UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended
May 7, 2000
Commission File Number 0-18275
ITEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-0922994
----------------------- -----------------
State (or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3400 Cottage Way, Sacramento, California 95825
- --------------------------------------------------------------------------------
(Address of principal executive offices including zip code)
916-679-1111
----------------------------------
(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____
---------------
Number of Shares of Common Stock, $0.01 Par Value Outstanding at June 26, 2000:
14,336,406
(This Form 10-Q includes 18 pages)
ITEX CORPORATION
FORM 10-Q
For The Quarterly Period Ended May 7, 2000
INDEX
Page
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AT MAY 7, 2000 AND
JULY 31, 1999 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE
AND FORTY WEEK PERIODS ENDED MAY 7, 2000 AND 1999 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWELVE AND
FORTY WEEK PERIODS ENDED MAY 7, 2000 AND 1999 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II.OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
May 7, July 31,
2000 1999
-------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ............................... $ 1,981 $ 203
Accounts receivable, net of allowance for doubtful
accounts of $308 and $697 .............................. 703 1,143
Notes receivable ........................................ 29 9
Prepaids and other current assets ....................... 159 219
-------- --------
Total current assets ................................ 2,872 1,574
Property and equipment, net of accumulated depreciation of
$1,059 and $635 ......................................... 2,678 523
Goodwill and purchased member lists, net ..................... 508 3,866
Note receivable from sale of Investment in Samana Resort ..... 350 518
Other assets ................................................. 71 148
-------- --------
Total assets .................................. $ 6,479 $ 6,629
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ..................................... $ -- $ 200
Long-term debt and capital lease obligations, current
portion ................................................ 84 1,189
Accounts payable ........................................ 265 675
Accounts payable to brokers ............................. 607 1,167
Deferred revenue ........................................ -- 586
Notes payable to related parties ........................ -- 480
Other current liabilities ............................... 1,163 1,949
-------- --------
Total current liabilities ........................... 2,119 6,246
-------- --------
Long-term debt and capital lease obligations ................. 548 209
Commitments and contingencies ................................ -- --
-------- --------
Common stock subject to a put (333 shares of common stock
outstanding, also included below) ........................... 1,500 --
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 50,000 shares authorized;
15,238 and 11,408 shares issued and outstanding ........ 153 118
Additional paid-in capital .............................. 28,312 27,130
Treasury stock, at cost (2 shares in 2000 and 1999) ..... (10) (10)
Accumulated deficit ..................................... (26,143) (27,064)
-------- --------
Total stockholders' equity .......................... 2,312 174
-------- --------
Total liabilities and stockholders' equity ... $ 6,129 $ 6,629
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
- 3 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Twelve Weeks Ended Forty Weeks Ended
May 7, May 7,
---------------------- ----------------------
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
Revenue:
Trade exchange revenue ....................... $ 2,430 $ 4,722 $ 11,243 $ 13,769
-------- -------- -------- --------
2,430 4,722 11,243 13,769
-------- -------- -------- --------
Costs and expenses:
Costs of trade exchange revenue .............. 866 3,259 5,469 9,360
Selling, general and administrative .......... 1,638 1,287 4,991 4,758
Costs and expenses of discontinued operations
operations ................................ -- 1,216 49 2,192
Costs of regulatory and litigation matters .. 63 34 240 955
Writedown of Samana ......................... -- 508 -- 508
Change in estimate on loss from disposal
of BXI .................................... -- -- (585) --
Depreciation and amortization ................ 112 453 388 1,555
-------- -------- -------- --------
2,679 6,757 10,552 19,328
-------- -------- -------- --------
Income (loss) from operations .................... (249) (2,035) 691 (5,559)
-------- -------- -------- --------
Other income (expense):
Interest income (expense), net ................. (109) (95) (331) (244)
Gains on sales of securities ................... 175 -- 175 --
Miscellaneous, net ............................. 159 5 386 13
-------- -------- -------- --------
234 (90) 230 (231)
-------- -------- -------- --------
Income (loss) before income taxes ................ (24) (2,125) 921 (5,790)
Provision for income taxes ....................... -- -- -- 5
-------- -------- -------- --------
Net income (loss) ................................ $ (24) $ (2,125) $ 921 $ (5,795)
======== ======== ======== ========
Average common and equivalent shares ............. 14,059 11,762 13,271 11,691
======== ======== ======== ========
Net income (loss) per common share (basic
and diluted) .................................... $ (0.00) $ (0.18) $ 0.07 $ (0.50)
======== ======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
- 4 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Forty Weeks
Ended May 7,
---------------------
2000 1999
-------- -------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ....................................... $ 921 $(5,795)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization ......................... 1,157 1,580
Writedowns and writeoffs .............................. -- 1,581
Gain on sale of magazine rights ....................... (100) --
Charge to reserve for BXI sale ........................ (769) --
Change in estimate for loss on BXI disposal ........... (585) --
Stock and options issued for goods and services ....... 24 743
Changes in operating assets and liabilities:
Accounts and notes receivable ........................ (217) 238
Prepaids and other current assets .................... (315) 93
Accounts payable and other current liabilities ....... (906) 495
Accounts payable to brokers .......................... 142 56
Deferred revenue ..................................... -- (183)
-------- -------
Net cash provided by (used in) operating activities (648) (1,192)
-------- -------
Cash flows from investing activities:
Proceeds from sale of BXI .............................. 4,000 --
Proceeds from payments on sale of Samana ............... 168 --
Proceeds from sale of magazine rights .................. 100 --
Purchase of Sacramento office building ................. (200) --
Purchase of Seattle and Houston brokerages ............. (200) --
Equipment, information systems and other ............... (64) (380)
-------- -------
Net cash provided by (used in) investing activities 3,804 (380)
-------- -------
Cash flows from financing activities:
Proceeds from sales of stock ............................ -- 10
Proceeds from bank borrowings ........................... -- 50
Proceeds from third party indebtedness .................. -- 1,140
Repayments of bank line of credit ....................... (200) --
Repayments of debentures and notes payable .............. (698) (40)
Repayments of notes payable to related parties .......... (480) --
-------- -------
Net cash provided by (used in) financing activities (1,378) 1,160
-------- -------
Net increase (decrease) in cash and cash equivalents ........ 1,778 (412)
Cash and cash equivalents at beginning of period ............ 203 936
-------- -------
Cash and cash equivalents at end of period .................. $ 1,981 $ 524
======== =======
Supplemental cash flow information:
o Cash paid for interest $ 173 $ 27
o Cash paid for income taxes -- 5
Supplemental noncash investing and financing activities:
o Common stock and options to purchase common stock in
acquisitions of Sacramento, Seattle, and Houston
brokerages 540 --
o Common stock subject to a put ($1,500) and note
payable ($300) in purchase of Sacramento office
building 1,800 --
o Common stock in repayment of convertible debentures 683 --
The accompanying notes are an integral part of the
consolidated financial statements.
- 5 -
ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 - UNAUDITED INTERIM INFORMATION
ITEX Corporation (the "Company" or "ITEX") and its wholly-owned subsidiaries
prepare and report financial results using a fiscal year ending July 31. The
Company closes its books of account at the end of each of 13 four-week
"accounting cycles". The Company reports financial position and results of
operations and cash flows using one quarter containing four four-week accounting
cycles and three quarters containing three four-week accounting cycles.
Accordingly, the dates for the fiscal ends of the Company's quarters for public
reporting are as follows: first quarter, November 20; second quarter, February
12; third quarter, May 7; fourth quarter (fiscal year-end), July 31.
This Form 10-Q includes the consolidated financial statements of the Company and
its wholly-owned subsidiaries. The consolidated balance sheet as of July 31,
1999 is excerpted from the Company's audited financial statements for the fiscal
year then ended. The Company's consolidated financial statements included in
this Form 10-Q for the interim periods ended May 7, 2000 and 1999 include all
normal recurring adjustments which, in the opinion of the Company, are necessary
for a fair statement of the results of operations, financial position, and cash
flows as of the dates and for the periods presented. The Company's operating
results for the twelve and forty week periods ended May 7, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending July 31, 2000.
The Notes to Consolidated Financial Statements included in the Company's July
31, 1999 Annual Report on Form 10-K should be read in conjunction with these
consolidated financial statements.
NOTE 2 - BUSINESS COMBINATIONS
Sacramento. In October 1999, the Company (the "issuing company") exchanged 1,967
shares of the Company's restricted common stock for all of the outstanding stock
of California Trade Exchange, Inc. (the "combining company"), a California
corporation, which operated the business of the Company's largest independent
broker located in Sacramento, California. The Company is required to account for
the business combination as a pooling-of-interests. Under this method, the stock
issued by the issuing company and the net assets of the combining company are
recorded at the historical net book values of the net assets of the combining
company, instead of at their fair market values as under the purchase method of
accounting for business combinations. No amounts are assigned to identifiable
intangible assets or goodwill.
The net book value of the net assets in the historical financial statements of
the combining company were approximately $270 and consisted primarily of
accounts receivable and office furniture and equipment. The pooling-of-interests
method requires restatement of prior financial statements to reflect financial
position and results of operations and cash flows as if the issuing and
combining companies had always been combined. The Company has not restated its
financial statements for this business combination because the effects of
restatement would be immaterial. The business combination had no effect on
revenue for the 16-week period ended November 20, 1999, but since the Sacramento
business is now owned and operated by the Company, the Company no longer pays
broker commissions with respect to the Company's revenue from the Sacramento
location. Instead, the Company now pays the operating costs of the business.
From October 1999, the date of acquisition, these costs are included in the
accompanying consolidated financial statements.
- 6 -
The principal owner of the Sacramento brokerage business became President, Chief
Executive Officer and a Director of ITEX Corporation 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.
Seattle. 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. The total value assigned to the acquisition, which is being accounted
for by the purchase method, was $305. Substantially all of the purchase price
was allocated to the right to service the member lists, which is being amortized
over a four-year life.
Houston. 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 100,000 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 total value
assigned to the acquisition, which is being accounted for by the purchase
method, was $184. Substantially all of the purchase price was allocated to the
right to service the member lists, which is being amortized over a four-year
life.
NOTE 3 - 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 agreed that the Company subsidiary was 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 was accomplished. Through May 7, 2000, the Company has sold
approximately 451 shares of the Wade Cook stock, from which it realized net
proceeds of approximately $175.
NOTE 4 - SALE OF ASSETS AND BUSINESS OF BXI CORPORATION
On January 18, 2000, the Company sold the assets and business of BXI Corporation
for $4,000 cash. During the fiscal year ended July 31, 1999, the Company had
decided to dispose of the assets and business of BXI Corporation and recorded an
estimated loss on disposal of $2,000, which included estimated losses of BXI
Corporation from the measurement date to the disposal date. During the 16-week
period ended November 20, 2000, the net loss for BXI of $382 (after amortization
of customer lists and goodwill) was charged to the reserve of $2,000 that was
established during fiscal 1999. During the 12-week period ended February 12,
2000, the net loss for BXI of $387 from November 20, 1999 to January 31, 2000
was charged to the reserve. Upon completion of the sale, the Company determined
that the actual loss on disposal was $1,515 and, accordingly, during the 12-week
period ended February 12, 2000, the Company recorded a change in estimate to
eliminate the remaining balance in the reserve of $485, which is shown
separately as a reduction of costs and expenses in the statement of operations.
The Company also reversed an additional liability of $100 that was no longer
necessary after the disposal of BXI, increasing the gain on change in estimate
to $585.
- 7 -
NOTE 5 - SALES OF OTHER ASSETS
Samana. During the 16-week period ended November 20, 1999, the Company sold its
investment in the Samana resort property to the parties from whom the Company
had originally purchased the property for $550. The property was previously
written down in fiscal 1999 to $518, based on the selling price less related
costs of $32. The purchasers have paid a total of $200. The remaining balance
due of $350 has not been paid in accordance with the terms of the sale and the
Company is contemplating legal action to enforce the terms of the sale
agreement. The Company believes that it will recover the unpaid balance of $350
either from the current debtors or from resale of the property to another party.
Magazine Publishing Rights. During the 12-week period ended February 12, 2000,
the Company sold the rights to publish its magazine related to the commercial
barter industry for $100, which was received in cash. There were no assets
associated with the magazine carried on the Company's books and, therefore, the
gain of $100 has been included in other income.
Marketing Information. During the 12-week period ended May 7, 2000, the
Company conveyed certain marketing information to a third party for a net fee
of $150.
NOTE 6 - PURCHASE OF SACRAMENTO OFFICE BUILDING
During the quarter ended May 7, 2000, the Company purchased an office building
in Sacramento, California and the Company moved its corporate headquarters to
that location in June 2000. The consideration paid consisted of: (a) $200 cash,
a promissory note for $300 with interest at 10%, with monthly interest payments
only until August 29, 2001 at which time the entire principle is due, (c) 333
shares of common stock of the Company that will be increased, if necessary, at a
future date to enable the seller to realize $1,500 from the sale of the stock,
and (d) 200 ITEX Trade Dollars. The Company has recorded the building at the
total of the cash paid, the promissory note, and the value of the stock of
$1,500 to be provided, altogether totaling $2,000. The arrangement provides that
if the seller is unable to sell the stock, the Company may satisfy this
obligation by paying cash. In the event that the stock cannot be sold and the
Company does not pay cash, the seller may foreclose on the building. The Company
has recorded the arrangement with respect to the stock as "common stock subject
to a put" in the balance sheet, which is not included in stockholders' equity.
The building is recorded in the accompanying consolidated financial statements
at the estimated fair value of $1,800,000.
NOTE 7 - RETIREMENT OF CONVERTIBLE DEBENTURES
During the quarter ended May 7, 2000, the holder of the remaining outstanding
convertible debentures requested conversion of one-half of the outstanding
amount into common stock pursuant to which the Company issued 1,134 shares of
common stock. At that time, the Company repaid the remaining amount outstanding
of $673, resulting in complete retirement of the convertible debentures.
NOTE 8 - LITIGATION
In the third quarter of fiscal 2000, a judgment was entered against the Company
that embodied the prior decision of a referee against the Company for $400 plus
interest in the matters associated with Martin Kagan. The Company intends to
appeal vigorously and believes that it has meritorious arguments sufficient to
reduce or eliminate this award. Subsequent to May 7, 2000, the Company posted a
cash bond of $550 that was required to enable moving forward with the Company's
appeal.
- 8 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (in thousands, except per share amounts)
OVERVIEW
ITEX Corporation and subsidiaries ("ITEX" or the "Company") operates the ITEX
Retail Trade Exchange and acts as third-party recordkeeper for transactions
between members of the exchange. 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.
The BXI trade exchange was acquired by the Company on June 25, 1998. The BXI
trade exchange operations are included in the financial statements up until the
date of sale on January 18, 2000, when the net assets and business of BXI
Corporation were sold to TAHO Enterprises, Inc., a Massachusetts corporation,
for $4,000 cash.
Additionally, 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. Prior to the 12 and 28 week periods
ended February 12, 2000, the Company incurred operating losses from its trade
exchange operations. Such losses were increased by costs associated with the
discontinued operations discussed above and costs and expenses of regulatory and
litigation matters connected with disputes about the acquisition of the BXI
trade exchange, an SEC investigation, and other legal and regulatory matters.
- 9 -
RESULTS OF OPERATIONS FOR TWELVE WEEK PERIODS ENDED MAY 7, 2000 ("3Q 2000") AND
1999 ("3Q 1999")
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:
Twelve Week Periods Ended May 7,
-------------------------------------------------
2000 1999
--------------------- ---------------------
Amount Pct* Amount Pct*
------- ----- ------- -----
Revenue:
Trade exchange:
Association fees ............. $ 835 34% $ 1,045 22%
Transaction fees ............. 1,595 66% 3,677 78%
------- ----- ------- -----
2,430 100% 4,722 100%
------- ----- ------- -----
Costs and expenses:
Trade exchange ................. 866 36% 3,259 69%
Selling, general, administrative 1,638 66% 1,287 26%
Discontinued operations ........ -- -- 1,216 26%
Regulatory and litigation ...... 63 3% 34 1%
Writedown of Samana ............ -- 11% 508 --
Depreciation and amortization .. 112 5% 453 10%
------- ----- ------- -----
2,679 110% 6,757 143%
------- ----- ------- -----
Income (loss) from operations .. (249) (10%) (2,035) (43%)
Other income (expense) ......... 234 9% (90) (2%)
------- ----- ------- -----
Income (loss) before taxes ..... (24) (1%) (2,125) (45%)
Tax provision .................. -- -- -- --
------- ----- ------- -----
Net income (loss) .............. $ (24) (1%) $(2,125) (45%)
======= ===== ======= =====
* Percent of Total Revenue
- ---------------------------------
Trade exchange revenue and costs
Total trade exchange revenue decreased to $2,430 in 3Q 2000 as compared to
$4,722 in 3Q 1999. Revenue of the ITEX Retail Trade Exchange (the "ITEX
Exchange") decreased slightly to $2,430 in 3Q 2000 from $2,519 in 3Q 1999. There
was no revenue from the BXI trade exchange in 3Q 2000 as compared to $2,203 in
3Q 1999. The net assets and business of BXI Corporation were sold by the Company
on January 18, 2000.
Association fee revenue for the ITEX Exchange increased to $835 in 3Q 2000 from
$631 in 3Q 1999. There was a slight decrease in the average number of members,
which was more than offset by an increase in the monthly cash association fee
from $15 per cycle to $20 per cycle,
Costs of trade exchange revenue decreased substantially for two reasons. One
reason was that there are no operations of BXI in 3Q 2000. Also, 3Q 2000
the Company operated four significant volume brokerages, which eliminated the
payment of commissions to brokers. The Sacramento brokerage was merged into
the Company on October 20, 1999 in a business combination required to be
accounted for as a pooling-of-interests. The prior period financial statements
have not been restated to reflect the operations of the acquired entity as the
effect is deemed to be immaterial. The Company terminated a broker in
New York City and opened its own office to service the existing client base.
The Company acquired the brokerages in Seattle and Houston in February 2000.
Trade exchange costs were 36% of trade exchange revenue in 3Q 2000 as compared
to 69% in Q3 1999 because of the removal of BXI operations, which had a higher
commission structure than ITEX, and because of the elimination of commissions
that were previously paid with respect to the four above mentioned brokerages,
which were operated by the Company in 3Q 2000. Lower levels of broker
commissions as a percentage of trade exchange revenue are expected in the future
with some increases in selling, general and administrative expenses, which are
discussed below, as a result of the Company assuming the facilities, personnel
and other costs of these brokerages.
Writedown of Samana
During March 1999, new management of the Company decided to liquidate the
investment in the Samana resort. In 3Q 1999, the investment was written down to
its net realizable value of $518 (after related expenses) based on a later sale
of the property. The Company has received cash of $200 from the buyers but the
buyers have not paid the remaining $350 in accordance with the terms of the sale
agreement. The Company is contemplating legal action to enforce the terms of the
sale agreement.
Change in estimate for loss on disposal of BXI
Upon completion of the sale, the Company determined that the actual loss on
disposal was $1,515 and, accordingly, in 3Q 2000, the Company recorded a change
in estimate to eliminate the remaining balance in the reserve of $485, which is
shown separately as a reduction of costs and expenses in the statement of
operations. The Company also reversed an additional liability of $100 that was
no longer necessary after the disposal of BXI, increasing the gain on change in
estimate to $585.
- 10 -
Depreciation and amortization
Depreciation and amortization decreased to $112 in 3Q 2000 from $453 in 3Q 1999
primarily as a result of depreciation and amortization in 3Q 1999 from BXI. The
net assets and business of BXI Corporation were disposed of on January 18, 2000.
Depreciation and amortization for 3Q 2000 includes $39 related to the two months
during 3Q 2000 that the Company owned the Sacramento office building and the
Houston and Seattle brokerages. Ongoing depreciation and amortization for these
will be approximately $59 per quarter.
Other income (expense)
Interest (expense) was ($109) in 3Q 2000 as compared to ($95) in 3Q 1999. In 3Q
2000, the Company realized gains on sales of portions of its Wade Cook stock,
realizing $175, all of which has been recognized as gain because the stock had
no carrying value in the financial statements. Additionally, in 3Q 2000, the
Company reserved a new fee of $150 for the transfer of certain marketing
information to a third party.
RESULTS OF OPERATIONS FOR FORTY WEEK PERIODS ENDED MAY 12, 2000 ("3Q YTD 2000")
AND 1999 ("3Q YTD 1999")
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:
Forty Week Periods Ended February 12,
-----------------------------------------------------
2000 1999
----------------------- -----------------------
Amount Pct* Amount Pct*
-------- ---- -------- ----
(Unaudited) (Unaudited)
Revenue:
Trade exchange:
Association fees ............. $ 3,169 28% $ 3,316 24%
Transaction fees ............. 8,074 72% 10,453 76%
-------- ---- -------- ----
11,243 100% 13,769 100%
-------- ---- -------- ----
Costs and expenses:
Trade exchange ................. 5,469 49% 9,360 67%
Selling, general, administrative 4,991 44% 4,758 35%
Discontinued operations ........ 49 1% 2,192 16%
Regulatory and litigation ...... 240 2% 955 7%
Writedown of Samana ............ -- -- 508 4%
Change in estimate for loss
on disposal of BXI ........... (585) (5%) -- --
Depreciation and amortization .. 388 3% 1,555 11%
-------- ---- -------- ----
10,552 94% 19,328 140%
-------- ---- -------- ----
Income (loss) from operations .. 691 6% (5,559) (40%)
Other income (expense) ......... 230 2 (231) (2%)
-------- ---- -------- ----
Income (loss) before taxes ..... 921 8% (5,790) (42%)
Tax provision .................. -- -- 5 --
-------- ---- -------- ----
Net income (loss) .............. $ 921 8% (5,795) (42%)
======== ==== ======== ====
- ---------------------------------
* Percent of Total Revenue
- 11 -
Trade exchange revenue and costs
Total trade exchange revenue decreased to $11,243 in 3Q YTD 2000 from $13,769 in
3Q YTD 1999, primarily because of the sale of the net assets and business of BXI
Corporation on January 18, 2000. Revenue from the BXI trade exchange decreased
to $3,341 in 3Q YTD 2000 from $6,221 in 3Q YTD 1999.
Revenue of the ITEX Retail Trade Exchange (the "ITEX Exchange") increased 5% to
$7,902 in 3Q YTD 2000 from $7,548 in 3Q YTD 1999. Association fee revenue for
the ITEX Exchange increased to $1,644 in 3Q YTD 2000 from $1,443 in 3Q YTD 1999.
There was a slight decrease in the average number of members, which was more
than offset by an increase in the monthly cash association fee from $15 per
cycle to $20 per cycle, which took effect for November 1999 and was applicable
to the latter part of the first quarter for the entire second and third quarters
of fiscal 2000. Future revenue from association fees is expected to remain at a
higher level as a result of this higher cash fee structure. Transaction fees for
the ITEX Exchange were stable at $5,423 in 3Q YTD 2000 and $5,474 in 3Q YTD
1999, despite the slight decrease in members, due to an increased average volume
of trading per member. Average revenue per member increased in 3Q YTD 2000 to
$568 (not in thousands) from $535 (not in thousands) in 3Q YTD 1999.
Costs of trade exchange revenue decreased from $9,360 (3Q YTD 1999) to $5,669
(3Q YTD 2000) substantially for two reasons. One reason was that operations of
BXI in 3Q YTD 2000 only through January 18, 2000, the date of sale of the net
assets and business of BXI Corporation. Also, in 3Q YTD 2000 the Company
operated four significant volume brokerages, which eliminated the payment of
commissions to brokers. The Sacramento brokerage was merged into the Company on
October 20, 1999 in a business combination required to be accounted for as a
pooling-of-interests. The Company hasnot lestated prior periods to reflect the
operations of the Sacramento brokerage office as the effect was deemed
immaterial. The Company terminated a broker in New York City and opened its
own office to service the existing client base. The Company acquired the
brokerages in Seattle and Houston in February 2000.
Trade exchange costs were 49% of trade exchange revenue in 3Q YTD 2000 as
compared to 68% in Q3 YTD 1999 because of the lower mix of BXI operations, which
had a higher commission structure than ITEX, and because of the elimination of
commissions that were previously paid with respect to the four above mentioned
brokerages, which were operated by the Company in 3Q YTD 2000. Lower levels of
broker commissions as a percentage of trade exchange revenue are expected in the
future, with some increases in selling, general and administrative expenses,
which are discussed below, as a result of the Company assuming the facilities,
personnel and other costs of these brokerages.
Selling, general and administrative expenses
Selling, general and administrative expenses increased slightly to $4,991 in 3Q
YTD 2000 from $4,758 in 3Q YTD 1999. In 3Q YTD 2000, the effects of increased
facilities, personnel, and other costs of the New York and Sacramento
operations, which are now operated by the Company, resulted in increases. These
increases were mostly offset by reduced personnel levels in various departments
at the Company's headquarters, terminating the publishing of the Company's
barter industry magazine, eliminating unnecessary expenses, achieving success
from increased efforts to reduce cash expenditures by obtaining various
goods and services used by the Company in its operations by paying with ITEX
Trade Dollars, and reductions because of the sale of the net assets and business
of BXI Corporation on January 18, 2000.
- 12 -
Costs and expenses of discontinued operations
In 3Q YTD 1999, the Company incurred costs and expenses of $2,192 in connection
with activities that have been discontinued. In 3Q YTD 2000, such costs totaled
only $49. These activities are described in the Company's Annual Report on Form
10-K for the fiscal year ended July 31, 1999.
Costs and expenses of regulatory and litigation matters
During 3Q YTD 2000 and 3Q 1999, the Company incurred costs and expenses of $240
and $955, respectively, in connection with regulatory and litigation matters.
These expenses were primarily professional fees which are described in the
Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1999.
Writedown of Samana
During March 1999, new management of the Company decided to liquidate the
investment in the Samana resort. In 2Q 1999, the investment was written down to
its net realizable value of $518 (after related expenses) based on a later sale
of the property. The Company has received cash of $200 from the buyers but the
buyers have not paid the remaining $350 in accordance with the terms of the sale
agreement. The Company is contemplating legal action to enforce the terms of the
sale agreement.
Change in estimate for loss on disposal of BXI
Upon completion of the sale, the Company determined that the actual loss on
disposal was $1,515 and, accordingly, in 3Q YTD 2000, the Company recorded a
change in estimate to eliminate the remaining balance in the reserve of $485,
which is shown separately as a reduction of costs and expenses in the statement
of operations. The Company also reversed an additional liability of $100 that
was no longer necessary after the disposal of BXI, increasing the gain on change
in estimate to $585.
Depreciation and amortization
Depreciation and amortization decreased to $388 in 3Q YTD 2000 from $1,555 in 3Q
1999 primarily as a result of depreciation and amortization in 3Q YTD 1999 from
BXI. The net assets and business of BXI Corporation were disposed of on January
18, 2000. Depreciation and amortization for 3Q YTD 2000 includes $39 related to
the two months during 3Q 2000 that the Company owned the Sacramento office
building and the Houston and Seattle brokerages. Ongoing depreciation and
amortization for these will be approximately $59 per quarter.
Other income (expense)
Interest (expense) was ($331) in 3Q YTD 2000 as compared to ($244) in 3Q YTD
1999. In 3Q YTD 2000, the Company realized gains on sales of portions of its
Wade Cook stock, realizing $175, all of which has been recognized as gain
because the stock had no carrying value in the financial statements. Also in 3Q
YTD 2000, the Company realized a gain of $100 from the sale of the rights to
publish its barter industry magazine and another gain of $100 from an extension
fee with regard to the sale of the assets and business of BXI Corporation.
Additionally, in 3Q YTD, the Company received a net fee of $150 for the transfer
of certain marketing information to a third party.
- 13 -
LIQUIDITY AND CAPITAL RESOURCES
At May 7, 2000, the Company's working capital ratio was 1.36 to 1 as compared to
0.25 to 1 at July 31, 1999. The improvement resulted from the sale, for $4,000
cash, of the net assets and business of BXI Corporation on January 18, 2000,
which significantly improved the liquidity and financial position of the
Company. Portions of the proceeds were used to pay a remaining outstanding bank
loan, borrowings from related parties, and to reduce payables attributable to
operations and various other liabilities. At May 7, 2000, stockholders'
equity increased to $2,312 from $174 at July 31, 1999, primarily as a result of
the Company's net income of $921 for 3Q YTD 2000 and because of the issuance of
common stock in connection with the merger with the corporation that previously
operated the Sacramento brokerage office and the issuance of common stock in
repayment of a portion of the convertible debentures.
For 3Q YTD 2000, the Company reported net cash (used in) operating activities of
$(648) as compared to net cash (used in) operating activities of $(1,192) for 3Q
YTD 1999. The improvement resulted from the discontinuance of various business
activities not related to the Company's core business, changes in operating
structures resulting in more Company owned and operated brokerage offices,
termination of publishing of the Company's barter industry magazine
(alt.finance), and increased use of ITEX Trade Dollars to pay for goods and
services used in the Company's operations. During 3Q YTD 2000, the Company
significantly reduced its operating liabilities using portions of the proceeds
from the sale of the net assets and business of BXI Corporation, which caused
cash flow from operating activities to remain negative for 3Q YTD 2000, despite
significant improvements in operating results.
For 3Q YTD 2000, the Company reported net cash provided by investing activities
of $3,804 as compared to net cash (used in) investing activities of $(380) for
3Q YTD 1999. During 3Q YTD 2000, the Company realized $4,000 cash from the sale
of the net assets and business of BXI Corporation.
For 3Q YTD 2000, the Company reported net cash (used in) financing activities of
$(1,378) as a result of repayment of loans from related parties of $480 and the
repayment of $200 of bank loans, from the payment of a portion of the
convertible debentures in cash and also other notes payable. For 3Q YTD 1999,
the Company reported net cash provided by financing activities of $1,160
primarily as a result of the completion of a private placement of convertible
debentures in which the Company realized net proceeds of $1,140.
Certain financing transactions and repayment of various debts of the Company are
discussed in the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1999. Currently management is attempting to further improve the cash
flows and financial condition of the Company and the focus of the Company 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.
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.
- 14 -
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.
- 15 -
PART II. OTHER INFORMATION
ITEM 1. 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
was given 90 days from that date to file its amended Form 10K for fiscal 1997
and its Form 10K's for 1998 and 1999. The Company complied with this requirement
on May 3, 2000.
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 dismissing 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 reasonable
attorneys fees. To be effective, the referee's decision must be confirmed by the
Multnamah County Circuit Court. Judgment has been entered and a bond filed for
$550,000. The Company will vigorously pursue this matter an appeal. It is
impossible to predict the outcome of an appeal.
- 16 -
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 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 May 7, 2000, the Company had realized approximately $175,000 from the sale
of approximately 451,000 shares of its Wade Cook common stock.
o Desert Rose Foods Litigation.
----------------------------
In 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
attorney's fees.
- 17 -
Plaintiff alleges that the Company entered into a contract with Plaintiff for
delivery of goods valued at approximately $120,000. The Company has retained
local counsel in this case and has denied all of the Plaintiff's allegations.
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.
o Skiers Edge Condominium Association, Inc. Litigation.
----------------------------------------------------
On June 19, 2000, the Company was served with a summons and complaint out of the
District Court for Summit County, Colorado, in the matter of Skiers Edge
Condominium Association v. George Owens. The complaint alleges that the Company
owes plaintiff association fees relating to interval timeshares that the Company
is alleged to own. The Company intends to defend, but does not foresee any
material impact from this matter.
o Metro Sales Litigation.
- ----------------------
On May 28, 2000, the Company was served with a summons and complaint out of the
Circuit Court of Multnomah County, Oregon, in the matter of Metro Sales v. ITEX.
The complaint alleges breach of contract and violation of an Oregon Blue Sky
statute. The Company denies all the allegations and intends to vigorously defend
this action.
o Antelope Company Litigation.
- ---------------------------
The Company was served with a summons and complaint on June 1, 2000, in the
matter of Antelope Company v. Zoring International Incorporated and ITEX
Corporation, filed in the District Court of the City and County of Denver,
Colorado. The complaint alleges that in December 1997, the plaintiff entered
into a lease with Zoring of certain office space in Denver, Colorado, and that
ITEX guaranteed the lease. Zoring is alleged to have defaulted on the lease and
the plaintiff is seeking to enforce the lease guaranty. The Company agrees that
the lease was breached, but contends that the plaintiff failed to mitigate its
damages. The Company intends to defend the action and has set up a reserve for
loss in the event that the plaintiff is successful.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The Exhibits hereto are listed in the accompanying Exhibit Index.
b. Reports on Form 8-K
None
- 18 -
SIGNATURES
Pursuant to the requirements 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.
ITEX CORPORATION
June 26, 2000 /s/ Collins M Christensen
------------------ ---------------------
Date Collins M. Christensen,
Director, President and
Chief Executive Officer
(principal executive
officer and director)
- 19 -
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27 Financial Data Schedule for the Forty
Weeks Ended May 7, 2000