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 September 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 (IRS Employer Identification Number)
incorporation or organization)
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
November 2, 2001
Class Outstanding as of November 2, 2001
----- ----------------------------------
Common stock, $0.001 par value 23,339,973
IGO CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 2001 AND 2000 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 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 23
PART II OTHER INFORMATION 23
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 25
2
IGO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
DOLLARS IN THOUSANDS SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 7,193 $ 20,321
Accounts receivable, net ......................... 5,622 6,875
Inventory, net ................................... 4,661 8,179
Prepaid expenses ................................. 406 905
--------- ---------
Total current assets ..................... 17,882 36,280
Property and equipment, net ........................ 3,551 4,466
Goodwill and other assets, net ..................... 10,980 13,093
--------- ---------
Total ............................... $ 32,413 $ 53,839
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 949 $ 5,117
Accrued liabilities .............................. 2,519 3,446
Current portion of capital lease obligations
and long-term debt ............................. 152 501
Short-term note payable .......................... 80 280
--------- ---------
Total current liabilities ................ 3,700 9,344
Long-term portion of capital lease obligations
and long-term debt ............................. 24 190
--------- ---------
Total liabilities ........................ 3,724 9,534
--------- ---------
Commitments and contingencies (note 6)
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000
shares authorized; 23,339,973 and
23,282,842 shares issued and outstanding .... 23 23
Additional paid-in capital ....................... 87,655 87,921
Deferred compensation ............................ (184) (604)
Receivable from stockholder ...................... (381) (47)
Accumulated deficit .............................. (58,424) (42,988)
--------- ---------
Total stockholders' equity ............... 28,689 44,305
--------- ---------
Total ............................... $ 32,413 $ 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 NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 2001 AND 2000
DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA) THREE-MONTH PERIODS NINE-MONTH PERIODS
ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
Net product revenue ................................ $ 5,420 $ 11,162 $ 22,459 $ 27,990
Cost of goods sold ...................................... 3,911 7,411 17,971 18,903
------------- ------------- ------------- -------------
Gross profit ............................................ 1,509 3,751 4,488 9,087
------------- ------------- ------------- -------------
Operating expenses:
Sales and marketing ................................ 2,259 5,487 9,267 18,017
Product development ................................ 398 881 2,122 3,801
General and administrative ......................... 2,109 1,995 6,393 5,964
Merger and acquisition costs, including amortization
of goodwill and other purchased intangibles ...... 879 527 2,584 1,530
------------- ------------- ------------- -------------
Total operating expenses ...................... 5,645 8,890 20,366 29,312
------------- ------------- ------------- -------------
Loss from operations .................................... (4,136) (5,139) (15,878) (20,225)
Other income, net ....................................... 58 492 442 1,382
------------- ------------- ------------- -------------
Loss before provision for income taxes .................. (4,078) (4,647) (15,436) (18,843)
Provision for income taxes .............................. - - - -
Net loss attributable to common
stockholders ......................................... $ (4,078) $ (4,647) $ (15,436) $ (18,843)
============= ============= ============= =============
Net loss per share:
Basic and diluted .................................. $ (0.17) $ (0.21) $ (0.66) $ (0.90)
============= ============= ============= =============
Weighted-average shares outstanding:
Basic and diluted .................................. 23,340,479 21,632,194 23,321,256 20,996,594
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
IGO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
DOLLARS IN THOUSANDS NINE-MONTH PERIODS ENDED
SEPT. 30, SEPT. 30,
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss ............................................. $(15,436) $(18,843)
Adjustments to reconcile net loss to net cash
used in operating activities:
Compensation expense related to stock options ...... 136 205
Accrued interest on stockholder note receivable .... (28) 6
Provisions for bad debt and inventory .............. 3,178 1,027
Loss on disposition of assets ...................... - 17
Depreciation and amortization ...................... 1,148 878
Amortization of goodwill ........................... 2,584 1,442
Changes in:
Accounts receivable .............................. 817 (3,192)
Inventory ........................................ 776 (4,435)
Prepaid expenses and other assets ................ 499 (412)
Accounts payable, accrued liabilities and
deferred rent ................................... (5,663) (738)
--------- ---------
Net cash used in operating activities .......... (11,989) (24,045)
--------- ---------
Cash flows from investing activities:
Acquisition of property and equipment ................ (137) (1,881)
Acquisition of businesses ............................ - (4,110)
--------- ---------
Net cash used in investing activities .......... (137) (5,991)
--------- ---------
Cash flows from financing activities:
Principal payments on short-term note and capital
leases .............................................. (715) (240)
Loan to stockholder .................................. (306) -
Proceeds from exercise of stock options .............. 19 306
--------- ---------
Net cash (used in) provided by financing
activities .................................... (1,002) 66
--------- ---------
Net decrease in cash and cash equivalents .............. (13,128) (29,970)
Cash and cash equivalents, beginning of period ......... 20,321 57,364
--------- ---------
Cash and cash equivalents, end of period ............... $ 7,193 $ 27,394
========= =========
Supplemental disclosure of cash flows information:
Cash paid during the year for interest ............... $ 66 $ 31
========= =========
Common stock issued in connection with
acquisitions ........................................ $ - $ 8,446
========= =========
Net liabilities acquired in acquisition .............. $ - $ 1,360
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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 notebooks, 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 Acer, Ariba Inc., AT&T Wireless, IBM, Ingram Micro, NEC
Computers, Inc., Perksatwork.com (now Abilizer Solutions), Quixtar, and Tech
Data. 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), 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 nine-month periods ended September 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This standard provides guidance on
the impairment of long-lived assets and for long-lived assets to be disposed of.
The standard supersedes the current authoritative literature on impairments as
well as disposal of a segment of a business and is effective for fiscal years
and interim periods beginning after December 15, 2001. The Company has not yet
completed its analysis of the impact that SFAS No. 144 will have on the
financial condition or results of operations.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at September 30, 2001 and
December 31, 2000:
DOLLARS IN THOUSANDS SEPT. 30, DECEMBER 31,
2001 2000
-------- --------
Trade receivables ........................... $ 6,131 $ 7,501
Other current receivables ................... 556 449
Allowance for bad debts ..................... (1,065) (1,075)
-------- --------
Total accounts receivable, net ......... $ 5,622 $ 6,875
======== ========
7
3. INVENTORY
Inventory consists of the following at September 30, 2001 and December
31, 2000:
DOLLARS IN THOUSANDS SEPT. 30, DECEMBER 31,
2001 2000
-------- --------
Products on hand ............................ $ 6,891 $ 8,964
Inventory reserve ........................... (2,230) (785)
-------- --------
Total inventory, net ................... $ 4,661 $ 8,179
======== ========
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at September 30, 2001
and December 31, 2000:
DOLLARS IN THOUSANDS SEPT. 30, DECEMBER 31,
2001 2000
-------- --------
Leasehold improvements ...................... $ 363 $ 363
Furniture and equipment ..................... 3,398 3,309
Software .................................... 2,047 2,039
Accumulated depreciation .................... (2,257) (1,245)
-------- --------
Total property and equipment, net ...... $ 3,551 $ 4,466
======== ========
5. GOODWILL AND OTHER ASSETS
Goodwill and other assets consists of the following at September 30,
2001 and December 31, 2000:
DOLLARS IN THOUSANDS SEPT. 30, DECEMBER 31,
2001 2000
-------- --------
Goodwill .................................... $14,859 $14,358
Accumulated amortization .................... (4,703) (2,109)
-------- --------
Goodwill, net .......................... 10,156 12,249
-------- --------
Other assets ................................ 1,169 1,089
Accumulated amortization .................... (345) (245)
-------- --------
Other assets, net ...................... 824 844
-------- --------
Total goodwill and other assets, net ... $10,980 $13,093
======== ========
6. 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.
8
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.
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. Xtend had 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 through August 31, 2001. In
August 2001, the Company paid $500,000 as an advance related to post-closing
operating performance pending final analysis to determine the specific amount
earned. 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 September 30, 2001,
management believes an adjustment for impairment is not necessary.
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
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. Management believes
this note is fully collectible.
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 nine months ended September 30, 2001, our net
loss was $15.4 million. At September 30, 2001, we had an accumulated deficit of
approximately $58.4 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 cash break-even
and profitability.
THREE MONTH PERIOD AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARISON TO
THREE MONTH AND NINE MONTH PERIOD ENDED SEPTEMBER 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 $11.2 million for the three
month period ended September 30, 2000 to $5.4 million for the three month period
ended September 30, 2001. For the nine month period ended September 30, 2001,
net revenues were $22.5 million compared to $28.0 million during the nine month
period ended September 30, 2000. The decrease in net revenues in the current
year periods is primarily attributable to a general contraction in purchasing by
our corporate customers during the second and third quarters. Additionally,
revenue levels have declined in part due to the reduction in products offered as
the Company has focused on offering core products which are expected to generate
higher gross margins.
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
nine month periods ended September 30, 2001, the Company recorded increases to
inventory reserves specific to discontinued and excess inventory. Gross margin
for the third quarter of 2001 amounted to 27.8% of net product revenues,
compared with 33.6% in the third quarter of last year. For the first nine months
of 2001, gross margin was 20.0% of net product revenues, compared with 32.5% in
the same period last year. The primary cause for the margin decline was an
approximately $500,000 non-cash charge for discontinued and excess inventory
recorded in the third quarter of 2001. This charge and an additional $1.0
million charge taken in each of the first and second quarters for discontinued
and excess inventory were the primary cause of the lower gross margin for the
first nine 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 $5.5 million for the three month
period ended September 30, 2000 to $2.3 million for the three month period ended
September 30, 2001, and decreased from $18.0 million for the nine month period
ended September 30, 2000 to $9.3 million for the nine month period ended
September 30, 2001. The most significant single component of sales and marketing
expense is advertising costs. From the third quarter of 2000 to the third
quarter of 2001 advertising costs declined from approximately $2.6 million to
$368,000. Expressed as a percentage of net revenue, advertising costs decreased
from 23% in the third quarter of 2000 to 7% in the third quarter of 2001.
Advertising costs declined from $8.8 million, or 31% of net revenue, in the
first nine months of 2000 to $2.0 million, or 9% of net revenue for the first
nine 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 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 $881,000
for the three month period ended September 30, 2000 to $398,000 for the three
month period ended September 30, 2001, and from $3.8 million for the nine month
period ended September 30, 2000 to $2.1 million for the nine month period ended
September 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, depreciation and amortization. General and administrative
expenses were approximately $2.1 million for the quarter ended September 30,
2001 compared to $2.0 million for quarter ended September 30, 2000. Expressed as
a percentage of net revenue, general and administrative expenses increased from
18% to 39%, respectively, due to lower net revenues in the current year period.
General and administrative expenses increased from $6.0 million for the nine
month period ended September 30, 2000 to $6.4 million for the nine month period
ended September 30, 2001. The increase in general and administrative expenses
for the first nine 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 September 30, 2001,
we incurred $879,000 in merger and acquisition costs inclusive of goodwill
amortization compared to $527,000 incurred during the three month period ended
September 30, 2000. In the nine month period ended September 30, 2001, merger
and acquisition costs inclusive of goodwill amortization were $2.6 million
compared to $1.5 million incurred during the nine month period ended September
30, 2000. These 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.
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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 $492,000 for the three month period ended September
30, 2000 to $58,000 for the three month period ended September 30, 2001. For the
nine month period ended September 30, 2001, other income, net, was $442,000
compared to $1.4 million for the nine month period ended September 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 nine month period ended
September 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 $12.0 million for the nine
month period ended September 30, 2001, compared to $24.0 million for the nine
month period ended September 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 accrued liabilities between periods, which
were offset in part by changes in accounts receivable, inventory and prepaid
expenses. Non-cash expenses included in the net loss for the first nine months
of 2001 were approximately $3.4 million higher than for the first nine months of
2000. In the nine month period ended September 30, 2000, increases in inventory
and accounts receivable accounted for approximately $7.6 million of cash used in
operating activities compared to $1.6 million in cash provided by operating
activities in the nine month period ended September 30, 2001, as a result of
decreases in accounts receivable and inventories.
Net cash used in investing activities was $137,000 for the nine month
period ended September 30, 2001, which was attributable to acquisitions of
property and equipment. Net cash used in investing activities was $6.0 million
for the nine month period ended September 30, 2000, and reflects purchases of
property and equipment and acquisitions associated with the growth of our
business.
Net cash used in financing activities was $1.0 million for the nine
month period ended September 30, 2001, compared to $66,000 in cash provided by
financing activities for the nine month period ended September 30, 2000. Cash
used in financing activities in the current year period represented a loan to a
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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 by principal payments on debt.
We currently anticipate that our available funds will be sufficient to
meet our anticipated working capital and capital expenditure needs at least to
the middle of 2002. We may need to raise additional funds 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 QUARTER
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 September
30, 2001, we had an accumulated deficit of approximately $58.4 million. We have
experienced declines in revenue in the second and third quarters of 2001. 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.
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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
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. At an oral hearing before the Nasdaq Listing Qualifications Panel on
August 31, 2001, the Company was granted an extension of time to come into
compliance with the $1.00 minimum bid price requirement. In September 2001,
Nasdaq announced that it had placed a moratorium on its minimum bid price and
public float market value requirements for continued listing. As a result, the
Nasdaq Listing Qualifications Panel determined to continue the listing of iGo's
common stock on The Nasdaq National Market. The hearing file has now been
closed. The requirement for the minimum bid price is expected to resume in
January 2002, and the Company will be required to come into compliance. In the
event that the Company's common stock fails to come into compliance with the
$1.00 minimum bid price requirement and is subsequently delisted from The Nasdaq
National Market, 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.
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;
15
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.
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 OR
EMPLOYEES TERMINATE EMPLOYMENT
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,
INCREASE OUR NET LOSSES, 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.
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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
relationships with Acer America and Quixtar. 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 and Acer 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. 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. To
date, the aforementioned relationships have attracted a significant number of
new customers each year.
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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 nine month period ended September 30, 2001, approximately 21%
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.
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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.
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
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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.
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 79% 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.
OUR FUTURE BUSINESS GROWTH MAY BE HINDERED BY THE DECLINE IN BUSINESS TRAVEL
SPENDING AND IN AIR TRAVEL
The slowing economy coupled with the tragic events of September 11, 2001 has
many businesses and mobile professionals reluctant to travel as frequently as in
previous quarters. Corporate America has reconsidered its assumption that
constant travel is simply a cost of doing business, and many companies are
restricting employees from traveling by air. According to a recent nationwide
study by the Travel Business Roundtable, many travelers say their business
travel patterns will not resume to previous levels for another six months or
more. In fact, 17% of all travelers surveyed say they are traveling less than
before September 11, 2001.
Although this reduction in air travel and business travel in general may be
only a temporary reaction to recent events, we may witness a significant
permanent reduction in travel spending by businesses. Researchers at Forrester
recently downgraded their estimate for online travel spending for the year,
cutting the forecast by 15% from $16.7 billion to $14.2 billion.
The decline in the number of business travelers has forced airlines to reduce
capacity by 15-20%, and some airlines may go out of business as a result. These
factors may hinder our ability to sustain existing and create new strategic
relationships with airlines as they cut their marketing budgets, reduce
capacity, and downsize.
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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 CONTINUED ACCEPTANCE AND USE OF THE
INTERNET AS AN EFFECTIVE METHOD OF COMMERCE BY CONSUMERS AND BUSINESS
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:
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:
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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.
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
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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.
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.
This risk is limited due to the fact that we have minimal debt. 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
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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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
None
(b) REPORTS ON FORM 8-K
None
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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: November 13, 2001
IGO CORPORATION
/s/ Scott Shackelton
-----------------------------------
Scott Shackelton
Senior Vice President
and Chief Financial Officer
(Duly Authorized Officer, Principal
Financial and Accounting Officer)
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