10-Q 1 igo_10q-063002.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission file number: 000-27021 iGo CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 94-3174623 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 9850 DOUBLE R BLVD. RENO, NEVADA 89521 (Address of principal executive offices) (775) 746 - 6140 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Shares outstanding of each of the registrant's classes of common stock as of July 31, 2002 Class Outstanding as July 31, 2002 ----- ---------------------------- Common stock, $0.001 par value 25,388,938 iGo CORPORATION FORM 10-Q TABLE OF CONTENTS

iGo CORPORATION UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

iGo CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

iGo CORPORATION UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

iGo CORPORATION UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION iGo Corporation (formerly Battery Express, Inc.) (the "Company") was incorporated in California in 1993 and is headquartered in Reno, Nevada. iGo Corporation (NASDAQ: IGOC) is a leading provider of parts and accessories for mobile technology products such as notebooks, cell phones and wireless devices. iGo's mission is to keep the mobile professional powered up and connected anywhere they go. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements for the three and six-month periods ended June 30, 2002 and 2001 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain interim information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of financial condition, results of operations, and cash flows have been included. The results of operations for the interim periods should not be considered indicative of results for any other interim period or for a full calendar year. These financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, in the Company's Form 10-K for the year ended December 31, 2001, as amended. 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, and $2.0 million for the six-months ended June 30, 2002. 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. With a targeted focus on high margin core products and improved inventory control resulting in significantly reduced excess and obsolete inventory charges the Company has been 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 relocation of the Company's main facility in Reno to a smaller, less costly facility in Reno. The Company may need to raise additional funds before the end of 2002 in the event that it fails to generate sufficient cash from operations. 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. In the event that the Company fails to generate sufficient cash from operations and is unable to secure additional financing from other sources, it is uncertain if or for how long the Company will be able to continue operations. 6 PRINCIPLES OF CONSOLIDATION The condensed consolidated financial statements include the accounts of iGo Corporation and its wholly owned subsidiaries. The subsidiaries were formed for specific transactions, such as acquisitions. All significant intercompany balances and transactions have been eliminated in consolidation. NET LOSS PER SHARE Net loss per share--basic and diluted, is computed using the weighted-average number of common shares outstanding during the period. Stock options and warrants were not included in the computations because they would have been antidilutive. The number of potentially dilutive shares that were not included in weighted average shares outstanding were 1,646,123 and 2,047,092 for the three and six-month periods ended June 30, 2002 and 2001, respectively. 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 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 changes the accounting for goodwill and indefinite lived intangible assets from an amortization method to an impairment only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of SFAS No. 142 in January 2002. Amortization is still required for identifiable intangible assets with finite lives. See Note 6. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The standard supersedes the current authoritative literature on impairments as well as disposal of a segment of a business and is effective for fiscal years and interim periods beginning after December 15, 2001. The Company therefore adopted SFAS No. 144 in January 2002. The Company periodically evaluates its long-lived assets for impairment. Adoption of SFAS No. 144 did not have a material effect on the Company's condensed consolidated financial statements. In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No. 146"). SFAS No.146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. A fundamental conclusion reached by the FASB in this statement is that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not yet determined the impact of SFAS No. 146 on its financial position and results of operations, if any. 7 2. ACCOUNTS RECEIVABLE Accounts receivable consist of the following at June 30, 2002 and December 31, 2001:

8 6. INTANGIBLE ASSETS AND GOODWILL On January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes new accounting and reporting requirements for goodwill and other intangible assets. Under this accounting standard, goodwill and intangible assets with indefinite lives are no longer subject to amortization but are tested for impairment at least annually. Amortization is still required for identifiable intangible assets with finite lives. SFAS 142 also requires the completion of a transitional impairment test at the date this accounting standard is initially applied. The Company recorded a charge during the first quarter of 2002 of $591,000 as a result of completing its transitional impairment test, and has recognized this loss as the effect of a change in accounting principle. This charge was determined based on a comparison of the fair value of the Company with its carrying amount, including goodwill that resulted from prior business acquisitions. The fair value applied in the comparison is based upon the purchase price established in the definitive merger agreement the Company entered into with Mobility Electronics, Inc., which agreement (as amended) provides for the acquisition of the Company by Mobility (see Note 12). The results of the comparison and loss measurement indicated that goodwill existing at the date of adoption of this accounting standard was fully impaired. In connection with its adoption of SFAS 142, the Company reassessed previously recognized intangible assets and determined that their classification and useful lives were appropriate. Goodwill consists of the following at June 30, 2002 and December 31, 2001:

Intangible assets consist of the following at June 30, 2002 and December 31, 2001:

9 Aggregate amortization expense for intangible assets totaled $76,000 and $58,000 for the six-month periods ended June 30, 2002 and 2001, respectively. Estimated amortization expense for each of the five succeeding years ended December 31 is as follows: DOLLARS IN THOUSANDS FISCAL YEAR ----------- 2002.................................................... $144 2003.................................................... 119 2004.................................................... 114 2005.................................................... 113 2006.................................................... 104 The following table adjusts the Company's net loss and net loss per share for the adoption of SFAS 142:

7. OTHER ASSETS Other assets consists of the following at June 30, 2002 and December 31, 2001: DOLLARS IN THOUSANDS JUNE 30, DECEMBER 31, 2002 2001 ----------- ----------- Asset held for sale..................... $ -- $ 330 Other................................... 38 179 ----------- ----------- Total other assets................. $ 38 $ 509 =========== =========== 8. 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. 10 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. On June 21, 2002, in the United States District Court, Central District of California, Comarco Wireless Technologies, Inc. filed a lawsuit against the Company and its wholly owned subsidiary Xtend Micro Products, Inc. The suit alleges that the Company and Xtend are offering products for sale that infringe upon two United States patents issued to Comarco. The suit seeks injunctive relief, monetary damages, and costs and attorney's fees. The Company is investigating the facts surrounding these claims and consulting with legal counsel for Mobility regarding this matter, as Mobility is currently involved in litigation with Comarco over similar patent issues. While the Company intends to vigorously defend itself in this matter, it cannot be certain that its defense will be successful, and its business could be harmed if it is unsuccessful. On June 14, 2002, in the United States District Court, Northern Nevada, the Company filed a lawsuit against Mark Rapparport and XMicro Holding Company, Inc., seeking declaratory relief and alleging intentional interference with prospective advantage. This lawsuit was filed in response to a letter received from counsel for Rapparport and XMicro which made various allegations regarding a previous settlement agreement between the parties, the Company's acquisition of Xtend Micro Products and certain other matters. In the lawsuit the Company sought an order stating that the settlement agreement is valid and enforceable, an order preventing the defendants from further attempting to interfere with the pending merger, monetary damages, and costs and attorney's fees. Effective July 18, 2002, the parties entered into a settlement agreement regarding these matters. In connection with this settlement, presuming that the merger is consummated, iGo will pay such parties $1,850,000 in cash, all active litigation between the parties will be dismissed and all claims and demands terminated and released. Mr. Rapparport has agreed to vote his 3,531,199 shares in favor of the merger, but prior to the consummation of the merger, such shares will be cancelled and he will not receive distributions of any of the merger consideration. If the merger agreement is terminated or the merger does not occur prior to October 31, 2002, the parties' respective obligations and releases under the settlement agreement will terminate, Mr. Rapparport will keep his shares and will forfeit all but certain portions of the settlement payment. If the merger is terminated prior to September 3, 2002 and no stockholder meeting to approve the merger has taken place by that time, Mr. Rapparport will retain $350,000 of the settlement payment. If the merger is terminated after September 3, 2002 or otherwise following the Company's stockholder meeting, Mr. Rapparport will retain $250,000 in addition to the previously retained payment. If the merger has not occurred by October 1, 2002 and the Company and Mobility choose to extend the merger agreement, but the merger does not occur by October 31, 2002, then Mr. Rapparport would retain $500,000 in addition to the previously retained payments. Mobility has agreed to reimburse the Company for one-half of any payments retained by such stockholder in the event the agreement is terminated or the merger does not occur by the deadline. Related to this agreement, the Company recorded a charge, representing the cost of settlement, of approximately $479,000 to general and administrative expense in the second quarter of 2002. 11 9. BUSINESS ACQUISITION 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. 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 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 Note 6). The Company subsequently entered into an additional agreement with Mr. Rapparport and XMicro Holding Company relating to the Company's merger with Mobility Electronics, Inc. See Note 8. 10. LOAN TO CHAIRMAN AND CHIEF EXECUTIVE OFFICER On January 2, 2001, the Company entered into a Secured Loan Agreement with Ken Hawk, then the Company's 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. 11. 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 served 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 received 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. 12. 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 12 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. On July 18, 2002, the Company entered into an amendment to the Agreement and Plan of Merger among Mobility Electronics, Inc., IGOC Acquisition, Inc., and the Company. The principal effects of the amendment are twofold. First, the cash consideration to be distributed at closing was changed to $3,250,000 from $5,100,000. Second, the date by which the merger must occur before either party may terminate the Agreement was extended from August 31, 2002 to October 1, 2002. Relating to a settlement with a stockholder of the Company as discussed above in Note 8, such stockholder has agreed to vote his 3,531,199 shares in favor of the merger pursuant to a Lock-Up and Voting Agreement dated July 18, 2002, but prior to the consummation of the merger, such shares will be cancelled and such stockholder will not receive distributions of any of the merger consideration. 13. 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 was recorded as an expense in the fourth quarter of 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. On May 31, 2002, the Company provided the Dermody Family Limited Partnership I written notice of its intent to terminate the lease on July 31, 2002. 14. POTENTIAL NASDAQ DELISTING In February 2002, the Company received notice from Nasdaq that it was not in compliance with Marketplace Rule 4450(a)(5), which requires its common stock to have a minimum bid price per share of $1.00 and, in June 2002, the Company also received notice from Nasdaq that it was 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 the Company) be at least $5,000,000. The Company failed to regain compliance with either of these standards during the grace periods established under the Marketplace Rules and received notice from Nasdaq on May 24, 2002 that its shares were subject to delisting. The Company appealed this decision and at an oral hearing before the Nasdaq Hearing Panel on July 11, 2002, requested a stay of delisting of its common stock for a 90 day period in order for the merger with Mobility to be completed. 13 On July 31, 2002, the Nasdaq Hearing Panel informed the Company that an appeal to continue its listing on The Nasdaq National Market was successful and its common stock could remain listed pending the consummation of the proposed merger with Mobility. The Panel's determination follows an oral hearing on July 11, 2002, in which the Company requested such an extension. The Hearing Panel has given the Company until October 11, 2002, to complete the merger and immediately thereafter, voluntarily delist its securities from The Nasdaq National Market. In the event the merger is not consummated, the Company may choose to transfer its securities to the Nasdaq SmallCap Market. There can be no assurance that the Company could maintain compliance with the continued listing requirements of the Nasdaq SmallCap Market for any substantial period of time. If the Company does not transfer its securities to the Nasdaq SmallCap Market, its securities will be delisted from the Nasdaq Stock Market. While the Company's stock would continue to trade on the over-the-counter bulletin board following any delisting from either Nasdaq Market, the Company expects that its stock price and trading volume would decline, possibly significantly, and its ability to raise additional capital would be substantially diminished by any such delisting. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. The following discussion was prepared by iGo Corporation (referred throughout this document where appropriate, as "iGo," "Company," "we," "our," and "us"), and should be read in conjunction with, and is qualified in its entirety by, the unaudited condensed consolidated financial statements and the unaudited notes thereto included in this report as well as the Factors That May Affect Future Results that follow this discussion. The following discussion and other material in this report on Form 10-Q contain certain forward-looking statements. The forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable, are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control, and upon assumptions with respect to future business decisions which are subject to change. Accordingly, actual results could differ materially from those contemplated by such forward-looking statements. iGo, iGo (stylized), iGo.com, and Road Warrior are registered trademarks of iGo. Mobile Technology Outfitter, iGo Alerts, iGo Concierge and Pocket Dock are trademarks of iGo or its subsidiaries. This report also contains brand names, service marks and trademarks of other companies which are the property of their respective holders. OVERVIEW iGo was incorporated in March 1993 and began offering products for sale later that year, but did not generate meaningful revenues until 1995. For the period from inception to 1995, our operating activities related primarily to the development of our proprietary databases and to locating favorable sources of supply. In 1995, we launched our first direct marketing campaign and focused on building sales volume and fulfillment capabilities, and in 1996, we launched our website. In June 1997, we relocated from San Jose, California to Reno, Nevada to take advantage of lower operating costs for our customer contact and fulfillment centers. Product revenue is generally recognized when persuasive evidence of a sale arrangement exists, shipment has occurred, title has passed, the 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. Individual customer purchases are generally 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 14 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 fiscal year 2001, $23.9 million in fiscal year 2000, and $15.0 million in fiscal year 1999. These prior years' net losses resulted primarily from costs associated with marketing programs to attract new customers, merger and acquisition costs, including amortization and write-down of goodwill through 2001, developing our website and proprietary databases, provisions for excess and discontinued inventory, provisions for bad debts and the development of our operational infrastructure. For the six months ended June 30, 2002, our net loss was $6.1 million. At June 30, 2002, we had an accumulated deficit of approximately $80.9 million. In conjunction with the adoption of SFAS No. 142 effective January 1, 2002, the Company recorded an impairment charge of $591,000, which is reflected on the statement of operations for the six-month period ended June 30, 2002 as a cumulative effect of change in accounting principle. 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 filed by Mobility with the Securities and Exchange Commission. The registration statement filed by Mobility was declared effective by the Securities and Exchange Commission on August 6, 2002. There can be no assurance that all of the remaining conditions will be satisfied. On July 18, 2002, the Company entered into an amendment to the definitive acquisition agreement. The principal effects of the amendment are twofold. First, the cash consideration to be distributed at closing was changed to $3,250,000 from $5,100,000. Second, the date by which the merger must occur before either party may terminate the Agreement was extended from August 31, 2002 to October 1, 2002. Relating to a settlement with a stockholder of the Company, such stockholder has agreed to vote his shares in favor of the merger pursuant to a Lock-Up and Voting Agreement dated July 18, 2002, but prior to the consummation of the merger, such shares will be cancelled and such stockholder will not receive distributions of any of the merger consideration. See Notes 8 and 12. 15 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 condensed 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, the 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. 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 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, which was in turn written off when we adopted SFAS 142 at January 1, 2002. See Note 6. 16 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. THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2002 COMPARED TO THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2001 NET PRODUCT REVENUE. Net product revenue consists of product sales to customers and outbound shipping charges, net of any discounts and reserves for expected returns. Net product revenue decreased from $7.7 million for the three-month period ended June 30, 2001 to $4.5 million for the three-month period ended June 30, 2002. Net product revenue decreased from $17.4 million for the six-month period ended June 30, 2001 to $9.3 million for the six-month period ended June 30, 2002. These decreases in net product revenue were primarily a result of an ongoing general contraction in purchasing by our corporate customers, which has had an impact on our sales since the second quarter of 2001. 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. COST OF GOODS SOLD AND GROSS MARGIN. Cost of goods sold consists 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 decreased from $6.7 million for the quarter ended June 30, 2001 to $3.1 million for the quarter ended June 30, 2002 and also decreased from $14.5 million for the six-month period ended June 30, 2001 to $6.2 million for the six-month period ended June 30, 2002. Gross margin represents the percentage derived by dividing gross profit (net product revenue less cost of goods sold) by net product revenue. Our gross margin increased from 13.1% in the second quarter of 2001 to 31.0% in the second quarter of 2002 and from 16.8% in the six-month period ended June 30, 2001 to 33.6% in the six-month period ended June 30, 2002. The increase in gross margin from the prior year periods was due primarily to additional inventory write-downs for discontinued and excess inventory of $1.0 million and $2.0 million in the three and six-month periods ended June 30, 2001, respectively, and the higher gross margins associated with our current offering of core accessory products. The lower gross margin on the sale of close out inventory also contributed to the overall lower gross margin in the 2001 periods. SALES AND MARKETING. Sales and marketing expenses consist primarily of advertising costs, fulfillment expenses, credit card costs and the salary and benefits of our sales, marketing and customer contact center personnel. Advertising and promotional expenses include pay for performance and online marketing efforts, print advertising, trade shows and direct marketing costs. Sales and marketing expenses decreased from $3.1 million for the three-month period ended June 30, 2001 to $1.9 million for the three-month period ended June 30, 2002, and also decreased from $7.0 million for the six-month period ended June 30, 2001 to $3.7 million for the six-month period ended June 30, 2002. 17 Historically, the most significant single component of our sales and marketing expense has been advertising costs. From the second quarter of 2001 to the second quarter of 2002, advertising costs declined from approximately $550,000 to approximately $450,000. Expressed as a percentage of net revenue, advertising costs were 7% in the second quarter of 2001 compared to 10% in the second quarter of 2002. From the six-month period ended June 30, 2001 to the six-month period ended June 30, 2002, advertising costs declined from approximately $1.7 million, or 10% of net revenue, to $502,000, or 5% of net revenue. This decrease 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. PRODUCT DEVELOPMENT. Product development expenses generally consist of payroll and related expenses for merchandising and website personnel, site hosting fees and web content and design expenses as well as expenses associated with development of our proprietary products. Product development expenses decreased from $880,000 for the three-month period ended June 30, 2001 to $382,000 for the three-month period ended June 30, 2002. From the six-month period ended June 30, 2001 to the six-month period ended June 30, 2002, product development expenses declined from approximately $1.7 million to $817,000. The expense decreases in the 2002 periods were attributable to completion in early to mid-2001 of several of the development projects initiated in 2000. GENERAL AND ADMINISTRATIVE. General and administrative expenses generally consist of salaries and related costs for our executive, administrative and finance personnel, support services and professional fees, as well as general corporate expenses such as rent and depreciation and amortization. General and administrative expenses increased from $2.0 million for the quarter ended June 30, 2001 to $2.3 million for the quarter ended June 30, 2002. This increase in general and administrative expenses for the second quarter of 2002 over the prior year period was primarily attributable to a charge of approximately $479,000 associated with a settlement agreement with a stockholder concerning certain allegations and related litigation. See Note 8. From the six-month period ended June 30, 2001 to the six-month period ended June 30, 2002, general and administrative expenses declined approximately $129,000 to approximately $4.2 million. The decrease in general and administrative expenses for the six-month period ended June 30, 2002 over the prior year period was primarily attributable to reductions in staffing. MERGER AND ACQUISITION COSTS, INCLUDING AMORTIZATION OF GOODWILL IN 2001. Amortization of goodwill recorded in past business combinations ceased upon the adoption of SFAS No. 142 in January 2002. Due to this change, the Company recorded no amortization of goodwill in 2002 compared to $853,000 and $1.7 million in amortization of goodwill in the three and six-month periods ended June 30, 2001. (see Notes 1 and 6 to the accompanying condensed consolidated financial statements). This non-cash acquisition cost primarily relates to the amortization of goodwill resulting from the January 2000 acquisitions of Road Warrior and Cellular Accessory Warehouse and the August 2000 acquisition of Xtend Micro Products. Goodwill was amortized on a straight-line basis over their respective useful lives through fiscal year 2001, generally 40 to 60 months. In conjunction with the adoption of SFAS No. 142 effective January 1, 2002, the Company recorded a charge of $591,000, which is reflected on the statement of operations for the six-month period ended June 30, 2002 as a cumulative effect of change in accounting principle. OTHER INCOME, NET. Other income, net, consists primarily of interest income earned on cash and cash equivalents, net of interest expense on borrowing and capital leases, and losses resulting from disposals of fixed assets. Other income, net, changed favorably from a net expense of $103,000 for the three-month period ended June 30, 2001 to other income, net of $44,000 for the three-month period ended June 30, 2002. This favorable difference is primarily attributable to a write-off of $144,000 in the three-month period ended June 30, 18 2001 of the net book value of web site equipment and software resulting from the implementation of our enhanced web site. For the six-month period ended June 30, 2002, other income, net was $71,000 compared to $240,000 for the six-month period ended June 30, 2001. The decrease was primarily attributable to lower interest income as funds invested from the net proceeds of the initial public offering in October 1999 declined. INCOME TAXES. The Company did not provide any current or deferred U.S. federal, state or foreign income tax provision or benefit for any of the periods presented because it has experienced losses since inception. Utilization of the Company's net operating loss carryforwards, which begin to expire in 2011, may be subject to certain limitations under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended. The Company has provided a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of the uncertainty regarding its realizability. LIQUIDITY AND CAPITAL RESOURCES Prior to our initial public offering, we financed our operations primarily through the sale of preferred stock, capital lease obligations and revolving credit facilities. Prior to our initial public offering, we received $13.2 million from the sale of preferred stock, net of issuance costs. Of this amount, $1.4 million was received in June 1996, $6.0 million in October 1998 and $5.8 million in July 1999. Proceeds from equipment financed under a sale-leaseback transaction, net of principal repayments, amounted to $685,000 during the year ended December 31, 1999. There were no proceeds from equipment financed under sale-leaseback transactions during the six-month period ended June 30, 2002. 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 $2.0 million for the six-month period ended June 30, 2002, compared to $9.1 million for the six-month period ended June 30, 2001. Net cash used in operating activities during the current period consisted primarily of net losses, which was partially offset by decreases in accounts and notes receivable and inventory. Non-cash expenses included in the net loss for the six-month period ended June 30, 2002 were approximately $2.9 million lower than for the six-month period ended June 30, 2001. Net cash used in investing activities was $283,000 and $131,000 for the six-month periods ended June 30, 2002 and 2001, respectively, which was attributable to acquisitions of property and equipment and payment related to a business acquisition in the 2002 period. Net cash used in financing activities was $185,000 for the six-month period ended June 30, 2002 compared to $549,000 for the six-month period ended June 30, 2001. Cash used in financing activities included principal payments on debt in both periods, and the prior year period included a loan to a stockholder, who was formerly our Chairman and Chief Executive Officer. 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, and $2.0 million for the six-month period ended June 30, 2002. Recurring losses and negative cash flows from operations and limited financing opportunities raise substantial doubt about our ability to continue as a going concern. 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 relocation of our main facility in Reno to a smaller, less costly facility in Reno completed in early August 2002. 19 We may need to raise additional funds before the end of 2002 in the event that we fail to generate sufficient cash from operations. 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. In the event that we fail to generate sufficient cash from operations and are unable to secure additional financing from other sources, it is uncertain if or for how long we will be able to continue operations. 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 "Factors that May Affect Future Results" below. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 changes the accounting for goodwill and indefinite lived intangible assets from an amortization method to an impairment only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of SFAS No. 142 in January 2002. Amortization is still required for identifiable intangible assets with finite lives. See Note 6. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The standard supersedes the current authoritative literature on impairments as well as disposal of a segment of a business and is effective for fiscal years and interim periods beginning after December 15, 2001. The Company therefore adopted SFAS No. 144 in January 2002. The Company periodically evaluates its long-lived assets for impairment. Adoption of SFAS No. 144 did not have a material effect on the Company's condensed consolidated financial statements. In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS No. 146"). SFAS No.146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. A fundamental conclusion reached by the FASB in this statement is that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The Company has not yet determined the impact of SFAS No. 146 on its financial position and results of operations, if any. 20 FACTORS THAT MAY AFFECT FUTURE RESULTS 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 June 30, 2002, we had an accumulated deficit of approximately $80.9 million. We do not expect to achieve profitability for at least the next several quarters. WE MAY NOT HAVE SUFFICIENT CAPITAL TO REACH PROFITABILITY. It is unlikely that we will reach cash-flow positive without raising additional funds. If additional funding is necessary, we may seek such additional funding through debt or equity financings. We currently have no commitments for any additional financing, and there can be no assurance that adequate funds for our operations will be available to us. Our auditors gave us a "going concern" opinion in connection with our fiscal 2001 audit, 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. In the event that we fail to generate sufficient cash from operations and are unable to secure additional financing from other sources, it is uncertain if or for how long we will be able to continue 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 were not in compliance with Marketplace Rule 4450(a)(5), which requires our common stock to have a minimum bid price per share of $1.00 and in June 2002, we also received notice from Nasdaq that we were 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 the Company) be at least $5,000,000. We failed to regain compliance with either of these standards during the grace periods established under the Marketplace Rules and received notice from Nasdaq on May 24, 2002 that our shares were subject to delisting. We appealed this decision and at an oral hearing before the Nasdaq Hearing Panel on July 11, 2002, requested a stay of delisting of our common stock for a 90 day period in order for the merger with Mobility to be completed. On July 31, 2002, the Nasdaq Hearing Panel informed us that our appeal was successful and our common stock could remain listed on The Nasdaq National Market pending the consummation of the proposed merger with Mobility. The Hearing Panel has given us until October 11, 2002, to complete the merger and immediately thereafter, voluntarily delist our securities from The Nasdaq National Market. In the event the merger is not consummated, we may choose to transfer our securities to the Nasdaq SmallCap Market. There can be no assurance that we could maintain compliance with the continued listing requirements of the Nasdaq SmallCap Market for any substantial period of time. If we do not transfer our securities to the Nasdaq SmallCap Market, our securities will be delisted from the Nasdaq Stock Market. 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. 21 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, as amended, 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. 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 22 customers or retain existing customers, and the failure to maintain a strong and effective brand may harm our business, financial condition and results of operations. WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS, AND WE MAY NOT BE ABLE TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS. Our performance is substantially dependent on the continued services and on the performance of our executive officers. 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. 23 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 and the six months ended June 30, 2002, approximately 22% and 35%, respectively, of our total net revenues were from products shipped to our customers directly from our suppliers. The failure 24 of these suppliers to continue to ship products directly to our customers or to ship products to our customers in a timely manner could result in lost revenues, customer dissatisfaction and damage to our reputation. In addition, if we could not depend on these suppliers to ship products to our customers directly, we would have to carry the products in our inventory, which would expose us to risks of excess inventory, outdated merchandise and increased warehouse costs, all of which could harm our business. FAILURE OF THIRD-PARTY CARRIERS TO DELIVER OUR PRODUCTS TIMELY AND CONSISTENTLY COULD HARM OUR BUSINESS. Our supply and distribution system is primarily dependent upon our relationships with United Parcel Service 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 25 notified from time to time that certain products that we offer may infringe on the proprietary rights of others. There can be no assurances that third parties will not claim infringement in the future. We expect that the continued growth of the Internet will result in an increasing number of infringement claims as legal standards related to our market continue to evolve. Any such claim, with or without merit, could be time consuming, result in costly litigation, and may have a material adverse effect on our business and results of operations. We have also 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. FAILURE TO SUCCESSFULLY DEFEND A LAWSUIT ALLEGING PATENT INFRINGEMENT ON OUR PART COULD HARM OUR BUSINESS. On June 21, 2002, in the United States District Court, Central District of California, Comarco Wireless Technologies, Inc. filed a lawsuit against iGo and its wholly owned subsidiary Xtend Micro Products, Inc. The suit alleges that iGo and Xtend are offering products for sale that infringe upon two United States patents issued to Comarco. The suit seeks injunctive relief, monetary damages, and costs and attorney's fees. We are investigating the facts surrounding these claims and consulting with legal counsel for Mobility regarding this matter, as Mobility is currently involved in litigation with Comarco over similar patent issues. While we intend to vigorously defend ourselves in this matter, we cannot be certain that our defense will be successful, and our business could be harmed if we are unsuccessful. 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 26 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; 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. 27 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. 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. For the year ended December 31, 2001 and the six months ended June 30, 2002, approximately 78% and 65%, respectively, 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 28 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; 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. 29 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. 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. 30 WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND LEGAL UNCERTAINTIES SURROUNDING THE INTERNET. New Internet legislation or regulation or the application of existing laws and regulations to the Internet and electronic commerce could harm our business, financial condition and results of operations. We are subject to regulations applicable to businesses generally and laws or regulations directly applicable to communications over the Internet and access to electronic commerce. Although there are currently few laws and regulations directly applicable to electronic commerce, it is possible that a number of laws and regulations may be adopted with respect to the Internet covering issues such as user privacy, pricing, content, copyrights, distribution, antitrust, taxation and characteristics and quality of products and services. For example, the United States Congress recently enacted Internet laws regarding children's privacy, copyrights and transmission of sexually explicit material. In addition, the European Union recently enacted its own Internet privacy regulations. Furthermore, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations regarding the Internet may decrease the growth of the Internet or electronic commerce, which could, in turn, decrease the demand for our products and services and increase our cost of doing business. In addition, if we were alleged to have violated federal, state or foreign civil or criminal law, we could be subject to liability, and even if we could successfully defend such claims, they may involve significant legal compliance and litigation costs. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk for changes in interest rates is limited to the exposure related to our debt instruments which are tied to market rates. 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. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time we are involved in litigation incidental to the conduct of our business. We are not currently a party to any lawsuit or 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, as amended, 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. 31 On June 21, 2002, in the United States District Court, Central District of California, Comarco Wireless Technologies, Inc. filed a lawsuit against us and our wholly owned subsidiary Xtend Micro Products, Inc. The suit alleges that we are offering products for sale that infringe upon two United States patents issued to Comarco. The suit seeks injunctive relief, monetary damages, and costs and attorney's fees. We are investigating the facts surrounding these claims and consulting with legal counsel for Mobility regarding this matter, as Mobility is currently involved in litigation with Comarco over similar patent issues. While we intend to vigorously defend ourselves in this matter, we cannot be certain that our defense will be successful, and our business could be harmed if we are unsuccessful. On June 14, 2002, in the United States District Court, Northern Nevada, we filed a lawsuit against Mark Rapparport and XMicro Holding Company, Inc., seeking declaratory relief and alleging intentional interference with prospective advantage. This lawsuit was filed in response to a letter received from counsel for Rapparport and XMicro which made various allegations regarding a previous settlement agreement between the parties, our acquisition of Xtend Micro Products and certain other matters. In the lawsuit we sought an order stating that the settlement agreement is valid and enforceable, an order preventing the defendants from further attempting to interfere with the pending merger, monetary damages, and costs and attorney's fees. Effective July 18, 2002, the parties entered into a settlement agreement regarding these matters. In connection with this settlement, presuming that the merger is consummated, we will pay such parties $1,850,000 in cash, all active litigation between the parties will be dismissed and all claims and demands terminated and released. Mr. Rapparport has agreed to vote his 3,531,199 shares in favor of the merger, but prior to the consummation of the merger, such shares will be cancelled and he will not receive distributions of any of the merger consideration. If the merger agreement is terminated or the merger does not occur prior to October 31, 2002, the parties' respective obligations and releases under the settlement agreement will terminate, Mr. Rapparport will keep his shares and will forfeit all but certain portions of the settlement payment. If the merger is terminated prior to September 3, 2002 and no stockholder meeting to approve the merger has taken place, Mr. Rapparport will retain $350,000 of the settlement payment. If the merger is terminated after September 3, 2002 or otherwise following our stockholder meeting, Mr. Rapparport will retain $250,000 in addition to the previously retained payment. If the merger has not occurred by October 1, 2002, and iGo and Mobility choose to extend the merger agreement, but the merger does not occur by October 31, 2002, then Mr. Rapparport would retain $500,000 in addition to the previously retained payments. Mobility has agreed to reimburse us for one-half of any payments retained by such stockholder in the event the merger agreement is terminated or the merger does not occur by the deadline. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In connection with our initial public offering of common stock, we filed a Registration Statement on Form S-1, SEC File No. 333-84723 (the "Registration Statement"), which was declared effective by the Commission on October 13, 1999. Pursuant to the Registration Statement, we registered 5,750,000 shares of our common stock, $.001 par value per share, including 750,000 shares available for sale to the underwriters upon the exercise of their over-allotment option. The aggregate offering price of the shares sold was $69.0 million, $4.8 million of which was applied towards the underwriters' discounts and commissions. Other expenses related to the offering totaled $1.6 million. The net proceeds to us from the sale of common stock in the initial public offering were approximately $62.6 million, including exercise of the underwriters' over-allotment option. 32 We have used a portion of the proceeds for investment in sales and marketing, and general corporate purposes, including capital expenditures ($4.9 million), as well as strategic acquisitions ($5.0 million). The remainder of the proceeds have been invested in short-term, interest-bearing, investment-grade securities. The use of proceeds from the offering does not represent a material change in the use of proceeds described in our final prospectus filed on October 15, 1999. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS Exhibit Number Description 99.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the period covered by this report. However, on July 26, 2002, the Company filed a Form 8-K under Item 1 and Item 5, announcing (respectively) an amendment to the Agreement and Plan of Merger among Mobility Electronics, Inc., IGOC Acquisition, Inc., and the Company, and that the adjustment to the cash consideration for the merger as set forth in such amendment was the result of a settlement reached with a significant stockholder of the Company, Mark Rapparport, and his affiliate, XMicro Holding Company, with respect to certain allegations that were made by such parties against the Company and certain of its affiliates. The principal agreements for such amendment and settlement were filed in connection with such Form 8-K and, accordingly, are not included herewith. 33 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 14, 2002 iGo CORPORATION /s/ Scott Shackelton ----------------------------------- Scott Shackelton Senior Vice President, Finance and Chief Financial Officer (Duly Authorized Officer, Principal Financial and Accounting Officer) 34

IGO CORP 10-Q