-----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, Kch77STYalaSVgto3SqtiYRrb2piX4WPo9fSl5kozGJKIzuShy6EHdsdmJBRpLbL P9mqAzpDEz1gP6XcfMRxZQ== 0000950144-03-010071.txt : 20030814 0000950144-03-010071.hdr.sgml : 20030814 20030814161511 ACCESSION NUMBER: 0000950144-03-010071 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23741 FILM NUMBER: 03847938 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-Q 1 g84439e10vq.txt INNOTRAC CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2003 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 (I.R.S. Employer incorporation or organization) 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes [ ] No [X]. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Outstanding at August 8, 2003 ----------------------------- Common Stock at $.10 par value 11,564,730 Shares
INNOTRAC CORPORATION INDEX
Page ---- Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheets - June 30, 2003 (Unaudited) and December 31, 2002 3 Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2003 and 2002 (Unaudited) 4 Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2003 and 2002 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosure About Market Risks 22 Item 4. Controls and Procedures 22 Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 25
1 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, 2003 are not necessarily indicative of the results for the entire year ending December 31, 2003. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2002 Annual Report on Form 10-K. 2 INNOTRAC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, 2003 DECEMBER 31, 2002 ------------- ----------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ..................................................... $ 615 $ 961 Accounts receivable (net of allowance for doubtful accounts of $1,052 at June 30, 2003 and $1,169 at December 31, 2002) ............................ 16,678 14,203 Inventory ..................................................................... 17,056 24,098 Deferred income taxes ......................................................... 640 552 Prepaid expenses and other .................................................... 1,621 2,357 -------- -------- Total current assets ................................................ 36,610 42,171 -------- -------- Property and equipment: Rental equipment .............................................................. 1,125 1,372 Computer software and equipment ............................................... 26,900 26,315 Furniture, fixtures and leasehold improvements ................................ 4,655 4,585 -------- -------- 32,680 32,272 Less accumulated depreciation and amortization ................................ (15,894) (13,357) -------- -------- 16,786 18,915 -------- -------- Goodwill ........................................................................... 25,164 24,988 Deferred income taxes .............................................................. 8,598 7,940 Other assets, net .................................................................. 1,253 1,485 -------- -------- Total assets ........................................................ $ 88,411 $ 95,499 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .............................................................. $ 4,805 $ 13,517 Accrued expenses and other .................................................... 4,208 6,626 Line of credit ................................................................ 19,007 -- -------- -------- Total current liabilities ........................................... 28,020 20,143 -------- -------- Noncurrent liabilities: Line of credit ................................................................ -- 14,372 Other noncurrent liabilities .................................................. 1,049 1,125 -------- -------- Total noncurrent liabilities ........................................ 1,049 15,497 -------- -------- Commitments and contingencies (see Note 7) Shareholders' equity: Preferred stock: 10,000,000 shares authorized, $0.10 par value, no shares issued or outstanding ....................................... -- -- Common stock: 50,000,000 shares authorized, $0.10 par value, 11,674,595 shares issued, 11,533,830 (2003) and 11,417,780 (2002) shares outstanding .................................................... 1,167 1,167 Additional paid-in capital .................................................... 63,063 62,614 Accumulated deficit ........................................................... (4,504) (3,219) Treasury stock: 140,765 (2003) and 256,815 (2002) shares held ................ (384) (703) -------- -------- Total shareholders' equity .......................................... 59,342 59,859 -------- -------- Total liabilities and shareholders' equity .......................... $ 88,411 $ 95,499 ======== ========
See notes to condensed consolidated financial statements. 3 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, --------------------------- 2003 2002 -------- -------- Revenues, net ........................................ $ 17,631 $ 19,351 Cost of revenues ..................................... 8,488 10,308 -------- -------- Gross margin ........................ 9,143 9,043 -------- -------- Operating expenses: Selling, general and administrative expenses .... 8,183 7,543 Special credits ................................. (30) (359) Depreciation and amortization ................... 1,462 1,271 -------- -------- Total operating expenses .................. 9,615 8,455 -------- -------- Operating (loss) income ............. (472) 588 -------- -------- Other (income) expense: Interest expense ............................... 155 50 Other income ................................... -- (2) -------- -------- Total other expense ...................... 155 48 -------- -------- (Loss) income before income taxes .................... (627) 540 Income tax benefit (provision) ....................... 234 (227) -------- -------- Net (loss) income ................... $ (393) $ 313 ======== ======== (Loss) earnings per share: Basic ......................................... $ (0.03) $ 0.03 ======== ======== Diluted ....................................... $ (0.03) $ 0.03 ======== ======== Weighted average shares outstanding: Basic ......................................... 11,487 11,623 ======== ======== Diluted ....................................... 11,487 12,017 ======== ========
See notes to condensed consolidated financial statements. 4 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 2003 2002 -------- -------- Revenues, net ........................................ $ 35,965 $ 40,399 Cost of revenues ..................................... 17,158 22,015 Special credits ...................................... -- (293) -------- -------- Gross margin ........................ 18,807 18,677 -------- -------- Operating expenses: Selling, general and administrative expenses .... 17,543 15,338 Special credits ................................. (30) (1,321) Depreciation and amortization ................... 2,931 2,489 -------- -------- Total operating expenses .................. 20,444 16,506 -------- -------- Operating (loss) income ............. (1,637) 2,171 -------- -------- Other (income) expense: Interest expense ............................... 402 132 Other income ................................... (7) (89) -------- -------- Total other expense ...................... 395 43 -------- -------- (Loss) income before income taxes .................... (2,032) 2,128 Income tax benefit (provision) ....................... 747 (849) -------- -------- Net (loss) income ................... $ (1,285) $ 1,279 ======== ======== (Loss) earnings per share: Basic ......................................... $ (0.11) $ 0.11 ======== ======== Diluted ....................................... $ (0.11) $ 0.11 ======== ======== Weighted average shares outstanding: Basic ......................................... 11,455 11,570 ======== ======== Diluted ....................................... 11,455 11,902 ======== ========
See notes to condensed consolidated financial statements. 5 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, --------------------------- 2003 2002 -------- -------- Cash flows from operating activities: Net (loss) income .............................................................. $ (1,285) $ 1,279 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization .............................................. 2,931 2,489 Impairment and loss on fixed assets ........................................ -- 501 Deferred income taxes ...................................................... (746) (2,177) Amortization of deferred compensation ...................................... 36 36 Changes in operating assets and liabilities: (Increase) decrease in accounts receivable ................................. (2,475) 2,144 Decrease in inventory ...................................................... 7,042 9,120 Decrease in prepaid expenses and other assets .............................. 853 2,180 (Decrease) increase in accounts payable .................................... (8,712) 2,749 (Decrease) in accrued expenses and other ................................... (2,163) (3,879) -------- -------- Net cash (used in) provided by operating activities ................... (4,519) 14,442 -------- -------- Cash flows from investing activities: Capital expenditures ........................................................... (655) (8,039) Earn-out payment ............................................................... -- (13,727) Payment for business acquired .................................................. (176) -- Sale of marketable securities .................................................. -- 435 -------- -------- Net cash used in investing activities ................................. (831) (21,331) -------- -------- Cash flows from financing activities: Borrowings under line of credit ................................................ 4,635 -- Repayment of capital lease and other obligations ............................... (72) (145) Loan fees paid ................................................................. (31) (50) Exercise of employee stock options ............................................. 472 -- -------- -------- Net cash provided by (used in) financing activities .................. 5,004 (195) -------- -------- Net decrease in cash and cash equivalents ........................................... (346) (7,084) Cash and cash equivalents, beginning of period ...................................... 961 9,413 -------- -------- Cash and cash equivalents, end of period ............................................ $ 615 $ 2,329 ======== ======== Supplemental cash flow disclosures: Cash paid for interest ......................................................... $ 425 $ 154 ======== ======== Cash refunds received for income taxes ......................................... $ (1,486) $ (18) ======== ======== Noncash transactions: Stock issued for business acquired ............................................. $ -- $ 1,550 ======== ========
See notes to condensed consolidated financial statements. 6 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 AND 2002 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES 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 Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2002, except as discussed below. Certain of the Company's more significant accounting policies are as follows: Accounting Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Goodwill and Other Acquired Intangibles. Goodwill represents the cost of an acquired enterprise in excess of the fair market value of the net tangible and identifiable intangible assets acquired. The Company accounts for goodwill and other acquired intangibles in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". The Company tests goodwill annually for impairment as of January 1 or sooner if circumstances indicate. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Upon completion of its analysis for impairment in the second quarter of 2002 and again in the first quarter of 2003 in accordance with SFAS No. 142, no impairment was determined to exist at those times. Innotrac's goodwill carrying amount as of June 30, 2003 is $25.2 million. 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"). Since the exercise price for all options granted under those plans was equal to the market value of the underlying common stock on the date of grant, no compensation cost is recognized in the accompanying condensed unaudited consolidated statements of operations. Had compensation cost for stock options been determined under a fair value based method, in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", as amended by Statement of Financial Accounting Standards No. 148, the Company's net (loss) income and net (loss) income per share would have been the following pro forma amounts (in 000's, except per share data): 7
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- ------------------------ 2003 2002 2003 2002 ------ ----- ------- ------ Net (loss) income $ (393) $ 313 $(1,285) $1,279 Pro forma net (loss) income $ (601) $ 52 $(1,705) $ 738 Diluted net (loss) income per share $(0.03) $0.03 $ (0.11) $ 0.11 Pro forma net (loss) income per share $(0.05) $0.00 $ (0.15) $ 0.06
Under the fair value based method, compensation cost, net of tax is $208,000 and $261,000 for the three months ended June 30, 2003 and 2002, respectively and $420,000 and $541,000 for the six months ended June 30, 2003 and 2002, respectively. During the three and six months ended June 30, 2003, options representing 101,050 and 116,050 shares were exercised, respectively. The option shares were issued out of treasury stock. Deferred Tax Asset. Innotrac 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. A valuation allowance is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized (see Note 6). Revenue Recognition. Innotrac derives its revenue primarily from two sources: (1) fulfillment operations and (2) the delivery of business services. Innotrac's fulfillment services operations record revenue at the conclusion of the material selection, packaging and shipping process. Innotrac's call center services business recognizes revenue according to written pricing agreements based on number of calls, minutes or hourly rate basis. All other revenues are recognized as services are rendered. As required by the consensus reached in Emerging Issue Task Force ("EITF") Issue No. 99-19, revenues have been recorded net of the cost of the equipment for all fee-for-service clients. 2. SPECIAL CHARGES AND SPECIAL CREDITS At June 30, 2003 and December 31, 2002, the Company had approximately $152,000 and $277,000, respectively, in accruals related to the special charges recorded during the year ended December 31, 2000. The remaining accruals at June 30, 2003 relate to exiting the front-end e-commerce and web hosting business. Cash payments relating to these accruals for the three and six months ended June 30, 2003 were 8 approximately $56,000 and $125,000, respectively. The Company recognized a credit of approximately $359,000 and $1.6 million during the three and six months ended June 30, 2002, related to gains realized on sales of inventory items and cash collected for accounts receivable, both of which were written off as special charges in previous periods. These amounts were recorded as a reduction of the special credit line item in the accompanying condensed unaudited consolidated statements of operations. We expect that the remaining accrual, which is associated with one specific client, will be fully utilized by the end of 2003. During the three and six months ended June 30, 2003, the Company recognized a credit of approximately $30,000 related to the favorable settlement of a severance accrual recorded as part of the third quarter 2002 special charge. This amount was recorded as a reduction of the special credit line item in the accompanying condensed unaudited consolidated statements of operations. 3. FINANCING OBLIGATIONS The Company has a revolving credit agreement (the "Agreement") with a bank for borrowings up to $40 million that matures in June 2005. The Company and its subsidiary have granted a security interest in their assets and the subsidiary has provided a guarantee to the lender as collateral under this revolving credit agreement. At June 30, 2003 and December 31, 2002, the Company had approximately $19.0 million and $14.4 million, respectively, outstanding in borrowings under the line of credit. The revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. Noncompliance with any of the covenants allows the lender to declare any outstanding borrowing amounts to be immediately due and payable. The Company entered into an amended and restated Agreement with its lenders on April 3, 2003. As amended, the Agreement requires the Company to maintain a lockbox arrangement with the lenders and contains provisions limiting borrowings under the Agreement to a specified percentage of eligible accounts receivable and inventory, which totaled $25.4 million at June 30, 2003 and $31.5 million at December 31, 2002. At June 30, 2003 and December 31, 2002, the Company had $6.4 million and $17.1 million, respectively, available under the Agreement. The financial covenants require the Company to maintain tangible net worth, as defined in the Agreement, which includes deferred taxes, of at least $33.0 million at June 30, 2003, a debt to tangible net worth ratio of not more than 1.5 to 1 at June 30, 2003 and a fixed charge coverage ratio of 1.75 to 1 by December 31, 2003. The quarterly tangible net worth requirement escalates to $34.0 million at December 31, 2003 and escalates by $250,000 for each fiscal quarter thereafter. At June 30, 2003, the Company was in compliance with all covenants under the Agreement. Due to the provisions of the Agreement, which 1) requires that the Company maintain a lockbox arrangement with the lender, and 2) allows the lender to declare any outstanding borrowing amounts to be immediately due and payable as a result of noncompliance with any of the covenants, the outstanding borrowings under the Agreement have been classified as a current liability at June 30, 2003. 9 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. On May 13, 2003, the Company fixed $10.0 million of its $19.0 million of borrowings at a 90-day LIBOR rate of 2.80%. During the three months ended June 30, 2003 and 2002, the Company incurred interest expense related to the line of credit of approximately $172,000 and $15,000, respectively, resulting in a weighted average interest rate of 3.46% and 3.18%, respectively. During the six months ended June 30, 2003 and 2002, the Company incurred interest expense related to the line of credit of approximately $401,000 and $49,000, respectively, resulting in a weighted average interest rate of 3.72% and 3.09%, respectively. The Company also incurred unused revolving credit facility fees of approximately $13,000 and $24,000 during the three months ended June 30, 2003 and 2002, respectively, and $24,000 and $67,000 during the six months ended June 30, 2003 and 2002, respectively. Interest expense disclosed in the accompanying condensed unaudited consolidated statements of operations includes capital lease interest of approximately $6,000 and $13,000 for the three and six months ended June 30, 2003, respectively, and is net of interest income of approximately $36,000 for both the three and six months ended June 30, 2003. As of June 30, 2003, the Company had outstanding letters of credit totaling approximately $420,000 issued in connection with routine business requirements. 4. EARNINGS PER SHARE The following table shows the shares (in 000's) used in computing diluted earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards No. 128:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2003 2002 2003 2002 ------ ------ ------ ------ Diluted earnings per share: Weighted average shares outstanding 11,487 11,623 11,455 11,570 Employee and director stock options -- 394 -- 332 ------ ------ ------ ------ Weighted average shares assuming dilution 11,487 12,017 11,455 11,902 ====== ====== ====== ======
Options and warrants outstanding to purchase 2.2 million shares of the Company's common stock for both the three and six months ended June 30, 2003 and 1.1 million for both the three and six months ended June 30, 2002 were not included in the computation of diluted EPS because their effect was anti-dilutive. 5. RECENT ACCOUNTING PRONOUNCEMENTS 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 10 to an exit plan, which is generally before an actual liability has been incurred. The Company adopted SFAS No. 146 on January 1, 2003; the adoption did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. 6. INCOME TAXES Innotrac's net deferred tax asset as of June 30, 2003 is approximately $9.2 million. This net deferred tax asset was generated by net operating loss carryforwards created primarily by the special charge of $34.3 million recorded in 2000 and the net losses generated in 2002 and the first half of 2003. Innotrac has a tax net operating loss carryforward of $27.6 million at December 31, 2002 that expires between 2018 and 2020. Although the Company has generated financial reporting and tax losses in 2000, 2002 and the first half of 2003, the Company was profitable in 2001 and prior to 2000. Management believes that its net operating loss carryforwards will be utilized through future earnings before their expiration. This assessment is based on management's expectations of increased revenues, lower selling, general and administrative expenses, reduced capital expenditures and no impairment losses related to goodwill in the future. Innotrac's ability to generate the expected amounts of taxable income from future operations is dependent upon general economic conditions, competitive pressures on sales and margins and other factors beyond management's control. There can be no assurance that Innotrac will meet its expectations for future taxable income in the carryforward period. However, management considered the above factors in reaching the conclusion that it is more likely than not that future taxable income will be sufficient to fully realize the net deferred tax asset recorded at June 30, 2003. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 7. COMMITMENTS AND CONTINGENCIES Shareholder Rights Plan. In December of 1997, the Company's Board of Directors approved a Shareholder Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution of one Right for each outstanding share of the Company's Common Stock held of record as of the close of business on January 1, 1998 or that thereafter becomes outstanding prior to the earlier of the final expiration date of the Rights or the first date upon which the Rights become exercisable. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Participating Cumulative Preferred Stock, par value $.10 per share, at a price of $60.00 (the "Purchase Price"), subject to adjustment. The Rights are not exercisable until ten calendar days after a person or group (an "Acquiring Person") buys, or announces a tender offer for 15% or more of the Company's Common Stock. Such ownership level has been increased to 25% for a particular shareholder that owned approximately 20.57% of the shares outstanding on August 13, 2003. In the event the Rights become exercisable, each Right will entitle the holder to receive that number of shares of Common Stock having a market value equal to the Purchase Price. If, after any person has become an Acquiring Person (other than through a tender offer approved by qualifying members of the Board of Directors), the Company is involved in a merger or other business combination where the Company is not the surviving corporation, or the Company sells 50% or more of its assets, operating income, or cash flow, then each Right will entitle the holder to purchase, for the Purchase Price, that number of shares of common or other capital stock of the acquiring entity which at the time of such transaction have a market value of twice the Purchase Price. The Rights will expire on January 1, 2008, 11 unless extended, unless the Rights are earlier exchanged, or unless the Rights are earlier redeemed by the Company in whole, but not in part, at a price of $0.001 per Right. Legal Proceedings. The Company is subject to various 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. 12 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 and pricing of our contracts; reliance on the telecommunications industry; risks associated with changing technology and supporting existing technology; risks associated with competition and other factors discussed in more detail under the heading "Certain Factors Affecting Forward-Looking Statements" in Part I, Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2002. OVERVIEW Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and headquartered in Atlanta, Georgia, provides order processing, order fulfillment and call center services to large corporations that outsource these functions. In order to perform call center and fulfillment 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 principal or core business. By assuming responsibility for these tasks, Innotrac strives to improve the quality of the non-core operations of their clients and to reduce their overall operating costs. Innotrac enables their clients to manage their sales channels efficiently by utilizing their core competencies, which include: - Fulfillment Services: - sophisticated warehouse management technology - automated shipping solutions - real-time inventory tracking and order status - purchasing and inventory management - channel development - zone skipping for shipment cost reduction - product sourcing and procurement - packaging solutions - back-order management - returns management - Customer Support Services: - inbound call center services - technical support and order status - returns and refunds processing - call centers integrated into fulfillment platform - cross-sell/up-sell services - collaborative chat - intuitive e-mail response 13 The Company fulfills products that include Digital Subscriber Line and Cable Modems ("Modems") and consumer phones and wireless pager equipment ("Telecommunications products") for clients such as BellSouth Corporation ("BellSouth"), Qwest Communications International, Inc. ("Qwest") and Comcast Corporation ("Comcast") and their customers. During the quarters ended June 30, 2003 and 2002, approximately 24.9% and 26.5% of revenues, respectively, were generated from Telecommunications product clients and 19.5% and 23.2% of revenues, respectively, were from Modems clients. During the six months ended June 30, 2003 and 2002, approximately 23.3% and 27.0% of revenues, respectively, were generated from Telecommunications product clients and 19.9% and 21.8% of revenues, respectively, were from Modems clients. The Company also provides a variety of these services for a significant number of retail, catalog and direct marketing companies such as Nordstrom, Inc., Ann Taylor Stores Corporation, Smith & Hawken, Ltd., The Coca-Cola Company, Tactica International, Inc., Porsche Cars North America, Inc., Wilsons Leather and Martha Stewart Living Omnimedia, Inc. During the quarters ended June 30, 2003 and 2002, 27.6% and 14.7% of revenues, respectively, were from retail and catalog clients and 16.2% and 26.7% of revenues, respectively, were from direct marketing clients. During the six months ended June 30, 2003 and 2002, 26.9% and 14.2% of revenues, respectively, were from retail and catalog clients and 16.8% and 30.7% of revenues, respectively, were from direct marketing clients. The Company also provides these services for business-to-business ("B2B") clients including Books are Fun (a division of Readers' Digest) and The Walt Disney Company. During the quarters ended June 30, 2003 and 2002, 11.7% and 4.3% of revenues, respectively, were from B2B clients. During the six months ended June 30, 2003 and 2002, 13.1% and 4.1% of revenues, respectively, were from B2B clients. 14 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, 2003 and 2002. 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 unaudited consolidated financial statements.
Three Months Six Months Ended June 30, Ended June 30, ---------------------- ---------------------- 2003 2002 2003 2002 ----- ----- ----- ----- Revenues ....................................... 100.0% 100.0% 100.0% 100.0% Cost of revenues ............................... 48.1 53.3 47.7 54.5 Special credits ................................ -- -- -- (0.7) ----- ----- ----- ----- Gross margin ................................ 51.9 46.7 52.3 46.2 Selling, general and administrative expenses ... 46.4 39.0 48.8 37.9 Special credits ................................ (0.1) (1.9) (0.1) (3.3) Depreciation and amortization .................. 8.3 6.6 8.1 6.2 ----- ----- ----- ----- Operating (loss) income ..................... (2.7) 3.0 (4.5) 5.4 Other expense, net ............................. 0.8 0.2 1.1 0.1 ----- ----- ----- ----- (Loss) income before income taxes ........... (3.5) 2.8 (5.6) 5.3 Income tax benefit (provision) ................. 1.3 (1.2) 2.0 (2.1) ----- ----- ----- ----- Net (loss) income ........................... (2.2)% 1.6% (3.6)% 3.2% ===== ===== ===== =====
SPECIAL CHARGES AND SPECIAL CREDITS At June 30, 2003 and December 31, 2002, the Company had approximately $152,000 and $277,000, respectively, in accruals related to the special charges recorded during the year ended December 31, 2000. The remaining accruals at June 30, 2003 relate to exiting the front-end e-commerce and web hosting business. Cash payments relating to these accruals for the three and six months ended June 30, 2003 were approximately $56,000 and $125,000, respectively. The Company recognized a credit of approximately $359,000 and $1.6 million during the three and six months ended June 30, 2002, related to gains realized on sales of inventory items and cash collected for accounts receivable, both of which were written off as special charges in previous periods. These amounts were recorded as a reduction of the special credit line item in the accompanying condensed unaudited consolidated statements of operations. We expect that the remaining accrual, which is associated with one specific client, will be fully utilized by the end of 2003. During the three and six months ended June 30, 2003, the Company recognized a credit of approximately $30,000 related to the favorable settlement of a severance accrual recorded as part of the third quarter 2002 special charge. This amount was recorded as a reduction of the special credit line item in the accompanying condensed unaudited consolidated statements of operations. 15 THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 Revenues. Net revenues decreased 8.9% to $17.6 million for the three months ended June 30, 2003 from $19.4 million for the three months ended June 30, 2002. The decrease in revenues is primarily due to a decrease in volumes from our direct marketing clients along with a substantial decline in associated pass-through freight revenues. This decline in revenues was offset by the commencement of the Smith & Hawken, Ann Taylor and Books Are Fun contracts in the third quarter of 2002. Cost of Revenues. Cost of revenues decreased 17.7% to $8.5 million for the three months ended June 30, 2003 compared to $10.3 million for the three months ended June 30, 2002. Cost of revenues decreased primarily due to the reduction in pass-through freight costs associated with the decline in volumes from our direct marketing clients. This decline in cost of revenues was offset by additional fulfillment labor costs incurred to support the new clients mentioned above, which commenced operations during the third quarter of 2002. Gross Margin. For the three months ended June 30, 2003, the Company's gross margin increased by $100,000 to $9.1 million, or 51.9% of revenues, compared to $9.0 million, or 46.7% of revenues, for the three months ended June 30, 2002. This increase was due primarily to the decrease in reimbursable freight costs, which have a low margin, during the three months ended June 30, 2003 and the reduction of low margin revenue related to one customer, Warranty Corporation of America ("WACA"). Selling, General and Administrative Expenses. S,G&A expenses for the three months ended June 30, 2003 increased to $8.2 million, or 46.4% of revenues, compared to $7.5 million, or 39.0% of revenues, for the same period in 2002. The increase in expenses primarily relates to expenses associated with the addition of two new fulfillment facilities located near Chicago and Cincinnati which were opened during the second half of 2002. Special Credits. During the three months ended June 30, 2003, the Company recognized approximately $30,000 related to the favorable settlement of a severance accrual recorded as part of the third quarter 2002 special charge. During the three months ended June 30, 2002, the Company collected cash of $359,000 on accounts receivable which were previously fully reserved for as part of the 2000 special charge. The special charge reserve was reversed as a credit to income within the special credit line item on the accompanying condensed unaudited consolidated statements of operations in an amount equal to the cash received. Income Taxes. The Company's effective tax rate for the three months ended June 30, 2003 and 2002 was 37.3% and 42.0%, respectively. The decrease in the absolute rate was principally due to the greater impact of certain items not deductible for tax purposes in 2002. 16 SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 Revenues. Net revenues decreased 11.0% to $36.0 million for the six months ended June 30, 2003 from $40.4 million for the six months ended June 30, 2002. The decrease in revenues is primarily due to a decrease in volumes from our direct marketing clients along with a substantial decline in associated pass-through freight revenues. This decline in revenues was offset by the commencement of the Smith & Hawken, Ann Taylor and Books Are Fun contracts in the third quarter of 2002. Cost of Revenues. Cost of revenues decreased 22.1% to $17.2 million for the six months ended June 30, 2003 compared to $22.0 million for the six months ended June 30, 2002. Cost of revenues decreased primarily due to the reduction in pass-through freight costs associated with the decline in volumes from our direct marketing clients. This decline in cost of revenues was offset by additional fulfillment labor costs incurred to support the new clients mentioned above, which commenced operations during the third quarter of 2002. Special Credits. The Company recognized approximately $293,000 related to gains realized on sales of inventory items previously written off as part of the 2000 special charge during the six months ended June 30, 2002. Gross Margin. For the six months ended June 30, 2003, the Company's gross margin increased by $130,000 to $18.8 million, or 52.3% of revenues, compared to $18.7 million, or 46.2% of revenues, for the six months ended June 30, 2002. This increase was due primarily to the decrease in reimbursable freight costs, which have a low margin, during the six months ended June 30, 2003 and the reduction of low margin revenue related to one customer, Warranty Corporation of America ("WACA"). Selling, General and Administrative Expenses. S,G&A expenses for the six months ended June 30, 2003 increased to $17.5 million, or 48.8% of revenues, compared to $15.3 million, or 37.9% of revenues, for the same period in 2002. The increase in expenses primarily relates to expenses associated with the addition of two new fulfillment facilities located near Chicago and Cincinnati which were opened during the second half of 2002. Special Credits. During the six months ended June 30, 2003, the Company recognized approximately $30,000 related to the favorable settlement of a severance accrual recorded as part of the third quarter 2002 special charge. During the six months ended June 30, 2002, the Company collected cash of $1.3 million on accounts receivable which were previously fully reserved for as part of the 2000 special charge. The special charge reserve was reversed as a credit to income within the special credit line item on the accompanying condensed unaudited consolidated statements of operations in an amount equal to the cash received. Income Taxes. The Company's effective tax rate for the six months ended June 30, 2003 and 2002 was 36.8% and 39.9%, respectively. The decrease in the absolute rate was principally due to the greater impact of certain items not deductible for tax purposes in 2002. 17 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 $615,000 at June 30, 2003 as compared to $961,000 at December 31, 2002. Additionally, the Company had borrowings under its revolving credit facility (discussed below) of $19.0 million outstanding at June 30, 2003 as compared to $14.4 million at December 31, 2002. The primary use of cash was to reduce accounts payable during the first half of 2003. The Company has a revolving credit agreement (the "Agreement") with a bank for borrowings up to $40 million that matures in June 2005. The Company and its subsidiary have granted a security interest in all of their assets and the subsidiary has provided a guarantee to the lender as collateral under this revolving credit agreement. At June 30, 2003 and December 31, 2002, the Company had approximately $19.0 million and $14.4 million, respectively, outstanding in borrowings under the line of credit. The revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. Noncompliance with any of the covenants allows the lender to declare any outstanding borrowing amounts to be immediately due and payable. The Company amended and restated the Agreement with its lender on April 3, 2003. As amended, the Agreement requires the Company to maintain a lockbox arrangement with the lenders and contains provisions limiting borrowings under the Agreement to a specified percentage of eligible accounts receivable and inventory, which totaled $25.4 million at June 30, 2003 and $31.5 million at December 31, 2002. At June 30, 2003 and December 31, 2002, the Company had $6.4 million and $17.1 million, respectively, available under the Agreement. The financial covenants require the Company to maintain tangible net worth, as defined in the Agreement, which includes deferred taxes, of at least $33.0 million at June 30, 2003, a debt to tangible net worth ratio of not more than 1.5 to 1 at June 30, 2003 and a fixed charge coverage ratio of 1.75 to 1 by December 31, 2003. The quarterly tangible net worth requirement escalates to $34.0 million at December 31, 2003 and escalates by $250,000 for each fiscal quarter thereafter. At June 30, 2003, the Company was in compliance with all covenants under the Agreement. Due to the provisions of the Agreement, which 1) requires that the Company maintain a lockbox arrangement with the lender, and 2) allows the lender to declare any outstanding borrowing amounts to be immediately due and payable as a result of noncompliance with any of the covenants, the outstanding borrowings under the Agreement have been classified as a current liability at June 30, 2003. 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. On May 13, 2003, the Company fixed $10.0 million of its $19.0 million of borrowings at a 90-day LIBOR rate of 2.80%. During the three months ended June 30, 2003 and 2002, the Company incurred interest expense related to the line of credit of approximately $172,000 and $15,000, respectively, resulting in a weighted average interest rate of 3.46% and 3.18%, respectively. During the six months ended June 30, 2003 and 2002, the Company incurred interest expense related to the line of credit of approximately $401,000 and $49,000, respectively, resulting in a weighted average interest rate of 3.72% and 3.09%, respectively. Interest expense disclosed in the accompanying condensed unaudited consolidated statements of operations includes capital lease interest of approximately $6,000 and $13,000 for the three and six months ended June 30, 2003, respectively, and is net of interest income of approximately $36,000 for both the three and six months ended June 30, 2003. 18 During the six months ended June 30, 2003, the Company used approximately $4.5 million in cash flows from operating activities compared to generating $14.4 million in cash flows from operating activities in the same period in 2002. The decrease in cash flows from operating activities was the result of a decrease of $2.6 million in net income, along with an increase in accounts receivable offset by a decrease in accounts payable, accrued expenses and inventory. During the six months ended June 30, 2003, net cash used in investing activities was $831,000 as compared to $21.3 million in 2002. This difference was due to a $13.7 million earn-out payment made in February 2002 resulting from a prior acquisition and $8.0 million in capital expenditures in 2002, primarily for capitalized technology costs, compared with $655,000 in 2003. During the six months ended June 30, 2003, net cash provided by financing activities was $5.0 million compared to net cash used in financing activities of $195,000 in the same period in 2002. The $5.2 million increase was primarily due to additional borrowings under the credit facility which were mainly used to reduce accounts payable. The Company's primary long-term contractual commitments consist of capital and operating leases. See the discussion of "Liquidity and Capital Resources" in our Annual Report on Form 10-K for the year ended December 31, 2002 and Note 7 to the consolidated financial statements therein. The Company has no long-term purchase commitments. The Company estimates that its cash and financing needs through 2003 will be met by cash flows from operations and its credit facility. The Company may need to raise additional funds in order to take advantage of unanticipated opportunities. 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 Critical accounting policies are those policies that can have a significant impact on the presentation of our financial position and results of operations and demand the most significant use of subjective estimates and management judgment. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Specific risks inherent in our application of these critical policies are described below. For all of these policies, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment. These policies often require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Additional information concerning our accounting policies can be found in Note 1 of this Form 10-Q and in Note 2 included in the Company's Annual Report on 10-K for the year ended December 31, 2002. Those that we believe that are most critical to an investor's understanding of our financial results and condition and require complex management judgment are discussed below: Goodwill and Other Acquired Intangibles - Goodwill represents the cost of an acquired enterprise in excess of the fair market value of the net tangible and identifiable intangible assets acquired. Goodwill and other acquired intangibles related to business combinations prior to July 1, 2001 were being amortized over 5-20 years on a straight-line basis, which represented management's estimation of the related benefit to be derived from the acquired business. However, goodwill and other acquired intangibles from business combinations occurring after June 30, 2001, including the Company's acquisition of iFulfillment, Inc. in July 2001, are accounted for under the transition provisions for business combinations of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". The Company adopted SFAS No. 142 effective January 1, 2002, which changed the accounting for 19 goodwill and other indefinite life intangibles from an amortization method to an impairment only approach. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Upon completion of its analysis for impairment in the first quarter of 2003 in accordance with SFAS No. 142, no impairment was determined to exist at that time. Innotrac's goodwill carrying amount as of June 30, 2003 was $25.2 million. This asset relates to the goodwill associated with the Company's acquisition of Universal Distribution Services ("UDS") in December 2000 (including the earnout payment made to the former UDS shareholders in February 2002), and the acquisition of iFulfillment, Inc. in July 2001. In accordance with SFAS No. 142, the Company contracted with an independent third party valuation firm to perform a valuation in the first quarter of 2003. The third party valuation supported the determination that the fair value of the reporting unit at January 1, 2003 exceeded the carrying amount of the net assets, including goodwill, and thus no impairment existed. Management has reviewed and concurs with the major assumptions used in the third party's valuation at January 1, 2003. The Company will perform this impairment test annually as of January 1 or sooner if circumstances indicate. There can be no assurance however that future valuations will continue to support this determination, or that goodwill will not be found to be impaired in the future. Deferred Tax Asset - Innotrac 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. A valuation allowance is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized. Innotrac's net deferred tax asset as of June 30, 2003 was approximately $9.2 million. This net deferred tax asset was generated by net operating loss carryforwards created primarily by the special charge of $34.3 million recorded in 2000 and the net losses generated in 2002 and the first half of 2003. Innotrac has a tax net operating loss carryforward of $27.6 million at December 31, 2002 that expires between 2018 and 2020. Although the Company has generated financial reporting and tax losses in 2000, 2002 and the first half of 2003, the Company was profitable in 2001 and prior to 2000. Management believes that its net operating loss carryforwards will be utilized principally through future earnings before their expiration. This assessment is based on management's expectations of increased revenues, lower selling, general and administrative expenses, reduced capital expenditures and no impairment losses related to goodwill in the future. Innotrac's ability to generate the expected amounts of taxable income from future operations is dependent upon general economic conditions, competitive pressures on sales and margins and other factors beyond management's control. There can be no assurance that Innotrac will meet its expectations for future taxable income in the carryforward period. However, management considered the above factors in reaching the conclusion that it is more likely than not that future taxable income will be sufficient to fully realize the net deferred tax asset recorded at June 30, 2003. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. If it is determined that the deferred tax asset is not realizable, the Company would then be required to review recorded goodwill and other intangibles for impairment in accordance with the provisions of SFAS No. 142. 20 RECENT ACCOUNTING PRONOUNCEMENTS 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. The Company adopted SFAS No. 146 on January 1, 2003; the adoption did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment to FASB Statement No. 123," which is effective for fiscal years beginning after December 15, 2002. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". The Company intends to continue to account for stock-based employee compensation under APB No. 25. The additional disclosure requirements of SFAS No. 148 are included in Note 1 of the Notes to Condensed Consolidated Financial Statements within this 10-Q. 21 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Management believes the Company's exposure to market risks is immaterial. Innotrac holds no market risk sensitive instruments for trading purposes. At present, the Company does not employ any derivative financial instruments, other financial instruments or derivative commodity instruments to hedge any market risks and does not currently plan to employ them in the future. To the extent that the Company has borrowings outstanding under its credit facility, the Company will have market risk relating to the amount of borrowings due to variable interest rates under the credit facility. The Company's exposure is immaterial due to the short-term nature of these borrowings. Additionally, all of the Company's lease obligations are fixed in nature as discussed in our Annual Report on Form 10-K for the year ended December 31, 2002 and other filings on file with the Securities and Exchange Commission. ITEM 4 - CONTROLS AND PROCEDURES Our management, including the chief executive and chief financial officers, supervised and participated in an evaluation of our disclosure controls and procedures (as defined in federal securities rules) as of the end of the fiscal quarter covered in this report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of the date of that evaluation. 22 PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On Monday, May 19, 2003, the Company held its annual meeting of shareholders in Duluth, Georgia. As of the record date, March 31, 2003, there were 11,674,595 shares of Common Stock issued, outstanding and entitled to vote at the annual meeting. Represented at the meeting in person or by proxy were 10,889,906 shares representing 93.28% of the total shares of Common Stock entitled to vote at the meeting. The purpose of the meeting was to re-elect the following three directors to three year terms expiring in 2006. The following table sets forth the number of votes cast "for" reelection and the number of votes "withheld" for each director. There were no abstentions or broker non-votes.
NUMBER OF VOTES --------------------------------------- FOR WITHHELD ---------- -------- Martin J. Blank.............................. 10,416,285 473,621 David L. Gamsey.............................. 10,416,230 473,676 Joel E. Marks................................ 10,416,285 473,621
The directors whose terms continued after the meeting are Bruce V. Benator, Scott D. Dorfman, David L. Ellin and Larry C. Hanger. ITEM 5 - OTHER INFORMATION The Company recently discovered that a shareholder had accumulated a total of 20.57% of the outstanding shares of Common Stock, which is above the 15% level of ownership that would normally trigger the effectiveness of the Company's Shareholder Rights Plan. After investigating the circumstances surrounding such acquisition, the Board of Directors concluded that this shareholder had exceeded the 15% level inadvertently and without an intention of triggering the effectiveness of the Rights Plan. The Board of Directors amended the Rights Plan on August 13, 2003 to exclude this shareholder from the definition of an "Acquiring Person" under the Rights Plan unless and until the shareholder becomes the beneficial owner of more than 25% of the shares of Common Stock outstanding. At the same time, the Company has entered into an agreement with this shareholder pursuant to which it has agreed (i) to vote its shares in excess of 15% in proportion to the votes cast by all the other shareholders of the Company, and (ii) not to participate in a proxy contest, seek election to the Board or otherwise seek to increase control of the Company without the approval of the Board. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10.1 Employment Agreement dated April 7, 2003, by and between James McMurphy and Innotrac Corporation 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a). 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a). 23 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.ss.1350. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.ss.1350. (b) Reports on Form 8-K: On April 29, 2003, the Company furnished to the Commission pursuant to Items 9 and 12 of Form 8-K its press release announcing the Company's financial results for the first quarter of 2003. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INNOTRAC CORPORATION ----------------------------------------------- (Registrant) Date: August 14, 2003 /s/ Scott D. Dorfman ----------------------------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: August 14, 2003 /s/ David L. Gamsey ----------------------------------------------- David L. Gamsey Senior Vice President , Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 25 EX-10.1 3 g84439exv10w1.txt EMPLOYMENT AGREEMENT Exhibit 10.1 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into as of this XXst day of April, 2003, by and between JAMES MCMURPHY, an individual resident of the State of Georgia ("Employee"), and INNOTRAC CORPORATION, a Georgia corporation (the "Employer"). W I T N E S S E T H: WHEREAS, the parties hereto desire to enter into an agreement for the Company's continued employment of Employee on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Employment. Subject to the terms hereof, the Employer hereby employs Employee, and Employee hereby accepts such employment. Employee will serve as Vice President and Chief Information Office of the Employer or in such other executive capacity as the Board of Directors of Employer (the "Board of Directors") may hereafter from time to time determine. Employee agrees to devote his full business time and best efforts to the performance of the duties that Employer may assign Employee from time to time and provided further that the Employee may also serve on boards of directors or trustees of other companies and organizations, as long as such service does not materially interfere with the performance of his duties hereunder. Section 2. Term of Employment. The term of Employee's employment (the "Term") shall continue from the date hereof until the earlier of (a) December 31, 2005 or (b) the occurrence of any of the following events: (i) The death or total disability of Employee (total disability meaning the failure to fully perform his normal required services hereunder for a period of three (3) months during any consecutive twelve (12) month period during the term hereof, as determined by the Board of Directors, by reason of mental or physical disability); (ii) The termination by Employer of Employee's employment hereunder, upon prior written notice to Employee, for "good cause", as determined by the Board of Directors. For purposes of this Agreement, "good cause" for termination of Employee's employment shall exist (A) if Employee is convicted of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (B) if Employee fails to comply with the terms of this Agreement, and, within thirty (30) days after written notice from Employer of such failure, Employee has not corrected such failure or, having once received such notice of failure and having so corrected such failure, Employee at any time thereafter again so fails, (C) if Employee violates any of the provisions contained in Section 4 of this Agreement, or (D) if Employee tests positive for illegal drugs; or (iii) The termination of this Agreement by either party upon at least ninety (90) days prior written notice. Section 3. Compensation. 3.1 Term of Employment. Employer will provide Employee with the following salary, expense reimbursement and additional employee benefits during the term of employment hereunder: (a) Salary. Employee will be paid a salary (the "Salary") of no less than Two Hundred Five Thousand ($205,000) per annum, less deductions and withholdings required by applicable law. The Salary shall be paid to Employee in equal monthly installments (or on such more frequent basis as other executives of Employer are compensated). The Salary shall be reviewed by the Board of Directors of Employer on at least an annual basis. (b) Stock Options. Employee will be granted 50,000 stock options priced at fair market value at date of grant, subject to the approval of the Board of Directors. (c) Bonus. Employee will be entitled to an annual bonus (the "Bonus") of 50% of Salary at Plan (to be defined) with a 3-up-3-down formula. The Bonus shall be paid promptly upon the availability of annual financial results (which is expected to occur in early February of each year). (d) Vacation. Employee shall receive four (4) weeks vacation time per calendar year during the term of this Agreement. Any unused vacation days in any calendar year may not be carried over to subsequent years. (e) Expenses. Employer shall reimburse Employee for all reasonable and necessary expenses incurred by Employee at the request of and on behalf of Employer. (f) Benefit Plans. Employee may participate in such medical, dental, disability, hospitalization, life insurance and other benefit plans (such as pension and profit sharing plans) as Employer maintains from time to time for the benefit of other senior executives of Employer, on the terms and subject to the conditions set forth in such plans. 3.2 Effect of Termination. (a) Except as hereinafter provided, upon the termination of the employment of Employee hereunder for any reason, Employee shall be entitled to all compensation and benefits earned or accrued under Section 3.1 as of the effective date of termination (the "Termination Date"), but from and after the Termination Date no additional compensation or benefits shall be earned by Employee hereunder. Employee shall be deemed to have earned any Bonus payable with respect to the calendar year in which the -2- Termination Date occurs on a prorated basis (based on the number of days in such calendar year through and including the Termination Date divided by 365) based upon the year to date financials and performance of the Employer and assuming performance at the target level for any individual performance criteria. Any such Bonus shall be payable upon termination. (b) If Employee's employment hereunder is terminated by Employer pursuant to Section 2(b)(iii) hereof, then, in addition to any other amount payable hereunder, Employer shall continue to pay Employee his normal Salary pursuant to Section 3.1(a) for a three-month period (on the same basis as if Employee continued to serve as an employee hereunder for such applicable period). If Employee's employment is terminated pursuant to Section 2(b)(i) hereof or if Employee's employment is terminated by Employer pursuant to Section 2(b)(iii), all options to purchase stock of the Company or an affiliate of the Company granted to Employee shall immediately become exercisable upon such termination. In the case of a termination pursuant to Section 2(b)(i) hereof, the options will expire in accordance with their respective scheduled expiration dates. Except as provided in Section 3.3, in the case of a termination by Employer pursuant to Section 2(b)(iii) hereof, the options will expire on the first anniversary after the effective date of the termination of Employee's employment hereunder. Upon the death of Employee, any options that Employee would otherwise be entitled to exercise hereunder may be exercised by his personal representatives or heirs, as applicable. Except as provided in Section 3.3, if Employee's employment is terminate by Employer pursuant to Section 2(b)(ii) or by Employee pursuant to Section 2(b)(iii), those options which are exercisable as of the date of such termination shall be exercisable for a period of 90 days after such termination (and all other options not then exercisable shall be forfeited as of such date), and after such 90-day period, all unexercised options will expire. To the extent necessary, this provision shall be deemed an amendment of any option agreement between the Employee and the Employer or an affiliate of the Employer. 3.3 Effect of Change in Control. Notwithstanding Section 3.2(b) above, if there is a Change in Control (as defined below) of the Employer and the Employee's employment is terminated within 18 months following the date of the Change in Control, the following provisions shall apply. (a) If Employee's employment hereunder is terminated by Employer pursuant to Section 2(b)(iii) hereof or by Employee for "Good Reason" as defined below, then, in addition to any other amount payable pursuant to Section 3.2(a), the Employee shall be entitled to receive the compensation and benefits set forth in subsections (i) through (iv) below: (i) Base Salary. Employee will continue to receive his Salary as then in effect (subject to withholding of all applicable taxes) for a period of six (6) months from his date of termination in the same manner as it was being paid as of the date of termination. -3- (ii) Health, Dental and Life Insurance Coverage. The health, dental and group term life insurance benefits coverage provided to Employee at his date of termination shall be continued at the same level and in the same manner as if his employment under this Agreement had not terminated (subject to the customary changes in such coverages if Employee retires, reaches age 65 or similar events), beginning on the date of such termination and ending on the date six (6) months from the date of such termination. Any additional coverages Employee had at termination, including dependent coverage, will also be continued for such period on the same terms, to the extent permitted by the applicable policies or contracts. Any costs Employee was paying for such coverages at the time of termination shall be paid by Employee by separate check payable to the Company each month in advance or by reduction of amounts owed to Employee by the Employer. If the terms of any benefit plan referred to in this Section, or the laws applicable to such plan, do not permit continued participation by Employee, then the Company will arrange for other coverage at its expense providing substantially similar benefits. The coverages provided for in this paragraph shall be applied against and reduce the period for which COBRA will be provided. (iii) Stock Options. Notwithstanding any provision in any option agreement, all outstanding stock options granted to Employee by Employer or an affiliate of Employer shall become fully vested on the date of Employee's termination of employment and shall remain exercisable as provided in the applicable option agreement or, if longer, for a period of three (3) years following the date of termination of employment. To the extent necessary, this provision shall be deemed an amendment of any option agreement between the Employee and the Employer or an affiliate of the Employer. (b) If Employee's employment hereunder is terminated by Employee pursuant to Section 2(b)(iii) hereof other than for "Good Reason" as defined below, then, in addition to any other amount payable pursuant to Section 3.2(a), the Employee shall be entitled to receive the compensation and benefits set forth in subsections (i) through (iii) of Subsection 3.3(a) above, provided, however, that a period of 3 months shall be substituted for 6 months in subsections 3.3(a)(i), (ii). 3.4 Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: (a) "Change in Control" means any of the following events: (i) The acquisition (other than from the Employer) by any person of beneficial ownership of fifty percent (50%) or more of the combined voting power of the Employer's then outstanding voting securities; provided, however, that for purposes of this Section, person shall not include any person who on the date hereof owns 25% or more of the Employer's outstanding securities, and a Change in Control shall not be deemed to occur solely because fifty percent -4- (50%) or more of the combined voting power of the Employer's then outstanding securities is acquired by (i) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Employer or any of its subsidiaries, or (ii) any corporation, which, immediately prior to such acquisition, is owned directly or indirectly by the shareholders of the Employer in the same proportion as their ownership of stock in the Employer immediately prior to such acquisition. (ii) Approval by shareholders of the Employer of (1) a merger or consolidation involving the Employer if the shareholders of the Employer, immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Employer outstanding immediately before such merger or consolidation, or (2) a complete liquidation or dissolution of the Employer, or (3) an agreement for the sale or other disposition of all or substantially all of the assets of the Employer. (iii) A change in the composition of the Board such that the individuals who, as of the date of this Agreement, 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 that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Employer'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. (iv) The occurrence of any other event or circumstance which is not covered by (i) through (iii) above which the Board determines affects control of the Company and adopts a resolution that such event or circumstance constitutes a Change in Control for the purposes of this Agreement. (b) A "Good Reason" for termination by Employee of Employee's employment shall mean the occurrence (without the Employee's express written consent), within the eighteen (18) month period following the date of a Change in Control, of any one of the following acts by the Employer, or failures by the Employer to act, unless, in the case of any act or failure to act described in paragraph (i) or (iv) below, such act or - 5 - failure to act is corrected within 30 days after notice by the Employee to the Employer of the act or failure to act: (i) the assignment to Employee of any duties inconsistent with Employee's title and status set forth herein, or a substantial adverse alteration in the nature or status of Employee's responsibilities at the Employer from those in effect immediately prior to the Change in Control; (ii) a substantial reduction by the Employer in Employee's Base Salary; (iii) the failure by the Employer to continue in effect any compensation or benefit plan or program in which Employee participates immediately prior to the Change in Control, which is material to Employee's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Employer to continue the Employee's participation in such plan (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of Employee's participation relative to other participants, as existed at the time of the Change in Control. The Employee's right to terminate the Employee's employment for Good Reason shall not be affected by the Employee's incapacity due to physical or mental illness, except for a total disability as defined in Section 2 above. The Employee's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. Section 4. Partial Restraint on Post-termination Competition. 4.1 Definitions. For the purposes of this Section 4, the following definitions shall apply: (a) "Company Activities" means the business of selling caller ID technology and hardware, fulfillment services, e-commerce fulfillment and e-commerce return services as well as other similar services that Innotrac or its subsidiaries is involved in at the date of this agreement. (b) "Competitor" means any business, individual, partnership, joint venture, association, firm, corporation or other entity, other than the Employer or its affiliates or subsidiaries, engaged, wholly or partly, in Company Activities. (c) "Competitive Position" means (i) the direct or indirect ownership or control of all or any portion of a Competitor; or (ii) any employment or independent contractor arrangement with any Competitor whereby Employee will serve such Competitor in any managerial capacity. (d) "Confidential Information" means any confidential, proprietary business information or data belonging to or pertaining to Employer that does not constitute a - 6 - "Trade Secret" (as hereinafter defined) and that is not generally known by or available through legal means to the public, including, but not limited to, information regarding Employer's customers or actively sought prospective customers, suppliers, manufacturers and distributors gained by Employee as a result of his employment with Employer. (e) "Customer" means actual customers or actively sought prospective customers of Employer during the Term. (f) "Noncompete Period" or "Nonsolicitation Period" means the period beginning the date hereof and ending on the first anniversary of the termination of Employee's employment with Employer. (g) "Territory" means the area within a thirty-five (35) mile radius of any corporate office of Employer or any of its subsidiaries, affiliates or divisions. (h) "Trade Secrets" means information or data of or about Employer, including but not limited to technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, products plans, or lists of actual or potential customers, clients, distributees or licensees, information concerning Employer's finances, services, staff, contemplated acquisitions, marketing investigations and surveys, that (i) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. (i) "Work Product" means any and all work product, property, data documentation or information of any kind, prepared, conceived, discovered, developed or created by Employee for Employer or its affiliates, or any of Employer's or its affiliates' clients or customers. 4.2 Trade Name and Confidential Information. --------------------------------------- (a) Employee hereby agrees that (i) with regard to each item constituting all or any portion of the Trade Secrets, at all times during the Term and all times during which such item continues to constitute a Trade Secret under applicable law; and (ii) with regard to any Confidential Information, during the Term and the Noncompete Period: (i) Employee shall not, directly or by assisting others, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be connected in any manner with, any business conducted under any corporate or trade name of Employer or name similar thereto, without the prior written consent of Employer; (ii) Employee shall hold in confidence all Trade Secrets and all Confidential Information and will not, either directly or indirectly, use, sell, lend, lease, distribute, license, give, transfer, assign, show, disclose, disseminate, -7- reproduce, copy, appropriate or otherwise communicate any Trade Secrets or Confidential Information, without the prior written consent of Employer; and (iii) Employee shall immediately notify Employer of any unauthorized disclosure or use of any Trade Secrets or Confidential Information of which Employee becomes aware. Employee shall assist Employer, to the extent necessary, in the procurement or any protection of Employer's rights to or in any of the Trade Secrets or Confidential Information. 4.3 Noncompetition. (a) The parties hereto acknowledge that Employee is conducting Company Activities throughout the Territory. Employee acknowledges that to protect adequately the interest of Employer in the business of Employer it is essential that any noncompete covenant with respect thereto cover all Company Activities and the entire Territory. (b) Employee hereby agrees that, during the Term and the Noncompete Period, Employee will not, in the Territory, either directly or indirectly, alone or in conjunction with any other party, accept, enter into or take any action in conjunction with or in furtherance of a Competitive Position. Employee shall notify Employer promptly in writing if Employee receives an offer of a Competitive Position during the Noncompete Term, and such notice shall describe all material terms of such offer. Nothing contained in this Section 4 shall prohibit Employee from acquiring not more than five percent (5%) of any company whose common stock is publicly traded on a national securities exchange or in the over-the-counter market. 4.4 Nonsolicitation During Employment Term. Employee hereby agrees that Employee will not, during the Term, either directly or indirectly, alone or in conjunction with any other party solicit, divert or appropriate or attempt to solicit, divert or appropriate, any Customer for the purpose of providing the Customer with services or products competitive with those offered by Employer during the Term. 4.5 Nonsolicitation During Nonsolicitation Period. Employee hereby agrees that Employee will not, during the Nonsolicitation Period, either directly or indirectly, alone or in conjunction with any other party solicit, divert or appropriate or attempt to solicit, divert or appropriate, any Customer for the purpose of providing the Customer with services or products competitive with those offered by Employer during the Term; provided, however, that the covenant in this clause shall limit Employee's conduct only with respect to those Customers with whom Employee had substantial contact (through direct or supervisory interaction with the Customer or the Customer's account) during a period of time up to but no greater than two (2) years prior to the last day of the Term. Section 5. Miscellaneous. 5.1 Severability. The covenants in this Agreement shall be construed as covenants independent of one another and as obligations distinct from any other contract between - 8 - Employee and Employer. Any claim that Employee may have against Employer shall not constitute a defense to enforcement by Employer of this Agreement. 5.2 Survival of Obligations. The covenants in Section 4 of this Agreement shall survive termination of Employee's employment, regardless of who causes the termination and under what circumstances. 5.3 Notices. Any notice or other document to be given hereunder by any party hereto to any other party hereto shall be in writing and delivered in person or by courier, by telecopy transmission or sent by any express mail service, postage or fees prepaid at the following addresses: EMPLOYER Innotrac Corporation 6655 Sugarloaf Parkway Duluth, GA 30097 Attention: Mr. Scott Dorfman Chief Executive Officer Telephone No.: (678) 584-4000 EMPLOYEE Mr. James McMurphy [Address to be forwarded within 120 days of signing this agreement] or at such other address or number for a party as shall be specified by like notice. Any notice which is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party or its agent. 5.4 Binding Effect. This Agreement inures to the benefit of, and is binding upon, Employer and their respective successors and assigns, and Employee, together with Employee's executor, administrator, personal representative, heirs, and legatees. 5.5 Entire Agreement. This Agreement is intended by the parties hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by all of the parties hereto. 5.6 Governing Law. This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed, and governed by and in accordance with, the laws of the State of Georgia. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority or by any board of arbitrators by reason of such party or its counsel having or being deemed to have structured or drafted such provision. -9- 5.7 Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 5.8 Specific Performance. Each party hereto hereby agrees that any remedy at law for any breach of the provisions contained in this Agreement shall be inadequate and that the other parties hereto shall be entitled to specific performance and any other appropriate injunctive relief in addition to any other remedy such party might have under this Agreement or at law or in equity. 5.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. 5.10 Public Announcement. Neither party shall disclose that this Agreement has been executed until such time as both parties mutually agree to such disclosure. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. INNOTRAC CORPORATION By: /s/ Scott D. Dorfman --------------------------- Scott D. Dorfman Chief Executive Officer EMPLOYEE /s/ James McMurphy -------------------------------- James McMurphy -10- EX-31.1 4 g84439exv31w1.txt 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) I, Scott D. Dorfman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Innotrac Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ Scott D. Dorfman --------------------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) EX-31.2 5 g84439exv31w2.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) I, David L. Gamsey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Innotrac Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ David L. Gamsey --------------------------------------- David L. Gamsey Senior Vice President, Chief Financial Officer and Secretary (Principal Financial Officer) EX-32.1 6 g84439exv32w1.txt 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 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 of the Company for the quarter ended June 30, 2003 (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 result of operations of the Company. Dated: August 14, 2003 /s/ Scott D. Dorfman --------------------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board EX-32.2 7 g84439exv32w2.txt 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 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 of the Company for the quarter ended June 30, 2003 (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 result of operations of the Company. Dated: August 14, 2003 /s/ David L. Gamsey --------------------------------------- David L. Gamsey Senior Vice President, Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----