-----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, E20xTjg7DhuqkG42YhysjU1NQK7/KIHB+jvGpovBlOtqWLfQleoifojwCiJwxUnP bb0XOC8vwJM2iL6j7YZAgQ== 0000950144-05-011798.txt : 20051114 0000950144-05-011798.hdr.sgml : 20051111 20051114153041 ACCESSION NUMBER: 0000950144-05-011798 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 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: 051200977 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 g98372e10vq.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 September 30, 2005 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 by check mark whether the registrant is a shell company (as defined in Rule 12-b-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 November 10, 2005 Common Stock $.10 par value per share 12,280,610 Shares INNOTRAC CORPORATION INDEX
Page ---- Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheets at September 30, 2005 (Unaudited) and December 31, 2004 3 Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2005 and 2004 (Unaudited) 4 Condensed Consolidated Statements of Operations for the Nine Months Ended September 30, 2005 and 2004 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and 2004 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure About Market Risks 21 Item 4. Controls and Procedures 21 Part II. Other Information Item 6. Exhibits 22 Signatures 23
1 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements The following condensed consolidated financial statements of Innotrac Corporation, a Georgia corporation ("Innotrac" or 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 accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments are of a normal and recurring nature, except those specified as 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 nine months ended September 30, 2005 are not necessarily indicative of the results for the entire year ending December 31, 2005. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2004 Annual Report on Form 10-K, which is available on our website at www.innotrac.com. 2 INNOTRAC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 2005 DECEMBER 31, 2004 ------------------ ----------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................................. $ 3,803 $ 1,377 Accounts receivable (net of allowance for doubtful accounts of $1,049 at September 30, 2005 and $1,624 at December 31, 2004)................... 12,846 18,405 Inventory................................................................. 4,131 2,662 Prepaid expenses and other................................................ 1,627 1,986 ------------------ ----------------- Total current assets............................................ 22,407 24,430 ------------------ ----------------- Property and equipment: Rental equipment.......................................................... 454 556 Computer software and equipment........................................... 29,732 29,034 Furniture, fixtures and leasehold improvements............................ 5,038 4,957 ------------------ ----------------- 35,224 34,547 Less accumulated depreciation and amortization............................ (25,318) (22,048) ------------------ ----------------- 9,906 12,499 ------------------ ----------------- Goodwill....................................................................... 25,169 25,169 Other assets, net.............................................................. 1,116 1,275 ------------------ ----------------- Total assets.................................................... $ 58,598 $ 63,373 ================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................................... $ 4,292 $ 6,023 Line of credit............................................................ - 3,063 Accrued expenses and other................................................ 3,127 2,630 ------------------ ----------------- Total current liabilities....................................... 7,419 11,716 ------------------ ----------------- Noncurrent liabilities: Other noncurrent liabilities.......................................... 1,039 1,098 ------------------ ----------------- Total noncurrent liabilities................................ 1,039 1,098 ------------------ ----------------- Commitments and contingencies (see Note 5) 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, 12,278,610 (2005) and 11,948,743 (2004) shares issued and outstanding....................................................... 1,228 1,195 Additional paid-in capital................................................ 65,895 64,644 Accumulated deficit....................................................... (16,983) (15,280) ------------------ ----------------- Total shareholders' equity...................................... 50,140 50,559 ------------------ ----------------- Total liabilities and shareholders' equity...................... $ 58,598 $ 63,373 ================== =================
See notes to condensed consolidated financial statements. 3 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, 2005 2004 ------------- ---------------- (UNAUDITED) (UNAUDITED) Revenues........................................... $ 17,543 $ 17,631 Cost of revenues................................... 8,695 8,756 ------------- ---------------- Gross profit...................... 8,848 8,875 ------------- ---------------- Operating expenses: Selling, general and administrative expenses.. 8,535 7,931 Depreciation and amortization................. 1,091 1,283 ------------- ---------------- Total operating expenses................ 9,626 9,214 ------------- ---------------- Operating (loss).................. (778) (339) ------------- ---------------- Other expense: Interest expense............................. 18 63 ------------- ---------------- Total other expense.............. 18 63 ------------- ---------------- (Loss) before income taxes......................... (796) (402) Income taxes....................................... - - ------------- ---------------- Net (loss)........................ $ (796) $ (402) ============= ================ (Loss) per share: Basic....................................... $ (0.06) $ (0.03) ============= ================ Diluted..................................... $ (0.06) $ (0.03) ============= ================ Weighted average shares outstanding: Basic....................................... 12,277 11,905 ============= ================ Diluted..................................... 12,277 11,905 ============= ================
See notes to condensed consolidated financial statements. 4 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues .......................................... $ 55,724 $ 57,433 Cost of revenues .................................. 28,328 26,670 ----------- ---------- Gross profit ..................... 27,396 30,763 ----------- ---------- Operating expenses: Selling, general and administrative expenses.. 25,421 26,574 Depreciation and amortization ................ 3,551 3,905 ----------- ---------- Total operating expenses ............... 28,972 30,479 ----------- ---------- Operating (loss) income .......... (1,576) 284 ----------- ---------- Other expense: Interest expense ............................ 127 234 ----------- ---------- Total other expense ............. 127 234 ----------- ---------- (Loss) income before income taxes ................. (1,703) 50 Income taxes ...................................... - - ----------- ---------- Net (loss) income ................ $ (1,703) $ 50 =========== ========== (Loss) income per share: Basic ...................................... $ (0.14) $ 0.00 =========== ========== Diluted .................................... $ (0.14) $ 0.00 =========== ========== Weighted average shares outstanding: Basic ...................................... 12,167 11,843 =========== ========== Diluted .................................... 12,167 12,540 =========== ==========
See notes to condensed consolidated financial statements. 5 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2005 2004 ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net (loss) income .............................................................. $ (1,703) $ 50 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization .................................................. 3,551 3,905 Loss on disposal of fixed assets ............................................... 12 106 (Decrease) increase in allowance for doubtful accounts ......................... (508) 447 Amortization of deferred compensation .......................................... - 68 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable ................................. 6,066 (1,820) (Increase) decrease in inventory ........................................... (1,469) 6,285 Decrease (increase) in prepaid expenses and other .......................... 348 (1,690) (Decrease) increase in accounts payable .................................... (1,731) 138 Increase in accrued expenses and other ..................................... 492 924 ----------- ----------- Net cash provided by operating activities ............................. 5,058 8,413 ----------- ----------- Cash flows from investing activity: Capital expenditures ........................................................... (800) (2,112) ----------- ----------- Net cash used in investing activities ................................. (800) (2,112) ----------- ----------- Cash flows from financing activities: Net repayments under line of credit ............................................ (3,063) (7,455) Repayment of capital lease and other obligations ............................... (54) (65) Loan fees paid ................................................................. - (15) Stock reacquired to settle employee stock bonus withholding tax obligation ..... - (286) Exercise of employee stock options ............................................. 1,285 748 ----------- ----------- Net cash used in financing activities ................................ (1,832) (7,073) ----------- ----------- Net increase (decrease) in cash and cash equivalents ................................ 2,426 (772) Cash and cash equivalents, beginning of period ...................................... 1,377 2,228 ----------- ----------- Cash and cash equivalents, end of period ............................................ $ 3,803 $ 1,456 =========== =========== Supplemental cash flow disclosures: Cash paid for interest ......................................................... $ 145 $ 261 =========== ===========
See notes to condensed consolidated financial statements. 6 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (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, 2004. 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 of America 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 tests goodwill annually for impairment as of January 1 or sooner if circumstances indicate. Impairment of Long-Lived Assets. The Company reviews long-lived assets and certain intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment would be measured based on a projected cash flow model. If the projected undiscounted cash flows for the asset are not in excess of the carrying value of the related asset, the impairment would be determined based upon the excess of the carrying value of the asset over the projected discounted cash flows for the asset. Accounting for Income Taxes. 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 basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance was recorded against the net deferred tax asset as of December 31, 2004 and September 30, 2005 (see Note 4). Revenue Recognition. Innotrac derives its revenue primarily from two sources: (1) fulfillment operations and (2) the delivery of call center 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 the number of calls, minutes or hourly rate basis. All other revenues are recognized as services are rendered. 7 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) 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 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 thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------- --------------------- 2005 2004 2005 2004 ---------- --------- ---------- -------- Net (loss) income $ (796) $ (402) $ (1,703) $ 50 Pro forma net (loss) $ (1,155) $ (606) $ (2,781) $ (561) Basic and diluted net (loss) income per share $ (0.06) $ (0.03) $ (0.14) $ 0.00 Basic and diluted pro forma net (loss) per share $ (0.09) $ (0.05) $ (0.23) $ (0.05)
Under the fair value based method, compensation cost, net of tax is $359,000 and $204,000 for the three months ended September 30, 2005 and 2004, respectively and $1.1 million and $611,000 for the nine months ended September 30, 2005 and 2004, respectively. During the three months ended September 30, 2005 and 2004, options representing 4,250 and 24,700 shares were exercised, respectively. During the nine months ended September 30, 2005 and 2004, options representing 279,867 and 159,700 shares were exercised, respectively. 2. FINANCING OBLIGATIONS The Company has a revolving bank credit agreement with a maximum borrowing limit of $25.0 million, which will mature in December 2005. Although the maximum borrowing limit is $25.0 million, the credit facility limits borrowings to a specified percentage of eligible accounts receivable and inventory, which totaled $9.6 million at September 30, 2005. At September 30, 2005 the Company had $9.6 million available under the revolving credit agreement. The Company has granted a security interest in all of its assets to the lender as collateral under this revolving credit agreement. The revolving 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 financial covenants require the Company to maintain a minimum fixed charge ratio of 1.30 to 1.00. The Company's fixed charge ratio at September 30, 2005 was 1.36 to 1.00. Additionally, the revolving 8 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) credit agreement contains a minimum tangible net worth requirement of $24.0 million. The Company's tangible net worth at September 30, 2005 was $24.9 million. Compliance with the minimum tangible net worth covenant and other financial covenants is determined on a quarterly basis. Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Company's option, LIBOR plus up to 225 basis points. During the three months ended September 30, 2005 and 2004, the Company incurred interest expense related to the line of credit of approximately $4,000 and $50,000, respectively, resulting in a weighted average interest rate of 6.33% and 3.90%, respectively. During the nine months ended September 30, 2005 and 2004, the Company incurred interest expense related to the line of credit of approximately $86,000 and $174,000, respectively, resulting in a weighted average interest rate of 5.00% and 3.37%, respectively. The Company also incurred unused revolving credit facility fees of approximately $10,000 and $8,000 during the three months ended September 30, 2005 and 2004, respectively, and $34,000 and $46,000 during the nine months ended September 30, 2005 and 2004, respectively. 3. EARNINGS PER SHARE The following table shows the shares (in thousands) used in computing diluted earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share":
Three Months Nine Months Ended September 30, Ended September 30, 2005 2004 2005 2004 ------ ------ ------- ------ Diluted earnings per share: Weighted average shares outstanding............................. 12,277 11,905 12,167 11,843 Employee and director stock options and unvested restricted shares....................................................... - - - 697 ------ ------ ------ ------ Weighted average shares assuming dilution...................... 12,277 11,905 12,167 12,540 ====== ====== ====== ======
Options outstanding to purchase 1.6 million shares of the Company's common stock for both the three and nine months ended September 30, 2005, and 1.7 million shares and 87,500 shares for the three and nine months ended September 30, 2004, respectively, were not included in the computation of diluted EPS because their effect was anti-dilutive. 4. INCOME TAXES 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 basis 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 gross deferred tax asset as of September 30, 2005 and December 31, 2004 was approximately $13.2 million and $12.8 million, respectively. This deferred tax asset was generated primarily by net operating loss carryforwards created mainly by a special charge of $34.3 million recorded in 2000 and the net losses generated in 2002 and 2003. Innotrac has a tax net operating loss carryforward of $31.5 million at December 31, 2004 that expires between 2020 and 2024. 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 9 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) management's control. These factors, combined with losses in recent years, create uncertainty about the ultimate realization of the gross deferred tax asset in future years. Therefore, a valuation allowance of approximately $10.2 million and $9.7 million has been recorded as of September 30, 2005 and December 31, 2004, respectively. Income taxes associated with future earnings will be offset by a reduction in the valuation allowance. For the nine months ended September 30, 2005, the deferred tax benefit of $600,000 was offset by a corresponding increase of the deferred tax asset valuation allowance. When, and if, the Company can return to consistent profitability, and management determines that it is likely it will be able to utilize the deferred tax assets prior to their expiration, then the valuation allowance can be reduced or eliminated. 5. COMMITMENTS AND CONTINGENCIES Shareholder Rights Plan. In December 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 40% for a particular shareholder that owned approximately 33.3% of the shares outstanding on September 30, 2005. 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, 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. No shares have been issued under the Rights Plan. 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. Employment Commitment. In June 1999, in conjunction with the opening of a new call center facility, the Company entered into an employment commitment agreement with the City of Pueblo, Colorado, whereby the Company received cash incentives of $968,000. These funds were accounted for as a reduction in the basis of the assets acquired. In return for this consideration, the Company is obligated to employ a minimum number of full-time employees at its Pueblo facility, measured on a quarterly basis. This obligation, which became effective June 2002, will continue through June 2009. In the event that the number of full-time employees fails to meet the minimum requirement, the Company will incur a quarterly penalty of $96.30 for each employee less than the minimum required amount. During the three and nine months ended September 30, 2005 and 2004, the Company did not meet the minimum employee requirements of 359 full-time employees, as measured on a quarterly basis, incurring a penalty of approximately $5,000 and $6,000 for the three months ended September 30, 2005 and 2004, respectively, 10 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) and approximately $10,000 and $16,000 for the nine months ended September 30, 2005 and 2004, respectively. 6. RELATED PARTY TRANSACTION In early 2004, the Company learned that certain trading activity of the IPOF Group, an owner of more than 5% of the outstanding Common Stock, may have violated the short-swing profit rules under Section 16(b) of the Securities Exchange Act of 1934. The Company promptly conducted an investigation of the matter. On March 3, 2004, the Company and the IPOF Group entered into a settlement agreement regarding the potential Section 16(b) liability issues that provides for the Company's recovery of $301,957, which is due no later than March 3, 2006. In March 2005, the Company learned that trading activity by members of the IPOF Group may have further violated the short-swing profit rules under Section 16(b). The Company promptly initiated another investigation and is presently engaged in discussions with the IPOF Group regarding the recovery by the company of disgorgeable profits of the IPOF Group pursuant to Section 16(b). 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion may contain certain forward-looking statements that are subject to conditions that are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, the Company's reliance on a small number of major clients; risks associated with the terms and pricing of our contracts; reliance on the telecommunications and direct marketing industries and the effect on the Company of the downturns, consolidation and changes in those industries in the past two years; risks associated with the fluctuations in volumes from our clients; risks associated with upgrading, customizing, migrating or supporting existing technology; risks associated with competition; and other factors discussed in more detail under "Business---Certain Factors Affecting Forward-Looking Statements" in our Annual Report on Form 10-K. OVERVIEW Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and headquartered in Atlanta, Georgia, is a full-service fulfillment and logistics provider serving enterprise clients and world-class brands. The Company employs sophisticated order processing and warehouse management technology and operates eight fulfillment centers and two call centers in six cities spanning all time zones across the continental United States. We receive most of our clients' orders either through inbound call center services, electronic data interchange ("EDI") or the Internet. On a same-day basis, depending on product availability, the Company picks, packs, verifies and ships the item, tracks inventory levels through an automated, integrated perpetual inventory system, warehouses data and handles customer support inquiries. Our core service offerings include the following: - 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; and - 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; and - intuitive e-mail response. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is primarily focused on five diverse lines of business, or industry verticals. This is a result of a significant effort made by the Company to diversify both its industry concentration and client base over the past several years. BUSINESS MIX
Three Months Ended Nine Months Ended September 30, September 30, Business Line/Vertical 2005 2004 2005 2004 - ---------------------- ----- ----- ----- ----- Telecommunications 12.7% 20.8% 13.1% 20.5% Modems 24.7 20.6 20.6 20.0 Retail/Catalog 29.4 31.0 28.8 26.9 Direct Marketing 21.1 15.7 26.5 22.0 Business-to-Business ("B2B") 12.1 11.9 11.0 10.6 ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
Telecommunications and Modems. The Company continues to be a major provider of fulfillment and customer support services to the telecommunications industry. In spite of a significant contraction and consolidation in this industry in the past several years, the Company continues to provide customer support services and fulfillment of telephones, caller ID equipment, digital subscriber line ("DSL") and other telecommunications products to companies such as BellSouth Corporation and Qwest Communications International, Inc. and their customers. Inventory for our telecommunications and DSL modem clients is held on a consignment basis, with the exception of certain BellSouth inventory for which we are contractually indemnified, and includes items such as telephones, caller ID equipment, DSL modems and ancillary equipment. We anticipate that the percentage of our revenues attributable to telecommunications and DSL modem clients will remain fairly constant for the remainder of the year due mainly to increased volumes (but at lower margins as compared to 2004) from our DSL modem business, which is still in a strong growth mode. The telephone and caller ID equipment business is mature, yet steady. Retail, Catalog and Direct Marketing. The Company also provides a variety of these services for a significant number of retail, catalog and direct marketing clients, including such companies as The Coca-Cola Company, Ann Taylor Retail, Inc., Smith & Hawken, Ltd., Porsche Cars North America, Inc., Nordstrom.com LLC, and Thane International. We take orders for our retail, catalog and direct marketing clients via the Internet, through customer service representatives at our Pueblo and Reno call centers or through direct electronic transmission from our clients. The orders are processed through one of our order management systems and then transmitted to one of our eight fulfillment centers located across the country and are shipped to the end consumer or retail store location, as applicable, typically within 24 hours of when the order is received. Inventory for our retail, catalog and direct marketing clients is held on a consignment basis, with minor exceptions, and includes items such as shoes, dresses, accessories, books and outdoor furniture. Our revenues are sensitive to the number of orders and customer service calls received. Our client contracts do not guarantee volumes. Despite the end of the Tactica International, Inc. business, which represented 2.2% and 3.6% of total revenues for the three and nine months ended September 30, 2004, respectively, and the end of the Martha Stewart Living Omnimedia business in March 2005, which represented 5.1% and 4.7% of total revenues for the three and nine months ended September 30, 2004, respectively, we anticipate that the percentage of our revenues attributable to our retail and catalog clients will remain fairly consistent during 2005 due to the addition of several new clients. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On October 21, 2004, Tactica International, Inc. ("Tactica"), one of the Company's direct response clients, filed a voluntary petition for relief under Chapter 11 in U.S. Bankruptcy Court. On October 25, 2004 the Bankruptcy Court approved, on an interim basis, a Stipulation and Consent Order ("Stipulation") entered into between Tactica and Innotrac, whereby Tactica has acknowledged the validity of Innotrac's claim and Innotrac's first priority security interest in and warehouseman's lien on Tactica's inventory held by Innotrac. This Stipulation allowed Tactica to continue to sell its inventory while reducing the receivables owed by Tactica to Innotrac. Tactica defaulted on the Stipulation and on January 18, 2005, Innotrac issued a Notice of Default to Tactica. In March 2005, Innotrac and Tactica reached a verbal agreement that would permit Innotrac to liquidate the Tactica inventory in order to pay down the receivable balance, with any excess proceeds to be remitted to Tactica. Innotrac, Tactica and the Creditor's Committee in the Tactica bankruptcy case have reached an agreement on the terms of the liquidation and an additional amount of the proceeds to be remitted to the unsecured creditors of Tactica, which was approved by the bankruptcy court on June 23, 2005. Based on this agreement and management's estimate of the net realizable value of the inventory, the reserve associated with the Tactica receivable was reduced from $1.2 million to $775,000 at March 31, 2005. The actual results of the liquidation could vary from this estimate. As of November 3, 2005, one liquidation sale had been completed and several other offers have been received with the expectation that a majority of them will be completed by December 31, 2005. As of September 30, 2005, Tactica owed $2.8 million in principal to Innotrac for past fulfillment and call center services. Business-to-Business. The Company also provides these services for business-to-business ("B2B") clients including Books Are Fun, Ltd. (a subsidiary of Reader's Digest), NAPA and The Walt Disney Company. This is a small, but growing area of our business. RESULTS OF OPERATIONS The following table sets forth unaudited summary operating data, expressed as a percentage of revenues, for the three and nine months ended September 30, 2005 and 2004. 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. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The financial information provided below has been rounded in order to simplify its presentation. However, the percentages below are calculated using the detailed information contained in the condensed consolidated financial statements.
Three Months Nine Months Ended September 30, Ended September 30, 2005 2004 2005 2004 ------ ----- ----- ----- Revenues............................................. 100.0% 100.0% 100.0% 100.0% Cost of revenues..................................... 49.6 49.7 50.8 46.4 ----- ----- ----- ----- Gross margin...................................... 50.4 50.3 49.2 53.6 Selling, general and administrative expenses......... 48.6 45.0 45.6 46.3 Depreciation and amortization........................ 6.2 7.2 6.4 6.8 ----- ----- ----- ----- Operating (loss) income.......................... (4.4) (1.9) (2.8) 0.5 Other expense, net................................... .1 .4 .2 .4 ----- ----- ----- ----- (Loss) income before income taxes................ (4.5) (2.3) (3.0) 0.1 Income tax benefit .................................. - - - - ----- ----- ----- ----- Net (loss) income................................ (4.5)% (2.3)% (3.0)% 0.1% ===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2004 Revenues. Net revenues decreased 0.5% to $17.5 million for the three months ended September 30, 2005 from $17.6 million for the three months ended September 30, 2004. This decrease was primarily attributable to the termination of services for Tactica International, Inc. and Martha Stewart Living Omnimedia business and reduced volumes from our telecommunications vertical, offset by revenues from several new clients and increased volumes from our direct marketing and DSL clients. Cost of Revenues. Cost of revenues decreased 0.7% to $8.7 million for the three months ended September 30, 2005, compared to $8.8 million for the three months ended September 30, 2004. The cost of revenue decrease was primarily due to a decrease in labor expense related to the decrease in volumes from our telecommunications vertical offset by an increase in freight and labor expense related to the increase in volume for our direct marketing clients. Gross Profit. For the three months ended September 30, 2005, the Company's gross profit decreased by $27,000 to $8.8 million, or 50.4% of revenues, compared to $8.9 million, or 50.3% of revenues, for the three months ended September 30, 2004. Selling, General and Administrative Expenses. S,G&A expenses for the three months ended September 30, 2005 increased to $8.5 million, or 48.6% of revenues, compared to $7.9 million, or 45.0% of revenues, for the same period in 2004. This net increase was primarily attributable to the fact that 2004 S,G&A expense was lower as a result of a $576,000 reduction in the allowance for doubtful accounts related to the Tactica receivable recorded in 2004 as a reduction to bad debt expense. This was partially offset by a reduction of corporate salary expense of $156,000 in 2005 as compared to 2004. Interest Expense. Interest expense for the three months ended September 30, 2005 decreased to $18,000, compared to $63,000 for the same period in 2004. This decrease was attributable to a reduction in borrowings from the line of credit during the three months ended September 30, 2005 compared to the same period in 2004. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Income Taxes. The Company's effective tax rate for the three months ended September 30, 2005 and 2004 was 0%. At December 31, 2003, a valuation allowance was recorded against the Company's net deferred tax assets as losses in recent years created uncertainty about the realization of tax benefits in future years. Income taxes associated with losses for the three months ended September 30, 2005 and 2004 were offset by a corresponding increase of this valuation allowance resulting in an effective tax rate of 0% for the three months ended September 30, 2005 and 2004. NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2004 Revenues. Net revenues decreased 3.0% to $55.7 million for the nine months ended September 30, 2005 from $57.4 million for the nine months ended September 30, 2004. This decrease was primarily attributable to a reduction in revenue from our telecommunications vertical as a result of reduced volumes and the conclusion of two programs for a major client offset by a net increase in revenues from our direct marketing and retail/catalog verticals as a result of the addition of several new clients and increased volumes, reduced by the termination of services for Tactica International, Inc. and Martha Stewart Living Omnimedia. Cost of Revenues. Cost of revenues increased 6.2% to $28.3 million for the nine months ended September 30, 2005, compared to $26.7 million for the nine months ended September 30, 2004. The cost of revenue increase was primarily due to an increase in freight and labor expense related to the increase in volume for our direct marketing clients and increased labor costs associated with increased volumes for our retail/catalog and B2B clients. Gross Profit. For the nine months ended September 30, 2005, the Company's gross profit decreased by $3.4 million to $27.4 million, or 49.2% of revenues, compared to $30.8 million, or 53.6% of revenues, for the nine months ended September 30, 2004. This decrease in gross profit was due primarily to a change in the business mix to clients with lower margin revenue and the addition of several new clients whose margins have not yet reached the level of a mature client. Selling, General and Administrative Expenses. S,G&A expenses for the nine months ended September 30, 2005 decreased to $25.4 million, or 45.6% of revenues, compared to $26.6 million, or 46.3% of revenues, for the same period in 2004. This net decrease was primarily attributable to an additional $264,000 in the allowance for doubtful accounts related to the Tactica receivable recorded in 2004 compared to a $440,000 reduction in the allowance for doubtful accounts related to the Tactica receivable recorded in 2005, a reduction in account services related costs of $356,000 in 2005 as compared to 2004 and a reduction of corporate salary expense of $430,000 in 2005 as compared to 2004, offset by an increase in facility costs of approximately $260,000, primarily related to the new facility opened in Delaware in the second half of 2004. Interest Expense. Interest expense for the nine months ended September 30, 2005 decreased to $127,000, compared to $234,000 for the same period in 2004. This decrease was attributable to a reduction in borrowings from the line of credit during the nine months ended September 30, 2005 compared to the same period in 2004. Income Taxes. The Company's effective tax rate for the nine months ended September 30, 2005 and 2004 was 0%. At December 31, 2003, a valuation allowance was recorded against the Company's net deferred tax assets as losses in recent years created uncertainty about the realization of tax benefits in future years. Income taxes associated with losses and earnings for the nine months ended September 30, 2005 and 2004 were offset by a corresponding increase or reduction of this valuation allowance resulting in an effective tax rate of 0% for the nine months ended September 30, 2005 and 2004. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The Company funds its operations and capital expenditures primarily through cash flow from operations and borrowings under a bank credit facility. The Company had cash and cash equivalents of approximately $3.8 million at September 30, 2005 as compared to $1.4 million at December 31, 2004. Additionally, the Company did not have any borrowings under its revolving credit facility (discussed below) at September 30, 2005, as compared to $3.1 million at December 31, 2004. The Company generated positive cash flow from operations of $5.1 million during the nine months ended September 30, 2005. We anticipate positive cash flows from operations during the remainder of 2005. The Company currently has a revolving credit agreement with a bank maturing in December 2005 and is negotiating an Amended and Restated Loan and Security Agreement with the bank to extend the Agreement for an additional three years. Although the facility has a maximum borrowing limit of $25.0 million, the credit facility limits borrowings to a specified percentage of eligible accounts receivable and inventory, which totaled $9.6 million at September 30, 2005. The Company has granted a security interest in all of its assets as collateral under this revolving credit agreement. The revolving credit agreement contains various restrictive financial and change of ownership control covenants. The provisions of the revolving credit agreement require that the Company maintain a lockbox arrangement with the lender, and 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 under the credit agreement. Accordingly, in the event of noncompliance, these amounts could be accelerated. Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Company's option, LIBOR plus up to 225 basis points. During the three months ended September 30, 2005 and 2004, the Company incurred interest expense related to the line of credit of approximately $4,000 and $50,000, respectively, resulting in a weighted average interest rate of 6.33% and 3.90%, respectively. During the nine months ended September 30, 2005 and 2004, the Company incurred interest expense related to the line of credit of approximately $86,000 and $174,000, respectively, resulting in a weighted average interest rate of 5.00% and 3.37%, respectively. The Company also incurred unused revolving credit facility fees of approximately $10,000 and $8,000 during the three months ended September 30, 2005 and 2004, respectively, and $34,000 and $46,000 during the nine months ended September 30, 2005 and 2004, respectively. At September 30, 2005, the Company had $9.6 million of additional availability under the revolving credit agreement. During the nine months ended September 30, 2005, the Company generated $5.1 million in cash flow from operating activities compared to $8.4 million in the same period in 2004. The decrease in cash provided from operating activities was primarily the result of the reduction of $6.3 million in inventory in 2004 compared to an increase in inventory of $1.5 million in 2005 and a reduction of $1.7 million in accounts payable in 2005 compared to an increase in accounts payable of $138,000 in 2004 offset by a net decrease in accounts receivable of $5.6 million in 2005 compared to a net increase of $1.4 million in 2004 and a net loss of $1.7 million in 2005 compared to net income of $50,000 in 2004. During the nine months ended September 30, 2005, net cash used in investing activities for capital additions was $800,000 as compared to $2.1 million in 2004. All of these expenditures were funded through existing cash on hand, cash flow from operations and borrowings under the Company's credit facility. During the nine months ended September 30, 2005, cash used in financing activities was $1.8 million compared to $7.1 million in the same period in 2004. The primary difference between years is attributable to a reduction in outstanding borrowings of $3.1 million in 2005 compared to a reduction in outstanding borrowings of $7.5 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS million in 2004. Additionally, during 2005, the Company generated cash of $1.3 million through the exercise of previously granted employee stock options, compared to $748,000 generated in 2004. The Company estimates that its cash and financing needs through 2005 will be met by cash flows from operations and its credit facility. The Company has generated positive cash flows from operations in each of the last four years and anticipates doing so again in 2005. The Company may need to raise additional funds in order to take advantage of unanticipated opportunities, such as acquisitions of complementary businesses. There can be no assurance that the Company will be able to raise any such capital on terms acceptable to the Company or at all. CRITICAL ACCOUNTING POLICIES 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 to the condensed consolidated financial statements in this Form 10-Q and Note 2 to the consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2004. The policies that we believe 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. The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Innotrac's goodwill carrying amount as of September 30, 2005 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 an 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 performed a goodwill valuation in the first quarter of 2005. The valuation supported that the fair value of the reporting unit at January 1, 2005 exceeded the carrying amount of the net assets, including goodwill, and thus no impairment was determined to exist. The Company performs this impairment test annually as of January 1 or sooner if circumstances indicate. Accounting for Income Taxes. 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 basis 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 more likely than not that deferred tax assets will not be realized. Innotrac's gross deferred tax asset as of September 30, 2005 and December 31, 2004 was approximately $13.2 million and $12.8 million, respectively. This deferred tax asset was generated primarily 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 2003. Innotrac has a tax net operating loss carryforward of $31.5 million at December 31, 2004 that expires between 2020 and 2024. 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. These factors, combined with losses in recent years, create uncertainty about the 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ultimate realization of the gross deferred tax asset in future years. Therefore, a valuation allowance of approximately $10.3 million and $9.7 million has been recorded as of September 30, 2005 and December 31, 2004. Income taxes associated with future earnings will be offset by a reduction in the valuation allowance. For the nine months ended September 30, 2005, an income tax benefit of $600,000 was offset by a corresponding increase of the deferred tax asset valuation allowance. When, and if, the Company can return to consistent profitability, and management determines that it will be able to utilize the deferred tax assets prior to their expiration, then the valuation allowance can be reduced or eliminated. 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. The Company makes estimates each reporting period associated with its reserve for uncollectible accounts. These estimates are based on the aging of the receivables and known specific facts and circumstances. One of Innotrac's direct marketing clients, Tactica, with a substantial past due balance at September 30, 2005 and December 31, 2004, filed for Chapter 11 bankruptcy protection on October 21, 2004. Subsequently, Innotrac and Tactica entered into a Stipulation and Consent Order whereby the client has acknowledged the validity of the Company's claim and first priority security interest in and warehouseman's lien on Tactica's inventory held by Innotrac. In March 2005, Innotrac and Tactica reached a verbal agreement that would permit Innotrac to liquidate the Tactica inventory in order to pay down the receivable balance, with any excess proceeds to be remitted to Tactica. Innotrac, Tactica and the Creditor's Committee in the Tactica bankruptcy case have reached an agreement on the terms of the liquidation and an additional amount of the proceeds to be remitted to the unsecured creditors of Tactica, which was approved by the bankruptcy court on June 23, 2005. Based on this agreement and management's estimate of the net realizable value of the inventory, the reserve associated with the Tactica receivable was reduced from $1.2 million to $775,000 at March 31, 2005. The actual results of the liquidation could vary from this estimate. As of November 3, 2005, one liquidation sale had been completed and several other offers have been received with the expectation that a majority of them will be completed by December 31, 2005. As of September 30, 2005, Tactica owed $2.8 million in principal to Innotrac for past fulfillment and call center services. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 123(R), "Share-Based Payment," which revises SFAS No. 123, "Accounting for Stock-Based Compensation." The revised Statement clarifies and expands SFAS No. 123's guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. The revised statement supercedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and its related implementation guidance. Under the provisions of SFAS No. 123(R), the alternative to use APB 25's intrinsic value method of accounting that was provided in SFAS No. 123, as originally issued, is eliminated, and entities are required to measure liabilities incurred to employees in share-based payment transactions at fair value. The Company currently accounts for its stock-based compensation plans under 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. SFAS No. 123(R) will be effective for the Company beginning January 1, 2006. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT DEVELOPMENTS The Company has reached agreements with three new clients to provide services beginning in the second quarter of 2006. The most significant of these agreements is a multiyear agreement with Target Corporation to provide North America's second largest general merchandise retailer with product fulfillment services to support the expansion of their Target.com eCommerce initiative. To handle the expected volumes, Innotrac will open another fulfillment center just outside of Cincinnati, Ohio, in Hebron, Kentucky. 20 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Management believes the Company's exposure to market risks (investments, interest rates and foreign currency) 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. The Company does not transact any sales in foreign currency. 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 believes this 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, 2004 and other filings on file with the Securities and Exchange Commission. ITEM 4 - CONTROLS AND PROCEDURES Our management, with the participation of the Chief Executive Officer and the principal financial officer, evaluated our disclosure controls and procedures (as defined in federal securities rules) as of September 30, 2005. No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met. Based on the evaluation discussed above, our CEO and principal financial officer have concluded that our disclosure controls and procedures were effective as of the date of that evaluation to provide reasonable assurance that the objectives of disclosure controls and procedures are met. There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Innotrac's internal control over financial reporting during the third quarter of 2005. 21 PART II - OTHER INFORMATION ITEM 6 - EXHIBITS Exhibits: 10.4(n) Loan Documents Modification Agreement between Innotrac Corporation and Wachovia Bank, National Association, successor by merger to SouthTrust Bank, dated August 19, 2005. 10.4(o) Loan Documents Modification Agreement between Innotrac Corporation and Wachovia Bank, National Association, successor by merger to SouthTrust Bank, dated October 24, 2005. 10.4(p) Loan Documents Modification Agreement between Innotrac Corporation and Wachovia Bank, National Association, successor by merger to SouthTrust Bank, dated November 7, 2005. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d - 14(a). 31.2 Certification of principal financial officer Pursuant to Rule 13a-14(a)/15a - 14(a). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of principal financial officer Pursuant to 18 U.S.C. Section 1350. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INNOTRAC CORPORATION -------------------------------- (Registrant) Date: November 14, 2005 By: /s/ Scott D. Dorfman ---------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: November 14, 2005 /s/ Christine A. Herren ---------------------------- Christine A. Herren Senior Director and Controller (Principal Financial Officer and Principal Accounting Officer) 23 EX-10.4(N) 2 g98372exv10w4xny.txt LOAN DOCUMENTS MODIFICATION AGREEMENT DATED AUGUST 19, 2005 EXHIBIT 10.4(n) LOAN DOCUMENTS MODIFICATION AGREEMENT THIS LOAN DOCUMENTS MODIFICATION AGREEMENT (hereinafter referred to as this "Amendment") is made and entered into as of the 19th day of August, 2005, by and among INNOTRAC CORPORATION, a Georgia corporation and successor by merger to iFULFILLMENT, Inc., a Georgia corporation (hereinafter referred to as "Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, (hereinafter referred to as "Lender"). BACKGROUND STATEMENT Borrower and Lender are parties to that certain Third Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrower (and iFulfillment, Inc.) to the order of Lender in the original principal amount of Twenty Five Million and No/100 Dollars ($25,000,000.00), as modified by the parties from time to time (hereinafter referred to as the "Note", and the loan evidenced thereby as the "Loan"). The Note is secured by that certain (a) Second Amended and Restated Loan and Security Agreement by and between Borrower and Lender dated as of April 3, 2003, as subsequently modified by the parties from time to time (the "Loan Agreement"), and (b) any and all other documents related to the aforementioned documents, as subsequently modified by the parties from time to time (hereinafter collectively referred to as the "Loan Documents"). Borrower and Lender have agreed to amend the Loan Agreement, to modify all of the other Loan Documents to reflect the same, and to waive a technical default under the Loan Agreement, and the parties hereto are entering into this Amendment to evidence their agreements. AGREEMENT FOR AND IN CONSIDERATION of the sum of Ten and No/100 Dollars ($10.00), the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender do hereby agree as follows: 1. MODIFICATION OF LOAN AGREEMENT. As of the date hereof, the representations and warranties set forth in the Loan Agreement are hereby affirmed to be true and correct as of the date hereof. Effective as of the date hereof, Section 1.1 of the Loan Agreement is amended by deleting the definition of "Commitment Period" in its entirety and replacing the same with the following substitute definition: "Commitment Period - shall mean that period during which Bank is obligated to make advances under the Line of Credit Loan hereunder, as provided in Section 2.1 hereof. The Commitment Period shall commence upon satisfaction of the conditions to lending set forth in Article III and shall continue until November 1, 2005, unless sooner terminated according to the provisions hereof." 2. MODIFICATION OF NOTE. Effective as of the date hereof, the paragraph on page 2 of the Note starting with the words "Interest only at said rates..." is hereby amended by deleting the second sentence of such paragraph and replacing such sentence with the following substitute sentence: "On November 1, 2005, all unpaid principal, plus accrued and unpaid interest, shall be due and payable in full." 3. MODIFICATION OF LOAN DOCUMENTS. As of the date hereof, Borrower hereby reaffirms and restates each and every warranty and representation set forth in the Loan Documents. The terms of the Loan Documents are hereby modified and amended, effective as of the date hereof, so that any reference in any of the Loan Documents to the Loan Agreement or the Note shall refer to the Loan Agreement and Note as herein amended. 4. RATIFICATION; EXPENSES. Except as herein expressly modified or amended, all the terms and conditions of the Note, the Loan Agreement and the other Loan Documents are hereby ratified, affirmed, and approved. In consideration of Lender agreeing to modify the Loan Agreement, Borrower agrees to pay all fees and expenses incurred in connection with this Amendment, including Lender's attorneys' fees and expenses. 5. NO DEFENSES; RELEASE. For purposes of this Paragraph 5, the terms "Borrower Parties" and "Lender Parties" shall mean and include Borrower and Lender, respectively, and each of their respective predecessors, successors, and assigns, and each past and present, direct and indirect, parent, subsidiary and affiliated entity of each of the foregoing, and each past and present employee, agent, attorney-in-fact, attorney-at-law, representative, officer, director, shareholder, partner, and joint venturer of each of the foregoing, and each heir, executor, administrator, successor and assign of each of the foregoing; references in this paragraph to "any" of such parties shall be deemed to mean "any one or more" of such parties: and references in this sentence to "each of the foregoing" shall mean and refer cumulatively to each party referred to in this sentence up to the point of such reference. Borrower hereby acknowledges, represents and agrees: that Borrower has no defenses, setoffs, claims, counterclaims, recoupments or causes of action of any kind or nature whatsoever with respect to the Loan, the Note and the other Loan Documents or the indebtedness evidence and secured thereby, or with respect to any other documents or instruments now or heretofore evidencing, securing or in any way relating to the Loan, or with respect to any other administration or funding of the Loan, or with respect to any other transaction, matter of occurrence between any of the Borrower Parties and any Lender Parties or with respect to any acts or omissions of any Lender Parties, with respect to each of the same, limited only to the extent that such acts, claims or actions exist on or prior to the date hereof (all of said defenses, setoffs, claims, counterclaims, recoupments or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrower may be deemed to have any Loan Related Claims, Borrower does hereby expressly waive, release and relinquish any and such Loan Related Claims, whether or not known to or suspected by Borrower; that Borrower shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any Loan Related Claims and any and all losses, damages, liabilities, costs and expenses suffered or incurred by any Lender Parties as a result of any assertion by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 6. NO NOVATION. Borrower and Lender hereby acknowledge and agree that this Amendment shall not constitute a novation of the indebtedness evidenced by the Loan Documents, and further that the terms and provisions of the Loan Documents are hereby ratified 2 and affirmed and shall remain valid and in full force and effect except as may be hereinabove modified and amended. 7. WAIVER OF TECHNICAL DEFAULT; NO OTHER WAIVER OR IMPLICATION. Borrower has (i) informed Lender that Borrower merged with iFulfillment, Inc., on January 1, 2005, which merger is a default under Section 7.8 of the Loan Agreement and (ii) requested that Lender waive such default by Borrower. Lender hereby waives such default under Section 7.8 and Borrower agrees to strictly comply with Section 7.8 hereafter. Borrower hereby agrees that nothing herein shall constitute a waiver by Lender of any default (except as expressly provided in this paragraph 7), whether known or unknown, which may exist under the Note or any other Loan Document. Borrower hereby further agrees that no action, inaction or agreement by Lender, including, without limitation, any extension, indulgence, waiver, consent or agreement of modification which may have occurred or have been granted or entered into (or which may be occurring or be granted or entered into hereunder or otherwise) with respect to nonpayment of the Loan or any portion thereof, or with respect to matters involving security for the Loan, or with respect to any other matter relating to the Loan, shall require or imply any further extension, indulgence, waiver, consent or agreement by Lender. Except as expressly provided in this paragraph 7, Borrower hereby acknowledges and agrees that Lender has made no agreement, and is in no way obligated, to grant any further extension, indulgence, waiver or consent with respect to the Loan or any matter relating to the Loan. 8. NO RELEASE OF COLLATERAL. Borrower further acknowledges and agrees that this Amendment shall in no way occasion a release of any collateral held by Lender as security to or for the Loan, and that all collateral held by Lender as security to or for the Loan shall continue to secure the Loan. 9. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. [Signatures on Following Page] 3 IN WITNESS WHEREOF, this Amendment has been duly executed and under seal by Borrower and Lender, as of the day and year first above written. BORROWER: INNOTRAC CORPORATION, a Georgia corporation (SEAL) By: /s/ Scott D. Dorfman ----------------------------------------------- Scott D. Dorfman, Chairman, President and Chief Executive Officer Attest: /s/ Scott D. Dorfman -------------------------------------------- Scott D. Dorfman, Secretary LENDER: WACHOVIA BANK, NATIONAL ASSOCIATION successor by merger to SouthTrust Bank By:_______________________________________________ Catherine Cowan, Director 4 EX-10.4(O) 3 g98372exv10w4xoy.txt LOAN DOCUMENTS MODIFICATION AGREEMENT DATED OCTOBER 24, 2005 EXHIBIT 10.4(o) LOAN DOCUMENTS MODIFICATION AGREEMENT THIS LOAN DOCUMENTS MODIFICATION AGREEMENT (hereinafter referred to as this "Amendment") is made and entered into as of the 24th day of October, 2005, by and among INNOTRAC CORPORATION, a Georgia corporation and successor by merger to iFULFILLMENT, Inc., a Georgia corporation (hereinafter referred to as "Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, (hereinafter referred to as "Lender"). BACKGROUND STATEMENT Borrower and Lender are parties to that certain Third Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrower (and iFulfillment, Inc.) to the order of Lender in the original principal amount of Twenty Five Million and No/100 Dollars ($25,000,000.00), as modified by the parties from time to time (hereinafter referred to as the "Note", and the loan evidenced thereby as the "Loan"). The Note is secured by that certain (a) Second Amended and Restated Loan and Security Agreement by and between Borrower and Lender dated as of April 3, 2003, as subsequently modified by the parties from time to time (the "Loan Agreement"), and (b) any and all other documents related to the aforementioned documents, as subsequently modified by the parties from time to time (hereinafter collectively referred to as the "Loan Documents"). Borrower and Lender have agreed to amend the Loan Agreement and to modify all of the other Loan Documents to extend the Commitment Period through December 1, 2005, subject to the terms and conditions set forth below. AGREEMENT FOR AND IN CONSIDERATION of the sum of Ten and No/100 Dollars ($10.00), the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender do hereby agree as follows: 1. MODIFICATION OF LOAN AGREEMENT. As of the date hereof, the representations and warranties set forth in the Loan Agreement are hereby affirmed to be true and correct as of the date hereof. Effective as of the date hereof, Section 1.1 of the Loan Agreement is amended by deleting the definition of "Commitment Period" in its entirety and replacing the same with the following substitute definition: "Commitment Period - shall mean that period during which Bank is obligated to make advances under the Line of Credit Loan hereunder, as provided in Section 2.1 hereof. The Commitment Period shall commence upon satisfaction of the conditions to lending set forth in Article III and shall continue until December 1,2005, unless sooner terminated according to the provisions hereof." 2. MODIFICATION OF NOTE. Effective as of the date hereof, the paragraph on page 2 of the Note starting with the words "Interest only at said rates..." is hereby amended by deleting the second sentence of such paragraph and replacing such sentence with the following substitute sentence: "On December 1, 2005, all unpaid principal, plus accrued and unpaid interest, shall be due and payable in full." 3. MODIFICATION OF LOAN DOCUMENTS. As of the date hereof, Borrower hereby reaffirms and restates each and every warranty and representation set forth in the Loan Documents. The terms of the Loan Documents are hereby modified and amended, effective as of the date hereof, so that any reference in any of the Loan Documents to the Loan Agreement or the Note shall refer to the Loan Agreement and Note as herein amended. 4. RATIFICATION; EXPENSES. Except as herein expressly modified or amended, all the terms and conditions of the Note, the Loan Agreement and the other Loan Documents are hereby ratified, affirmed, and approved. In consideration of Lender agreeing to modify the Loan Agreement, Borrower agrees to pay all fees and expenses incurred in connection with this Amendment, including Lender's attorneys' fees and expenses. 5. NO DEFENSES; RELEASE. For purposes of this Paragraph 5, the terms "Borrower Parties" and "Lender Parties" shall mean and include Borrower and Lender, respectively, and each of their respective predecessors, successors, and assigns, and each past and present, direct and indirect, parent, subsidiary and affiliated entity of each of the foregoing, and each past and present employee, agent, attorney-in-fact, attorney-at-law, representative, officer, director, shareholder, partner, and joint venturer of each of the foregoing, and each heir, executor, administrator, successor and assign of each of the foregoing; references in this paragraph to "any" of such parties shall be deemed to mean "any one or more" of such parties: and references in this sentence to "each of the foregoing" shall mean and refer cumulatively to each party referred to in this sentence up to the point of such reference. Borrower hereby acknowledges, represents and agrees: that Borrower has no defenses, setoffs, claims, counterclaims, recoupments or causes of action of any kind or nature whatsoever with respect to the Loan, the Note and the other Loan Documents or the indebtedness evidence and secured thereby, or with respect to any other documents or instruments now or heretofore evidencing, securing or in any way relating to the Loan, or with respect to any other administration or funding of the Loan, or with respect to any other transaction, matter of occurrence between any of the Borrower Parties and any Lender Parties or with respect to any acts or omissions of any Lender Parties, with respect to each of the same, limited only to the extent that such acts, claims or actions exist on or prior to the date hereof (all of said defenses, setoffs, claims, counterclaims, recoupments or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrower may be deemed to have any Loan Related Claims, Borrower does hereby expressly waive, release and relinquish any and such Loan Related Claims, whether or not known to or suspected by Borrower; that Borrower shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any Loan Related Claims and any and all losses, damages, liabilities, costs and expenses suffered or incurred by any Lender Parties as a result of any assertion by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 6. NO NOVATION. Borrower and Lender hereby acknowledge and agree that this Amendment shall not constitute a novation of the indebtedness evidenced by the Loan Documents, and further that the terms and provisions of the Loan Documents are hereby ratified 2 and affirmed and shall remain valid and in full force and effect except as may be hereinabove modified and amended. 7. NO RELEASE OF COLLATERAL. Borrower further acknowledges and agrees that this Amendment shall in no way occasion a release of any collateral held by Lender as security to or for the Loan, and that all collateral held by Lender as security to or for the Loan shall continue to secure the Loan. 8. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. IN WITNESS WHEREOF, this Amendment has been duly executed and under seal by Borrower and Lender, as of the day and year first above written. BORROWER: INNOTRAC CORPORATION, a Georgia corporation (SEAL) By: /s/ Scott D. Dorfman ------------------------------------------------- Scott D. Dorfman, Chairman, President and Chief Executive Officer Attest: /s/ Christine A. Herren --------------------------------------------- Christine A. Herren, Assistant Secretary LENDER: WACHOVIA BANK, NATIONAL ASSOCIATION successor by merger to SouthTrust Bank By:___________________________________________________ Catherine Cowan, Director 3 EX-10.4(P) 4 g98372exv10w4xpy.txt LOAN DOCUMENTS MODIFICATION AGREEMENT DATED NOVEMBER 17,2005 EXHIBIT 10.4(p) LOAN DOCUMENTS MODIFICATION AGREEMENT THIS LOAN DOCUMENTS MODIFICATION AGREEMENT (hereinafter referred to as this "Amendment") is made and entered into as of the 7th day of November, 2005, by and among INNOTRAC CORPORATION, a Georgia corporation and successor by merger to iFULFILLMENT, Inc., a Georgia corporation (hereinafter referred to as "Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, (hereinafter referred to as "Lender"). BACKGROUND STATEMENT Borrower and Lender are parties to that certain Third Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrower (and iFulfillment, Inc.) to the order of Lender in the original principal amount of Twenty Five Million and No/100 Dollars ($25,000,000.00), as modified by the parties from time to time (hereinafter referred to as the "Note", and the loan evidenced thereby as the "Loan"). The Note is secured by that certain (a) Second Amended and Restated Loan and Security Agreement by and between Borrower and Lender dated as of April 3, 2003, as subsequently modified by the parties from time to time (the "Loan Agreement"), and (b) any and all other documents related to the aforementioned documents, as subsequently modified by the parties from time to time (hereinafter collectively referred to as the "Loan Documents"). Borrower and Lender have agreed to amend the Loan Agreement and to modify all of the other Loan Documents to increase the sublimit for Letters of Credit to $1,250,000 and permit the issuance of a Letter of Credit with an expiry date later than the expiration of the Commitment Period, subject to the terms and conditions set forth below. AGREEMENT FOR AND IN CONSIDERATION of the sum of Ten and No/100 Dollars ($10.00), the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrower and Lender do hereby agree as follows: 1. MODIFICATION OF LOAN AGREEMENT. Effective as of the date hereof, the representations and warranties set forth in the Loan Agreement are hereby affirmed to be true and correct as of the date hereof. Effective as of the date hereof, the second sentence of Section 2.1(B)(1) of the Loan Agreement is amended and restated in its entirety as follows: "The aggregate amount of all outstanding Letters of Credit shall not exceed $1,250,000, and no Letters of Credit shall have an expiry date of more than one (1) year from the date of issuance or beyond the expiration of the Commitment Period, provided that (i) Borrower may request a $1,000,000 Letter of Credit to be issued for the benefit of Duke Realty Limited Partnership that has an expiry date of no later than March 31, 2006 (the "Duke LC"), and (ii) in the event that the Duke LC remains outstanding after the expiration of the Commitment Period, Borrower shall immediately pledge to Bank cash collateral to secure Borrower's obligations under the Duke LC in an amount equal to 105% of the undrawn amount of the Duke LC. 2. MODIFICATION OF LOAN DOCUMENTS. As of the date hereof, Borrower hereby reaffirms and restates each and every warranty and representation set forth in the Loan Documents. The terms of the Loan Documents are hereby modified and amended, effective as of the date hereof, so that any reference in any of the Loan Documents to the Loan Agreement or the Note shall refer to the Loan Agreement and Note as herein amended. 3. RATIFICATION; EXPENSES. Except as herein expressly modified or amended, all the terms and conditions of the Note, the Loan Agreement and the other Loan Documents are hereby ratified, affirmed, and approved. In consideration of Lender agreeing to modify the Loan Agreement, Borrower agrees to pay all fees and expenses incurred in connection with this Amendment, including Lender's attorneys' fees and expenses. 4. NO DEFENSES; RELEASE. For purposes of this Paragraph 4, the terms "Borrower Parties" and "Lender Parties" shall mean and include Borrower and Lender, respectively, and each of their respective predecessors, successors, and assigns, and each past and present, direct and indirect, parent, subsidiary and affiliated entity of each of the foregoing, and each past and present employee, agent, attorney-in-fact, attorney-at-law, representative, officer, director, shareholder, partner, and joint venturer of each of the foregoing, and each heir, executor, administrator, successor and assign of each of the foregoing; references in this paragraph to "any" of such parties shall be deemed to mean "any one or more" of such parties: and references in this sentence to "each of the foregoing" shall mean and refer cumulatively to each party referred to in this sentence up to the point of such reference. Borrower hereby acknowledges, represents and agrees: that Borrower has no defenses, setoffs, claims, counterclaims, recoupments or causes of action of any kind or nature whatsoever with respect to the Loan, the Note and the other Loan Documents or the indebtedness evidence and secured thereby, or with respect to any other documents or instruments now or heretofore evidencing, securing or in any way relating to the Loan, or with respect to any other administration or funding of the Loan, or with respect to any other transaction, matter of occurrence between any of the Borrower Parties and any Lender Parties or with respect to any acts or omissions of any Lender Parties, with respect to each of the same, limited only to the extent that such acts, claims or actions exist on or prior to the date hereof (all of said defenses, setoffs, claims, counterclaims, recoupments or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrower may be deemed to have any Loan Related Claims, Borrower does hereby expressly waive, release and relinquish any and such Loan Related Claims, whether or not known to or suspected by Borrower; that Borrower shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any Loan Related Claims and any and all losses, damages, liabilities, costs and expenses suffered or incurred by any Lender Parties as a result of any assertion by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 5. NO NOVATION. Borrower and Lender hereby acknowledge and agree that this Amendment shall not constitute a novation of the indebtedness evidenced by the Loan Documents, and further that the terms and provisions of the Loan Documents are hereby ratified and affirmed and shall remain valid and in full force and effect except as may be hereinabove modified and amended. 6. NO RELEASE OF COLLATERAL. Borrower further acknowledges and agrees that this Amendment shall in no way occasion a release of any collateral held by Lender as security to or 2 for the Loan, and that all collateral held by Lender as security to or for the Loan shall continue to secure the Loan. 7. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. IN WITNESS WHEREOF, this Amendment has been duly executed and under seal by Borrower and Lender, as of the day and year first above written. BORROWER: INNOTRAC CORPORATION, a Georgia corporation (SEAL) By: /s/ Scott D. Dorfman -------------------------------------------- Scott D. Dorfman, Chairman, President and Chief Executive Officer Attest: /s/ Christine A. Herren ---------------------------------------- Christine A. Herren, Assistant Secretary LENDER: WACHOVIA BANK, NATIONAL ASSOCIATION successor by merger to South Trust Bank By:____________________________________________ Catherine Cowan, Director 3 EX-31.1 5 g98372exv31w1.txt SECTION 302 CERTIFICATION OF THE CEO 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 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: November 14, 2005 /s/ Scott D. Dorfman ---------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) EX-31.2 6 g98372exv31w2.txt SECTION 302 CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13A-14(a)/15D-14(a) I, Christine A. Herren, 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: November 14, 2005 /s/ Christine A. Herren ----------------------------------- Christine A. Herren Senior Director and Controller (Principal Financial Officer and Principal Accounting Officer) EX-32.1 7 g98372exv32w1.txt SECTION 906 CERTIFICATION OF THE CEO 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. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, thAT: (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2005 /s/ Scott D. Dorfman --------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board EX-32.2 8 g98372exv32w2.txt SECTION 906 CERTIFICATION OF THE PRINCIPAL FINANCIAL OFFICER EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Christine A. Herren, Principal Financial and Accounting Officer of Innotrac Corporation (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-OxleY Act of 2002, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2005 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 14, 2005 /s/ Christine A. Herren ---------------------------- Christine A. Herren Senior Director and Controller (Principal Financial Officer and Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----