10-Q/A

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A

(X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2002

OR

(  )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934

For the transition period from _________ to __________

Commission file number 000-23740           

INNOTRAC CORPORATION

(Exact name of registrant as specified in its charter)

Georgia	58-1592285
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
6655 Sugarloaf Parkway   Duluth, Georgia	30097
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:       (678) 584-4000     

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]  No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Outstanding at November 12, 2002
Common Stock at $.10 par value	11,674,595 Shares

TABLE OF CONTENTS

Part I — Financial Information
	Item 1 — Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part II — Other Information
	Item 6 — Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
EX-99.2 SECTION 906 CERTIFICATION OF THE CFO

INNOTRAC CORPORATION

INDEX

			Page
Explanatory Note			2
Part I. Financial Information
	Item 1. Financial Statements:		3
		Condensed Consolidated Balance Sheets – June 30, 2002 and December 31, 2001 (Unaudited)	4
		Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2002 and 2001 (as Restated) (Unaudited)	5
		Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2002 and 2001 (as Restated) (Unaudited)	6
		Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (Unaudited)	7
		Notes to Condensed Consolidated Financial Statements (Unaudited)	8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Part II. Other Information
	Item 6. Exhibits and Reports on Form 8-K		20
Signatures			21
Certifications			22

1

Explanatory Note

The Company is filing this amendment to its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 in order to properly reflect the adoption of a new accounting standard and to retroactively apply this standard for all periods presented. In January 2002, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board concluded in EITF No. 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred”, that reimbursements received from customers for out-of-pocket expenses incurred on their behalf should be characterized as revenue in the statement of operations. Prior to the adoption of this standard, the Company netted reimbursements from customers, primarily for freight and postage fees, against the related expenses, with the result that reimbursements were not included in revenues and out-of-pocket expenses were not included in cost of revenues. With the adoption of this standard, effective for reporting periods beginning after December 15, 2001, the Company has reclassified out-of-pocket expenses incurred and reimbursements from customers for those expenses as cost of revenues and revenues, respectively.

Adoption of this accounting standard results in no change to operating or net income or earnings per share or to the consolidated balance sheets or consolidated statements of cash flows for the three or six month periods ended June 30, 2002 or any prior periods presented, and we anticipate no net impact on operating or net income or earnings per share or the balance sheets or cash flow statements for future periods because of this standard. The only impact of EITF Issue No. 01-14 was to increase revenues and cost of revenues equally by $3.1 million and $7.7 million for the three months ended June 30, 2002 and 2001, respectively, and by $7.8 million and $15.6 million for the six months ended June 30, 2002 and 2001, respectively.

2

Part I – Financial Information

Item 1 – Financial Statements

The following condensed consolidated financial statements of Innotrac Corporation, a Georgia corporation (the “Company”), have been prepared in accordance with the instructions to Form 10-Q and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America. In the opinion of management, all adjustments are of a normal and recurring nature, except those specified otherwise, and include those necessary for a fair presentation of the financial information for the interim periods reported. Results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results for the entire year ending December 31, 2002. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2001 Annual Report on Form 10-K.

3

INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

					June 30, 2002			December 31, 2001
ASSETS
Current assets:
	Cash and cash equivalents				$	2,329		$	9,413
	Accounts receivable, net					11,518			13,662
	Inventories, net					18,143			27,264
	Deferred income taxes					—			2,736
	Prepaid expenses and other					1,664			5,018
		Total current assets				33,654			58,093
Property and equipment:
	Rental equipment					1,680			2,003
	Computer software and equipment					25,552			19,715
	Furniture, fixtures and leasehold improvements					4,211			4,005
						31,443			25,723
	Less accumulated depreciation and amortization					(11,630	)		(11,223	)
						19,813			14,500
Goodwill, net						24,758			25,213
Deferred income taxes						5,726			438
Intangibles, net						690			958
Other assets						802			191
			Total assets		$	85,443		$	99,393
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable				$	11,330		$	8,581
	Accrued earn-out payment					—			15,275
	Accrued expenses and other					6,201			11,861
			Total current liabilities			17,531			35,717
Total noncurrent liabilities						1,943			393
				Total liabilities		19,474			36,110
Commitments and contingencies
Shareholders’ equity:
	Common stock, $.10 par value, 50,000,000 shares authorized, 11,674,595 shares issued and outstanding					1,167			1,136
	Additional paid-in capital					62,578			61,023
	Retained earnings					2,479			1,201
	Accumulated other comprehensive income					—			178
	Less: Treasury stock					(255	)		(255	)
			Total shareholders’ equity			65,969			63,283
			Total liabilities and shareholders’ equity		$	85,443		$	99,393

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Financial Statements-Continued

INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2002 and 2001
(in thousands, except per share amounts)

					Three Months Ended June 30,
					2002			2001
					(As Restated, See Note 1)
Revenues, net					$	16,225		$	26,025
Reimbursable costs						3,126			7,679
	Total revenues					19,351			33,704
Cost of revenues						7,182			12,282
Reimbursable costs						3,126			7,679
	Total cost of revenues					10,308			19,961
			Gross margin			9,043			13,743
Operating expenses:
	Selling, general and administrative expenses					7,543			10,770
	Special credit					(359	)		—
	Depreciation and amortization					1,271			1,191
		Total operating expenses				8,455			11,961
Operating income						588			1,782
Other expenses (income), net						48			(197	)
Income before income taxes						540			1,979
Income tax provision						(227	)		(944	)
				Net income	$	313		$	1,035
Basic and diluted earnings per share:
	Basic				$	0.03		$	0.09
	Diluted				$	0.03		$	0.09
Weighted average shares outstanding:
	Basic					11,623			11,319
	Diluted					12,017			11,739

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Financial Statements-Continued

INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended June 30, 2002 and 2001
(in thousands, except per share amounts)

			Six Months Ended June 30,
			2002			2001
			(As Restated,
			See Note 1)
Revenues, net			$	32,555		$	50,946
Reimbursable costs				7,844			15,628
	Total revenues			40,399			66,574
Cost of revenues				14,171			23,590
Reimbursable costs				7,844			15,628
Special credit				(293	)		—
	Total cost of revenues			21,722			39,218
		Gross margin		18,677			27,356
Operating expenses:
	Selling, general and administrative expenses			15,338			24,010
	Special credit			(1,321	)		—
	Depreciation and amortization			2,489			2,387
		Total operating expenses		16,506			26,397
Operating income				2,171			959
Other expenses (income), net				43			(409	)
Income before income taxes and minority interest				2,128			1,368
Income tax provision				(849	)		(704	)
Net income before minority interest				1,279			664
Minority interest, net of income tax benefit				—			871
		Net income	$	1,279		$	1,535
Basic and diluted earnings per share:
	Basic		$	0.11		$	0.14
	Diluted		$	0.11		$	0.13
Weighted average shares outstanding:
	Basic			11,570			11,319
	Diluted			11,902			11,645

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Financial Statements-Continued

INNOTRAC CORPORATION
CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001
(in thousands)

				Six Months Ended June 30,
				2002			2001
Cash flows from operating activities:
	Net income			$	1,279		$	1,535
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			2,489			2,387
		Loss on disposal of fixed assets			501			164
		Deferred income taxes			(2,177	)		22
		Minority interest in subsidiary			—			(871	)
		Amortization of deferred compensation			36			67
	Changes in operating assets and liabilities:
		Decrease in accounts receivable			2,144			6,438
		Decrease in inventories			9,120			3,523
		Decrease in prepaid expenses and other			2,180			620
		Decrease in accounts payable and accrued expenses			(1,130	)		(6,486	)
			Net cash provided by operating activities		14,442			7,399
Cash flows from investing activities:
	Capital expenditures				(8,039	)		(3,490	)
	Earn-out payment				(13,727	)		—
	Sale of marketable securities				435			—
			Net cash used in investing activities		(21,331	)		(3,490	)
Cash flows from financing activities:
	Repayment of capital lease obligations				(145	)		(22	)
	Loan fees paid				(50	)		—
			Net cash used in financing activities		(195	)		(22	)
Net (decrease) increase in cash and cash equivalents					(7,084	)		3,887
Cash and cash equivalents, beginning of period					9,413			18,334
Cash and cash equivalents, end of period				$	2,329		$	22,221
Supplemental cash flow disclosures:
	Cash paid for interest			$	154		$	25
	Cash paid for income taxes, net of refunds received			$	(18	)	$	(68	)
Noncash transactions:
	Stock issued for earn-out payment			$	1,550		$	—

The accompanying notes are an integral part of these condensed consolidated financial statements.

7

INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)

1.    SIGNIFICANT ACCOUNTING POLICIES

Except as set forth below, the accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company’s 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2002 for the year ended December 31, 2001. Certain prior year amounts have been reclassified to conform with current year financial statement presentation.

Subsequent to the issuance of the unaudited condensed consolidated financial statements for the three and six months ended June 30, 2002, management determined that the Emerging Issues Task Force (“EITF”) No. 01-14, “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred”, should have been adopted by the Company as of January 1, 2002. EITF No 01-14 states that reimbursements received from customers for out-of-pocket expenses incurred on their behalf should be characterized as revenue in the statement of operations. Prior to the adoption of this standard, the Company netted reimbursements from customers, primarily for freight and postage fees, against the related expenses, with the result that reimbursements were not included in revenues and out-of-pocket expenses were not included in cost of revenues. With the adoption of this standard, effective for reporting periods beginning after December 15, 2001, the Company has reclassified reimbursements from customers for these expenses as revenues, and has conformed this presentation for all periods presented.

Adoption of this accounting standard results in no change to operating or net income or earnings per share or to the consolidated balance sheets or consolidated statements of cash flows for the three or six month periods ended June 30, 2002. The impact of the adoption of EITF Issue No. 01-14 was to increase revenues and cost of revenues equally by $3.1 million and $7.7 million for the three months ended June 30, 2002 and 2001, respectively, and by $7.8 million and $15.6 million for the six months ended June 30, 2002 and 2001, respectively.

2.    SPECIAL CHARGES

At June 30, 2002 and December 31, 2001, the Company had approximately $1.7 million and $4.6 million, respectively, in accruals related to the special charges incurred during the year ended December 31, 2000. The remaining accruals at June 30, 2002 included $352,000 for the Company’s shift to a fee-for-service business model and $1.3 million for e-commerce costs. Cash payments relating to these accruals for the three and six months ended June 30, 2002 were approximately $377,000 and $466,000, respectively. The Company recognized approximately $359,000 and $1.6 million into income as a special credit during the three and six months ended June 30, 2002, respectively, related to the gains realized on sales of inventory items and cash collected for accounts receivable items that were written off as special charges in previous periods. The majority of the remaining accruals, except for that associated with one specific client which represents about 40% of the remaining accrual and is classified as long-term, are expected to be utilized during the remainder of the year ending December 31, 2002.

3.    FINANCING OBLIGATIONS

The Company has a revolving credit agreement with a bank for borrowings up to $40 million. In May 2002, the Company extended its credit facility through June 1, 2005 under similar terms and conditions as the previous revolving credit agreement. The Company and its subsidiaries have pledged all of its assets and provided guarantees to the lender as collateral under this revolving credit agreement. At June 30, 2002 and December 31, 2001, the Company did not have any outstanding borrowings under the line of credit. The revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. The May 2002 amendment added provisions limiting borrowings under the agreement to a margin or borrowing base, as defined, which totaled $25.3 million at June 30, 2002 and tightened certain of the financial covenants. At June 30, 2002, the Company was in compliance with all covenants under the credit agreement.

Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Company’s option, LIBOR plus up to 225 basis points. During the three and six months ended June 30, 2002, the Company incurred interest expense related to the line of credit of approximately $15,400 and $49,400, respectively, resulting in a weighted average interest rate of 4.22% and 4.33%, respectively.

8

INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)

4.    MINORITY INTERESTS

The Company had a majority ownership in Return.com Online, LLC (“Return.com”) during the three months ended March 31, 2001. The remaining interest was owned by Mail Boxes Etc (“MBE”). In March 2001, United Parcel Services, Inc. (“UPS”) announced a definitive agreement to purchase MBE. As a result of this agreement, the Company agreed to reacquire MBE’s 40% ownership interest in Return.com in April 2001. The note receivable of $3.4 million due from MBE was forgiven by the Company in exchange for MBE’s ownership interest in Return.com, resulting in 100% ownership by the Company. All remaining contractual commitments for additional funding by the Company were also cancelled.

During the first quarter of 2001, the Company recorded $2.8 million in impairment reserves for its investment in Return.com. The Company utilized these reserves during the fourth quarter of 2001 to write off its investment in Return.com. At December 31, 2001, Return.com was no longer in operation.

5.    EARNINGS PER SHARE

The following table shows the amounts used in computing earnings per share (“EPS”) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share”, and the effects on income and the weighted average number of shares of potential diluted common stock. Certain options outstanding to purchase shares of the Company’s common stock aggregating 1.1 million and 871,000 were not included in the computation of diluted EPS for both the three months ended June 30, 2002 and 2001, respectively, because their effect was anti-dilutive. For the six months ended June 30, 2002 and 2001, certain options outstanding to purchase shares of the Company’s common stock aggregating 1.1 million and 1.2 million, respectively, were not included in the computation of diluted EPS because their effect was anti-dilutive. Shares used to compute diluted EPS for the three and six months ended June 30, 2002 and 2001 are as follows (in 000’s):

		Three Months Ended				Six Months Ended
		June 30,				June 30,
		2002		2001		2002		2001
Diluted earnings per share:
	Weighted average shares outstanding		11,623		11,319		11,570		11,319
	Employee and director stock options		394		420		332		326
	Weighted average shares assuming dilution		12,017		11,739		11,902		11,645

9

INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)

6.    OTHER COMPREHENSIVE INCOME

SFAS No. 130, “Reporting Comprehensive Income,” established standards for reporting and display of comprehensive income and its components in financial statements. For the three month period ended June 30, 2002 and 2001, comprehensive income was the same as net income. For the six months period ended June 30, 2002 and 2001, the components of the Company’s comprehensive income are as follows (in thousands):

		Six Months Ended
		June 30,
		2002			2001
Other comprehensive income:
	Net income	$	1,279		$	1,535
	Reclassification adjustment for gains included in net income		(178	)		0
Comprehensive income		$	1,101		$	1,535

7.    RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 prohibits the use of pooling-of-interest for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed after July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 changes the accounting for goodwill and other indefinite life intangible assets from an amortization method to an impairment only approach.

The Company adopted these statements effective January 1, 2002. In accordance with SFAS No. 142, the Company no longer amortizes goodwill. The Company completed its impairment analysis required upon the adoption of SFAS No. 142 during the second quarter of 2002 and determined that no impairment existed. During the three and six months ended June 30, 2001, amortization expense associated with goodwill was approximately $42,000 and $85,000, respectively. The Company’s proforma consolidated net income and earnings per share for the three and six months ended June 30, 2001, excluding goodwill amortization, would have been $1,057,000 ($0.09 per share, basic and diluted) and $1,576,000 ($0.14 per share, basic and diluted), respectively.

The Company has intangible assets that continue to be subject to amortization under the provisions of SFAS No. 142. The intangible assets consist of acquired customer contracts, which are amortized over a period of 1 to 5 years on a straight-line basis. At June 30, 2002 and December 31, 2001, the Company had intangible assets of approximately $690,000 and $958,000, net of accumulated amortization of $570,000 and $302,000, respectively. Amortization expense of these intangible assets amounted to approximately $134,000 and $51,000 during the three months ended June 30, 2002 and 2001, respectively, and approximately $268,000 and $101,000 during the six months ended June 30, 2002 and 2001, respectively. Expected amortization expense for these intangible assets is $202,000 in 2003, $202,000 in 2004 and $185,000 in 2005.

10

INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002 and 2001
(Unaudited)

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” and amends ARB Opinion No. 51, “Consolidated Financial Statements.” SFAS No. 144 retains many of the requirements of SFAS No. 121 and the basic provisions of APB Opinion No. 30; however, it establishes a single accounting model for long-lived assets to be disposed of by sale. The Company adopted SFAS No. 144 on January 1, 2002; the adoption did not have any effect on the Company’s financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections. One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. Upon adoption, the Company will follow APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring events and Transactions in determining whether such extinguishment of debt may be classified as extraordinary. The provisions of this statement related to the rescission of FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002 with early application encouraged. The Company believes this Statement will not have any impact on its Financial Statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this Statement is required with the beginning of fiscal year 2003. The Company is currently evaluating the impact of adopting this Statement.

8.    EARN-OUT PAYMENT

On December 8, 2000, the Company acquired UDS, which was accounted for under the purchase method of accounting. At December 31, 2001, the Company recorded an accrual for approximately $15.3 million for payment to the sellers of UDS under the terms of an earn-out provision contained in the December 8, 2000 Merger Agreement. The earn-out accrual was recorded as additional purchase price consideration. In February 2002, the payment was made consisting of $13.7 million of cash and 310,000 shares of the Company’s common stock valued at $1.6 million. As a result, goodwill related to UDS amounts to $18.8 million, net of accumulated amortization of $0.3 million as of June 30, 2002.

11

Item 2 –

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion may contain certain forward-looking statements that are subject to conditions that are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, the Company’s reliance on a small number of major clients; risks associated with the terms of our contracts; reliance on the telecommunications industry; the impact of the trend toward outsourcing; risks associated with changing technology; risks associated with competition; and other factors discussed in more detail under “Business” in our Annual Report on Form 10-K for the year ended December 31, 2001.

As discussed in Note 1 to the unaudited condensed consolidated financial statements included in Item 1, the accompanying financial statements have been restated. The following Management’s Discussion and Analysis reflects this restatement.

Overview

Innotrac provides customized, technology-based order fulfillment, call center and total customer relationship management services to large corporations that outsource these functions. The Company offers inventory management, inbound call center, pick/pack/ship services, order tracking, transaction processing and returns processing. The Company handles telecommunications products that include Digital Subscriber Line and Cable Modems (“Modems”), consumer phones and wireless pager equipment, for clients such as BellSouth Corporation (“BellSouth”), Qwest International, Inc. (“Qwest”), and Comcast Corporation (“Comcast”) and their customers. The Company also provides these services for a significant number of catalog, retail, direct marketing and consumer products companies such as Coca-Cola, NAPA, Tactica, Nordstrom.com, Porsche, Wilsons Leather, Martha Stewart Living Omnimedia and Thane International. During the three months ended June 30, 2002, approximately 26.5% of the Company’s revenues were generated from its telecommunications clients, 23.4% from its Modems clients and 50.1% from its retail, catalog and direct marketing clients. During the six months ended June 30, 2002, approximately 27.0% of the Company’s revenues were generated from its telecommunications clients, 21.9% from its Modems clients and 51.1% from its retail, catalog and direct marketing clients. The Company anticipates that the percentage of its revenues attributable to telecommunications clients will continue to decrease in 2002 due to the loss of SBC Communications Inc. (“SBC”) as a client during the fourth quarter of 2001 and the addition of several new retail and catalog fulfillment and call center clients during the second half of 2002.

With the Company’s conversion of substantially all of its clients to a fee-for-service model during 2000 and 2001, the Company no longer purchases and sells Caller ID equipped phones, modems and other telecommunications equipment from third party manufacturers for these clients. Instead, the Company warehouses products on a consignment basis and fulfills these products on behalf of its customers for a fee. The Company still purchases and owns inventory for certain clients, but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. The new model substantially reduces revenues as the pass through cost of purchased equipment is no longer included in revenues. Gross margins have improved since the Company no longer has inventory risk or cost of equipment.

As of April 16, 2001, Innotrac owned 60% of Return.com LLC, (“Return.com”) a subsidiary that processed product returns for online and catalog retailers. The Company’s equity partner in this venture, Mail Boxes, Etc. (“MBE”), owned the remaining 40% of Return.com. However, due to the announcement in March 2001 that United Parcel Services, Inc. had entered into a definitive agreement to purchase MBE, the Company elected to acquire from MBE the remaining 40% ownership interest in Return.com and terminate its arrangement with MBE as its exclusive front-end solution. This became effective April 17, 2001. During the fourth

12

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

quarter of 2001, the Company utilized its $2.8 million impairment reserve, which was recorded in the first quarter of 2001, to write off its investment in Return.com. At December 31, 2001, Return.com was no longer in operation.

As a result of the loss of the SBC contract in December 2001, the Company elected to close its call center operations in Atlanta, Georgia in January 2002 and shifted the clients served from this facility to its call center operations in Pueblo, Colorado. The Company terminated approximately 260 employees at the Atlanta and Pueblo call center facilities effective January 2002. The Company incurred approximately $1.0 million in severance, write-off of assets, and other expenses related to the closure of the Atlanta call center operations during the fourth quarter of 2001. Management does not anticipate incurring any additional costs associated with this closure during 2002. The Company continues to operate its call center facilities in Pueblo, Colorado and Reno, Nevada.

On February 1, 2002, the Company made an additional payment of $15.3 million to the sellers of Universal Distribution Services, Inc. (“UDS”) in accordance with the earn-out provisions in the December 2000 Merger Agreement with UDS (as discussed in Note 8 to the Notes to Condensed Consolidated Financial Statements). The payment was funded from existing working capital and borrowings under the Company’s line of credit.

13

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The following table sets forth unaudited summary operating data, expressed as a percentage of revenues, for the three and six months ended June 30, 2002 and 2001. The data has been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, it reflects normal and recurring adjustments, necessary for a fair presentation of the information for the periods presented. Operating results for any period are not necessarily indicative of results for any future period.

The financial information provided below has been rounded in order to simplify its presentation. However, the percentages below are calculated using the detailed information contained in the condensed consolidated financial statements.

		Three Months						Six Months
		Ended June 30,						Ended June 30,
		2002			2001			2002			2001
Revenues			100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenues			53.3			59.2			54.5			58.9
Special credit			—			—			(0.7	)		—
	Gross margin		46.7			40.8			46.2			41.1
Selling, general and administrative expenses			39.0			32.0			37.9			36.1
Special credit			(1.9	)		—			(3.3	)		—
Depreciation and amortization			6.6			3.5			6.2			3.6
	Operating income		3.0			5.3			5.4			1.4
Other (income) expense, net			0.2			(0.6	)		0.1			(0.6	)
Income before income taxes and minority interest			2.8			5.9			5.3			2.0
Income tax provision			(1.2	)		(2.8	)		(2.1	)		(1.0	)
Net income before minority interest			1.6			3.1			3.2			1.0
Minority interest			—			—			—			1.3
	Net income		1.6	%		3.1	%		3.2	%		2.3	%

Special Charges

At June 30, 2002 and December 31, 2001, the Company had approximately $1.7 million and $4.6 million, respectively, in accruals related to the special charges incurred during the year ended December 31, 2000. The remaining accruals at June 30, 2002 included $352,000 for the Company’s shift to a fee-for-service business model and $1.3 million for e-commerce costs. Cash payments relating to these accruals for the three and six months ended June 30, 2002 were approximately $377,000 and $466,000, respectively. The Company recognized approximately $359,000 and $1.6 million into income as a special credit during the three and six months ended June 30, 2002, respectively, related to the gains realized on sales of inventory items and cash collected for accounts receivable items that were written off as special charges in previous periods. The majority of the remaining accruals, except for that associated with one specific client which represents about 40% of the remaining accrual and is classified as long-term, are expected to be utilized during the remainder of the year ending December 31, 2002.

14

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001

Revenues. Total revenues decreased 42.4% to $19.4 million for the three months ended June 30, 2002 from $33.7 million for the three months ended June 30, 2001. The decrease in revenues is primarily due to the loss of the SBC contract at December 1, 2001 which represented approximately $4.5 million of revenues during the second quarter of 2001; completion of an outbound consumer premise equipment (“CPE”) sales program for BellSouth Corporation (“BellSouth”) during 2001; completion of the fee-for-service transition; and a decrease in product sales from Warranty Corporation of America (“WACA”) as a result of its loss of a significant client. This decline in revenues was offset by the re-initiation of fulfillment services of CPE during the third quarter of 2001 and the expansion of services to include wireless pager equipment with BellSouth during the fourth quarter of 2001, as well as the initiation of the Martha Stewart Living Omnimedia, Inc. contract which began in the first quarter of 2002.

Cost of Revenues. Cost of revenues decreased 48.5% to $10.3 million for the three months ended June 30, 2002 compared to $20.0 million for the three months ended June 30, 2001. Cost of revenues decreased primarily due to the decrease in equipment units sold to WACA and from the completion of the CPE outbound sales program for BellSouth during 2001. A reduction in call center direct costs from the loss of the SBC contract in December 2001 and the subsequent closure of the Atlanta call center in January 2002 also contributed to the decrease in cost of revenues during the second quarter of 2002 as compared to the same period in 2001.

Gross Margin. For the three months ended June 30, 2002, the Company’s gross margin decreased by $4.7 million to $9.0 million, or 46.7% of revenues, compared to $13.7 million, or 40.8% of revenues, for the three months ended June 30, 2001. This decrease was due primarily to the factors discussed above.

Selling, General and Administrative Expenses. S,G&A expenses for the three months ended June 30, 2002 decreased to $7.5 million, or 39.0% of revenues, compared to $10.8 million, or 32.0% of revenues, for the same period in 2001. The decrease in expenses was mainly attributable to a decrease in bad debt expense, a 2001 impairment write-off for long-lived assets associated with the termination of the SBC contract, and a reduction in other variable expenditures. The decline in S,G&A costs was partially offset by increased facility costs due to the iFulfillment acquisition and increased information technology expenses associated with new customer start-ups which will continue during the second half of 2002.

Income Taxes. The Company’s effective tax rate for the three months ended June 30, 2002 and 2001 was 42.1% and 47.7%, respectively.

15

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Revenues. Total revenues decreased 39.3% to $40.4 million for the six months ended June 30, 2002 from $66.6 million for the six months ended June 30, 2001. The decrease in revenues is primarily due to the loss of the SBC contract at December 1, 2001 which represented approximately $9.4 million of revenues during the first half of 2001; completion of the CPE outbound sales program for BellSouth during 2001; completion of the fee-for-service transition; and a decrease in product sales from WACA as a result of its loss of a significant client. This decline in revenues was offset by the re-initiation of fulfillment services of CPE during the third quarter of 2001 and the expansion of services to include wireless pager equipment with BellSouth during the fourth quarter of 2001, as well as the initiation of the Martha Stewart Living Omnimedia, Inc. contract which began in the first quarter of 2002.

Cost of Revenues. The company’s cost of revenues decreased 44.6% to $21.7 million for the six months ended June 30, 2002 compared to $39.2 million for the six months ended June 30, 2001. Cost of revenues decreased primarily due to the decrease in equipment units sold to WACA and from the completion of the CPE outbound sales program for BellSouth during 2001. A reduction in call center direct costs from the loss of the SBC contract in December 2001 and the subsequent closure of the Atlanta call center in January 2002 also contributed to the decrease in cost of revenues during the first half of 2002 as compared to the same period in 2001.

Gross Margin. For the six months ended June 30, 2002, the Company’s gross margin decreased by $8.7 million to $18.7 million, or 46.2% of revenues, compared to $27.4 million, or 41.1% of revenues, for the six months ended June 30, 2001. This decrease was due primarily to the factors discussed above.

Selling, General and Administrative Expenses. S,G&A expenses for the six months ended June 30, 2002 decreased to $15.3 million, or 37.9% of revenues, compared to $24.0 million, or 36.1% of revenues, for the six months ended June 30, 2001. The decrease in expenses was mainly attributable to charges recorded during the first quarter of 2001, primarily for the impairment of software development costs, and severance costs related to Return.com and a significant decrease in bad debt expense. The decline in S,G&A costs was partially offset by increased costs from the acquisition of iFulfillment, Inc. in July 2001 and increased information technology expenses associated with new customer start-ups which will continue during the second half of 2002.

Income Taxes. The Company’s effective tax rate for the six months ended June 30, 2002 and 2001 was 39.9% and 51.5%, respectively.

16

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

The Company funds its operations and capital expenditures primarily through cash flow from operations and borrowings under a credit facility with a bank. The Company had cash and cash equivalents of approximately $2.3 million at June 30, 2002 as compared to $9.4 million at December 31, 2001. This decrease in cash was primarily due to an earn-out payment of $15.3 million made by the Company during the first quarter of 2002 to the sellers of UDS (see Note 8 to the Condensed Consolidated Financial Statements).

On February 11, 2002, the Board of Directors authorized the repurchase of up to $10 million of the Company’s outstanding common stock through February 2003. During the six months ended June 30, 2002, the Company did not repurchase any shares of common stock.

The Company has a revolving credit agreement with a bank for borrowings up to $40 million. In May 2002, the Company extended its credit facility through June 1, 2005 under similar terms and conditions as the previous revolving credit agreement. The Company and its subsidiaries have pledged all of its assets and provided guarantees to the lender as collateral under this revolving credit agreement. At June 30, 2002 and 2001, the Company did not have any outstanding borrowings under the line of credit. The revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. The May 2002 amendment added provisions limiting borrowings under the agreement to a margin or borrowing base, as defined, which totaled $25.3 million at June 30, 2002 and tightened certain of the financial covenants. At June 30, 2002, the Company was in compliance with all covenants under the credit agreement.

Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Company’s option, LIBOR plus up to 225 basis points. During the three and six months ended June 30, 2002, the Company incurred interest expense related to the line of credit of approximately $15,400 and $49,400, respectively, resulting in a weighted average interest rate of 4.22% and 4.33%, respectively.

During the six months ended June 30, 2002, the Company generated approximately $14.4 million in cash flows from operating activities compared to $7.4 million in cash flows from operating activities in the same period in 2001. The company anticipates a significant increase in BellSouth inventory purchases along with increases in information technology spending and new customer start-up costs which will result in negative cash flows from operating activities during the second half of 2002.

During the six months ended June 30, 2002, net cash used in investing activities was $21.3 million as compared to $3.5 million in 2001. This difference was primarily due to the earn-out payment of $13.7 million in cash made in February 2002, $8.0 million in capital expenditures primarily in conjunction with the Company’s new facility in Hebron, Kentucky and capitalized software costs. As a result of significant negative developments in the telecommunications industry in July 2002, which affected several of the Company’s customers, the Company will undertake a review of its business strategy with respect to its customers within this industry in the third quarter. As part of this review, the Company will also evaluate associated capitalized software and equipment costs for any potential impairment and further assess the collectibility of its accounts receivable from these customers.

During the six months ended June 30, 2002, net cash used in financing activities was $195,000 compared to $22,000 used in financing activities in the same period in 2001.

17

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company estimates that its cash needs through 2002 will be met by cash flows from operations and borrowings under its line of credit facility. The Company may need to raise additional funds in order to take advantage of unanticipated opportunities, such as acquisitions of complementary businesses. 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.

Critical Accounting Policies

Innotrac’s significant accounting policies are described in Note 1 to the Condensed Consolidated Financial Statements and are included in the Company’s 2001 Annual Report on Form 10-K.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 prohibits the use of pooling-of-interest for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed after July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 changes the accounting for goodwill and other indefinite life intangible assets from an amortization method to an impairment only approach.

The Company adopted these statements effective January 1, 2002. In accordance with SFAS No. 142, the Company no longer amortizes goodwill. The Company completed its impairment analysis required upon the adoption of SFAS No. 142 during the second quarter of 2002 and determined that no impairment existed. During the three and six months ended June 30, 2001, amortization expense associated with goodwill was approximately $42,000 and $85,000, respectively. The Company’s proforma consolidated net income and earnings per share for the three and six months ended June 30, 2001, excluding goodwill amortization, would have been $1,057,000 ($0.09 per share, basic and diluted) and $1,576,000 ($0.14 per share, basic and diluted), respectively.

The Company has intangible assets that continue to be subject to amortization under the provisions of SFAS No. 142. The intangible assets consist of acquired customer contracts and warrants, which are included in other assets in the Company’s condensed consolidated balance sheet and which are amortized over a period of 1 to 5 years on a straight-line basis. At June 30, 2002 and 2001, the Company had intangible assets of approximately $690,000 and $892,000, net of accumulated amortization of $570,000 and $118,000, respectively. Amortization expense of these intangible assets amounted to approximately $134,000 and $51,000 during the three months ended June 30, 2002 and 2001, respectively, and approximately $247,000 and $101,000 during the six months ended June 30, 2002 and 2001, respectively

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” and amends APB Opinion No. 51, “Consolidated Financial Statements.” SFAS No. 144 retains many of the requirements of SFAS No. 121 and the basic provisions of APB Opinion No. 30; however, it establishes a single accounting model for long-lived assets to be disposed of by sale. The Company

18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

adopted SFAS No. 144 on January 1, 2002; the adoption did not have any effect on the Company’s financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections. One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. Upon adoption, the Company will follow APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring events and Transactions in determining whether such extinguishment of debt may be classified as extraordinary. The provisions of this statement related to the rescission of FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002 with early application encouraged. The Company believes this Statement will not have any impact on its Financial Statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this Statement is required with the beginning of fiscal year 2003. The Company is currently evaluating the impact of adopting this Statement.

19

Part II – Other Information

Item 6 – Exhibits and Reports on Form 8-K

     (a)  Exhibits:

     99.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350.

     99.2    Certification of Chief Financial Officer Pursuant to 18 U.S.C. § 1350.

     (b)  Reports on Form 8-K:

Innotrac Corporation filed a current report on Form 8-K on April 24, 2002 regarding a dismissal of the Company’s independent accountants. Arthur Andersen LLP was dismissed, and the Company appointed Deloitte and Touche LLP as its new independent accountants effective immediately.

20

     SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	INNOTRAC CORPORATION (Registrant)
Date: November 19, 2002	By:	/s/ Scott D. Dorfman Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board
Date: November 19, 2002	By:	/s/ David L. Gamsey David L. Gamsey Senior Vice President, Chief Financial Officer and Secretary (Principal Financial Officer)

21

CERTIFICATIONS

I, Scott D. Dorfman, certify that:

1.  I have reviewed this quarterly report on Form 10-Q/A of Innotrac Corporation;

2.  Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3.  Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date:  November 19, 2002	/s/ Scott D. Dorfman
	Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board

22

CERTIFICATIONS

I, David L. Gamsey, certify that:

1.    I have reviewed this quarterly report on Form 10-Q/A of Innotrac Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: November 19, 2002 /s/ David L. Gamsey
David L. Gamsey
Senior Vice President, Chief Financial Officer
and Secretary (Principal Financial Officer)

23 EX-99.1 3 g79336exv99w1.txt EX-99.1 SECTION 906 CERTIFICATION OF THE CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Scott D. Dorfman, Chief Executive Officer of Innotrac Corporation (the "Company"), certify, pursuant to 18 U.S.C. ss 1350 as adopted by ss 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q/A of the Company for the quarterly period ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 19, 2002 /s/ Scott D. Dorfman ---------------------------- Scott D. Dorfman President, Chief Executive Officer Chairman of the Board EX-99.2 4 g79336exv99w2.txt EX-99.2 SECTION 906 CERTIFICATION OF THE CFO Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, David L. Gamsey, Chief Financial Officer of Innotrac Corporation (the "Company"), certify, pursuant to 18 U.S.C. ss 1350 as adopted by ss 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q/A of the Company for the quarterly period ended June 30, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 19, 2002 /s/ David L. Gamsey ---------------------------------- David L. Gamsey Senior Vice President, Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----

EX-99.1

                                                                   EXHIBIT 99.1


               CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350


         I, Scott D. Dorfman, Chief Executive Officer of Innotrac Corporation
(the "Company"), certify, pursuant to 18 U.S.C. ss 1350 as adopted by ss 906 of
the Sarbanes-Oxley Act of 2002, that:

(1)      the Quarterly Report on Form 10-Q/A of the Company for the quarterly
         period ended June 30, 2002 (the "Report") fully complies with the
         requirements of Section 13(a) or 15(d) of the Securities Exchange Act
         of 1934; and

(2)      the information contained in the Report fairly presents, in all
         material respects, the financial condition and results of operations
         of the Company.


Dated: November 19, 2002

                                         /s/ Scott D. Dorfman
                                         ----------------------------
                                         Scott D. Dorfman
                                         President, Chief Executive Officer
                                         Chairman of the Board

EX-99.2

                                                                    Exhibit 99.2

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350

         I, David L. Gamsey, Chief Financial Officer of Innotrac Corporation
(the "Company"), certify, pursuant to 18 U.S.C. ss 1350 as adopted by ss 906 of
the Sarbanes-Oxley Act of 2002, that:

(1)      the Quarterly Report on Form 10-Q/A of the Company for the quarterly
period ended June 30, 2002 (the "Report") fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)      the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

Dated: November 19, 2002

                                         /s/ David L. Gamsey
                                         ----------------------------------
                                         David L. Gamsey
                                         Senior Vice President,
                                         Chief Financial Officer and
                                         Secretary