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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K/A No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2001, or
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from _____ to _________.
Commission file number:
IGO CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 94-3174623
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
9393 Gateway Drive
Reno, Nevada 89511
(Address of principal executive offices)
Registrant's telephone number, including area code: (775) 746-6140
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant based upon the closing sale price of the Registrant's Common
Stock on the Nasdaq National Market on March 28, 2002 was approximately
$3,388,141 as of such date. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
There were 25,386,438 shares of Registrant's Common Stock issued and
outstanding as of March 31, 2002.
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EXPLANATORY NOTE
We are amending Item 3 of Part I and Items 6, 7 and 8 of Part II of
this report as a result of the restatement of our 2001 consolidated financial
statements, as well as the disclosure regarding our selected interim financial
information for the second, third and fourth quarters of fiscal 2001. The
information in Part II, Item 7b under the heading "Factors That May Affect
Future Results" has been updated to reflect the risks applicable as of the date
of this amendment. The other items or sections of this report not affected by
the restatement have been excluded. The effects of the restatement are
incorporated into our 2001 consolidated financial statements and are reflected
in management's discussion and analysis of our operating results in this report.
See Note 17 to the consolidated financial statements included herein.
2
IGO CORPORATION
FORM 10-K/A NO. 1
FOR THE YEAR ENDED DECEMBER 31, 2001
INDEX
PART I
PAGE
----
Item 3. Legal Proceedings.................................................. 4
PART II
Item 6. Selected Consolidated Financial Data............................... 5
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 6
Item 7a. Quantitative and Qualitative Factors About Market Risk ............16
Item 7b. Factors that May Affect Future Results.............................16
Item 8. Financial Statements and Supplementary Data........................27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....27
Signatures .................................................................F-23
3
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,"
"we," "our," and "us"), and should be read in conjunction with, and is qualified
in its entirety by, the 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-K 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, Xtend, 1-800-Batteries, Road Warrior and
PowerXtender are registered trademarks of iGo or its subsidiaries. Mobile
Technology Outfitter 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.
On March 24, 2002, iGo entered into a definitive agreement to be
acquired by Mobility Electronics, Inc. of Phoenix, Arizona. Under the agreement,
our stockholders would receive an aggregate of $5,100,000 in cash and 2,600,000
shares of Mobility Electronics common stock at the transaction closing and up to
an additional $1,000,000 in cash and 500,000 additional Mobility Electronics
shares one year following the transaction closing subject to certain conditions.
The closing of the transaction is subject to certain material conditions,
including the transaction's approval by our stockholders and the effectiveness
of a registration statement to be filed with the Securities and Exchange
Commission, and there can be no assurance that all of the conditions will be
satisfied. Accordingly, the balance of this report presents the status and
condition of iGo as a stand-alone operation without taking into account the
impact of the pending acquisition by Mobility Electronics.
PART I
ITEM 3. LEGAL PROCEEDINGS
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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
arbitration proceeding the outcome of which we believe will have a material
adverse effect on our financial position, results of operations or liquidity.
The Securities and Exchange Commission has entered a formal order of
private investigation concerning the events underlying our revisions of our
fiscal 2000 operating results based on adjustments to fourth quarter 2000
revenue, which results were announced and revised in certain press releases
issued in January and March of 2001. In connection with its investigation, the
Commission will also be reviewing the restatement of our financial statements
set forth in our 2001 Annual Report on Form 10-K and this amendment thereto, and
certain related accounting, sales and organizational matters. We have been
cooperating fully with the Staff of the Commission in its investigation and to
date the Staff has made no determinations that we are aware of with respect to
this investigation.
4
PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
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The following selected financial data should be read in conjunction
with the consolidated financial statements and related notes to the consolidated
financial statements and "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations." The statements of operations
data for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 and the
balance sheet data at December 31, 2001, 2000, 1999, 1998 and 1997 are derived
from audited financial statements.
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(as restated*)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Net product revenue ................... $ 28,886 $ 39,947 $ 21,043 $ 12,318 $ 7,422
Development revenue ................... -- -- -- 502 665
--------- --------- --------- --------- ---------
Total net revenues ............... 28,886 39,947 21,043 12,820 8,087
Cost of goods sold ......................... 24,435 26,914 14,793 8,602 5,320
--------- --------- --------- --------- ---------
Gross profit ............................... 4,451 13,033 6,250 4,218 2,767
Operating expenses:
Sales and marketing ................... 11,855 23,663 15,396 3,883 2,485
Product development ................... 2,590 4,800 1,544 511 113
General and administrative ............ 9,064 7,961 4,657 1,666 1,076
Merger and acquisition costs, including
amortization of goodwill and other
purchased intangibles ................. 12,956 2,357 -- -- --
--------- --------- --------- --------- ---------
Total operating expenses ......... 36,465 38,781 21,597 6,060 3,674
--------- --------- --------- --------- ---------
Loss from operations ....................... (32,014) (25,748) (15,347) (1,842) (907)
Other income (expense), net ................ 166 1,847 334 (44) 21
--------- --------- --------- --------- ---------
Net loss ................................... (31,848) (23,901) (15,013) (1,886) (886)
Preferred stock dividends .................. -- -- -- (247) (140)
--------- --------- --------- --------- ---------
Net loss attributable to common stockholders $(31,848) $(23,901) $(15,013) $ (2,133) $ (1,026)
========= ========= ========= ========= =========
Net loss per share--basic and diluted ...... $ (1.37) $ (1.11) $ (1.01) $ (0.36) $ (0.19)
========= ========= ========= ========= =========
Weighted-average shares outstanding ........ 23,328 21,555 14,818 5,998 5,544
========= ========= ========= ========= =========
* See Note 17 to the Company's 2001 consolidated financial statements included
herein for a discussion of such restatement.
Cost of goods sold and gross profit were adversely impacted in 2001 by
additional inventory write-downs related to the transition of our product
strategy toward higher margin accessory products, as well as normal write-downs
for excess or obsolete product inventory. The additional write-downs related to
the transition of our product strategy amounted to approximately $3.3 million.
In addition, we recorded a write-down of goodwill of approximately $9.5 million
during the fourth quarter of 2001, which is included in merger and acquisition
costs.
5
DECEMBER 31,
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2001 2000 1999 1998 1997
----- ----- ----- ----- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 5,846 $ 20,321 $ 57,364 $ 2,504 $ --
Working capital........................................ 8,194 26,936 55,776 3,447 157
Total assets........................................... 17,556 53,839 67,667 5,536 2,384
Long-term portion of capital lease obligations and long
term debt........................................... 19 190 788 23 20
Mandatory redeemable preferred stock................... -- -- -- 7,890 1,680
Total stockholders' equity (deficit)................... 12,303 44,305 59,143 (3,425) (1,314)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
-------------------------
WE REFER THE READER TO THE DISCLOSURE APPEARING ON PAGE 3 OF THIS
REPORT REGARDING OUR FORWARD-LOOKING STATEMENTS AND THEIR ASSOCIATED RISKS.
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. Since 1997, we have significantly increased the depth of our management
team to help implement our growth strategy. 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.
Product revenue is generally recognized when persuasive evidence of a
sale arrangement exists, shipment has occurred, title has passed, sales price is
fixed or determinable, and collectibility is reasonably assured. Product revenue
is recorded 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. During
2001, approximately 83% of customer purchase transactions were 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 $31.8 million in 2001, $23.9 million in 2000,
and $15.0 million in 1999. At December 31, 2001, we had an accumulated deficit
of approximately $74.8 million. The net losses resulted from costs associated
with marketing programs to attract new customers, merger and acquisition costs,
including amortization of goodwill, developing our website and proprietary
databases, provisions for excess and discontinued inventory, increased
provisions for bad debts and the development of our operational infrastructure.
6
Although we have reduced sales and marketing 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of
operations is based upon our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We evaluate, on an on-going basis, our estimates and judgments,
including those related to sales returns, bad debts, excess inventory and
purchase commitments, and contingencies and litigation. We base our estimates on
historical experience and assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies, among others,
affect our more significant judgments and estimates used in the preparation of
our Consolidated Financial Statements:
o Revenue Recognition and Return Allowances;
o Inventory Reserves;
o Impairment of Long Lived Assets;
o Bad Debt Reserves; and
o Deferred Income Taxes.
Product revenue is generally recognized when persuasive evidence of a
sale arrangement exists, shipment has occurred, title has passed, sales price is
fixed or determinable, and collectibility is reasonably assured. Evidence of a
sale arrangement may include one or more factors and may require us to make
subjective determinations regarding the extent to which an arrangement exists.
Collectibility determinations can be subjective and are generally based on a
customer's payment history or, in the case of new customers, internal credit
evaluations based upon available information. These subjective determinations
affect the accuracy of our revenue recognition. We record a provision for
returns on product sales in the same period as the related revenues are
recorded. These estimates are based on historical sales returns and analysis of
credit memo data. If the data used to calculate these estimates does not
properly anticipate future returns, revenue could be misstated.
We write down inventory for estimated excess and obsolete inventory
equal to the difference between the cost of inventory and the estimated net
realizable value based upon assumptions about future demand and market
conditions. Although we strive to ensure the accuracy of our forecasts of future
product demand, any significant unanticipated changes in demand or technological
developments could have a significant impact on the value of our inventory and
commitments, and our reported results. If actual market conditions are less
favorable than those projected, additional inventory write-downs, purchase
commitment reserves, and charges against earnings may be required.
During the fourth quarter of 2001, in accordance with SFAS 121
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed Of," we estimated the future cash flows of the businesses we
acquired based on what we believed to be reasonable assumptions and projections.
Our estimates of the future discounted and undiscounted cash flows attributable
7
to the unamortized balances of goodwill related to these business acquisitions
were less than the respective carrying values, as discussed further below.
Accordingly, we recorded a $9,457,000 write-down of goodwill in 2001, leaving a
remaining goodwill balance of $591,000. Although we believe our estimates to be
accurate, future events (such as technological developments, loss of significant
customers or changes in product demand) could further erode the value of the
goodwill related to these acquired businesses and result in further goodwill
write-downs.
We maintain bad debt allowances against our receivables for potential
losses resulting from the inability of our customers to make required payments.
We analyze accounts receivable and historical bad debts, customer
concentrations, customer creditworthiness, current economic trends and changes
in customer payment terms and practices when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances and charges against earnings may be required.
Due to the uncertainty of the realization of certain tax carryforward
items, a valuation allowance against deferred income taxes has been established
in the aggregate of $24.6 million at December 31, 2001. The amount of this
allowance has been determined based on an assessment of our ability to generate
sufficient taxable income prior to the expiration of the loss and credit
carryforwards. Regardless of our internal assessment, the availability of the
loss and credit carryforwards may be subject to further limitation under the
Internal Revenue Code in the event of a significant change of control.
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
RESTATEMENT OF PREVIOUSLY REPORTED AMOUNTS
Our consolidated financial statements for the year ended December 31,
2001 have been restated from those previously reported to increase both net
product revenue and cost of goods sold by $932,000 as a result of corrections to
accounting entries duplicating the elimination of certain intercompany
transactions during the period. Because net product revenue and cost of goods
sold were understated by equal amounts, their restatement results in no change
our previously reported gross profit dollars, net loss or balance sheet
information for such periods.
The significant effects of this restatement are disclosed in Note 17 to
the accompanying consolidated financial statements and are incorporated in
management's discussion and analysis.
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 increased from $21.0 million in 1999 to
$39.9 million in 2000 primarily as a result of our purchases of Xtend Micro
Products, Road Warrior International and Cellular Accessory Warehouse, expanded
marketing efforts and strategic relationship initiatives, repeat purchases from
pre-existing buyers and increased success in selling to enterprises, or business
to business. Net product revenue decreased from $39.9 million in 2000 to $28.9
million in 2001. The decrease in net revenues in the current year is primarily
attributable to a general contraction in purchasing by our corporate customers
during the second, third and fourth quarters. Additionally, revenue levels have
declined in part due to the reduction in products offered as we have focused on
offering core accessory products which are expected to generate higher gross
margins. Among other factors, the continuation of current general economic
conditions and the resulting purchasing practices of our customers in 2002 may
prevent us from meeting or exceeding 2001 revenue levels.
8
COST OF GOODS SOLD AND GROSS MARGIN. Cost of goods sold consists
primarily of the cost of products sold to customers, costs associated with
excess and discontinued inventory, inbound shipping expense and outbound
shipping charges. Cost of goods sold increased from $14.8 million in 1999 to
$26.9 million in 2000, and decreased to $24.4 million in 2001. Gross margin
represents the percentage derived by dividing gross profit by net product
revenue. The increase in gross margin from 30% in 1999 to 33% in 2000 was
primarily the result of a shift in the overall sales mix away from lower margin
gift and gadget items towards higher margin, model-specific accessories,
particularly our proprietary line of power and connectivity accessories,
combined with better freight management. The decrease in gross margin from 33%
in 2000 to 15% in 2001 was primarily due to increases of approximately $3.3
million to inventory reserves specific to discontinued and excess inventory
resulting from our continued efforts to focus on targeted core products, as well
as unanticipated changes in customer demand for certain products. Also
contributing to the lower 2001 gross margin were inventory shrinkage and sales
of closeout inventory. We anticipate that our gross margin will increase in 2002
from the 2001 level as a result of our shift to sales of core accessory products
with a higher profit margin, as well as the adverse impact of significant
additional inventory reserves on 2001 gross margin.
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 increased from $15.4 million in 1999 to $23.7
million in 2000, and decreased to $11.9 million in 2001. Advertising and
promotional expenses increased from $10.4 million in 1999 to $11.7 million in
2000, and declined to $2.2 million in 2001. All other sales and marketing
expenses, consisting primarily of payroll expenses, increased from $5.1 million
in 1999 to $12.0 million in 2000, and decreased to $9.7 million in 2001. During
2000, we migrated from a sales model driven by advertising spending to one based
on leveraging our direct sales force and business partners, aggressive pursuit
of pay-for-performance marketing opportunities and the continued refinement of
our database profiling for direct marketing campaigns. Additionally, we
significantly reduced our reliance on outside agencies and performed more work
internally. The expense decrease in 2001 is principally due to continued efforts
to reduce spending and to redirect marketing expenditures into programs with the
greatest benefit potential. Reductions in staffing, lower incentive plan
expenses and lower fulfillment expenses, which decline due to lower sales
volume, also contributed to the cost decline in 2001. We expect that our efforts
to control expenses, and make cuts where appropriate, will keep sales and
marketing expenses from increasing significantly in 2002 from the 2001 level.
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
increased from $1.5 million in 1999 to $4.8 million in 2000, and decreased to
$2.6 million in 2001. The higher expense in 2000 was primarily attributable to
additional investments made to improve the functionality and speed of our
existing website, planning and design costs incurred for the next generation of
our website, the acquisition of Xtend Micro Products and the overall expansion
of our mobile product offerings. The decrease in 2001 was attributable to
completion in early to mid-2001 of several of the development projects initiated
in 2000. We do not anticipate any significant change in product development
expense levels in 2002 from those recorded in 2001.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
of salaries and related costs for our executive, administrative, human
resources, 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 increased from $4.7 million in
1999 to $8.0 million in 2000 and to $9.1 million in 2001. During 2000, the
increase in general and administrative expense was attributable to three primary
factors: first, an increase in non-cash expenses, depreciation and deferred
9
compensation; second, the January 2000 move into a significantly larger facility
to accommodate our growth; and third, increased administrative headcount as a
result of our acquisition activity. The increase in general and administrative
expenses for 2001 over the prior year period was primarily attributable to one
time charges related to our reorganization in the first half of 2001, costs
associated with operations of Xtend Micro Products, which was acquired in late
2000, higher professional fees, a provision for an estimated sales and use tax
deficiency and costs associated with restructuring the lease of our Reno
facility to significantly reduce the term. These increased expenses were
partially offset by general staff reductions during 2001.
In 1999, we recorded $2.0 million in deferred compensation for new
option grants to employees and directors, and expensed $387,000, principally
related to these grants. No deferred compensation was recorded for stock option
grants in 2000 and 2001. In 2000 and 2001 we expensed $259,000 and $166,000,
respectively, of the previously recorded deferred compensation. This deferred
compensation amount represents the difference between the deemed fair value of
the common stock and the exercise price at the time the options were granted,
and is expensed on a straight line basis over the four-year vesting period of
the options. In 2000 and 2001 we recorded adjustments of $942,000 and $312,000,
respectively, reducing deferred compensation as a result of employee
terminations and option cancellations.
MERGER AND ACQUISITION COSTS, INCLUDING AMORTIZATION OF GOODWILL AND
OTHER PURCHASED INTANGIBLES. During 2000, we incurred an aggregate of $2.4
million in merger and acquisition costs, consisting of $300,000 in
transaction-related expenses and $2.1 million in goodwill amortization resulting
from the January 2000 acquisitions of Road Warrior and Cellular Accessory
Warehouse and the August 2000 acquisition of Xtend Micro Products. Goodwill
related to these acquisitions is amortized on a straight-line basis over their
respective useful lives, generally 40 to 60 months. There were no merger and
acquisition related costs in 1999. In 2001, we incurred $13.0 million in
non-cash merger and acquisition costs. These costs include normal amortization
of goodwill based on the originally assigned useful lives, amounting to
approximately $3.5 million. Additionally, in the fourth quarter of 2001, we
recorded a $9.5 million write-down of these assets based on actual losses
realized in the third and fourth quarters of 2001 and similar forecasted
operating results of the acquired businesses in 2002 based on the impact of the
events of September 11, 2001 on the travel industry and the overall effect on
the economy, resulting in reduced purchases by our distributors and customers,
all of which indicated an impairment of the future economic benefits of these
assets. As a result of our adoption of SFAS 142 "Goodwill and Other Intangible
Assets" on January 1, 2002, goodwill amortization will cease.
OTHER INCOME, NET. Other income, net, consists primarily of interest
income earned on cash and cash equivalents, interest expense on borrowings and
capital leases, and losses resulting from sale-leaseback transactions and
disposals of fixed assets. Other income, net, changed from income of $334,000 in
1999 to $1.8 million in 2000 and $166,000 in 2001. The change from 1999 to 2000
was primarily a result of $2.2 million in interest income earned on the net
proceeds from the initial public offering in October 1999 partially offset by a
loss of $278,000 on asset disposals and $170,000 in interest expense. The change
from 2000 to 2001 was primarily the result of a decline in interest income to
$530,000 due to the decline of interest bearing account balances and a loss of
$501,000 from the disposal and write-off of assets. Interest expense declined to
$75,000 as a result of declining debt.
INCOME TAXES. We have experienced losses since our inception and,
accordingly, have net operating loss carryforwards. However, because of
uncertainty regarding realizability, we have provided a full valuation allowance
against this deferred tax asset. Utilization of our net operating loss
carryforwards, which begin to expire in 2011, may be subject to certain
limitations under Sections 382 and 383 of the Internal Revenue Code.
10
NET LOSS. Our net loss increased from $15.0 million in 1999 to $23.9
million in 2000 and $31.8 million in 2001. The increase in net loss from 1999 to
2000 related primarily to increased expenses incurred, particularly relating to
sales and marketing as well as expenses associated with our move to a larger
facility. The increase from 2000 to 2001 is related primarily to the one-time
write-off of $9.5 million in goodwill associated with our acquisition activity
as well as lower gross margins on reduced product sales.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly statements of
operations data for each of the eight quarters in the period ended December 31,
2001. In the opinion of management, this unaudited information has been prepared
on the same basis as the annual financial statements, and includes all
adjustments (consisting only of normal recurring adjustments) necessary for the
fair presentation of our results of operations for those periods. This
information should be read in conjunction with the financial statements and
related notes appearing elsewhere in this filing. In addition, certain of the
information reflected in the following table varies from amounts previously
reported for the third quarters of 2001 and 2000, the second quarter of 2001 and
the fourth quarters of 2001 and 2000, and the differences between those
previously reported amounts and the restated amounts are discussed below under
"--Reconciliation of Previously Reported Amounts." The results of operations for
any quarter are not necessarily indicative of the results of operations for any
future period.
THREE-MONTH PERIODS ENDED
-------------------------
DEC. 31, SEPT. 30, JUNE 30, MAR. 31, DEC. 31, SEPT. 30, JUNE 30, MAR. 31,
2001 2001 2001 2001 2000 2000 2000 2000
---- ---- ----- ----- ---- ---- ----- ----
(as (as (as (as (as
restated) restated) restated) restated) restated)
(DOLLARS IN THOUSANDS)
Revenues:
Net product revenue........... $ 6,190 $ 5,313 $ 7,747 $ 9,636 $ 12,646 $ 10,473 $ 9,224 $ 7,604
--------- -------- -------- -------- --------- --------- -------- --------
Cost of goods sold............... 5,473 4,496 6,730 7,736 8,222 7,200 6,267 5,225
--------- -------- -------- -------- --------- --------- -------- --------
Gross profit 717 817 1,017 1,900 4,424 3,273 2,957 2,379
Operating expenses:
Sales and marketing........... 2,132 2,690 3,138 3,895 5,667 5,466 5,595 6,934
Product development........... 435 432 880 843 999 881 1,291 1,629
General and administrative.... 2,670 2,109 2,026 2,259 1,997 1,995 2,000 1,970
Merger and acquisition costs.. 10,372 878 853 853 827 527 404 599
--------- -------- -------- -------- --------- --------- -------- --------
Total operating expenses.... 15,609 6,109 6,897 7,850 9,490 8,869 9,290 11,132
--------- -------- -------- -------- --------- --------- -------- --------
Loss from operations............. (14,892) (5,292) (5,880) (5,950) (5,066) (5,596) (6,333) (8,753)
Other income (expense), net...... (133) 58 (103) 344 465 492 344 546
--------- -------- -------- -------- --------- --------- -------- --------
Net loss.................... $(15,025) $(5,234) $(5,983) $(5,606) $ (4,601) $ (5,104) $(5,989) $(8,207)
========= ======== ======== ======== ========= ========= ======== ========
Net loss per share:
Basic and diluted............ $ (0.64) $ (0.22) $ (0.26) $ (0.24) $ (0.20) $ (0.24) $ (0.29) $ (0.40)
========= ======== ======== ======== ========= ========= ======== ========
Cost of goods sold was adversely impacted in the 2001 quarters by
additional inventory write-downs related to the transition of our product
strategy toward higher margin accessory products, as well as write-downs for
excess or obsolete product inventory. These additional write-downs amounted to
approximately $1.0 million, $1.0 million, $500,000 and $800,000 in the first,
second, third and fourth quarters of 2001, respectively. In addition, we
recorded a write-down of goodwill of approximately $9.5 million during the
fourth quarter of 2001, which is included in merger and acquisition costs.
11
RECONCILIATION OF PREVIOUSLY REPORTED AMOUNTS
Our interim financial information for the quarter ended December 31,
2001 has been restated from that previously reported in our 2001 Annual Report
on Form 10-K to increase both net product revenue and cost of goods sold by
$436,000 as a result of corrections to accounting entries duplicating the
elimination of certain intercompany transactions during the period, and to
record the following expenses, previously reported in the fourth quarter, in the
quarter ended June 30, 2001: (1) cost of goods sold of $62,000 for inventory
pricing and tracking errors, (2) sales and marketing expense of $26,000 relating
to the provision for bad debts and (3) other expense, net of $144,000 for a
write-off of the net book value of website hardware and software resulting from
the implementation of our enhanced website. As a result of these adjustments,
the Company's net loss for the second quarter was increased by approximately
$232,000 and was reduced by approximately $232,000 for the fourth quarter from
the previously reported amounts.
Our interim financial information for the quarter ended September 30,
2001 has been restated from that previously reported on our Form 10-Q filed for
such period to (1) reduce net product revenue and cost of goods sold by $259,000
and $140,000, respectively, for a transaction subsequently determined to be a
consignment arrangement, (2) recognize cost of goods sold of $573,000 for
inventory pricing and tracking errors, (3) record additional sales and marketing
expense of $431,000 for an increase in the provision for bad debts of $359,000
and certain severance expenses of $72,000 not previously reported for the
quarter, and (4) record additional product development expense of $34,000 for
certain severance expenses not previously reported for the quarter. This
information has been further restated from that previously reported in our 2001
Form 10-K to increase both net revenues and cost of goods sold by $152,000 as a
result of corrections to accounting entries duplicating the elimination of
certain intercompany transactions during the period. As a result of these
adjustments, our net loss for the third quarter increased by approximately $1.2
million from the previously reported amount on our Form 10-Q filed for such
period. The foregoing adjustments are incorporated into our 2001 consolidated
statements of operations and reflected in management's discussion and analysis
of our 2001 operating results in this report.
Our interim financial information for the quarter ended June 30, 2001
has been restated from that previously reported on our Form 10-Q filed for such
period (as well as our 2001 Form 10-K) to (1) increase both second quarter net
product revenue and cost of goods sold by $344,000 as a result of corrections to
accounting entries duplicating the elimination of certain intercompany
transactions during the period, (2) recognize additional second quarter cost of
goods sold of $62,000 for inventory pricing and tracking errors, (3) record
additional second quarter sales and marketing expense of $26,000 for an increase
in the provision for bad debts and (4) record $144,000 of other expense for a
write-off of the net book value of website hardware and software resulting from
the implementation of our enhanced website. As a result of these adjustments,
the Company's net loss for the second quarter was increased by approximately
$232,000 from the previously reported amount. The foregoing adjustments are
incorporated into our 2001 consolidated statements of operations and reflected
in management's discussion and analysis of our 2001 operating results in this
report. The transactions noted in (2), (3) and (4), which had been recognized in
the fourth quarter of 2001, were previously identified during the Company's 2001
audit, but were deemed not material and therefore did not warrant restatement of
the second quarter. Since the second quarter is being restated for the matter
noted in (1), the Company determined that these transactions would also be
corrected as part of the restatement.
Our interim financial information for the quarters ended September 30,
2000 and December 31, 2000 has been restated from that previously reported on
our Form 10-Q and Form 10-K for such periods to reflect the reclassification of
a significant sale transaction from the third to the fourth quarter of 2000
based upon a determination that all elements of revenue recognition were not met
for recognition in the third quarter. The effect of the reclassification of such
transaction from the third to the fourth quarter of 2000 on the previously
reported results is to (1) reduce net revenues, cost of goods sold and sales and
marketing expense by $689,000, $211,000, and $21,000, respectively, in the third
quarter of 2000, (2) increase net revenues, cost of goods sold and sales and
marketing expense for the fourth quarter of 2000 by corresponding respective
12
amounts, (3) increase our net loss for the third quarter of 2000 by $457,000 and
(4) decrease our net loss for the fourth quarter of 2000 by $457,000. The
foregoing adjustments represent only differences between interim periods and do
not impact our consolidated operating results previously reported for the full
year ended December 31, 2000.
A summary of the cumulative effects of these restatements on the
operating results first reported for the applicable period is as follows:
THREE-MONTH PERIODS ENDED
DEC. 31, 2001 SEPT. 30, 2001 JUNE 30, 2001
----------------------- ---------------------- ----------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Revenues:
Net product revenue ......... $ 5,754 $ 6,190 $ 5,420 $ 5,313 $ 7,403 $ 7,747
--------- --------- --------- --------- --------- ---------
Cost of goods sold ............... 5,099 5,473 3,911 4,496 6,324 6,730
--------- --------- --------- --------- --------- ---------
Gross profit ..................... 655 717 1,509 817 1,079 1,017
Operating expenses:
Sales and marketing ......... 2,158 2,132 2,259 2,690 3,112 3,138
Product development ......... 435 435 398 432 880 880
General and administrative .. 2,670 2,670 2,109 2,109 2,026 2,026
Merger and acquisition costs 10,372 10,372 879 878 853 853
--------- --------- --------- --------- --------- ---------
Total operating expenses 15,635 15,609 5,645 6,109 6,871 6,897
--------- --------- --------- --------- --------- ---------
Loss from operations ............. (14,980) (14,892) (4,136) (5,292) (5,792) (5,880)
Other income, net ................ (277) (133) 58 58 41 (103)
--------- --------- --------- --------- --------- ---------
Net loss ............... $(15,257) $(15,025) $ (4,078) $ (5,234) $ (5,751) $ (5,983)
========= ========= ========= ========= ========= =========
Net loss per share:
Basic and diluted .......... $ (0.65) $ (0.64) $ (0.17) $ (0.22) $ (0.25) $ (0.26)
========= ========= ========= ========= ========= =========
13
THREE-MONTH PERIODS ENDED
DEC. 31, 2000 SEPT. 30, 2000
----------------------- -----------------------
AS PREVIOUSLY AS AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Revenues:
Net product revenue ......... $ 11,957 $ 12,646 $ 11,162 $ 10,473
--------- --------- --------- ---------
Cost of goods sold ............... 8,011 8,222 7,411 7,200
--------- --------- --------- ---------
Gross profit ..................... 3,946 4,424 3,751 3,273
Operating expenses:
Sales and marketing ......... 5,646 5,667 5,487 5,466
Product development ......... 999 999 881 881
General and administrative .. 1,997 1,997 1,995 1,995
Merger and acquisition costs 827 827 527 527
--------- --------- --------- ---------
Total operating expenses 9,469 9,490 8,890 8,869
--------- --------- --------- ---------
Loss from operations ............. (5,523) (5,066) (5,139) (5,596)
Other income, net ................ 465 465 492 492
--------- --------- --------- ---------
Net loss ............... $ (5,058) $ (4,601) $ (4,647) $ (5,104)
========= ========= ========= =========
Net loss per share:
Basic and diluted .......... $ (0.22) $ (0.20) $ (0.21) $ (0.24)
========= ========= ========= =========
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 had
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. 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 $12.8 million for the year
ended December 31, 2001, $30.0 million for the year ended December 31, 2000 and
$11.4 million for the year ended December 31, 1999. Net cash used in operating
activities consisted primarily of net losses and a decrease in accounts payable,
partially offset by increased non-cash expenses including a $9.5 million
write-down of goodwill, higher goodwill amortization resulting from the
acquisition of Xtend Micro Products in August 2000 and increased provisions for
bad debt and inventory.
Net cash used in investing activities was $886,000 for the year ended
December 31, 2001, which was attributable to $500,000 related to business
acquisitions, $400,000 for acquisitions of property and equipment and $14,000 in
proceeds from fixed asset disposals. Net cash used in investing activities was
$7.1 million for the year ended December 31, 2000. This amount was primarily
attributable to $2.6 million for acquisition of property and equipment and $4.5
million for acquisition of businesses. For the year ended December 31, 1999, net
cash used in investing activities was $3.8 million, of which $702,000 was
financed through sale-leaseback transactions.
Net cash used in financing activities was $824,000 for the year ended
December 31, 2001, which represents payments on debt and a loan to our former
Chairman and Chief Executive Officer. Net cash provided by financing activities
was $60,000 for the year ended December 31, 2000, and $70.1 million for the year
14
ended December 31, 1999. Cash provided by financing activities reflected sales
of preferred stock, as well as proceeds received from the exercise of stock
options and warrants, equipment leases and bank borrowings and our initial
public offering in October 1999. On June 23, 1999, we entered into a lease to
finance the acquisition of equipment. The lease expires 42 months from the date
of the lease. As of December 31, 2001, the aggregate obligation under this
capital lease was $137,000.
On July 30, 1999, we received gross proceeds of $5.8 million from the
sale of Series C preferred stock and entered into a loan agreement, effective
through January 30, 2000, which provided for borrowings of up to $3.5 million.
On July 30, 1999, we borrowed $1.2 million under this facility. Borrowings under
this credit facility bear interest at 11% per annum, are due in 36 months and
are secured by substantially all of our assets. The terms of the debt required
interest-only payments for the first 12 months and interest and principal
repayments for the next 24 months. This debt is secured but subordinate to
future credit arrangements with banks of similar lenders. As of December 31,
2001, we had an outstanding balance of $54,000. This reflects the original loan
amount of $1.2 million net of a conversion of $980,000 into 124,982 shares of
our capital stock in connection with our initial public offering in October 1999
and $137,000 in cash payments. The draw-down period under this facility ended
January 30, 2000.
We have experienced negative cash flows from operations of $11.4
million, $30.0 million and $12.8 million for the years ended December 31, 1999,
2000 and 2001, respectively. Recurring losses and negative cash flows from
operations and limited financing opportunities raise substantial doubt about our
ability to continue as a going concern. We believe that if we are able to
execute in accordance with our business and financial plans, we will have
sufficient cash to fund operations. We anticipate that in 2002 we will be able
to significantly increase our gross margins on product sales and further reduce
our expenses while maintaining or growing our revenue levels. With a targeted
focus on high margin core products and improved inventory control resulting in
significantly reduced excess and obsolete inventory charges we believe that we
will be able to achieve improved gross margins. Additionally, we have taken
steps to reduce costs through several initiatives including: further downsizing
the workforce and facility cost reductions resulting from a planned relocation
of our main facility in Reno to a smaller, less costly facility in Reno. If we
are successful in implementing these plans, we believe that our current cash and
cash from operations will be adequate to fund our cash requirements through
December 31, 2002. This estimate assumes that we will be able to meet quarterly
revenue targets in our second, third and fourth quarters in excess of those
recorded in the third and fourth quarters of 2001, achieve significantly higher
percentage gross margins than those achieved in each of the prior three years
and reduce expenses substantially below those realized in the fourth quarter of
2001, excluding the write down of goodwill.
We may need to raise additional funds before the end of 2002 in the
event that we fail to generate sufficient cash from operations or experience
unanticipated or excessive expenditures. We have no commitments and are not
seeking commitments for additional financing. If we were to seek additional
financing there can be no assurance that we would be successful in obtaining any
additional financing on terms acceptable to iGo or its stockholders. If we raise
additional funds through the issuance of equity securities or convertible debt
securities, our existing stockholders may experience significant dilution. For a
discussion of various risks that may impact the likelihood that we will be able
to generate cash from operations or financing activities, please see "Item 7b -
Factors that May Effect Future Results" below.
15
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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. The adoption of SFAS No. 133 did not have a material impact on our
consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued two new
standards, 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 141 requires the purchase method of
accounting for all business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. SFAS 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 142.
Amortization will still be required for identifiable intangible assets with
finite lives. The provisions of SFAS 142 are required to be applied starting
with fiscal years beginning after December 15, 2001. We are required to adopt
SFAS 142 at the beginning of our fiscal year 2002. We have not yet completed our
analysis of the impact that SFAS 141 and SFAS 142 will have on our financial
condition or results of operations.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets." This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. We have not yet completed our analysis of the
impact that SFAS 144 will have on our financial condition or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE FACTORS 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 have invested in
high-quality, investment-grade securities. As a result, we do not believe that
we are subject to material interest rate risk.
ITEM 7B. FACTORS THAT MAY AFFECT 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 high-technology and electronic commerce. These
risks include our ability to continue to:
o sustain sales while reducing operation costs;
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;
16
o manage distribution of our proprietary products;
o manage cost effective marketing programs; 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 SEVERAL
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 December
31, 2001, we had an accumulated deficit of approximately $74.8 million. If our
revenue is less 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.
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, may 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. We may experience unexpected expenditures or higher
than expected expenditures, which may require us to seek additional funding. 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. Our auditors have given us a "going concern" opinion,
which may further limit our ability to obtain additional financing. 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.
In February 2002, we received notice from Nasdaq that we are not in
compliance with Marketplace Rule 4450(a)(5), which requires our common stock to
have a minimum $1.00 bid price per share. Under the Marketplace Rules, we have
until May 15, 2002, to regain compliance by achieving a closing bid price for
our shares of $1.00 or more for a minimum of ten consecutive trading days. We
have also been notified that we are not in compliance with Marketplace Rule
4450(a)(2), which requires that the minimum market value of our publicly held
shares (shares held by non-affiliates of iGo) be at least $5,000,000, and that
we have until June 17, 2002 to regain compliance by raising the market value of
publicly held shares to $5,000,000 or more for ten consecutive trading days.
Failure to regain compliance with either of these standards would result in our
common stock being delisted from the Nasdaq National Market. We could appeal a
delisting decision and/or transfer our securities to the Nasdaq SmallCap Market.
There can be no assurance that any such appeal would be successful or that we
could maintain compliance with the continued listing requirements of the Nasdaq
SmallCap Market for any substantial period of time. While our stock would
continue to trade on the over-the-counter bulletin board following any delisting
from either Nasdaq 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.
17
ALTHOUGH WE ARE AWARE OF NO DETERMINATIONS, CONCERNS REGARDING THE SEC
INVESTIGATION COULD HARM OUR BUSINESS.
The Securities and Exchange Commission has issued a formal order of
private investigation concerning the events underlying our revisions of our
fiscal 2000 operating results based on adjustments to fourth quarter 2000
revenue, which results were announced and revised in certain press releases
issued in January and March of 2001. In connection with its investigation, the
Commission will also be reviewing the restatement of our financial statements
set forth in our 2001 Annual Report on Form 10-K and this amendment thereto, and
certain related accounting, sales and organizational matters. Although the Staff
of the Commission has made no determinations that we are aware of with respect
to this investigation, the investigation itself could raise concerns about iGo
in the eyes of customers and investors and, as a result, could harm our business
and our stock price.
OUR STOCK PRICE MAY BE ADVERSELY AFFECTED BY SIGNIFICANT FLUCTUATIONS IN OUR
QUARTERLY OPERATING RESULTS.
Although independent market research firms forecast that shipments of
portable personal computers, the number of wireless subscribers and the market
for accessories 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 or at all. We cannot forecast with any
degree of certainty the extent of our sales of these products. We expect our
operating results could fluctuate significantly from quarter to quarter as a
result of various factors including:
o our ability to attract prospects 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.
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 investors
in some future periods, our stock price will likely decline further. See "Item 7
- -Management's Discussion and Analysis of Financial Condition and Results of
Operations - Quarterly Results of Operations" for more information on our
quarterly operating results.
STRENGTHENING THE IGO, ROAD WARRIOR AND XTEND BRANDS IS CRITICAL TO OUR SUCCESS.
We believe that strengthening the iGo brand as well as the brands of
our proprietary product lines, Road Warrior and Xtend, will be critical to the
success of our business. We cannot be certain that our brands 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.
18
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. The loss of the services of
any of our executive officers could harm our business. Any of our officers or
employees can terminate his or her employment relationship at any time. 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 are significant administrative
burdens placed on our management team as a result of our status as a public
company. The loss of any of our officers could harm our results of operations
and financial condition. In addition, we may be unable to retain our other 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.
The mobile computing and communications markets in which we operate are
rapidly evolving and highly competitive. Our competitors operate in a number of
different distribution channels, including electronic commerce, traditional
retailing, catalog retailing and direct selling. 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 retailers and etailers such as CompUSA and Amazon.com;
o direct marketers such as Buy.com, CDW, Insight and
Microwarehouse;
o traditional mobile device manufacturers or OEM's such as
Fujitsu, Toshiba, IBM, NEC, Acer, Gateway, Dell, Nokia,
Motorola and Erickson.
Our competitors may have the ability to devote substantially more
resources to the development, marketing, and/or sale of mobile device
accessories 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. There can be no assurance that we
will be able to compete successfully against current and future competitors.
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.
19
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, search engine optimization, channel
relationships, our customer contact center and 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, then 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, airlines, suppliers and electronic commerce
partners to enable us to collect crucial product-specific information, ensure
access to adequate product supply and acquire new customers. We cannot be
certain that any of these strategic relationships or partnerships will be or
continue to be successful in attracting new customers. Our strategic
relationships are often not subject to formal agreements and/or can be
terminated on little or no advance notice. The terms of our agreements with
Acer, NEC and IBM require us to purchase minimum amounts of product each year.
If we fail to meet these purchase levels, those parties have the discretion to
terminate our agreements with them. We have not met such purchase levels to
date, but have received no indication from any of those parties that they intend
to terminate our relationship. Also, in each case either party may terminate the
agreement with or without cause on two to three months' written notice.
Accordingly, we can provide no assurance that these relationships will continue
on their current terms or at all. If these programs fail to attract additional
customers or we are unable to maintain these relationships, our business,
financial condition and results of operations would be harmed.
WE MUST EFFECTIVELY MANAGE OUR INVENTORY AND IMPROVE OUR GROSS MARGINS.
In order to fulfill our orders, we depend upon our factories and
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. In 2001, we changed our product strategy to focus on offering
a targeted core product line with a higher gross margin. As a result of this
change of strategy, we recorded significant write-offs of inventory in 2001. If
we underestimate customer demand, we may disappoint customers who may purchase
from our competitors. We also seek to 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 effectively manage our factories and 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 year ended December 31, 2001, approximately 22% 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.
20
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 and Federal Express. 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 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. 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, Xtend, 1-800-Batteries,
iGo.com and PowerXtender trademarks. Mobile Technology Outfitter and Pocket Dock
are trademarks of iGo or its subsidiaries.
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
21
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 registered our iGo, Xtend and Road Warrior trademarks 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.
In addition, we may be prohibited from using one or more of our marks in certain
foreign countries, which may have a material adverse effect on our business and
results of operations.
We currently hold various Internet domain names, including iGo.com,
RoadWarrior.com and XtendMicro.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, which moratorium has been extended until November
2003. 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.
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;
22
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.
In addition to our acquisitions of Road Warrior, Cellular Accessory
Warehouse and Xtend Micro Products, we 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.
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.
23
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
design and develop as well as those we sell. While we believe that our product
liability coverage of $7,000,000 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 78% 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.
A PORTION OF OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE ELECTRONIC
COMMERCE MARKET, WHICH IS UNCERTAIN.
A portion of our future revenues substantially depends 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;
24
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.
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. Failure to adequately control fraudulent credit
card transactions could reduce our revenues and harm our business.
25
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.
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Our financial statements are set forth in this Annual Report on Form
10-K beginning on page F-1.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
------------------------------------------------------
FORM 8-K
--------
(a) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements and Independent Auditors'
Report
Balance Sheets at December 31, 2001 and 2000
Statements of Operations, Years ended December 31, 2001, 2000
and 1999
Statements of Stockholders' Equity (Deficit), Years ended
December 31, 2001, 2000 and 1999
Statements of Cash Flows, Years ended December 31, 2001, 2000,
and 1999
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the
information required to be set forth therein is not applicable
or is shown in the financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation
S-K)
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1(1) Agreement and Plan of Merger dated March 24, 2002 between the
Registrant, Mobility Electronics, Inc. and IGOC Acquisition, Inc.
2.2(1) Lock-Up and Voting Agreement dated March 24, 2002 between the
Registrant, Mobility Electronics, Inc. and certain of the
Registrant's Stockholders
3.1(2) Amended and Restated Certificate of Incorporation
3.2(3) Bylaws
4.1(4) Specimen Common Stock Certificate
4.2(4) Stock Subscription Warrant dated June 14, 1996
4.3(4) Warrant Agreement to Purchase Shares of Preferred Stock dated June
23, 1999
4.4(4) Second Amended and Restated Registration Rights Agreement dated as
of July 30, 1999, between Registrant and certain of its stockholders
and a warrant holder
10.1(4) Amended and Restated 1996 Stock Option Plan
27
10.2(4)(5) 1999 Employee Stock Purchase Plan
10.3(4)(5) Form of Indemnification Agreement
10.4(4)(5) Form of Change of Control Agreement (Model A)
10.5(4)(5) Form of Change of Control Agreement (Model B)
10.6(4) Master Lease Agreement dated June 23, 1999, between iGo and
Comdisco, Inc.
10.7(4) Subordinated Loan and Security Agreement dated July 30, 1999,
between iGo and Comdisco, Inc.
10.8(2) Lease Agreement dated December 16, 1999 for the facilities at 9393
Gateway Drive, Reno, Nevada, between iGo and Dermody Family Limited
Partnership I & Guila Dermody Turville
10.9(4)(6) NEC Computer Systems Division Authorized Reseller Master Agreement
Number 306552 dated June 23, 1999 between NEC Computer Systems
Division and the Registrant and addendum thereto
10.10(4) Ariba Supplier Link Program Memorandum of Understanding dated
November 3, 1998, between Ariba Technologies, Inc. and iGo
10.11(2) IBM Business Partner Agreement Distributor Profile dated November
15, 1999, between iGo and International Business Machines
Corporation
10.16(2)(5) Employment Agreement dated January 4, 2000, between Tom de Jong and
CAW Products, Inc.
10.17(2)(5) Employment Agreement dated January 11, 2000, between Rod Hosilyk and
AR Industries, Inc.
10.18(6)(7) Asset Purchase Agreement dated August 29, 2000 among iGo, XMP
Acquisition Corp., Xtend Micro Products, Inc. and the Shareholders
of Xtend Micro Products, Inc.
10.19(5)(8) Employment Offer letter dated October 11, 2000 between iGo and Rick
Shaff
10.20(5)(8) Employment Offer letter dated October 11, 2000 between iGo and Gary
Bale
10.21(5)(8) Employment Offer letter dated February 22, 2001 between iGo and
Lonnie Ramos
10.22(8) Secured Loan Agreement dated January 2, 2001 between iGo and Kenneth
W. Hawk
10.23(8) Separation Agreement dated March 26, 2001 between iGo and Kenneth W.
Hawk
10.24(9) Separation Agreement dated effective as of March 26, 2001 between
iGo and Tom DeJong
10.25(5)(10) Employment Offer Letter dated June 1, 2001 between iGo and Scott
Shackelton A
10.26(10) Amended and Restated Change of Control Agreement dated June 26, 2001
between iGo and Richard Shaff
10.27(5) (11) Employment Agreement dated August 29, 2000, between Ejaz Afzal
and XMP Acquisition Corp.
10.28(5) (11) Employment Offer Letter dated January 18, 2002 between iGo and
Rick Blair
10.29(5) Employment Offer Letter dated January 28, 2002, between iGo and
David Olson
10.30(11) Settlement Agreement dated March 13, 2002 between iGo, Xtend Micro
Products, Inc., XMicro Holding Company, Inc., and Mark Rapparport
28
10.31(5) Employment Extension Letter dated March 5, 2002 between iGo and
Richard Shaff
10.32(11) Second Amendment to Lease Agreement dated March 22, 2002 between iGo
and Dermody Family Limited Partnership I and Guila Dermody Turville
21.1(11) Subsidiaries of iGo
23.1 Consent of Deloitte & Touche LLP
24.1(11) Power of Attorney
----------------
(1) Incorporated by reference to identically numbered
exhibits filed with our Current Report on Form 8-K filed
on March 28, 2002.
(2) Incorporated by reference to identically numbered
exhibits filed with our Annual Report on Form 10-K for
the fiscal year ended December 31, 1999.
(3) Incorporated by reference to Exhibit 3.4 filed with our
Registration Statement on Form S-1, as amended (File No.
333-84723), which became effective on October 13, 1999.
(4) Incorporated by reference to identically numbered
exhibits filed with our Registration Statement on Form
S-1, as amended (File No. 333-84723), which became
effective on October 13, 1999.
(5) Management contract or compensatory plan or arrangement.
(6) Confidential treatment has been granted or requested by
order from the Securities and Exchange Commission with
respect to certain portions of this Exhibit.
(7) Incorporated by reference to Exhibit 2.1 filed with our
Current Report on Form 8-K/A on November 13, 2000,
amending our previously filed Current Report on Form 8-K
filed on September 11, 2000.
(8) Incorporated by reference to identically numbered
exhibits filed with our Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.
(9) Incorporated by reference to identically numbered
exhibits filed with our Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2001.
(10) Incorporated by reference to identically numbered
exhibits filed with our Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2001.
(11) Incorporated by reference to identically numbered
exhibits filed with our Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.
(b) REPORTS ON FORM 8-K
None.
29
IGO CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................................ F-2
Consolidated Financial Statements:
Balance Sheets, December 31, 2001 and 2000.............................. F-3
Statements of Operations, Years Ended December 31, 2001, 2000 and 1999.. F-4
Statements of Stockholders' Equity (Deficit), Years Ended December 31,
2001, 2000 and 1999................................................... F-5
Statements of Cash Flows, Years Ended December 31, 2001, 2000 and 1999.. F-6
Notes to Consolidated Financial Statements.............................. F-7
Schedule II - Valuation and Qualifying Accounts.........................F-24
F-1
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of iGo Corporation:
We have audited the accompanying consolidated balance sheets of iGo
Corporation and subsidiaries (the "Company") as of December 31, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 2001. Our audits also included the financial statement schedule
listed in the Index at Item 14. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of iGo Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
The accompanying consolidated financial statements for the year ended
December 31, 2001 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company's recurring losses and negative cash flows from
operations and limited financing opportunities raise substantial doubt about its
ability to continue as a going concern. Management's plans concerning these
matters are also described in Note 2. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 17, the accompanying consolidated financial
statements have been restated.
DELOITTE & TOUCHE LLP
Reno, Nevada
April 5, 2002 (Except as to Note 17, which the date is May 3, 2002)
F-2
IGO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
DOLLARS IN THOUSANDS
2001 2000
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 5,846 $ 20,321
Accounts receivable, net .......................................... 4,212 6,875
Note receivable, net .............................................. 236 --
Inventory, net .................................................... 2,480 8,179
Prepaid expenses .................................................. 654 905
--------- ---------
Total current assets ......................................... 13,428 36,280
Property and equipment, net ............................................ 2,378 4,466
Goodwill and other assets, net ......................................... 1,750 13,093
--------- ---------
Total ................................................... $ 17,556 $ 53,839
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 1,135 $ 5,117
Accrued liabilities ............................................... 2,936 3,506
Accrued liability related to business acquisition (Notes 15 and 18) 972 125
Current portion of capital lease obligations
and long-term debt ........................................... 137 316
Short-term borrowings ............................................. 54 280
--------- ---------
Total current liabilities .................................... 5,234 9,344
Long-term portion of capital lease obligations
and long-term debt ................................................. 19 190
--------- ---------
Total liabilities ............................................ 5,253 9,534
--------- ---------
Commitments and contingencies (Notes 8, 9, 14 and 18)
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000
shares authorized; 23,353,085 and
23,282,842 shares issued and outstanding ................. 23 23
Additional paid-in capital ........................................ 87,630 87,921
Deferred compensation ............................................. (126) (604)
Receivable from stockholder ....................................... (388) (47)
Accumulated deficit ............................................... (74,836) (42,988)
--------- ---------
Total stockholders' equity ................................... 12,303 44,305
--------- ---------
Total ................................................... $ 17,556 $ 53,839
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-3
IGO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------
DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA) 2001 2000 1999
---- ---- ----
(AS RESTATED,
SEE NOTE 17)
Revenues:
Net product revenue ............................ $ 28,886 $ 39,947 $ 21,043
Cost of goods sold ...................................... 24,435 26,914 14,793
------------- ------------- -------------
Gross profit ............................................ 4,451 13,033 6,250
------------- ------------- -------------
Operating expenses:
Sales and marketing ................................ 11,855 23,663 15,396
Product development ................................ 2,590 4,800 1,544
General and administrative ......................... 9,064 7,961 4,657
Merger and acquisition costs, including amortization
of goodwill and other purchased intangibles and
goodwill write-down of $9,457 in 2001 ............. 12,956 2,357 --
------------- ------------- -------------
Total operating expenses ...................... 36,465 38,781 21,597
------------- ------------- -------------
Loss from operations .................................... (32,014) (25,748) (15,347)
Other income, net ....................................... 166 1,847 334
------------- ------------- -------------
Loss before provision for income
taxes ................................................ (31,848) (23,901) (15,013)
Provision for income taxes .............................. -- -- --
------------- ------------- -------------
Net loss ................................................ $ (31,848) $ (23,901) $ (15,013)
============= ============= =============
Net loss per share:
Basic and diluted .................................. $ (1.37) $ (1.11) $ (1.01)
============= ============= =============
Weighted-average shares outstanding:
Basic and diluted .................................. 23,328,165 21,554,824 14,817,915
============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
IGO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ADDITIONAL
AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------- ------------
Balance, January 1, 1999 ........................ 6,590,646 $ 6 $ 300 $ (188)
Net loss ........................................ -- -- -- --
Deferred compensation on stock options granted .. -- -- 2,004 (2,004)
Compensation expense related to stock options ... -- -- (21) 387
Stock options and warrants exercised ........... 135,352 -- 26 --
Accrued interest ................................ -- -- -- --
Initial public offering, net .................... 5,750,000 6 62,549 --
Conversion of preferred stock ................... 7,643,054 8 15,209 --
----------- ----------- ----------- -----------
Balance, December 31, 1999 ...................... 20,119,052 20 80,067 (1,805)
Net loss ........................................ -- -- -- --
Deferred compensation adjustment for terminations -- -- (942) 942
Compensation expense related to stock options ... -- -- -- 259
Stock options and warrants exercised ........... 574,626 -- 329 --
Employee stock purchase plan .................... 12,385 -- 27 --
Payment on stockholder note receivable .......... -- -- -- --
Acquisition of companies ........................ 2,576,779 3 8,440 --
----------- ----------- ----------- -----------
Balance, December 31, 2000 ...................... 23,282,842 23 87,921 (604)
Net loss ........................................ -- -- -- --
Deferred compensation adjustment for terminations -- -- (312) 312
Compensation expense related to stock options ... -- -- -- 166
Stock options and warrants exercised ........... 37,656 -- 5 --
Employee stock purchase plan .................... 32,587 -- 16 --
Stockholder note receivable ..................... -- -- -- --
Accrued interest ................................ -- -- -- --
----------- ----------- ----------- -----------
Balance, December 31, 2001 ...................... 23,353,085 $ 23 $ 87,630 $ (126)
=========== =========== =========== ===========
(continued)
RECEIVABLE
FROM ACCUMULATED
STOCKHOLDER DEFICIT TOTAL
----------- ------- -----
Balance, January 1, 1999 ........................ $ (46) $ (3,497) $ (3,425)
Net loss ........................................ -- (15,013) (15,013)
Deferred compensation on stock options granted .. -- -- --
Compensation expense related to stock options ... -- -- 366
Stock options and warrants exercised ........... -- -- 26
Accrued interest ................................ (6) -- (6)
Initial public offering, net .................... -- -- 62,555
Conversion of preferred stock ................... -- (577) 14,640
----------- ----------- -----------
Balance, December 31, 1999 ...................... (52) (19,087) 59,143
Net loss ........................................ -- (23,901) (23,901)
Deferred compensation adjustment for terminations -- -- --
Compensation expense related to stock options ... -- -- 259
Stock options and warrants exercised ........... -- -- 329
Employee stock purchase plan .................... -- -- 27
Payment on stockholder note receivable .......... 5 -- 5
Acquisition of companies ........................ -- -- 8,443
----------- ----------- -----------
Balance, December 31, 2000 ...................... (47) (42,988) 44,305
Net loss ........................................ -- (31,848) (31,848)
Deferred compensation adjustment for terminations -- -- --
Compensation expense related to stock options ... -- -- 166
Stock options and warrants exercised ........... -- -- 5
Employee stock purchase plan .................... -- -- 16
Stockholder note receivable ..................... (306) -- (306)
Accrued interest ................................ (35) -- (35)
----------- ----------- -----------
Balance, December 31, 2001 ...................... $ (388) $ (74,836) $ 12,303
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
IGO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------
DOLLARS IN THOUSANDS 2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net loss .......................................................... $(31,848) $(23,901) $(15,013)
Adjustments to reconcile net loss to net cash used in operating
activities:
Compensation expense related to stock options ................... 166 259 366
Accrued interest on stockholder note receivable ................. (35) -- (6)
Provisions for bad debt and inventory ........................... 4,910 1,453 593
Loss on sale leaseback and disposal of property and equipment ... 818 288 264
Goodwill amortization and goodwill write-down of $9,457 in 2001 . 12,956 2,109 --
Depreciation and amortization ................................... 1,562 1,242 540
Changes in:
Accounts receivable ........................................... 1,098 (4,519) (2,091)
Inventory ..................................................... 2,040 (6,099) (1,367)
Prepaid expenses and other assets ............................. (1,574) 217 (1,118)
Accounts payable and accrued liabilities ...................... (2,858) (1,035) 6,436
--------- --------- ---------
Net cash used in operating activities ....................... (12,765) (29,986) (11,396)
--------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment ............................. (400) (2,607) (3,208)
Proceeds from fixed asset disposal ................................ 14 -- --
Acquisition of companies .......................................... (500) (4,510) --
Acquisition of intangibles and other assets ....................... -- -- (629)
--------- --------- ---------
Net cash used in investing activities ....................... (886) (7,117) (3,837)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on short-term notes and capital leases ......... (540) (301) (132)
Proceeds from sale leaseback ...................................... -- -- 702
Proceeds from initial public offering, net ........................ -- -- 62,555
Stockholder note receivable ....................................... (306) 5 --
Proceeds from exercise of stock options and warrants .............. 22 356 26
Net proceeds from issuance of mandatory redeemable preferred
stock .......................................................... -- -- 5,771
Net proceeds from issuance of debt ................................ -- -- 1,171
--------- --------- ---------
Net cash provided by (used in) financing activities ......... (824) 60 70,093
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ................ (14,475) (37,043) 54,860
Cash and cash equivalents, beginning of year ........................ 20,321 57,364 2,504
--------- --------- ---------
Cash and cash equivalents, end of year .............................. $ 5,846 $ 20,321 $ 57,364
========= ========= =========
Supplemental disclosure of cash flows information:
Cash paid during the year for interest ............................ $ 75 $ 173 $ 112
========= ========= =========
Supplemental schedule of non-cash investing and financing activities:
Conversion of debt to preferred stock ............................ $ -- $ -- $ 980
========= ========= =========
Equipment acquired through capital leases ......................... $ -- $ 10 $ 46
========= ========= =========
Mandatory redeemable preferred stock dividends accrued and
mandatory conversion of preferred stock to common stock ........ $ -- $ -- $ 14,640
========= ========= =========
Intangibles and other assets acquired with short-term borrowings .. $ 36 $ -- $ --
========= ========= =========
Deferred compensation on stock options issued and canceled ........ $ (312) $ (942) $ 2,004
========= ========= =========
Common stock issued in connection with acquisitions ............... $ -- $ 8,443 $ --
========= ========= =========
Net liabilities acquired in acquisitions .......................... $ -- $ 1,404 $ --
========= ========= =========
Accrued liability related to business acquisition ................. $ 847 $ -- $ --
========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
IGO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
iGo Corporation (formerly Battery Express, Inc.) (the "Company" or "iGo")
was incorporated in California in 1993 and is headquartered in Reno, Nevada. iGo
designs, develops and markets accessories including batteries, adapters and
chargers for mobile technology products such as notebooks, cell phones and
wireless devices. iGo's products address the needs of mobile professionals as
well as corporations with mobile workforces who demand solutions to keep them
powered up and connected. iGo develops its own line of mobile accessories under
the Xtend(R) and Road Warrior(R) brands.
STOCK SPLIT AND DELAWARE REINCORPORATION
On August 30, 1999, the Company reincorporated in Delaware and effected a
6-for-1 share stock split. The number of shares issued and outstanding, the
conversion factors for all series of preferred stock, stock option information,
and per share information for all periods presented have been adjusted to
reflect the stock split.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of intercompany balances and
transactions.
INITIAL PUBLIC OFFERING
On October 13, 1999, the Company conducted its initial public offering of
5,000,000 shares of its common stock, and in November 1999 the underwriters
exercised their over-allotment option of 750,000 shares, the net proceeds of
which aggregated approximately $62.6 million. At the closing of the offering,
all issued and outstanding shares of the Company's mandatory redeemable
preferred stock were converted into an aggregate of 7,643,054 shares of common
stock.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase to be cash equivalents, and such items
are recorded at cost, which approximates fair market value.
INVENTORY
Inventory is stated at the lower of first-in, first-out, cost or market,
and consists primarily of batteries and electronic accessories held for sale.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is recorded under
the straight-line method over the following estimated useful lives: leasehold
improvements, the shorter of the estimated useful life or the remaining life of
the lease; furniture and equipment, four to seven years; and software, four
years. Costs of normal repairs and maintenance are charged to expense as
incurred.
F-7
GOODWILL AND OTHER ASSETS
The costs of trademarks and copyrights are amortized under the
straight-line method over their remaining lives ranging from one to 15 years.
The goodwill acquired in the Company's three acquisitions during 2000 have been
amortized under the straight-line method over their estimated useful lives,
which approximate 40 to 60 months. Amortization expense charged to operations in
2001, 2000 and 1999 was $3.5 million, $2.2 million and $65,605, respectively.
Additionally, in 2001, our review of recoverability of certain long-lived and
intangible assets resulted in a charge of $9.5 million for the estimated
impairment to our carrying value for goodwill (see Notes 7 and 16).
Included in Other Assets is equipment held for sale, which is carried at
an estimated realizable value of approximately $330,000 as of December 31, 2001.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes,"
which requires recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
consolidated financial statements or tax returns. Deferred income taxes reflect
the net tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes and (b) operating loss and tax credit carry forwards. The
Company has established a valuation allowance for its tax carryforward items due
to uncertainty of their realization.
CONCENTRATIONS OF CREDIT RISK
As of December 31, 2001 and 2000, the Company had accounts receivable from
a major customer, Ingram Micro Inc., of approximately $1.4 million and $1.9
million, respectively. Sales to this customer totaled approximately $3.6 million
and $5.0 million in the years 2001 and 2000, respectively. No other customer
represented a significant percentage of accounts receivable or sales in the
years 2001 and 2000. As of December 31, 1999, and for the year then ended, there
were no customers that represented a significant percentage of sales or accounts
receivable. Concentrations with respect to trade receivables are generally
limited due to the Company's large number of customers and their geographic and
economic dispersion. Financial instruments that potentially subject the Company
to credit risks consist primarily of cash accounts on deposit with banks, which,
at times, may exceed federally insured limits. The Company believes it is not
exposed to any significant credit risk related to cash or accounts receivable.
REVENUE RECOGNITION AND CLASSIFICATION
Product revenue is generally recognized when persuasive evidence of a sale
arrangement exists, shipment has occurred, title has passed, sales price is
fixed or determinable, and collectibility is reasonably assured. Product revenue
is recorded net of any discounts and reserves for expected returns. Outbound
shipping fees amounted to $1.0 million, $1.5 million, and $1.2 million in 2001,
2000, and 1999, respectively.
SHIPPING EXPENSE
Inbound shipping expense and outbound shipping charges are included in
cost of goods sold. Total freight expense for the years ended December 31, 2001,
2000 and 1999 were $1.7 million, $2.3 million and $1.5 million, respectively.
The Company estimates its outbound shipping expense to be approximately 60% to
90% of the total freight expense, and its inbound shipping expense to be
approximately 10% to 40%, accordingly.
F-8
ADVERTISING AND PROMOTIONAL EXPENSES
The Company expenses advertising and promotional costs as they are
incurred. Advertising and promotional expenses for the years ended December 31,
2001, 2000 and 1999 were $2.2 million, $11.7 million and $10.4 million,
respectively.
RETIREMENT PLANS
The Company provides a tax-qualified 401(k) retirement plan for the
benefit of eligible employees. The plan is designed to provide employees with
retirement funds on a tax-deferred basis, and allows for discretionary matching
by the employer. Currently, the Company does not match employee contributions.
1999 EMPLOYEE STOCK PURCHASE PLAN
In July 1999, the Board adopted, and in August 1999 the Company's
stockholders approved, the 1999 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved 132,000 shares of common stock for issuance thereunder, plus
an annual increase to be added on the first day of the Company's fiscal year
beginning in January 2001, equal to the lesser of (i) one hundred twenty
thousand (120,000) shares (post-split), (ii) three quarters of one percent
(0.75%) of the outstanding shares on such date, or (iii) such amount as may be
determined by the Board. The Purchase Plan became effective on October 14, 1999,
the first business day on which price quotations for the Company's common stock
were available on the Nasdaq National Market. Employees are generally eligible
to participate in the Purchase Plan if they are customarily employed by the
Company for more than 20 hours per week and more than five months in a calendar
year and are not (and would not become as a result of being granted an option
under the Purchase Plan) 5% stockholders of the Company. Under the Purchase
Plan, the maximum authorized contribution may be no greater than 10% of cash
compensation of eligible employees, subject to certain maximum purchase
limitations. Each Offering Period has a maximum duration of two years (the
"Offering Period") and consists of four six-month Purchase Periods (each, a
"Purchase Period"). Offering Periods and Purchase Periods will begin on May 1
and November 1. The price at which the common stock is purchased under the
Purchase Plan is 85% of the lesser of the fair market value of the Company's
common stock on the first day of the applicable Offering Period or on the last
day of that Purchase Period. Pursuant to action by the Company's Board of
Directors, the Purchase Plan will terminate at the close of the Purchase Period
ending in April 2002.
STOCK-BASED COMPENSATION
The Company accounts for its employee stock-based compensation in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25 and provides pro forma disclosures in the notes to the consolidated
financial statements, as if the measurement provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" had been adopted.
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. The number of potentially dilutive shares that were not
included in weighted average shares outstanding were 1,693,470; 1,851,035 and
1,400,982 for the years ended December 31, 2001, 2000 and 1999, respectively.
F-9
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include: accounts receivable, accounts
payable and notes payable. The Company has estimated that the carrying amounts
of accounts receivable and accounts payable approximate fair value due to the
short-term maturities of these instruments. The fair value of the Company's
notes approximate their carrying value. The fair value is based on management's
estimate of current rates available to the Company for similar debt with the
remaining maturity.
SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one principal business segment across domestic and
international markets. International sales have been insignificant throughout
the history of the Company. There were no transfers between geographic areas.
Substantially all operating results and identifiable assets are in the United
States. Disclosure regarding revenues from external customers for each group of
similar products has not been included because it is impracticable to do so.
LONG-LIVED ASSETS
In accordance with SFAS No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the carrying
value of intangible assets and other long-lived assets is reviewed on a regular
basis for the existence of facts or circumstances, both internally and
externally, that may suggest impairment. In 2001, the Company's review of
recoverability of certain long-lived and intangible assets resulted in charges
of $124,000 for the estimated impairment to our carrying value for certain
property and equipment and $9,457,000 of goodwill (see Notes 7 and 16).
PRODUCT DEVELOPMENT COSTS
Product development costs consist primarily of payroll and related
expenses for merchandising and website personnel, site hosting fees and web
content and design expenses. Such costs are expensed as incurred.
COMPREHENSIVE INCOME
The Company has no elements of comprehensive income other than its net
loss.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect 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 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. The adoption of SFAS No. 133, as amended, did not have a material impact
on the Company's consolidated financial statements.
In June 2001, the FASB issued two new standards, 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 141 requires the purchase method of accounting for all business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. SFAS 142 changes the accounting for goodwill and
F-10
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 142. Amortization
will still be required for identifiable intangible assets with finite lives. The
provisions of SFAS 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. The Company is required to adopt SFAS 142 at
the beginning of its fiscal year 2002. The Company has not yet completed its
analysis of the impact that SFAS 141 and SFAS 142 will have on its financial
condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." This statement is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
The Company has not yet completed its analysis of the impact that SFAS 144 will
have on its financial condition or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the 2001 presentation.
2. GOING CONCERN
The Company has experienced negative cash flows from operations of $11.4
million, $30.0 million and $12.8 million for the years ended December 31, 1999,
2000 and 2001, respectively. Recurring losses and negative cash flows from
operations and limited financing opportunities raise substantial doubt about the
Company's ability to continue as a going concern. Management believes that if
the Company is able to execute in accordance with its business and financial
plans, the Company will have sufficient cash to fund operations. The Company
anticipates that in 2002 it will be able to significantly increase its gross
margins on product sales and further reduce its expenses while maintaining or
growing its revenue levels. With a targeted focus on high margin core products
and improved inventory control resulting in significantly reduced excess and
obsolete inventory charges the Company believes that it will be able to achieve
improved gross margins. Additionally, the Company has taken steps to reduce
costs through several initiatives including: further downsizing the workforce
and facility cost reductions resulting from a planned relocation of the
Company's main facility in Reno to a smaller, less costly facility in Reno. If
the Company is successful in implementing these plans, it believes that its
current cash and cash from operations will be adequate to fund its cash
requirements through December 31, 2002. This estimate assumes that the Company
will be able to meet quarterly revenue targets in its second, third and fourth
quarters in excess of those recorded in the third and fourth quarters of 2001,
achieve significantly higher percentage gross margins than those achieved in
each of the prior three years and reduce expenses substantially below those
realized in the fourth quarter of 2001, excluding the write-down of goodwill.
The Company may need to raise additional funds before the end of the year
in the event that it fails to generate sufficient cash from operations or
experiences unanticipated or excessive expenditures. The Company has no
commitments and is not seeking commitments for additional financing. If the
Company were to seek additional financing, there can be no assurance that it
would be successful in obtaining any additional financing on terms acceptable to
the Company or its stockholders. If the Company raises additional funds through
the issuance of equity securities or convertible debt securities, its existing
stockholders may experience significant dilution.
F-11
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31:
DOLLARS IN THOUSANDS 2001 2000
----- ----
Trade receivables............................. $ 5,353 $ 7,501
Other current receivables..................... 482 449
Allowance for bad debt........................ (1,623) (1,075)
-------- --------
Total accounts receivable, net........... $ 4,212 $ 6,875
======== ========
The Company extends payment terms, generally net 30 days to 90 days, to
business customers that it has evaluated for credit worthiness.
4. NOTE RECEIVABLE
The Company has a note receivable from a customer for a principal amount
due of $493,000. The note bears interest at prime plus 2% and is payable in
monthly installments of principal and interest, with a balloon payment due
December 1, 2002, which is to be in the amount of all remaining principal and
accrued interest to that date. Repayment of this note is secured by the
customer's accounts receivable. The Company has recorded a provision for
doubtful notes receivable of approximately $236,000 as of December 31, 2001. The
principal amount of this note was an account receivable as of December 31, 2000
and was converted to a note receivable in 2001.
5. INVENTORY
Inventory consists of the following at December 31:
DOLLARS IN THOUSANDS 2001 2000
---- ----
Products on hand............................... $ 4,315 $ 8,964
Inventory reserve.............................. (1,835) (785)
-------- --------
Total inventory, net...................... $ 2,480 $ 8,179
======== ========
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
DOLLARS IN THOUSANDS 2001 2000
---- ----
Leasehold improvements....................... $ 416 $ 363
Furniture and equipment...................... 2,034 3,309
Software..................................... 1,966 2,039
Accumulated depreciation and amortization.... (2,038) (1,245)
-------- --------
Total property and equipment, net....... $ 2,378 $ 4,466
======== ========
F-12
7. GOODWILL AND OTHER ASSETS
Goodwill and other assets consist of the following at December 31:
DOLLARS IN THOUSANDS 2001 2000
---- ----
Goodwill............................................... $ 15,706 $ 14,358
Accumulated amortization............................... (5,658) (2,109)
Write-off of goodwill (see Note 16).................... (9,457) --
--------- ---------
Goodwill, net..................................... 591 12,249
--------- ---------
Assets held for sale................................... 330 --
Other assets........................................... 1,158 1,089
Accumulated amortization............................... (329) (245)
--------- ---------
Other assets, net................................. 1,159 844
--------- ---------
Total goodwill and other assets, net $ 1,750 $ 13,093
========= =========
8. LEASE COMMITMENTS
OPERATING LEASES
The Company leases certain equipment under non-cancelable operating
leases. Lease expense for all equipment operating leases was $105,000, $10,000,
and $859 for the years ended December 31, 2001, 2000, and 1999, respectively.
The Company leases its facility under a non-cancelable operating lease,
which was entered into in December 1999 and is effective through December 2013
(see Note 18). The lease requires monthly rental payments, which do not increase
over the lease term. The Company records rent expense on a straight-line basis.
The Company may extend the lease term for two additional five year periods. In
addition to the Company's primary facility, the Company has recorded lease
expense for facilities occupied by companies acquired by the Company during the
2000. The Company recorded facility rent expense for the years ended December
31, 2001, 2000 and 1999 of $905,000, $947,000 and $138,000, respectively.
The following is a schedule of the future minimum lease payments under the
equipment and facility operating leases as of December 31, 2001:
DOLLARS IN THOUSANDS
FISCAL YEAR
-----------
2002........................................................ $ 922
2003........................................................ 879
2004........................................................ 847
2005........................................................ 842
2006........................................................ 840
Thereafter.................................................. 5,880
---------
$ 10,210
=========
CAPITAL LEASES AND SHORT-TERM BORROWINGS
The Company conducts a portion of its operations with equipment under
leases, which have been capitalized. The leases are non-cancelable and expire on
various dates through 2004. The capitalized value of the equipment was
approximately $667,000 and $822,000, and the related accumulated depreciation
was $414,000 and $294,000 as of December 31, 2001 and 2000, respectively.
Depreciation expense for fixed assets acquired under a capital lease is included
in depreciation expense, which is included in general and administrative
expense. The Company has short-term borrowings with an outstanding balance of
$54,000 as of December 31, 2001. This obligation required interest payments only
through September 2000, at which time principal and interest payments are due
through maturity in August 2002 (see Note 10). The following is a schedule of
the future minimum payments under capital leases and short-term borrowings as of
December 31, 2001:
F-13
DOLLARS IN THOUSANDS
FISCAL YEAR
2002..................................................... $ 205
2003..................................................... 12
2004..................................................... 9
------
226
Amount representing interest............................. (16)
------
Net present value of future minimum lease payments....... 210
Current portion of capital lease obligation.............. (191)
------
Non-current portion of capital lease obligations......... $ 19
======
9. LEASE LINE OF CREDIT
On June 28, 1999, the Company signed a $2.0 million equipment lease line
of credit with a leasing company. The initial term of the lease is 42 months
with an option to extend the initial term for a period of 12 months. A portion
of the line was used in a sale leaseback transaction of certain computer
hardware and software owned by the Company. The lease was recorded as a capital
lease, and resulted in a loss of $219,000 recorded in the Company's statement of
operations for the year ended December 31, 1999.
In connection with this line, the Company issued a warrant currently
representing the right to purchase 16,132 shares of common stock at an exercise
price of $6.82 per share. The warrant expires in October 2002.
10. SUBORDINATED CONVERTIBLE DEBT
On July 30, 1999, the Company entered into a $3.5 million subordinated
convertible debt agreement with a leasing company, which expired January 30,
2000. Amounts borrowed under such agreement bear interest at an annual rate of
11%. Interest only was payable for the first 12 months, then principal and
interest for the final 24 months. On August 6, 1999, the Company drew down
$1,167,000 under this agreement.
On September 10, 1999, the leasing company converted $980,000 of the
$1,167,000 outstanding subordinated convertible debt into 124,982 shares of the
Series C preferred stock. As of December 31, 2001 and 2000, the balance
outstanding was $54,000 and $280,000, respectively.
11. INCOME TAXES
The provision for income taxes recognized for the years ended December 31
consists of the following:
DOLLARS IN THOUSANDS 2001 2000 1999
---- ---- ----
Tax benefit at U.S. statutory rates.......... $ 10,801 $ 7,940 $ 5,104
Other items.................................. 95 (94) (137)
Deductible IPO fees.................. -- -- 128
Increase in valuation allowance.............. (10,896) (7,846) (5,095)
--------- --------- ---------
Tax benefit.................................. $ -- $ -- $ --
========= ========= =========
The following summarizes the effect of deferred income tax items and the
impact of temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured by tax laws. The tax
items composing the Company's net deferred tax asset as of December 31 are as
follows:
F-14
DOLLARS IN THOUSANDS 2001 2000
---- ----
Current deferred tax asset:
Accrued liabilities ................................................ $ 1,370 $ 575
Other .............................................................. -- (1)
Current deferred tax liability:
Prepaid expenses ................................................... (213) (307)
Valuation allowance ................................................... (1,157) (267)
--------- ---------
Net current deferred tax asset ........................................ -- --
--------- ---------
Non-current deferred tax asset:
Net operating loss ................................................. 19,063 13,539
Difference between book and tax basis of goodwill .................. 4,669 --
Other .............................................................. 3 1
Non-current deferred tax liability:
Difference between book and tax basis of fixed asset and intangibles (274) (85)
Valuation allowance ................................................... (23,461) (13,455)
--------- ---------
Net non-current deferred tax asset .................................... -- --
--------- ---------
Net deferred tax asset ................................................ $ -- $ --
========= =========
Due to the uncertainty of the realization of certain tax carryforward
items, a valuation allowance has been established in the aggregate amount of
$24.6 million and $13.7 million, at December 31, 2001 and 2000, respectively.
Realization of a significant portion of the assets offset by the valuation
allowance is dependent on the Company generating sufficient taxable income prior
to the expiration of the loss and credit carryforwards. As of December 31, 2001
and 2000, the Company had net operating loss carryforwards of approximately
$56.1 million and $39.8 million, respectively, available to offset future
taxable income, which are available through 2021. The availability of the loss
and credit carryforwards may be subject to further limitation under Sections 382
and 383 of the Internal Revenue Code in the event of a significant change of
ownership.
12. EQUITY SECURITIES
MANDATORY REDEEMABLE PREFERRED STOCK
The Company issued 3,667,500 shares of Series A mandatory redeemable
preferred stock ("Series A") during 1996 and 3,000,000 shares of Series B
mandatory redeemable preferred stock ("Series B") during 1998. Holders of Series
A and Series B were entitled to receive dividends at 8% per annum, prior to
conversion of their shares into common stock at a ratio of 1:1 excluding accrued
dividends. The conversion ratio for Series A would have been adjusted upon
issuance of common stock at less than $0.45 per share. The conversion ratio for
Series B would have been adjusted upon issuance of common stock at less than
$2.00 per share. Conversion was automatic upon the Company's initial public
offering at a share price of not less than $1.25, with aggregate proceeds of not
less than $15.0 million. If elected by the holders of 66 2/3% of the preferred
stock then outstanding, unconverted preferred stock would have been redeemed, on
a quarterly basis, over eight consecutive quarters beginning in June 2003 at the
original issuance price plus any declared but unpaid dividends, or upon a sale
or merger of the Company meeting certain criteria. Holders of Series A and
Series B were also entitled to a liquidation preference over common stock equal
to the original price plus any accrued but unpaid dividends.
On July 30, 1999, the Company received gross proceeds of approximately
$5.8 million on the sale of 850,572 shares of Series C mandatory redeemable
preferred stock ("Series C") at $6.82 per share. The Series C shareholders had
the same rights, preferences, and privileges as the Series A and Series B
shareholders.
No dividends were declared or paid as of December 31, 1999. The Company
recorded accrued dividends of $122,000, $373,000 and $81,000 on Series A, Series
B and Series C, respectively, during the year ended December 31, 1999.
F-15
On October 13, 1999, the Company conducted an initial public offering of
5,750,000 shares of its common stock at a price of $12.00 per share, including
750,000 shares available for sale to the underwriters upon the exercise of their
over-allotment option. All shares of Series A, B and C automatically converted
into 7,643,054 shares of common stock upon the consummation of the offering.
WARRANTS
In connection with the issuance of Series A, the Company issued warrants
for the purchase of 81,000 shares of its common stock at $0.445 per share all of
which, as of December 31, 2000, had been exercised and converted into common
stock. In connection with an equipment lease entered into on June 28, 1999 (see
Note 9) the Company issued a warrant currently representing the right to
purchase 16,132 shares. The Company has reserved 16,132, 16,132 and 56,632
shares of common stock for issuance under outstanding warrants as of December
31, 2001, 2000 and 1999, respectively.
ISSUANCE OF UNVESTED COMMON STOCK AND STOCKHOLDER LOAN
In connection with the issuance of Series A to an investor group, the
Company issued 885,600 shares of common stock to its president at $0.05 per
share in exchange for a note receivable of $39,852. These shares vest to the
president only upon the successful achievement of certain sales and
profitability performance goals or upon a sale of the Company at a price
sufficient to meet a specified internal rate of return criteria. At the
conclusion of the performance period, any unvested shares may be repurchased by
the Company, at the Company's discretion, at the original issuance price of the
stock. At December 31, 1999, the president had vested in 100% of the shares
issued under this arrangement.
The stockholder loan called for interest to be accrued at 6% and is due
upon the sale of the Company or, if no sale occurs, on June 13, 2003. The
stockholder loan is secured by the stock issued under this arrangement and the
Company has recourse against the stockholder. This loan was subsequently
restructured as described below.
LOAN TO CHAIRMAN AND CHIEF EXECUTIVE OFFICER
On January 2, 2001, the Company entered into a Secured Loan Agreement with
Ken Hawk, then 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.
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 continues to serve as a member of the Company's Board of Directors. Under a
Consulting Agreement, Mr. Hawk also serves 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.
F-16
13. STOCK OPTION PLAN
The Company has a stock option plan under which the Board of Directors has
reserved an aggregate of 3,256,800 shares of common stock for issuance, which
reserve amount is subject to automatic annual increases on the first day of the
Company's fiscal year, beginning in January 2001. Under the plan, the Company
may grant incentive stock options to employees and non-qualified stock options
to employees, directors, and consultants.
Incentive stock options may be granted at a price not less than the
estimated fair market value of the common stock (110% of estimated fair value
for options granted to stockholders of 10% or more of the voting stock) at the
date of grant. Options are exercisable over periods not to exceed ten years from
the date of grant (five years for stockholders owning 10% or more of common
stock). Non-qualified options may be granted at a price not less than 85% of the
estimated fair market value of the common stock at the date of grant and are
exercisable over periods not to exceed ten years. Options granted prior to the
Company's initial public offering can be exercised at any time following grant.
The Company has the right to repurchase at the option exercise price shares that
have not vested. Options granted subsequent to the Company's initial public
offering can be exercised only to the extent vested. Options granted to date
generally vest over a four-year term, with 25% of the options vesting after the
first year and the remaining options vesting on a monthly basis thereafter.
Stock option activity under the plan is as follows:
NUMBER WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE
---------- --------------
Balance, January 1, 1999............ 634,878 $0.12
Granted........................ 840,324 1.87
Exercised...................... (94,852) 0.10
Forfeited...................... (36,000) 0.83
------------ ----
Balance, December 31, 1999.......... 1,344,350 1.19
Granted........................ 1,844,050 4.61
Exercised...................... (534,126) 0.55
Forfeited...................... (819,371) 4.20
------------ ----
Balance, December 31, 2000.......... 1,834,903 3.93
Granted........................ 922,000 0.63
Exercised...................... (37,656) 0.15
Forfeited...................... (1,041,909) 3.22
----------- ----
Balance, December 31, 2001.......... 1,677,338 $2.62
============ =====
As of December 31, 1999, there were 39,967 options exercisable at a
weighted average exercise price of $0.10 per share; as of December 31, 2000,
there were 245,989 options exercisable at a weighted average exercise price of
$4.53 per share; and as of December 31, 2001, there were 450,805 options
exercisable at a weighted average exercise price of $4.06 per share.
F-17
The following table summarizes information about stock options
outstanding at December 31, 2001:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------- -------------------------
WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
EXERCISE OPTIONS REMAINING AVERAGE OF OPTIONS AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----- ----------- ---------------- -------------- ----------- --------------
$ 8.94 5,500 8.3 years $ 8.94 3,294 $ 8.94
7.56 181,250 8.1 years 7.56 93,814 7.56
7.00 125,000 8.1 years 7.00 62,500 7.00
5.49 3,000 7.8 years 5.49 1,875 5.49
3.96 13,400 7.6 years 3.96 8,181 3.96
3.69 235,000 8.5 years 3.69 97,282 3.69
3.13 132,000 8.8 years 3.13 43,669 3.13
2.75 50,000 8.8 years 2.75 16,667 2.75
1.03 169,000 9.0 years 1.03 47,897 1.03
0.55-0.77 566,000 9.4 years 0.69 18,063 0.60
0.04-0.26 197,188 8.7 years 0.23 57,563 0.16
--------- -------
1,677,338 450,805
========= =======
The Company applies the provisions of APB No. 25 and related
interpretations in accounting for its stock options. For the years ended 2001,
2000 and 1999, had the Company recorded stock-based compensation cost consistent
with the provisions of SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts included in the table below. The below
paragraph discloses the weighted-average assumptions used in estimating the fair
value of stock options using the Black-Scholes option valuation model and the
weighted-average fair value of the stock options granted. The Black-Scholes
option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable.
Additionally, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the Company's
stock-based compensation has characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
the Company's stock-based compensation.
The weighted average fair value of options granted during 2001, 2000 and
1999 was estimated at $0.56, $4.61 and $4.48 per share, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for the grants: risk-free interest rates of 5.0%, 5.8% and 5.9%
in 2001, 2000 and 1999, respectively; dividend yield of 0%; expected lives of
four years; expected lives of two years for employee stock purchases and
volatility of 154.5%, 146%, 133.5% in 2001, 2000 and 1999, respectively.
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2001 2000 1999
---------------------------------------------- ---- ---- ----
Net loss - as reported..................................... $(31,848) $(23,901) $(15,013)
Net loss - pro forma....................................... (33,327) (25,464) (15,236)
Basic and diluted loss per share - as reported............. $ (1.37) $ (1.11) $ (1.01)
Basic and diluted loss per share - pro forma............... (1.43) (1.21) (1.03)
F-18
The Company recorded deferred compensation during 2001, 2000 and 1999
aggregating $0, $0 and $2,004,745, respectively, related to stock options.
Compensation expense for 2001, 2000 and 1999 totaled $165,654, $258,895 and
$365,571, respectively. The remaining balance of deferred compensation at
December 31, 2001 will be recognized as expense over the remaining vesting
periods of the options as follows:
2002................................................. $ 99,770
2003................................................. 26,570
---------
$126,340
=========
Deferred compensation was computed as the difference between the deemed
fair value of the common stock and the option exercise price at the date of
grant of the options. Deemed fair value was derived from prices paid by
independent investors in the Series A, Series B and Series C financings.
14. LEGAL PROCEEDINGS
From time to time the Company is involved in litigation incidental to the
conduct of its business. The Company is not currently a party to any lawsuit or
arbitration proceeding the outcome of which the Company believes will have a
material adverse effect on its financial position, results of operations or
liquidity.
The Securities and Exchange Commission has entered a formal order of
private investigation concerning the events underlying the Company's revisions
of its fiscal 2000 operating results based on adjustments to fourth quarter 2000
revenue, which results were announced and revised in certain press releases
issued in January and March of 2001. In connection with its investigation, the
Commission will also be reviewing the restatement of the Company's financial
statements set forth in the Company's 2001 Annual Report on Form 10-K, as
amended, and certain related accounting, sales and organizational matters. The
Company has been cooperating fully with the Staff of the Commission in its
investigation and to date the Staff has made no determinations that the Company
is aware of with respect to this investigation.
15. 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 common 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
common 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 is a designer and
distributor of notebook computer connectivity and power products, as well as
model-specific notebook computer hard drive upgrades. Cellular Accessory
Warehouse is a distributor of model-specific cellular accessories.
Additionally, 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 were subject to an
earn-out provision based on the post-closing operating performance of the Xtend
business unit. These earn-out provisions were met. Xtend also 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. In August 2001, we advanced $500,000 to XMicro Holding
Company against anticipated payments that would be due to XMicro pursuant to the
August 2000 Asset Purchase Agreement (see Note 18).
F-19
Each acquisition was recorded using the purchase method of accounting
under Accounting Principles Board ("APB") Opinion No. 16 "Business
Combinations." 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 "Goodwill and other assets, net" on the accompanying
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 (see
Note 16).
The pro forma condensed consolidated financial information for the year
ended December 31, 1999, determined as if all acquisitions had occurred on
January 1 of that period, would have resulted in net sales of $37.4 million, net
loss of $16.1 million, and basic and diluted loss per share of $1.09. Due to the
timing of the acquisitions on January 4, 2000 and January 11, 2000 for Cellular
Accessory Warehouse and Road Warrior International, respectively, no significant
activity took place prior to the acquisitions and therefore pro forma results
are not presented. The pro forma condensed consolidated financial information
for the year ended December 31, 2000, determined as if the Xtend acquisition had
occurred on January 1 of that period, would have resulted in net sales of $47.2
million, net loss of $22.8 million, and basic and diluted loss per share of
$1.06. This unaudited pro forma information is presented for illustrative
purposes only, and is not necessarily indicative of the results of operations in
future periods or results that would have been achieved had iGo Corporation and
the acquired companies been combined during the specified period.
16. IMPAIRMENT OF ASSETS
BUSINESS ACQUISITIONS.
As discussed in Note 15, the Company made three business acquisitions
during fiscal year 2000: CAW Products, Inc., AR Industries Inc., and Xtend Micro
Products, Inc. The Company allocated the acquisition cost for each of these
entities to identifiable assets and goodwill. The amounts allocated to goodwill
have subsequently been amortized on the basis of their estimated useful lives
ranging from 40 to 60 months. During the fourth quarter of 2001, in accordance
with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long
Lived Assets to be Disposed Of," the Company estimated the future cash flows of
the businesses based on reasonable assumptions and projections containing
management's best estimates taking into account actual losses realized in the
third and fourth quarters of 2001 and similar forecasted operating results of
the acquired businesses in 2002 based on the impact of the events of September
11, 2001 on the travel industry and the overall effect on the economy, resulting
in reduced purchases by the Company's distributors and customers. The Company
used undiscounted cash flows to determine if the goodwill was impaired. Because
the amount of the undiscounted cash flows was less than the carrying value of
the goodwill, the Company recognized a write-down with respect to each acquired
business computed based upon discounted cash flows. The resulting write-downs of
unamortized goodwill related to the acquisitions of CAW Products, Inc., AR
Industries Inc., and Xtend Micro Products, Inc. were approximately $250,000,
$1.4 million and $7.8 million, respectively.
F-20
LONG-LIVED ASSETS.
During the fourth quarter of 2001, the Company determined that due to our
staffing reductions, certain assets had become idle and therefore their carrying
value was impaired. As a result of this determination, the Company recorded a
write-down for these assets in the amount of approximately $124,000.
17. RESTATEMENT
Subsequent to the issuance of the Company's consolidated financial
statements for the year ended December 31, 2001, management of the Company
determined that accounting entries duplicating the elimination of certain
intercompany transactions during the period had been made. As a result, the
consolidated financial statements for the year ended December 31, 2001 have been
restated from those previously reported on the Company's Form 10-K to increase
both net product revenue and cost of goods sold by $932,000. A summary of the
significant effects of the restatement on the accompanying consolidated
statement of operations is as follows (items that have not been changed were not
affected by the restatement):
EFFECTS ON THE CONSOLIDATED STATEMENT OF OPERATIONS:
2001
----
AS PREVIOUSLY AS
REPORTED RESTATED
-------- --------
(DOLLARS IN THOUSANDS)
Revenues:
Net product revenue ..................... $ 27,954 $ 28,886
--------- ---------
Cost of goods sold ........................... 23,503 24,435
--------- ---------
Gross profit ................................. 4,451 4,451
Operating expenses:
Sales and marketing ..................... 11,855 11,855
Product development ..................... 2,590 2,590
General and administrative .............. 9,064 9,064
Merger and acquisition costs ............ 12,956 12,956
--------- ---------
Total operating expenses ........... 36,465 36,465
--------- ---------
Loss from operations ......................... (32,014) (32,014)
Other income, net ............................ 166 166
--------- ---------
Net loss ........................... $(31,848) $(31,848)
========= =========
Net loss per share:
Basic and diluted ...................... $ (1.37) $ (1.37)
========= =========
18. SUBSEQUENT EVENTS
DEFINITIVE MERGER AGREEMENT WITH MOBILITY ELECTRONICS, INC.
On March 24, 2002, the Company entered into a definitive agreement to be
acquired by Mobility Electronics, Inc. of Phoenix, Arizona. Under the agreement,
the Company's stockholders would receive an aggregate of $5,100,000 in cash and
2,600,000 shares of Mobility Electronics common stock (valued at $3,562,000
based on the approximate market price per share during the few days leading up
to and following the announcement of the transaction of $1.37) at the
transaction closing and up to an additional $1,000,000 in cash and 500,000
additional Mobility Electronics shares (similarly valued at $685,000) one year
following the transaction closing subject to certain conditions. The closing of
the transaction is subject to certain material conditions, including the
transaction's approval by the Company's stockholders and the effectiveness of a
registration statement to be filed with the Securities and Exchange Commission,
and there can be no assurance that all of the conditions will be satisfied.
F-21
SETTLEMENT AGREEMENT WITH XMICRO HOLDING COMPANY, INC. AND FORMER OFFICER
On March 13, 2002, iGo, Xtend Micro Products, Inc., XMicro Holding
Company, Inc., and Mark Rapparport entered into a settlement agreement resolving
certain matters related to the employment of Mr. Rapparport with one of our
subsidiaries and the finalization of an earn-out in relation to our acquisition
of Xtend Micro Products, Inc. In August 2001, iGo advanced $500,000 to XMicro
Holding Company against the anticipated earn-out obligation (see Note 15). In
March 2002, iGo paid an additional $250,000 and issued 1,989,807 shares of its
common stock to XMicro Holding Company as final settlement and satisfaction of
these matters. At the deemed price per share of $0.363, the aggregate value of
the cash and stock provided in March 2002 as part of this settlement is
$972,300. This settlement was recorded as additional purchase price in
connection with the acquisition of Xtend Micro Products and was included in the
Company's write-down of goodwill in 2001 (see Notes 7 and 16).
SECOND AMENDMENT TO LEASE AGREEMENT
On March 22, 2002, iGo entered into a Second Amendment with Dermody Family
Limited Partnership I and Gulia Dermody Turville, the landlord under the lease
for the premises located at 9393 Gateway Drive, Reno, Nevada. The primary
purpose of the Second Amendment is to provide that iGo may terminate the lease
at any time in its sole discretion by giving the landlord at least sixty (60)
days' advance written notice of such termination. The Second Amendment also
provides that the landlord may terminate the lease at any time in its sole
discretion by giving iGo at least ninety (90) days' advance written notice of
such termination. In connection with the Second Amendment iGo agreed to allow
the landlord to forever retain the security deposit of $140,000 described in the
lease and paid the landlord $360,000. This total sum of $500,000, which is
included in accrued liabilities as of December 31, 2001, is characterized in the
Second Amendment as a lease restructuring fee and as such is nonrefundable.
There are certain representations, warranties, releases and covenants by and
among the parties in the Second Amendment, as well as a condition imposed upon
iGo that it cannot terminate the lease if at the time of delivering notice to
the landlord there is an uncured monetary default.
POTENTIAL NASDAQ DELISTING
In February 2002, the Company received notice from Nasdaq that it is not
in compliance with Nasdaq Marketplace Rule 4450(a)(5), which requires the
Company's common stock to have a minimum $1.00 bid price per share. Under the
Marketplace Rules, the Company has until May 15, 2002, to regain compliance by
achieving a closing bid price for its shares of $1.00 or more for a minimum of
ten consecutive trading days. The Company has also been notified that it is not
in compliance with Marketplace Rule 4450(a)(2), which requires that the minimum
market value of the Company's publicly held shares (shares held by
non-affiliates of iGo) be at least $5,000,000, and that it has until June 17,
2002 to regain compliance by raising the market value of publicly held shares to
$5,000,000 or more for ten consecutive trading days. Failure to regain
compliance with either of these standards would result in the Company's common
stock being delisted from the Nasdaq National Market. The Company could appeal a
delisting decision and/or transfer its securities to the Nasdaq SmallCap Market.
There can be no assurance that any such appeal would be successful or that the
Company could maintain compliance with the continued listing requirements of the
Nasdaq SmallCap Market for any substantial period of time. The Company's stock
would continue to trade on the over-the-counter bulletin board following any
delisting from either Nasdaq Market.
F-22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of Reno,
Nevada on this 7th day of May 2002.
IGO CORPORATION
By: /s/ David Olson
--------------------------------------------
David Olson
Acting President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ David Olson Acting President and Chief Executive Officer May 7, 2002
--------------------------------- (Principal Executive Officer)
(David Olson)
/s/ Scott Shackelton* Chief Financial Officer and Secretary May 7, 2002
--------------------------------- (Principal Financial and Accounting Officer)
(Scott Shackelton)
/s/ Ross Bott* Director May 7, 2002
---------------------------------
(Ross Bott)
/s/ Darrell Boyle* Director May 7, 2002
---------------------------------
(Darrell Boyle)
/s/ Peter Gotcher* Director May 7, 2002
---------------------------------
(Peter Gotcher)
/s/ Ken Hawk* Director May 7, 2002
---------------------------------
(Ken Hawk)
* By: /s/ David Olson
------------------------------
(David Olson)
(Attorney-In-Fact)
F-23
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Additional
Balance at Provisions Balance at End
Beginning of Obtained in Accounts of
Dollars in thousands Period Provisions Acquisitions Written Off Period
------ ---------- ------------ ----------- ------
Allowance for Doubtful
Accounts Receivable:
YEAR ENDED 12/31/01 $ 1,075 $ 1,015 $ 0 $ 467 $1,623
========= ========= ======= ========= =======
YEAR ENDED 12/31/00 $ 565 $ 663 $ 511 $ 664 $1,075
========= ========= ======= ========= =======
YEAR ENDED 12/31/99 $ 170 $ 719 $ -- $ 324 $ 565
========= ========= ======= ========= =======
Allowance for Doubtful Notes
Receivable:
YEAR ENDED 12/31/01 $ -- $ 236 $ -- $ -- $ 236
========= ========= ======= ========= =======
YEAR ENDED 12/31/00 $ -- $ -- $ -- $ -- $ --
========= ========= ======= ========= =======
YEAR ENDED 12/31/99 $ -- $ -- $ -- $ -- $ --
========= ========= ======= ========= =======
Allowance for Sales Returns:
YEAR ENDED 12/31/01 $ 440 $ 180 $ -- $ 386 $ 234
========= ========= ======= ========= =======
YEAR ENDED 12/31/00 $ 147 $ 360 $ -- $ 67 $ 440
========= ========= ======= ========= =======
YEAR ENDED 12/31/99 $ 237 $ (3) $ -- $ 87 $ 147
========= ========= ======= ========= =======
Inventory Reserve:
YEAR ENDED 12/31/01 $ 785 $ 3,659 $ 0 $ 2,609 $1,835
========= ========= ======= ========= =======
YEAR ENDED 12/31/00 $ 307 $ 790 $ 300 $ 612 $ 785
========= ========= ======= ========= =======
YEAR ENDED 12/31/99 $ 109 $ 356 $ -- $ 158 $ 307
========= ========= ======= ========= =======
F-24