the Company is not the surviving company in such transaction, or, if after such transaction, any other company, association or other person, entity or group or the shareholders thereof that did not own fifty percent (50%) or more of the then outstanding Shares prior to such transaction, then own, directly and/or indirectly, more than -13- fifty percent (50%) of the then outstanding Shares of the Company or more than fifty percent (50%) of the assets of the Company; or (b) more than 35% of the Shares of the Company are, in a single transaction or in a series of related transactions, sold or otherwise transferred to or are acquired by (except as collateral security for a loan) any other company, association or other person, entity or group, whether or not any such shareholder or any shareholders included in such group were shareholders of the Company prior to the Change in Control, PROVIDED HOWEVER that a "Change in Control" shall not be deemed to have occurred as a result of any transaction wherein any person, entity or group that owns more than sixty-five percent (65%) of the then outstanding Shares prior to such transaction continues to own sixty-five percent (65%) or more after such transaction; or (c) a change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this Section 13.1 that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, including any successor to such Rule), or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, shall not be so considered as a member of the Incumbent Board. ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION 14.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board may, at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part; provided, that, unless approved by the holders of a majority of the total number of Shares of the Company represented and voted at a meeting at which a quorum is present, no amendment shall be made to the Plan if such amendment would (a) materially modify the eligibility requirements provided in Article 5; (b) increase the manner in which the total number of Shares which may be granted under the Plan is determined (except as provided in Section 4.3); (c) extend the term of the Plan; or (d) amend the Plan in any other manner which the Board, in its discretion, determines should become effective only if approved by the shareholders even if such shareholder approval is not expressly required by the Plan or by law. -14- 14.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award previously granted under the Plan, without the written consent of the Participant holding such Award. The Committee shall, with the written consent of the Participant holding such Award, have the authority to cancel Awards outstanding and grant replacement Awards therefor. 14.3 COMPLIANCE WITH CODE SECTION 162(m). At all times when the Committee determines that compliance with Code Section 162(m) is required or desired, all Awards granted under this Plan to Named Executive Officers shall comply with the requirements of Code Section 162(m). In addition, in the event that changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Awards under the Plan, the Committee may, subject to this Article 14, make any adjustments it deem appropriate. ARTICLE 15. WITHHOLDING 15.1 TAX WITHHOLDING. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising in connection with an Award under this Plan. 15.2 SHARE WITHHOLDING. With respect to withholding required upon the exercise of Options, or upon any other taxable event arising as a result of Awards granted hereunder which are to be paid in the form of Shares, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction. All elections shall be irrevocable, made in writing, signed by the Participant, and elections by Insiders shall additionally comply with all legal requirements applicable to Share transactions by such Participants. ARTICLE 16. INDEMNIFICATION Each person who is or shall have been a member of the Committee, or the Board, shall be indemnified and held harmless by the Company against and from any loss, cost, liability or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan and against and from any and all amounts paid by him or her in settlement thereof, with the Company's approval, or paid by him or her in satisfaction of any judgment in any such action, suit or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall be in addition to any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. -15- ARTICLE 17. SUCCESSORS All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 18. LEGAL CONSTRUCTION 18.1 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein shall also include the feminine; the plural shall include the singular and the singular shall include the plural. 18.2 SEVERABILITY. If any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 18.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 18.4 REGULATORY APPROVALS AND LISTING. The Company shall not be required to issue any certificate or certificates for Shares under the Plan prior to (i) obtaining any approval from any governmental agency which the Company shall, in its discretion, determine to be necessary or advisable, (ii) the admission of such shares to listing on any national securities exchange or Nasdaq on which the Company's Shares may be listed, and (iii) the completion of any registration or other qualification of such Shares under any state or federal law or ruling or regulation of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable. To the extent applicable, if required by the then-current Section 16 of the Exchange Act, any "derivative security" or "equity security" offered pursuant to the Plan to any Insider may not be sold or transferred for at least six (6) months after the date of grant of such Award. The terms "equity security" and "derivative security" shall have the meanings ascribed to them in the then-current Rule 16(a) under the Exchange Act. 18.5 SECURITIES LAW COMPLIANCE. To the extent applicable, with respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provisions of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 18.6 GOVERNING LAW. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Georgia. -16- AS APPROVED BY THE BOARD OF DIRECTORS OF INNOTRAC CORPORATION ON MARCH 28, 2000. -17- EX-10.13 3 EXHIBIT 10.13 EXHIBIT 10.13 INNOTRAC CORPORATION SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN Effective as of January 1, 2000 1. ESTABLISHMENT AND EFFECTIVE DATE OF PLAN Innotrac Corporation (the "Corporation") hereby adopts the Innotrac Corporation Senior Executive Incentive Compensation Plan (the "Plan") for its executive officers and certain other key employees of the Corporation, its Operating Units and affiliates who are in management positions designated as eligible for participation by the Executive Compensation Subcommittee (the "Committee") of the Board of Directors of the Corporation or its designee. The Plan shall be effective as of January 1, 2000 and shall remain in effect, subject to the rights of amendment and termination in Section 13, until the Incentive Awards are paid for the Corporation's fiscal year ending in 2004. Payments under the Plan shall only be made to Named Executive Officers after the Plan is approved by the stockholders of the Corporation. 2. PURPOSE OF THE PLAN The purpose of the Plan is to further the growth and financial success of the Corporation by offering performance incentives to designated executives who have significant responsibility for such success. 3. DEFINITIONS (a) "Base Annual Salary" means the actual salary paid to a Participant during the applicable Plan Year, increased by the amount of any pre-tax deferrals or other pre-tax payments made by the Participant to the Corporation's deferred compensation or welfare plans (whether qualified or non-qualified). (b) "Board of Directors" means the Board of Directors of the Corporation. (c) "Change in Control" shall be deemed to have occurred if: (i) the Company consolidates or merges with or into another company, or is otherwise reorganized, if the Company is not the surviving company in such transaction, or, if after such transaction, any other company, association or other person, entity or group or the shareholders thereof that did not own fifty percent (50%) or more of the then outstanding Shares prior to such transaction, then own, directly and/or indirectly, more than fifty percent (50%) of the then outstanding Shares of the Company or more than fifty percent (50%) of the assets of the Company; or (ii) more than 35% of the Shares of the Company are, in a single transaction or in a series of related transactions, sold or otherwise transferred to or are acquired by (except as collateral security for a loan) any other company, association or other person, entity or group, whether or not any such shareholder or any shareholders included in such group were shareholders of the Company prior to the Change in Control, provided however that a "Change in Control" shall not be deemed to have occurred as a result of any transaction wherein any person, entity or group that owns more than sixty-five percent (65%) of the then outstanding Shares prior to such transaction continues to own sixty-five percent (65%) or more after such transaction; or (iii) a change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this Section 13.1 that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, including any successor to such Rule), or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, shall not be so considered as a member of the Incumbent Board."Change in Control" means any of the following events: (d) "Chief Executive Officer" means the chief executive officer of the Corporation, unless otherwise specified. (e) "Code" means the Internal Revenue Code of 1986, as amended. (f) "Committee" means the Executive Compensation Subcommittee of the Compensation Committee of the Board of Directors or any other committee designated by the Board of Directors which is responsible for administering the Plan. (g) "Corporation" means Innotrac Corporation, a Georgia corporation, and its successors. (h) "Incentive Award" or "Award" means the bonus awarded to a Participant under the terms of the Plan. 2 (i) "Maximum Award" means the maximum percentage of Base Annual Salary which may be paid based upon the Relative Performance during the Plan Year. (j) "Named Executive Officer" means a Participant who as of the date of payment of an Incentive Award is one of the group of "covered employees" under Code Section 162(m) and the regulations thereunder. (k) "Operating Unit" means a separate business operating unit of the Corporation with respect to which separate performance goals may be established hereunder. (l) "Participant" means an employee of the Corporation, an Operating Unit or an affiliate who is designated by the Committee to participate in the Plan. (m) "Personal Performance Goals" means the goals that may be established for a Participant each year to improve the effectiveness of the Participant's area of responsibility as well as the Corporation as a whole. (n) "Plan Rules" means the guidelines established annually by the Committee pursuant to Section 4, subject, where applicable, to ratification by the Board of Directors. (o) "Plan Year" means the twelve month period which is the same as the Corporation's fiscal year. The initial Plan Year for the amended and restated Plan shall be January 1, 2000 through December 31, 2000. (p) "Relative Performance" means the extent to which the Corporation, and/or designated Operating Unit, as applicable, achieves the performance measurement criteria set forth in the Plan Rules. (q) "Target Award" means the percentage (which may vary among Participants and from Plan Year to Plan Year) of Base Annual Salary which will be paid to a Participant as an Incentive Award if the performance measurement criteria applicable to the Participant for the Plan Year is achieved, as reflected in the Plan Rules for such Plan Year. (r) "Threshold Award" means the percentage of Base Annual Salary which may be paid based on the minimum acceptable Relative Performance during the Plan Year. 4. ADMINISTRATION OF THE PLAN The Plan will be administered by the Committee, subject to its right to delegate responsibility for administration of the Plan as it applies to Participants other than Named Executive Officers pursuant to Section 7. The Committee will have authority to establish Plan Rules with respect to the following matters for the Plan Year, subject to the right of the Board of Directors to ratify such Plan Rules as provided in this Section 4: 3 (a) the employees who are Participants in the Plan; (b) the Target Award, Maximum Award and Threshold Award that can be granted to each Participant and the method for determining such award, which the Committee may amend from time to time; (c) the performance targets and the measurement criteria to be used in determining the Corporation's or an Operating Unit's Relative Performance, which will include one or more of the following, as determined by the Committee each year: earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA), sales, net income, operating income, earnings per share, return on capital employed, return on equity, return on assets (or net assets), after-tax or pre-tax profit, market value of the Corporation's stock, total shareholder return, return on investment, economic profit, capitalized economic profit, cash flow and cash flow return; and (d) the time or times, the form, and the conditions subject to which any Incentive Award may become payable. The Plan Rules will be adopted by the Committee prior to, or as soon as practical after, the commencement of each Plan Year. Subject to the provisions of the Plan and the Committee's right to delegate its responsibilities, the Committee will also have the discretionary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, and to make all other determinations deemed necessary or advisable in administering the Plan. The determinations of the Committee on the matters referred to in paragraphs (a) through (d) of this Section 4 with respect to Named Executive Officers (and such other Participants as the Committee may determine) shall be submitted at least annually to the Board of Directors for its consideration and ratification. For Participants who are not Named Executive Officers, the Committee may in its discretion establish performance measures not listed in this Section 4 without obtaining shareholder approval. 5. PARTICIPATION Eligibility for participation in the Plan is limited to executive officers of the Corporation and certain other key employees of the Corporation and its Operating Units or affiliates who hold key management and staff positions. From among those eligible and based upon the recommendations of the Chief Executive Officer and other designees, the Committee will designate by name or position the Participants each Plan Year. Any employee who is a Participant in one Plan Year may be excluded from participation in any other Plan Year. If, during the Plan Year, a Participant other than a Named Executive Officer changes employment positions to a new position which corresponds to a different award level, the Committee may, in its discretion, adjust the Participant's award level for such Plan Year. The Committee may, in its discretion, designate employees who are hired after the beginning of the Plan Year as Participants for such Plan Year and as eligible to receive full or partial Incentive Awards for such year. 4 6. INCENTIVE AWARDS 6.1 DETERMINATION OF THE AMOUNT OF INCENTIVE AWARDS At the end of each Plan Year, the Committee or its designee shall certify the extent to which the performance targets and measurement criteria established pursuant to Section 4 have been achieved for such Plan Year based upon financial information provided by the Corporation. Subject to the right to decrease an award as described in the next paragraph, the Participant's Incentive Award shall be computed by the Committee based upon the achievement of the established performance targets, measurement criteria and the requirements of the Plan. In addition to any adjustments provided by the Incentive Award; the Committee may in determining whether performance targets have been met adjust the Corporation's financial results to exclude the effect of unusual charges or income items or other events, including acquisitions or dispositions of businesses or assets, recapitalizations, reorganizations, restructurings, reductions in force, currency fluctuations or changes in accounting, which are distortive of results for the year (either on a segment or consolidated basis); provided, that for purposes of determining the Incentive Awards of Named Executive Officers, the Committee shall exclude unusual items whose exclusion has the effect of increasing Relative Performance if such items constitute "extraordinary items" under generally accepted accounting principles or are unusual events or items. In addition, the Committee will adjust its calculations to exclude the unanticipated effect on financial results of changes in the Code or other tax laws, or the regulations relating thereto. The Committee may, in its discretion, decrease the amount of a Participant's Incentive Award for a Plan Year based upon such factors as it may determine, including the failure of the Corporation or an Operating Unit to meet certain performance goals or of a Participant to meet his Personal Performance Goals. The factors to be used in reducing an Incentive Award may be established at the beginning of a Plan Year and may vary among Participants. In the event that the Corporation's or an Operating Unit's performance is below the anticipated performance thresholds for the Plan Year and the Incentive Awards are below expectations or not earned at all, the Committee may in its discretion grant Incentive Awards (or increase the otherwise earned Incentive Awards) to deserving Participants, except for Participants who are Named Executive Officers. The Plan Rules and Incentive Awards under the Plan shall be administered in a manner to qualify payments under the Plan to the Named Executive Officers for the performance-based exception under Code Section 162(m) and the regulations thereunder, except where the Board of Directors determines such compliance is not necessary. The maximum Incentive Award that may be paid to an individual Participant for a Plan Year shall be $2,000,000. 5 6.2 ELIGIBILITY FOR PAYMENT OF INCENTIVE AWARD No Participant will have any vested right to receive any Incentive Award until such date as the Board of Directors has ratified the Committee's determination with respect to the payment of individual Incentive Awards, except where the Committee determines such ratification is not necessary. No Incentive Award will be paid to any Participant who is not an active employee of the Corporation, an Operating Unit or an affiliate at the end of the Plan Year to which the Incentive Award relates; provided, however, at the discretion of the Committee or its designee (subject to ratification by the Board of Directors, where required, and the limitations of Code Section 162(m)), partial Incentive Awards may be paid to Participants (or their beneficiaries) who are terminated without cause (as determined by the Committee or its designee) or who retire, die or become permanently and totally disabled during the Plan Year. No Participant entitled to receive an Incentive Award shall have any interest in any specific asset of the Corporation, and such Participant's rights shall be equivalent to that of a general unsecured creditor of the Corporation. 6.3 PAYMENT OF AWARDS Payment of the Incentive Awards will be made as soon as practicable after their determination pursuant to Sections 6.1 and 6.2, subject to a Participant's right to defer payment pursuant to any applicable deferred compensation plans of the Corporation. Payment will generally be made in a lump sum in cash, unless the Committee otherwise determines at the beginning of the Plan Year. 7. DELEGATION OF AUTHORITY BY THE COMMITTEE Notwithstanding the responsibilities of the Committee set forth herein, the Committee may delegate to the Chief Executive Officer or others all or any portion of its responsibility for administration of the Plan as it relates to Participants other than Named Executive Officers. Such delegation may include, without limitation, the authority to designate employees who can participate in the Plan, to establish Plan Rules, to interpret the Plan, to determine the extent to which performance criteria have been achieved, and to adjust any Incentive Awards that are payable. In the case of each such delegation, the administrative actions of the delegate shall be subject to the approval of the person within the Corporation to whom the delegate reports (or, in the case of a delegation to the Chief Executive Officer, to the approval of the Committee). 8. CHANGE IN CONTROL Upon the occurrence of a Change in Control, unless the Participant otherwise elects in writing, the Participant's Incentive Award for the Plan Year, determined at the Target Award level (without any reductions under Section 6.1) shall be deemed to have been fully earned for the Plan Year, provided that` the Participant shall only be entitled to a pro rata portion of the Incentive Award based upon the number of days within the Plan Year that had elapsed as of the effective date of the Change in Control. The Incentive Award amount shall be paid in cash within thirty (30) days of the effective date of the Change in Control. The Incentive Award payable upon a Change in Control to a 6 Participant for the Plan Year during which a Change in Control occurs shall be the greater of the amount provided for under this Section 8 or the amount of the Incentive Award payable to such Participant for the Plan Year under the terms of any employment agreement or severance agreement with the Corporation, its Operating Units or affiliates. Notwithstanding the above, the Committee may provide in the Plan Rules for alternative consequences upon a Change in Control, which may apply to some or all Participants and which may vary among Participants. 9. BENEFICIARY To the extent provided by the Committee or its designee each Participant will designate a person or persons to receive, in the event of death, any Incentive Award to which the Participant would then be entitled under Section 6.2. Such designation will be made in the manner determined by the Committee and may be revoked by the Participant in writing. If the Committee does not provide for a designation of beneficiary or if a Participant fails effectively to designate a beneficiary, then the estate of the Participant will be deemed to be the beneficiary. 10. WITHHOLDING OF TAXES The Corporation shall deduct from each Incentive Award the amount of any taxes required to be withheld by any governmental authority. 11. EMPLOYMENT Nothing in the Plan or in any Incentive Award shall confer (or be deemed to confer) upon any Participant the right to continue in the employ of the Corporation, an Operating Unit or an affiliate, or interfere with or restrict in any way the rights of the Corporation, an Operating Unit or an affiliate to discharge any Participant at any time for any reason whatsoever, with or without cause. 12. SUCCESSORS All obligations of the Corporation under the Plan with respect to Incentive Awards granted hereunder shall be binding upon any successor to the Corporation, whether such successor is the result of an acquisition of stock or assets of the Corporation, a merger, a consolidation or otherwise. 13. TERMINATION AND AMENDMENT OF THE PLAN; GOVERNING LAW The Committee, subject to the ratification rights of the Board of Directors, has the right to suspend or terminate the Plan at any time, or to amend the Plan in any respect, provided that no such action will, without the consent of a Participant, adversely affect the Participant's rights under an Incentive Award approved under Section 6.2. The Plan shall be interpreted and construed under the laws of the State of Georgia. AS APPROVED BY THE BOARD OF DIRECTORS OF THE CORPORATION ON THE 28TH DAY OF MARCH, 2000. 7 EX-13.1 4 EXHIBIT 13.1 EXHIBIT 13.1 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, 1999, 1998, 1997 and 1996 and the selected historical balance sheet data for the periods then ended have been derived from the Consolidated Financial Statements that have been audited by Arthur Andersen LLP, independent public accountants.
1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (IN 000'S, EXCEPT PER SHARE AMOUNTS) RESULTS FOR YEAR: Revenues, net........................ $ 227,011 $ 139,673 $87,978 $ 71,297 $ 44,886 Cost of revenues (1)................. 195,230 108,785 67,986 55,519 30,658 --------- --------- -------- -------- -------- Gross profit......................... 31,781 30,888 19,992 15,778 14,228 --------- --------- -------- -------- -------- Operating expenses: Selling, general and administrative Expenses......................... 12,495 15,642 12,572 10,391 6,510 --------- --------- -------- -------- -------- Depreciation and Amortization (1)................. 1,711 943 631 429 293 --------- --------- -------- -------- -------- Total operating expenses........... 14,206 16,585 13,203 10,820 6,803 --------- --------- -------- -------- -------- Operating income..................... 17,575 14,303 6,789 4,958 7,425 --------- --------- -------- -------- -------- Other (income) expense: Interest expense, net.............. 1,370 956 1,788 1,457 1,090 Other.............................. (19) 35 118 94 (73) --------- --------- -------- -------- -------- Total other expense................ 1,351 991 1,906 1,551 1,017 --------- --------- -------- -------- -------- Income before income Taxes.............................. 16,224 13,312 4,883 3,407 6,408 Income tax (provision) benefit....... (6,389) (3,743) 77 (212) (793) --------- --------- -------- -------- -------- Net income........................... 9,835 9,569 4,960 3,195 5,615 ========= ========= ======== ======== ======== Pro forma net ncome.................. 9,835 8,186 3,003 2,095 3,941 ========= ========= ======== ======== ======== Pro forma net income per share-basic. 0.99 1.01 0.46 0.32 0.61 Pro forma net income per share-diluted........................ 0.98 1.00 0.46 0.32 0.61 YEAR-END FINANCIAL POSITION: Current assets....................... $ 94,810 $ 66,416 $ 24,330 $ 37,845 $ 21,156 Current liabilities.................. 24,930 39,563 22,809 38,887 21,772 Property and equipment, net.......... 8,922 7,463 7,609 10,939 9,099 Total assets......................... 104,218 73,992 32,497 49,037 30,414 Long-term obligations................ 75 135 3,944 4,779 4,729 Total liabilities.................... 25,005 39,698 26,753 43,666 26,501 Shareholders' equity................. 79,213 34,294 4,827 4,540 3,195 COMMON STOCK INFORMATION: Average number of common shares Outstanding.......................... 9,911 8,096 6,500 6,500 6,500 Common stock price per share: High 26 3/4 24 3/8 N/A N/A N/A Low 10 5 3/4 N/A N/A N/A Year-end 13 3/4 18 1/8 N/A N/A N/A Book value per common share 7.99 4.24 0.74 0.70 0.49 OTHER DATA: Capital expenditures................. $ 5,328 $ 5,739 $ 6,937 $ 7,972 $ 6,568
(1) Cost of revenue includes $1,703, $2,900, $3,711, $3,005 and $1,750 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively, related to depreciation on rental equipment. 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, those factors discussed in more detail under "Business" in the Company's Annual Report on Form 10-K. 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, Ameritech Services, Inc., Bell Atlantic and US West and their customers. Pacific Bell, Southwestern Bell and Ameritech Services, Inc. are all subsidiaries of SBC Communications. Recently, we began distributing Digital Subscriber Line Modems (DSL) for BellSouth.Net and other internet service providers (ISPs). 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 or other clients have purchased from various third-party manufacturers. Under our programs with US West, Southwestern Bell and Pacific Bell and the ISPs, like our current 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, 1999 was approximately 36.4% and is expected to reach approximately 75% by 2007. BellSouth indicates that as of December 31, 1999 its Caller ID penetration was 43.1%. If BellSouth's Caller ID penetration fails to increase, our net revenues could be adversely affected. We believe that opportunities exist 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. However, these opportunities may be delayed, as was a marketing program in the fourth quarter of 1999, which resulted in an increase in our inventory. Caller ID equipment sales may eventually level off as the Caller ID market matures. We believe that by distributing other telecommunications products such as DSL modems 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 and lower penetration levels in our Caller ID business. However there is no guarantee that the gross margins associated with the expansion into these markets will be at historical levels. 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, 1999, 1998 and 1997.
YEAR ENDED DECEMBER 31, --------------------------------- 1999 1998 1997 --------------------------------- BellSouth..................... 39% 59% 85% Pacific Bell.................. 31 25 8 Southwestern Bell............. 20 11 -- US West....................... 3 2 2 Bell Atlantic................. 3 -- -- Ameritech..................... 1 -- -- ---------- ----------- ---------- Total................ 97% 97% 95% ========== =========== ==========
The decline in revenues from BellSouth customers as a percentage of total revenues for the years ended December 31, 1999 and 1998 results from the diversification of our client base, increased revenue from Pacific Bell and Southwestern Bell and the impact of the new pricing model with BellSouth. BellSouth revenue dollars increased 8% and 10% for the years ended December 31, 1999 and 1998, respectively. In connection with previously disclosed issues at BellSouth, our sales of Caller ID equipment for BellSouth slowed in the fourth quarter to 22% below fourth quarter 1998 equipment sales. This decrease was partially offset by sales of DSL modems. The Company believes that continued issues at BellSouth will result in a decrease in sales of Caller ID equipment that the Company undertakes for BellSouth during 2000. The Company cannot estimate the impact of any such decrease in promotional programs on its net revenues. 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 (including call center support), - 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. RESULTS OF OPERATIONS The following table sets forth summary operating data, expressed as a percentage of revenues, for the years ended December 31, 1999, 1998 and 1997. 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 and notes thereto.
YEARS ENDED DECEMBER 31, ------------ 1999 1998 1997 ---- ---- ---- Revenues, net................................... 100.0% 100.0% 100.0% Cost of revenues................................ 86.0 77.9 77.3 Gross profit.................................... 14.0 22.1 22.7 Selling, general and administrative expenses.... 5.5 11.2 14.3 Operating income................................ 7.7 10.2 7.7 Interest expense................................ 0.6 0.7 2.0 Income before income taxes...................... 7.1% 9.5% 5.6%
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 REVENUES. Net revenues increased 62.5% to $227.0 million for the year ended December 31, 1999 from $139.7 million for the year ended December 31,1998. The increase in revenue was due primarily to increased Caller ID volume. Total Caller ID units sold and fulfilled during the year ended December 31, 1999 increased 95.7% to 5.6 million units from 2.9 million units for the year ended December 31, 1998. The percentage of units sold was 61.3% versus 62.4% for the year ended December 31, 1999 and 1998, respectively. The percentage of units fulfilled for promotional giveaway programs for which we are paid a fee was 38.7% versus 37.6% for the same period in 1998. This increase in units fulfilled was due to an increase in promotional sales programs by certain clients. The increase in unit volume was partially offset by a decrease in the 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." In connection with previously disclosed issues at BellSouth, our sales of Caller ID equipment for BellSouth slowed in the fourth quarter to 22% below fourth quarter 1998 equipment sales. This decrease was partially offset by sales of DSL modems. The Company believes that continued issues at BellSouth will result in a decrease in sales of Caller ID equipment that the Company undertakes for BellSouth during 2000. The Company cannot estimate the impact of any such decrease in promotional programs on its net revenues. The Company's reserve for returns and allowances decreased from $11.1 million (7.9% of net revenues) for the year ended December 31, 1998 to $8.5 million (3.7% of net revenues) for the year ended December 31, 1999. COST OF REVENUES. Cost of revenues increased 79.5% to $195.2 million for the year ended December 31, 1999 compared to $108.8 million for the year ended December 31, 1998. Cost of revenues increased primarily due to an increase in cost of equipment associated with the increase in units we sold and the impact of the new call center in Pueblo, Colorado that became operational during the third quarter of 1999. GROSS PROFIT. Gross profit for the year ended December 31, 1999 increased 2.9% to $31.8 million or 14.0% of revenues as compared to $30.9 million or 22.1% of revenues for the year ended December 31, 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. During the three months ended September 30, 1999, the Company opened a new call center in Pueblo, Colorado. The impact of the new call center was an increase in revenues and cost of revenues of $1.0 million dollars. The $1.0 million dollars in cost of revenues included start up costs of the new facility. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses for the year ended December 31, 1999 were $12.5 million or 5.5% of revenues compared to $15.6 million or 11.2% of revenues for the year ended December 31, 1998. The Company's bad debt expense was $3.3 million (1.5% of net revenues) for the year ended December 31, 1999 as compared to $8.2 million (5.9% of net revenues) for the year ended December 31, 1998. The decrease in bad debt expense as a percentage of revenue is due primarily to the increased 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 years ended December 31, 1999 and 1998 were 39.4% and 28.1%, respectively. The effective tax rates are lower than statutory rates for the year ended December 31, 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 year ended December 31, 1999. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 REVENUES. Our net revenues increased 58.8% to $139.7 million for the year ended December 31, 1998 from $88.8 million for the year ended December 31, 1997. The increase in revenues during 1998 was primarily due to a 61.3% increase in Caller ID units sold in 1998. During 1988, we distributed 2.9 million units as it increased its percentage of units sold (as opposed to distributed for a fee) to 62.3% of total unit volume. During 1997, we distributed 1.8 million units or 56.9% of total unit volume. The 1998 increase was offset by a decrease in average per unit prices of Caller ID units. Our reserve for returns and allowances increased from $6.3 million (7.2% of net revenues) for the year ended December 31, 1997 to $11.1 million (7.9% of net revenues) for the year ended December 31, 1998. COST OF REVENUES. Our cost of revenues increased 60.0% to $108.8 million for the year ended December 31, 1998 compared to $68.0 million for the year ended December 31, 1997. This was primarily due to an increase in cost of equipment associated with the increase in units we sold as described above offset by a $1.3 million decrease from 1997 in rental equipment losses to $3.2 million and a $1.6 million write-down on Caller ID equipment in the year ended December 31, 1997. The writedown resulted from obsolesence issues related to the regulatory-delayed start-up of the Pacific Bell program because of California regulatory issues. GROSS PROFIT. For the year ended December 31, 1998, our gross profit increased 54.5% to $30.9 million or 22.1% of revenues as compared to $20.0 million or 22.7% of revenues for the year ended December 31, 1997. The increase in gross profit was primarily due to the increase in revenues. The decrease in gross margin was due primarily to the increasing percentage of business derived from Southwestern Bell and Pacific Bell clients for which Innotrac does not assume the bad debt risk, as described above. We are therefore able to charge lower unit prices to Southwestern Bell and Pacific Bell. As a result, the Company experiences lower gross margins. This is offset by lower bad debt expenses. This was subsaantially offset by lower bad debt expenses. During the fourth quarter of 1998, BellSouth sales were switched over to a similar program. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses for the year ended December 31, 1998 were $15.6 million or 11.2% of revenues compared to $12.6 million or 14.3% of revenues for the year ended December 31, 1997. Our bad debt expense, most of which was associated with sales of Caller ID and other telecommunications equipment to BellSouth and Pacific Bell customers, was $8.2 million (5.9% of net revenue) for the year ended December 31, 1998 as compared to $7.8 million (8.8% of net revenue) for the year ended December 31, 1997. The decrease in bad debt expense as a percentage of revenue was primarily due to the new direct client billing model ion which the client assumes the bad debt risk in exchange for a lower sales price. Other SG&A expenses increased over prior year due to increased sales and marketing efforts, increased insurance and benefits expenses and administrative costs to support the Company's growth. INTEREST EXPENSE. Interest expense decreased from $1.8 million for the year ended December 31, 1997 to $1.0 million for the year ended December 31, 1998. The decrease is primarily due to repayment of a note payable from a bank and subordinated note payable to a shareholder from the proceeds received from the May 1998 initial public offering and lower bank borrowings under the Company's line of credit from the previous year ended. INCOME TAXES. Our effective tax rates for the years ended December 31, 1998 and 1997 were 28.1% and (1.6)%, respectively. The change from 1997 to 1998 was primarily the result of a lower level of income attributable to the pass-through entities involved in the Consolidation prior to the consolidation. 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 $0.9 million and $3.4 million at December 31, 1999 and 1998, respectively. 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 December 31, 1999, the interest rate on the line of credit was 7.10%, and the weighted average interest rate for the year ended December 31, 1999 was 6.26%. In May 1998, the Company repaid a term loan with a bank that would have matured in July 1999 and bore interest at 8.95% per annum, along with a subordinated note payable to a shareholder, which would have matured in April 1999 and bore interest as a particular bank's prime rate at adjusted from time to time, plus 8.0% per annum. At December 31, 1999, $7.0 million was outstanding under the line of credit. During 1999 we entered into various leases for a new call center and distribution facility. As a result of these leases, rental expense increased approximately $0.2 million in 1999 and will increase $1.0 million a year through 2004. During the years ended December 31, 1999 and 1998, the Company used $23.4 million and $9.1 million, respectively, in cash flow from operating activities, compared to the generation of $18.9 million in cash flow from operating activities in the year ended December 31, 1997. The decrease in cash flow from operating activities in 1999 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 year ended December 31, 1999 compared with 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 installment receivables and receivables from Pacific Bell and Southwestern Bell) and inventory due to increased sales volume during the year ended December 31, 1998 compared with the same period in 1997. During the years ended December 31, 1999, 1998 and 1997, net cash used in investing activities was $5.3 million, $5.7 million and $6.9 million, respectively. This decrease in 1999 was primarily due to a decrease in the number of purchases of Caller ID units for rent offset by purchases of new furniture and equipment for the our call center and distribution facility. The decrease in 1998 was primarily due to a decrease in the number of purchases of Caller ID units for rent, partially offest by expenditures associated with the Company's software upgrade and new furniture and equipment for the new corporate facility and expansion of its call center to service new clients. During years ended December 31, 1999 and 1998, the net cash provided by financing activities was $26.2 million and $17.7 million, respectively, compared to $13.4 million used in financing activities for the year ended December 31,1997. We received net proceeds of $34.9 million in a public offering of 2.2 million shares of common stock completed July 30, 1999. We used the proceeds to reduce our borrowings under our line of credit with a bank. Subsequent to the July 1999 offering, we made periodic borrowings under our line of credit to fund short-term working capital needs, resulting in a net decrease in borrowings on the line of credit of $8.7 million for the year ended December 31, 1999. During the year ended December 31, 1998, we received $26.7 million in the initial public offering completed on May 11, 1998, net of fees associated with the initial public offering. We used a portion of the proceeds to repay $4.6 million of long-term debt, $7.5 million in distributions of undistributed earnings to shareholders of affiliated flow through entitities that were merged into the Company in conjunction with the initial public offering, and reduced our borrowings under our line of credit by $13.8 million. Subsequent to the intital public offering, we made periodic borrowings against the line of credit to fund short-term working capital needs, resulting in a net increase in borrowings on the line of credit of $7.2 millions for the year ended December 31, 1998. We estimate that our cash and financing needs through 2000 will be met by cash flows from operations 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 was approximately $120,000 through January 2000. We do not anticipate additional material expenditures for Year 2000 compliance issues. Our Year 2000 compliance efforts for both IT and non-IT systems included 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 December 31, 1999:
PHASE: I II III ------ - -- --- IT Systems............................. 100% 100% 100% Non-IT Systems......................... 100% 100% 100%
While we did not experience any Year 2000 issues during the month of January 2000, we intend to continue to test for any potential unidentified Year 2000 issues of which we may not be currently aware. We obtained 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. We have obtained documentation from most of the entities we have contacted and , 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 developed contingency plans to address Year 2000 failures of these entities with which we interface. Our contingency plans included the ability to address the following issues: (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. As of March 7, 2000, no material issues were identified. 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. 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. INDEX TO THE FINANCIAL STATEMENTS OF INNOTRAC CORPORATION Consolidated Financial Statements Report of Independent Public Accountants................................................................... Consolidated Balance Sheets as of December 31, 1999 and 1998............................................... Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997................. Consolidated Statements of Partners', Members' and Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997........................................................................ Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997................. Notes to Consolidated Financial Statements.................................................................
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Innotrac Corporation: We have audited the accompanying consolidated balance sheets of INNOTRAC CORPORATION (a Georgia corporation) as of December 31, 1999 and 1998 and the related combined statements of operations, partners', members' and shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innotrac Corporation as of December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with auditing standards generally accepted in the United States. Arthur Andersen LLP Atlanta, Georgia January 27, 2000 INNOTRAC CORPORATION, CONSOLIDATED BALANCE SHEETS (IN 000'S)
DECEMBER 31, ------------ ASSETS 1999 1998 ------ ---- ---- Current assets: Cash and cash equivalents................... $ 894 $ 3,379 Accounts receivable, net (Note 3)........... 52,431 44,354 Inventories................................. 39,503 14,381 Deferred tax assets (Note 6)................ 583 2,866 Prepaid expenses and other current assets... 1,399 1,436 -------- -------- Total current assets...................... 94,810 66,416 -------- -------- Property and equipment: Rental equipment............................ 4,986 6,891 Computer, machinery and transportation equipment................................. 8,711 4,949 Furniture, fixtures and leasehold improvements.............................. 2,830 1,390 -------- -------- 16,527 13,230 Less accumulated depreciation and amortization.............................. (7,605) (5,767) -------- -------- 8,922 7,463 -------- -------- Other assets, net (Note 6).................... 486 113 -------- -------- Total assets.............................. $104,218 $ 73,992 ======== ========
DECEMBER 31, -------------------- 1999 1998 ---- ---- LIABILITIES AND AND SHAREHOLDERS' EQUITY ---------------------------------------- Current liabilities: Current portion of long-term debt (Note 4)............. $ 8 $ 68 Line of credit (Note 4)................................ 7,008 15,736 Accounts payable....................................... 10,530 9,387 Distributions payable (Note 2)......................... 0 70 Accrued expenses....................................... 7,384 14,302 -------- -------- Total current liabilities............................ 24,930 39,563 -------- -------- Total noncurrent liabilities (Note 4 and 6).............. 75 135 -------- -------- Total liabilities.................................... 25,005 39,698 -------- -------- Commitments and contingencies (Note 5)................... Shareholders' equity (Note 8): Common stock........................................... 1,121 900 Additional paid-in capital............................. 59,701 24,838 Retained earnings...................................... 18,391 8,556 -------- -------- Total shareholders' equity........................... 79,213 34,294 -------- -------- Total liabilities and shareholders' equity........... $104,218 $ 73,992 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN 000'S EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 -------- ------- ------ Revenues, net.............................. $227,011 $139,673 $87,978 Cost of revenues........................... 195,230 108,785 67,986 -------- -------- ------- Gross profit..................... 31,781 30,888 19,992 -------- -------- ------- Operating expenses: Selling, general and administrative expenses........................... 12,495 15,642 12,572 Depreciation and amortization......... 1,711 943 631 -------- -------- ------- Total operating Expenses...................... 14,206 16,585 13,203 -------- -------- ------- Operating income........................... 17,575 14,303 6,789 -------- -------- ------- Other (income) expense: Interest expense, net................. 1,370 956 1,788 Other ................................ (19) 35 118 -------- -------- ------- Total other Expense....................... 1,351 991 1,906 -------- -------- ------- Income before income taxes................................... 16,224 13,312 4,883 Income tax (provision) benefit............. (6,389) (3,743) 77 -------- -------- ------- Net income....................... $ 9,835 $ 9,569 $ 4,960 ======== ======== ======= Unaudited Pro Forma Data: Income tax provision.................... $ (6,389) $ (5,126) $(1,880) ======== ======== ======= Pro forma net income.................... $ 9,835 $ 8,186 $ 3,003 ======== ======== ======= Pro forma net income per share-basic... $ 0.99 $ 1.01 $ 0.46 ======== ======== ======= Pro forma net income per share-diluted.. $ 0.98 $ 1.00 $ 0.46 ======== ======== =======
The accompanying notes are an integral part of these consolidated statements. INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY (IN 000'S)
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED CAPITAL DEFICIT STOCK CAPITAL EARNINGS TOTAL ------- ------- ------ ------- -------- ------- BALANCE, DECEMBER 31, 1996............. 1,902 (272) 5 14 2,891 4,540 Net income (loss)...................... 3,541 (233) 0 0 1,652 4,960 Distributions to shareholders, Members and partners................ (3,684) 15 0 0 (917) (4,586) Accreted dividends on redeemable Capital stock....................... 0 0 0 0 (87) (87) ------- ------- ------ ------- ------- ------- BALANCE, DECEMBER 31, 1997............. 1,759 (490) 5 14 3,539 4,827 Distributions to shareholders, Members and partners.............. (4,836) (209) 0 0 (4,747) (9,792) Merger of companies.................... (461) 288 645 (1,667) 1,195 0 Record deferred taxes associated with merger............................ 0 0 0 0 3,016 3,016 Proceeds from sale of common stock, net.............................. 0 0 250 26,491 0 26,741 Net income (loss)...................... 3,538 411 0 0 5,620 9,569 Accreted dividends on redeemable Capital stock....................... 0 0 0 0 (67) (67) ------- ------- ------ ------- ------- ------- BALANCE, DECEMBER 31, 1998............. $ 0 $ 0 $ 900 $24,838 $ 8,556 $34,294 Proceeds from sale of common stock, net............................... 0 0 220 34,694 0 34,914 Proceeds from stockholder's options and grants........................ 0 0 1 169 0 170 Net income (loss)...................... 0 0 0 0 9,835 9,835 ------- ------- ------ ------- ------- ------- BALANCE, DECEMBER 31, 1999............. $ 0 $ 0 $1,121 $59,701 $18,391 $79,213 ======= ======= ====== ======= ======= =======
The accompanying notes are an integral part of these consolidated statements. INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000'S)
YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income................................... $ 9,835 $ 9,569 $ 4,960 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.............. 1,711 943 631 Depreciation--rental equipment............. 1,703 2,900 3,711 Loss on disposal of rental equipment....... 502 2,158 4,479 Deferred income taxes...................... 1,824 602 (537) (Increase) decrease in accounts receivable. (8,077) (24,273) 5,379 (Increase) decrease in inventories......... (25,122) (11,445) 7,085 Increase in prepaid expenses and other assets................................... (30) (734) (485) Increase (decrease) in accounts payable.... 1,143 4,621 (8,960) (Decrease) increase in accrued expenses.... (6,867) 6,571 1,881 -------- ------- ------- Net cash (used in) provided by operating Activities............................. (23,378) (9,088) 18,882 -------- ------- ------- Cash flows from investing activities: Accrued equipment purchases.................. 0 0 (1,595) Purchases of property and equipment.......... (5,328) (5,739) (5,342) -------- ------- ------- Net cash used in investing activities.... (5,328) (5,739) (6,937) -------- ------- ------- Cash flows from financing activities: Net (repayments) borrowings under lines of credit..................................... (8,728) 7,191 (8,685) Repayment of long-term debt.................. (65) (1,067) (702) Repayment of subordinated debt............... 0 (3,500) 0 Loan commitment fees......................... 0 0 (125) Proceeds from public offerings, net........ 34,914 26,741 0 Proceeds from stock options and grants exercised................................ 170 0 0 Redemption of redeemable capital stock....... 0 (984) 0 Distributions to shareholders, members and Partners................................... (70) (10,729) (3,884) -------- ------- ------- Net cash provided by (used in) financing Activities............................. 26,221 17,652 (13,396) -------- ------- ------- Net (decrease) increase in cash and cash (2,485) 2,825 (1,451) equivalents.................................... Cash and cash equivalents, beginning of period. 3,379 554 2,005 -------- ------- ------- Cash and cash equivalents, end of period....... $ 894 $ 3,379 $ 554 ======== ======= ======= Supplemental cash flow disclosures: Cash paid for interest....................... $ 1,386 $ 1,006 $ 1,788 ======== ======= ======= Cash paid for income taxes, net of refunds Received................................... $ 7,364 $ 1,493 $ 86 ======== ======= ======= Non cash transactions: Accreted dividends on Redeemable Capital Stock...................................... $ 0 $ 67 $ 87 ======== ======= =======
The accompanying notes are an integral part of these consolidated statements. INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Innotrac Corporation ("Innotrac" or the "Company") is a full service provider of customized technology based marketing support services. The majority of the Company's operation is directly related to the sale and distribution of caller identification display devices (Caller ID units). Prior to May 6, 1998, Innotrac operated as eight separate affiliates: 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.") (collectively referred to herein as the "Companies"). The Companies were all owned 100% by one shareholder or his immediate family except for RenTel, SellTel, and Providers L.P. (which each had a 10% minority interest owned by one party). The minority interests of RenTel and SellTel were owned by a related party of the shareholder. On May 6, 1998, Innotrac consolidated these eight entities (the "Consolidation"), effective simultaneously with, and as a condition to, the Company's initial public offering (the "Offering") of 2.5 million shares, at an initial public offering price of $12.00 per share (See Footnote 8). For accounting purposes, Providers, L.P. was deemed to be the acquiring entity and its balance sheet carried over at historical cost. Since the other entities that were parties to the Consolidation were wholly-owned by either the majority shareholder of Providers L.P. or his direct relatives, those entities were considered to be under common control, and the balance sheets of such entities also carried over at historical cost. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF COMBINATION AND CONSOLIDATION Prior to the Consolidation, the accompanying combined financial statements include the accounts of the Companies and were prepared on the accrual basis of accounting. Significant intercompany accounts and transactions have been eliminated in the combination. Combined financial statements were 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. Subsequent to the Consolidation, the accompanying financial statements include the consolidated accounts of Innotrac. Significant intercompany accounts and transactions have been eliminated in the consolidation. Certain prior year amounts have been reclassified to conform with the current financial statement presentation. INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) PRO FORMA NET INCOME AND NET INCOME PER SHARE In conjunction with the Consolidation, HomeTel Providers, Inc., Providers LP, RenTel #1, RenTel #2, and SellTel #2 lost their non C corporation status for tax purposes. Accordingly, the pro forma income taxes reflect income taxes at statutory rates applied to pro forma earnings. In addition the pro forma earnings per share reflect the Consolidation as if it had occurred at the beginning of each period presented. FASB Statement No. 128, Earnings per Share, simplifies the methodology for computing both basic and diluted earnings per share. The only difference in the two methods for computing per share amounts is attributable to outstanding options under the Stock Option Plan. The effect of the stock options was determined using the treasury stock method. Net income as reported was not affected. Shares used to compute diluted earnings per share are as follows:
Average Common Stock Share (In 000's) 1999 1998 1997 ---------- ---- ---- ---- As Reported 9,911 8,096 6,500 Effect of Options 122 59 0 ------ ----- ------ Diluted Shares 10,033 8,155 6,500 ====== ===== =====
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 its agreements with certain telecommunications companies, the Company primarily uses three providers for the supply of telecommunications equipment. However, if these vendors were unable to meet the Company's 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 Company's agreements with major telecommunication companies/clients to sell and rent certain telecommunications equipment to the customers of this company accounted for approximately 93%, 97% and 95% of total revenues for the years ended December 31, 1999, 1998 and 1997, respectively. If any of these agreements were terminated, it could have a material adverse affect on the future operating results and liquidity of the Company. CASH AND CASH EQUIVALENTS The Company considers all short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 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: Rental equipment............................ 3 years Computers................................... 3 years Machinery and transportation equipment...... 5-7 years Furniture and fixtures...................... 7 years
Leasehold improvements are amortized using the straight-line method over the shorter of the service lives of the improvements or the remaining term of the lease. During the 3rd Quarter of 1999, the Company opened a call center in Pueblo, Colorado. As part of the establishment of the facility in Pueblo, Colorado, the Company received various tax incentives from the city of Pueblo. These tax incentives have been recorded as a reduction in the basis of property and equipment. 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 $502,000, $2,158,000 and $4,479,000 for the years ended December 31, 1999, 1998 and 1997 respectively, and are included in "Cost of revenues" in the accompanying statements of operations. LONG-LIVED ASSETS The Company periodically reviews 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 in 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. INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) INCOME TAXES Innotrac, as a C corporation, utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Prior to the Consolidation, the shareholders of certain affiliated companies had 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. In addition, other entities were limited liability companies which are not subject to federal and state income taxes. Accordingly, no provisions for federal and certain state income taxes related to these entities have been made in the accompanying financial statements. Prior to the Consolidation, it was the policy of management to pay and accrue distributions primarily for income taxes that were required to be paid by the shareholders, members and partners due to the flow through of income of these entities. During the years ended December 31, 1998 and 1997, distributions of approximately $2,292,000 and $4,586,000, respectively, were recorded, of which approximately $70,000 was accrued and unpaid as of December 31, 1998. Additionally, in conjunction with the consolidation (Note 1), the Company distributed $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. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of the Company's financial instruments approximate their fair values. ADVERTISING COSTS The Company expenses all advertising costs as incurred. RECENT ACCOUNTING PRONOUNCEMENTS In 1998, the Company was subject to the provisions of Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". These statements had no impact on the Company's financial statements as it has no comprehensive income elements other than distributions to owners and returns on equity and its financial statements reflect how the "key operating decisions maker" views the business. The Company will continue to review these statements over time to determine if any additional disclosures are necessary based on evolving circumstances. The FASB has issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which must be adopted by the year 2000. 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 the financial statements. In March 1998, the American Institute of Certified Public Accountants (AICPA) 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. We adopted this statement in April 1998, and it did not have a material impact on the financial statements. INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 3. ACCOUNTS RECEIVABLE The Company's accounts receivable includes amounts that are unbilled as of December 31, 1999. Accounts receivable were composed of the following at December 31, 1999 and 1998 (in 000s):
1999 1998 ------- ------- Billed receivables.................. $32,778 $32,081 Unbilled receivables................ 20,831 17,208 ------- ------- Total receivables................... 53,609 49,289 Less allowances..................... (1,178) (4,935) ------- ------- $52,431 $44,354 ======= =======
Management believes that the allowances for doubtful accounts and returns reduce the gross accounts receivable to net amounts that will be collected. 4. FINANCING OBLIGATIONS Financing obligations as of December 31, 1999 and 1998 consisted of the following (in 000s):
1999 1998 -------- -------- Borrowings under revolving credit agreement (up to $40,000,000); 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 7.75% at December 31, 1999 and 1998, respectively), or at the Company's option, LIBOR plus a margin (7.10% at December 31, 1999), expires on June 1, 2002, secured by all assets of the Company................... $ 7,008 $ 15,736 Other............................................................................... 10 75 -------- -------- 7,018 15,811 Current portion..................................................................... 7,016 15,804 -------- -------- $ 2 $ 7 ======== ========
Scheduled maturities of financing obligations are as follows (in 000s): 2000............................................................................................. 7,016 2001............................................................................................. 2 ------ Total................................................................................... $7,018 ======
The weighted average interest rate on the revolving line of credit agreement was 6.26% and 7.61% for the years ending December 31, 1999 and 1998, respectively. The revolving line of credit agreement and the term note contain various restrictive financial and change of ownership control covenants. The Company was in compliance with all covenants as of December 31, 1999. INNOTRAC CORPORATION NOTES TO CONSOLIDATED 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, 1999 are as follows (in 000s): 2000........................................................................................ $ 2,494 2001........................................................................................ 2,416 2002........................................................................................ 2,160 2003........................................................................................ 2,058 2004........................................................................................ 1,863 Thereafter.................................................................................. 4,208 ------- Total minimum lease payments................................................................ $15,199 =======
Rent expense under all operating leases totaled approximately $2,005,000, $1,231,000 and $1,121,000 during the years ended December 31, 1999, 1998 and 1997, respectively. LEGAL PROCEEDINGS The Company is subject to legal proceedings and claims that arise in the ordinary course of business. There are no material pending legal proceedings to which the Company is a party. 6. INCOME TAXES Details of the income tax (provision) benefit for the years ended December 31, 1999, 1998 and 1997 are as follows (in 000s):
1999 1998 1997 ------- ------- ----- Current...... $(4,565) $(3,141) $(460) Deferred..... (1,824) (602) 537 ------- ------- ----- $(6,389) $(3,743) $ 77 ======= ======= =====
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, 1999 and 1998 are as follows (in 000s):
1999 1998 ------ ------ Noncurrent deferred tax assets (liabilities): Property, plant, equipment basis differences................... $ 324 $ (114) Other.......................................................... 29 8 ----- ------ 353 (106) ----- ------ Current deferred tax assets (liabilities): Reserves for uncollectable accounts............................ 466 2,372 Reserve for returns and equipment losses................. 117 526 Other.......................................................... 0 (32) ----- ------ 583 2,866 ----- ------ Net deferred tax asset.............................................. $ 936 $ 2,760 ===== =======
INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 6. INCOME TAXES-CONTINUED 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. Effective with the Consolidation in 1998, the Company coverted all of its entities that were non-C-corporations status for income tax reporting purposes to C-corporation status and recorded a one-time benefit of approximately $3 million related to certain temporary differences at these entities. A reconciliation of the income tax provision (benefit) computed at statutory rates to the income tax provision (benefit) for the years ended December 31, 1999, 1998 and 1997 is as follows:
1999 1998 1997 ------- ------ ------ Federal statutory rate................................................. 35.0% 35.0% 34.0% Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit........................ 4.0 6.0 1.4 Income taxable directly to shareholders, partners and members (Note 2)....................................................... 0.0 (13.3) (37.9) Other.................................................................. 0.5 0.5 0.9 ----- ----- ----- 39.5% 28.2% (1.6)% ===== ===== =====
7. REDEEMABLE CAPITAL STOCK In September 1993, the Company obtained $1,000,000 of financing from a related party in the form of subordinated debt, in two entities that were involved in the Consolidation. 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 of these entities. The terms of the callable common stock provided each of these entities the option to call the common stock at predetermined amounts on or before September 30, 1998 beginning in September 1996. If the Company did not call the common stock interests, the Company was 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 Company accounted for the callable common stock as redeemable equity. The Company allocated the capital raised between "Subordinated Debt" and "Redeemable Capital Stock" 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 Company accreted through the recording of dividends to the estimated redemption amounts at each balance sheet date. 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 1), the Company redeemed the shares of one entity in February 1998 for $390,000 and the shares of the other entity for $594,000 in December 1998. INNOTRAC CORPORATION NOTES TO CONSOLIDATED STATEMENTS-(CONTINUED) 8. SHAREHOLDERS' EQUITY 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. 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 were issued to the remaining entity owners pari-passu based on their relative value to the consolidated group except for the minority stockholder of one of the affiliated entities, whose ownership interest was repurchased as scheduled in the fourth quarter of 1998. After the Consolidation, there were an aggregate of 6,500,000 shares outstanding. As discussed in Note 1, on May 6, 1998 the Company completed an initial public offering of 2.5 million shares at a price of $12.00 per share for net proceeds of approximately $26,741,000. On July 30,1999, the Company completed a secondary public offering of 2.2 million shares at a price of $17.00 per share for net proceeds of approximately $34,914,000. As of December 31, 1999, there were 11,215,000 shares of common stock outstanding. 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 or older. Participants may elect to defer up to 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, 1999, 1998 and 1997 were not material. 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, 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. INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) A summary of the options outstanding and exercisable by price range as of December 31, 1999 is as follows:
Options Outstanding Options Exercisable -------------------------------------------------------------------------- ------------------------------------- Outstanding Weighted-Average Exercisable Range of As of Remaining Weighted-Average As of Weighted-Average Exercise Prices December 31, 1999 Contractual Life Exercise Price December 31, 1999 Exercise Price ------------------ ------------------ ------------------ ----------------- ------------------ ------------------ $9.0000 - $11.0000 309,575 7.9 $ 9.1000 180,786 $ 9.1000 11.0000 - 14.0000 80,000 9.3 12.3906 30,000 12.0000 14.0000 - 17.0000 93,500 9.2 14.9271 0 N/A 17.0000 - 20.0000 15,000 9.4 17.6880 5,001 17.6880 ------- --- -------- ------- -------- 498,075 8.4 $10.9811 215,787 $9.7022
A summary of the status of the Company's Stock Option Plan and other options at December 31, 1999 is as follows (in thousands):
Shares Weighted Average Price ------ ---------------------- Outstanding at December 31, 1996 0 $ 0.00 Granted 343 9.10 Outstanding at December 31, 1997 343 9.10 Granted 40 12.00 Forfeited (20) 9.10 Outstanding at December 31, 1998 363 9.42 Granted 179 14.64 Exercised (13) 11.33 Forfeited (31) 14.11 ---- Outstanding at December 31, 1999 498 10.98
The total value of options granted during 1999 and 1998 was computed as approximately $1,379,000 and $3,013,000 which would be amortized to expense on a pro forma basis over the vesting period of the options. Had compensation cost for stock options been determined under SFAS No. 123, the Company's net income and net income per share would have been the following pro forma amounts (in thousands except per share data):
Year ended December 31, ----------------------------------------- 1999 1998 1997 ----- ----- ----- Net income Pro forma $ 9,835 $8,186 $ 3,003 Pro forma adjusted for the Impact of SFAS 123 $ 9,048 $7,402 $ 2,686 Diluted net income per share Pro forma $0.98 $1.00 $ 0.46 Pro forma adjusted for the $0.90 $0.91 $ 0.41 Impact of SFAS 123
INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) 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 using the Black-Scholes option-pricing model as prescribed by SFAS 123 using the following weighted average assumptions:
1999 1998 1997 Risk-free interest rate..... 6.34% 5.17% 5.17% Expected dividend yield..... 0% 0% 0% Expected lives.............. 2.7 Years 2.7 Years 2.7 Years Expected volatility......... 80.5% 86.0% 106.0%
11. QUATERLY FINANCIAL INFORMATION (UNAUDITED)
(In Thousands, Except Per Share Data) First Second Third Fourth ----------------------------------------------------------- -------------- ------------- -------------- ------------- 1999 Quarters: Revenues, net $67,320 $57,496 $51,661 $50,534 Operating income 5,784 5,869 4,075 1,847 Net income 3,286 3,266 2,303 980 Net income per share-basic 0.37 0.36 0.22 0.09 Net income per share-diluted $ 0.36 $ 0.36 $ 0.22 $ 0.09 1998 Quarters: Revenues, net $22,565 $36,346 $35,233 $45,529 Operating income 2,587 4,494 3,669 3,553 Net income 1,371 2,596 2,169 2,050 Net income per share-basic 0.21 0.33 0.24 0.23 Net income per share-diluted $ 0.21 $ 0.33 $ 0.24 $ 0.22 1997 Quarters: Revenues, net $22,388 $24,699 $20,226 $20,665 Operating income 1,371 2,722 1,896 800 Net income 718 1,205 873 207 Net income per share-basic 0.11 0.19 0.13 0.03 Net income per share-diluted $ 0.11 $ 0.19 $ 0.13 $ 0.03
EX-21.1 5 EXHIBIT 21.1 EXHIBIT 21.1 LIST OF SUBSIDIARIES Return.com Online, Inc. EX-23.1 6 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the incorporation by reference in the Registration Statement on Form S-8 filed with the Securities and Exchange Commission on October 23, 1998 (no. 333-66045) of Innotrac Corporation of our reports, dated January 27, 2000, included in the December 31, 1999 Annual Report on Form 10-K of Innotrac Corporation. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia March 24, 2000 EX-27.1 7 EXHIBIT 27.1
5 12-MOS DEC-31-1999 DEC-31-1999 $894,000 0 53,609,000 1,178,000 39,503,000 94,810,000 16,527,000 7,605,000 104,218,000 24,930,000 0 0 0 60,822,000 18,391,000 104,218,000 227,011,000 227,011,000 0 195,230,000 14,206,000 11,853,000 1,370,000 16,224,000 6,389,000 9,835,000 0 0 0 9,835,000 0.99 0.98
EX-99.1 8 EXHIBIT 99.1 [LOGO] April 7, 2000 To Our Shareholders: On behalf of the Board of Directors and management of Innotrac Corporation, I cordially invite you to the Annual Meeting of Shareholders to be held on May 17, 2000, at 9:00 AM, Eastern Time, at the Gwinnett Civic and Cultural Center located at 6400 Sugarloaf Parkway, Duluth, Georgia 30155. At the Annual Meeting, shareholders will be asked to (1) consider and vote upon the election of two directors of the Company, each of whom is currently a director of the Company; (2) approve the Company's 2000 Stock Option and Incentive Award Plan (the "Stock Incentive Plan"); and (3) approve the Company's Senior Executive Compensation Plan (the "Executive Plan"). As explained in the Proxy Statement, the Board of Directors believes that the Stock Incentive Plan and the Executive Plan are both essential elements of the Company's comprehensive compensation program. The Stock Incentive Plan plays an integral role in the ability of the Company to attract and retain key employees and directors and to provide incentives for such persons to promote the financial success of the Company. The Executive Plan is designed to reward key management personnel on an ongoing basis for helping the Company achieve operating performance goals. Information about the nominees for directors, the Stock Incentive Plan, the Executive Plan and certain other matters is contained in the accompanying Proxy Statement. A copy of the Company's 1999 Annual Report to Shareholders, which contains financial statements and other important information about the Company's business, is also enclosed. It is important that your shares of stock be represented at the meeting, regardless of the number of shares you hold. You are encouraged to specify your voting preferences by marking and dating the enclosed proxy card. However, if you wish to vote for re-electing the nominees for director specified herein, approving the Stock Incentive Plan and approving the Executive Plan, all you need to do is sign and date the proxy card. Please complete and return the proxy card in the enclosed envelope, whether or not you plan to attend the meeting. If you do attend and wish to vote in person, you may revoke your proxy at that time. I hope you are able to attend, and look forward to seeing you. Sincerely, /s/ Scott D. Dorfman SCOTT D. DORFMAN PRESIDENT, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER INNOTRAC CORPORATION 6655 SUGARLOAF PARKWAY DULUTH, GEORGIA 30097 ------------------------ NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 17, 2000 ------------------------ To the Shareholders of Innotrac Corporation: Notice is hereby given that the Annual Meeting of Shareholders of Innotrac Corporation will be held at 9:00 AM, Eastern Time, on Wednesday, May 17, 2000, at the Gwinnett Civic and Cultural Center, 6400 Sugarloaf Parkway, Duluth, Georgia 30155, for the following purposes: 1. To elect two directors whose terms will expire in 2003; 2. To approve the Company's 2000 Stock Option and Incentive Award Plan (the "Stock Incentive Plan"); 3. To approve the Company's Senior Executive Compensation Plan (the "Executive Plan"); and 4. To consider such other matters as may properly come before the meeting and any adjournment or postponement thereof. Only shareholders of record on March 17, 2000, are entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. A Proxy Statement and a Proxy solicited by the Board of Directors are enclosed herewith. Please sign, date and return the Proxy promptly in the enclosed business reply envelope. If you attend the meeting you may, if you wish, withdraw your Proxy and vote in person. BY ORDER OF THE BOARD OF DIRECTORS, DAVID L. ELLIN SECRETARY APRIL 7, 2000 WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, PLEASE FILL IN, DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED BUSINESS REPLY ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE, AND IF YOU ARE PRESENT AT THE ANNUAL MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT THAT TIME AND EXERCISE THE RIGHT TO VOTE YOUR SHARES PERSONALLY. [LOGO] PROXY STATEMENT DATED APRIL 7, 2000 FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 17, 2000 This Proxy Statement is furnished to shareholders in connection with the solicitation of proxies by the Board of Directors of Innotrac Corporation ("Innotrac" or the "Company") for use at Innotrac's 2000 Annual Meeting of Shareholders ("Annual Meeting") to be held on Wednesday, May 17, 2000, including any postponement, adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of Annual Meeting. Management intends to mail this Proxy Statement and the accompanying form of proxy to shareholders on or about April 7, 2000. Only shareholders of record at the close of business on March 17, 2000 (the "Record Date"), are entitled to notice of and to vote in person or by proxy at the Annual Meeting. As of the Record Date, there were 11,214,595 shares of common stock, $.10 par value per share ("Common Stock"), of Innotrac outstanding and entitled to vote at the Annual Meeting. The presence of a majority of such shares is required, in person or by proxy, to constitute a quorum for the conduct of business at the Annual Meeting. Each share is entitled to one vote on any matter submitted for vote by the shareholders. The vote required for approval of each matter submitted to the shareholders is described with the discussion of that matter in this Proxy Statement. Proxies in the accompanying form, duly executed and returned to the management of the Company, and not revoked, will be voted at the Annual Meeting. Any proxy given pursuant to this solicitation may be revoked by the shareholder at any time prior to the voting of the proxy by delivery of a subsequently dated proxy, by written notification to the Secretary of the Company or by personally withdrawing the proxy at the Annual Meeting and voting in person. Proxies that are executed, but that do not contain any specific instructions, will be voted for the election of all the nominees for directors specified herein, and for approval of the Stock Incentive Plan and the Executive Plan. The persons appointed as proxies will vote in their discretion on any other matter that may properly come before the Annual Meeting or any postponement, adjournment or adjournments thereof, including any vote to postpone or adjourn the Annual Meeting. A copy of the Company's 1999 Annual Report to Shareholders is being furnished herewith to each shareholder of record as of the close of business on the Record Date. Copies of the Company's Annual Report on Form 10-K for the year ended December 31, 1999 will be provided free of charge upon written request to: INNOTRAC CORPORATION 6655 SUGARLOAF PARKWAY DULUTH, GEORGIA 30097 ATTN.: VICE PRESIDENT--OPERATIONS If the person requesting the Annual Report on Form 10-K for the year ended December 31, 1999 was not a shareholder of record on the Record Date, the request must include a representation that the person was a beneficial owner of Common Stock on that date. Copies of any exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1999 will also be furnished on request and upon payment of the Company's expenses in furnishing the exhibits. 1 VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS The following table sets forth the information concerning the beneficial ownership of the common stock, par value $.10 per share, of Innotrac (the "Common Stock"), which is the Company's only class of voting stock, at March 17, 2000, by: - each person known to Innotrac to beneficially own more than 5% of the Common Stock, - each director, the Chief Executive Officer and the four other most highly compensated executive officers, and - all of Innotrac's directors and executive officers as a group. Unless otherwise indicated below, the persons named below had sole voting and investment power with respect to all shares of the Common Stock shown as beneficially owned by them.
NUMBER OF SHARES PERCENTAGE BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED - ---------------- --------------------- ------------------ Scott D. Dorfman...................... 5,572,962(2)(3) 49.7% SAFECO Corporation.................... 768,400(4) 6.9 SAFECO Asset Management Company....... 719,400(5) 6.4 SAFECO Common Stock Trust............. 611,000(6) 5.4 David L. Ellin........................ 137,500(7) 1.2 Larry C. Hanger....................... 12,500(8) * Don L. Colter......................... 13,500(8) * Will Hendrick......................... 12,500(9) * Bruce V. Benator...................... 22,667(10) * Martin J. Blank....................... 21,667(11) * William H. Scott, III................. 223,000(11)(12) 2.0 All directors and executive officers as a group (10 persons)............. 6,017,296 52.8
- ------------------------ * 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 the person or group has the right to acquire within 60 days or with respect to which the 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 the 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 the person or group but are not deemed to be outstanding for the purpose of computing the percentage of any other person or group. As of March 17, 2000, there were 11,214,595 shares of Common Stock outstanding. (2) Mr. Dorfman's address is 6655 Sugarloaf Parkway, Duluth, Georgia 30097. (3) Includes an aggregate of 214,033 shares owned by: (i) Mr. Dorfman's wife individually and as custodian for the benefit of his children; (ii) Mr. Dorfman's brother as trustee for the benefit of Mr. Dorfman's children; and (iii) by a foundation for which Mr. Dorfman and his wife serve as trustees. (4) The address of SAFECO Corporation ("SAFECO") is SAFECO Plaza, Seattle, Washington 98185. According to a joint Schedule 13G filed March 10, 2000, SAFECO is the parent holding company of SAFECO Asset Management Company ("SAFECO AMC") and disclaims beneficial ownership of the reported shares, which include the shares reported by SAFECO AMC and SAFECO Common Stock Trust ("SAFECO CST"). The reported shares are beneficially owned by (i) registered 2 investment companies for which SAFECO AMC serves as investment adviser and (ii) employee benefit plans for which SAFECO serves as plan sponsor. (5) The address of SAFECO AMC is 601 Union Street, Suite 2500, Seattle, Washington 98101. SAFECO AMC is an investment adviser and disclaims beneficial ownership of the reported shares, which are beneficially owned by registered investment companies for which SAFECO AMC serves as investment adviser, and include the shares reported by SAFECO CST. (6) The address of SAFECO CST is 10865 Willows Road NE, Redmond, Washington 98052. SAFECO CST is an investment company for which SAFECO AMC serves as investment adviser. (7) Includes 105,000 shares subject to presently exercisable stock options. (8) Includes 12,500 shares subject to presently exercisable stock options. (9) Includes 12,500 shares subject to options vesting in the next 60 days. (10) Includes 21,667 shares subject to presently exercisable stock options. (11) Includes 11,667 shares subject to presently exercisable stock options. (12) Includes 208,333 shares owned of record by ITC Service Company, with respect to which Mr. Scott is an officer and director. Mr. Scott disclaims beneficial ownership of these shares. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires Innotrac's directors and executive officers, and persons who own more than 10% of Innotrac's Common Stock, to file with the Securities and Exchange Commission certain reports of beneficial ownership of the Company's Common Stock. Based solely on copies of such reports furnished to the Company and written representations that no other reports were required, the Company believes that all applicable Section 16(a) reports were filed by its directors, officers and 10% shareholders during the fiscal year ended December 31, 1999. ELECTION OF DIRECTORS (ITEM NUMBER 1 ON THE PROXY CARD) The Bylaws of the Company provide that the Board of Directors shall consist of not less than five nor more than eleven directors, with the exact number being set from time to time by the Board or the shareholders. The Board presently consists of six directors, three of whom are independent directors. The Board of Directors is divided into three classes of directors serving staggered three-year terms. Two directors are to be elected at the meeting for a three-year term expiring in 2003. The Board has nominated Martin J. Blank and William H. Scott, III for those positions. Directors are elected by a plurality of the votes cast by the holders of shares of Common Stock entitled to vote for the election of directors at a meeting at which a quorum is present. A quorum will be present for the Annual Meeting when the holders of a majority of the shares outstanding on the Record Date are present in person or by proxy. An abstention and a broker non-vote are included in determining whether a quorum is present, but will not affect the outcome of the vote for the election of directors. Unless otherwise indicated on a proxy, all duly executed proxies granted by the holders of Common Stock will be voted individually at the Annual Meeting for the election of each nominee. Each nominee has indicated that he will serve if elected, but if the situation should arise that any nominee is no longer able or willing to serve, the proxy may be voted for the election of such other person as may be designated by the Board of Directors. The following information as of February 11, 2000 has been furnished by the nominees for director and the continuing directors. Except as otherwise indicated, the nominees and the continuing directors 3 have been or were engaged in their present or last principal employment, in the same or a similar position, for more than five years.
NAME (AGE) INFORMATION ABOUT THE NOMINEES AND THE CONTINUING DIRECTORS ---------- ------------------------------------------------------------ NOMINEES FOR DIRECTOR AT THE MEETING AND WHOSE TERM WILL EXPIRE IN 2003 MARTIN J. BLANK (53) MR. BLANK has been a director of Innotrac since 1997 and is a co-founder of Automobile Protection Corporation, or APCO, a subsidiary of the Ford Motor Company 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. WILLIAM H. SCOTT, III (52) MR. SCOTT has been a director of Innotrac since 1997 and has served as President and Chief Operating Officer of ITC Holding Company, Inc., the parent company of ITC Service Company, since 1991. He has been a director of Headhunter.Net, Inc., a job information and recruiting internet site, since October 1997 and has served as Chairman of the Board of that company since July 1998. He has also been a director of ITC Holding Company, Inc. since 1989, and served as its Executive Vice President from 1989 to 1991. Mr. Scott is a director of Powertel, Inc., a wireless telecommunications services company operating in the southeastern United States; KNOLOGY Holdings, Inc., a broadband telecommunications services company currently operating in Alabama, Florida, Georgia and South Carolina; ITC DeltaCom, Inc., a full service telecommunications provider to business customers in the southeastern United States; Earthlink Network, Inc., a national internet service provider; and nFront, Inc., a provider of Internet banking services. DIRECTORS WHOSE TERMS EXPIRE IN 2001 SCOTT D. DORFMAN (42) MR. DORFMAN founded Innotrac and has served as President, Chief Executive Officer and Chairman of the Board since its inception in 1984. Prior to founding Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc., an equipment distributor. At Paymaster, Mr. Dorfman gained experience in distribution, tracking and inventory control by developing and managing Paymaster's mail order catalog. DAVID L. ELLIN (41) MR. ELLIN joined Innotrac in 1986 and has served as Senior Vice President and Chief Operating Officer since November 1997 and as a director since December 1997. He also serves as Secretary of Innotrac. He served as Vice President from 1988 to November 1997. From 1984 to 1986, Mr. Ellin was employed by the Atlanta branch of WHERE Magazine, where he managed the sales and production departments. From 1980 to 1984, Mr. Ellin was employed by Paymaster, where he was responsible for Paymaster's sales and collections.
4
NAME (AGE) INFORMATION ABOUT THE NOMINEES AND THE CONTINUING DIRECTORS ---------- ------------------------------------------------------------ DIRECTORS WHOSE TERMS EXPIRE IN 2002 LARRY C. HANGER (45) MR. HANGER joined Innotrac in 1994, and has served as Vice President-Business Development since November 1997 and as a director since December 1997. He was promoted to Senior Vice President in April 1999. He served as Innotrac'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 Corporation, where he managed the marketing program for BellSouth's network services and was involved in implementing the billing options program for BellSouth with Innotrac. BRUCE V. BENATOR (42) MR. BENATOR is the Managing Partner of Williams Benator and Libby, LLP, certified public accountants, and has been a director since 1997. He has been affiliated with the firm since 1984 and is the firm's Director of Accounting and Auditing Services. From 1979 to 1984, Mr. Benator was employed by Ernst & Young, LLP.
MEETINGS AND COMMITTEES OF THE BOARD The Board of Directors meets on a regular basis to supervise, review, and direct Innotrac's business and affairs. During the 1999 fiscal year, the Board held four meetings. The Board of Directors has established an Executive Committee, an Audit Committee, a Compensation Committee and an Executive Compensation Subcommittee to which it has assigned certain responsibilities in connection with the governance and management of our affairs. Innotrac has no standing nominating committee or other committee performing similar functions. Each of the directors attended 75% of the Board meetings and meetings of committees on which he served during the 1999 fiscal year. EXECUTIVE COMMITTEE. The Executive Committee, pursuant to authority delegated by the Board, from time to time considers certain matters in lieu of convening a meeting of the full Board, subject to any restrictions in applicable law related to the delegation of certain powers to a committee of the Board. Messrs. Dorfman, Ellin and Benator comprise the members of the Executive Committee. The Executive Committee held no meetings during fiscal 1999. AUDIT COMMITTEE. The Audit Committee recommends the appointment of independent public accountants, reviews the scope of audits proposed by the independent public accountants, reviews internal audit reports on various aspects of corporate operations and periodically consults with the independent public accountants on matters relating to internal financial controls and procedures. Messrs. Benator, Blank and Scott comprise the members of the Audit Committee. The Audit Committee held three meetings during fiscal 1999. COMPENSATION COMMITTEE AND EXECUTIVE COMPENSATION SUBCOMMITTEE. The Compensation Committee is responsible for the review and approval of compensation of employees above a certain salary level, the review of management recommendations relating to incentive compensation plans, the administration of Innotrac's stock option and senior executive compensation plans, the review of compensation of directors and consultation with management and the Board on senior executive continuity and organizational matters. Messrs. Dorfman, Blank and Scott comprise the members of the Compensation Committee. The Compensation Committee held one meeting during fiscal 1999. 5 Effective October 1999, the Board established the Executive Compensation Subcommittee, comprised of Messrs. Blank and Scott. This subcommittee was constituted to (1) achieve certain securities law advantages with respect to stock-based compensation to Innotrac's officers and directors and (2) maintain the tax deductibility of certain annual compensation in excess of $1 million to Innotrac's Chief Executive Officer and four other most highly compensated officers, as explained more fully under "Compliance with Section 162(m) of the Internal Revenue Code" below. DIRECTORS' COMPENSATION We pay our outside directors an annual fee of $10,000, and additional fees of $250 and $100, respectively, for each Board meeting and committee meeting attended. We also reimburse all directors for their travel and other expenses incurred in connection with attending Board or committee meetings. We grant options for 5,000 shares annually to each of our outside directors on the dates we hold our annual meetings of shareholders. The exercise price is the closing price of our common stock reported on the Nasdaq National Market on the date of grant. One-third of the options are immediately exercisable, the next third vest on the first anniversary of the date of grant, and the last third, on the second anniversary. On May 11, 1999, we granted options for 5,000 shares--1,667 of which were presently exerciseable--to each of Messrs. Benator, Blank and Scott under this plan. These options are exercisable at $17.688 per share. 6 APPROVAL OF 2000 STOCK INCENTIVE PLAN (ITEM NUMBER 2 ON THE PROXY CARD) PURPOSE OF THE 2000 STOCK INCENTIVE PLAN The Board of Directors adopted the Innotrac Corporation 2000 Stock Option and Incentive Award Plan (the "Stock Incentive Plan") on March 28, 2000, subject to shareholder approval. The Board of Directors is proposing that the Company's shareholders approve the Stock Incentive Plan for a number of reasons, including compliance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). See "Compliance with Section 162(m) of the Internal Revenue Code" below. The Stock Incentive Plan, if approved by shareholders, will be effective March 28, 2000 and will remain in effect until March 27, 2010, unless it is terminated by the Board at an earlier date. The Board of Directors previously adopted the Innotrac Corporation Stock Option and Incentive Award Plan, as amended, on November 24, 1997 (the "1997 Option Plan"). As of December 31, 1999, options for 498,075 shares of Common Stock had been granted under the 1997 Option Plan. A total of 800,000 shares were reserved for issuance under the 1997 Option Plan. Upon the approval of the 2000 Stock Incentive Plan, no additional options or other awards will be granted under the 1997 Option Plan. The Board of Directors believes that the Stock Incentive Plan will play an integral role in the ability of the Company to attract and retain key employees and directors and to provide incentives for such persons to promote the financial success of the Company. The following description of the material features of the Stock Incentive Plan is a summary and is qualified in its entirety by reference to the Stock Incentive Plan, a copy of which will be provided to any shareholder upon written request to the Company. The Stock Incentive Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). DESCRIPTION OF AWARDS OPTIONS. Awards granted under the Stock Incentive Plan may be "incentive stock options" ("ISOs"), as defined in Section 422 of the Code, "nonqualified stock options" ("NQSOs"), shares of Common Stock subject to terms and conditions set by the Board of Directors ("restricted stock" or "stock awards"), stock appreciation rights ("SARs"), or performance shares. ISOs may be granted only to employees of the Company, including officers. NQSOs may be granted to any person employed by or performing services for the Company, including non-employee directors. The Compensation Committee of the Board of Directors or its designee, or the Executive Compensation Subcommittee or its designee, generally has discretion to set the terms and conditions of grants and awards, including the term, exercise price, and vesting conditions (including vesting based on the Company's performance); to select the persons who receive such grants and awards; and to interpret and administer the Stock Incentive Plan. The maximum number of shares of Common Stock with respect to which awards may be granted under the Stock Incentive Plan is 1,300,000 shares. The maximum number of shares for which options (ISOs and NQSOs) may be granted to any individual during any calendar year is 500,000 shares, subject to anti-dilution and similar provisions. The Board of Directors may at any time amend or terminate the Stock Incentive Plan, subject to applicable laws. The Company will pay the administrative costs of the Stock Incentive Plan. The option price for each ISO may be not less than 100% of the fair market value of the Common Stock subject to the option. The option price for a NQSO can be less than, equal to, or greater than the fair market value on the date of grant. ISOs 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 (a "principal shareholder") of the Company, unless the option price is at least 110% of the fair market value of the Common Stock subject to the option. In addition, an ISO granted to a principal shareholder may not be exercisable more than five years from its date of grant. 7 Full payment of the option price must be made when an Option is exercised. The purchase price may be paid in cash or in such other form of consideration as the Committee may approve, which may include shares of Common Stock valued at their fair market value on the date of exercise, or by any other means which the Committee determines to be consistent with the Stock Incentive Plan's purpose and applicable law. A Participant will have no rights as a shareholder with respect to the shares subject to his Option until the Option is exercised. SARS. The Committee may grant stock appreciation rights separately or in connection with another stock incentive, and the Committee may provide that the holder may exercise them at any time or that they will be paid at a certain time or times or upon the occurrence or non-occurrence of certain events. Stock appreciation rights may be settled in shares of common stock or in cash, according to terms established by the Committee with respect to any particular award. The maximum number of stock appreciation rights which can be granted under the Stock Incentive Plan during any calendar year to any individual is 500,000. RESTRICTED STOCK; STOCK AWARDS. Participants may also be awarded shares of Common Stock pursuant to a stock award. The Committee, in its discretion, may prescribe that a Participant's rights in a stock award shall be nontransferable or forfeitable or both unless certain conditions are satisfied. These conditions may include, for example, a requirement that the Participant continue employment with the Company for a specified period or that the Company or the Participant achieve stated objectives. In addition, the restrictions may lapse incrementally. At the time a grant of restricted stock is made, the Committee shall establish a period or periods of time (the "Restricted Period") applicable to such grant. Subject to certain provisions, at the end of the Restricted Period, all restrictions shall lapse and the restricted stock shall vest in the Participant. The Committee may, in its discretion, shorten or terminate the Restricted Period, or waive any conditions for the lapse or termination of restrictions with respect to all or any portion of the restricted stock at any time after the date the grant is made. Upon a grant of restricted stock, a stock certificate representing the number of shares of restricted stock granted to the Participant shall be registered in the Participant's name and shall be held in custody by the Company or a bank selected by the Committee for the Participant's account. Following such registration, the Participant shall, subject to certain restrictions, have the rights and privileges of a shareholder as to such restricted stock, including the right to receive dividends and to vote such restricted stock, except that the right to receive cash dividends shall be the right to receive such dividends either in cash currently or by payment in restricted stock, as the Committee shall determine. The maximum number of Shares of Restricted Stock or Stock Awards which can be granted under the Stock Incentive Plan during any calendar year to any individual is 500,000. PERFORMANCE SHARE AWARDS. The Stock Incentive Plan also provides for the award of performance shares. A performance share award entitles the Participant to receive a payment equal to the fair market value of a specified number of shares of Common Stock if certain performance standards are met. The Committee will prescribe the requirements that must be satisfied before a performance share award is earned. The performance share requirements may include, for example, a requirement that the Participant continue employment with the Company for a specified period or that the Company or the Participant achieve stated objectives. To the extent that performance shares are earned, the obligation may be settled in cash, in Common Stock or by a combination of the two. No Participant shall have, as a result of receiving a performance share award, any rights as a shareholder until and to the extent that the performance shares are earned and Common Stock is transferred to such Participant. If the Award Agreement so provides, a Participant may receive a cash payment equal to the dividends that would have been payable with respect to the number of shares of Common Stock covered by an award between (a) the date that the performance shares are awarded and (b) the date that a transfer of Common Stock to the Participant, cash settlement, or combination thereof is made pursuant to the performance share award. 8 TERMINATION OF AWARDS. The terms of an award may provide that it will terminate, among other reasons, upon the holder's termination of employment or other status with the Company or its subsidiaries, upon a specified date, upon the holder's death or disability, or upon the occurrence of a change in control. Also, the Committee may, within the terms of the Stock Incentive Plan, provide in the Award Agreement for the acceleration of vesting for any of the above reasons. COMPLIANCE WITH SECTION 162(m) OF THE INTERNAL REVENUE CODE Section 162(m) of the Code denies a deduction by an employer for certain compensation in excess of $1.0 million per year paid by a publicly traded corporation to the Chief Executive Officer or any of the four most highly compensated executive officers other than the Chief Executive Officer (the "Named Executive Officers"). Compensation realized with respect to stock options, including upon exercise of an NQSO or upon a disqualifying disposition of an ISO, as described below under "Certain Federal Income Tax Consequences", will be excluded from this deduction limit if it satisfies certain requirements, including a requirement that the Stock Incentive Plan be approved by the Company's shareholders. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OPTIONS. Under current tax law, a holder of an ISO under the Stock Incentive Plan does not, as a general matter, realize taxable income upon the grant or exercise of the ISO. (Depending upon the holder's income tax situation, however, the exercise of the ISO may have alternative minimum tax implications.) In general, a holder of an ISO will only recognize income at the time that Common Stock acquired through exercise of the ISO is sold or otherwise disposed of. In that situation, the amount of income that the optionee must recognize is equal to the amount by which the value of the Common Stock on the date of the sale or other disposition exceeds the option exercise price. If the optionee disposes of the stock after the required holding period--that is, no earlier than a date that is two years after the date of grant of the option and one year after the date of exercise--the income is taxed as capital gains. If disposition occurs prior to expiration of the holding period, the optionee will recognize ordinary income equal to the difference between the fair market value of the shares at the exercise date and the option exercise price; any additional increase in the value of option shares after the exercise date will be taxed as capital gain. The Company is entitled to a tax deduction equal to the amount of ordinary income recognized by the optionee. An optionee will not realize income when an NQSO option is granted to him or her. Upon exercise of such option, however, the optionee must recognize ordinary income to the extent that the fair market value of the Common Stock on the date the option is exercised exceeds the option exercise price. Any such gain is taxed in the same manner as ordinary income in the year the option is exercised. Thereafter, any additional gain recognized upon the disposition of the shares of stock obtained by the exercise of an NQSO will be taxed as short or long-term capital gain, depending on the optionee's holding period. The Company will not experience any tax consequences upon the grant of an NQSO, but will be entitled to take an income tax deduction equal to the amount that the option holder includes in income (if any) when the NQSO is exercised. STOCK AWARDS; RESTRICTED STOCK. With respect to outright grants of Common Stock under the Stock Incentive Plan, the Company is of the opinion that the Participant will realize compensation income at the time of grant in an amount equal to the fair market value of the Common Stock less any amount paid for such Common Stock. The Company is also of the opinion that it will be entitled to a deduction under the Code in the amount and at the time that compensation income is realized by the Participant. With respect to the grant of restricted stock under the Stock Incentive Plan, the Company is of the opinion that the Participant will realize compensation income in an amount equal to the fair market value of the restricted stock (whether received as a grant or as a dividend), less any amount paid for such 9 restricted stock, at the time when the Participant's rights with respect to such restricted stock are no longer subject to a substantial risk of forfeiture, unless the Participant elected, pursuant to a special election provided in the Code, to be taxed on the restricted stock at the time it was granted or received as a dividend, as the case may be. Dividends paid to the Participant during the Restricted Period will be taxable as compensation income, rather than as dividend income, unless the election referred to above was made. The Company is also of the opinion that it will be entitled to a deduction under the Code in the amount and at the time that compensation income is realized by the Participant. PERFORMANCE SHARE AWARDS. Unless an election is made under Section 83(b) of the Code, a Participant will recognize income on account of the settlement of a performance share award. The amount of such income will be equal to any cash that is paid and the fair market value of Common Stock (on the date that the shares are first transferable or not subject to a substantial risk of forfeiture) that is received in settlement of the award, and the Company will generally be entitled to claim a deduction of such amount for tax purposes. NEW STOCK INCENTIVE PLAN BENEFITS As of December 31, 1999, options for 498,075 shares of Common Stock had been granted under the Company's 1997 Option Plan. The following table sets forth information on option and restricted share grants made or anticipated to be made under the Stock Incentive Plan during fiscal 2000 to the specified persons and groups. Unless otherwise noted, all awards are stock options. Other awards may be made in the discretion of the Compensation Committee and Executive Compensation Subcommittee. NEW PLAN BENEFITS IN FISCAL 2000
NAME AND POSITION NUMBER OF SHARES (1) - ----------------- -------------------- Scott D. Dorfman, President, Chairman of the Board and Chief Executive Officer................................................... 50,000 David L. Ellin Senior Vice President, Chief Operating Officer and Secretary................................................. 100,000(2) Larry C. Hanger Senior Vice President--Business Development............... 50,000 Don L. Colter Vice President--Operations, and Interim Chief Financial Officer................................................... 50,000 Will Hendrick Vice President--Telecommunications........................ 50,000 All executive officers as a group (7 persons)............... 400,000 Nonemployee directors as a group (3 persons)................ 15,000 Non-executive officer employees as a group.................. 85,000
- ------------------------ (1) Options are granted with an exercise price equal to the closing price on the Nasdaq National Market on the date of grant. The value of restricted share awards is not determinable until the restrictions lapse. (2) Includes 50,000 shares of restricted stock. VOTE REQUIRED AND RECOMMENDATION OF THE BOARD The affirmative vote of holders of a majority of the shares of the Common Stock of the Company represented and voted at the Annual Meeting, assuming the presence of a quorum, is required to approve the Stock Incentive Plan. The Board of Directors, which unanimously approved the Stock Incentive Plan, recommends a vote "FOR" approval of the Stock Incentive Plan. 10 APPROVAL OF THE SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN (ITEM NUMBER 3 ON THE PROXY CARD) Subject to approval by the Company's shareholders, the Board of Directors on March 28, 2000 adopted the Innotrac Company Senior Executive Incentive Compensation Plan (the "Executive Plan") effective as of January 1, 2000. Stockholder approval of the Executive Plan is sought in order to qualify the Executive Plan under Section 162(m) of the Internal Revenue Code and to thereby allow the Company to deduct for federal income tax purposes all compensation paid under the Executive Plan to the Named Executive Officers. This summary of certain features of the Executive Plan is qualified in its entirety by reference to the full text of the Executive Plan, a copy of which will be provided to any shareholder upon written request to the Company. GENERAL The purpose of the Executive Plan is to further the growth and financial success of the Company by offering performance incentives to designated executives who have significant responsibility for such success. The Executive Plan will be administered by the Executive Compensation Subcommittee of the Compensation Committee or other committee designated by the Board (the "Committee"), subject to the Committee's right to delegate to the Chief Executive Officer and others responsibility for administration of the Executive Plan as it relates to participants other than the Named Executive Officers. Persons eligible to participate in the Executive Plan are the executive officers and other key employees of the Company, its operating units, or its affiliates who are in management positions designated as eligible for participation by the Committee or its designee. The Executive Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). The Executive Plan may be amended, suspended or terminated by the Committee at any time, subject to ratification by the Board and to the consent of each participant whose rights with respect to an approved award would be adversely affected. Unless terminated, the Executive Plan will remain in effect until awards thereunder are paid for the Company's fiscal year ending in 2004. AWARDS UNDER THE EXECUTIVE PLAN Prior to, or as soon as practical after, the commencement of each fiscal year, the Committee will establish plan rules for that year with respect to the following matters: (a) employees who are eligible to participate; (b) performance targets and the measurement criteria for determining the level of achievement of the performance targets; (c) the percentage of a participant's base salary which may be paid as an incentive award at specified levels of achievement of the performance targets; (d) the form of payment of an incentive award; and (e) the times and conditions subject to which any incentive award may become payable. Performance criteria for the Named Executive Officers will include one or more of the following: earnings before interest and taxes (EBIT), earnings before interest, taxes, depreciation and amortization (EBITDA), return on capital employed, cash flow, cash flow return, operating income, gross margin, net income, earnings per share, return on equity, return on assets (or net assets), pre-tax profit, market value of the Company's stock, and total shareholder return. The Committee may establish other performance criteria for participants other than the Named Executive Officers. The maximum incentive award payable to a participant in any year will be $2 million. After the end of each fiscal year, the Committee will certify the extent to which the performance criteria have been achieved for that year. In measuring performance, the Committee may adjust the Company's financial results to exclude the effect of unusual charges or income items which distort year-to-year comparisons of results. With respect to the Named Executive Officers the Committee shall exclude such items whose exclusion has the effect of increasing achievement of performance criteria if such 11 items constitute "extraordinary items" under generally accepted accounting principles. The Committee will also make adjustments to eliminate the effect of unanticipated changes in the tax laws and regulations. Incentive awards shall be approved by the Committee, subject to ratification by the Board when required under the Executive Plan or elected by the Committee, based on the Executive Plan rules then in effect and the achievement of performance criteria as certified by the Committee. The Committee may in its discretion grant awards to deserving participants, except the Named Executive Officers, notwithstanding levels of achievement of performance criteria. Awards will generally be made in lump sum cash payments or in such other form as the Committee may specify at the beginning of the year. Payment will be made as soon as practicable after determination of awards. A partial incentive award may be authorized by the Committee for a participant who is terminated without cause or who retires, dies, or becomes permanently and totally disabled. Otherwise, no award will be paid to a participant who is not an active employee of the Company, an operating unit, or an affiliate at the end of the fiscal year to which the award relates. In general and unless with respect to some or all participants, the Committee has established a different rule, upon the occurrence of a Change in Control, the participant's incentive award for that year will be deemed to have been fully earned for the year, with deemed performance at the target level; will be prorated for the portion of the year that has elapsed; and will be paid within thirty days after the effective date of the Change in Control. FEDERAL TAX CONSEQUENCES An award under the Executive Plan will constitute taxable ordinary income to the participant to the extent it is paid in cash. The grant of stock options will not be currently taxable. Generally, the Company will be entitled to a corresponding deduction. Section 162(m) of the Internal Revenue Code limits to $1 million the amount of compensation that may be deducted in any tax year with respect to a Named Executive Officer (generally, the executive officers who would be listed for a fiscal year in the Summary Compensation Table appearing below), with an exception for certain performance-based compensation. The Executive Plan is designed, and is to be administered, to qualify payments to the Named Executive Officers for that performance-based exception. NEW EXECUTIVE PLAN AWARDS For fiscal year 2000, each of the Named Executive Officers currently serving as an employee and certain other executives have been granted an opportunity to receive a cash incentive award under the Executive Plan. The future benefits to be received by participants in the Executive Plan are not currently determinable because they are dependent upon performance criteria and results which are not now known. VOTE REQUIRED AND RECOMMENDATION OF THE BOARD Approval requires the affirmative vote of a majority of the shares represented at the meeting which are entitled to vote. In the event the Executive Plan is not approved by the Company's shareholders, the Board will take such action with respect to incentive awards as it considers to be in the best interests of the Company, consistent with the compensation policies set forth in the Report of the Compensation Committee appearing below. The Board of Directors, which unanimously approved the Executive Plan, recommends a vote "FOR" approval of the Executive Plan. 12 EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued by Innotrac for services rendered during the fiscal years ended December 31, 1999, 1998 and 1997, to or for Innotrac's Named Executive Officers. The total amount of perquisites, personal benefits and other annual compensation paid to the Named Executive Officers do not in any case exceed the lesser of $50,000 or ten per cent of such officer's total salary and bonus. None of the executive officers has an employment agreement with Innotrac. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------- ------------ SECURITIES FISCAL UNDERLYING ALL OTHER NAME YEAR SALARY BONUS OPTIONS(#) COMPENSATION - ----------------------------------------- -------- -------- -------- ------------ ------------ Scott D. Dorfman......................... 1999 $383,675 $325,000 -- $58,625(1) 1998 356,855 250,000 -- 26,218 1997 226,179 25,000 -- 9,526 David L. Ellin........................... 1999 163,825 119,755 6,000 11,357(2) 1998 145,000 87,000 -- 10,241 1997 137,692 70,000 155,000 -- Larry C. Hanger.......................... 1999 120,440 100,000 3,500 766(2) 1998 100,000 100,000 -- 500 1997 89,343 35,000 25,000 -- Don L. Colter............................ 1999 101,540 55,775 3,500 2,988(2) 1998 92,606 46,300 -- 3,457 1997 78,832 40,000 25,000 -- Will Hendrick(3)......................... 1999 86,308 65,925 25,000 5,394(2)
- ------------------------ (1) Includes (i) Innotrac's matching contribution to deferred compensation plan in the approximate amount of $55,799; (ii) the full dollar amount of premiums, $1,986, paid by Innotrac with respect to split-dollar life insurance on the life of Mr. Dorfman; and (iii) $840 in commissions. (2) Represents Innotrac's matching contribution to deferred compensation plan. (3) Mr. Hendrick's employment commenced April 1999. 13 The following table sets forth option grants to Named Executive Officers during fiscal 1999. OPTION GRANTS IN FISCAL 1999
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM - ------------------------------------------------------------------------------------------- ----------------------- PERCENT OF TOTAL SHARES OPTIONS GRANTED UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION NAME OPTIONS FISCAL YEAR* PRICE DATE 5% 10% - ---- ---------- ---------------- -------- ---------- ---------- ---------- David L. Ellin...................... 6,000 3.7% $ 16.00 2/04/09 $ 60,374 $152,999 Larry C. Hanger..................... 3,500 2.1 16.00 2/04/09 35,218 89,250 Don L. Colter....................... 3,500 2.1 16.00 2/04/09 35,218 89,250 Will Hendrick....................... 25,000 15.2 14.13 4/13/09 222,078 562,790
- ------------------------ * Based on options for 164,000 shares granted to employees in fiscal 1999. No company-granted options were exercised by any Named Executive Officers during fiscal 1999. The following table sets forth the year-end value of unexercised options held by the Named Executive Officers at the fiscal year ended December 31, 1999. FISCAL YEAR-END OPTION VALUES
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS NAME FISCAL YEAR END AT FISCAL YEAR END(1) - ----------------------------------------------- ----------------------------- --------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------ -------------- ----------- ------------- Scott D. Dorfman............................... -- -- -- -- David L. Ellin................................. 105,000 56,000(2) $488,250 $232,500 Larry C. Hanger................................ 12,500 16,000(2) 58,125 58,125 Don L. Colter.................................. 12,500 16,000(2) 58,125 58,125 Will Hendrick.................................. -- 25,000(3) -- --
- ------------------------ (1) As required by the rules of the Securities and Exchange Commission, the value of unexercised in-the-money options is calculated based on the closing sale price of the Company's Common Stock on the Nasdaq National Market as of the last business day of its fiscal year, December 31, 1999, which was $13.75 per share. (2) The in-the-money portion of the options becomes exercisable with respect to 50% of the underlying shares on November 24, 2000 and with respect to the remaining 50%, on November 24, 2001. The out-of-the-money portion becomes exercisable with respect to 50% of the underlying shares on February 4, 2001; 25% on February 4, 2002; and the remaining 25% on February 4, 2003. (3) The options become exercisable with respect to 50% of the underlying shares on April 13, 2000; with respect to an additional 25% of the underlying shares on April 13, 2002; and with respect to the remaining 25%, on April 13, 2003. 14 RELATED PARTY TRANSACTIONS We lease a single engine aircraft from a company wholly-owned by Scott D. Dorfman pursuant to a three-year lease that provides for annual rent of $72,000. We are responsible for maintenance, insurance, taxes, fuel and other expenses associated with the aircraft. In 1999, the Company paid $79,000 in fees to Williams Benator & Libby, LLP, certified public accountants, for accounting and consulting services. Bruce V. Benator, one of our directors, is Managing Partner of Williams Benator & Libby, LLP. POLICY RESPECTING RELATED PARTY TRANSACTIONS The Board of Directors has 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. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Dorfman, Blank and Scott comprised the members of the Compensation Committee during fiscal 1999. Messrs. Blank and Scott comprised the members of the Executive Compensation Subcommittee. While Mr. Dorfman is our President and Chief Executive Officer, neither Mr. Blank nor Mr. Scott is a current officer or former officer of Innotrac. We have entered into a transaction with Mr. Dorfman as described in "Related Party Transactions." REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION This report sets forth the current components of Innotrac's compensation programs for its executive officers and describes the basis on which fiscal 1999 compensation determinations were made with respect to our executive officers, including Mr. Dorfman, the Chief Executive Officer and the other Named Executive Officers. Mr. Dorfman does not participate as a member of the Committee in any deliberations or discussions regarding his compensation as an employee of Innotrac and is not a member of the Executive Compensation Subcommittee. GENERAL COMPENSATION PHILOSOPHY The programs and policies for the compensation of Innotrac's executive officers are designed to link the compensation of executive officers to Innotrac's performance. These programs are intended to align the financial interests of our executive officers with those of our shareholders. We use a combination of base salary, short-term performance bonuses and long-term incentive plans to tie executive compensation to increases in our earnings and return on shareholders' equity. Our compensation programs consist of the following basic components: - Competitive base salaries, - Annual incentive cash bonuses, - Long-term incentive stock options, appreciation rights or bonuses and - Customary benefits. The Committee will review and determine the appropriateness of the compensation paid to each of Innotrac's executive officers from time to time (and at least annually), with the philosophy described above as its basis. While promoting initiative and providing incentives for superior performance by executives on behalf of Innotrac for the benefit of its shareholders, the Committee also will seek to assure that Innotrac 15 is able to compete for and retain talented personnel who will lead Innotrac in achieving levels of financial performance that will enhance shareholder value over the long-term as well as the short-term. BASE SALARIES Innotrac has established the current base salaries of its executive officers without reference to specific company performance criteria. The Committee reviews salaries of executive officers on an annual basis. STOCK INCENTIVE PLAN The Stock Incentive Plan is described under Item No. 2 in this Proxy Statement, "Approval of Stock Incentive Plan." Options granted to the Named Executive Officers in fiscal 1999 are set forth under the table captioned "Option Grants in Fiscal 1999." SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN The Executive Plan is described under Item No. 3 in this Proxy Statement, "Approval of Executive Plan." COMPENSATION OF THE CHIEF EXECUTIVE OFFICER As with the other executive officers, Mr. Dorfman's base salary was not determined with reference to specific performance-based criteria. Mr. Dorfman's bonus was determined with reference to the criteria of the Executive Plan, described under Item No. 3 in this Proxy Statement, "Approval of Executive Plan." BENEFITS Executives also participate, on a voluntary basis, in Innotrac's regular employee benefit programs, including group medical and dental coverage, group life insurance and group long-term disability insurance. In addition, executive officers can participate in a deferred compensation plan with respect to which the Company provides matching contributions. The rate of match depends upon the officer's number of years in service, and ranges from 25% of a participant's contribution for less than 5 years of service to 100% for 10 years or more. EXECUTIVE COMPENSATION SUBCOMMITTEE AND SECTION 162(m) Effective October 1999, the Board established the Executive Compensation Subcommittee, comprised of Messrs. Blank and Scott. This subcommittee was constituted to (1) achieve certain securities law advantages with respect to stock-based compensation to Innotrac's officers and directors and (2) maintain the tax deductibility of certain annual compensation in excess of $1 million to Innotrac's Named Executive Officers under Section 162(m) of the IRC. See "Compliance With Section 162(m) of the Internal Revenue Code" above. In fiscal 1999, the Company did not pay "compensation" within the meaning of Section 162(m) to such executive officers in excess of $1 million. However, the Company's policy is to maintain the tax deductibility of compensation to such officers under Section 162(m). In furtherance of this goal, the Board is recommending that the shareholders vote to approve Item Nos. 2 and 3 on the Proxy Card relating to the Stock Inventive Plan and the Executive Plan. Scott D. Dorfman--Martin J. Blank--William H. Scott, III (Members of Committee during fiscal 1999) 16 STOCK PERFORMANCE GRAPH Set forth below is a line graph comparing the percentage change in the cumulative total shareholder return of the Company's Common Stock against the cumulative total return of The Nasdaq Stock Market (U.S.) Index and the Nasdaq Non-Financial Index for the period commencing on May 7, 1998 and ending on December 31, 1999. EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
DOLLARS 05/07/1998 12/98 12/99 INNOTRAC CORPORATION 100 138 105 NASDAQ STOCK MARKET (U.S.) 100 118 214 NASDAQ NON-FINANCIAL 100 121 232
CUMULATIVE TOTAL RETURN -------------------------------- 05/07/1998 12/1998 12/1999 ---------- -------- -------- Innotrac Corporation........................................ 100 138 105 Nasdaq Stock Market (U.S.) Index............................ 100 118 214 Nasdaq Non-Financial Index.................................. 100 121 232
17 INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors, upon recommendation of the Audit Committee, appoints each year the firm that will serve as the Company's independent public accountants. The Board has appointed Arthur Andersen LLP, which firm served as independent public accountants for the Company during the past fiscal year, to serve as such accountants for the current fiscal year. Such appointment is not subject to ratification or other vote by the shareholders. A representative of Arthur Andersen LLP is expected to be present at the Annual Meeting, with the opportunity to make a statement if he or she desires to do so, and is expected to be available to respond to appropriate questions. SHAREHOLDERS' PROPOSALS FOR 2001 ANNUAL MEETING Any shareholder who wishes to present a proposal appropriate for consideration at the Company's 2000 Annual Meeting of Shareholders must submit the proposal in proper form to the Company at its address set forth on the first page of this Proxy Statement no later than December 11, 2000 for the proposal to be considered for inclusion in the Company's proxy statement and form of proxy relating to such Annual Meeting. The Company must be notified of any other shareholder proposal intended to be presented for consideration at the 2001 Annual Meeting not later than February 23, 2001 or else proxies may be voted on such proposal at the discretion of the persons named in the proxy. OTHER MATTERS All of the expenses involved in preparing, assembling, and mailing this Proxy Statement and the materials enclosed herewith and soliciting proxies will be paid by the Company. It is estimated that such costs will be nominal. The Company may reimburse banks, brokerage firms and other custodians, nominees and fiduciaries for expenses reasonably incurred by them in sending proxy materials to beneficial owners of stock. The solicitation of proxies will be conducted primarily by mail but may include telephone, telegraph or oral communications by directors, officers, or regular employees of the Company, acting without special compensation. The Board of Directors is aware of no other matters, except for those incidental to the conduct of the Annual Meeting, that are to be presented to shareholders for formal action at the Annual Meeting. If, however, any other matters properly come before the Annual Meeting or any postponement, adjournment, or adjournments thereof, it is the intention of the persons named in the proxy to vote the proxy in accordance with their judgment. Shareholders are urged to fill in, date and sign the accompanying form of proxy and return it to the Company as soon as possible. BY ORDER OF THE BOARD OF DIRECTORS, DAVID L. ELLIN SECRETARY 18 COMMON STOCK OF INNOTRAC CORPORATION THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE MAY 17, 2000 ANNUAL MEETING OF SHAREHOLDERS. The undersigned hereby appoints Scott D. Dorfman and Don L. Colter, and each of them, the proxy of the undersigned to vote the Common Stock of the undersigned at the Annual Meeting of Shareholders of INNOTRAC CORPORATION (the "Company") to be held on May 17, 2000, and any adjournment or postponement thereof. 1. Election of directors Martin J. Blank William H. Scott, III / / FOR all nominees for director listed above (except as marked to the contrary). / / WITHHOLD AUTHORITY to vote for all nominees listed above. / / WITHHOLD AUTHORITY to vote for an individual nominee. Write name(s) below. 2. Approval of Stock Incentive Plan. / / FOR approval of the Stock Incentive Plan. / / AGAINST approval of the Stock Incentive Plan. / / ABSTAIN 3. Approval of the Executive Plan. / / FOR approval of the Executive Plan. / / AGAINST approval of the Executive Plan. / / ABSTAIN 4. In accordance with their best judgment with respect to any other matters that may properly come before the meeting. THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE PERSONS NAMED IN THE PROXY AND ACCOMPANYING PROXY STATEMENT, "FOR" APPROVAL OF THE STOCK INCENTIVE PLAN AND "FOR" APPROVAL OF THE EXECUTIVE PLAN, AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY WILL BE SO VOTED. Date: , 2000 --------------------------- -------------------------------------- Please sign this Proxy exactly as name appears on the Proxy. Note: When signing as attorney, trustee, administrator, or guardian, please give your title as such. In the case of joint tenants, each joint owner must sign. -----END PRIVACY-ENHANCED MESSAGE-----