10-Q 1 igo_10q-063001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 Commission file number: 000-27021 IGO CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3174623 (State or other jurisdiction of incorporation or (IRS Employer Identification organization) Number) RICK SHAFF PRESIDENT AND CHIEF EXECUTIVE OFFICER 9393 GATEWAY DRIVE RENO, NEVADA 89511 (Address of principal executive offices) (775) 746 - 6140 (Registrant's telephone number, including area code) 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 than 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 |_| Shares outstanding of each of the registrant's classes of common stock as of August 3, 2001 Class Outstanding as August 3, 2001 ----- ----------------------------- Common stock, $0.001 par value 23,341,474 IGO CORPORATION FORM 10-Q TABLE OF CONTENTS PART I FINANCIAL INFORMATION ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2001 AND DECEMBER 31, 2000 3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000 5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 FACTORS THAT MAY EFFECT FUTURE RESULTS 14 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24 PART II OTHER INFORMATION 24 ITEM 1 LEGAL PROCEEDINGS ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 3 DEFAULTS UPON SENIOR SECURITIES ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS ITEM 5 OTHER INFORMATION ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES 26 2 IGO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS JUNE 30, 2001 AND DECEMBER 31, 2000 DOLLARS IN THOUSANDS JUNE 30, DECEMBER 31, 2001 2000 --------- --------- ASSETS Current assets: Cash and cash equivalents ................... $ 10,538 $ 20,321 Accounts receivable, net .................... 6,154 6,875 Inventory, net .............................. 5,574 8,179 Prepaid expenses ............................ 582 905 --------- --------- Total current assets ................... 22,848 36,280 Property and equipment, net ...................... 3,894 4,466 Goodwill and other assets, net ................... 11,403 13,093 --------- --------- Total ............................. $ 38,145 $ 53,839 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ............................ $ 1,671 $ 5,117 Accrued liabilities ......................... 3,206 3,446 Current portion of capital lease obligations and long-term debt ..................... 372 501 Short-term note payable ..................... 121 280 --------- --------- Total current liabilities .............. 5,370 9,344 Long-term portion of capital lease obligations and long-term debt ........................... 31 190 --------- --------- Total liabilities ...................... 5,401 9,534 --------- --------- Commitments and contingencies (note 6) Stockholders' equity: Common stock, $0.001 par value; 50,000,000 shares authorized; 23,341,474 and 23,282,842 shares issued and outstanding 23 23 Additional paid-in capital .................. 87,681 87,921 Deferred compensation ....................... (240) (604) Receivable from stockholder ................. (374) (47) Accumulated deficit ......................... (54,346) (42,988) --------- --------- Total stockholders' equity ............. 32,744 44,305 --------- --------- Total ............................. $ 38,145 $ 53,839 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. 3 IGO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000

4 IGO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2001 AND 2000

5 IGO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION iGo Corporation (formerly Battery Express, Inc.) (the "Company") was incorporated in California in 1993 and is headquartered in Reno, Nevada. iGo Corporation (NASDAQ: IGOC) is a leading provider of parts and accessories for mobile technology products such as laptops, cell phones and wireless devices. iGo's mission is to keep the mobile professional powered up and connected anywhere they go. iGo's industry leading alliances and business partners include companies such as Ariba Inc., AT&T Wireless, IBM, Intelisys, NEC Computers, Inc., Perksatwork.com (now Abilizer Solutions), Ingram Micro, Concur Technologies and PurchasePro.com. Through the iGo.com website and corporate solutions representatives, iGo enables more than half of the FORTUNE 500 to efficiently purchase and receive mobile products and services overnight. iGo's products and services are available via the Internet (www.igo.com) and iGo's mobile sales specialists (24 hours a day, 7 days a week) at 1-800-228-8374 and through a corporate account team, resellers and strategic partners. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements for the three-month and six-month periods ended June 30, 2001 and 2000 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain interim information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial condition, results of operations, and cash flows have been included. The results of operations for the interim periods should not be considered indicative of results for any other interim period or for a full calendar year. These financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, in the Company's Form 10-K for the year ended December 31, 2000. Certain of the 2000 amounts included herein have been reclassified to be consistent with the 2001 condensed consolidated financial statements. PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of iGo Corporation and its wholly owned subsidiaries. The subsidiaries were formed for specific transactions, such as acquisitions. All significant intercompany balances and transactions have been eliminated in consolidation. NET LOSS PER SHARE Net loss per share--basic and diluted, is computed using the weighted-average number of common shares outstanding during the period. Stock options and warrants were not included in the computations because they would have been antidilutive. 6 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Actual amounts could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for all fiscal quarters for all fiscal years beginning after June 15, 2000. Adoption of SFAS No. 133 in January 2001, did not have a material impact on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 141, "Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets". Together these statements will change the accounting for business combinations and goodwill. SFAS No. 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001, and eliminates the pooling-of-interests method. SFAS No. 142 changes the accounting for goodwill and indefinite lived intangible assets from an amortization method to an impairment only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of SFAS No. 142. Amortization will still be required for identifiable intangible assets with finite lives. The Company is required to adopt SFAS No. 142 in January 2002. The Company has not yet completed its analysis of the impact that SFAS No. 141 and SFAS No. 142 will have on its financial condition or results of operations. 2. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at June 30, 2001 and December 31, 2000: DOLLARS IN THOUSANDS JUNE 30, DECEMBER 31, 2001 2000 -------- -------- Trade receivables ................. $ 6,480 $ 7,501 Other current receivables ......... 449 449 Allowance for bad debts ........... (775) (1,075) -------- -------- Total accounts receivable, net $ 6,154 $ 6,875 ======== ======== 3. INVENTORY Inventory consists of the following at June 30, 2001 and December 31, 2000: DOLLARS IN THOUSANDS JUNE 30, DECEMBER 31, 2001 2000 -------- -------- Products on hand .................. $ 7,362 $ 8,964 Inventory reserve ................. (1,788) (785) -------- -------- Total inventory, net $ 5,574 $ 8,179 ======== ======== 7 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following at June 30, 2001 and December 31, 2000: DOLLARS IN THOUSANDS JUNE 30, DECEMBER 31, 2001 2000 --------- --------- Leasehold improvements................... $ 363 $ 363 Furniture and equipment.................. 3,424 3,309 Software................................. 2,047 2,039 Accumulated depreciation................. (1,940) (1,245) --------- --------- Total property and equipment, net... $ 3,894 $ 4,466 ========= ========= 5. GOODWILL AND OTHER ASSETS Goodwill and other assets consists of the following at June 30, 2001 and December 31, 2000: DOLLARS IN THOUSANDS JUNE 30, DECEMBER 31, 2001 2000 --------- --------- Goodwill .................................. $ 14,359 $ 14,358 Accumulated amortization .................. (3,814) (2,109) --------- --------- Goodwill, net ........................ 10,545 12,249 --------- --------- Other assets .............................. 1,169 1,089 Accumulated amortization .................. (311) (245) --------- --------- Other assets, net .................... 858 844 --------- --------- Total goodwill and other assets, net $ 11,403 $ 13,093 ========= ========= 6. LEGAL PROCEDINGS From time to time we are involved in litigation incidental to the conduct of our business. We are not currently a party to any lawsuit or administrative or arbitration proceeding that, in our opinion, is likely to seriously harm our business. From time to time, we receive communications from other parties claiming that products we sell infringe technology rights owned by those third parties. We consider all such claims seriously and handle them appropriately. 7. BUSINESS ACQUISITIONS On January 4, 2000, the Company acquired CAW Products, Inc., d.b.a. Cellular Accessory Warehouse, for $353,458 comprised of $100,000 in cash and $253,458 in stock (29,167 shares of common stock valued at $8.69 per share, the approximate market price of such shares during the few days leading up to and following the announcement of the transaction). Additionally, on January 11, 2000, the Company acquired AR Industries Inc., d.b.a. Road Warrior International, for $2,704,167 comprised of $750,000 in cash and $1,954,167 in stock (279,167 shares of common stock valued at $7.00 per share, the approximate market price of such shares during the few days leading up to and following the announcement of the transaction). Road Warrior International is a designer and distributor of laptop connectivity and power products, as well as model specific laptop hard drive upgrades. Cellular Accessory Warehouse is a distributor of model specific cellular accessories. 8 On August 29, 2000, the Company acquired substantially all the assets of Xtend Micro Products, Inc., for $2,500,000 in cash and 2,268,451 shares of iGo Common Stock. Of such shares, 1,896,574 shares are subject to an earn-out provision based on the post-closing operating performance of the Xtend business unit. Xtend will have the opportunity to earn up to an additional $2,500,000 in a combination of iGo Common Stock and/or cash (at iGo's election) for exceptional post-closing operating performance. Founded in 1990, Xtend Micro Products Inc. is a leader in OEM and OEM compatible power products and accessories for the portable computer market. Each acquisition was recorded using the purchase method of accounting under Accounting Principles Board ("APB") Opinion No. 16. Results of operations for each acquired company have been included in the financial results of the Company from the respective acquisition date forward. In accordance with APB Opinion No. 16, all identifiable assets were assigned a portion of the cost of the acquired companies (purchase price) on the basis of their respective fair values. Identifiable intangible assets and goodwill are included in "Intangibles and other assets, net" on the accompanying condensed consolidated balance sheets and are amortized over their estimated useful lives, which approximates 40 months for both Cellular Accessory Warehouse and Road Warrior International, and 60 months for Xtend Micro Products. Intangible assets were identified and valued by considering the Company's intended use of acquired assets and analysis of data concerning products, technologies, markets, historical financial performance, and underlying assumptions of future performance. The economic and competitive environment in which the Company and the acquired companies operate was also considered in the valuation analysis. The Company periodically evaluates its intangible assets for impairment, and as of June 30, 2001, management believes such assets are not impaired. 8. LOAN TO CHAIRMAN AND CHIEF EXECUTIVE OFFICER On January 2, 2001, the Company entered into a Secured Loan Agreement with Ken Hawk, then our Chairman and Chief Executive Officer, pursuant to which the Company loaned him $306,100. This loan bore interest at 10.5% and would have matured on June 8, 2001. The loan was full recourse and was secured by 306,100 shares of iGo common stock held by Mr. Hawk, which represented shares with a market value of twice the loan principal amount on the date the loan was made. As described below, this loan was subsequently restructured. 9. RESIGNATION OF CHAIRMAN AND CHIEF EXECUTIVE OFFICER On March 26, 2001, Ken Hawk resigned from his employment with and as the President, Chairman of the Board and Chief Executive Officer of the Company. Mr. Hawk will continue to serve as a member of the Company's Board of Directors. Under a Consulting Agreement, Mr. Hawk will also serve as a consultant to the Company for a period of one year following his resignation. As consideration for his services as a consultant, Mr. Hawk will receive an aggregate of approximately $240,500 during the term of the Consulting Agreement. The Company also agreed to restructure the indebtedness owed by Mr. Hawk to the Company. Under the terms of a Secured Note, previously existing notes payable to the Company were consolidated into one note for an aggregate principal amount of $366,410. This note bears interest at 8.0% and matures on March 26, 2003, or upon an event of default. The note is secured by 977,000 shares of iGo common stock owned by Mr. Hawk, which represented shares with a market value of approximately twice the principal amount of the note on the date of the Security Agreement executed by Mr. Hawk in conjunction with the note. 9 10. NOTICE OF POSSIBLE DELISTING FROM NASDAQ On July 17, 2001, the Company received a letter from Nasdaq stating that its common stock had failed to maintain a minimum bid price of $1.00 as required for continued listing on the Nasdaq National Market under Marketplace Rules 4450(a)(5) and 4310(c)(8)(B) and that our stock was therefore subject to delisting. The Company has filed a request for an oral hearing before the Nasdaq Listing Qualifications Panel, and such hearing has been scheduled for August 31, 2001. At the hearing the Company will request an extension of time to come into compliance with the $1.00 minimum bid price requirement. There can be no assurances that this appeal will be resolved favorably. In the event that such request for an extension is denied, the Company's common stock would thereafter be quoted on the OTC Bulletin Board unless re-listed on the Nasdaq or another exchange or quotation system. While our stock would continue to trade on the over-the-counter bulletin board following any delisting from the Nasdaq National Market, the Company expects that our stock price and trading volume would decline, possibly significantly, and its ability to raise additional capital would be substantially diminished by any such delisting. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The following discussion was prepared by iGo Corporation (referred throughout this document where appropriate, as "iGo," "Company," "we," "our," and "us"), and should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and the Notes thereto included in this report as well as the Factors That May Effect Future Results that follow this discussion. The following discussion and other material in this report on Form 10-Q contain certain forward-looking statements. The forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and upon assumptions with respect to future business decisions which are subject to change. Accordingly, actual results could differ materially from those contemplated by such forward-looking statements. iGo, iGo (stylized), iGo.com, and Road Warrior are registered trademarks of iGo. Mobile Technology Outfitter, iGo Alerts, iGo Concierge and Pocket Dock are trademarks of iGo or its subsidiaries. This report also contains brand names, service marks and trademarks of other companies which are the property of their respective holders. OVERVIEW iGo was incorporated in March 1993 and began offering products for sale later that year, but did not generate meaningful revenues until 1995. For the period from inception to 1995, our operating activities related primarily to the development of our proprietary databases and to locating favorable sources of supply. In 1995, we launched our first direct marketing campaign and focused on building sales volume and fulfillment capabilities, and in 1996, we launched our website. In June 1997, we relocated from San Jose, California to Reno, Nevada to take advantage of lower operating costs for our customer contact and fulfillment centers. 10 Revenues from sales of products and shipping fees are recognized at the time the merchandise is shipped, net of any discounts and reserves for expected returns. The majority of orders are shipped the same day they are received. Wireless data service activation fees are recognized at the time of activation of the service. To date, approximately 55% of customer purchases have been made with credit cards. We generally receive payment from the credit card companies within one to four business days after shipment of the product. We also extend credit terms, typically net 30 days to 90 days, to corporate accounts that we have evaluated for creditworthiness. Inventory is carried at the lower of cost or market. We use the first-in-first-out method to determine cost. Advertising and promotional costs are expensed as incurred and are recorded net of any cooperative advertising amounts due from our suppliers at that time. In the case of direct mail campaigns, the expenses are recorded at the time the promotional piece is mailed to potential customers because the projected future revenue stream from these mailings, which can occur over a two-month period, cannot be ultimately determined at the time the mailing occurs. We incurred net losses of $23.9 million in 2000, $15.0 million in 1999 and $1.9 million in 1998. For the six months ended June 30, 2001, our net loss was $11.4 million. At June 30, 2001, we had an accumulated deficit of approximately $54.3 million. The net losses resulted primarily from operating expenses including costs associated with marketing programs to attract new customers, developing our website and proprietary databases and the development of our operational infrastructure. Although we have reduced operating expenses in absolute dollar terms, we will need to generate significantly higher revenues to achieve and maintain profitability. If our revenue growth is slower than we anticipate or our operating expenses exceed our expectations, our losses will be significantly greater, which will in turn delay or prevent our achievement of profitability. THREE MONTH PERIOD AND SIX MONTH PERIOD ENDED JUNE 30, 2001 COMPARISON TO THREE MONTH AND SIX MONTH PERIOD ENDED JUNE 30, 2000 NET PRODUCT REVENUE. Net product revenue consists of product sales to customers and outbound shipping charges, net of any discounts and reserves for expected returns. Net product revenue decreased from $9.2 million for the three month period ended June 30, 2000 to $7.4 million for the three month period ended June 30, 2001. The decrease in net revenues in the current year period is primarily attributable to a general contraction in purchasing by our corporate customers during the second quarter. For the six month period ended June 30, 2001, net revenues were $17.0 million compared to $16.8 million during the six month period ended June 30, 2000. The increase in net product revenue for the current year six month period was attributable to higher revenues in the first quarter of 2001, primarily a result of expanded marketing efforts and strategic relationship initiatives, repeat purchases from pre-existing buyers, increased success in selling to enterprises, or business-to-business, and our purchase of Xtend Micro Products. GROSS MARGIN. Gross Margin is net product revenue less the cost of sales, which typically consists of the cost of products sold to customers, inbound shipping expense and outbound shipping charges. In the three month and six month periods ended June 30, 2001, the Company also recorded increases to inventory reserves specific to discontinued and excess inventory. Gross margin for the second quarter of 2001 amounted to 14.6% of net product revenues, compared with 32.1% in the second quarter of last year. For the first six months of 2001, gross margin was 17.5% of net product revenues, compared with 31.7% in the same period last year. The primary cause for the margin decline was a $1.0 million, non-cash charge for discontinued and excess inventory recorded in the second quarter of 2001. This charge and an additional $1.0 million charge taken in the first quarter were the primary cause of the lower gross margin for the first six months of 2001. These charges resulted from the Company's continued efforts to focus on targeted core products and unanticipated changes in customer demand for certain products. The lower gross margin on the sale of close out inventory also contributed to the overall lower gross margin. 11 SALES AND MARKETING. Sales and marketing expenses consist primarily of advertising costs, fulfillment expenses, credit card costs and the salary and benefits of our sales, marketing and customer contact center personnel. Advertising and promotional expenses include pay for performance and online marketing efforts, print advertising, trade shows and direct marketing costs. Sales and marketing expenses decreased from $5.6 million for the three month period ended June 30, 2000 to $3.1 million for the three month period ended June 30, 2001, and decreased from $12.5 million for the six month period ended June 30, 2000 to $7.0 million for the six month period ended June 30, 2001. The most significant single component of sales and marketing expense is advertising costs. From the second quarter of 2000 to the second quarter of 2001 advertising costs declined in absolute dollars from approximately $2.4 million to $550,000. Expressed as a percentage of net revenue, advertising costs decreased from 26% in the second quarter of 2000 to 7% in the second quarter of 2001. Advertising costs declined from $6.4 million, or 38% of net revenue, in the first six months of 2000 to $1.7 million, or 10% of net revenue for the first six months of 2001. This decrease is principally due to efforts to reduce spending and direct marketing expenditures into programs with the greatest benefit potential. Additional cost declines are associated with reductions in staffing, lower incentive plan expenses and lower fulfillment expenses, which decline due to lower sales volume. PRODUCT DEVELOPMENT. Product development expenses generally consist of payroll and related expenses for merchandising and website personnel, site hosting fees and web content and design expenses as well as expenses associated with development of our proprietary products. Product development expenses decreased from $1.3 million for the three month period ended June 30, 2000 to $880,000 for the three month period ended June 30, 2001, and from $2.9 million for the six month period ended June 30, 2000 to $1.7 million for the six month period ended June 30, 2001. The higher expense in the prior year was primarily attributable to additional investment made to improve the functionality and speed of our existing web site, as well as planning and design costs incurred for the next generation of our web site. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of salaries and related costs for our executive, administrative and finance personnel, support services and professional fees, as well as general corporate expenses such as rent and depreciation and amortization. General and administrative expenses were unchanged at $2.0 million for each of the quarters ended June 30, 2000 and 2001. Expressed as a percentage of net revenue, general and administrative expenses increased from 22% to 27%, respectively, due to lower net revenues in the current year period. General and administrative expenses increased from $4.0 million for the six month period ended June 30, 2000 to $4.3 million for the six month period ended June 30, 2001. The increase in general and administrative expenses for the first six months of 2001 over the prior year period was primarily attributable to one time charges related to our reorganization in the first half of 2001 and costs associated with operations of Xtend Micro Products, which was acquired in August of 2000. MERGER AND ACQUISITION COSTS, INCLUDING AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLES. In the three month period ended June 30, 2001, we incurred $853,000 in merger and acquisition costs inclusive of goodwill amortization compared to $404,000 incurred during the three month period ended June 30, 2000. In the six month period ended June 30, 2001, merger and acquisition costs inclusive of goodwill amortization were $1.7 million compared to $1.0 million incurred during the six month period ended June 30, 2000. These non-cash acquisition costs primarily relate to the amortization of goodwill resulting from the January 2000 acquisitions of Road Warrior and Cellular Accessory Warehouse and the August 2000 acquisition of Xtend Micro Products. Goodwill and covenants not to compete are amortized on a straight-line basis over their respective useful lives, generally 40 to 60 months. 12 OTHER INCOME, NET. Other income, net, consists primarily of interest income earned on cash and cash equivalents, net of interest expense on borrowing and capital leases, and losses resulting from disposals of fixed assets. Other income, net, decreased from $344,000 for the three month period ended June 30, 2000 to $41,000 for the three month period ended June 30, 2001. For the six month period ended June 30, 2001, other income, net, was $384,000 compared to $890,000 for the six month period ended June 30, 2000. These decreases were primarily attributable to lower interest income as funds invested from the net proceeds of the initial public offering in October 1999 declined. INCOME TAXES. The Company did not provide any current or deferred U.S. federal, state or foreign income tax provision or benefit for any of the periods presented because it has experienced losses since inception. Utilization of the Company's net operating loss carryforwards, which begin to expire in 2011, may be subject to certain limitations under Section 382 of the Internal Revenue Code of 1986, as amended. The Company has provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of the uncertainty regarding its realizability. LIQUIDITY AND CAPITAL RESOURCES Prior to our initial public offering, we financed our operations primarily through the sale of preferred stock, capital lease obligations and revolving credit facilities. Prior to our initial public offering, we received $13.2 million from the sale of preferred stock, net of issuance costs. Of this amount, $1.4 million was received in June 1996, $6.0 million in October 1998 and $5.8 million in July 1999. Proceeds from equipment financed under a sale-leaseback transaction, net of principal repayments, amounted to $685,000 during the year ended December 31, 1999. There were no proceeds from equipment financed under sale-leaseback transactions during the six month period ended June 30, 2001. Proceeds from our initial public offering in October 1999, net of offering costs, amounted to approximately $62.6 million. Net cash used in operating activities was $8.9 million for the six month period ended June 30, 2001, compared to $17.1 million for the six month period ended June 30, 2000. Net cash used in operating activities during the current period consisted primarily of net losses, as well as fluctuations in accounts payable and accounts receivable between periods. Non-cash expenses included in the net loss for the first six months of 2001 were approximately $2.8 million higher than for the first six months of 2000. In the six month period ended June 30, 2000, an increase in inventory accounted for approximately $2.7 million of cash used in operating activities compared to $448,000 in cash provided by operating activities in six month period ended June 30, 2001, as a result of a decrease in inventories. Net cash used in investing activities was $131,000 for the six month period ended June 30, 2001, which was attributable to acquisitions of property and equipment. Net cash used in investing activities was $3.3 million for the six month period ended June 30, 2000, and reflects purchases of property and equipment and acquisition of businesses associated with growth of our business. Net cash used in financing activities was $734,000 for the six month period ended June 30, 2001, compared to $114,000 in cash provided by financing activities for the six month period ended June 30, 2000. Cash used in financing activities in the current year period represented a loan to a stockholder, who was formerly our Chairman and Chief Executive Officer, and principal payments on debt. Cash provided by financing activities in the prior year period represented proceeds from the exercise of stock options, which was partially offset of principal payments on debt. 13 We currently anticipate that our available funds will be sufficient to meet our anticipated working capital and capital expenditure needs at least through the end of 2001. We may need to raise additional funds before the end of 2001 in the event that we pursue strategic acquisitions or experience operating losses that exceed our expectations. If we raise additional funds through the issuance of equity securities or convertible debt securities, our existing stockholders may experience significant dilution. Furthermore, additional financing may not be available when needed or, if it is available, the terms may not be favorable to our stockholders or us. FACTORS THAT MAY EFFECT FUTURE RESULTS WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO EVALUATE OUR POTENTIAL FOR FUTURE SUCCESS We were incorporated in 1993 and did not begin to generate meaningful revenues until 1995. Accordingly, we have only a limited operating history upon which you can evaluate our business and prospects. You must consider the risks and uncertainties frequently encountered by growth stage companies in new and rapidly evolving markets, such as electronic commerce. These risks include our ability to continue to: o sustain historical growth rates; o implement our business model; o attract new customers, o retain existing customers and maintain customer satisfaction; o maintain our gross margins in the event of price competition or rising wholesale prices; o minimize technical difficulties and system downtime; o manage distribution of our direct marketing materials; and o attract, train and retain employees. If we are unsuccessful in addressing these risks and uncertainties, our business, financial condition and results of operations will be harmed. WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES FOR AT LEAST THE NEXT FEW QUARTERS Since our inception in 1993, we have incurred significant net losses, resulting primarily from costs related to developing our proprietary databases, establishing our brand, building our customer contact center, developing relationships with suppliers and attracting users to our website. At June 30, 2001, we had an accumulated deficit of approximately $54.3 million. Although we have experienced an increase in net product revenue each period, with the exception of second quarter 2001, this growth may not be sustainable. If our revenue growth is slower than we anticipate or our operating expenses exceed our expectations, our losses will be significantly greater, which will in turn delay or prevent our achievement of profitability. 14 WE MAY NOT HAVE SUFFICIENT CAPITAL TO REACH PROFITABILITY Our internal financial models project that our current cash, cash equivalents and short-term investments, together with other available capital resources, will be sufficient to permit us to reach a cash-flow positive state. However, there can be no assurance that we will reach cash-flow positive without raising additional funds. If additional funding is necessary, we may seek such additional funding through debt or equity financings. We currently have no commitments for any additional financing, and there can be no assurance that adequate funds for our operations will be available to us when needed. A lack of sufficient capital may require us to delay, scale back or even eliminate some or all of our operations. IF OUR SHARES ARE DELISTED, OUR STOCK PRICE MAY DECLINE FURTHER AND WE MAY BE UNABLE TO RAISE ADDITIONAL CAPITAL One of the continued listing standards for our stock on the Nasdaq National Market is the maintenance of a $1.00 bid price. On July 17, 2001, we received a letter from Nasdaq stating that our common stock had failed to maintain a minimum bid price of $1.00 as required for continued listing on the Nasdaq National Market under Marketplace Rules 4450(a)(5) and 4310(c)(8)(B) and that our stock was therefore subject to delisting. We have filed a request for an oral hearing before the Nasdaq Listing Qualifications Panel, and such hearing has been scheduled for August 31, 2001. At the hearing we will request an extension of time to come into compliance with the $1.00 minimum bid price requirement. There can be no assurances that this appeal will be resolved favorably. In the event that such request for an extension is denied, our common stock would thereafter be quoted on the OTC Bulletin Board unless re-listed on the Nasdaq or another exchange or quotation system. While our stock would continue to trade on the over-the-counter bulletin board following any delisting from the Nasdaq National Market, we expect that our stock price and trading volume would decline, possibly significantly, and our ability to raise additional capital would be substantially diminished by any such delisting. OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS Our revenues for the foreseeable future will remain primarily dependent on sales of mobile electronic devices, accessories, batteries and services through our website and our customer contact center. Although independent market research firms forecast that shipments of portable personal computers, the number of wireless subscribers and the market for accessories and batteries for mobile electronic devices will grow substantially over the next few years, we cannot be certain that this growth will actually occur or that our sales will grow at the same rate. We cannot forecast with any degree of certainty the extent of our sales of these products or services. We expect our operating results could fluctuate significantly from quarter to quarter as a result of various factors including: o our ability to attract visitors to our website and convert them into customers; o the level of merchandise returns we experience; o changes and seasonal fluctuations in the buying patterns of our customers; o our inability to obtain adequate supplies of high-demand products; o unanticipated cost increases or delays in shipping of our products, transaction processing, or production and distribution of our direct marketing materials; o unanticipated delays with respect to product introductions; and o the costs, timing and impact of our marketing and promotional initiatives. 15 Because of these and other factors, we believe that quarter to quarter comparisons of our results of operations are not good indicators of our future performance. If our operating results fall below the expectations of securities analysts and investors in some future periods, our stock price will likely decline further. STRENGTHENING THE IGO BRAND IS CRITICAL TO OUR SUCCESS During 1999 we launched our new iGo brand, and with a portion of the proceeds of our recent stock offerings we have begun to implement aggressive traditional and online marketing programs to promote our brand in order to attract visitors to our website. We believe that strengthening the iGo brand will be critical to the success of our business. We cannot be certain that our brand will attract new customers or retain existing customers, and the failure to maintain a strong and effective brand may harm our business, financial condition and results of operations. WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS AND WE MAY NOT BE ABLE TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS Our performance is substantially dependent on the continued services and on the performance of our executive officers. Some key members of our management team have recently been hired. These individuals have had little experience working in our organization. We cannot be certain that we will be able to integrate new executives or other employees into our organization effectively. In addition, there will be significant administrative burdens placed on our management team as a result of our status as a public company. The loss of the services of any of our executive officers could harm our business. Additionally, we will need to attract, retain and motivate talented management and other highly skilled employees to be successful. In particular, competition for employees that possess knowledge of the Internet industry is intense. None of our employees are bound by an employment agreement for any specific term. Any of our officers or employees can terminate his or her employment relationship at any time. The loss of any of our officers or our inability to attract or retain other qualified employees could harm our results of operations and financial condition. We may be unable to retain our key employees or attract, assimilate and retain other highly qualified employees in the future, which could harm our business, financial condition and results of operations. COMPETITION MAY DECREASE OUR MARKET SHARE, NET REVENUES AND GROSS MARGINS AND MAY CAUSE OUR STOCK PRICE TO DECLINE We believe the portable computing and mobile communications market is highly fragmented. In addition, the electronic commerce market in which we operate is new, rapidly evolving and highly competitive. We believe no single competitor competes directly with us with respect to all of the products and services we offer; however, we currently or potentially compete with a variety of companies in the sale of products in specific categories, including: o mobile products suppliers such as Targus; o mass merchant retailers such as Ingram Micro, Tech Data, CDW and CompUSA; o direct marketers such as Buy.com, Insight and Microwarehouse; and o traditional mobile device manufacturers or OEM's such as Fujitsu, Toshiba, IBM, NEC, Acer, Gateway, Dell, Nokia, Motorola and Erickson. 16 Many of these current and potential competitors may have the ability to devote substantially more resources to marketing, and systems and website development than we do. In addition, larger and more well-financed entities may acquire, invest in or form joint ventures with our competitors. Some of our competitors may be able to secure products from suppliers on more favorable terms, fulfill customer orders more efficiently and adopt more aggressive pricing or inventory availability policies then we can. Finally, new technologies and the expansion of existing technologies, such as price comparison programs that search for products from a variety of websites, may direct customers to other online merchants. THE LOSS OF OUR PROPRIETARY DATABASES WOULD SERIOUSLY HARM OUR BUSINESS Our proprietary databases are a key competitive advantage. If we fail to keep these databases current or if the proprietary customer, product, supplier and compatibility information contained in these databases is damaged or destroyed, our business would be seriously harmed and our stock price would decline. THE FAILURE TO SUCCESSFULLY GROW, MANAGE AND USE OUR DATABASE OF CUSTOMERS AND USERS WOULD HARM OUR BUSINESS We intend to continually expand our database of customers, potential customers and website registrants to more effectively create targeted direct marketing offers. We seek to expand our customer database by using information we collect through our website and our customer contact center as well as from purchased or rented lists. We must also continually develop and refine our techniques for segmenting this information to maximize its usefulness. If we are unable to expand our customer database or if we fail to utilize this information successfully, our business model may not be successful. In addition, if federal or state governments enact privacy legislation resulting in the increased regulation of mailing lists, we could experience increased costs in complying with potentially burdensome regulations concerning the solicitation of consents to keep or add customer names to our mailing lists. FAILURE OF OUR STRATEGIC RELATIONSHIPS TO ATTRACT CUSTOMERS COULD HARM OUR BUSINESS We intend to continue to establish, leverage and grow key strategic relationships with manufacturers, suppliers and electronic commerce partners to enable us to collect crucial product-specific information, ensure access to adequate product supply and acquire new customers. For example, we have entered into strategic relationships with the NEC Computer Systems Division (or NEC), IBM, and Motorola, that provide us with priority access to new products and gives us the ability to offer a more integrated electronic commerce solution for enterprises. In addition, we plan to establish additional online partnerships that create direct online links from other websites and from the portable computing and mobile communications areas of major Internet portals. For example, we have entered into an agreement with Ariba which enables customers to order our products from the Ariba purchasing system, and we recently launched relationship with LetsTalk.com and Acer America. We cannot be certain that any of these strategic relationships or partnerships will be or continue to be successful in attracting new customers. In addition, the strategic relationships with Motorola, Acer and LetsTalk.com are not subject to a written agreement and the agreements with Ariba and NEC may be terminated by any party at any time upon written notice. Furthermore, under our agreement with NEC we are currently obligated to purchase at least $4,000,000 of product per year, which requirement may be increased, decreased or waived by NEC at its discretion. Because our agreement with NEC was only recently established, it is uncertain whether we will meet or exceed the stated purchase obligation. The terms of one agreement with IBM require us to purchase at least $2,000,000 of product per year. If iGo fails to meet this purchase level, IBM has the discretion to allow iGo to cure before terminating the agreement. Also, either party may terminate the agreement with or without cause on three months written notice. Consequently, we cannot be certain that we will be able to maintain these strategic relationships in the future. If these programs fail to attract additional customers or we are unable to maintain these relationships, our business, financial condition and results of operations could be harmed. 17 WE MUST EFFECTIVELY MANAGE OUR VENDORS TO MINIMIZE INVENTORY RISK AND MAINTAIN OUR GROSS MARGINS In order to fulfill our orders, we depend upon our vendors to produce sufficient quantities of products according to schedule. We may maintain high inventory levels in some categories of merchandise in an effort to ensure that these products are available to our customers. This may expose us to risks of excess inventory and outdated merchandise, which could harm our business. If we underestimate customer demand, we may disappoint customers who may purchase from our competitors. We also negotiate with our vendors to get the best quality available at the best prices in order to maintain and increase our gross margins. Our failure to be able to manage our vendors effectively would harm our operating results. FAILURE OF THIRD PARTY SUPPLIERS TO SHIP PRODUCTS DIRECTLY TO OUR CUSTOMERS COULD HARM OUR BUSINESS For the six month period ended June 30, 2001, approximately 18% of our total net revenues were from products shipped to our customers directly from our suppliers. The failure of these suppliers to continue to ship products directly to our customers or to ship products to our customers in a timely manner could result in lost revenues, customer dissatisfaction and damage to our reputation. In addition, if we could not depend on these suppliers to ship products to our customers directly, we would have to carry the products in our inventory, which would expose us to risks of excess inventory, outdated merchandise and increased warehouse costs, all of which could harm our business. FAILURE OF THIRD-PARTY CARRIERS TO DELIVER OUR PRODUCTS TIMELY AND CONSISTENTLY COULD HARM OUR BUSINESS Our supply and distribution system is primarily dependent upon our relationships with United Parcel Service, Federal Express and AirborneExpress. We ship substantially all of our orders with these carriers. Because we do not have written agreements with these carriers that guarantee continued service, we cannot be sure that our relationships with these carriers will continue on terms favorable to us, or at all. If our relationship with one or more of these carriers is terminated or impaired, or if one or more of these carriers is unable to ship products for us, whether through labor shortage, slow down or stoppage, deteriorating financial or business conditions or for any other reason, we would be required to rely on the other carriers. These carriers may not be able to accommodate the increased shipping volume, in which case we may be required to use alternative carriers, with whom we may have no prior business relationship, for the shipment of products to our customers. We may be unable to engage an alternative carrier on a timely basis or upon terms favorable to us. Changing carriers would likely harm our business, financial condition and results of operations. Potential adverse consequences include: o reduced package tracking information; o delays in order processing and product delivery; o increased delivery costs, resulting in reduced gross margins; and o reduced shipment quality, which may result in damaged products and customer dissatisfaction. WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, INTERNET ADDRESSES AND INTELLECTUAL PROPERTY RIGHTS We regard our brand and substantial elements of our website and relational databases as proprietary, and seek their protection through trademark, service mark, copyright and trade secret laws as critical to our success. We enter into non-disclosure agreements with our employees and consultants, and generally with strategic partners. Despite these precautions, it may be possible for third parties to copy or otherwise obtain and use our intellectual property without our authorization. Our iGo brand and our Internet address, www.iGo.com, are important components of our business strategy. We have obtained federal trademark registrations for our "iGo," "iGo" (stylized), "Road Warrior" and "iGo.com" trademarks. 18 We also rely to a material extent on technology developed and licensed from third parties. These licenses may not continue to be available to us on commercially reasonable terms in the future. The loss of existing technology licenses could harm the performance of our existing services until equivalent technology can be identified, obtained and integrated. Failure to obtain new technology licenses may result in delays or reductions in the introduction of new features, functions or services, which would harm our business. We have been notified from time to time that certain products that we offer may infringe on the proprietary rights of others. There can be no assurances that third parties will not claim infringement in the future. We expect that the continued growth of the Internet will result in an increasing number of infringement claims as legal standards related to our market continue to evolve. Any such claim, with or without merit, could be time consuming, result in costly litigation, and may have a material adverse effect on our business and results of operations. We have also filed applications to register our iGo trademark in certain foreign countries in which we currently conduct, or intend to conduct significant business. It is often difficult to obtain clear, registered title to trademarks in foreign countries. We have encountered certain conflicts in connection with these foreign trademark applications, and there is no guarantee that we will be able to secure registrations in any particular foreign country. At this time, we have not encountered any objections to our use of iGo marks in any foreign country. Nevertheless, it is possible that another entity having prior rights in a similar mark in a particular country or countries, could prevent us from using our iGo trademarks in those countries, which may have a material adverse effect on our business and results of operations. In addition, we currently hold various Internet domain names, including iGo.com. The acquisition and maintenance of domain names generally is regulated by Internet regulatory bodies. The regulation of domain names in the United States and in foreign countries is subject to change. Governing bodies may establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we may be unable to acquire or maintain relevant domain names in all countries in which we conduct business. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights continues to evolve. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights. WE MAY BE VULNERABLE TO NEW TAX OBLIGATIONS THAT COULD BE IMPOSED ON ELECTRONIC COMMERCE TRANSACTIONS We do not expect to collect sales or other similar taxes or goods shipped into most states. However, one or more states or the federal government may seek to impose sales tax collection obligations on out-of-state companies, such as ours, which engage in or facilitate electronic commerce. A number of proposals have been made at the state and local levels that would impose additional taxes on the sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of electronic commerce and cause purchasing through our website to be less attractive to customers. In October 1998, the United States Congress passed legislation limiting for three years the ability of the states to impose taxes on Internet-based transactions. Failure to renew this legislation could result in the imposition by various states of taxes on electronic commerce. Further, states have attempted to impose sales tax collection obligations on direct marketing sales from businesses such as ours. A successful assertion by one or more states that we should have collected or be collecting sales taxes on the sale of products could harm our business. 19 IF WE EXPAND OUR BUSINESS INTERNATIONALLY, OUR BUSINESS WOULD BECOME INCREASINGLY SUSCEPTIBLE TO NUMEROUS INTERNATIONAL RISKS AND CHALLENGES THAT COULD AFFECT OUR RESULTS OF OPERATIONS Although we have not had meaningful international revenues to date, we intend to increase our international sales efforts. International sales are subject to inherent risks and challenges that could affect our results of operations, including: o the need to develop new supplier relationships; o unexpected changes in international regulatory requirements and tariffs; o difficulties in staffing and managing foreign operations; o potential adverse tax consequences; o price controls or other restrictions on, or fluctuations in, foreign currency; and o difficulties in obtaining export and import licenses. To the extent we generate international sales in the future, any negative effects on our international business could harm our business, financial condition and results of operations as a whole. In particular, gains and losses on the conversion of foreign payments into U.S. dollars may contribute to fluctuations in our results of operations, and fluctuating exchange rates could cause reduced revenues from dollar-denominated international sales. ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION We have recently bought and may again invest in or buy complementary businesses, products or technologies in the future. In the event of any investments or purchases, we could: o issue stock that would dilute the percentage ownership of our current stockholders; o incur debt; o assume liabilities; o incur amortization expenses related to goodwill and other intangible assets; or o incur large and immediate write-offs. These acquisitions could also involve numerous operational risks, including: o problems combining the purchased operations, products or technologies; o unanticipated costs; o diversion of management's attention away from our core business; o adverse effects on existing business relationships with suppliers and customers; o risks associated with entering markets in which we have no or limited prior experience; and o potential loss of key employees, particularly those of the purchased organizations. We cannot assure you that we will be able to successfully integrate any businesses, products or technologies that we have acquired or might acquire in the future. 20 THE LOSS OF TECHNOLOGIES LICENSED FROM THIRD PARTIES COULD HARM OUR BUSINESS We rely to a material extent on technology developed and licensed from third parties. The loss of existing technology licenses could harm the performance of our existing services until equivalent technology can be identified, obtained and integrated. Failure to obtain new technology licenses may result in delays or reductions in the introduction of new features, functions or services, which would harm our business. OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE HARMED IF WE WERE TO BE LIABLE FOR DEFECTS IN THE PRODUCTS WE OFFER We may be subject to product liability claims for the products we sell. While we believe that our product liability coverage of $4,000,000 is currently adequate, we can provide no assurance that the insurance can be maintained in the future at a reasonable cost or in amounts sufficient to protect us against losses due to liability. A successful liability claim brought against us in excess of relevant insurance coverage could harm our business, financial condition and results of operations. Damage to or destruction of our warehouse could result in loss of our inventory, which could harm our business, financial condition and results of operations. If all or most of the inventory in our warehouse were damaged or destroyed, we might be unable to replace the inventory in a timely manner and, as a result, be unable to process orders in a timely manner or at all. Approximately 82% of the products we sell come from the inventory in our warehouse. We cannot be certain that we would be able to replace the inventory as quickly as our customer orders demand, which may result in the loss of revenue and customers, which would harm our business, financial condition and results of operations. RISKS RELATED TO THE INTERNET INDUSTRY WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE Our industry is new and rapidly evolving. Our business would be harmed if Internet usage does not continue to grow. Internet usage may be inhibited for a number of reasons, including: o inadequate Internet infrastructure; o inconsistent quality of service; and o unavailability of cost-effective, high-speed service. If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth, or its performance and reliability may decline. In addition, websites, including ours, have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. We anticipate that these outages or delays will occur from time to time in the future and, if they occur frequently or for extended periods of time, Internet usage, including usage of our website, could grow more slowly or decline. OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE ELECTRONIC COMMERCE MARKET, WHICH IS UNCERTAIN Our future revenues substantially depend upon the widespread acceptance and use of the Internet as an effective medium of commerce by consumers. Demand for recently introduced products and services over the Internet is subject to a high level of uncertainty. Although independent market research firms forecast that the number of Internet users worldwide will grow substantially in the next few years, we cannot be certain that this growth will occur or that our sales will grow at the same rate. The development of the Internet as a viable commercial marketplace is subject to a number of risks including: 21 o potential customers may be unwilling to shift their purchasing from traditional vendors to online vendors; o insufficient availability of or changes in telecommunications services could result in slower response times, which could delay the acceptance of the Internet as an effective commerce medium; o continued growth in the number of Internet users; o concerns about transaction security; o continued development of the necessary technological infrastructure; o development of enabling technologies; and o uncertain and increasing government regulations. RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR WEBSITES AND SYSTEMS OBSOLETE AND REQUIRE SIGNIFICANT CAPITAL EXPENDITURES The Internet and the electronic commerce industry are characterized by rapid technological change, sudden changes in customer requirements and preferences, frequent new product and service introductions incorporating new technologies and the emergence of new industry standards and practices that could render our existing websites and transaction processing systems obsolete. The emerging nature of these products and services and their rapid evolution will require that we continually improve the performance, features and reliability of our online services, particularly in response to competitive offerings. Our success will depend, in part, on our ability: o to enhance our existing products and services; and o to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. The development of websites and other proprietary technology entails significant technical and business risks and requires substantial expenditures and lead time. We may be unable to use new technologies effectively or adapt our website, proprietary technology and transaction-processing systems to customer requirements or emerging industry standards which could harm our business. Updating our technology internally and licensing new technology from third parties may require significant additional capital expenditures and could affect our results of operations. WE ARE EXPOSED TO RISKS ASSOCIATED WITH ELECTRONIC COMMERCE SECURITY AND CREDIT CARD FRAUD, WHICH MAY REDUCE COLLECTIONS AND DISCOURAGE ONLINE TRANSACTIONS Consumer concerns about privacy or the security of transactions conducted on the Internet may inhibit the growth of the Internet and electronic commerce. To securely transmit confidential information, such as customer credit card numbers, we rely on encryption and authentication technology that we license from third parties. We cannot predict whether the algorithms we use to protect customer transaction data will be compromised. Furthermore, our servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. We may need to expend significant additional capital and other resources to protect against a security breach or to alleviate problems caused by any security breaches. The measures we take to protect against security breaches may not be successful. Our failure to prevent security breaches could harm our business. 22 To date, we have suffered minor losses as a result of orders placed with fraudulent credit card data even though the associated financial institution approved payment of the orders in each case. Under current credit card practices, a merchant is liable for fraudulent credit card transactions where, as is the case with the transactions we process, that merchant does not obtain a cardholder's signature. A failure to adequately control fraudulent credit card transactions could reduce our revenues and harm our business. WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH OUR WEBSITE We may be subject to claims for defamation, negligence, copyright or trademark infringement or other claims relating to the information we publish on our website. These types of claims have been brought, sometimes successfully, against Internet companies as well as print publications in the past. We also utilize email as a marketing medium, which may subject us to potential risks, such as: o liabilities or claims resulting from unsolicited email; o lost or misdirected messages; or o illegal or fraudulent use of email. These claims could result in substantial costs and a diversion of our management's attention and resources, which could harm our business. EFFORTS TO REGULATE OR ELIMINATE THE USE OF MECHANISMS THAT AUTOMATICALLY COLLECT INFORMATION ON VISITORS TO OUR WEBSITE MAY INTERFERE WITH OUR ABILITY TO TARGET OUR MARKETING EFFORTS Websites typically place a small tracking program on a user's hard drive without the user's knowledge or consent. These programs automatically collect data about any visits that a user makes to various websites. Website operators use these mechanisms for a variety of purposes, including the collection of data derived from users' Internet activity. Most currently available Internet browsers allow users to elect to remove these tracking programs at any time or to prevent this information from being stored on their hard drive. In addition, some commentators, privacy advocates and governmental bodies have suggested limiting or eliminating the use of these tracking mechanisms. Any reduction or limitation in the use of this software could limit the effectiveness of our sales and marketing efforts. WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND LEGAL UNCERTAINTIES SURROUNDING THE INTERNET New Internet legislation or regulation or the application of existing laws and regulations to the Internet and electronic commerce could harm our business, financial condition and results of operations. We are subject to regulations applicable to businesses generally and laws or regulations directly applicable to communications over the Internet and access to electronic commerce. Although there are currently few laws and regulations directly applicable to electronic commerce, it is possible that a number of laws and regulations may be adopted with respect to the Internet covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust, taxation and characteristics and quality of products and services. For example, the United States Congress recently enacted Internet laws regarding children's privacy, copyrights and transmission of sexually explicit material. In addition, the European Union recently enacted its own Internet privacy regulations. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations regarding the Internet may decrease the growth of the Internet or electronic commerce, which could, in turn, decrease the demand for our products and services and increase our cost of doing business. In addition, if we were alleged to have violated federal, state or foreign civil or criminal law, we could be subject to liability, and even if we could successfully defend such claims, they may involve significant legal compliance and litigation costs. 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk for changes in interest rates is limited to the exposure related to our debt instruments which are tied to market rates. We plan to ensure the safety and preservation of our invested principal funds by limiting default risks, market risk and reinvestment risk. We plan to invest in high-quality, investment-grade securities. As a result, we do not believe that we are subject to material market risk. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time we are involved in litigation incidental to the conduct of our business. We are not currently a party to any lawsuit or administrative or arbitration proceeding that, in our opinion, is likely to seriously harm our business. From time to time, we receive communications from other parties claiming that products we sell infringe technology rights owned by those third parties. We consider all such claims seriously and handle them appropriately. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In connection with our initial public offering of common stock, we filed a Registration Statement on Form S-1, SEC File No. 333-84723 (the "Registration Statement"), which was declared effective by the Commission on October 13, 1999. Pursuant to the Registration Statement, we registered 5,750,000 shares of our common stock, $.001 par value per share, including 750,000 shares available for sale to the underwriters upon the exercise of their over-allotment option. The aggregate offering price of the shares sold was $69.0 million, $4.8 million of which was applied towards the underwriters' discounts and commissions. Other expenses related to the offering totaled $1.6 million. The net proceeds to us from the sale of common stock in the initial public offering were approximately $62.6 million, including exercise of the underwriters' over-allotment option. We have used a portion of the proceeds for investment in sales and marketing, and general corporate purposes, including capital expenditures ($4.6 million), as well as strategic acquisitions ($4.5 million). The remainder of the proceeds have been invested in short-term, interest-bearing, investment-grade securities. The use of proceeds from the offering does not represent a material change in the use of proceeds described in our final prospectus filed on October 15, 1999. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our 2001 Annual Meeting of Stockholders was held on June 13, 2001. At the meeting, our Board of Directors was elected and the selection of Deloitte & Touche LLP as our independent auditors was ratified. The tabulation of votes on each of the matters is as follows: ELECTION OF DIRECTORS FOR WITHHELD BROKER NON-VOTE Michael Edwards 17,398,427 55,580 0 Ross Bott 17,398,147 55,860 0 Darrell Boyle 17,401,047 52,960 0 Peter Gotcher 17,400,657 53,350 0 Ken Hawk 17,261,175 192,832 0 RATIFICATION OF DELOITTE & TOUCHE LLP AS INDEPENDENT AUDITORS FOR 2001 FOR AGAINST ABSTAIN BROKER NON-VOTE 17,404,233 42,574 7,200 0 ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS AND FINANCIAL STATEMENT SCHEDULES Exhibit No. Description 10.25 Employment Offer letter dated June 1, 2001 between iGo and Scott Shackelton 10.26 Amended and Restated Change of Control Agreement dated June 26, 2001 between iGo and Richard Shaff (b) REPORTS ON FORM 8-K None 25 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. Dated: August 13, 2001 IGO CORPORATION /s/ Scott Shackelton -------------------- Scott Shackelton Senior Vice President and Chief Financial Officer (Duly Authorized Officer, Principal Financial and Accounting Officer) 26

IGO CORP 10-Q