UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
(Amendment No. 1 to Form 10-K as Amended May 2, 2000)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE Securities Exchange Act of 1934
For The Fiscal Year Ended
July 31, 1997
Commission File Number 0-18275
ITEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-0922994
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State (or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
10300 SW Greenburg Road, Suite 370, Portland, Oregon 97223
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(Address of principal executive offices including zip code)
(503) 244-4673
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(Registrant's telephone number including area code)
Indicate by check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes No ____X____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
The approximate market value of stock held by non-affiliates is $6,911,453 based
upon 12,297,959 shares held by such persons and the close price of $0.56 on
April 19, 2000. The number of shares outstanding of the Registrant's $0.01 par
value common stock at April 19, 2000 was 14,336,406.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's definitive proxy statement filed pursuant to
Regulation 14A in connection with the annual meeting of shareholders:
Part III, Items 10, 11, 12 of this report
(This Form 10-K includes ____ pages)
ITEX CORPORATION
FORM 10-K/A
For The Fiscal Year Ended July 31, 1997
INDEX
Page
PART I
ITEM 1. BUSINESS
ITEM 2. DESCRIPTION OF PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
Condition and Results of Operations
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
PART I
ITEM 1. BUSINESS
General
ITEX Corporation and its subsidiaries ("ITEX" or the "Company") operates what it
believes is one of the leading retail trade exchanges in the United States and
has licensees who operate trade exchanges in international markets in Mexico,
New Zealand and Turkey. The ITEX retail trade exchange headquartered in
Portland, Oregon has approximately 12,500 members (or "clients") who,
collectively, make up the trade exchange, which operates as an unincorporated
association. The trade exchange contracts with the Company to administer the
exchange and to act as a third-party recordkeeper for transactions entered into
by the members. ITEX works through approximately 90 independent brokers and
seven Company owned and operated regional offices to service existing ITEX
clients and enroll new clients.
From June 25, 1998 to January 18, 2000, the Company administered the BXI trade
exchange ("BXI") through its wholly-owned subsidiary, BXI Corporation, based in
Burbank California. The BXI trade exchange has approximately 13,800 members,
which are serviced by approximately 100 independent brokers. On January 18,
2000, the net assets and business of BXI Corporation, including all assets used
in operation of the BXI trade exchange, were sold. See Note 2 to Consolidated
Financial Statements included in this Form 10-K
The Company founded the ITEX Retail Trade Exchange in 1982.
In general, businesses choose to become members of a trade exchange when they
have excess capacity of the goods or services they provide particularly where
those goods or services are time-sensitive or over-abundant. Businesses become
members of trade exchanges to extend their customer base and market reach to
sell these time-sensitive or over-abundant goods or services. If a restaurant or
hotel does not fill a table or room at a particular time, the ability to realize
revenue on that table or room for that time is gone. However, if someone who may
not be willing to pay cash for a meal is willing to use trade credits to dine,
the restaurant has received revenue in the form of trade credits for that table
at that time which it otherwise would not have realized. Those trade credits can
then be spent by the restaurant to purchase goods and services it otherwise
would have to pay for in cash. Goods and services available through the exchange
are also available for cash purchase by members and nonmembers. Naturally,
members would prefer to sell their goods or services for cash, but for items
that are time sensitive, such as restaurant meals or hotel rooms, it makes
economic sense to sell them for trade credits. Slow moving or excess inventory
can also often be traded to achieve better economic results than if they remain
unsold or are sold at liquidation prices.
Members of exchanges contractually agree to sell their goods or services to
other members at the same price as cash customers pay but to receive payment in
trade credits. These trade credits can then be exchanged for other goods or
services offered by other members of the exchange and that are used in the
operation of the member's business. Exchange members have access to both printed
and Internet-based directories that list goods and services available for
purchase for trade credits, by category, on a local and national basis. Such
directories are frequently updated so they are current as to available goods and
services. The Company may grant, on behalf of the exchange, trade lines of
credit to clients who wish to purchase goods or services for trade credits prior
to selling goods or services to other members of the exchange.
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The trade credits of the ITEX retail trade exchange are referred to as "ITEX
Trade Dollars." An "ITEX Trade Dollar" is an accounting unit used by the ITEX
retail trade exchange to record the value of trades as determined by the parties
in trade exchange transactions. ITEX Trade Dollars denote the right to provide
goods or services to other Exchange members. In general, Trade Dollars can only
be used by members of the exchange to purchase the goods and services offered by
members of the exchange. However, the Company has "reciprocal" relations with
various other trade exchanges pursuant to which it is possible for a member of
the ITEX trade exchange to purchase goods or services offered by members of
those other trade exchanges, and members of other trade exchanges with
reciprocal agreements may acquire goods and services from the ITEX trade
exchange.
Trade Dollars may not be redeemed for cash. Trade Dollars may be used only in
the manner and for the purpose set forth in the Rules of the exchange. Trade
Dollars are not legal tender, securities, or commodities.
The Internal Revenue Service considers trade credit income to be equivalent to
cash income and a trade dollar expense to be equal to a cash dollar of expense.
The Company is obliged under the Tax Equity and Fiscal Responsibility Act of
1982 (TEFRA) to send Forms 1099-B to each of the Company's clients and to the
Internal Revenue Service (which the Company does electronically). The Form
1099-B reflects the total trade credit sales made by the client for the calendar
year, less the amount of any returns. Trade credits received must be reported as
gross income in tax returns. Expenditures of trade credits may be reported as
deductions in tax returns if they qualify as deductible business expenses or as
other deductions that are permitted by the Internal Revenue Code (e.g., medical
expenses, charitable contributions, and the like).
Members of the exchange are serviced by trade brokers who are independent
contractors with respect to the Company or, in the case of ITEX regional
offices, are employees of the Company. The Company provides brokers with
training, help in facilitating transactions, marketing materials, computer
services, computer software systems, and Internet-based resources including
directories, listings of goods and services currently available from and the
opportunity to advertise to members locally, nationally and internationally.
ITEX is in the process of upgrading and broadening these services to clients and
brokers.
Independent Brokers
Members of the exchange have a contractual relationship with the Company and are
assigned to an independent broker or a Company operated regional office. A
broker's responsibilities are to enroll new ITEX clients, train them in the use
of the system, facilitate business among clients, monitor the delivery of goods
and services between clients and assure payment of dues and fees to ITEX. For
the three years and eight months ended March 23, 2000, the number of member
clients who have left the system as a percent of total member clients at the
beginning of the fiscal year has been approximately 35% annually. New member
client enrollment has basically offset this attrition resulting in the number of
member clients remaining approximately the same during the three years and eight
months.
In the four week accounting cycle ended February 24, 2000, the seven company
owned offices servicing approximately 3,200 clients and the 20 largest
independent broker offices servicing approximately 4,800 clients produced, 36%
and 46% respectively of total net revenue of $685,000. The broker provides
client members with information about goods and services that are available
locally, nationally and internationally.
ITEX brokers do not have exclusive contractual rights to operate in a
geographical area. The ITEX broker contract provides for a five-year term unless
the contract is terminated for cause (as explained in the contract). The
contract automatically renews for subsequent five-year terms so long as the
broker is not in breach and otherwise is in compliance with the contract and any
policies and procedures then in place as adopted by the Company.
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Independent brokers are paid a percentage of revenue collected from ITEX clients
serviced by those brokers which generally ranges from 50% to 75% depending on
the volume of transactions and net increases in the number of clients enrolled
during each 28-day accounting cycle. For the four week accounting cycle ended
February 24, 2000, payments to Independent brokers were 58% of revenues
collected from ITEX clients which they serviced. New brokers are signed to
standard contracts.
The Company views its commitment to its brokers as critical to its long-term
success. The Company depends on a high rate of repeat business and views the
quality of its brokers' interaction with clients as an important element of its
strategy to continue to successfully develop the Company's business. By
providing training, marketing materials and programs, Internet and computer
related support, it seeks to foster a strong cooperative relationship with
brokers which will then foster a high level of service to clients by brokers.
Sources of Revenue
ITEX Corporation charges each member of the trade exchange an association fee of
$20 cash each four week accounting cycle ($260 annually) and 10 ITEX trade
dollars each cycle. This rate structure has been in place since November 4,
1999, when the cash fee was increased from $15 to $20 and the Trade Dollar fee
was decreased from 15 Trade Dollars to 10 Trade Dollars.
ITEX also receives transaction fees on the value of the transaction, from both
the buyer and the seller. Clients are billed at the end of each accounting cycle
and if a client makes payment automatically by credit card or electronic funds
transfer through the Company's Preferred Member (Autopay) system, the fee is 5%
of the dollar amount of the client's purchases and sales during the billing
period. If a client pays by check or otherwise after receiving a mailed
statement at the end of each four-week cycle, the fee is 7-1/2% of the dollar
amount of that client's purchases and sales during the period. Approximately 80%
of payments are made through electronic funds transfer or by credit cards
automatically using the Preferred Member Autopay system.
The Company prepares its financial statements on an accrual basis. See Notes To
Consolidated Financial Statements for a description of accounting policies. The
Company internally accounts for trade dollars in addition to cash in statements
to clients and brokers and in other ways necessary for operation of the trade
exchanges and the business of the Company. The Company considers the trade
dollars it receives from transactions to be valuable and uses them in the
operation of its business including the payment of obligations. Clients and
brokers use trade dollars in exchange for goods and services and in the
operation of their businesses.
Company Strategies
Key elements of the Company's strategy include the following:
o Increasing the number of new brokers and improving the operation of existing
independent brokers and the number of clients they serve in key markets. This
will require extensive recruiting and training programs. Historically, the
Company has not concentrated its efforts on recruiting independent brokers,
but believes it will be able to attract qualified individuals.
o Improving and increasing marketing programs and materials provided to
independent brokers and Company offices to assist them in signing new clients
and increasing services to members of the trade exchanges. Beginning in
mid-1999, the Company instituted a program of broker education known as the
"ITEX Boot Camp." In an interactive educational setting brokers are trained in
methods of recruiting new members for the Exchange and increasing the number
and size of trade transactions participated in by members.
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o Upgrading and enhancing computer software and related support, including
improved Internet access to ITEX clients and brokers. Recent advances in
computer and communications technology offers the Company opportunities to
provide clients and brokers with additional tools and simpler computer
applications. Such tools will enable them to more easily engage in trade
exchange transactions. Opportunities include improving the Company's existing
on-line system known as "Trade Flash" which provides clients with information
about goods and services that are immediately available. Another strategy is
to improve client profiles so the system will alert members when products or
services they are seeking become available on the trade exchange. Presently
the system provides listings of members by category and separate category
listings and descriptions of goods and services currently available for sale.
o Strengthening the infrastructure at the trade exchanges and administrative
offices of the Company, including centralized accounting, granting lines of
credits, credit checking, management of client information and other systems
resulting in increased efficiencies and productivity.
Purchase of Independent Broker Offices
Sacramento, California. On October 20, 1999, the Company completed the
acquisition of all of the outstanding stock of California Trade Exchange, Inc.,
a California corporation which operated the business of the Company's largest
independent broker located in Sacramento, California. The purchase price was
paid by issuing 1,966,667 shares of the Company's restricted common stock.
The primary identifiable assets of the acquired business were accounts
receivable, furniture and equipment and the right to service ITEX clients as
represented by the Independent Retail Broker Agreement for that office. The
Company is currently working on its accounting for the acquisition and has
concluded that the transaction will be assigned a value of less than 10% of the
Company's total assets.
Operating Income of the Sacramento Broker operation for the two nine and three
months ended September 30, 1999 prior to acquisition are as follows (unaudited):
Nine Months Ended Year Ended Year Ended
September 30, December 31, December 31,
1999 1998 1997
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Revenue
Membership fees $164,375 $263,487 $ 78,152
Commissions 533,434 610,943 325,146
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697,809 874,430 403,298
Operating income (loss)
before depreciation
and interest 139,304 215,983 (4,556)
Number of client
members, end of
period 806 706 496
The Sacramento, California independent brokerage office was previously licensed
to Collins M. Christensen on September 15, 1995. Mr. Christensen, the principal
owner of the Sacramento brokerage business became President, Chief Executive
Officer and a Director of ITEX Corporation after acquisition of the Sacramento
business. Gerry Layo, minority owner of the Sacramento brokerage business served
as a vice president of the Company in charge of broker training until March 7,
2000. Of the shares issued in the transaction, Mr. Christensen received
1,573,334 shares and Mr. Layo received 393,333 shares.
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Seattle, Washington. In February 2000, the Company acquired all of the issued
and outstanding stock of Seattle Trade Network, Inc., ("STN") a Washington
corporation which operated the business of the independent broker located in
Issaqua (Seattle area), Washington. The purchase price consisted of $150,000
cash, 150,000 ITEX Trade Dollars and 200,000 shares of common stock of the
company. In addition, the Company issued 15,000 warrants to purchase restricted
common stock of the Company at an exercise price of $0.75 per share. One of the
former stockholders of "STN" continued as an ITEX employee to manage the Seattle
office.
Houston, Texas. Also in February 2000, the Company acquired the assets of the
operator of the independent broker office located in Houston, Texas. The
purchase price was $100,000 cash, payable $50,000 at closing and the remainder
over time, 100,000 ITEX Trade Dollars and 100,000 shares of the restricted
common stock of the and the option to acquire up to an additional 25,000 shares
of restricted common stock at an exercise price of $0.75 per share. The owner of
the operation has remained as an ITEX employee to manage the Houston office. The
primary identifiable assets of the acquired business were accounts receivable,
furniture and equipment and the right to service ITEX clients as represented by
the Independent Retail Broker Agreement for that office.
Discontinued Businesses
In recent years the Company engaged in investing in, starting, and acquiring
operations and ventures outside its core business of operating trade exchanges
and related operations. These businesses have not been profitable and the
Company does not intend to make additional investments in them, nor does it
appear that the businesses would be successful if additional management and
capital were devoted to them. The Company is in the process of an orderly
liquidation of these investments. A significant amount of the original
investments will not be recovered. See, Item 7, Management's Discussion and
Analysis.
Competition
The Company competes with a wide range of other companies and individuals who
offer goods and services at retail, wholesale and discount locations as well as
those that offer such items for sale over the Internet. Some of the present and
potential future competitors of the Company have greater financial, technical,
marketing or personnel resources than the Company. The competitive environment
could have one or more of the following adverse effects on the Company:
O Negatively impact the Company's ability to generate greater revenues and
profits from such sources as membership fees and transaction fees
O limit the Company's opportunities to enter into or renew agreements with
brokers
O limit the Company's ability to develop new systems and services
O limit the Company's ability to continue to grow or sustain its membership
base
O Require price reductions in membership or transaction fees, or both, and
require increased spending on marketing and systems development
O Result in a loss of the Company's market share in the retail trade
exchange industry
O Require an increase in the Company's sales and marketing expenditures
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Any of the foregoing events could have an adverse effect on revenues or result
in an increase in costs as a percent of revenue, either of which could have a
material adverse effect on the Company's business, financial condition, and
operating results.
The Company is among a relatively few companies that provide opportunities for
customers to trade their goods and services for other goods and services, for a
fee. It believes, however, that as a result of improvements in communication and
computer technology, including use of the Internet, it is likely that trading
will become a more acceptable form of doing business and new competitors will
develop.
Government Regulations
The Company and its independent brokers are subject to various federal, state
and local laws, regulations and administrative practices affecting their
businesses, including, among others, the requirement to obtain business
licenses, tax withholding and remittance of matching contributions for
employees' social security accounts, and other such laws, regulations and
administrative practices required of businesses in general. In addition, the
Company, is a "third party record keeper" (similar to banks) under TEFRA, and is
required to account for and report to the IRS the total of trade sales
transactions of each member of the exchange. The Company believes it has
complied with such laws and regulations in the past, with the exception of
timely filings with the Securities and Exchange Commission, and believes it can
comply with all such regulations in the future.
Trademarks and Service Marks
"ITEX and Design" (the ribbon design of the ITEX logo) is a registered trademark
and service mark of the Company on the Principal Register of the United States
Patent and Trademark Office. This registration will expire on December 29, 2007
unless before that date the Company files an application for renewal as required
by Section 9 of the Trademark Act of 1946.
The Company has filed trademark applications for the word mark "ITEX" (that is,
independent of the logo) and for the word mark and design "Intercard". The
Company's policy is to strenuously police the use of its marks and to oppose any
infringement.
Employees
As of April 15, 2000, the Company employed 77 persons. Additionally the
approximately 90 independent ITEX brokers employ support staff estimated to
total approximately 100 additional persons. The independent brokers and their
employees are not employees of the Company.
Executive Officers of the Registrant
The directors and executive officers of the Company as of April 15, 2000 are as
follows:
NAME AGE POSITION
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Dr. Evan B. Ames 60 Director
Collins M. Christensen 41 President, Chief Executive Officer,
Director
Wayne E. Harmond 39 Vice President, Travel & Related
Business Development
Lewis A. Humer, Jr. 40 Vice President of Operations
Robert Nelson 52 Director
Dr. Charles T. Padbury 61 Director
Mary J. Scherr 62 Senior Vice President, Director
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Business Risks
Characteristics and dynamics of the Company's business and markets in general
create risks to the Company's long-term success and to predictable financial
results. These risks include:
o Operating losses and negative cash flow of primary business.
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Operating losses and negative cash flow have been incurred in each four fiscal
years ended July 31, 1999. Such losses and negative cash flow resulted in part
from increased staffing, marketing and administrative expenses while revenues
remained relatively flat and in part by previous management focusing on new
business ventures which required substantial cash investments. These non-core
businesses have been discontinued. There can be no assurance that the Company
will be able to achieve long-term profitability or positive cash flow.
o Ability to shift more revenue from trade dollars to cash.
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A primary strategy of the Company is to increase revenues by strengthening and
expanding its network of independent brokers and to provide more and improved
services to clients and brokers. In the interim the Company may emphasize a
higher percentage of membership and transaction fees be collected in cash
rather than in trade dollars. Such a change was instituted in November 1999.
o Ability to obtain financing.
---------------------------
In November 1998 the Company incurred debt with a face amount of $1,625,000,
bearing interest at 4%, from which the Company realized approximately
$1,100,000 after a 20% discount from the face value and fees paid to brokers
and related expenses.
In July 1999 the Company retired $312,500 of the above notes at the
discounted amount of $250,000 and in January 2000 retired an additional
$62,500 by payment of $50,000. In April 2000 the Company retired the balance
of these notes of $1,250,000 by converting $675,000 plus accrued interest
into 1,133,659 shares of common stock and payment of $575,000 in cash plus
accrued interest.
In May 1999 the Company entered into an agreement with its commercial bank
relative to a line of credit for $250,000, which was at that time in default.
A new agreement provided that $50,000 would be repaid each month for five
months beginning June 15, 1999. The Company has made all five payments,
resulting in the bank note being fully repaid in October 1999. As of the date
hereof, the Company does not have a line of credit with any bank.
In July 1999 at a time when the Company was in need of cash for operations,
the Company raised $480,000 from convertible loans from an individual, who at
that time was Chairman of the Company's Board of Directors and another
individual, the President, CEO and Director of the Company in a private
transaction. Those loans bore interest rates of 10% per annum and were
subsequently paid in full in January 2000.
To finance future expansion of the Company's core business of operating its
retail trade exchange and to retire the notes described above, the Company
concluded it should sell the net assets and business of its wholly-owned
subsidiary, BXI Corporation. This business was acquired by the Company on
June 25, 1998 and was sold on January 18, 2000. See, Item 7, Management's
Discussion and Analysis. There is no assurance that the Company will be
successful in raising additional capital, if required, or in achieving
profitability.
o Investigation by the Securities and Exchange Commission.
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The Company has been the subject of an investigation by this agency of the
U. S. Government for over four years. On September 27, 1999, the SEC filed a
civil Complaint in the United States District Court for the District of Oregon
naming the Company and former officers and/or directors of the Company,
Terry L. Neal, Michael T. Baer, Graham H. Norris, Cynthia Pfaltzgraff and
Joseph M. Morris as defendants and alleging securities fraud and other
securities law violations. In January 2000, the Company reached a settlement
with the SEC for disposition of that litigation. Without admitting or denying
the allegations of the SEC's Complaint, the Company consented to entry of a
final judgment of permanent injunction. See, Item 3, Legal Proceedings.
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o Delisting of stock from the Nasdaq Small Cap market.
---------------------------------------------------
Because the Company did not file reports to the Securities and Exchange
Commission in a timely manner and citing public interest concerns, the NASD
delisted the Company's common stock from the Nasdaq Small Cap stock market in
December 1998. When fully compliant with its SEC filing requirements and
eligible under the rules of the Small-Cap Market, the Company will apply for
re-listing. However, there is no assurance that the Company will be able to be
re-listed and management anticipates that the re-listing will, in any event,
take several months to complete once the Company is eligible. This situation
makes it more difficult for the Company to obtain financing.
o Ability to recruit brokers and clients in markets now served and in new
markets and to develop marketing programs.
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The success of the Company depends on its ability to expand its network of
independent brokers and the number of clients they serve and to improve the
operating and marketing programs it furnishes to brokers. The Company will be
dependent on the ability of its broker network to expand the number of clients
and the volume of transactions through the trade exchange. Competition for
qualified employees and brokers is intense and their ability to enroll new
client members is unknown, thus there is no assurance that the Company will
be successful in achieving these plans.
o Ability to upgrade and improve computer software and internet-based systems to
clients and independent brokers.
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The Company's computer systems are important for providing accounting service
to clients and brokers and communicating the availability of goods and
services offered for trade. To be successful in the future the Company
believes it is important that its computer and Internet systems reflect
improvements in computer and communications technology. There is no assurance
that the Company will be successful in upgrading it computer systems and
Internet applications.
ITEM 2. DESCRIPTION OF PROPERTIES
All of the Company's operations as of March 15, 2000 are conducted in leased
space as follows:
Location Lease Expiration Square Feet Annual Rent
-------------------- -------------------- ------------- -------------
Portland, Oregon (2) December 31, 2001 10,900 $209,900
Salem, Oregon (4) Month to month 1,500 $ 12,000
Seattle, Washington June 30, 2000 850 $ 26,400(3)
Costa Mesa, California December 31, 2000 1,500 $ 20,000
Sacramento, California November 30, 2001 4,200 63,000 Trade dollars
Denver, Colorado (1) March 31, 2002 4,700 $ 90,000
St. Louis, Missouri March 31, 2002 2,500 $ 21,100
Houston, Texas Month to Month 3,200 29,160 Trade dollars
New York, New York November 30, 2004 1,800 $ 31,500
(1) Offered for sublease by the Company.
(2) Includes 1,300 square feet of office space sublet to a third party at an
annual rent of $26,500.
(3) One-half cash and one-half ITEX Trade Dollars
(4) Lease assigned to third party as part of the sale of the assets of this
office in February 2000.
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ITEM 3. LEGAL PROCEEDINGS
o SEC Inquiry.
-----------
During June 1996, the Company announced in a press release that the Company was
the subject of an informal inquiry from the Securities and Exchange Commission.
Subsequently, the Company received subpoenas for the production of certain
documents pursuant to a formal order of private investigation. In connection
with that investigation, the SEC took the deposition of several individuals. On
September 27, 1999, the SEC filed a civil Complaint in the United States
District Court for the District of Oregon naming the Company and former officers
and/or directors of the Company, Terry L. Neal, Michael T. Baer, Graham H.
Norris, Cynthia Pfaltzgraff and Joseph M. Morris, as defendants and alleging
securities fraud and other securities law violations. In January, 2000, the
Company entered into a Consent and Undertaking with the SEC wherein, without
admitting or denying the allegations of the Complaint, the Company consented to
entry of a Final Judgment of Permanent Injunction which, among other things, (i)
permanently restrains and enjoins the Company from violating Sections 5 and
17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and
13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-1,
13a-13 and 12b-20 thereunder, and (ii) orders the Company to restate its
financial statements for the fiscal year ended July 31, 1997. The Final Judgment
based upon the Consent was entered by the Court on February 3, 2000. The Company
is given 90 days from that date to file its amended Form 10-K for fiscal 1997
and its Form 10-K's for fiscal 1998 and 1999.
o Sondra Ames Litigation.
----------------------
In October 1998, the Company was served with summons and complaint for an
action in the Superior Court of Orange County, California styled Sondra Ames
v. ITEX Corporation, Graham H. Norris and John Does I through X. The complaint
alleged (i) fraud in the acquisition by ITEX of plaintiff's trade exchange in
1996; (ii) violation of Rule 10b-5 of the Securities and Exchange Act of 1934
in connection with plaintiff's purchase of ITEX stock on the open market in
1996; (iii) breach of written and oral contracts, (iv) sex discrimination and
harassment; (v) discrimination based on religion; (vi) retaliation and
tortuous discharge; (vii) defamation; and (viii) violation of various
provisions of the California labor code. Plaintiff asked for $5,000,000 actual
damages and for punitive damages along with other statutory relief. The case
was subsequently moved to Federal Court.
Plaintiff was a former employee and former officer of the Company whose
employment agreement expired in April 1998. The parties settled the matter for
an undisclosed amount, which is confidential by the terms of the agreement, in
January 2000 without any admission of liability and the case has been
dismissed in its entirety. The amount for which the matter was settled was not
significant to the Company's financial position.
o Martin Kagan Litigation.
-----------------------
During July 1998, the Company was served with a summons and complaint for a
case in Circuit Court of Multnomah County, Oregon, styled Martin Kagan v. ITEX
Corporation. The complaint alleges breach of a stock option agreement between
the Company and Kagan and seeks to set aside a settlement agreement between
the parties dated January 14, 1997. The Company has answered the complaint
denying its material allegations. Subsequently, the plaintiff filed a first
amended complaint adding Graham H. Norris, the Company's former President and
Chief Executive Officer, as an additional party and modifying somewhat the
allegations of the original complaint. The Company and Mr. Norris have
answered the amended complaint and denied all allegations. The Company has
vigorously defended the action. Trial before a court appointed referee was
held on November 4, 8 and 9, 1999. On April 12, 2000, the referee issued a
decision that dismissed all of Kagan's claims except his claim for unlawful
sale and purchase of securities. The referee awarded Kagan $400,000, plus
interest from July 14, 1998, plus a reasonable legal fee. To be effective,
the referee's decision must be confirmed by the Multnomah County Circuit
Court. An unfavorable result is probable. However, the Company will vigorously
pursue this matter on appeal. It is impossible to predict the outcome of an
appeal.
- 11 -
o IBTEX, A.G. Litigation.
----------------------
During September 1998, the Company was served with a summons and complaint for
a case in the Circuit Court of Multnomah County, Oregon, styled IBTEX, A.G. v.
ITEX Corporation, Donovan Snyder and Graham Norris, Sr. The complaint alleges
breach of contract, breach of duty of good faith and fair dealing and
violations of the Oregon Franchise Act. The defendants have answered the
complaint denying its material allegations, demanding that the disputes
between IBTEX and the Company be arbitrated pursuant to an arbitration
agreement between the parties and requiring that the action be stayed until
such time as the arbitration is complete. No arbitration has been set and the
case has been dormant for several months.
o Don Schilz Litigation.
----------------------
During November 1998, a case was filed in the U.S. District Court for the
Northern District of Illinois styled Radio Spirits, Inc. v. Don Schilz and
Pride Communications and Don Schilz v. ITEX Corporation. The case primarily
alleges a common law copyright infringement by the defendants one of whom
(Schilz) claims that the Company is liable for any infringement which is
proven.
The plaintiff claims that the defendants have infringed its claimed
copyrights in old time radio programs "The Life of Riley" and "Lone Ranger".
Those programs were part of The Golden Age of Radio, which ITEX formerly
owned. The defendants are a small radio station (Pride Communications) and an
individual (Schilz) whose show has used elements of the Golden Age of Radio.
Defendant Schilz alleges that, if there was an infringement, it is the
responsibility of the Company as it supplied the allegedly infringing
material. In January 2000, the case was settled without any admission of
liability on the part of the Company and the third-party complaint was
dismissed in its entirety.
o Wade Cook Financial Corporation Litigation.
------------------------------------------
During February 1998, an action was filed in Washington (Seattle) State Court
by Associated Reciprocal Traders, Ltd., ("ART") an ITEX wholly owned
subsidiary, based on Wade Cook Financial Corporation's ("WCFC") refusal to
permit transfer, without restricted legend, of WCFC stock issued to ART in
exchange for a media due bill. ART filed a Motion for Replevin and Preliminary
Injunction requesting delivery and transfer of the certificates of WCFC stock
to ART based upon compliance by ART with the requirements of Rule 144 of the
Securities Act of 1933. After two separate hearings, on October 2, 1998, the
Court ruled that the requirements of Rule 144 had been met, but that issues
raised by WCFC concerning the radio spots, pursuant to the due bill, required
a trial of the merits of the action.
During August 1999, the matter was settled. WCFC has agreed that ART is the
owner of 1,400,000 shares of WCFC unrestricted stock which may be sold by
ITEX at no more than 100,000 shares a month, at current market prices,
subject to a right of first refusal by WCFC. The settlement agreement also
provided for the transfer of 300,000 ITEX trade dollars to WCFC, which the
Company has completed. As of April 28, 2000, the Company had realized
approximately $176,000 from the sale of approximately 451,000 shares of its
Wade Cook common stock.
o "John Doe" Litigation.
---------------------
In July 1998, the Company filed an action in Multnomah County, Oregon, State
Court against 100 John Doe defendants, that is, individuals whose identities
were, at the time of filing, unknown to the Company. The Complaint arose from
certain anonymous postings on the Internet which the Company believed
constituted intentional interference with the Company's economic
relationships, unfair trade practices, civil conspiracy and, with respect to
then President of the Company Graham H. Norris, defamation. The Complaint
sought monetary damages and injunctive relief.
- 12 -
After filing the Complaint, the Company subpoenaed certain Internet Service
Providers to determine the true identity of the anonymous posters. Various
amendments to the Complaint were filed naming certain defendants until the
Company's Fifth Amended Complaint was filed naming Leslie L. French and
adding a claim for breach of a settlement agreement previously entered into
between Mr. French and the Company in connection with other litigation in
1997.
Mr. French has answered the Fifth Amended Complaint essentially denying all
of the allegations of the Complaint and asserting counterclaims against the
Company for (1) breach of contract related to a Settlement Agreement
previously entered into between French and the Company; (2) fraud in the
inducement in connection with the Settlement Agreement; (3) securities fraud;
and (4) unlawful trade practices. The Company denies the allegations of the
counterclaims. In April 2000, without any admission of liability, the parties
agreed upon and executed a settlement of the matter, which will result in the
dismissal of the entire action. However, a stipulated final judgment has not
yet been entered. The amount for which the matter was settled was not
significant to the Company's financial position.
o Desert Rose Foods Litigation.
----------------------------
On April 28, 2000, ITEX Corporation was served with summons and complaint for
an action in the Circuit Court of Fairfax County, Virginia style Desert Rose
Foods, Inc. v. ITEX Corporation and ITEX USA, Inc. The complaint alleges
Breach of Contract, Fraud, and violations of federal law. Plaintiff asks for
$750,000 compensatory damages, punitive damages, other statutory damages,
interest and attorneys fees.
Plaintiff entered into a contract with the Company for delivery of goods
valued at approximately $120,000. The Company has not yet retained local
counsel in this case. The Company believes Plaintiff's complaint is frivolous
and the Company intends to vigorously defend itself. The Company has
successfully defended similar actions. The Company does not believe this
action is significant to the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Public trading of the Company's stock was initiated on June 11, 1992. The
Registrant's common stock currently trades in the United States on the National
Quotation Bureau "Pink Sheets" under the symbol "ITEX". The stock was de-listed
by the NASD from the Nasdaq Small Cap stock market on December 22, 1998 due to
the Company's inability to file its Form 10-K on a timely basis and for public
policy concerns. The Company intends to file for re-listing when it achieves
current status with its Securities and Exchange Commission filings and is
otherwise eligible to do so. (See Item 1, Business Risks)
Previously, the Registrant's common stock traded "over-the counter" in the
United States via the NASD Bulletin Board and on the NASD Small Cap market,
under the symbols "ITXE" and "ITEX", respectively.
- 13 -
The following are the Company's common stock high and low closing sales prices
for fiscal years 1998 and 1997:
Sale Prices
--------------------------
High Low
------------ ------------
1997
- ----------------------
Fiscal quarters ended:
July 31, 1997 $4.13 $2.75
May 7, 1997 5.50 3.44
February 12, 1997 4.75 3.25
November 20, 1996 6.00 3.50
1996
- ----------------------
Fiscal quarters ended:
July 31, 1996 9.75 4.25
May 7, 1996 12.50 7.75
February 12, 1996 9.00 6.13
November 20, 1995 8.13 6.13
During the fiscal year ended July 31, 1998 the closing sales prices varied from
$2.94 to $7.00. During the fiscal year ended July 31, 1999 the closing sales
prices varied from $.20 to $4.63. As of March 15, 2000, the last quoted price
was $0.83.
As of July 31, 1997 there were approximately 4,800 holders of record of the
Company's common stock.
The Company has not declared any dividends since its inception. Management
anticipates that any future profits will be retained to finance corporate
growth.
ITEM 6. SELECTED CONSOLIDATED DATA
The following table sets forth a summary of selected consolidated financial data
for the Company as of the dates and for the periods indicated. The data should
be read in conjunction with the Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The financial information has been restated as described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and in
Note 1 to Consolidated Financial Statements.
For the fiscal years ended July 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
--------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
(Restated) (Restated) (Restated) (Restated) (Restated)
Total revenue $11,602 $13,526 $7,531 $4,557 $2,758
Loss from operations (2,212) (757) (1,039) (157) (380)
Net loss (1,894) (2,402) (1,660) (241) (387)
Net loss per common share (0.27) (0.37) (0.40) (0.07) (0.14)
Total assets 8,144 7,466 4,259 2,255 1,775
Working capital (deficit) 2,050 1,363 1,398 (268) 568
Long-term debt and capital
lease obligations 26 192 156 190 672
Stockholders' equity
(deficiency) 6,922 6,055 2,641 (119) (442)
- 14 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (in thousands, except share and per share amounts)
Overview
ITEX Corporation and subsidiaries ("ITEX" or the "Company") was incorporated in
October 1985 in the State of Nevada. The Company operates a retail trade
exchange and acts as third-party recordkeeper for transactions between members
of the exchanges. The Company charges association fees for each of 13 four-week
accounting cycles each year, as well as commissions on transactions. ITEX also
receives fees paid in ITEX trade dollars, which the Company uses to pay a
portion of its own operating expenses and to provide merchandise for sale for
trade dollars to trade exchange members.
In January 1996, the Company acquired a 50% equity interest in what was later
named BXI Corporation, which operates the BXI Trade Exchange. The validity of
the Company's interest, among other things, became the subject of extensive
litigation, which was finally resolved in 1998. An addition, in recent years the
Company has engaged in the operation of several new businesses outside its core
business of operating trade exchanges. These new businesses have not been
profitable and commencing in March 1999 the Company began the process of
discontinuing these businesses and, where possible, liquidating them. It is the
intent of the Company not to engage in business activities or ventures that are
not related to the Company's core business of operating the ITEX Retail Trade
Exchange.
For the past four years, the Company has been subject to an investigation by the
Securities and Exchange Commission ("SEC"). See Item 3, Legal Proceedings. As a
result of discussions with the SEC Staff, the Company has changed its previous
accounting policies and procedures to apply Accounting Principles Board ("APB")
Opinion No. 29, "Accounting for Nonmonetary Transactions", by recording
nonmonetary transactions at the fair value of the goods or services involved,
rather that based on a U.S. dollar amount that is equal to the number of ITEX
trade dollars that are exchanged.
The Company has also followed the guidance of EITF Issue No. 99-17, "Accounting
for Advertising Barter Transactions" and EITF Issue 93-11, "Accounting for
Barter Transactions Involving Barter Credits", which require high thresholds of
evidence in establishing fair value for amounts to be recorded in financial
statements for barter transactions. The Company's barter transactions
denominated in ITEX trade dollars to not meet the high thresholds contemplated
in EITF 93-11 as applied in respect to EITF 99-17 of cash equivalency or
convertibility to cash. Also, they are not transactions for which the Company
has a historical practice of receiving or paying cash for similar transactions.
Accordingly, in the restated financial statements, the Company has not recorded
any transactions denominated in ITEX trade dollars. If there are any significant
transactions in the future that meet these high thresholds, the Company will
report them in the financial statements at fair value in accordance with Opinion
29.
For financial reporting purposes, the Company previously recognized revenues,
expenses, assets, and liabilities for all transactions in which the Company
either received or spent trade credits (hereinafter referred to as "ITEX trade
dollars"), using the ratio of one U.S. dollar per ITEX trade dollar. The Company
has also revised its application of revenue recognition principles to better
reflect when an ITEX trade dollar transaction involving the Company should be
recorded. See Note 1 to Consolidated Financial Statements.
The Company has incurred operating losses from its trade exchange operations for
the fiscal years ended July 31, 1997, 1996 and 1995. Such losses have been
increased by costs associated with the regulatory and litigation matters
connected with disputes about the acquisition of the BXI trade exchange and the
SEC investigation referred to above.
- 15 -
Results of Operations
The following table sets forth, for the periods indicated, selected consolidated
financial information of the Company, with amounts also expressed as a
percentage of net revenues:
Fiscal Years Ended July 31,
---------------------------------------------------
1997 1996 1995
---------------- --------------- ----------------
Amount Pct* Amount Pct* Amount Pct*
-------- ----- -------- ----- -------- ------
(Restated) (Restated) (Restated)
Revenue:
Trade exchange:
Association
fees $ 2,368 20% $ 2,321 17% $ 1,587 24%
Transaction
fees 7,247 62% 6,272 47% 3,628 46%
License fees 401 4% --- --- --- ---
-------- ----- -------- ----- -------- ------
10,016 86% 8,593 64% 5,215 70%
Corporate
trading 1,586 14% 4,933 36% 2,316 30%
-------- ----- -------- ----- -------- ------
11,602 100% 13,526 100% 7,531 100%
-------- ===== -------- ===== -------- ======
Costs and expenses:
Trade exchange 5,937 51% 5,468 41% 3,482 46%
Corporate trading 1,674 14% 3,099 23% 1,552 21%
Selling, general
and
administrative 4,812 42% 5,221 39% 3,253 43%
Discontinued
operations 50 ---- ---- ---- ---- ----
Regulatory and
litigation 646 6% 49 ---- ---- ----
Depreciation and
amortization 695 6% 446 3% 283 4%
-------- ----- -------- ----- -------- ------
13,814 119% 14,283 106% 8,570 114%
-------- ===== -------- ===== -------- ======
Loss from
operations (2,212) (19%) (757) (6%) (1,039) (14%)
Other income
(expense) (78) (1%) (65) ----- 3 ----
-------- ----- -------- ----- -------- ------
Loss before
taxes (2,290) (20%) (822) (6%) (1,036) (14%)
Tax provision
(credit) (396) (4%) 1,580 (12%) 624 (8%)
-------- ----- -------- ----- -------- ------
Net (loss) $(1,894) (16%) $(2,402) (18%) $(1,660) (22%)
======== ===== ======== ===== ======== ======
* Percent of Total Revenue
Trade exchange revenue and costs
Trade exchange revenues increased $3,378 from 1995 to 1996 as a result of
increased membership and increased transaction fees as a result of higher
trading volume per member. A substantial part of the membership increase was the
result of the acquisition of the member list of a significant trade exchange in
late fiscal 1995. Trade exchange revenues increased $1,423 from 1996 to 1997 as
a result of revenue from foreign licenses of $401 in 1997 as compared to none in
1996, slightly increased membership, and also higher transaction fees due to
increased trading volume per member in 1997.
- 16 -
The average number of members of the ITEX trade exchange during each of the
1997, 1996, and 1995 fiscal years and the average trade exchange revenue per
were as follows:
1997 1996 1995
---- ---- ----
Average number of members
12,146 11,900 8,816
Average annual $792 $722 $592
Total costs of trade exchange revenue as a percentage of total trade exchange
revenue were 59.3%, 63.6% and 66.7% in fiscal 1997, 1996 and 1995, respectively.
The lower percentage in 1997 was partly attributable to the inclusion of the
$401 in foreign license revenue, as such revenues do not result in an increase
in trade exchange costs.
Corporate trading revenue and costs
Corporate trading revenue relates to transactions in which the Company has acted
as a principal in the purchase and sale of goods. These transactions often
involve a mixture of cash and trade credits. Only the cash portions of such
transactions are included in the consolidated financial statements because there
is no persuasive evidence that the fair market value of the goods exchanged
exceeds the monetary consideration received for these goods. Profit margins on
individual corporate trading transactions vary widely.
Corporate trading revenue peaked at $4,933 in 1996, which was when the Company
was at the highest level of business through ITEX USA, an unrelated corporate
barter management company, which had been the Company's exclusive agent for
corporate and industrial trading. The relationship with ITEX USA was terminated.
Management has not emphasized the corporate and industrial trading market in
recent years, nor will it be in the future, other than those transactions that
will benefit the retail trade exchanges. As a result, such operations were not
profitable in 1997.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $409 from 1996 to 1997.
The largest decreased category of expense was advertising and promotion, for
which cash costs were reduced from approximately $300 in fiscal 1996 to
approximately $100 in fiscal 1997. Selling, general and administrative expenses
increased $1,968 from 1995 to 1996. Reasons contributing to the increase
included additional personnel costs from a higher scope of operations in 1996
because of the acquisition of a significant trade exchange in late fiscal 1995
and also from the expansion of Company-owned and operated trade exchanges.
Costs and expenses of discontinued operations
During 1997, the Company incurred $50 of costs and expenses in connection with
activities that have been discontinued.
Costs and expenses of regulatory and litigation matters.
For the past four years, the Company has been subject to an investigation by the
Securities and Exchange Commission including the Company's accounting for
trading transactions. See Item 3. Legal Proceedings for a discussion of the
settlement of these matters between the Company and the SEC. In addition, the
Company has been involved in various litigation matters as discussed in Item 3.
Legal Proceedings including costs in connection with disputes arising from the
acquisition of the BXI Trade Exchange. Costs and expenses of regulatory and
litigation matters consists of expenses related to these matters.
- 17 -
Liquidity and Capital Resources
During fiscal 1997, the Company reported net cash used in operations of $693 in
the consolidated statements of cash flows, as compared to cash used in
operations of $1,419 and $584 in fiscal years 1996 and 1995, respectively.
Factors contributing to the negative cash flow include unprofitable operations,
discontinued operations, and legal and accounting costs connected with the
Company's regulatory matters and expenditures. Currently management is
attempting to reduce such negative cash flows by discontinuing and liquidating,
to the extent possible, operations outside the Company's core business. To
facilitate this effort, management is refocusing capital resources on its
primary business of operating trade exchanges and related activities. However,
there can be no assurance that the Company will be successful in its efforts.
At July 31, 1997, the Company had a line of credit with a bank pursuant to which
no borrowings were outstanding. After July 31, 1997, the Company incurred
borrowings to the maximum amount available under the line of $250. In May 1999
the Company entered into an agreement with its commercial bank relative to the
$250, for which it was in default. The new agreement provided that $50 would be
repaid each month for five months beginning June 15, 1999. The Company has made
all five payments, resulting in the bank note being fully repaid in October
1999. As of March 2000, the Company does not have a line of credit with any
bank.
At July 31, 1997, the Company's working capital ratio was 2.7 to 1.0 as compared
to 2.1 to 1.0 at July 31, 1996. In addition, while the July 31, 1997 and 1996
consolidated balance sheets show working capital of $2,050 and $1,363,
respectively, the liquidity of the Company has continued to decrease. As a
result, management believed that it would be difficult for the Company to meet
its future operating cash requirements and capital requirements through existing
cash balances, cash provided by operations and its borrowing arrangements.
Therefore, during fiscal 1999, the Company began seeking additional financing.
In November 1998 the Company incurred debt with a face amount of $1,625, bearing
interest at 4%, from which the Company realized approximately $1,100 after a 20%
discount from the face value and fees paid to brokers and related expenses.
In July 1999 the Company retired $313 of the above notes at the discounted
amount of $250 and in January 2000 retired an additional $62 by payment of $50.
In April 2000 the Company retired the balance of these notes of $1,250 by
converting $675 plus accrued interest into 1,134 shares of common stock and
payment of $575 in cash plus accrued interest.
In July 1999, when the Company needed working capital, an individual who was at
that time Chairman of the Board of Directors, and another individual who is
President, CEO and a Director of the Company, loaned a total of $480 to the
Company. The transactions were structured as convertible notes bearing interest
at 10% per annum. The Company paid those notes in full together with accrued
interest in January 2000. The conversion privilege was never exercised. The
offering was made in reliance on Section 4(2) of the Securities Act of 1933 on
the basis of the offering having been made to officers and directors of the
Company who had access to sufficient information to make an informed investment
decision.
- 18 -
To finance future expansion of the Company's core business of operating the
retail trade exchange and to retire the notes described above, the Company is
seeking additional financing and has concluded the sale of the net assets and
business of its wholly-owned subsidiary, BXI Corporation, which operated the BXI
trade exchange from June 25, 1998 to January 18, 2000. The Company realized
$4,000 cash from the sale of BXI.
During the fiscal year ended July 31, 1997 the Company received proceeds of $179
from a private placement of 55,000 units at $3.25 per unit, each unit consisting
of one share of common stock and one warrant. The warrants, which had an
exercise price of $3.25, expired on June 18, 1999. During the fiscal year ended
July 31, 1999, the Company also received proceeds of $245 from the exercise of
options to purchase 120,000 shares of common stock. The proceeds were primarily
used for working capital.
Trade dollars earned and expended
The Company earns ITEX trade dollars as compensation for management of the trade
exchange and as a result of transactions entered into by the Company as a member
of the exchanges. At July 31, 1997, the Company had a total of 786 trade dollars
that were available for future expenditures. In fiscal 1997, the Company earned
a total of 11,309 trade dollars and expended a total of 10,523 trade dollars. In
fiscal 1996, the Company earned a total of 17,551 trade dollars and expended a
total of 17,588 trade dollars. In fiscal 1995, the Company earned a total of
16,608 trade dollars and expended a total of 16,581 trade dollars. These amounts
have not been included in the financial statements for the reasons discussed
above and further described in Note 1 to Consolidated Financial Statements.
Inflation
Since inflation has been moderate in recent years, inflation has not had a
significant impact on the Company. Inflation is not expected to have a material
future effect.
Inflation may be a factor within the ITEX Retail Trade Exchange. The viability
of the ITEX Retail Trade Exchange is maintained by the confidence that the
members of the exchange have in the strength and stability of the ITEX Trade
Dollar. To maintain such confidence it is necessary that the exchange be
operated in a sound and economic manner. Toward this end, the Company intends
from time to time to take actions to decrease the number of ITEX Trade Dollars
in the exchange by transferring some of its own holdings of trade dollars to the
Exchange.
Year 2000 Software Requirements
Background of the Year 2000 issue
.
The Year 2000 ("Y2K") issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Scope and impact of the Y2K issue on the Company
The Company utilizes both proprietary software and software provided by outside
vendors and computer systems including desktop stations and servers that could
have been impacted by the Y2K issue. In addition, the Company has
non-information technology (non-IT) systems upon which it relies in its
operations including, for example, its telephone and voice mail system, which
could have been impacted by the Y2K issue.
- 19 -
Since the efficient operation of the ITEX retail trade exchange depends upon the
proper functioning of these software, hardware and non-IT systems, management
assessed the potential impact of the Y2K issue on the Company's business,
operations and financial condition. For the reasons set out below, management
did not believe that the Company's business, operations or financial condition
would be materially impacted by the Y2K issue as it relates to the Company's
proprietary software, third-party software, computer systems and non-IT systems.
Furthermore, a review of the potential impact of third parties' failure to
remediate those third parties' Y2K issues indicated that such failure would not
have a material impact on the Company's business, operations or financial
condition.
Remediation plans - proprietary software
The Company completed the reprogramming of its Account Information Management
(AIM) broker software and ACCT accounting proprietary software. The cost of such
reprogramming and verification was not material nor did that cost have a
material effect on the Company's results of operations when incurred.
Remediation plans - third-party software
With respect to software supplied by third parties, the Company determined that
such software was already Y2K compliant or would be compliant before the year
2000 or, alternatively, that any such software would be replaced at a cost which
was not material to the Company's results of operations.
Remediation plans - computer systems
Most of the Company's computer systems are of recent manufacture and presented
no Y2K problems. The Company utilized TF2000 software with which it tested all
company computers for Y2K compliance.
Remediation plans - non-IT systems
The Company's voice mail system was not Y2K compliant. The voice mail system was
modified to work properly at a cost which was not material to the Company's
results of operations.
As of February 1, 2000, the Company has experienced no disruptions or other
problems because of the Y2K issue and it does not anticipate experiencing any in
the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not had significant exposure to interest rate risk primarily
because of having had limited borrowing activities. The Company has not used
derivative financial instruments to hedge its limited borrowing risks. There is
inherent rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and business financing requirements.
At July 31, 1998, the Company's market risk sensitive instruments primarily
included a bank line of credit agreement that totaled $208. Based on borrowing
rates currently available to the Company, the carrying amount of debt
approximates fair value.
During November 1998, the Company issued convertible promissory notes totaling
$1,625 at face value. The notes bear interest at a fixed rate of 4% and were
issued at a 20% discount.
- 20 -
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company at July 31, 1997 and for
the three fiscal years ended July 31, 1997 and the report of Andersen, Andersen
& Strong, independent public accountants are included as listed on page F-2 of
this Form 10-K, Item 14.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Collins M. Christensen, age 41, President, CEO and Director, Director since
1999.
Mr. Christensen, who was appointed President and Chief Executive Officer
of the Company on May 21, 1999. Prior to becoming President of the Company, he
had been the owner of a cellular telephone company and a limousine service. In
1995 he became an independent licensed broker for the Company and formed and
operated an office in Sacramento, California. That office was acquired by the
Company in May 1999. (See Item 1, Business, General, Purchase of Sacramento
Broker Office).
Mary Scherr, CTB, age 62, Senior Vice President, Director since 1986.
Ms. Scherr joined the Company in 1993 as Vice President of Broker
Development. She was appointed Senior Vice President in 1999.
Charles T. Padbury, age 61, Director since 1992.
Dr. Padbury is a Beaverton, Oregon dentist and has been a member of the
ITEX Retail Trade Exchange since 1985. During 1996 and again in 1999, Dr.
Padbury served briefly as Chairman of the Board of Directors. In March 1999,
Dr. Padbury served as acting CEO until the appointment of Mr. Christensen to
that office in May 1999.
Robert Nelson, CPA, age 52, Director since 1995.
Mr. Nelson is a Certified Public Accountant in private practice in
Portland, Oregon specializing in tax accounting. He is a member of the American
Institute of CPAs and the Oregon Society of CPAs.
Evan B. Ames, age 60, Director since 1995.
Dr. Ames is a Registered Investment Adviser registered with the Securities
& Exchange Commission.
Wayne E. Harmond, age 39, Vice President of Travel and Related Business
Development.
Mr. Harmond has been employed by the Company since May 1998 and was
appointed Vice President of Travel and related business development in 1999.
His past experience includes five years with Alaska Airlines in reservations and
customer service, five years at Hawaiian Airlines as a station manager,
operations auditor and director of transpacific sales and services. He was also
a director of Hotel Program Development at Rosenbluth International.
Lewis A. Humer, Jr., age 40, Vice President of Operations and Chief
Operating Officer.
Mr. Humer joined the Company in March 1999 as Director of Training and was
named Vice President of Operations in June 1999. Prior to joining the Company
Mr. Humer was a Vice President of Operations and was an Operations Manager of
two manufacturing companies. In 2000 he was named Vice President of Operations
and Chief Operating Officer.
Since July 31, 1998, the following changes occurred in management of the
Company:
Graham H. Norris Sr. was president, CEO and Chairman of the Board of
Directors from September 1996 until March 1999 when he resigned all positions.
- 21 -
Vern O. Curtis served as Chairman of the Board of Directors from May 21, 1999
until he resigned in November 1999.
Joel S. Sternberg served as Senior Vice President, Chief Financial Officer and a
Director from May 21, 1999 until he resigned on December 31, 1999.
Gerry E. Layo served as Vice President of Sales and Marketing from 1999 until
March 7, 2000.
Donovan C. Snyder served as Vice President-Legal and Corporate Secretary from
1995 until April 14, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has dealt with Mr. Terry Neal, the founder of the Company and its
former Chairman and Chief Executive Officer, in various transactions in which
Mr. Neal acted as agent or otherwise represented the other parties to the
transactions. At July 31, 1990 Mr. Neal owned (including shares beneficially
owned) approximately 284,000 shares of the Company's common stock and held
options to purchase 450,000 shares of the Company's common stock at exercise
prices ranging from $1.94 per share to $6.13 per share, which were cancelled by
the Company in November 1999 in accordance with the option plan. If Mr. Neal had
exercised all his options and there were no other stock issuances from exercises
of other contingently issuable shares pursuant to options and warrants held by
others or conversions of preferred stock, Mr. Neal would have had a common
equity interest in the Company of approximately 9% at July 31, 1998.
On July 31, 1997, the Company invested in natural resources located on four
mineral properties in the State of Washington. In exchange for these properties,
the Company issued 130,000 shares of common stock valued at $149,000 (as
restated), paid $20,000 in cash and transferred various barter industry
commodities. The Company initially recorded the natural resource interests at
$169,000 (as restated). Subsequent to fiscal 1998, management decided to abandon
the intended use for these properties and recorded a write down of $119,000 to
reflect estimated net realizable value at that time for the mining interests of
$50,000. The four properties contain deposits including limestone and high-grade
calcium carbonate, high-grade and very-high-grade calcium carbonate, limestone
and medium-grade calcium carbonate, quartzite flagstone, and olivine and dunite.
Mr. Terry Neal represented Pacific Mineral Resources, Inc., the other party, in
this transaction. Therefore, this may be considered a related party transaction.
During the fiscal years ended July 31, 1994, 1995, 1996, and 1997, a 49%-owned
affiliate, Associated Reciprocal Traders, Inc. ("ART") conducted trading
transactions outside the United States. These transactions did not generate any
cash for the Company. During those periods, Newcastle Services, Ltd.
("Newcastle"), the owner of a 5.4% beneficial common equity interest in the
Company owned the remaining 51% of ART. During that period, the Company dealt
with Mr. Neal in connection with various transactions involving ART and
Newcastle. This included the transaction on July 30, 1997, in which the Company
completed the purchase of the remaining 51% interest of ART from Newcastle.
Therefore, these may be considered related party transactions.
In August 1997 the Company entered into a transaction in which it conveyed to
The Bailey Mutual Fund ("Bailey") 976,000 ITEX Trade Dollars and certain
securities of other companies in exchange for shares of Wade Cook Financial
Corporation ("WCFC") with market value of $2,000,000. The Company sold these
shares during the same fiscal quarter in which they were acquired. During the
fiscal year ended July 31, 1994, the Company entered into transactions in which
it sold marketable securities to Bailey for an aggregate amount of 140,000 ITEX
Trade Dollars. During the fiscal year ended July 31, 1995, the Company entered
into transactions in which it sold marketable securities to Bailey for an
aggregate amount of 2,990,000 ITEX Trade Dollars. During the fiscal year ended
July 31, 1996, the Company entered into transactions in which it sold marketable
securities to Bailey for an aggregate amount of 440,000 ITEX Trade Dollars. In
these transactions, the Company dealt with Mr. Neal as agent for Bailey.
Therefore, these may be considered related party transactions.
- 22 -
On March 30, 1998, the Company agreed to issue 250,000 shares of unregistered
common stock in exchange for the retirement of outstanding warrants to purchase
1,011,000 shares of common stock. The warrants to be retired had exercise prices
ranging from $3.50 per share to $6.12 per share, with expiration dates ranging
from June 29, 2000 to April 11, 2006. The warrants were held by Wycliff Fund,
Inc. ("Wycliff") and The Bailey Mutual Fund, Inc. ("Bailey"). Mr. Terry Neal,
the founder of the Company and its former Chairman and Chief Executive Officer
represented Wycliff and Bailey in this transaction. Therefore, this may be
considered a related party transaction. The transaction was completed and the
shares of common stock were issued on July 22, 1998.
During 1996 the Company obtained $750,000 in equity capital from the sale of
200,000 shares of common stock through a private placement with Newcastle
Services Ltd. It also raised $1,250,000 in equity capital from the sale of
255,624 shares of common stock and certain warrants to purchase common stock
through a regulation S transaction with Wycliff Fund, Inc. See Note 15 to the
Consolidated Financial Statements for additional information.
In June 1999 when the company needed working capital, an individual, at that
time Chairman of the Board of Directors, and another individual, the President,
CEO and Director, loaned a total of $480,000 to the Company. The transaction was
structured as a convertible note bearing interest at 10% per annum. The Company
paid those notes in full together with accrued interest in January 2000.
The conversion privilege was never exercised.
- 23 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: May 2, 2000
ITEX CORPORATION
May 2, 2000 /s/ Collins M. Christensen
--------------------------------
Collins M. Christensen, Director, President
and Chief Executive Officer (principal
executive officer and director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ Collins M. Christensen May 2, 2000
- -------------------------------------------
Collins M. Christense, Director, President
and Chief Executive Officer (principal
executive officer and director)
/s/ Mary Scherr May 1, 2000
- -------------------------------------------
Mary Scherr, Senior Vice President, Director
/s/ Dr. Evan B. Ames May 1, 2000
- -------------------------------------------
Dr. Evan B. Ames, Director
/s/ Robert Nelson May 1, 2000
- -------------------------------------------
Robert Nelson, Director
/s/ Dr. Charles Padbury May 1, 2000
- -------------------------------------------
Dr. Charles Padbury, Director
- 24 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Report:
(a) 1. Financial statements.
Report of Andersen, Andersen & Strong,
LC, Independent Public Accountants ....................... 26
Consolidated balance sheets at July 31,
1997 (restated) and 1996 (restated) ...................... 27
Consolidated statements of operations for
the fiscal years ended July 31, 1997
(restated), 1996 (restated) and 1995 (restated) .......... 28
Consolidated statements of stockholders'
equity for the fiscal years ended July 31,
1997 (restated), 1996 (restated) and 1995
(restated) ............................................... 29
Consolidated statements of cash flows for
the fiscal years ended July 31, 1997
(restated), 1996 (restated) and 1995 (restated) .......... 30
Notes to consolidated financial statements ................ 31
2. Financial statement schedules. All schedules have been omitted because the
information required to be set forth therein is not applicable or is shown
in the consolidated financial statements or notes thereto.
3. Exhibits. The Exhibits listed in the accompanying Exhibit Index are filed or
incorporated by reference as part of this Report.
(b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K
during the fourth quarter of fiscal 1997.
- 25 -
ANDERSEN ANDERSEN & STRONG, L.C. 941 East 3300 South, Suite 202
Salt Lake City, Utah 84106
Certified Public Accountants and Business Telephone 801-486-0096
Consultants Fax 801-486-0098
Member SEC Practice Section of the AICPA E-mail Kandersen@msn.com
To the Stockholders and Board of Directors
of Itex Corporation
Portland, Oregon
We have audited the consolidated balance sheets of Itex Corporation and
subsidiaries as of July 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended July 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Itex
Corporation and subsidiaries as of July 31, 1997 and 1996, and the results of
their consolidated operations and their consolidated cash flows for each of the
three years ended July 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for barter transactions and also changed its
method of accounting for debt and equity securities.
/s/Andersen Andersen & Strong L.C.
October 28, 1997
Salt Lake City, Utah
- 26 -
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
July 31,
-------------------------
1997 1996
(Restated) (Restated)
---------- ----------
Assets
Current assets:
Cash and cash equivalents ................. $ 813 $ 1,301
Accounts receivable, net of allowance
for doubtful accounts of $140 and $96 .... 1,084 847
Notes receivable .......................... 45 115
Deferred taxes ............................ 1,224 --
Prepaids and other current assets ......... 80 319
-------- --------
Total current assets .................. 3,246 2,582
Investment in Business Exchange International
Corporation ................................ 2,791 2,791
Property and equipment, net of accumulated
depreciation of $179 and $484 .............. 281 352
Purchased member lists, net ................. 671 1,057
Other assets ................................ 1,155 684
-------- --------
Total assets .......................... $ 8,144 $ 7,466
======== ========
Liabilities and stockholders' equity
Current liabilities:
Bank line of credit ....................... $ -- $ --
Long-term debt and capital lease
obligations, current portion ............. 138 138
Accounts payable .......................... 246 183
Portion of receivables due to brokers ..... 552 508
Deferred revenue .......................... -- --
Other current liabilities ................. 260 390
-------- --------
Total current liabilities ............. 1,196 1,219
-------- --------
Long-term debt and capital lease obligations 26 192
-------- --------
Commitments and contingencies ............... -- --
Stockholders' equity:
Common stock, $.01 par value; 50,000
shares authorized; 7,207 and 6,804
shares issued and outstanding ............ 72 68
Additional paid-in capital ................ 19,114 16,386
Treasury stock, at cost (4 shares in 1996) -- (29)
Accumulated deficit ....................... (12,264) (10,370)
-------- --------
Total stockholders' equity ............ 6,922 6,055
-------- --------
Total liabilities and stockholders'
equity ............................... $ 8,144 $ 7,466
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
- 27 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the fiscal years ended July 31,
----------------------------------------
1997 1996 1995
(Restated) (Restated) (Restated)
----------------------------------------
Revenue:
Trade exchange revenue ............ $ 10,016 $ 8,593 $ 5,215
Corporate trading revenue ......... 1,586 4,933 2,316
-------- --------- ----------
11,602 13,526 7,531
-------- --------- ----------
Costs and expenses:
Costs of trade exchange revenue ... 5,937 5,468 3,482
Costs of corporate trading ........ 1,674 3,099 1,552
Selling, general and administrative 4,812 5,221 3,253
Costs and expenses of discontinued
operations ....................... 50 -- --
Costs and expenses of regulatory
and litigation matters ........... 646 49 --
Depreciation and amortization ..... 695 446 283
-------- --------- ----------
13,814 14,283 8,570
-------- --------- ----------
Loss from operations ................ (2,212) (757) (1,039)
-------- --------- ----------
Other income (expense):
Interest income (expense), net .... 66 49 3
Miscellaneous, net ................ (144) (114) --
-------- --------- ----------
(78) (65) 3
-------- --------- ----------
Loss before income taxes ............ (2,290) (822) (1,036)
Provision (credit) for income taxes . (396) 1,580 624
-------- --------- ----------
Net loss ............................ $ (1,894) $ (2,402) $ (1,660)
======== ========= ==========
Average common and equivalent shares 6,940 6,499 4,150
======== ========= ==========
Net loss per common share
basic and diluted .................. $ (0.27) $ (0.37) $ (0.40)
======== ========= ==========
The accompanying notes are an integral part of the
consolidated financial statements.
- 28 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the fiscal years ended July 31, 1997 (restated), 1996 (restated)
and 1995 (restated)
(in thousands)
Common Stock Additional
--------------------- paid-in Accumulated Treasury
Shares Amount capital deficit stock Total
-------- -------- -------- -------- -------- --------
Balance, July 31, 1994 3,416 $ 34 $ 6,224 $ (6,308) $ (69) $ (119)
Stock sold for cash .. 941 9 2,000 -- -- 2,009
Stock issued for
acquisitions ........ 556 6 1,326 -- -- 1,332
Stock exchanged for
goods and services .. 300 3 1,076 -- -- 1,079
Net loss ............. -- -- -- (1,660) -- (1,660)
-------- -------- -------- -------- -------- --------
Balance, July 31, 1995 5,213 52 10,626 (7,968) (69) 2,641
Stock sold for cash .. 1,294 13 3,678 -- -- 3,691
Stock issued for
acquisitions ........ 60 1 644 -- -- 645
Stock exchanged for
goods and services .. 237 2 1,438 -- 40 1,480
Net loss ............. -- -- -- (2,402) -- (2,402)
-------- -------- -------- -------- -------- --------
Balance, July 31, 1996 6,804 68 16,386 (10,370) (29) 6,055
Stock sold for cash .. 175 2 422 -- -- 424
Stock and options
issued for goods
and services ........ 228 2 1,214 -- 29 1,245
Tax benefit from
stock options
exercised ........... -- -- 1,092 -- -- 1,092
Net income ........... -- -- -- (1,894) -- (1,894)
-------- -------- -------- -------- -------- --------
Balance, July 31, 1997 7,207 $ 72 $ 19,114 $(12,264) $ -- $ 6,922
======== ======== ======== ======== ======== ========
The accompanying notes are an
integral part of the consolidated financial statements.
- 29 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the fiscal years ended July 31,
-------------------------------------
1997 1996 1995
----------- ---------- ----------
(Restated) (Restated) (Restated)
Cash flows from operating activities
Net loss .......................... $(1,894) $(2,402) $(1,660)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization ... 695 446 283
Stock and options issued for
goods and services ............. 1,245 1,480 660
Tax benefit from stock
options exercised .............. 1,092 -- --
Changes in operating assets and
liabilities:
Accounts and notes receivable ... (95) (62) 243
Deferred taxes .................. (1,224) -- --
Prepaids and other current
assets ......................... (379) (461) (123)
Accounts payable and other
current liabilities ............ (177) (348) 45
Portion of receivables due to
brokers ........................ 44 (72) (32)
Deferred revenue ................ -- -- --
------- ------- -------
Net cash used in operating
activities ................... (693) (1,419) (584)
------- ------- -------
Cash flows from investing activities:
Business Exchange International,
Inc. acquisition ................. -- (2,158) --
Equipment, information systems and
other ............................ (53) (450) (227)
------- ------- -------
Net cash utilized in investing
activities ................... (53) (2,608) (227)
------- ------- -------
Cash flows from financing activities:
Proceeds from sales of stock ...... 424 3,691 2,009
Proceeds from (repayments of) notes
payable, net ..................... (166) 113 (125)
------- ------- -------
Net cash provided by financing
activities ................... 258 3,804 1,884
------- ------- -------
Net increase (decrease) in cash and
cash equivalents .................... (488) (223) 1,073
Cash and cash equivalents at
beginning of period ................ 1,301 1,524 451
------- ------- -------
Cash and cash equivalents at end of
period ............................. $ 813 $ 1,301 $ 1,524
======= ======= =======
Supplemental cash flow information
Cash paid for interest ........... $ 25 $ 29 $ 30
Cash paid for income taxes ....... 430 610 180
Supplemental noncash investing and
financing activities:
Costs of investment in BXI
Corporation paid in stock --- 645 ---
The accompanying notes are an integral part of the
consolidated financial statements.
- 30 -
ITEX CORPORATION
nOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company. ITEX Corporation ("ITEX" or the "Company") as incorporated in
October 1985 in the State of Nevada. The Company operates a retail trade
exchange for which it acts as third-party recordkeeper for transactions between
members of the exchange. The Company charges monthly membership fees, as well as
commissions on transactions. ITEX also provides merchandise for sale to its
members for trade dollars.
A summary of significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows:
Restatement of financial statements and accounting for nonmonetary transactions.
For financial reporting purposes, the Company previously recognized revenues,
expenses, assets, and liabilities for all transactions in which the Company
either received or spent trade credits (hereinafter referred to as "ITEX trade
dollars"), using the ratio of one U.S. dollar per ITEX trade dollar.
As a result of discussions with the Staff of the Securities and Exchange
Commission ("SEC"), the Company has changed its previous accounting policies and
procedures to apply Accounting Principles Board ("APB") Opinion No. 29,
"Accounting for Nonmonetary Transactions", by recording nonmonetary transactions
based on a measure of fair value of the goods or services involved, rather that
based on a U.S. dollar amount that is equal to the number of ITEX trade dollars
that are exchanged. The Company has also revised its application of revenue
recognition principles in determining when an ITEX trade dollar transaction
involving the Company would be recorded. The Company's revised accounting
policies are described below.
Revenue Recogntion. For financial reporting purposes, the Company records its
barter and ITEX trade dollar transactions based on a measure of fair value of
the goods or services involved. The Company participates in numerous barter and
ITEX trade dollar transactions that are described below. The Company enters into
these transactions primarily to generate cash based on transaction fees for the
benefit of the Company. The Company recognizes membership fees and commissions
on transactions as the related services are performed.
Accounting for Membership and Transaction Fees Received in ITEX Trade Dollars.
In addition to receiving cash membership and transaction fees, the Company also
receives ITEX trade dollars from members of the trade exchange in connection
with its services in operating the exchange. These trade dollars are utilized by
the Company for either the acquisition of goods and services that are then made
available for purchase by members of the exchange (enabling the Company to earn
transaction fees) or for use by the Company in its operations. The Company does
not record revenue at the time of earning these trade credits because there is
no persuasive evidence that the value of the services provided by the Company
exceeds the amount of monetary consideration received. Further, the Company does
not record revenue at the time of receiving the ITEX trade dollars because not
all of the Company's performance obligations have been completed; that is, the
Company must continue to successfully operate the exchange in future periods in
order to be able to utilize the ITEX trade dollars.
- 31 -
Accounting for ITEX Trade Dollars Spent by the Company for Goods and Services
Used in the Company's Operations. When ITEX trade dollars are exchanged by the
Company for goods and services that are used by the Company in its own
operations, the Company records an expense or asset equal to the fair value of
the underlying goods or services received. The Company also records a
corresponding revenue amount equal to the fair value of the underlying goods or
services received because at that point, the Company has completed its
performance obligations. Fair value is determined by determining estimated cash
prices for the sale of similar goods and services. If the Company cannot
determine a fair value, no U.S. dollar amount is assigned to the transaction for
financial reporting purposes. The Company also assigns zero value to ITEX trade
dollars that are exchanged in transactions in which cash is also paid and for
which there is no persuasive evidence that the fair value of the goods or
services received exceeds the amount of monetary consideration paid.
Historically, a significant portion of the ITEX trade dollar expended has been
for advertising in various forms. The Company historically has not conducted
significant advertising transactions in cash; therefore, ITEX trade dollars
expended for these advertising items are not reflected as revenue or costs in
the accompanying financial statements. In implementing its accounting policies
and procedures, the Company has considered the guidance of EITF Issue No. 99-17,
"Accounting for Advertising Barter Transactions", which was written in the
context of Internet companies bartering with one another for web advertising,
but applies to other industries as well. Issue 99-17 was initially considered by
the EITF in November 1999 and was concluded in January 2000. EITF 99-17
specifically addresses advertising barter transactions for which there is no
ultimate realization in cash. It tentatively concludes that revenue and expenses
from such transactions should be recognized in financial statements (at fair
value) only if an entity has a historical practice of receiving or paying cash
for similar transactions. The EITF indicated that the notion of a "historical
practice" should be similar to the guidance in EITF Issue 93-11, "Accounting for
Barter Transactions Involving Barter Credits." EITF 93-11 establishes high
thresholds in accounting for barter transactions such as " . . . if an entity
can convert the barter credits into cash in the near term, as evidenced by a
historical practice of converting barter credits into cash shortly after
receipt, or if independent quoted market prices exist for items to be received .
. ." The Company's barter transactions denominated in ITEX trade dollars do not
meet the high thresholds contemplated in EITF 93-11 as applied with respect to
EITF 99-17 of cash equivalency or convertibility to cash. Also, they are not
transactions for which the Company has a historical practice of receiving or
paying cash for similar transactions. Accordingly, in the restated financial
statements, the Company has not recorded transactions denominated in ITEX trade
dollars. If there are any significant transactions in the future that meet these
high thresholds, the Company will report them in the financial statements at
fair value in accordance with Opinion 29.
Acquisition and Disposition of Barter-Type Commodities. The Company does not
record in its financial statements transactions for acquisition and disposition
of barter-type commodities such as hotel room nights, media due bills and other
barter-type commodities (in exchange for ITEX trade dollars or other barter-type
commodities) because additional performance by the Company is required.
Typically, the Company must arrange one or more other large ITEX trade dollar
transactions to enable the provider of the commodities to utilize the trade
dollars received by the provider. Also, the provider typically must still
fulfill by shipping or otherwise providing the barter-type commodities to the
ultimate users. The culmination of this process occurs and revenue for
transaction fees is recognized by the Company when the commodities are provided
to the ultimate users and the Company earns its transaction fees. The Company
does not report the commodities in its financial statements as inventories
because these transactions only represent commitments by the provider and the
Company to perform in the future.
IRS Requirements. While the accounting policies described above are used for
financial reporting purposes, the Internal Revenue Service requires, for
purposes of taxation, that the Company recognize revenues, expenses, assets, and
liabilities for all transactions in which the Company either receives or spends
ITEX trade Dollars using the ratio of one U.S. dollar per ITEX trade dollar. The
Company internally accounts for ITEX trade dollars, in addition to cash, in
statements to clients and brokers and in other ways necessary for the operation
of the trade exchanges and the business of the Company, including payment for
certain operating expenses of the Company.
- 32 -
Revision of Accounting for Debt and Equity Securities. The Company has restated
its financial statements for the years ended July 31, 1997, 1996, 1995, 1994 and
1993 for the application of FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and related pronouncements affecting
the Company's accounting for its investments in equity securities of other
companies. The change resulted primarily in assigning no value to certain equity
securities at the dates such securities were received by the Company, mostly in
fiscal 1994 and 1995.
Revision of Amortization Period for Customer Lists. The Company has also revised
its amortization policy to amortize all acquired customer lists over a four-year
life.
Effects of Restatements. The financial statements for fiscal 1997, 1996 and 1995
have been restated as described above. The initial adjustments to earlier years
affect the recording of other transactions and carrying amounts assigned to
other assets in subsequent years, including accounting for related deferred
income taxes, certain subsequent nonmonetary transactions and business
combinations.
The restatements impacted the consolidated financial statements for the years
ended July 1997 and 1996 as follows:
Previously report As restated
----------------- -----------
Fiscal year ended July 31, 1997:
Revenue ...................... $ 29,184 $ 11,602
Net income (loss) ............ 4,472 (1,894)
Income (loss) per share ...... 0.64 (0.27)
Total assets ................. 29,968 8,144
Stockholders' equity ......... 27,774 6,922
Fiscal year ended July 31, 1996:
Revenue ...................... $ 30,956 $ 13,526
Net income (loss) ............ 1,384 (2,402)
Income (loss) per share ...... 0.21 (0.37)
Total assets ................. 23,406 7,466
Stockholders' equity ......... 20,383 6,055
Fiscal year ended July 31, 1995:
Revenue ...................... $ 23,628 $ 7,531
Net income (loss) ............ 1,835 (1,660)
Income (loss) per share ...... 0.41 (0.40)
Total assets ................. 15,578 4,259
Stockholders' equity ......... 13,783 2,641
Trade Dollar Activity. The following table summarizes the trade dollar activity
of the Company for each of the fiscal years ended July 31, 1997, 1996 and 1995:
Fiscal years ended July 31,
--------------------------------
1997 1996 1995
------- ------- -------
Trade dollars earned .. 11,309 17,551 16,608
Trade dollars expended 10,523 17,588 16,581
------- ------- -------
Net increase (decrease) 786 (37) 27
======= ======= =======
Trade dollars at fiscal
year end ............. 786 -- 27
======= ======= =======
- 33 -
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
Net Revenue and Deferred Revenue. The Company charges each client cash
membership fees and individual cash transaction fees from the buyer and seller.
Members of the ITEX retail trade exchange pay a monthly membership fee.
Cash and Cash Equivalents. Cash and cash equivalents includes all cash and
highly liquid investments with maturities at the date of purchase of 90 days or
less.
Concentrations of Credit Risk. At July 31, 1997, the Company maintained its
major cash balances at one financial institution located in Portland, Oregon.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100. At July 31, 1997, the Company's uninsured cash balances totaled $713.
Property and Equipment. Property and equipment are stated at cost and include
those additions and improvements that add to productive capacity or extend
useful life. When property or equipment are sold or otherwise retired, the cost
and related accumulated depreciation are removed from the respective accounts
and the resulting gain or loss is recorded in the statement of operations. The
costs of repair and maintenance are charged to expense as incurred. Depreciation
is computed using the straight-line method over useful lives of three to five
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the asset life or lease term.
Vehicle and equipment capital leases have been recorded at the present value of
the net minimum lease payments. These assets are amortized using the
straight-line method over lease terms of three to five years.
Intangible Assets. The Company amortizes costs of customer lists acquired in
business combinations over four years. The Company amortizes the excess of fair
value of net assets acquired (goodwill) using the straight-line method over a
period not to exceed 10 years. The Company periodically evaluates the carrying
value of intangible assets in relation to the discounted cash benefit expected
to be realized from the performance of the underlying operations and adjusts for
any impairment in value. Based on its review, at July 31, 1997, the Company does
not believe that an impairment of customer lists had occurred. At July 31, 1997,
the Company's balance sheet did not include any goodwill.
Other Assets. Effective August 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" (SFAS 115). The adoption had no effect on retained
earnings. The Company's equity securities generally qualify under the provisions
of SFAS No. 115 as available for sale. The application of SFAS No. 115 has
resulted in the Company not recognizing these securities until sold for cash.
Income Taxes. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109. Under SFAS No. 109, an asset and
liability approach is required. Such approach results in the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and the tax basis of
assets and liabilities.
Income (Loss) Per Share. Effective August 1, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share", which requires presentation on the face of the statement of operations
of both basic and diluted earnings per share. Basic and diluted earnings per
share have replaced the previously presented primary and fully diluted earnings
per share. Basic earnings per share excludes potential dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. All prior period income per share data has been restated to comply with
Statement 128.
- 34 -
Fair Value of Financial Instruments. All of the Company's significant financial
instruments are recognized in its balance sheet. The carrying value of financial
assets and liabilities generally approximates fair value as of July 31, 1997.
Estimates and Assumptions. Management uses estimates and assumptions in
preparing financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets, liabilities, revenue, expenses, gains and losses, and also disclosures
about contingent assets and liabilities. Actual results may vary from estimates
and assumptions that were used in preparing the financial statements.
Reclassifications. Certain reclassifications have been made to the financial
statements of prior years to conform to the July 31, 1997 presentation. Such
reclassifications had no effect on the results of operations or stockholders'
equity.
NOTE 2 - ACQUISITION AND DIVESTITURE OF BXI CORPORATION
During January 1996, the Company acquired the common stock of SLI, Inc. ("SLI"),
a Nevada corporation now known as IME, Inc., in exchange for 60 shares of the
Company's common stock valued at approximately $645 and cash of $1,750. The
Company also made a loan to SLI of $300.
During January 1996, SLI purchased a 50% common stock interest in Business
Exchange International Corporation ("BXI"), a barter exchange with corporate
headquarters in Burbank, California. SLI paid $1,750 in cash and loaned $300 to
BXI.
During June 1998, the Company completed the acquisition of the remaining 50%
interest in BXI for $3,725 in cash. In connection with this purchase, the
Company agreed to place 75 shares of common stock and warrants to purchase an
additional 75 shares of common stock at $7 per share, into a fund that will be
distributed to current BXI trade exchange brokers who continue as BXI brokers
for a three-year period after the date of closing. The warrants will be
exercisable for three years after distribution to the brokers. These securities
have been valued at $150 in accounting for the acquisition.
The total cost of the acquisition of BXI, including amounts paid for the initial
50% interest, as well as the remaining 50% interest, and ancillary costs of the
acquisition, totaled $6,749. The transaction will be accounted for in the July
31, 1998 financial statements using the purchase method of accounting and the
net assets and results of BXI will be included in the consolidated financial
statements commencing June 25, 1998, the date of completion of the acquisition.
The amount of purchase price to be allocated to customer lists will be $5,000
and the amount to be allocated to excess of cost over net assets acquired
(goodwill) will be $2,511. The customer lists will be amortized over a four-year
period and the goodwill will be amortized over a 10 year period.
On May 31, 1999, the Board of Directors decided to sell the net assets and
business of BXI Corporation. On January 18, 2000, the Company consummated the
sale of the net assets and business of BXI Corporation to an unrelated third
party for $4,000, which was paid by the buyer in cash. On the measurement date
(May 31, 1999), the Company will record an estimated loss on the disposal of
$2,000 which includes an estimated loss from operations of BXI Corporation from
the period May 31, 1999 to January 18, 2000 of approximately $600.
- 35 -
NOTE 3 - PROPERTY AND EQUIPMENT
Depreciation expense for property and equipment was $108, $91 and $68 for the
fiscal years ending July 31, 1997, 1996 and 1995, respectively.
At July 31, 1997 and 1996, assets held under capitalized leases include computer
and other equipment totaling $175 and $175, respectively. Depreciation expense
for capitalized equipment leases was $42, $41 and $31 for the fiscal years ended
July 31, 1997, 1996 and 1995, respectively.
NOTE 4 - PURCHASED MEMBER LISTS
At July 31, 1997, the total cost of member lists was $1,534, less accumulated
amortization of $863, for a net carrying value of $671. At July 31, 1996, the
total cost of member lists was $1,534, less accumulated amortization of $477,
for a net carrying value of $1,057.
NOTE 5 - OTHER ASSETS
Other assets consists of the following:
July 31,
-----------------
1997 1996
------ ------
Natural resource interests of four
mineral properties located in the
State of Washington ............. $ 169 $ 169
Capitalized software costs ....... 414 486
Foreign licensing rights ......... 424 --
Other ............................ 148 29
------ ------
$1,155 $ 684
====== ======
During the fiscal year ending July 31, 1999, the investment in natural resource
interests was written down to $50 and the capitalized software costs and foreign
licensing rights were written off. The event causing this writedown and these
writeoffs was the decision in March 1999 of the Company's then new management to
offer the mineral properties for sale and the decision to suspend international
expansion in order to focus on the Company's domestic trade operations. The note
receivable from GlobalTel was written off in fiscal 1999 upon the determination
that GlobalTel was no longer financially viable.
NOTE 6 - BANK LINE OF CREDIT
On December 4, 1996, the Company's primary bank agreed to a new line of credit
arrangement with a term through December 31, 1997. Pursuant to the line of
credit, the Company was able to borrow up to $250 on a short-term basis for
working capital purposes. The interest rate applicable to borrowings pursuant to
the facility was equal to the bank's prime rate of interest plus 1.5%. The
maximum amount of cash borrowings that could be outstanding at any time was
determined by a borrowing base formula related to available collateral.
Borrowings were collateralized by the Company's accounts receivable, fixed
assets and inventory. As of July 31, 1997, the Company had no borrowings
outstanding under the bank credit facility. Based on available collateral, the
entire facility amount of credit of $250 was available to the Company as of July
31, 1997.
In May 1999 the Company entered into an agreement with the bank relative to the
note for $250 under the continuing line of credit, which was then in default.
The new agreement provided that $50 would be repaid each month for five months
beginning June 15, 1999. The Company has made all five payments, resulting in
the bank note being fully repaid in October 1999. As of March 2000 , the Company
does not have a line of credit with any bank.
- 36 -
NOTE 7 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consist of the following:
----------------
1997 1996
----- -----
(in thousands)
Note payable at $1 per month,
including interest at 7% per
annum, collateralized by
property of a related party $-- $ 11
Note payable at $8 per month,
including interest at 6% per
annum ...................... 78 185
Capital leases and other .... 86 134
----- -----
164 330
Less, current maturities .... (138) (138)
----- -----
$ 26 $ 192
===== =====
The annual maturity of long-term debt and capital lease obligations are as
follows:
Fiscal year ending July 31,
1998 ............... $ 143
1999 ............... 26
-----
169
Less, imputed interest on
capital leases ........... (5)
-----
Present value ............. 164
Less, current portion ..... (138)
-----
$ 26
=====
NOTE 8 - COMMITMENTS AND CONTINGENCIES
The Company conducts a majority of its business utilizing leased facilities in
various cities in which it operates. The Company also leases office space for
its corporate headquarters. Certain lease agreements provide for payment of
insurance, maintenance and other expenses related to the leased property.
Certain lease agreements also provide an option for renewal at varying terms.
The aggregate future minimum commitments under operating leases are as follows:
Fiscal years ending July 31,
1998 .................... $ 193
1999 .................... 182
2000 .................... 183
2001 .................... 188
2002 .................... 78
- 37 -
Rent expense for the periods ended July 31, 1997, 1996 and 1995 amounted to
$200, $172 and $122, respectively.
In the ordinary course of its business, the Company may be subject to litigation
matters and claims that are normal for its operations. While the results of
litigation and claims cannot be predicted with certainty, management believes,
based on advice of counsel, the final outcome of such matters will not have a
materially adverse effect on the consolidated financial position.
NOTE 9 - STOCKHOLDERS' EQUITY
Private Placements.
Year ended July 31, 1997. During the year ended July 31, 1997, the Company
received proceeds of $179 from a private placement of 55 units at $3.25 per
unit, each unit consisting of one share of common stock and one warrant. Each
warrant entitles the holder to purchase one share of common stock for $3.25
through June 18, 1999 and for $4.00 thereafter through June 18, 2000.
Year ended July 31, 1996. During the fiscal year ended July 31, 1996, the
Company completed a private placement with Newcastle Services Ltd.
("Newcastle"), a foreign corporation, which then owned a 51% interest in
Associated Reciprocal Traders, Ltd., the Company's then 49% owned foreign
affiliate, pursuant to which Newcastle purchased 200 shares of the Company's
common stock for $750. In this transaction, the Company dealt with Mr. Terry
Neal, founder and former chief executive officer of the Company, as agent for
Newcastle. Therefore, this may be considered a related party transaction.
Effective January 1, 1996, the Company entered into a Regulation S transaction
with Wycliff Fund, Inc. ("Wycliff"), a foreign corporation. Through July 31,
1996, the Company received $1,250 from Wycliff and issued: (a) 255 shares of
common stock, (b) warrants to purchase 255 shares of common stock at an exercise
price of $4.89 per share, exercisable from two years from the date of issuance
until expiration five years from the date of issuance, and (c) warrants to
purchase 255 shares of common stock at an exercise price of $6.12 per share,
exercisable from four years from the date of issuance until expiration ten years
from the date of issuance. In this transaction, the Company dealt with Mr. Terry
Neal, founder and former chief executive officer of the Company, as agent for
Newcastle. Therefore, this may be considered a related party transaction.
The Company also completed a private placement pursuant to which an individual
purchased 56 shares of the Company's common stock for $210. The Company also
completed a private placement pursuant to which an officer of the Company
purchased 25 shares of the Company's common stock for $94,000. In each of these
private placements, the Company issued for each share of common stock purchased
a warrant to purchase one share of common stock at an exercise price of $4.50
per share and one share of common stock at an exercise price of $5.50 per share.
The warrants were exercisable from date of issuance and expired on July 31,
1996.
In addition, during the fiscal year ended July 31, 1996, the Company issued 350
shares of common stock as compensation for services and in connection with the
acquisition of SLI, Inc. Stock Options. Through September 1997, the Company
adopted the following incentive stock option plans under which common stock may
be granted to employees, officers, directors and consultants of the Company. All
option prices are at market price at the date of grant.
- 38 -
Number of
Plan Adoption Shares Grant Period Date of Shareholder Approval
- ------------------ --------- -------------- --------------------------
February 11, 1994 200 10 years February 10, 1995
October 26, 1994 750 10 years February 10, 1995
December 15, 1995 1,250 10 years May 3, 1996
December 27, 1996 1,000 5 years February 9, 1999
September 3, 1997 965 10 years February 9, 1999
The following summarizes activity for the three years ended July 31, 1997:
Number of
Shares:
Option Price
Available Granted Per Share
Balance, July 31, 1994 322 378 $1.00 - $3.38
New plan 750 --- ---
Granted (955) 955 $1.94 - $2.50
Exercised --- (10) $1.00
----------- -----------
Balance, July 31, 1995 117 1,323 $1.00 - $3.38
New plan 1,250 --- ---
Granted (905) 905 $6.13
Exercised --- (687) $1.94 - $2.50
----------- -----------
Balance, July 31, 1996 462 1,541 $1.00 - $6.13
New plans 1,755 --- ---
Granted (775) 775 $3.50 - $3.75
Exercised --- (120) $1.00 - $2.50
----------- -----------
Balance, July 31, 1997 1,442 2,196 $1.00 - $6.13
=========== ===========
Number of options exercisable:
July 31, 1997 2,196
===========
July 31, 1996 1,541
===========
Prior to July 1999, options granted became exercisable immediately and were not
cancelled if unexercised within 90 days of termination. Effective July 1999,
options granted become exercisable over a period of time, typically four years,
and are forfeited by the employee if not exercised within 90 days of termination
of employment. Depending on the former employee's length of employment,
effective October 1, 1999, the Company has given terminated employees from four
months to two years to exercise their options. In 1999, the Company informed
terminated employees of its intent to follow the provisions of the option plans
as to the expiration of options of terminated employees, if it had the
contractual right to do so. Certain former officers' options to purchase
approximately 825 shares were cancelled in their entirety in October 1999.
Warrants. As of July 31, 1997, the following warrants to purchase common stock
were outstanding:
Exercise
Number of Per
Shares Share Expiration Date
--------------- ------------- ----------------
625 $3.83 December 15, 1998
55 $3.35 June 19, 2000
20 $3.50 January 27, 2002
129 $3.75 June 16, 2003
2 $5.25 April 1, 2001
255 $4.89 April 11, 2001
256 $6.12 April 11, 2006
250 $3.50 June 29, 2000
250 $4.25 June 29, 2000
- 39 -
Repurchase of Outstanding Warrants. On March 30, 1998, the Company agreed to
issue 250 shares of unregistered common stock in exchange for the retirement of
outstanding warrants to purchase 1,011 shares of common stock. The warrants to
be retired had exercise prices ranging from $3.50 per share to $6.12 per share,
with expiration dates ranging from June 29, 2000 to April 11, 2006. The warrants
were held by Wycliff Fund, Inc. ("Wycliff") and The Bailey Mutual Fund, Inc.
("Bailey"). Mr. Terry Neal, the founder of the Company and its former Chairman
and Chief Executive Officer represented Wycliff and Bailey in this transaction.
The transaction was completed and the shares of common stock were issued on July
22, 1998.
Loss Per Share. Following is a reconciliation of basic loss per share:
Fiscal years ended July 31,
---------------------------------------
1997 1996 1995
---------- ---------- -------
Net loss .................. $ (1,894) $ (2,402) $(1,660)
========== ========== =======
Weighted average shares ... 6,940 6,499 4,150
========== ========== =======
Basic loss per common share $ (0.27) $ (0.37) $ (0.40)
========== ========== =======
Stock-Based Compensation. The Company has adopted FASB Statement No. 123,
"Accounting for Stock-Based Compensation" as of August 1, 1996. Statement 123
allows for the Company to account for its stock option plans in accordance with
APB Opinion No. 25, "Accounting for Stock Issued to Employees" using the
intrinsic value method. The Company granted options to purchase 555 shares of
common stock to employees during the year ended July 31, 1997.
The following table summarizes the difference between the fair value and
intrinsic value methods and the pro forma net income and net income per share
amounts for the years ended July 31, 1998, 1997 and 1996 had the Company adopted
the fair value-based method of accounting for stock-based compensation.
Years ended July 31,
-----------------------
1997 1996
--------- ---------
Difference between fair value and
intrinsic value methods (additional
compensation expense) ............. $ 576 $ 3,307
Net loss ........................... (2,470) (5,709)
Net loss per share ................. (0.36) (0.88)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted average
assumptions used for grants in fiscal 1997 and 1996: dividend yield of zero,
expected average annual volatility of 63%, average annual risk-free interest
rate of 6.0%, and expected lives of four years and nine years, respectively.
Because the Statement 123 method of accounting has not been applied to options
granted prior to August 1, 1996, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The impact on
future years is not known or reasonably estimable.
Statement 123 also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. Accordingly, the
implementation of Statement 123 may have a material effect on the Company's
financial statements and the pro forma disclosures in the notes thereto in
future periods.
- 40 -
NOTE 10 - INCOME TAXES
Comparative analysis of the provisions for income taxes follows:
Fiscal years ended
July 31,
---------------------------------
1997 1996 1995
------- ------- -------
Current:
Federal ............ $ -- $ 649 $ 563
State .............. -- 133 115
------- ------- -------
-- 782 678
------- ------- -------
Deferred:
Federal ............ (329) 662 (45)
State .............. (67) 136 (9)
------- ------- -------
(396) 798 (54)
------- ------- -------
Tax provision (credit) $ (396) $ 1,580 $ 624
======= ======= =======
The computed income tax expense (benefit) differs from applying the U.S. federal
income tax rate due to losses before income taxes for the years ended July 31,
1997, 1996 and 1995 as a result of the following:
Fiscal years ended July 31,
---------------------------------
1997 1996 1995
------- ------- -------
Taxes at U.S. federal
statutory rate ...... $ (779) $ (279) $ (352)
Change in deferred tax
valuation allowance . 526 2,457 989
Other, net ........... (143) (598) (13)
------- ------- -------
Tax provision (credit) $ (396) $ 1,580 $ 624
======= ======= =======
- 41 -
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at July 31, 1997 and 1996 are presented
below:
July 31,
--------------------
1997 1996
------- -------
Deferred tax assets:
Net trade activity included for
income tax purposes not recognized
for financial reporting purposes . $ 4,942 $ 4,821
Net operating loss carryforward ... 1,104 393
Capital loss carryforward ......... 785 --
Other ............................. 355 292
------- -------
7,186 5,506
Deferred tax liabilities:
Amortization and other ............ (143) (213)
------- -------
Net deferred tax assets ............. 7,043 5,293
Valuation allowance ................. (5,819) (5,293)
------- -------
$ 1,224 $ --
======= =======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generating future taxable income during the periods in which
those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and projections for future taxable income over the periods in which the deferred
tax assets are deductible. At this time, management has concluded that it is not
likely that the Company will realize the benefits of these deductible
differences as there can be no assurance that the Company will generate the
necessary taxable income in any future periods.
NOTE 11 - 401(k) SAVINGS PLAN AND BONUS PLAN
Employees of the Company may participate in a 401(k) savings plan, whereby the
employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length of service requirements. The Company makes
matching contributions of 50% of electing employees' deferrals, up to a ceiling
amount of 3% of gross annual wages. Matching contributions to the plan were $18,
$10 and $7 for the plan years ended December 31, 1997, 1996 and 1995,
respectively.
The Company has a bonus plan for its officers. Bonuses applicable to the fiscal
years ended July 31, 1997, 1996 and 1995 were zero, $109 and zero, respectively.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Financial Accounting Standards Board Statement No. 107 requires the disclosure
of fair value for financial instruments. The following disclosures are made in
accordance with the requirements of that Statement. The estimated fair value has
been determined by the Company using appropriate valuation methodologies and
available or quoted market information.
- 42 -
July 31, 1997 July 31, 1996
------------------- -------------------
Carrying Carrying
Amount Value Amount Value
-------- -------- -------- ---------
Assets:
Cash .................. $ 813 $ 813 $1,301 $1,301
Accounts receivable ... 1,084 1,084 847 847
Notes receivable,
current portion ...... 45 45 115 115
Liabilities:
Accounts payable ...... 246 246 183 183
Portion of receivables
due to brokers ....... 552 552 508 508
Current portion of
long-term indebtedness 138 138 138 138
Long-term portion of
long-term indebtedness 26 26 192 192
Cash, accounts receivable, notes receivable, accounts payable, and portion of
receivables due to brokers. The carrying value of such items approximates their
fair value at July 31, 1997 and 1996.
Current and long-term portion of long-term indebtedness. Fair value of such debt
is based on rates currently available to the Company for debt of similar terms
and remaining maturities. There are no quoted market prices for the debt or
similar debt.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company has dealt with Mr. Terry Neal, the founder of the Company and its
former Chairman and Chief Executive Officer, in various transactions in which
Mr. Neal acted as agent or otherwise represented the other parties to the
transactions. Mr. Neal owns (including shares beneficially owned) approximately
284 shares of the Company's common stock and held options to purchase 450 shares
of the Company's common stock at exercise prices ranging from $1.94 per share to
$6.13 per share. Those options were cancelled by the Company in November 1999 in
accordance with the option plan. If Mr. Neal had exercised all his options and
there were no other stock issuances from exercises of other contingently
issuable shares pursuant to options and warrants held by others or conversions
of preferred stock, Mr. Neal would have had a common equity interest in the
Company of approximately 9% at July 31, 1998.
On July 31, 1997, the Company invested in natural resources located on four
mineral properties in the State of Washington. In exchange for these properties,
the Company issued 130 shares of common stock valued at $149 (as restated),
paid $20 in cash and transferred various barter industry commodities. The
Company initially recorded the natural resource interests at $169 (as restated).
Subsequent to fiscal 1998, management decided to abandon the intended use for
these properties and recorded a write down of $119 to reflect net realizable
value at that time for the mining interests of $50. The four properties contain
deposits including limestone and high-grade calcium carbonate, high-grade and
very-high-grade calcium carbonate, limestone and medium-grade calcium carbonate,
quartzite flagstone, and olivine and dunite. Mr. Terry Neal represented Pacific
Mineral Resources, Inc., the other party, in this transaction. Therefore, this
may be considered a related party transaction.
During the fiscal years ended July 31, 1994, 1995, 1996, and 1997, a 49%-owned
affiliate, Associated Reciprocal Traders, Inc. ("ART"). conducted trading
transactions outside the United States. These transactions did not generate any
cash for the Company. During those periods, Newcastle Services, Ltd.
("Newcastle"), the owner of a 5.4% beneficial common equity interest in the
Company owned the remaining 51% of ART. During that period, the Company dealt
with Mr. Terry Neal in connection with various transactions involving ART and
Newcastle. This included the transaction on July 30, 1997, in which the Company
completed the purchase of the remaining 51% interest of ART from Newcastle.
Therefore, these may be considered related party transactions.
- 43 -
In August 1997 the Company entered into a transaction in which it conveyed to
The Bailey Mutual Fund ("Bailey") 976 ITEX Trade Dollars and certain securities
of other companies in exchange for shares of Wade Cook Financial Corporation
("WCFC") with market value of $2,000. The Company sold these shares during the
same fiscal quarter in which they were acquired. During the fiscal year ended
July 31, 1994, the Company entered into transactions in which it sold marketable
securities to Bailey for an aggregate amount of 140 ITEX Trade Dollars. During
the fiscal year ended July 31, 1995, the Company entered into transactions in
which it sold marketable securities to Bailey for an aggregate amount of 2,990
ITEX Trade Dollars. During the fiscal year ended July 31, 1996, the Company
entered into transactions in which it sold marketable securities to Bailey for
an aggregate amount of 440 ITEX Trade Dollars. In these transactions, the
Company dealt with Mr. Neal as agent for Bailey. Therefore, these may be
considered related party transactions.
During the fiscal year ended July 31, 1996, the Company completed a private
placement with Newcastle Services Ltd. ("Newcastle"), a foreign corporation,
which then owned a 51% interest in Associated Reciprocal Traders, Ltd., the
Company's then 49% owned foreign affiliate, pursuant to which Newcastle
purchased 200 shares of the Company's common stock for $750. In this
transaction, the Company dealt with Mr. Terry Neal, founder and former chief
executive officer of the Company, as agent for Newcastle. Therefore, this may be
considered a related party transaction.
Effective January 1, 1996, the Company entered into a Regulation S transaction
with Wycliff Fund, Inc. ("Wycliff"), a foreign corporation. Through July 31,
1996, the Company received $1,250 from Wycliff and issued: (a) 255 shares of
common stock, (b) warrants to purchase 255 shares of common stock at an exercise
price of $4.89 per share, exercisable from two years from the date of issuance
until expiration five years from the date of issuance, and (c) warrants to
purchase 255 shares of common stock at an exercise price of $6.12 per share,
exercisable from four years from the date of issuance until expiration ten years
from the date of issuance. In this transaction, the Company dealt with Mr. Terry
Neal, founder and former chief executive officer of the Company, as agent for
Wycliff. Therefore, this may be considered a related party transaction.
In June 1999, when the Company needed working capital, an individual who was at
that time Chairman of the Board of Directors, and another individual who is
President, CEO and a Director of the Company, loaned a total of $480 to the
Company. The transactions were structured as convertible notes bearing interest
at 10% per annum. The Company paid those notes in full together with accrued
interest in January 2000. The conversion privilege was never exercised.
NOTE 15 - SUBSEQUENT EVENTS
Investment in Samana Resort. In October 1997 the Company acquired a 60% interest
in the undeveloped Villas Punta Ballena (Samana) Resort located in the Dominican
Republic, at a cash cost of $1,026. In March 1999, new management of the Company
decided to discontinue this project and to sell its interest and wrote the
investment down to $518, representing the estimated realizable value of the
property including associated plans, engineering drawings, permits and
approvals, based on a subsequent sale of the property during the fiscal year
ending July 31, 2000.
Financing. In November 1998 the Company completed a Regulation D private
placement of promissory notes totaling $1,625 face value realizing approximately
$1,100 after a 20% discount and issuance costs. The Company has the right to
repay the notes and accrued interest in cash or in common stock of the Company.
The maturity date of the notes is November 30, 2000.
In June 1999 the Company retired $313 of the above notes at the discounted
amount of $250, retired an additional $63 by the payment of $50 in January 2000.
In July 1999 the Company retired $313 of the above notes at the discounted
amount of $250 and in January 2000 retired an additional $63 by payment of $50.
In April 2000, the Company retired the balance of these notes with a face value
of $1,250 by converting $675 plus accrued interest into 1,134 shares of common
stock and payment of $575 in cash plus accrued interest. Warrants to purchase
195 shares of stock at an average price of $3 a share, issued in connection with
this financing, remain outstanding.
- 44 -
In June 1999 when the company needed working capital, an individual, at that
time Chairman of the Board of Directors, and another individual, the President,
CEO and Director, loaned a total of $480 to the Company. The transaction was
structured as a convertible note bearing interest at 10% per annum. The Company
paid those notes in full together with accrued interest in January 2000. The
conversion privilege was never exercised.
In August 1999, a settlement agreement was reached between the Company and Wade
Cook Financial Corporation ("WCFC") related to WCFC's refusal to permit
transfer, without restricted legend, of WCFC stock issued to a Company
subsidiary in exchange for a media due bill. Under the settlement agreement,
WCFC has agreed that the Company subsidiary is the owner of 1,400 shares of WCFC
unrestricted stock which may be sold by ITEX at no more than 100 shares a month,
at current market prices, subject to a right of first refusal by WCFC. The
settlement agreement also provides for the transfer of 300 ITEX trade dollars to
WCFC which has been accomplished. As of April 2000, the Company has realized
proceeds of approximately $176 from the sale of approximately 451 shares of its
Wade Cook stock.
Wade Cook Settlement. In August 1999, a settlement agreement was reached between
the Company and Wade Cook Financial Corporation ("WCFC") related to WCFC's
refusal to permit transfer, without restricted legend, of WCFC stock issued to a
Company subsidiary in exchange for a media due bill. Under the settlement
agreement, WCFC has agreed that the Company subsidiary is the owner of 1,400
shares of WCFC unrestricted stock which may be sold by ITEX at no more than 100
shares a month, at current market prices, subject to a right of first refusal by
WCFC. The settlement agreement also provides for the transfer of 300 ITEX trade
dollars to WCFC which has been accomplished. Through April 28, 2000, the Company
has sold approximately 451 shares of the Wade Cook, stock from which it realized
net proceeds of approximately $176.
Purchase of Sacramento, California, Broker Office. In October 2000, the Company
acquired all of the outstanding stock of California Trade Exchange, Inc., a
California corporation which operated the business of the Company's largest
independent broker located in Sacramento, California. The purchase price was
paid by issuing 1,967 shares of the Company's restricted common stock The
primary identifiable assets of the acquired business were accounts receivable,
furniture and equipment and the right to service ITEX clients as represented by
the Independent Retail Broker Agreement for that office. The Company is
currently working on its accounting for the acquisition and has concluded that
the transaction will be assigned a value of less than 10% of the Company's
total assets.
The principal owner of the Sacramento brokerage business became President, Chief
Executive Officer and a Director of ITEX Corporation after acquisition of the
Sacramento business and a minority owner of the Sacramento brokerage business
served as a vice president of the Company in charge of broker training until
March 7, 2000.
Purchase of Seattle, Washington, Broker Office. In February 2000, the Company
acquired all of the issued and outstanding stock of Seattle Trade Network, Inc.,
("STN") a Washington corporation which operated the business of the independent
broker located in Issaqua (Seattle area), Washington. The purchase price
consisted of $150 cash, 150 ITEX Trade Dollars and 200 shares of common stock of
the company. In addition, the Company issued 15 warrants to purchase restricted
common stock of the Company at an exercise price of $0.75 per share. One of the
former stockholders of "STN" continued as an ITEX employee to manage the Seattle
office.
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Purchase of Houston, Texas, Broker Office. Also in February 2000, the Company
acquired the assets of the operator of the independent broker office located in
Houston, Texas. The purchase price was $100 cash, payable $50 at closing and the
remainder over time, 100 ITEX Trade Dollars and 100 shares of the restricted
common stock of the Company and the option to acquire up to an additional 25
shares of restricted common stock at an exercise price of $0.75 per share. The
owner of the operation has remained as an ITEX employee to manage the Houston
office. The primary identifiable assets of the acquired business were accounts
receivable, furniture and equipment and the right to service ITEX clients as
represented by the Independent Retail Broker Agreement for that office.
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NOTE 16 - LEGAL PROCEEDINGS
o SEC Inquiry.
-----------
During June 1996, the Company announced in a press release that the Company was
the subject of an informal inquiry from the Securities and Exchange Commission.
Subsequently, the Company received subpoenas for the production of certain
documents pursuant to a formal order of private investigation. In connection
with that investigation, the SEC took the deposition of several individuals. On
September 27, 1999, the SEC filed a civil Complaint in the United States
District Court for the District of Oregon naming the Company and former officers
and/or directors of the Company, Terry L. Neal, Michael T. Baer, Graham H.
Norris, Cynthia Pfaltzgraff and Joseph M. Morris, as defendants and alleging
securities fraud and other securities law violations. In January, 2000, the
Company entered into a Consent and Undertaking with the SEC wherein, without
admitting or denying the allegations of the Complaint, the Company consented to
entry of a Final Judgment of Permanent Injunction which, among other things, (i)
permanently restrains and enjoins the Company from violating Sections 5 and
17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A) and
13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 10b-5, 13a-1,
13a-13 and 12b-20 thereunder, and (ii) orders the Company to restate its
financial statements for the fiscal year ended July 31, 1997. The Final Judgment
based upon the Consent was entered by the Court on February 3, 2000. The Company
is given 90 days from that date to file its amended Form 10-K for fiscal 1997
and its Form 10-K's for fiscal 1998 and 1999.
o Sondra Ames Litigation.
----------------------
In October 1998, the Company was served with summons and complaint for an
action in the Superior Court of Orange County, California styled Sondra Ames
v. ITEX Corporation, Graham H. Norris and John Does I through X. The complaint
alleged (i) fraud in the acquisition by ITEX of plaintiff's trade exchange in
1996; (ii) violation of Rule 10b-5 of the Securities and Exchange Act of 1934
in connection with plaintiff's purchase of ITEX stock on the open market in
1996; (iii) breach of written and oral contracts, (iv) sex discrimination and
harassment; (v) discrimination based on religion; (vi) retaliation and
tortuous discharge; (vii) defamation; and (viii) violation of various
provisions of the California labor code. Plaintiff asked for $5,000 actual
damages and for punitive damages along with other statutory relief. The case
was subsequently moved to Federal Court.
Plaintiff was a former employee and former officer of the Company whose
employment agreement expired in April 1998. The parties settled the matter for
an undisclosed amount, which is confidential by the terms of the agreement, in
January 2000 without any admission of liability and the case has been
dismissed in its entirety. The amount for which the matter was settled was not
significant to the Company's financial position.
o Martin Kagan Litigation.
-----------------------
During July 1998, the Company was served with a summons and complaint for a
case in Circuit Court of Multnomah County, Oregon, styled Martin Kagan v. ITEX
Corporation. The complaint alleges breach of a stock option agreement between
the Company and Kagan and seeks to set aside a settlement agreement between
the parties dated January 14, 1997. The Company has answered the complaint
denying its material allegations. Subsequently, the plaintiff filed a first
amended complaint adding Graham H. Norris, the Company's former President and
Chief Executive Officer, as an additional party and modifying somewhat the
allegations of the original complaint. The Company and Mr. Norris have
answered the amended complaint and denied all allegations. The Company has
vigorously defended the action. Trial before a court appointed referee was
held on November 4, 8 and 9, 1999. On April 12, 2000, the referee issued a
decision that dismissed all of Kagan's claims except his claim for unlawful
sale and purchase of securities. The referee awarded Kagan $400, plus
interest from July 14, 1998, plus a reasonable attorneys fee. To be effective,
the referee's decision must be confirmed by the Multnomah County Circuit
Court. An unfavorable result is probable. However, the Company will vigorously
pursue this matter on appeal. It is impossible to predict the outcome of an
appeal.
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o IBTEX, A.G. Litigation.
----------------------
During September 1998, the Company was served with a summons and complaint for
a case in the Circuit Court of Multnomah County, Oregon, styled IBTEX, A.G. v.
ITEX Corporation, Donovan Snyder and Graham Norris, Sr. The complaint alleges
breach of contract, breach of duty of good faith and fair dealing and
violations of the Oregon Franchise Act. The defendants have answered the
complaint denying its material allegations, demanding that the disputes
between IBTEX and the Company be arbitrated pursuant to an arbitration
agreement between the parties and requiring that the action be stayed until
such time as the arbitration is complete. No arbitration has been set and the
case has been dormant for several months.
o Don Schilz Litigation.
----------------------
During November 1998, a case was filed in the U.S. District Court for the
Northern District of Illinois styled Radio Spirits, Inc. v. Don Schilz and
Pride Communications and Don Schilz v. ITEX Corporation. The case primarily
alleges a common law copyright infringement by the defendants one of whom
(Schilz) claims that the Company is liable for any infringement which is
proven.
The plaintiff claims that the defendants have infringed its claimed
copyrights in old time radio programs "The Life of Riley" and "Lone Ranger".
Those programs were part of The Golden Age of Radio, which ITEX formerly
owned. The defendants are a small radio station (Pride Communications) and an
individual (Schilz) whose show has used elements of the Golden Age of Radio.
Defendant Schilz alleges that, if there was an infringement, it is the
responsibility of the Company as it supplied the allegedly infringing
material. In January 2000, the case was settled without any admission of
liability on the part of the Company and the third-party complaint was
dismissed in its entirety.
o Wade Cook Financial Corporation Litigation.
------------------------------------------
During February 1998, an action was filed in Washington (Seattle) State Court
by Associated Reciprocal Traders, Ltd., ("ART") an ITEX wholly owned
subsidiary, based on Wade Cook Financial Corporation's ("WCFC") refusal to
permit transfer, without restricted legend, of WCFC stock issued to ART in
exchange for a media due bill. ART filed a Motion for Replevin and Preliminary
Injunction requesting delivery and transfer of the certificates of WCFC stock
to ART based upon compliance by ART with the requirements of Rule 144 of the
Securities Act of 1933. After two separate hearings, on October 2, 1998, the
Court ruled that the requirements of Rule 144 had been met, but that issues
raised by WCFC concerning the radio spots, pursuant to the due bill, required
a trial of the merits of the action.
During August 1999, the matter was settled. WCFC has agreed that ART is the
owner of 1,400,000 shares of WCFC unrestricted stock which may be sold by
ITEX at no more than 100,000 shares a month, at current market prices,
subject to a right of first refusal by WCFC. The settlement agreement also
provided for the transfer of 300 ITEX trade dollars to WCFC, which the
Company has completed. As of April 28, 2000, the Company had realized
approximately $176 from the sale of approximately 451 shares of its
Wade Cook common stock.
o "John Doe" Litigation.
---------------------
In July 1998, the Company filed an action in Multnomah County, Oregon, State
Court against 100 John Doe defendants, that is, individuals whose identities
were, at the time of filing, unknown to the Company. The Complaint arose from
certain anonymous postings on the Internet which the Company believed
constituted intentional interference with the Company's economic
relationships, unfair trade practices, civil conspiracy and, with respect to
then President of the Company Graham H. Norris, defamation. The Complaint
sought monetary damages and injunctive relief.
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After filing the Complaint, the Company subpoenaed certain Internet Service
Providers to determine the true identity of the anonymous posters. Various
amendments to the Complaint were filed naming certain defendants until the
Company's Fifth Amended Complaint was filed naming Leslie L. French and
adding a claim for breach of a settlement agreement previously entered into
between Mr. French and the Company in connection with other litigation in
1997.
Mr. French has answered the Fifth Amended Complaint essentially denying all
of the allegations of the Complaint and asserting counterclaims against the
Company for (1) breach of contract related to a Settlement Agreement
previously entered into between French and the Company; (2) fraud in the
inducement in connection with the Settlement Agreement; (3) securities fraud;
and (4) unlawful trade practices. The Company denies the allegations of the
counterclaims. In April 2000, without any admission of liability, the parties
agreed upon and executed a settlement of the matter, which will result in the
dismissal of the entire action. However, a stipulated final judgment has not
yet been entered. The amount for which the matter was settled was not
significant to the company's financial position.
o Desert Rose Foods Litigation.
----------------------------
On April 28, 2000, ITEX Corporation was served with summons and complaint for
an action in the Circuit Court of Fairfax County, Virginia style Desert Rose
Foods, Inc. v. ITEX Corporation and ITEX USA, Inc. The complaint alleges
Breach of Contract, Fraud, and violations of federal law. Plaintiff asks for
$750,000 compensatory damages, punitive damages, other statutory damages,
interest and attorneys fees.
Plaintiff entered into a contract with the Company for delivery of goods
valued at approximately $120,000. The Company has not yet retained local
counsel in this case. The Company believes Plaintiff's complaint is frivolous
and the Company intends to vigorously defend itself. The Company has
successfully defended similar actions. The Company does not believe this
action is significant to the Company's financial position.
The Company believes it has accrued adequate reserves to cover potential
losses on litigation.
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