UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(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
- ------------------------------- -------------------
State (or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10300 SW Greenburg Road, Suite 370, Portland, Oregon 97223
- --------------------------------------------------------------------------------
(Address of principal executive offices including zip code)
(503) 244-4673
-------------------------------
(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 X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
The approximate market value of stock held by non-affiliates is $41,525,000
based upon 6,644,000 shares held by such persons and the close price of $6.25 on
October 23, 1997. The number of shares outstanding of the Registrant's $0.01 par
value common stock at October 23, 1997 was 7,307,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's definitive proxy statement to be filed pursuant
to Regulation 14A in connection with the annual meeting of shareholders:
Part III, Items 10, 11, 12, and 13 of this report
(This Form 10-K includes 62 pages)
ITEX CORPORATION
FORM 10-K
For the Fiscal Year Ended
July 31, 1997
INDEX
Page
----------
PART I
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 17
HOLDERS
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 18
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6.1 SELECTED CONSOLIDATED DATA 19
ITEM 7.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 20
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 59
REPORTS ON FORM 8-K
SIGNATURES 61
2
ITEX CORPORATION
FORM 10-K
For the Fiscal Year Ended
July 31, 1997
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The business practice of bartering has been used by individuals, companies, and
countries throughout the world for centuries. In recent years, companies like
ITEX have developed barter into an organized business practice that brings
benefits to participating businesses.
The barter industry represents the exchange of goods or services for other goods
or services rather than for cash. The retail portion of the commercial barter
industry is typically a group of merchants and professionals who purchase goods
and services from others in the group. In lieu of using cash, the members of the
group operate with trade dollars, sometimes referred to as trade units, or trade
credits. A trade dollar is a ledger entry, or medium of exchange, by which goods
and services can be bought and sold. The Company handles accounting for
transactions between members of the group, including the allocation of trade
dollars. Also, the Company attempts to maximize trade through the promotion of
barter transactions.
Organized commercial barter plays an increasingly important role in the way
American companies do business. Barter is becoming an integral part of strategic
planning for companies from small family-owned and -operated businesses to
Fortune 500 companies. The International Reciprocal Trade Association ("IRTA")
is the barter industry's leading trade association. According to IRTA, an
estimated 300,000 U.S. companies participate in organized commercial barter
through the services of a barter company. Currently, IRTA estimates that barter
is a $9 billion a year industry which is growing at an annual rate of 8%. There
are over 500 barter exchanges in the U.S. Most are small operations limited to a
specific city, state, or region. ITEX is one of only three companies with
national stature.
3
Management believes that the Company is the largest barter exchange in the
United States, calculated either by number of offices, total customer count,
client trade volume, or cash service fees billed. Financial comparisons are not
available, however, because none of the other major exchanges are operated by
publicly reporting companies. BarterNews, the barter industry's primary
magazine, has referred to the Company as the "world's largest exchange".
THE COMPANY
General
ITEX Corporation (hereinafter referred to as "ITEX" or the "Company" or the
"Registrant") was incorporated in the State of Delaware on March 8, 1901 as
Magneto-Electric Company. The Registrant became inactive in 1905 and was revived
in the State of Delaware on September 1, 1985. On October 1, 1985, the domicile
of the Registrant was changed to the State of Nevada and the name was changed to
B.I.G. Enterprises Inc. On February 14, 1986, an Agreement and Plan of
Reorganization was entered into between the Registrant and The ITEX Corporation,
an Arizona corporation, whereby the Registrant became the surviving corporation
under the name of ITEX Barter Systems Inc. The name of the Registrant was
changed by means of an amendment to its Nevada Articles of Incorporation filed
on May 19, 1986, to ITEX Barter Systems Inc. The name was changed to ITEX
Corporation on April 12, 1991.
The Company is engaged in domestic and international operations in both the
retail trade exchange and corporate barter areas of the commercial barter
industry. The Company administers the ITEX Retail Trade Exchange (the
"Exchange"), which is an association of business owners and professionals who
trade goods and services with other members of the Exchange through the medium
of the ITEX Trade Dollar. The Company promotes the maximization of trade through
barter transactions that benefit members within the Exchange by: (a) generating
incremental new business, (b) conserving members' cash by their ability to spend
ITEX Trade Dollars for needed goods and services, (c) serving effectively as an
alternative source of financing, (d) enhancing the lifestyles of members, and
(e) enabling the sale of slow moving or excess inventories at better values than
can be realized in cash markets.
The Company acts as a third-party record-keeper of members' transactions and
balances, which are denominated in ITEX Trade Dollars. An ITEX Trade Dollar is
an accounting unit used by the Exchange to record the value of trades as
determined by the buying and selling parties in barter transactions. ITEX Trade
Dollars denote the right to receive goods or services available from other
Exchange members or the obligation to provide goods or services to other
Exchange members. The Company does not redeem Trade Dollars for cash. ITEX Trade
Dollars may be used only in the manner and for the purpose set forth in the
Trading Rules of the ITEX Retail Trade Exchange which govern the trade
operations of the Exchange. ITEX Trade Dollars are not legal tender, securities
or commodities.
Members of the Exchange pay cash and ITEX Trade Dollar fees and commissions to
the Company. The Company typically receives a cash commission ranging from 5% to
7.5% on the purchases and sales made to and by members of the Exchange. In
addition to administering the activities and record-keeping of the Exchange, the
Company, as a member of the Exchange, trades as a principal party in barter
transactions with other members. The Company also engages as a principal party
in trade transactions in the corporate barter area of the industry. In these
transactions, the Company acquires goods and services that it sells for cash or
ITEX Trade Dollars, holds in inventory for further trades in the corporate
barter area, or for selling to members of the Exchange.
The Company owns and operates retail trade offices in Portland, Oregon; St.
Louis, Missouri; and Orange County, California. All other ITEX broker offices
are independently owned and operated by ITEX Licensed Brokers. The Company bears
no financial responsibility for the financing of an independent broker office.
There are presently over 150 brokers worldwide. One of the Company's current
objectives is aggressive international expansion of the ITEX trade network. The
Company has license arrangements with companies operating in Canada, South
Africa, and Australia that were established in prior fiscal years. During fiscal
1997, the Company has signed new
4
agreements with licensees in Turkey, Norway, New Zealand and Romania and has
extended the license arrangements in South Africa and Australia.
Additionally, the Company acts as an intermediary for the exchange of goods and
services between major companies through ITEX USA, Inc., a corporate barter
management company, which is the Company's exclusive agent for marketing the
Company's corporate and industrial trading business as described below. ITEX USA
negotiates corporate barter agreements, services these agreements and sells the
inventory it acquires in these transactions. In these transactions, ITEX USA
issues ITEX Cash Equivalent Credits, which are separate and apart from the ITEX
Retail Trade Dollar used in accounting for transactions in the ITEX Retail Trade
Exchange System. The revenues generated from those inventories when sold for
cash are divided between the Company and ITEX USA. Additionally, a 12%
transaction fee is paid by the ITEX Corporate Barter client on the Cash
Equivalent Credit portion of each purchase. This revenue is also divided between
the Company and ITEX USA.
The Company operates with the objectives of long-term equity-building while also
ensuring availability of sufficient cash for current operating requirements.
Accordingly, the Company may in any period report significant revenue, profits,
and increases in net assets from transactions denominated in ITEX Trade Dollars
or other noncash consideration. Sometimes, the Company invests in equity
securities with ITEX Trade Dollars that have been earned by the Company in trade
transactions. The firms in which the Company has invested are able to use the
ITEX Trade Dollars to purchase goods and services used in the operation of their
businesses. Further, the Company invests in other business ventures, which
involve acquiring and operating businesses, operating projects, or holding
properties for investment or operation. The Company focuses on ventures in which
the Company has or will obtain adequate expertise for successful management and
operation. Ventures that can benefit from the financial resources and liquidity
that the Company provides through trading for goods and services are given
priority.
Natural Resource Interests
On July 31, 1997, the Company commenced a partial redeployment of its assets and
investment strategy by investing 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, paid $20,000 in cash and
transferred media inventory, hotel room inventory, and fine art paintings and
sculpture. The total carrying value of the acquired mineral properties of
$6,576,000 has been confirmed in an appraisal by a firm of independent qualified
mining consultants. 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. Subsequent to July 31, 1997, the Company obtained several additional
mineral property claims at nominal cost by original claim staking.
Foreign Subsidiary
The Company has a wholly-owned foreign subsidiary, Associated Reciprocal
Traders, Ltd. ("ART"), which engages in international commercial barter and
other activities. In 1993 the Company purchased a 49% interest in ART and
through July 31, 1996, the Company accounted for its investment in and share of
net income or loss of ART by the
5
equity method. All of the undistributed earnings of the foreign affiliate were
reinvested and were not expected to be remitted to the Company.
On November 27, 1996, the majority owner of ART informed the Company of its
intent to take immediate steps to distribute all the assets of ART and to end
the relationship with the Company. The Company had previously intended to
reinvest its share of the earnings of this venture indefinitely and,
accordingly, had not provided for income taxes on its share of ART's
undistributed earnings. As a result of the perceived inability to continue to
reinvest its share of ART's earnings, in the fourth quarter of fiscal 1996 the
Company recognized a deferred provision for income taxes of $1,247,000, which
reduced net income for the year ended July 31, 1996 by $0.17 per share. The
deferred tax accrual was reported as a reduction of the Company's share of
equity in net income (loss) of foreign affiliate in the statement of operations
for the fiscal year ended July 31, 1996. Commencing August 1, 1996 and through
July 30, 1997, the Company accounted for its investment in ART by the cost
method.
During fiscal 1997, the Company explored alternative ways of terminating the
relationship with the other stockholder of ART and during the quarter ended May
7, 1997, it was determined that this could be accomplished by the Company
purchasing the other stockholder's interest, in which case the Company would not
repatriate the foreign assets of ART. In the quarter ended May 7, 1997, the
Company reversed the deferred liability for income taxes of $1,247,000 that had
been recorded at July 31, 1996 as described above. On July 30, 1997, the Company
completed the purchase of the remaining 51% interest. The acquisition has been
accounted for using the purchase method. The historical basis of the Company's
49% share of assets when the equity method of accounting was used and the other
51% share was allocated based on respective fair value. The assets of ART
consisted primarily of available-for-sale securities.
The purchase price was $2,840,000, which was paid by conveyance of certain of
the Company's available-for-sale securities and investments in fine art. The
assets acquired were primarily other available-for-sale securities. The Company
has fully consolidated the assets and liabilities of ART in the consolidated
balance sheet at July 31, 1997.
During October 1997, ART acquired a 60% interest in 16 acres of improved but
undeveloped resort property known as the Villas Punta Ballena Samana Resort (the
"Samana Resort"), along with associated plans, engineering drawings, permits and
approvals for the resort, and a commitment for a construction loan of
approximately $40,000,000. The Samana Resort is located in the northeast corner
of the Dominican Republic on the Bay of Samana. The transaction was structured
as the purchase of a 60% equity interest in Villas Punta Ballena C. por A.
("VPB"), a Dominican Republic corporation, the holder of the Samana Resort
property. VPB has never had any business operations other than ownership of the
Samana Project.
The total purchase price consisted of cash of $1,250,000, ITEX Corporation
common stock to have a market value at time of issuance of $1,000,000, and
available-for-sale securities totaling $5,142,000 from the portfolio of ART. The
purchase price is to be paid in installments ranging from payments at the time
of contract signing to the final payment of ITEX Corporation common stock which
is due within five days of the commencement of substantial construction on the
property. The value of the acquired assets has been determined by independent
appraisal of the property.
6
The Company intends to proceed with construction of the resort facility pursuant
to the plans for development of the property, which have been approved by the
appropriate authorities. When completed, the Samana Resort is expected to
include more than 250 condominium and hotel units, as well as a casino, swimming
pools, tennis courts, restaurants, and most other amenities associated with a
five-star Caribbean resort.
International Licensees
On December 19, 1996, the Company announced the signing of an agreement with
Ihlas Holdings, a major Turkish corporation, to license an ITEX Trade Exchange
in Turkey, to be called Ihlas ITEX Barter SA. Under the agreement, which was
effective January 1, 1997, Ihlas Holdings receives exclusive use of the ITEX
name, trademarks, and proprietary barter accounting and management software for
use in Turkey. The Company will receive royalties based on trade transactions
generated through the new system, which will enable Ihlas ITEX clients to trade
with ITEX members in other countries. Ihlas Holdings is one of Turkey's largest
corporations and has 57 subsidiaries, which include interests in chemicals,
textiles, food, electronics, health care, construction, media, banking,
insurance, and international trade. Ihlas has already taken steps to expand the
Ihlas ITEX barter network into nearby Kazakhistan, Turkistan, and Azerbaijan.
The Company has arrangements with licensees in Canada, South Africa, and
Australia that were established in prior fiscal years. During fiscal 1997, the
Company has signed new agreements with licensees in Turkey, Norway, New Zealand
and Romania and has extended the license arrangements in South Africa and
Australia.
IBNet
In October 1997, the Company announced that it has formed an alliance with
Internatonal Business Ntework for World Commerce and Industry, Ltd. ("IBNET").
IBNET is the Managing Partner of the IBCC-Net Consortium for Global Commerce
("the Consortium"). The Consortium consists of the International Bureau of
Chambers of Commerce ("IBCC"), representing over 1,000 chambers, the Paris
Chamber of Commerce and Industry ("CCIP"), which represents over 270,000
companies, and the Global Management Center of the Trade Information Network
("GMC") of the United Nations Group of 77 Chambers of Commerce ("G77")
representing 132 countries, plus China, and IBNET. IBNET's primary
responsibility to the Consortium is to operate a global business network to
enable businesses worldwide to exchange and validate information for the purpose
of achieving sales, marketing, establish joint ventures and other business
transactions. Working through overf 10,000 Chambers of Commerce worldwide, the
Network will serve as a third party to validate participating businesses via an
electronic information and transaction system. This system, operating on the
Internet, is very similar to the ITEX Online system operated by the Company.
ITEX's unique expertise and capability to facilitate barter transactions will
enhance the World Chamber Netwrok's ("WCN") mission of meeting the needs of
their constituents. The Company views the Strategic Partnership with IBNET as a
significant activity to advance it's effectiveness in the International
Marketplace.
Media
Media is an important commodity in the commercial barter industry. Several years
ago, the Company started and operated a media department, which exchanged media
7
products owned by the Company for due bills for prepaid advertising credits on
radio stations across the U.S. During the fourth quarter of the fiscal year
ended July 31, 1996, the Company sold certain media inventory and reduced the
scope of its media operations in order to improve the Company's ongoing cash
flow. The Company now obtains media under favorable terms from outside sources.
Broker Training
The Company has developed a comprehensive training program for its brokers. New
brokers come to the training center at the Company's Portland, Oregon,
headquarters for an intensive week of initial training before receiving the
credential of "Associate Broker." They are then permitted to set up offices and
act as barter brokers for the Company's clients. After demonstrating adequate
competence and achieving specified performance levels, they return to the
training center for an additional week of training before receiving the
credential of "ITEX Licensed Broker."
Technology
The Company has developed the largest and most innovative electronic barter
exchange in the industry. The system is modeled after the NASDAQ electronic
market quotation system. In a commercial barter exchange, the exchange acts as a
third party recordkeeper for all parties who join the barter system. One
advantage of this system is that it enables multi-lateral trade to take place.
Recent technological improvements include a software update of the Account
Information Maintenance program utilized by ITEX Brokers, a software update of
the BarterWire program which is utilized by both ITEX Brokers and ITEX Retail
Trade Exchange Members, and developing access through the Internet.
The Company has pioneered electronic trading with its BarterWire system,
introduced by the Company nearly a decade ago. Using BarterWire, Exchange
members can buy and sell products and services through a personal computer and
modem from anywhere in the world where telephone service is available. The
Company has continued to enhance its BarterWire software so that users can trade
more efficiently through the Exchange system. Latest enhanced versions are more
user friendly with features familiar to those who are accustomed to the Windows
environment. It also includes color and graphic capabilities for better
presentation of products and services offered through the system.
The Company has also made BarterWire available to clients through the Internet
with "ITEX Online", complete with its own in-house gateway and web server
(www.itex.com). This enables Exchange members to enjoy the advantages of the
latest version of BarterWire together with savings on long distance charges and
a larger electronic marketplace. The Company has the same Internet connection
capability as that of many typical internet service providers.
Another electronic trading feature introduced by the Company is a "fax-back"
system for Exchange clients, which enables Exchange members to request and
receive their account records, company data, ITEX business forms, product and
service lists, and other information by fax.
The ITEX Express card continues to enhance trade among ITEX clients,
particularly when taken in concert with other electronic trading innovations.
The ITEX Express card
8
is the Company's debit-credit card for barter, the first of its kind in the U.S.
The card can be used for identification or to make purchases using a three part
voucher form or point-of-sale (POS) terminal. ITEX has encouraged the use of POS
terminals as a way to speed barter transactions and increase the volume of
trade.
Management believes that electronic trading systems such as BarterWire, ITEX
Online, the ITEX Express card, and the fax-back information and trading service
represent the next major step forward in the development of the barter industry.
By its early involvement in the electronic marketplace, ITEX believes it will be
positioned to take full advantage of future developments in this area.
During the fiscal year ended July 31, 1997, the Company spent a total of
$166,000 on research and development for its communication and information
systems, $31,000 of which was capitalized. During the fiscal year ended July 31,
1996, the Company spent a total of $577,000 on research and development for its
communication and information systems, of which $560,000 was capitalized. During
the fiscal year ended July 31, 1995, the Company spent a total of $169,000 on
research and development for its communication and information systems, all of
which was charged to expense.
Domestic Acquisitions
In addition to internal expansion by increasing the Company's broker network,
the Company has also expanded the scope of its operations by acquisition.
Acquisitions of existing barter exchanges with in-place membership groups have
enabled the Company to accelerate the growth of its presence in several markets
and geographic areas.
Acquisition of Global Exchange Network. During the fiscal year ended July 31,
1996, the Company acquired the assets and business of Global Exchange Network of
Irvine, California, including its membership base. The purchase price was
$385,000, which was paid by $200,000 in cash and the issuance of a 6% promissory
note for $185,000, payable in monthly installments of $8,331 including principal
and interest, commencing with the first such payment on September 1, 1996, with
monthly payments thereafter until the final payment on August 1, 1998. The
acquisition has been accounted for by the purchase method. Pro forma operating
data is not provided because the effects on previously reported data would be
insignificant.
Acquisition of 50% Interest in Business Exchange International Corporation and
Related Litigation. On January 24, 1996, the Company acquired a 100% common
stock interest in SLI, Inc. ("SLI"), a Nevada corporation now known as IME,
Inc., in exchange for the issuance to SLI's former shareholders of 60,000 shares
of the Company's common stock valued at approximately $645,000. The Company then
made a cash contribution to the capital of SLI of $1,750,000 and made a loan of
$300,000 to SLI. Also on January 24, 1996, SLI purchased a 50% common stock
interest in Business Exchange International Corporation ("BXI"), a Nevada
corporation, pursuant to rights to purchase such interest that had been assigned
to SLI by the former shareholders of SLI. SLI paid $1,750,000 for the common
interest in BXI by the purchase of newly issued common stock of BXI and, in
addition, SLI loaned $300,000 to BXI. BXI owns and operates one of the leading
organized barter exchanges in the United States.
9
Because the holder of the other 50% of the common stock of BXI denied that BXI
was the owner of the BXI Trade Exchange, SLI was forced to file litigation in
February 1996 requesting a court to decide the issue. That litigation is
described in detail in Item 3 of this Form 10-K.
Acquisition of Barter Exchange, Inc. (BEI) Trade Exchange. On March 1, 1995, the
Company acquired the barter exchange business of Barter Exchange, Inc. ("BEI").
BEI has twelve offices located primarily in the Southwest and lower Midwest.
This acquisition added significantly to the Company's client base and increased
the number of Exchange offices nationwide by nearly 10%. This acquisition
enabled the Company to absorbed a long-time competitor with a well defined
presence in the market. It also gave the Company much improved presence in
geographic areas in which the Company had not previously had a significant
presence.
Acquisition of Name and Trademarks of International Trade Exchange of Vancouver,
B.C. In March, 1995 ITEX acquired the rights to the name and trademarks of
International Trade Exchange (ITEX) Corp., of Vancouver, B.C. Canada, together
with the right to acquire its client base and assets. The purchase did not add
to the Company's assets, but the acquisition had strategic importance for the
Company's future plans.
Acquisition of Travel Agents Hotel Guide. In February 1995 the Company acquired
the Travel Agents Hotel Guide, a directory of hotels and resorts across North
America and the Caribbean that the Company uses to acquire room nights on trade
in exchange for advertising in the Guide. The room nights are then sold to
Exchange clients in exchange for trade dollars, thus providing a highly
desirable business and vacation inventory for trade to Exchange members.
Subsequently, the Company transferred the rights to use of the name "Travel
Agents Hotel Guide". The Company continues to obtain hotel room nights in
exchange for advertising on the Company's web site.
Seasonality
There appear to be no significant seasonal influences which affect the Company's
business. However, the barter industry as a whole is viewed by some as being
counter-cyclic to the regular business cycle--that is, when the economy is
recessionary, businesses tend to barter more. Then, as the business cycle
improves, conventional wisdom suggests that companies barter less since more
cash business is available. However, the Company has experienced continued
growth even during periods viewed as business "up-cycles."
Employees
As of October 23, 1997, the Company employed 66 persons, of which 60 are full
time employees. Additionally each of the Exchange's 120 domestic broker offices
is managed by an ITEX Licensed Broker who is an independent contractor that
employs support staff. This results in a total network of approximately 265
persons working as either consultants, independent contractors, or employees of
the Company.
10
MANAGEMENT
The following table lists the names of all Directors and Executive Officers of
the Company. All Directors will serve until the next annual general meeting
unless his or her office is vacated in accordance with the Articles and Bylaws
of the Company. The Executive Officers serve at the discretion of the Board of
Directors.
Directors and Executive Officers
Name Age Position
- ------------------------ ------- -------------------------------------------
Graham H. Norris 55 Chairman of the Board Of Directors
President and Chief Executive Officer
Mary Scherr 60 Vice President of Broker Development, Director
Gerald Pitts 41 Vice President of International Operations
Joseph M. Morris, CPA 48 Senior Vice President and Chief Financial
Officer, Director
Sondra R. Ames 41 Vice President
Edward S. Wittman 50 Vice President of Business Development
Cynthia Pfaltzgraff, CMA 43 Controller
Donovan Snyder, Esq. 47 General Counsel, Corporate Secretary
Dr. Charles Padbury 59 Director
Dr. Evan B. Ames 58 Director
Robert Nelson 49 Director
Ronald P. Erickson 53 Director
Business Experience, Directorships, and Legal Proceedings:
Mr. Norris, who was elected President and Chief Executive Officer of the
Company on September 6, 1996, has over 30 years experience in management and
finance. Prior to his becoming President of the Company, he had been a
consultant providing a variety of management consulting services to small
private and public corporations. A previous Registered Principal, Mr. Norris has
a strong sales and marketing background in fields including securities,
insurance, electronics and aviation. After a period of transition in management
of the Company, Mr. Norris was elected Chairman of the Board of Directors in
addition to President and Chief Executive Officer. Mr. Norris has been a pilot
for United Airlines since 1963. He has been a director of the Company since
1986. In 1993, Mr. Norris became an ITEX Broker, operating an independent barter
office in Provo, Utah, in which capacity he earned the prestigious credential of
Certified Trade Broker.
Ms. Scherr, with over 15 years of experience within the barter industry,
became an independent broker with ITEX in 1984. She has been recognized as
Broker of the Year three times and in 1991, received the Distinguished Service
Award from the International Reciprocal Trade Association for outstanding
contributions to the barter industry. She
11
became a Director of the Company in 1988 and in 1993 joined the Company as Vice
President of Broker Development. She received a Masters Degree from the
University of Iowa and is a Certified Trade Broker.
Mr. Pitts has been active in the commercial barter industry for over 15
years. He participated in activities of the Company as early as 1982, including
helping with the development of the original BarterWire and further improvement
in the new BarterWire and ITEX Online. He was elected Vice President of
International and Central Trade Development in early 1997. He has been
instrumental in the Company's success in entering into foreign license
agreements.
Mr. Morris joined the Company in January 1996 as Vice President and Chief
Financial Officer and a Director and on September 1, 1997 was named Senior Vice
President and Chief Financial Officer and a Director. He had been a consultant
to the Company and a Director since February 1995. He has been active in the
barter industry for over 16 years, including serving as a consultant to the
International Reciprocal Trading Association ("IRTA"). He was Vice
President-Controller of Scientific Software-Intercomp, Inc., a NASDAQ company,
from 1984 through 1995, except for 1988 to 1990, when he was a project manager
with the FASB. He has authored several books for financial professionals, two of
which received awards. Earlier in his career, Mr. Morris was an audit manager
with Coopers & Lybrand.
Ms. Ames joined the Company in May 1996, following the acquisition of her
company, Global Exchange Network and was named Vice President On October 1,
1997. Ms. Ames has over 20 years experience in the commercial barter industry.
She was instrumental in founding both the International Reciprocal Trade
Association ("IRTA") and the California Reciprocal Trade Association and has
twice received IRTA's Distinguished Service Award for Outstanding Contributions
to Commercial Barter. She is a member of the Dwight D. Eisenhower Economic and
Financial Delegation, contributing to international industrialization worldwide
and has served as a director of Orange National Bank over the last 10 years. Ms.
Ames is a Certified Trade Broker.
Mr. Wittman joined the Company in August 1997 and became Vice President of
Business Development in October 1997. Previously, he was President of Wittman
Associates, Inc., a consulting firm specializing in strategic planning, mergers
and acquisitions and financial management. He also served as president of the
U.S. subsidiary of AGE Construction & Trading Company, Ltd., a large
international construction company. Over the preceding 11 years, he was vice
president of a NASDAQ company, serving as chief financial officer, as an
operating division head, and negotiating, planning and managing international
projects. Previously, he held various operations and financial management
postions in the computer and medical products fields.
Ms. Pfaltzgraff has been Controller of the Company since 1991. Ms.
Pfaltzgraff is responsible for the Company's accounting operations, risk
management, budgeting, cash flow management, systems, and financial reporting.
She has more than 16 years experience in accounting and financial management.
Ms. Pfaltzgraff has a Bachelor of Science in Business Administration degree from
Oregon State University and earned the credential of Certified Management
Accountant (CMA) in 1993.
Mr. Snyder, who joined ITEX as corporate counsel in 1995, has 19 years
experience as an attorney, including 10 years as corporate in-house counsel to
several companies
12
in Salt Lake City, Utah. He is a member of both the Utah and Oregon State Bar
Associations. He was elected Corporate Secretary by the Board of Directors in
May 1996.
Dr. Padbury was elected Chairman of the Board of Directors on September 6,
1996 and served in that capacity during a period of transition in management of
the Company until November 14, 1996, when Mr. Norris was elected Chairman of the
Board of Directors. Dr. Padbury, who continues serving as a Director, is a
leading Beaverton, Oregon, dentist and has been a member of the ITEX Retail
Trade Exchange since 1985. Dr. Padbury has brought a wealth of experience to the
Board in terms of the interests, perceptions, and vantage point of ITEX clients.
Dr. Padbury has been a Director of the Company since 1992.
Dr. Ames has been a Director of the Company since August 1995. He is a
Registered Investment Advisor and operates his investment strategy research
firm, EBA Associates, Inc. Dr. Ames received a Ph.D. in 1971 from Princeton
University in near eastern and soviet studies. He then served with the Central
Intelligence Agency, before entering the investment field, first as an
investment researcher, analyst, and investment strategist.
Mr. Nelson is a Certified Public Accountant in private practice in
Portland, Oregon specializing in tax accounting. He has also been an active
member of the ITEX Retail Trade Exchange, and brings the advantages of both of
these areas of experience to the Board. Mr. Nelson received an MBA from Brigham
Young University and is still active in the BYU Management Society. He is a
member of the American Institute of CPAs and the Oregon Society of CPAs.
Mr. Erickson, who became a Director in October 1997, is Chairman and Chief
Executive Officer of Global Tel Resources, Inc., a provider of
telecommunications services, messaging and intranet solutions. He was one of the
initial investors and Chairman, President and Chief Executive Officer of Egghead
Software, Inc. and also was a founder, director, and/or officer of various
companies, generally in the high technology and communications industries. He
has a law degree and was a practicing attorney from 1975 to the late 1980's.
Earlier in his career, he worked in Washington, D.C. as a White House staff
member. Mr. Erickson was appointed to the Board seat vacated by the retirement
from the Board of Dr. Sherry L. Meinberg, who had meritoriously served as a
Director of the Company since 1982.
Committees and Meetings of the Board of Directors
The ITEX Board of Directors has had standing audit, nominating and compensation
committees since May 1996. In the last fiscal year (August 1, 1996 - July 31,
1997) there were five meetings of the Board of Directors.
Compliance with Section 16(a) of the Exchange Act:
Section 16(a) of the Securities Exchange Act requires the Company's executive
officers and directors and persons who own more than ten percent of the
Company's common stock to file reports of ownership and changes in ownership of
the Company's Common Stock and any other equity securities of the Company with
the Securities and Exchange Commissions (SEC). Executive officers, directors and
greater than ten percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
13
Based solely on its review of the copies of such forms received by the Company,
or written representations from certain reporting persons, the following
reporting persons were delinquent in filing such reports:
Dr. Sherry Meinberg was late in filing a report showing sales of shares of the
Company of 1,445 shares on March 25, 1997 at $3.43 per share, of 5,500 shares on
April 3, 1997 at $3.77 per share, and of 1,445 shares on April 8, 1997 at $3.75
per share.
Dr. Charles Padbury was late in filing a report showing purchases of shares of
the Company of 2,000 shares on January 16, 1997 for $4.3125 per share and 2,000
shares on January 14, 1997 for $4.375 per share.
ITEM 2. PROPERTIES
All of the Company's operations are conducted in leased space as follows:
Approximate Current
Location Lease Expiration Sq. Ft. Annual Rent
------------------------- ------------------ ----------- ---------------
Portland, Oregon December 31, 2001 10,900 $178,000
Westminster, California December 31, 1996 3,700 45,000
St. Louis, Missouri October 31, 1998 1,100 15,000
The Portland, Oregon, lease is payable entirely in cash. The Company has a
subtenant that occupies 2,200 square feet of the Portland office space at a
monthly sublease rate of $3,400.
The Westminster, California, lease is payable in cash of $3,000 and 42,000 ITEX
trade dollars per year. There is presently no commitment for this space, which
is on a month-to-month arrangement.
The St. Louis, Missouri, lease is payable 50% in cash and 50% in ITEX trade
dollars.
ITEM 3. LEGAL PROCEEDINGS
On January 24, 1996, the Company acquired a 100% common stock interest in SLI,
Inc. ("SLI"), a Nevada corporation now known as IME, Inc., in exchange for the
issuance to SLI's former shareholders of 60,000 shares of the Company's common
stock valued at approximately $645,000. The Company then made a cash
contribution to the capital of SLI of $1,750,000 and made a loan of $300,000 to
SLI. Also on January 24, 1996, SLI purchased a 50% common stock interest in
Business Exchange International Corporation ("BXI"), a Nevada corporation,
pursuant to rights to purchase such interest that had been assigned to SLI by
the former shareholders of SLI. SLI paid $1,750,000 for the common interest in
BXI by the purchase of newly issued common stock of BXI and,
14
in addition, SLI loaned $300,000 to BXI. BXI owns and operates one of the
leading organized barter exchanges in the United States.
On February 12, 1996, a complaint was filed on behalf of the Company and its
wholly owned subsidiary, SLI, Inc., against Saul Yarmak, Stephen Friedland,
Business Exchange International Corp., BX International, Inc., Joel Sens, and
David Lawson. The complaint, filed in the Circuit Court of the State of Oregon
for Multnomah County, Case No. 9602-01076, asserted claims for breach of
contract, specific performance, declaratory judgment, fraud, defamation,
unlawful trade practices, and interference with economic relationships. It
sought to recover damages for allegedly disparaging remarks made by certain of
the defendants against ITEX and for a court ruling that SLI acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.
On December 20, 1996 SLI filed a motion for partial summary judgment requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange. If the court found in favor of SLI on these issues, the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade exchange or, alternatively, order the defendants to take whatever
steps are necessary to transfer the assets of the BXI trade exchange to BXI. On
March 12, 1997 the court ruled from the bench and granted SLI's motion for
partial summary judgment. On April 8, 1997, the court rejected objections filed
by the defendants to the proposed judgment and on April 21, 1997, a formal
judgment was entered in favor of SLI. The critical portion of the judgment
declares that BEI is the owner of the BXI Trade Exchange. The judgment also
awards certain supplemental relief to effectuate this declaration, including
requiring the defendants: (a) transfer all assets of the BXI Trade Exchange to
BEI, (b) to provide the court and SLI with certificates of title to reflect the
fact that BEI owns all assets of the BXI Trade Exchange, and (c) to preserve the
status quo by operating the BXI Trade Exchange in the usual and ordinary course
of business in conformity with all applicable laws and regulations.
On May 2, 1997, the defendants filed notices of appeal from the judgment entered
against them. Defendants concurrently filed a "Deposit of Instruments"
consisting of a "Bill of Sale" and a "Certificate of Ownership". The Bill of
Sale purports to convey all the assets of the BXI Trade Exchange to BEI upon
payment of $1,783,000 and if the judgment is affirmed on appeal. The Certificate
states that BEI will own the assets of the BXI Trade Exchange if the judgment is
affirmed on appeal.
The Company believes that these documents do not comply with the requirements of
the judgment. SLI immediately filed an objection to the sufficiency of the
documents and asked that the defendants be required to file a bond in a
sufficient sum to assure SLI that the judgment will be complied with when it is
upheld on appeal. A hearing to require a bond of between $2.5 million and $3.5
million or, alternatively, to appoint a receiver was heard on June 3, 1997. By
letter ruling dated June 30, 1997, the Circuit court judge: (a) ordered that in
order to obtain a stay pending appeal of the judgment, the defendants must post
a bond totaling $1.2 million and deposit an unconditional certificate of
ownership and bill of sale, and (b) awarded to SLI $193,000 in attorney fees and
$16,000 in costs. Pursuant to legal action subsequent to entry of the judgment,
the Court increased the attorney fees award to $218,000 and the costs award to
$21,000.
On September 15, 1997, the parties participated in a mediation program mandated
by the Oregon Court of Appeals. The parties and their attorneys met for several
hours with a
15
neutral mediator. Mediation does not result in a binding resolution
of the disputes between the parties. However, the Company believes that the
mediation process was fruitful in that it resulted in a framework under which
the parties may yet be able to settle the disputes without exhausting the
litigation process. As part of the efforts at settling, SLI has agreed to
temporarily pause its actions in Nevada and California directed toward
preserving its interest in the BXI Trade Exchange.
On September 17, 1996 the Company filed an action in the Circuit Court for
Multnomah County, Oregon, against Leslie L. French and Linda French,
individually and dba AlphaNet and AlphaNet, Inc., an inactive Oregon
corporation. The Complaint is for Breach of Contract and Action on Guaranty and
seeks a total of $89,726 on three claims. On October 2, 1996, defendants filed
an Answer denying all claims and a Counterclaim alleging malicious prosecution,
abuse of process, invasion of privacy and libel. The counterclaim seeks
compensatory and punitive damages of $5.5 million. A Reply to defendant's
counterclaims has been filed.
The Company considers each counterclaim to be totally without merit and
vigorously prosecuted both its own claims and the defense of the counterclaims.
Trial of the matter was set for September 16, 1997. Just prior to trial, the
parties agreed to settle both this case and the "William Bradford" case
described below. The parties continue to negotiate the details of the
settlement. It is expected that the settlement will dispose of all disputes
between the Company and Leslie L. French and Linda French and their companies.
On June 28, 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 a subpoena for the production of certain
documents on September 19, 1996, pursuant to a formal order of private
investigation. The Company is cooperating fully with the Securities and Exchange
Commission.
On November 21, 1996, the Company was served with a complaint filed in the
Circuit Court for Washington County, Oregon, by William Bradford Financial
Services, Inc. against the Company; Michael Baer; Graham Norris; Oxford
Transfer, Inc.; David Christensen, C.P.A.; Andersen, Andersen & Strong, L.C.,
Donovan Snyder, and John Does I-III. William Bradford Services is controlled by
Leslie French, plaintiff in the litigation described above. The complaint
alleges breach of fiduciary duty, breach of contract, interference with
contract, and fraud and seeks compensatory and punitive damages. The Company
filed an answer denying all of the allegations of the complaint.
As discussed above in connection with the ITEX Corporation v. French, et al.
case, this matter has been settled in principle and it is expected that the case
will be dismissed as to all defendants.
On February 14, 1997 the Company was served with a summons and complaint in a
matter filed in the Circuit Court of Multnomah County, Oregon entitled BXI Trade
Exchange, Inc. and Business Exchange International Corp. v. ITEX Corporation,
Terry L. Neal, Michael T. Baer. Donovan C. Snyder, Joel P. Sens and David
Lawson. This action arises out of the basic fact situation involved in the SLI
matter described above. The complaint contains seven claims for relief, only two
of which relate to the Company, Mr. Neal, Mr. Baer and Mr. Snyder (the "ITEX
defendants"). All other claims relate solely to Mr. Sens and Mr. Lawson.
16
The claims against the ITEX defendants are for conspiracy to defraud and
unlawful trade practices under the Oregon unfair trade practices statute. The
ITEX defendants consider each and every claim against them to be without merit
and will vigorously defend against those claims. In connection with a Motion for
Summary Judgment filed by the ITEX defendants but which has not yet been heard
by the Court, the plaintiffs conceded that the claim alleging violation of the
Oregon unfair trade practices statute must be dismissed. The ITEX defendants
have temporarily delayed the hearing on the remainder of their summary judgment
motion based upon the mediation in the SLI, Inc. v. Yarmak, et al. case
described above. Since a global settlement is sought with the defendants in the
SLI case, it may be possible to dispose of this litigation in that context. In
any event, however, this litigation does not present scenarios which would be
expected to result in a materially adverse effect on the Company' s financial
position of results of operations.
On May 6, 1997, SLI, Inc. filed a legal action in Nevada against BEI seeking to
preserve its rights as a 50% shareholder of BEI both under Nevada state law (SLI
and BEI are Nevada corporations) and pursuant to the Stock Purchase Agreement by
which SLI acquired its interest in BEI. Those rights include the right to
conduct an audit of the BEI financial records (including an audit of the
operations of the BXI Trade Exchange) and the right to representation on the BEI
board of directors.
A hearing on SLI's motion for a mandatory injunction requiring BEI to permit an
audit of its books and records, including the books of the BXI Trade Exchange
and for appointment of a receiver was heard on June 11, 1997. The Nevada court
has initially declined to rule on the requests on the basis that similar relief
was requested in the Oregon action. SLI's attorneys are prepared to file further
motions in this case in order to vindicate its rights as a shareholder of BEI.
However, based upon the mediation in the SLI, Inc. v. Yarmak, et al. case
discussed above, SLI has temporarily delayed any further action on this case
pending possibly reaching a global settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders.
17
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Registrant's common stock trades in the United States via the NASDAQ Stock
Market, under the symbol "ITEX". Trading was initiated on April 18, 1994.
Previously the Registrant's common stock traded "over-the counter" in the United
States via the NASD Bulletin Board, under the symbol "ITXE". Trading was
initiated on June 11, 1992.
Quarter Ended Sale Prices
- -------------------------------- -------------------------------------------
High Low
--------------------- ---------------------
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
July 31, 1996............. 9.75 4.25
April 9, 1996............. 12.50 7.75
January 15, 1996.......... 9.00 6.13
October 23, 1995.......... 8.13 6.13
A stockholder's list was prepared by the transfer agent, OTR Inc., in Portland
Oregon, as of July 31, 1997. The list, as adjusted, indicated 796 registered
shareholders of the 7,207,000 shares issued and outstanding. It is estimated
another 4,000 individual shareholders own stock in the Company which is held "in
street name" by brokerage firms. This results in a total estimated number of
shareholders of 4,796.
The Registrant has not declared any dividends from its inception. Management
anticipates that any future profits will be retained to finance corporate growth
and that no dividends will be declared in the foreseeable future.
18
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 such financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Except for historical information contained herein, the statements in this
report are forward-looking statements that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties
that may cause the Company's actual results in future periods to differ
materially from forecasted results.
Fiscal Years Ended July 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands, except per share data)
Statement of Operations Data:
Revenue:
Corporate trading revenue......... $ 11,602 $ 16,936 $ 14,210 $ 8,427 $ 4,446
Trade exchange revenue............ 17,582 14,020 9,418 6,339 3,488
---------- ---------- ---------- ---------- ----------
Total revenue................... 29,184 30,956 23,628 14,766 7,934
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Costs of corporate trading........ 9,245 13,745 11,137 6,409 2,891
Costs of trade exchange revenue 6,715 7,153 4,361 2,806 2,125
Selling, general and administrative 8,445 8,146 7,185 5,257 2,768
---------- ---------- ---------- ---------- ----------
Total costs and expenses........ 24,405 28,774 22,683 14,472 7,784
---------- ---------- ---------- ---------- ----------
Income (loss) from operations........ 4,779 2,182 945 294 150
Other income (expense)............... 201 200 454 19 74
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.... 4,980 2,382 1,399 313 224
Provision for income taxes........... 1,755 908 522 101 (8)
---------- ---------- ---------- ---------- ----------
Income before equity in net income
of foreign affiliate.............. 3,225 1,474 877 212 232
Equity in net income (loss) of
foreign affiliate.................. 1,247 (90) 958 632 ---
---------- ---------- ---------- ---------- ----------
Net income........................... $ 4,472 $ 1,384 $ 1,835 $ 844 $ 232
========== ========== ========== ========== ==========
Net income per share................. $ 0.52 $ 0.19 $ 0.41 $ 0.26 $ 0.08
========== ========== ========== ========== ==========
Balance Sheet Data:
Working capital ..................... $ 981 $ 261 $ 1,507 $ 503 $ 452
Total assets......................... 29,968 23,406 15,578 10,051 6,157
Long-term debt, net of current
portion............................ 26 192 156 189 98
Stockholders' equity................. $ 27,774 $ 20,383 $ 13,783 $ 7,432 $ 5,046
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Strategy and Diversification. The Company operates with the objectives of
long-term equity-building while also ensuring availability of sufficient cash
for current operating requirements. Accordingly, the Company may in any period
report significant revenue, profits, and increases in net assets from
transactions denominated in ITEX Trade Dollars or other noncash consideration.
Sometimes, the Company invests in equity securities with ITEX Trade Dollars that
have been earned by the Company in trade transactions. The firms in which the
Company has invested are able to use the ITEX Trade Dollars to purchase goods
and services used in the operation of their businesses. Further, the Company
invests in other business ventures, which involve acquiring and operating
businesses, operating projects, or holding properties for investment or
operation. The Company will focus on ventures in which the Company has or will
obtain adequate expertise for successful management and operation. Ventures that
can benefit from the financial resources and liquidity that the Company provides
through trading for goods and services are given priority.
On July 31, 1997, the Company commenced a partial redeployment of its assets and
investment strategy by investing 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, paid $20,000 in cash and
transferred media inventory, hotel room inventory, and fine art paintings and
sculpture. The total carrying value of the acquired mineral properties of
$6,576,000 has been confirmed in an appraisal by a firm of independent qualified
mining consultants. 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. Subsequent to July 31, 1997, the Company obtained several additional
mineral property claims at nominal cost by original claim staking.
On July 30, 1997, the Company completed the purchase of the remaining 51%
interest in Associated Reciprocal Traders, Ltd. ("ART"), making ART a
wholly-owned foreign subsidiary. The assets of ART consisted primarily of
available-for-sale securities.
During October 1997, ART acquired a 60% interest in 16 acres of improved but
undeveloped resort property known as the Villas Punta Ballena Samana Resort (the
"Samana Resort"), along with associated plans, engineering drawings, permits and
approvals for the resort, and a commitment for a construction loan of
approximately $40,000,000. The Samana Resort is located in the northeast corner
of the Dominican Republic on the Bay of Samana. The transaction was structured
as the purchase of a 60% equity interest in Villas Punta Ballena C. por A.
("VPB"), a Dominican Republic corporation, the holder of the Samana Resort
property. VPB has never had any business operations other than ownership of the
Samana Project.
The total purchase price consisted of cash of $1,250,000, ITEX Corporation
common stock to have a market value at time of issuance of $1,000,000, and
available-for-sale securities totaling $5,142,000 from the portfolio of ART. The
purchase price is to be paid in installments ranging from payments at the time
of contract signing to the final
20
payment of ITEX Corporation common stock which is due within five days of the
commencement of substantial construction on the property. The value of the
acquired assets has been determined by independent appraisal of the property.
The Company intends to proceed with construction of the resort facility pursuant
to the plans for development of the property, which have been approved by the
appropriate authorities. When completed, the Samana Resort is expected to
include more than 250 condominium and hotel units, as well as a casino, swimming
pools, tennis courts, restaurants, and most other amenities associated with a
five-star Caribbean resort.
Overall Financial Position. Subsequent to July 31, 1977 and through October 28,
1997, the Company sold a portion of its available-for-sale securities, realizing
cash proceeds of $3,218,000, substantially increasing the liquidity of the
Company. The Company believes that this demonstrates the success of the
Company's strategy of realizing cash from the sale of stocks of other companies
that are purchased for trade dollars or other nonmonetary consideration.
At July 31, 1997, the Company's working capital ratio was 1.5 to 1, based on
current assets of $3,048,000 and current liabilities of $2,067,000. The
Company's working capital ratio at July 31, 1996, was 1.1 to 1, based on current
assets of $2,827,000 and current liabilities of $2,566,000. The primary reason
for the improvement in the working capital ratio was due to the inclusion of
$1,247,000 in current deferred taxes at July 31, 1996 for earnings expected to
be repatriated as a result of the termination of the Associated Reciprocal
Traders, Inc. ("ART") foreign venture. In fiscal 1997, instead of receiving a
distribution of its share of ART's assets, the Company purchased the other
venturer's 51% interest in ART, making ART a wholly-owned foreign subsidiary.
The deferred tax liability was reversed in fiscal 1997 because of the change in
circumstances that now permit the Company to reinvest the foreign earnings for
an indefinite period.
Total stockholders' equity increased by $7,391,000 to $27,774,000 at July 31,
1997, from $20,383,000 at July 31, 1996. The primary reason for the increase in
stockholders' equity were: (a) continued profitable operations and (b) a credit
to additional paid-in capital of $1,092,000 for tax benefits derived from tax
deductions allowed to corporations as a result of exercises of stock options at
exercise prices lower than market price of the stock at the date of exercise.
The tax refunds due were applied as a reduction of the Company's income tax
liabilities for the fiscal year ended July 31, 1997.
Statement of Cash Flows. Net cash used in operating activities improved to
$349,000 in fiscal 1997 as compared to $1,418,000 in fiscal 1996. The Company
believes that cash fees and commissions, cash that can be obtained from the sale
of inventories and available-for-sale equity securities at the discretion of the
Company, and cash that would be available from the sale of equity and debt
securities of the Company will be sufficient to fund cash operating needs of the
Company while continuing to follow the strategy of mixing cash and trade
activities so as to maximize long-term equity building and shareholder value.
Furthermore, the Company is presently incurring negative cash flow with respect
to several development projects. At the Company's discretion, it could conserve
cash by suspending or terminating these activities. Further, the success of the
Company's strategy of realizing cash from the sale of stocks of other companies
that are purchased for trade dollars or other nonmonetary consideration
indicates that trade dollars or other nonmonetary consideration earned by the
Company can be converted into cash. However, there can be no assurance that
adequate funds from operations or any other sources will continue to be
available on terms acceptable to the Company.
21
Net cash used in investing activities was $398,000 in fiscal 1997 and $2,608,000
in fiscal 1996. The primary reason for the difference was the acquisition of a
50% equity interest in Business Exchange International, Inc.
during fiscal 1996.
Net cash provided by financing activities was $259,000 in fiscal 1997 and
$3,803,000 in fiscal 1996. In fiscal 1996, the Company received $2,081,000 from
the exercise of stock options and $1,250,000 from the sale of common stock in
the Newcastle private placement.
Private Placements. During the year ended July 31, 1997, the Company received
proceeds of $179,000 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. 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.
The terms of a private placement with Wycliff Fund, Inc. previously reported by
the Company provided that if Wycliff failed to pay at least $625,000 in any
calendar quarter, the Company could, at its sole option, decline to thereafter
sell any of the then unpurchased units to Wycliff. Wycliff did not pay the
purchase price that was due for the calendar quarter ended September 30, 1996
and following quarters. Therefore, the Company may cancel the remaining portion
of the private placement.
Stock Options. The Board of Directors adopted a new stock option plan applicable
to directors, officers, employees, and consultants of the Company effective
December 27, 1996, pursuant to which 1,000,000 shares of common stock were
reserved for issuance at an exercise price of $3.75 per share. Exercise prices
for the options granted under the new plan are equal to market value on the date
of grant and may be exercisable for up to five years.
Effective September 3, 1997, the Board of Directors adopted a new stock option
plan pursuant to which options to purchase up to 965,000 shares of the Company's
common stock may be granted to employees, officers, directors, and consultants
of the Company. Exercise prices for options granted under the plans are equal to
market value on the date of grant and options may be exercisable for up to ten
years from the date of grant. Pursuant to the new stock option plan, options to
purchase 765,000 shares were granted on September 3, 1997 at an exercise price
of $3.19 per share.
The Company intends to request shareholder action on the stock option plans that
were adopted on December 27, 1996 and September 3, 1997 by the Company's
shareholders at the annual meeting of the Company's shareholders scheduled for
January 8, 1998. It is the intention of the Company to file a Form S-8
registration with the Securities and Exchange Commission with respect to the
shares of common stock underlying options to be issued pursuant to the stock
option plans that were adopted on December 15, 1995, December 27, 1996 and
September 3, 1997.
During the fiscal year ended July 31, 1996, the Company received proceeds
totaling $1,437,000 from the exercise of stock options to purchase 687,000
shares of common stock. During the fiscal year ended July 31, 1997, the Company
received proceeds totaling $245,000 from the exercise of stock options to
purchase 120,000 shares of common stock.
22
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 may borrow up to $250,000 on a short-term
basis for working capital purposes. The interest rate applicable to borrowings
pursuant to the facility is equal to the bank's prime rate of interest plus
1.5%. The maximum amount of cash borrowings that may be outstanding at any time
is determined by a borrowing base formula related to available collateral.
Borrowings are 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 $250,000 was available to the Company as of July
31, 1997.
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended July 31, 1997 ("Fiscal 1997") and July 31, 1996
("Fiscal 1996")
Overall Operating Results
Total revenue decreased 6% to $29,184,000 in fiscal 1997 from $30,956,000 in
fiscal 1996. Income from operations more than doubled to $4,779,000 in fiscal
1997 from $2,182,000 in fiscal 1996. Net income increased to $4,472,000, or
$0.52 per share in fiscal 1997 from $1,384,000, or $0.19 per share, in fiscal
1996.
The increases resulted primarily from:
(a) More profitable operations in fiscal 1997, and
(b) The reversal in fiscal 1997 of a liability for deferred income
taxes of $1,247,000 that had been provided with respect to the
Company's foreign venture, Associated Reciprocal Traders, Inc.
("ART"), which is now a wholly-owned subsidiary.
The Company believes that an important comparison of fiscal 1997 operations to
fiscal 1996 operations is that "Income before Equity in Net Income (Loss) of
Foreign Affiliate" amounted to $3,225,000, or $.39 per share in fiscal 1997 as
compared to $1,474,000, or $.20 per share in fiscal 1996. These amounts exclude
the unusual effects of the deferred tax provision related to ART of $1,247,000
that was recorded in fiscal 1996 and reversed in fiscal 1997.
The fluctuations in net income and net income per share are not proportionate
because of a greater number of shares outstanding in fiscal 1997 for the income
per share computation because of more incremental shares from options and
warrants.
23
Revenue
Total Revenue. The following table summarizes the cash and trade (consisting of
ITEX trade dollars and other noncash consideration) components of revenue for
fiscal years 1997 and 1996:
Fiscal Years Ended July 31,
------------------------------
1997 1996
------------ ------------
(in thousands)
Corporate Trading Revenue
Trade $ 9,893 $ 12,003
Cash 1,709 4,933
------------ ------------
11,602 16,936
------------ ------------
Trade Exchange Revenue
Trade 7,566 5,427
Cash 10,016 8,593
------------ ------------
17,582 14,020
------------ ------------
Total Revenue
Trade 17,459 17,430
Cash 11,725 13,526
------------ ------------
$ 29,184 $ 30,956
============ ============
Corporate Trading Revenue. Corporate trading revenue decreased 31% to
$11,602,000 in fiscal 1997 from $16,936,000 in fiscal 1995. During the first two
quarters of fiscal 1997, the Company had a decreased level of corporate trading
revenue, which was attributable to the Company devoting less of its resources to
corporate trading activities during those periods. Significant management and
staff time was spent on litigation and other regulatory matters, on further
development of the retail trade exchange, and on international expansion. During
the second half of fiscal 1997, management refocused more resources on corporate
trading activities. Management is continuing to focus on corporate trading
activities through its Central Trade Department and through its corporate
trading agent, ITEX USA, Inc. Continued significant contributions to revenue are
expected for corporate trading activities.
Trade Exchange Revenue. Trade exchange revenue increased 25% to $17,582,000 in
fiscal 1997 from $14,020,000 in fiscal 1996. The increase in trade exchange
revenue was attributable to an array of factors. The Company has continued its
expansion internally, by acquisition, and entering into foreign license
agreements. In fiscal 1997, the Company reported revenue from foreign licensees
totaling $386,000. The Company has also started to realize transaction fee
revenue based on activity of the foreign licensees. This foreign transaction fee
revenue amounted to $15,000 in fiscal 1997.
The Company has continued its commitment to improved broker training programs,
which is having the effect of increased enrollments of new clients joining as
members of the Exchange and higher performance levels by brokers. Further, the
Company continues to invest in its ongoing broad-based marketing and advertising
program targeted at recruitment of additional brokers and members of the
Exchange.
24
Costs and Expenses
Costs of Corporate Trading. Costs of corporate trading decreased to $9,245,000
in fiscal 1997 from $13,475,000 in fiscal 1996 because of the lower revenue
level. Costs of corporate trading revenue were 80% in each of fiscal 1997 and
fiscal 1996.
Costs of Trade Exchange Revenue. Costs of trade exchange revenue decreased to
$6,715,000 in fiscal 1997 from $7,153,000 in fiscal 1996. Costs of trade
exchange revenue, which consists of brokers' fees and commissions, were 38% of
trade exchange revenue in fiscal 1997 and 51% in fiscal 1996. The decrease in
the cost percentage is partially attributable to revenue from foreign licenses,
on which the Company does not pay brokers' fees and commissions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were at approximately the same level at $8,445,000 in
fiscal 1997 and $8,146,000 in fiscal 1996.
Total advertising and promotion was $1,943,000 in fiscal 1997 as compared to
$2,597,000 in fiscal 1996. The reduction was a result of the Companies decision
to reduce costs in this area. One of the advantages available to barter
businesses is the ability to fund a significant portion of advertising costs
using trade dollars or by other trade consideration. During fiscal 1997, the
Company paid $1,851,000 of its advertising costs by ITEX trade dollars or other
trade consideration, representing 95% of total advertising costs for the period.
Comparison of Fiscal Years Ended July 31, 1996 ("Fiscal 1996") and July 31, 1995
("Fiscal 1995")
Overall Operating Results
Total revenue increased 31% to $30,956,000 in fiscal 1996 from $23,628,000 in
fiscal 1995. Income from operations increased to $2,182,000 in fiscal 1996 from
$945,000 in fiscal 1995.
Equity in net income (loss) from foreign affiliate was ($90,000) in fiscal 1996
as compared to $958,000 in fiscal 1995. All of the undistributed earnings of the
foreign affiliate were reinvested and were not expected to be remitted to the
parent company. On November 27, 1996, the majority owner of ART informed the
Company of its intent to take immediate steps to distribute all the assets of
ART and to end the relationship with the Company. The Company had previously
intended to reinvest its share of the earnings of this venture indefinitely and,
accordingly, had not provided income taxes on its share of ART's undistributed
earnings. At July 31, 1995, the cumulative amounts of reinvested income on which
deferred taxes had not been provided was approximately $1,590,000. As a result
of the perceived inability to continue to reinvest its share of ART's earnings,
the Company recognized a deferred provision for income taxes of $1,247,000
during the fourth quarter of the fiscal year ended July 31, 1996, which has been
reported as a reduction of the Company's share of equity in net income (loss) of
foreign affiliate in the statement of operations. This decreased net income by
$1,247,000, or $0.17 per share.
Net income decreased to $1,384,000, or $0.19 per share in fiscal 1996 from
$1,835,000, or $0.41 per share, in fiscal 1995. The decrease resulted from the
requirement to provide
25
the deferred tax provision of $1,247,000 related to the unexpected termination
of the ART foreign venture. This decreased net income by $1,247,000, or $0.17
per share.
The fluctuations in net income and net income per share are not proportionate
because of a greater number of shares outstanding in fiscal 1996 and because of
more incremental shares from options and warrants in computing income per share
caused by increases in the market price of the Company's stock during part of
fiscal 1996.
Revenue
Total Revenue. The following table summarizes the cash and trade (consisting of
ITEX trade dollars and other noncash consideration) components of revenue for
fiscal years 1996 and 1995:
Fiscal Years Ended July 31,
----------------------------
1996 1995
------------ ------------
(in thousands)
Corporate Trading Revenue
Trade $ 12,003 $ 12,403
Cash 4,933 1,807
------------ ------------
16,936 14,210
------------ ------------
Trade Exchange Revenue
Trade 5,427 4,204
Cash 8,593 5,214
------------ ------------
14,020 9,418
------------ ------------
Total Revenue
Trade 17,430 16,607
Cash 13,526 7,021
------------ ------------
$ 30,956 $ 23,628
============ ============
Corporate Trading Revenue. Corporate trading revenue increased 19% to
$16,936,000 in fiscal 1996 from $14,210,000 in fiscal 1995. The continued
increased level of corporate trade revenue was attributable to continued
operation of the Company's corporate trade department, which was established in
fiscal 1994. Management expects continuing significant contributions to revenue
from its corporate trading activities.
Trade Exchange Revenue. Trade exchange revenue increased 49% to $14,020,000 in
fiscal 1996 from $9,418,000 in fiscal 1995. The increase in trade exchange
revenue was attributable to an array of factors. During fiscal 1996, the Company
recognized a significant amount of enrollment fees for new clients joining as
members of the Exchange. The Company has continued its commitment to improved
broker training programs, which is having the effect of increased rates of new
clients joining as members of the Exchange. The Company has also continued its
internal expansion by opening more broker offices. The Company has continued its
ongoing broad-based marketing and advertising program targeted at recruitment of
additional brokers and members of the Exchange.
Costs and Expenses
Costs of Corporate Trading. Costs of corporate trading increased to $13,475,000
in fiscal 1996 from $11,137,000 in fiscal 1995 because of the higher revenue
level. Costs of corporate trading revenue were 80% in fiscal 1996 and 78% in
fiscal 1995.
26
Costs of Trade Exchange Revenue. Costs of trade exchange revenue increased to
$7,153,000 in fiscal 1996 from $4,361,000 in fiscal 1995. Costs of trade
exchange revenue, which consists of brokers' fees and commissions, were 51% of
trade exchange revenue in fiscal 1996 and 46% in fiscal 1995. The resulting
variance of 5% in gross margin percentage was due to specific commission rates
applicable to transactions completed in each period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $8,146,000 in fiscal 1996 from $7,185,000
in fiscal 1995. The increase resulted from the Company's higher scope of
operations, including expansion Company-owned and operated local trade
exchanges.
Total advertising and promotion was $2,597,000 in fiscal 1996 as compared to
$2,985,000 in fiscal 1995. The reduction was a result of the Companies decision
to reduce costs in this area. One of the advantages available to barter
businesses is the ability to fund a significant portion of advertising costs
using trade dollars or by other trade consideration. During fiscal 1996, the
Company paid $2,312,000 of its advertising costs by ITEX trade dollars or other
trade consideration, representing 89% of total advertising costs for the period.
INFLATION
The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.
FORWARD-LOOKING INFORMATION
From time to time, the Company or its representatives may have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
Words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the Reform Act"). The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to maximize to the fullest extent possible the protections of
the safe harbor established in the Reform Act. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from such forward-looking statements.
Management is currently unaware of any trends or conditions that could have a
material adverse effect on the Company's consolidated financial position, future
results of operations, or liquidity.
However, investors should also be aware of factors that could have a negative
impact on the Company's prospects and the consistency of progress in the areas
of revenue generation, liquidity, and generation of capital resources. These
include: (i) variations in the mix of corporate trading and trade exchange
revenue, (ii) possible inability of the
27
Company to attract investors for its equity securities or otherwise raise
adequate funds from any source, (iii) increased governmental regulation of the
barter business, (iv) a decrease in the cash fees and commissions realized by
the Company based upon a substantial decrease in corporate or retail trade
exchange transactions, and (v) unfavorable outcomes to litigation presently
involving the Company or to which the Company may become a party in the future.
The risks identified here are not all inclusive. Furthermore, reference is also
made to other sections of this report that include additional factors that could
adversely impact the Company's business and financial performance. Moreover, the
Company operates in a very competitive and rapidly changing environment. New
risk factors emerge from time to time and it is not possible for Management to
predict all such risk factors, nor can it assess the impact of all such risk
factors on the Company's business or the extent to which any factor or
combination of factors may cause actual results to differ materially from those
contained in any forward-looking statements. Accordingly, forward-looking
statements should not be relied upon as a prediction of actual results.
28
ITEX CORPORATION
FORM 10-K
For the Fiscal Year Ended
July 31, 1997
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
--------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 30
CONSOLIDATED BALANCE SHEETS AT JULY 31, 1997 AND 1996 31
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
YEARS ENDED JULY 31, 1997, 1996, AND 1995 32
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
THREE YEARS ENDED JULY 31, 1997, 1996, AND 1995 33
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
YEARS ENDED JULY 31, 1997, 1996, AND 1995 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35
All schedules have been omitted because they are not applicable or not
required, because the information is shown in the consolidated financial
statements or the notes thereto, or because the information is immaterial.
29
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of ITEX Corporation
Portland, Oregon
We have audited the consolidated financial statements of ITEX Corporation and
subsidiaries for the years ended July 31, 1997, 1996, and 1995. These 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 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
operations and their cash flows for the years ended July 31, 1997, 1996, and
1995, in accordance with generally accepted accounting principles.
Andersen, Andersen & Strong
October 28, 1997
Salt Lake City, Utah
30
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts )
July 31,
---------------------------
1997 1996
------------ ------------
ASSETS
Current Assets
Cash .................................................. $ 813 $ 1,301
Trade Dollars.......................................... 786 ---
Accounts receivable, net of allowance for doubtful
accounts of $140 and $96.............................. 1,084 847
Notes receivable....................................... 285 360
Prepaids and other current assets...................... 80 319
------------ ------------
Total current assets............................... 3,048 2,827
Inventory for Principal Party Trading....................... 6,939 5,202
Available for Sale Equity Securities........................ 7,088 3,877
Natural Resource Interests.................................. 6,576 ---
Investment in Foreign Equity Affiliate...................... --- 3,197
Investment in Business Exchange International Corp.......... 2,792 2,418
Investment in Fine Art ..................................... 36 2,642
Goodwill and Purchased Member Lists, net.................... 1,075 1,299
Notes Receivable, Long-Term Portion......................... 810 997
Other Assets................................................ 1,604 947
------------ ------------
$ 29,968 $ 23,406
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable....................................... $ 246 $ 183
Portion of receivables due to brokers ................. 552 508
Income taxes payable................................... 840 94
Deferred tax liability................................. --- 1,253
Current portion of long-term indebtedness.............. 166 138
Other current liabilities.............................. 263 390
------------ ------------
Total current liabilities.......................... 2,067 2,566
------------ ------------
Deferred Income Taxes....................................... 101 265
------------ ------------
Long-term Indebtedness...................................... 26 192
------------ ------------
Stockholders' Equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 7,207,000 and 6,804,000 shares
issued and outstanding.............................. 72 68
Paid-in capital........................................ 19,114 16,386
Net unrealized gain on marketable securities........... 60 132
Treasury stock, at cost (3,900 shares in 1996)......... --- (29)
Retained earnings...................................... 8,938 4,466
Prepaid Printing....................................... (410) (640)
------------ ------------
Total stockholders' equity......................... 27,774 20,383
------------ ------------
$ 29,968 $ 23,406
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
31
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Fiscal Years Ended July 31,
------------------------------------------------
1997 1996 1995
------------ ------------- -------------
Revenue
Corporate trading revenue......................... $ 11,602 $ 16,936 $ 14,210
Trade exchange revenue............................ 17,582 14,020 9,418
------------ ------------- -------------
29,184 30,956 23,628
------------ ------------- -------------
Costs and Expenses
Costs of corporate trading........................ 9,245 13,475 11,137
Costs of trade exchange revenue................... 6,715 7,153 4,361
Selling, general, and administrative.............. 8,445 8,146 7,185
------------ ------------- -------------
24,405 28,774 22,683
------------ ------------- -------------
Income from Operations................................ 4,779 2,182 945
Other Income (Expense)
Interest income (expense), net...................... 63 72 3
Dividends and subordination fees.................... --- 204 229
Gain (loss) on sale of securities................... 138 (76) 222
Miscellaneous, net................................ --- --- ---
------------ ------------- -------------
201 200 454
------------ ------------- -------------
Income Before Taxes and Equity in Net
Income (Loss) of Foreign Affiliate.................. 4,980 2,382 1,399
Provision for Income Taxes............................ 1,755 908 522
------------ ------------- -------------
Income Before Equity in Net Income
(Loss) of Foreign Affiliate......................... 3,225 1,474 877
Equity in Net Income (Loss) of Foreign
Affiliate (net of tax provision of
$1,247 in 1996)..................................... 1,247 (90) 958
------------ ------------- -------------
Net Income ........................................... $ 4,472 $ 1,384 $ 1,835
============ ============= =============
Average Common and Equivalent Shares:
Primary............................................ 9,503 7,346 4,658
============ ============= ==============
Net Income Per Common Share:
Primary............................................ $ 0.52 $ 0.19 $ 0.41
============ ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
32
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended July 31, 1997, 1996, and 1995
(In thousands)
Unrealized
Additional Gain (Loss)
Common Stock Paid-in Retained on Treasury Prepaid
----------------
Shares Amount Capital Earnings Securities Stock Printing Total
-------- ------ ---------- -------- ----------- -------- -------- -----------
Balance, July
31, 1994 3,416 $ 34 $ 6,224 $ 1,247 $ (4) $ (69) $ $ 7,432
Stock sold for
cash 941 9 2,000 2,009
Stock issued for
acquisitions and
in exchange for
member lists 556 6 1,326 1,332
Stock exchanged
for goods and 1,079
services 300 3 1,076
Unrealized Gain
(Loss) 96 96
Net income,
fiscal 1995 1,835 1,835
-------- ------ ---------- -------- ----------- -------- -------- -----------
Balance, July
31, 1995 5,213 52 10,626 3,082 92 (69) 13,783
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
Prepaid printing 1,480
(640) (640)
Unrealized Gain
(Loss) 40 40
Net income,
fiscal 1996 1,384 1,384
-------- ------ ---------- -------- ----------- -------- -------- -----------
Balance, July
31, 1996 6,804 68 16,386 4,466 132 (29) (640) 20,383
Stock sold for
cash 175 2 422 424
Stock and options
issued for goods
and services 228 2 1,214 29 1,245
Prepaid printing 230 230
Tax benefit from
stock options 1,092 1,092
exercised
Unrealized Gain
(Loss) (72) (72)
Net income,
fiscal 1997 4,472 4,472
-------- ------ ---------- -------- ----------- -------- -------- -----------
Balance, July 7,207 $ 72 $ 19,114 $ 8,938 $ 60 $ --- $ (410) $ 27,774
31, 1997 ======== ====== ========== ======== =========== ======== ======== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
33
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Years Ended July 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Cash Flows from Operating Activities
Net income............................................ $ 4,472 $ 1,384 $ 1,835
Adjustments:
Equity in net income of foreign affiliate and
related deferred tax effect in 1997 and 1996.. (1,247) 90 (958)
Depreciation and amortization...................... 619 290 215
Services paid for in stock and options............. 438 740 660
Net trade revenue earned over trade costs ........ (5,451) (2,974) (2,137)
Changes in operating assets and liabilities:
Accounts and notes receivable...................... 25 (596) 288
Deferred taxes..................................... (170) 175 (48)
Prepaids and other assets.......................... 239 (224) 189
Accounts payable and other current liabilities..... (64) 239 13
Portion of receivables due to brokers.............. 44 (73) (32)
Income taxes payable............................... 746 (469) 388
Deferred revenue................................... --- --- (1,000)
------------ ------------ ------------
Net cash (used in) operating activities.......... (349) (1,418) (587)
------------ ------------ ------------
Cash Flows From Investing Activities
Business Exchange International, Inc. and other
acquisitions (345) (2,158) ---
Equipment, information systems and other.............. (53) (450) (227)
------------ ------------ ------------
Net cash (utilized in) investing activities..... (398) (2,608) (227)
------------ ------------ ------------
Cash Flows From Financing Activities
Proceeds from sales of common stock................... 424 3,691 2,010
Proceeds from notes payable........................... --- 237 814
Repayments of notes payable........................... (165) (125) (937)
------------ ------------ ------------
Net cash provided by financing activities....... 259 3,803 1,887
------------ ------------ ------------
Net increase (decrease) in cash and 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................................ --- 610 180
Non-Cash Investing and Financing Activities
Investments, equipment, inventory, information systems
development services, prepaids, customer lists,
marketable securities and goodwill acquired for
common stock, ITEX trade dollars, and other assets...... 9,396 4,846 4,240
The accompanying notes are an integral part of the consolidated financial
statements.
34
ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany transactions have been eliminated.
Trade Dollar Transactions
- -------------------------
Normal Valuation of Trade Dollars. The Company uses the ratio of one trade
dollar to one United States dollar in measuring and accounting for purchases and
sales. This one-for-one ratio is the pervasive standard within the ITEX Retail
Barter Exchange and throughout the barter industry. The Company does not
recognize any accounting implications if differences are observed between trade
dollar and U.S. dollar prices that are within reasonable ranges that might exist
between prices of similar U.S. dollar transactions.
Abnormal Valuation of Trade Dollars. For those few significant trade dollar
transactions in which fair market values are determined to be materially
different from the ratio of $1 to one trade dollar, the fair market values are
used in determining the accounting result of the transaction instead of amounts
equal to the number of trade dollars exchanged. Abnormal valuations most often
occur in certain acquisitions of bulk inventories, such as those entered into by
the Company for principal party trading or for trading to and for the benefit of
members of the ITEX Retail Barter Exchange. In such situations, an accounting
adjustment is recorded to decrease the carrying value of the inventory to fair
market value along with a decrease to income for the period.
Trade Dollar Valuation in the Statement of Operations. The ratio of $1 per trade
dollar is applicable to revenue and costs and expenses in the statement of
operations with the exception of the effects of additional costs and expenses
recorded as a result of the circumstances described under the preceding section
"Abnormal Valuation of Trade Dollars." It should be noted that adjustments to
trade dollar revenue may be offset by corresponding adjustments to expenses paid
in trade dollars.
Trade Dollar Valuation in the Balance Sheet. The Company has expertise in
trading. The Company has a blended cash-trade purchasing program in which it
spends trade dollars that have been earned by the Company and U.S. dollars--in
tandem--to pay for goods and services used by the Company in its operations.
Any negative trade dollar balance of the Company is shown as a liability in the
balance sheet. The contractual relationship between the Company and members of
the ITEX Retail Barter Exchange permit the Company to essentially "borrow" trade
dollars through the issuance of trade dollars in excess of the amount
specifically earned by the Company, within certain specified limitations.
At each balance sheet date, in accordance with generally accepted accounting
principles, any positive trade dollar balance of the Company would be evaluated
for net realizable value. The Company would adjust the carrying value of the
trade dollars if the
35
fair value of the trade dollars is less than the carrying value or it is
probable that not all trade dollars will be used.
Information that would be used to support the net realizable value of a
significant positive trade dollar balance at a balance sheet date would include
the Company's past track record of utilizing trade dollars, evident ability and
intent to utilize the trade dollars in a reasonable time, indicated by the
quantity of trade dollars relative to the size of the Company's procurement
budget for items the trade dollars may be used for, and preparation of a trade
plan for timely utilization on a $1 per trade dollar basis for goods and
services that will be available.
Inventory for Principal Party Trading
General. Inventories are stated at the lower of cost (first-in, first-out basis)
or market.
Inventory Purchased and Sold for Trade Dollars. Purchases of inventory for
principal party trading paid with trade dollars are valued at the amount of
trade dollars paid unless the circumstances described in the preceding section
"Abnormal Valuation of trade dollars" are present. For significant purchases of
inventory for principal party trading paid for with trade dollars in which fair
market values are determined to be materially different from the ratio of $1 per
trade dollar, the fair market values are used in determining the accounting
result of the transaction and the carrying value of the inventory. In such
situations, an accounting adjustment is recorded to decrease the carrying value
of the inventory to fair market value along with a decrease to income for the
period.
Determination and Substantiation of Fair Market Value. The Company's procedures
for inventory for principal party trading include obtaining appraisals of fair
market, comparison to equivalent cash market prices that would be required for
similar purchases, or both.
Revenue Recognition. Revenue is recognized for sales of inventory for principal
party trading when the buyer has made an unconditional commitment to convey the
applicable consideration to the Company and the Company has culminated the
earnings process by having shipped the inventory to the buyer or performed such
other acts necessary to have completed its required performance pursuant to the
applicable transaction. For any transaction resulting in revenue to the Company,
if any material contingencies are present, revenue recognition is delayed until
all material contingencies are eliminated. Further, no revenue is recognized
unless collection of the applicable consideration is probable.
Trading With Cash Equivalent Credits
Nature of Transactions. In addition to and separate from principal party trading
transactions in which the Company acquires and sells inventories for trade
dollars or other nonmonetary consideration, the Company enters into transactions
in which it exchanges "Cash Equivalent Credits" for bulk inventory of
corporations. These transactions occur completely outside the ITEX Retail Barter
Exchange and do not involve trade dollars, which are completely different from
Cash Equivalent Credits. The Company arranges the sale of the inventory for
cash, which is retained by the Company.
Holders of Cash Equivalent Credits may only use them in purchases of goods and
services from specific vendors identified by the Company in a blend of mostly
cash and
36
a smaller proportion of Cash Equivalent Credits. Because of bulk purchasing
arrangements the Company has with these vendors, the vendors accept the cash
portion of the price and essentially grant a special discount to the client
equal to the number of Cash Equivalent Credits utilized in the cash-trade
blended purchases. ITEX will assist the client in executing transactions in
which the client utilizes its Cash Equivalent Credits, but the Company does not
guarantee the utilization of the Cash Equivalent Credits and it is the client's
responsibility to utilize its Cash Equivalent Credits. The Company earns
transaction fees equal to a percentage of the Cash Equivalent Credits utilized
by the client.
Revenue Recognition. The Company recognizes revenue equal to the cash to be
received from the sale of the inventory when the buyer has made an unconditional
commitment to pay and the earnings process has been completed by the shipment of
the inventory or such other acts necessary to have completed required
performance pursuant to the applicable transaction.
Transaction fee revenue associated with clients' utilization of Cash Equivalent
Credits is recognized when Cash Equivalent Credits are utilized and the client
is obligated to pay the transaction fee to the Company.
For any transaction resulting in revenue to the Company, if any material
contingencies are present, revenue recognition is delayed until all material
contingencies are eliminated. Further, no revenue is recognized unless
collection of the applicable consideration is probable.
Available for Sale Securities
- -----------------------------
Nature of Transactions. The Company operates with the objectives of long-term
wealth-building while also ensuring availability of sufficient cash for current
operating requirements. In this respect, the Company sometimes exchanges ITEX
Corporation common stock for stock of other publicly-traded companies. The
Company also invests trade dollars that have been earned or issued by the
Company or inventories for principal party trading in equity securities of other
publicly-traded companies. The investee companies are able to use the trade
dollars received in payment for the stock issued to purchase needed goods and
services or to use the inventory items received as payment for the stock in the
operation of their businesses.
Accounting Principles. Effective August 1, 1994, the Company changed its method
of accounting for equity securities to conform to the requirements of financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." The change had no effect on retained
earnings. The noncurrent portfolio of available-for-sale securities is stated at
fair market value at balance sheet dates. Realized gains and losses are
determined on the specific identification method and recognized in net income.
Net unrealized gains or losses on noncurrent available-for-sale securities are
recorded in a separate stockholders' equity account, except for unrealized
losses that are considered to be other than temporary, which are recognized as
losses in determining net income.
Determination of Fair Market Value. Investments in stock of publicly-traded
companies are stated at the current quoted market price of freely-trading stock
of the investee. Convertible preferred stocks are stated at the current quoted
market price of common shares that the preferred stock is convertible into or
based on other measures of value, if more compelling .
37
Income Taxes
- ------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of certain assets and
liabilities for financial and tax reporting. The deferred taxes represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
The Company accounts for investment tax credits using the flow-through method,
and thus, they reduce income tax in the year the related assets are placed in
service or qualified progress payments are made.
For years prior to July 31, 1995, the Company filed its income tax returns on
the cash basis whereby, trade accounts receivable and various operating payables
had no tax basis. Revenue associated with trade accounts receivable was
recognized when payments were received and the various operating payables were
deductible when payments were made.
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statements and tax bases of assets and liabilities.
Income Per Share
- ----------------
Income per share of common stock is computed on the basis of the weighted
average shares of common stock outstanding, plus common equivalent shares
arising from the effect of dilutive stock options using the modified treasury
stock method, and net income increased for debt reduction and investment in
short-term paper from the hypothetical exercise of options.
Costs of Communication and Information Systems
- ----------------------------------------------
The Company capitalizes costs of purchasing and internal costs of developing and
enhancing its communication and information systems. The Company capitalizes
only direct costs of development after technological feasibility has been
determined. Other costs related to development are expensed as incurred as
research and development expenditures. Capitalized costs of communication and
information systems are amortized over a 4 year period.
Depreciation and Amortization
- -----------------------------
Property and equipment are stated at cost. Depreciation is computed on the
straight-line method for financial statement purposes. Estimated useful lives
range from 3 to 10 years. Goodwill and Purchased Member lists are stated at cost
and are amortized over periods ranging from 5 to 20 years.
Capitalized Equipment Leases
- ----------------------------
Vehicle and equipment leases have been recorded at the present value of the net
minimum lease payments. These assets are being depreciated using the
straight-line method over lease terms of 3 to 5 years.
Allowance for Uncollectible Accounts
- ------------------------------------
The Company provides an allowance for accounts receivable which are doubtful of
collection. The allowance is based upon management's periodic analysis of
receivables, evaluation of current economic conditions, and other pertinent
factors. Ultimate losses may vary from the current estimates and, as additions
to the allowance become
38
necessary, they are charged against earnings in the period in which they become
known. Losses are charged and recoveries are credited to the allowance.
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 to financial statements of prior fiscal years have
been made to be consistent with classifications in the financial statements for
the fiscal year ended July 31, 1997.
NOTE 2 - TRADE DOLLARS
At July 31, 1997, the Company had earned 786,000 ITEX Trade Dollars in excess of
the amount of Trade Dollars expended by the Company. The Company has classified
the net positive Trade Dollar balance as a current asset because the Company
expects to utilize the full amount within the next 12 months. The Company
intends to use these Trade Dollars to purchase goods and services from other
members of the Exchange for use by the Company in its operations or for the
purchase of equity securities of other companies.
At July 31, 1996, the Company had expended 41,000 ITEX trade dollars in excess
of the amount of trade dollars earned by the Company. This situation is commonly
referred to in the commercial barter industry as a "negative trade balance." The
ITEX Trading Rules that govern the Exchange specifically provide that the
Company may expend Trade Dollars in excess of earned within certain guideline
amounts. This practice is consistent with regulations of the International
Reciprocal Trade Association ("IRTA"), the leading barter industry association
which, among other things, provides regulations and other guidance on business
practices and ethics within the industry. The ability to borrow trade dollars,
just as other members of the exchange may, provides the Company with additional
liquidity and the opportunity to complete advantageous purchase transactions
that benefit the Company and Exchange members. The Company would be ultimately
obligated to provide goods and services for sale to Exchange members to offset
any amounts of Trade Dollars expended in excess of earned. This could be
accomplished by the sale for Trade Dollars of the assets for which acquisition
resulted in the Trade Dollars issued in excess of earned or other inventories,
by otherwise earning Trade Dollars, or a combination of both.
Trade dollars issued in excess of earned by the Company is specifically provided
for in the ITEX Trading Rules that govern the Exchange. Such provisions allow
the Company to issue trade dollars in excess of earned within certain guideline
amounts. This provides the Company with additional liquidity and the opportunity
to complete advantageous purchase transactions that benefit the Company and
Exchange members. The Company would be ultimately obligated to provide goods and
services to Exchange members to offset any amounts of trade dollars issued in
excess of earned. This could be accomplished by the sale for trade dollars of
the inventories for which the acquisition resulted in the trade dollars issued
in excess of earned or other inventories, by otherwise earning trade dollars, or
a combination of both.
39
NOTE 3 - NOTES RECEIVABLE
At July 31, 1997 and 1996, notes receivable consisted of the following:
July 31,
----------------------------
1997 1996
------------ ------------
(in thousands, except monthly
payment amounts)
Note receivable in five equal annual
installments, including interest at 6% per
annum $ 480 $ 600
Note receivable from Business Exchange
International, Inc., payable over a fifteen-
year period in monthly installments of
$3,513, including interest at 8% 300 300
Note receivable from former officer of SLI,
Inc., currently due, with interest at 8% 125 125
Note receivable from ITEX USA, Inc.,
currently due, with interest at 9% 106 106
Other 84 226
------------ ------------
1,095 1,357
Less, current portion (285) (360)
------------ ------------
$ 810 $ 997
============ ============
NOTE 4 - INVENTORY FOR PRINCIPAL PARTY TRADING
Following are the components of inventory for principal party trading:
July 31,
----------------------------
1997 1996
------------ ------------
(in thousands)
Prepaid media advertising duebills $ 4,190 $ 3,530
Hotel roomnights 1,006 1,482
Health products 653 ----
Electronic products 278 ----
Condominium timeshares 570 ----
Miscellaneous inventory 242 190
------------ ------------
$ 6,939 $ 5,202
============ ============
40
NOTE 5 - AVAILABLE-FOR-SALE SECURITIES
Following is information about the value of available-for-sale securities at
July 31, 1997 and 1996:
Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ------------ ------------
July 31, 1997:
Convertible preferred stock $ 3,928 $ ---- $ 132 $ 3,796
Stock dividends receivable 90 ---- ---- 90
Common stock (restricted) 3,010 418 226 3,202
------------ ------------ ------------ ------------
$ 7,028 $ 418 $ 358 $ 7,088
============ ============ ============ ============
July 31, 1996:
Convertible preferred stock $ 3,163 $ 138 $ $ 3,301
Stock dividends receivable 327 327
Subordination fee receivable 255 (6) 249
------------ ------------ ------------ ------------
$ 3,745 $ 138 $ (6) $ 3,877
============ ============ ============ ============
Subsequent to July 31, 1977 and through October 28, 1997, the Company sold a
portion of its available-for-sale securities for cash, realizing proceeds of
$3,218,000, substantially increasing the liquidity of the Company.
During October 1997, the Company, through its wholly-owned foreign subsidiary,
Associated Reciprocal Traders, Ltd., acquired a 60% interest in 16 acres of
improved but undeveloped resort property known as the Villas Punta Ballena
Samana Resort (the "Samana Resort"), along with associated plans, engineering
drawings, permits and approvals for the resort, and a commitment for a
construction loan of approximately $40,000,000. Part of the purchase price was
paid by the Company's conveyance to the seller of available-for-sale securities
of $5,142,000.
NOTE 6 - NATURAL RESOURCE INTERESTS
On July 31, 1997, the Company commenced a partial redeployment of its assets and
investment strategy by investing 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, paid $20,000 in cash and
transferred media inventory, hotel room inventory, and fine art paintings and
sculpture. The total carrying value of the acquired mineral properties of
$6,576,000 has been confirmed in an appraisal by a firm of independent qualified
mining consultants. 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. Subsequent to July 31, 1997, the Company obtained several additional
mineral property claims at nominal cost by original claim staking.
41
NOTE 7 - GOODWILL AND PURCHASED MEMBER LISTS
On September 20, 1993, ITEX acquired the clients (member lists) of a trade
exchange for $67,000 and subsequently, on January 10, 1995, the Company acquired
additional clients for $76,000. The cost of the member lists is being amortized
over a five-year period.
At July 31, 1997 and 1996, the unamortized balance of member lists consisted of
the following:
July 31,
---------------------------
1997 1996
------------ ------------
(in thousands)
Cost $ 142 $ 142
Accumulated amortization (91) (60)
------------ ------------
$ 51 $ 82
============== ============
Amortization expense for member lists was $31,000, $28,000, and $21,000 for the
fiscal years ended July 31, 1997, 1996, and 1995, respectively.
On February 10, 1995, the Company acquired the assets and clients of the Travel
Agent's Hotel Guide (TAHG) for $329,000, of which $293,000 represented the value
of the clients (member lists). Previously, the Company had acquired a lodging
commitment from TAHG for $96,000. The unamortized cost of the commitment of
$55,000 was added to the acquisition basis and is being amortized over a
five-year period.
At July 31, 1997 and 1996, the unamortized balance consisted of the following:
July 31,
---------------------------
1997 1996
------------ ------------
(in thousands)
Cost $ 348 $ 348
Accumulated amortization (174) (104)
------------ ------------
$ 174 $ 244
============ ============
Amortization expense was $70,000, $70,000 and $35,000 for the fiscal years ended
July 31, 1997, 1996, and 1995, respectively.
On March 1, 1995, the Company acquired 100% of the common stock of Barter
Exchange, Inc. (BEI) for $900,000, of which $657,825 represented the excess of
cost over the fair value of net assets acquired. The excess of cost over net
assets of the Company acquired is amortized on a straight-line basis over 20
years.
At July 31, 1997 and 1996, the unamortized cost consisted of the following:
July 31,
---------------------------
1997 1996
------------ ------------
(in thousands)
Cost $ 658 $ 658
Accumulated amortization (82) (47)
------------ ------------
$ 576 $ 611
============ ============
Amortization expense was $36,000, $33,000 and $14,000 for the fiscal years ended
July 31, 1997, 1996 and 1995, respectively.
42
On April 27, 1996, the Company acquired the assets and clients of Global
Exchange Network, Inc. for $385,000, of which $257,000 represented the value of
a noncompete agreement and $128,000 represented the value of the member list. At
July 31, 1997 and 1996, the unamortized balance consisted of the following:
July 31,
---------------------------
1997 1996
------------ ------------
(in thousands)
Cost $ 385 $ 385
Accumulated amortization (112) (23)
------------ ------------
$ 273 $ 362
============ ============
Amortization expense was $89,000, and $22,000 for the fiscal years ended July
31, 1997 and 1996.
NOTE 8 - OTHER ASSETS
At July 31, 1997 and 1996, property and equipment, which are included in Other
assets, consisted of the following:
July 31,
---------------------------
1997 1996
------------ ------------
(in thousands)
Office furniture and fixtures $ 96 $ 111
Computer equipment 167 486
Vehicles 29 29
Leasehold improvements 112 118
------------ ------------
404 744
Less, accumulated depreciation (195) (491)
------------ ------------
$ 209 $ 253
============ ============
Depreciation expense for property and equipment was $108,000, $91,000, and
$68,000 for the fiscal years ended July 31, 1997, 1996, and 1995, respectively.
At July 31, 1997 and 1996, capitalized equipment leases, which are included in
Other assets, consisted of the following:
July 31,
---------------------------
1997 1996
------------ ------------
(in thousands)
Computer and other equipment $ 175 $ 175
Less, accumulated depreciation (115) (72)
------------ ------------
$ 60 $ 103
============ ============
Depreciation expense for capitalized equipment leases was $42,000, $41,000 and
$31,000 for the fiscal years ended July 31, 1997, 1996, and 1995, respectively.
At July 31, 1997, Other assets includes costs of purchasing and developing
certain of the Company's information, communication, and Internet systems.
During fiscal 1997
43
and 1996, the Company continued work on development projects that had been
commenced in prior years. Research and development during the past two fiscal
years has focused both on technological improvements and international
expansion. During the fiscal year ended July 31, 1997, the Company spent a total
of $166,000 on research and development for its communication and information
systems, of which $31,000 was capitalized. During the fiscal year ended July 31,
1996, the Company spent a total of $577,000 on research and development for its
communication and information systems, of which $560,000 was capitalized. During
the fiscal year ended July 31, 1995, the Company spent a total of $169,000 on
research and development for its communication and information systems, all of
which was charged to expense.
When projects are completed and ready for general use, their costs are amortized
over a four-year period. Amortization expense recognized during fiscal 1997
totaled $150,000.
NOTE 9 - BROKER PORTION OF ACCOUNTS RECEIVABLE
Independent brokers and brokers in Company-owned retail trade locations service
the Company's clients. Brokers are entitled to a portion of collections by the
Company from customers of the brokers, which is then payable within 35 days. The
liability for amounts estimated to be collected in the future was $552,000 and
$508,000 at July 31, 1997 and 1996, respectively.
NOTE 10 - 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 may borrow up to $250,000 on a short-term basis for working
capital purposes. The interest rate applicable to borrowings pursuant to the
facility is equal to the bank's prime rate of interest plus 1.5%. The maximum
amount of cash borrowings that may be outstanding at any time is determined by a
borrowing base formula related to available collateral. Borrowings are
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 $250,000 was available to the Company as of July 31, 1997.
44
NOTE 11 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Notes Payable
At July 31, 1997 and 1996, long-term debt (including capital lease obligations)
consisted of the following:
July 31,
-------------------------------
1997 1996
-------------- --------------
(in thousands)
Note payable at $1,000 per month, including interest
at 7% per annum, collateralized by property of a
related party $ --- $ 11
Note payable at $8,300 per month, including interest
at 6% per annum 78 185
Note payable at $600 per month, including interest
at 8% per annum, collateralized by a vehicle
21 26
Capital leases 65 108
Other 28 ---
-------------- --------------
192 330
Less, current maturities (166) (138)
-------------- --------------
$ 26 $ 192
============== ==============
The annual maturity of long-term debt (including capital leases) is as follows:
(in thousands)
Fiscal Year Ending July 31,
1998 $ 166
1999 26
Capital Leases
The Company leases equipment under six noncancellable capital leases. The
leases, which expire during the years 1998 through 1999, have terms from three
to five years and provide for aggregate monthly payments of $4,200. Future
payments are included in the annual maturity schedule above. Following are the
separate details of minimum future lease payments under capital leases for the
next five years are as follows:
(in thousands)
Fiscal Year Ending July 31,
1998 $ 44
1999 26
--------------
70
Less, imputed interest (5)
--------------
Present value of minimum lease payments 65
Less, current portion (39)
--------------
$ 26
==============
45
NOTE 12 - CAPITAL STOCK
Private Placements. During the year ended July 31, 1997, the Company received
proceeds of $179,000 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. 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.
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 200,000 shares of the Company's common stock for $750,000. The Company
also completed a private placement pursuant to which an individual purchased
56,000 shares of the Company's common stock for $210,000. The Company also
completed a private placement pursuant to which an officer of the Company
purchased 25,000 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.
Effective January 1, 1996, the Company entered into a Regulation S transaction
with Wycliff Fund, Inc. ("Wycliff"), a foreign corporation. Wycliff agreed to
purchase 1,022,495 units of the Company's equity securities over a two-year
period for $4.89 per unit, equaling a total of $5,000,000. Each unit consists of
one share of common stock and warrants to purchase two shares of common stock.
One warrant entitles the holder to purchase one share of common stock at an
exercise price of $4.89 per share, is exercisable from and after two years from
the date of issuance, and expires five years from the date of issuance. The
other warrant entitles the holder to purchase one share of common stock at an
exercise price of $6.12 per share, is exercisable from and after four years from
the date of issuance, and expires ten years from the date of issuance. Wycliff
was required to pay the purchase price of the units at a minimum rate of
$625,000 per quarter.
Through July 31, 1996, the Company received $1,250,000 from Wycliff and issued
255,624 shares of common stock and the Company also issued warrants to purchase
255,624 shares of common stock at an exercise price of $4.89 per share,
exercisable from and after two years from the date of issuance, with expiration
five years from the date of issuance, and warrants to purchase 255,624 shares of
common stock at an exercise price of $6.12 per share, exercisable from and after
four years from the date of issuance, with expiration ten years from the date of
issuance.
Under the terms of the Wycliff private placement, if the entire purchase price
of $5,000,000 was paid no later than December 31, 1996, the Company would have
been required to issue to Wycliff warrants to purchase an additional 250,000
shares of common stock at an exercise price of $4.89 per share. The private
placement terms also provided that Wycliff would pay to the Company additional
amounts equal to 8% per annum for any portion of the purchase price that was not
paid on or before December 31, 1996. Further, the private placement provided
that if Wycliff failed to pay at least $625,000 in any calendar quarter, the
Company could, at its sole option, decline to thereafter sell any of the then
unpurchased units to Wycliff. Wycliff did not pay the
46
purchase price that was due for the calendar quarter ended September 30, 1996
and following quarters. Therefore, the Company may cancel the remaining portion
of the private placement.
In addition, during the fiscal year ended July 31, 1996, the Company issued
350,000 shares of common stock as compensation for services and in connection
with the acquisition of SLI, Inc.
Stock Options. Effective April 19, 1993, the Company adopted a Key Employee's
Incentive Stock Option Plan (the 1993 Plan) that provides for the grant of
options intended to meet the requirements of Internal Revenue Code Section 422,
to purchase shares of the Company's common stock. Under the Plan, the Company
may grant to the Optionee during the period ending on a date not more than ten
years from the date of the grant of the option, the option to purchase common
stock of the Company at a price per share equal to the bid price of the
Company's traded common stock on the date of the grant of the option. The
Company filed a Form S-8 registration with the Securities and Exchange
Commission with respect to the shares of common stock underlying options issued
or to be issued pursuant to the 1993 Plan.
Effective December 15, 1995, the Board of Directors adopted a new stock option
plan pursuant to which options to purchase up to 1,300,000 shares of the
Company's common stock may be granted to employees, officers, directors, and
consultants of the Company. Exercise prices for options granted under the plans
are equal to market value on the date of grant and options may be exercisable
for up to ten years from the date of grant at the discretion of the Board of
Directors. During the fiscal year ended July 31, 1996, pursuant to the new stock
option plan, options to purchase 1,295,000 shares were granted at an exercise
price of $6.13 per share. The plan was approved by the Company's shareholders at
the annual meeting of the Company's shareholders held on May 3, 1996.
The Board of Directors adopted a new stock option plan applicable to directors,
officers, employees, and consultants of the Company effective December 27, 1996,
pursuant to which 1,000,000 shares of common stock were reserved for issuance at
an exercise price of $3.75 per share. Exercise prices for the options granted
under the new plan are equal to market value on the date of grant and may be
exercisable for up to five years.
During the fiscal year ended July 31, 1996, the Company received proceeds
totaling $1,437,000 from the exercise of stock options to purchase 687,000
shares of common stock. During the fiscal year ended July 31, 1997, the Company
received proceeds totaling $245,000 from the exercise of stock options to
purchase 120,000 shares of common stock.
47
Following is a summary of activity under all stock option plans for the
three-year period ended July 31, 1996:
Option Price (equal to Market
Number of Value) at Date of Grant
--------------------------------------
Shares Per Share Total
---------------- ----------------------- -----------
Balance at August 1, 1993.... 305,000 $1.00 $ 305,000
Grants................... 203,000 3.38 686,000
Exercises................ (130,000) 1.00 (130,000)
---------------- -----------
Balance at July 31, 1994..... 378,000 1.00-3.38 861,000
Grants................... 955,000 1.94-2.50 2,081,000
Exercises................ (10,000) 1.00 (10,000)
---------------- -----------
Balance at July 31, 1995..... 1,323,000 1.00-3.38 2,932,000
Grants................... 905,000 6.13 5,541,000
Exercises................ (687,000) 1.94-2.50 (1,437,000)
---------------- -----------
Balance at July 31, 1996..... 1,541,000 1.00-6.13 7,036,000
Grants................... 775,000 3.50-3.75 2,851,000
Exercises................ (120,000) 1.00-2.50 (245,000)
---------------- -----------
Balance at July 31, 1997..... 2,196,000 1.00-6.13 $9,642,000
================ ===========
Number of shares exercisable:
July 31, 1997............ 2,196,000
================
July 31, 1996............ 1,541,000
================
Effective September 3, 1997, the Board of Directors adopted a new stock option
plan pursuant to which options to purchase up to 965,000 shares of the Company's
common stock may be granted to employees, officers, directors, and consultants
of the Company. Exercise prices for options granted under the plans are equal to
market value on the date of grant and options may be exercisable for up to ten
years from the date of grant. Pursuant to the new stock option plan, options to
purchase 765,000 shares were granted on September 3, 1997 at an exercise price
of $3.19 per share.
The Company intends to request action by shareholders on stock option plans that
were adopted on December 27, 1996 and September 3, 1997 by the Company's
shareholders at the annual meeting of the Company's shareholders scheduled for
January 8, 1998. It is the intention of the Company to file a Form S-8
registration with the Securities and Exchange Commission with respect to the
shares of common stock underlying options to be issued pursuant to the stock
option plans that were adopted on December 15, 1995, December 27, 1996 and
September 3, 1997.
Warrants. During the fiscal year ended July 31, 1996, the Company received
proceeds totaling $656,000 from the exercise of previously outstanding warrants
to purchase 250,000 shares of common stock.
Prepaid Printing. The Company issued common stock in exchange for prepaid
printing services totaling $640,000, of which $410,000 and $640,000 had not been
performed as of July 31, 1997 and 1996, respectively. The Company has classified
these balances as a reduction of stockholders' equity at July 31, 1997 and 1996,
rather than as a prepaid expense and an increase to equity. The Company expects
to use the balance of prepaid printing services remaining at July 31, 1997 in
future periods.
48
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 issued options to purchase 405,000 shares of
common stock to employees during fiscal 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 fiscal 1997 had the Company adopted the fair value-based method of
accounting for stock-based compensation.
Year Ended July 1, 1997
1997 1996
-------------- -------------
(in thousands, except
per share amount)
Difference between fair value and intrinsic
value methods (additional compensation
expense) $ 576 $ 3,307
Net income 4,121 (633)
Net income (loss) per share 0.48 (0.11)
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 0.0%,
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 nonemployees. 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.
49
NOTE 13 - REVENUE
The following table summarizes the cash and trade (consisting of ITEX trade
dollars and other noncash consideration) components of revenue for each of the
fiscal years ended July 31, 1997, 1996, and 1995:
Fiscal Years Ended July 31,
--------------------------------------------
1997 1996 1995
-------------- ------------ ------------
(in thousands)
Corporate Trading Revenue
Trade $ 9,893 $ 12,003 $ 12,402
Cash 1,709 4,933 1,808
-------------- ------------ ------------
11,602 16,936 14,210
-------------- ------------ ------------
Trade Exchange Revenue
Trade 7,566 5,427 4,204
Cash 10,016 8,593 5,214
-------------- ------------ ------------
17,582 14,020 9,418
-------------- ------------ ------------
Total Revenue
Trade 17,459 17,430 16,606
Cash 11,725 13,526 7,022
-------------- ------------ ------------
$ 29,184 $ 30,956 $ 23,628
============== ============ ============
NOTE 14 - FOREIGN LICENSE AGREEMENTS
On December 19, 1996, the Company announced the signing of an agreement with
Ihlas Holdings, a major Turkish corporation, to license an ITEX Trade Exchange
in Turkey, to be called Ihlas ITEX Barter SA. Under the agreement, which was
effective January 1, 1997, Ihlas Holdings receives exclusive use of the ITEX
name, trademarks, and proprietary barter accounting and management software for
use in Turkey. The Company will receive royalties based on trade transactions
generated through the new system, which will enable Ihlas ITEX clients to trade
with ITEX members in other countries. Ihlas Holdings is one of Turkey's largest
corporations and has 57 subsidiaries, which include interests in chemicals,
textiles, food, electronics, health care, construction, media, banking,
insurance, and international trade. Ihlas has already taken steps to expand the
Ihlas ITEX barter network into nearby Kazakhistan, Turkistan, and Azerbijan.
The Company has license arrangements with companies operating in Canada, South
Africa, and Australia that were established in prior fiscal years. During fiscal
1997, the Company has signed new agreements with licensees in Turkey, Norway,
New Zealand and Romania and has extended the license arrangements in South
Africa and Australia. In fiscal 1997, the Company reported revenue from foreign
licensees totaling $386,000. The Company has also started to realize association
and transaction fee revenue based on activity of the foreign licensees, which
amounted to $15,000 in fiscal 1997.
50
NOTE 15 - INCOME TAXES
Comparative analysis of the provisions for income taxes follows:
Fiscal Years Ended July 31,
----------------------------------------------------
1997 1996 1995
-------------- ------------- -------------
(in thousands)
Current:
Federal $ 1,603 $ 607 $ 475
State 244 125 94
-------------- ------------- -------------
1,847 732 569
-------------- ------------- -------------
Deferred
Federal (76) 147 (40)
State (16) 29 (7)
-------------- ------------- -------------
(92) 176 (47)
-------------- ------------- -------------
$ 1,755 $ 908 $ 522
============== ============= =============
A reconciliation of the consolidated income tax expense on income per the U.S.
Federal Statutory rate to the reported income tax follows:
Fiscal Years Ended July 31,
-----------------------------------------
1997 1996 1995
------------ ----------- ------------
(in thousands)
Taxes at U.S. Federal
statutory rate $ 1,417 $ 757 $ 444
State income taxes 295 157 92
Other 43 (6) (14)
------------ ----------- ------------
$ 1,755 $ 908 $ 522
============ =========== ============
At July 31, 1997 and 1996, deferred tax (assets) liabilities consisted of the
following:
July 31,
----------------------------
1997 1996
------------ -------------
(in thousands)
Current deferred tax liabilities $ --- $ 1,253
Noncurrent deferred tax liabilities 101 265
Current deferred tax assets --- ---
Noncurrent deferred tax assets --- ---
Valuation allowance --- ---
------------ -------------
$ 101 $ 1,518
============ =============
On November 27, 1996, the 51% owner of Associated Reciprocal Traders, Inc.
("ART"), then 49% owned by the Company, informed the Company of its intent to
take immediate steps to distribute all the assets of ART to end the relationship
with the Company. The Company had previously intended to reinvest its share of
the earnings of this venture indefinitely and, accordingly, had not provided
income taxes on its share of ART's undistributed earnings. At July 31, 1995, the
cumulative amounts of reinvested income was approximately $1,590,000. As a
result of the perceived inability to continue to reinvest its share of ART's
earnings, the Company recognized a deferred provision for income taxes of
$1,247,000 during the fourth quarter of the fiscal year ended July 31, 1996,
which was reported as a reduction of the Company's share of equity in net income
51
(loss) of foreign affiliate in the statement of operations. This decreased net
income by $1,247,000, or $0.17 per share.
During fiscal 1997, the Company explored alternative ways of terminating the
relationship with the other stockholder of ART and during the quarter ended May
7, 1997, it was determined that this could be accomplished by the Company
purchasing the other stockholder's interest, in which case the Company would not
repatriate the foreign assets of ART. In the quarter ended May 7, 1997, the
Company reversed the deferred liability for income taxes of $1,247,000 that had
been recorded at July 31, 1997 as described above. On July 30, 1997, the Company
completed the purchase of the remaining 51% interest.
NOTE 16 - INCOME PER SHARE
Income per share of common stock is computed on the basis of the weighted
average shares of common stock outstanding, plus common equivalent shares
arising from the effect of dilutive stock options using the modified treasury
stock method, and net income increased for debt reduction and investment in
short-term paper from the hypothetical exercise of options. This modified
version of the treasury stock method, also referred to as "the 20% provision,"
is required if the number of shares issuable from the exercise of all
outstanding options and warrants exceeds 20% of the number of shares outstanding
at the end of the period.
Under the 20% provision, all options and warrants are assumed to be exercised
(3,737,000 shares at July 31, 1997) but an amount equal to only 20% of shares
outstanding (1,441,000 shares at July 31, 1997) may be assumed to be
repurchased, which results in incremental shares for the income per share
computation of 2,296,000 shares, which when added to 7,207,000 shares
outstanding at July 31, 1997, results in a total number of shares of 9,503,000
for the denominator in the income per share computation for the year ended July
31, 1997.
The numerator for the computation is equal to net income increased by a factor
equivalent to interest income or a reduction in interest expense that would
result from the use of funds that would be available from the conversion not
used to repurchase stock because of the 20% limitation. For the year ended July
31, 1997, that would result in an increase to net income from interest income
and reduction of interest expense, after tax effect, totaled $448,000. Because
of these increases in net income that are required by the 20% provision, income
per share cannot be directly computed using net income as reported in the
statement of operations.
The effect of the calculation of income per share using the 20% provision is to
significantly increase the denominator of the computation and to make a small
increase to the numerator because the earning of only an interest factor is
presumed on available excess funds. This results in a decrease in income per
share in comparison to income per share computed using the normal "treasury
stock method".
52
NOTE 17 - FOREIGN SUBSIDIARY
The Company has a wholly-owned foreign subsidiary, Associated Reciprocal
Traders, Inc. ("ART"), which engages in international business, including
commercial barter transactions as a buyer and seller of goods and services with
companies and businesses in the international corporate barter marketplace. In
1993 the Company purchased a 49% interest in ART and through July 31, 1996, the
Company accounted for its investment in and share of net income or loss of ART
by the equity method. All of the undistributed earnings of the foreign affiliate
were reinvested and were not expected to be remitted to the Company.
On November 27, 1996, the majority owner of ART informed the Company of its
intent to take immediate steps to distribute all the assets of ART and to end
the relationship with the Company. The Company had previously intended to
reinvest its share of the earnings of this venture indefinitely and,
accordingly, had not provided for income taxes on its share of ART's
undistributed earnings. As a result of the perceived inability to continue to
reinvest its share of ART's earnings, in the fourth quarter of fiscal 1996 the
Company recognized a deferred provision for income taxes of $1,247,000, which
reduced net income for the year ended July 31, 1996 by $0.17 per share. The
deferred tax accrual which was reported as a reduction of the Company's share of
equity in net income (loss) of foreign affiliate in the statement of operations
for the fiscal quarter ended July 31, 1996. Commencing August 1, 1996 and
through July 30, 1997, the Company accounted for its investment in ART by the
cost method.
During fiscal 1997, the Company explored alternative ways of terminating the
relationship with the other stockholder of ART and during the quarter ended May
7, 1997, it was determined that this could be accomplished by the Company
purchasing the other stockholder's interest, in which case the Company would not
repatriate the foreign assets of ART. In the quarter ended May 7, 1997, the
Company reversed the deferred liability for income taxes of $1,247,000 that had
been recorded at July 31, 1996 as described above.
On July 30, 1997, the Company completed the purchase of the remaining 51%
interest. The purchase price was $2,840,000, which was paid by conveyance of
certain of the Company's available-for-sale securities and investments in fine
art. The acquisition resulted in the purchase of the seller's interest in a
portfolio of marketable securities held by ART. The Company has fully
consolidated the assets and liabilities of ART in the consolidated balance sheet
at July 31, 1997. The previously owned 49% interest in the assets of ART is
carried in the consolidated balance sheet at July 31, 1997 based on historical
cost. The newly-purchased share has been accounted for by allocating the cost of
the purchase of the 51% interest to the underlying marketable securities based
on respective fair values.
During October 1997, ART acquired a 60% interest in 16 acres of improved but
undeveloped resort property known as the Villas Punta Ballena Samana Resort (the
"Samana Resort"), along with associated plans, engineering drawings, permits and
approvals for the resort, and a commitment for a construction loan of
approximately $40,000,000. The Samana Resort is located in the northeast corner
of the Dominican Republic on the Bay of Samana. The transaction was structured
as the purchase of a 60% equity interest in Villas Punta Ballena C. por A.
("VPB"), a Dominican Republic corporation, the holder of the Samana Resort
property. VPB has never had any business operations other than ownership of the
Samana Project.
53
The total purchase price consisted of cash of $1,250,000, ITEX Corporation
common stock to have a market value at time of issuance of $1,000,000, and
available-for-sale securities totaling $5,142,000 from the portfolio of ART. The
purchase price is to be paid in installments ranging from payments at the time
of contract signing to the final payment of ITEX Corporation common stock which
is due within five days of the commencement of substantial construction on the
property. The value of the acquired assets has been determined by independent
appraisal of the property.
ART had no operations in the fiscal year ended July 31, 1997. Following is
summary balance sheet data of ART as of July 31, 1996:
(in thousands)
Total assets $ 5,679
======================
Current liabilities $ 84
Stockholders' equity 5,595
----------------------
Total liabilities and equity $ 5,679
======================
The assets of ART as of July 31, 1996 consisted primarily of available-for-sale
securities, none of which were securities of ITEX Corporation.
Following is financial information for the Company's foreign subsidiary as of
July 31, 1997 and for the year then ended:
(In thousands)
Revenue................................ $ ---
==================
Income (loss) from operations.......... $ ---
==================
Identifiable assets.................... $ 6,415
==================
NOTE 18 - BUSINESS CONCENTRATIONS
One customer accounted for $6,150,000 or 53% of corporate trading revenue and
21% of total revenue for the year ended July 31, 1997.
One customer accounted for approximately $3,200,000 or 19% of corporate trading
revenue and 10% of total revenue for the year ended July 31, 1996.
Three customers accounted for approximately $6,200,000 or 44% of corporate trade
revenue and 26% of total operating revenues for the year ended July 31, 1995.
The Company maintains its major cash balances at one financial institution
located in Portland, Oregon. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At July 31, 1997, the Company's uninsured
cash balance totaled $713,000.
54
NOTE 19 - ACQUISITIONS
Acquisition of Global Exchange Network. During the fiscal year ended July 31,
1996, the Company acquired the assets and business of Global Exchange Network of
Irvine, California, including its membership base. The purchase price was
$385,000, which was paid $200,000 in cash and by the issuance of a 6% promissory
note for $185,000, payable in monthly installments of $8,331 including principal
and interest, commencing with thefirst such payment on September 1, 1996, with
monthly payments thereafter until the final payment on August 1, 1998. The
acquisition has been accounted for by the purchase method. The purchase price
was allocated to the following:
(in thousands)
Member lists $ 128
Noncompete covenant 257
--------------
$ 385
==============
The accompanying consolidated financial statements include operations of Global
from April 27, 1996, the date of acquisition.
Acquisition of Barter Exchange, Inc. (BEI) Trade Exchange. Effective March 1,
1995, ITEX entered into an Agreement to acquire all of the issued and
outstanding capital stock of Barter Exchange, Inc. (BEI) (a newly formed
corporation), from Inventory Merchandising Services, Inc. (IMS). Pursuant to the
Agreement, ITEX agreed to transfer and deliver to IMS 300,000 shares of
authorized but previously unissued common stock of ITEX. BEI is involved in the
retail barter industry in the Texas region.
The exchange of stock was accounting for using the purchase method of
accounting, and the results of operations of BEI have been included in ITEX's
consolidated financial statements subsequent to March 1, 1995. As of March 31,
1995, the fair market value of the 300,000 shares of ITEX common stock
approximated $900,000 and, accordingly, ITEX has used the fair market value of
the ITEX shares exchanged for purposes of purchase accounting. Goodwill
resulting from the acquisition is being amortized over 20 years on a
straight-line basis.
The price was allocated as follows:
(in thousands)
Accounts receivable $ 242
Goodwill 658
---------------
$ 900
===============
The accompanying consolidated financial statements include operations of the
subsidiary from March 1, 1995, the date of acquisition.
Acquisition of Travel Agents Hotel Guide. Effective February 10, 1995, ITEX
acquired all of the business assets of Travel Agent's Hotel Guide (TAHG) in
exchange for 125,000 shares of ITEX common stock valued at $328,125.
Subsequently, the Company transferred the rights to use of the name "Travel
Agents Hotel Guide". The Company continues to obtain hotel room nights in
exchange for advertising on the Company's web site. The purchase price was
allocated as follows:
(in thousands)
Fixed assets $ 35
Goodwill 293
---------------
$ 328
===============
55
The accompanying consolidated financial statements include operations of TAHG
for the period from February 10, 1995, the date of acquisition.
NOTE 20 - ACQUISITION OF 50% INTEREST IN BUSINESS EXCHANGE
INTERNATIONAL CORPORATION AND RELATED LITIGATION
On January 24, 1996, the Company acquired a 100% common stock interest in SLI,
Inc. ("SLI"), a Nevada corporation now known as IME, Inc., in exchange for the
issuance to SLI's former shareholders of 60,000 shares of the Company's common
stock valued at approximately $645,000. The Company then made a cash
contribution to the capital of SLI of $1,750,000 and made a loan of $300,000 to
SLI. Also on January 24, 1996, SLI purchased a 50% common stock interest in
Business Exchange International Corporation ("BXI"), a Nevada corporation,
pursuant to rights to purchase such interest that had been assigned to SLI by
the former shareholders of SLI. SLI paid $1,750,000 for the common interest in
BXI by the purchase of newly issued common stock of BXI and, in addition, SLI
loaned $300,000 to BXI. BXI owns and operates one of the leading organized
barter exchanges in the United States.
On February 12, 1996, a complaint was filed on behalf of the Company and its
wholly owned subsidiary, SLI, Inc., against Saul Yarmak, Stephen Friedland,
Business Exchange International Corp., BX International, Inc., Joel Sens, and
David Lawson. The complaint, filed in the Circuit Court of the State of Oregon
for Multnomah County, Case No. 9602-01076, asserted claims for breach of
contract, specific performance, declaratory judgment, fraud, defamation,
unlawful trade practices, and interference with economic relationships. It
sought to recover damages for allegedly disparaging remarks made by certain of
the defendants against ITEX and for a court ruling that SLI acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.
On December 20, 1996 SLI filed a motion for partial summary judgment requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange. If the court found in favor of SLI on these issues, the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade exchange or, alternatively, order the defendants to take whatever
steps are necessary to transfer the assets of the BXI trade exchange to BXI. On
March 12, 1997 the court ruled from the bench and granted SLI's motion for
partial summary judgment. On April 8, 1997, the court rejected objections filed
by the defendants to the proposed judgment and on April 21, 1997, a formal
judgment was entered in favor of SLI. The critical portion of the judgment
declares that BEI is the owner of the BXI Trade Exchange. The judgment also
awards certain supplemental relief to effectuate this declaration, including
requiring the defendants: (a) transfer all assets of the BXI Trade Exchange to
BEI, (b) to provide the court and SLI with certificates of title to reflect the
fact that BEI owns all assets of the BXI Trade Exchange, and (c) to preserve the
status quo by operating the BXI Trade Exchange in the usual and ordinary course
of business in conformity with all applicable laws and regulations.
On May 2, 1997, the defendants filed notices of appeal from the judgment entered
against them. Defendants concurrently filed a "Deposit of Instruments"
consisting of a "Bill of Sale" and a "Certificate of Ownership". The Bill of
Sale purports to convey all the assets of the BXI Trade Exchange to BEI upon
payment of $1,783,000 and if the judgment is affirmed on appeal. The Certificate
states that BEI will own the assets of the BXI Trade Exchange if the judgment is
affirmed on appeal.
56
The Company believes that these documents do not comply with the requirements of
the judgment. SLI immediately filed an objection to the sufficiency of the
documents and asked that the defendants be required to file a bond in a
sufficient sum to assure SLI that the judgment will be complied with when it is
upheld on appeal. A hearing to require a bond of between $2.5 million and $3.5
million or, alternatively, to appoint a receiver was heard on June 3, 1997. By
letter ruling dated June 30, 1997, the Circuit court judge: (a) ordered that in
order to obtain a stay pending appeal of the judgment, the defendants must post
a bond totaling $1.2 million and deposit an unconditional certificate of
ownership and bill of sale, and (b) awarded to SLI $193,000 in attorney fees and
$16,000 in costs. Pursuant to legal action subsequent to entry of the judgment,
the Court increased the attorney fees award to $218,000 and the costs award to
$21,000.
On September 15, 1997, the parties participated in a mediation program mandated
by the Oregon Court of Appeals. The parties and their attorneys met for several
hours with a neutral mediator. Mediation does not result in a binding resolution
of the disputes between the parties. However, the Company believes that the
mediation process was fruitful in that it resulted in a framework under which
the parties may yet be able to settle the disputes without exhausting the
litigation process. As part of the efforts at settling, SLI has agreed to
temporarily pause its actions in Nevada and California directed toward
preserving its interest in the BXI Trade Exchange.
NOTE 21 - 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
$18,000, $10,000 and $7,000 for the plan years ended December 31, 1996, 1995 and
1994, respectively.
The company has a bonus plan for its officers. Bonuses applicable to fiscal 1997
totaled $109,000.
N0TE 22 - COMMITMENTS AND CONTINGENCIES
The Company leases office facilities in Portland, Oregon; Orange County,
California; and St. Louis, Missouri. Future minimum rental commitments pursuant
to these leases are as follows:
(in thousands)
Fiscal Years Ending July 31,
1998 $ 193
1999 182
2000 183
2001 188
2002 78
Of the minimum rental commitment due in fiscal 1998, $185,000 is payable in cash
and $8,000 is payable in ITEX trade dollars.
57
N0TE 23 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
Carrying Amount Fair Value
--------------- ---------------
(in thousands)
Assets:
-------
Cash $ 813 $ 813
Trade dollars 786 786
Accounts receivable 1,084 1,084
Notes receivable, current portion 285 285
Available-for-sale securities 7,088 7,088
Liabilities:
------------
Accounts payable 246 246
Portion of receivables due to brokers 552 552
Current portion of long-term indebtedness 166 166
Long-term portion of long-term
indebtedness 26 26
Cash, trade dollars, 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.
Available-for sale securities. These have been valued using appropriate
valuation methodologies and available or quoted market prices.
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.
58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
a) 1. Financial Statements. The following financial statements are filed
as a part of this Form 10-K:
The Index to Consolidated Financial Statements is set out in Item 8
herein.
3. Exhibits
Articles of Incorporation and Bylaws (incorporated by reference
for Form 10 filed February 7, 1990)
10.1 Barter Exchange, Inc. contract dated March 1, 1995
(incorporated by reference from Form 8-K filed June 16, 1995)
10.2 Key Employees' Incentive Stock Option Plan (incorporated by
reference from Form S-8 effective August 24, 1995,
File No. 33-95900)
10.3 ITEX Corporation 1995-96 Key Employees' Stock Option Plan
(incorporated by reference from proxy materials filed April 12,
1996)
10.4 Contract with SLI, Inc. dated January 24, 1996 (incorporated
by reference from Form 8-K filed February 7, 1996)
10.5 Agreement for Purchase of ITEX Units by Wycliff Fund, Inc.,
dated as of January 1, 1996 ( incorporated by reference from
Form 10-K filed November 12, 1996)
10.6 Purchase and Sale Agreement with Pacific Mineral Resources,
Inc., dated July 30, 1997
10.7 Acquisition Agreement with Newcastle Services, Ltd., dated Jul
31, 1997
10.8 Stock Purchase Agreement with Villas Punta Ballena P. por
A. and others dated October 16, 1997 (incorporated by
reference from Form 8-K filed October 23, 1997)
21. Subsidiaries of the Company:
Barter Exchange, Inc., incorporated in Nevada
IME, Inc., incorporated in Nevada (previously known as SLI,
Inc.)
ITEX Marketing Services, Inc., incorporated in Nevada
Associated Reciprocal Traders, Ltd., incorporated in the
British Virgin Islands
23. Consent of Independent Certified Public Accountants
27. Financial Data Schedule for the Fiscal Year Ended July 31, 1997
59
Exhibit 10.6
PURCHASE AND SALE AGREEMENT
This PURCHASE AND SALE AGREEMENT (the "Agreement") is entered into
effective July 30, 1997 (the AEffective Date@), by and between Pacific Mineral
Resources, Inc., a Nevada corporation with principal offices at 1050 Flamingo,
Suite 134, Las Vegas, Nevada (ASeller@), and ITEX Corporation, a Nevada
corporation with principal offices at One Lincoln Center, P.O. Box 2309,
Portland, OR 97208-2309 (APurchaser@).
WHEREAS, Seller wishes to sell and Purchaser wishes to purchase all of
Seller's right, title and interest in and to certain non-metallic mineral
deposits for the consideration hereafter recited, all as more specifically
described below;
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the benefits to be derived by each party hereunder, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
expressly acknowledged, Seller and Purchaser agree as follows:
1. Purchase and Sale
Seller agrees to assign, transfer, set over and sell to Purchaser all
of Seller's right, title and interest in and to the non-metallic
mineral deposits (hereafter the "Properties") Properties which are
situated in the State of Washington and more particular described in
Exhibit "A" hereto which is incorporated herein by this reference.
2. Purchase Price
The purchase price for the Properties shall be US$6,495,000.00, payable
in the form of:
A. US$20,000 in cash, where $10,000 is payable at Closing and
$10,000 to be paid 30 days after Closing;
B. 130,000 shares of the newly issued common stock of ITEX
Corporation (the AShares@) in a transaction exempt from the
registration requirements of the Securities Act of 1933, as
amended (the "Act"). The Shares will be "restricted stock" as
that term is defined pursuant to the Act and will bear a
legend substantially to the effect that the Shares may not be
transferred without being registered under the Act or ITEX
Corporation receiving an opinion of counsel satisfactory to
ITEX Corporation that an exemption from registration is
available and will otherwise be subject to Rule 144 under the
Act;
AND
C. Various items set forth on Exhibit AB@ hereto which is incorporated
herein by this reference.
3. Closing and Deliveries
A. Closing Date. Unless otherwise agreed between the parties,
closing (the "Closing") shall occur at the office of Purchaser
on or before July 30, 1997, or at such other time and place as
shall be mutually agreed to in writing by the Parties.
B. Deliveries by Seller. At closing, Seller shall deliver the
following to Purchaser, in addition to all other steps and
actions as Purchaser may reasonably request or as may
otherwise by necessary to consummate the transaction
contemplated hereby.
(i) Properly executed Power of Attorney providing for
signature authority for the person whose name is affixed to
this Agreement on behalf of Pacific Mineral Resources, Inc.;
and
(ii) All certificates or other documents sufficient in the
judgment of Purchaser to demonstrate that the Properties which
are included in this transaction are legitimate and existing
interests and that said Properties will be transferrred to
Seller within a reasonable period of time at which time the
Properties will be recorded with the appropriate county, state
and federal authorities and thence transferred into the name
of Purchaser or that of its designee.
C. Deliveries by Purchaser. At closing, or as soon thereafter as
practicable, Purchaser shall deliver the following to Seller,
in addition to all steps and actions as Seller may reasonably
request or as may otherwise be necessary to consummate the
transaction contemplated hereby:
(i) A certificate or certificates for 130,000 restricted
shares of ITEX Corporation stock.
(ii) A bill of sale transferring all items set forth on
Exhibit AB@ free and clear of all liens and encumbrances. Said
goods shall be delivered at Purchaser=s primary place of
business, or such other place as the Parties may agree. Title
to and risk of loss of the items shall pass to Seller as of
the Closing date.
4. Representations and Warranties of Seller
Seller hereby represents and warrants to Purchaser that:
A. Representations of Seller Regarding Issuance of the Shares.
Seller hereby represents and warrants to Purchaser that:
(i) Seller is a corporation duly organized and existing under
the laws of the state of Nevada.
(ii) Seller acknowledges that the receipt of the Shares as
consideration involves a high degree of risk and further
acknowledges that it can bear the economic risk of receiving
the Shares as consideration, including the total loss of its
investment.
(iii) Seller understands that the issuance of the Shares is
being made pursuant to an exemption from registration under
state law and with the Securities and Exchange Commission
afforded by Section 4(2) of the Securities Act of 1933 (the
"Act") and/or Regulation D adopted by the Commission relating
to transactions by an issuer not involving any public
offering. Consequently, the Shares are "restricted securities"
as that term is defined under the federal securities laws and
the materials submitted to Seller have not been subject to the
review and comment by the Staff of the Commission, the
National Association of Securities Dealers, Inc. or any state
securities regulators. Therefore, ITEX is relying upon the
truth and accuracy of the representations, warranties,
agreements, acknowledgments and understandings of Seller set
forth herein and in order to determine the applicability of
such exemptions and the suitability of Seller to acquire the
Shares. As a consequence thereof, Seller understands that it
must bear the economic risks of receiving the Shares as
consideration for at least one year under Rule 144 under the
Act because the securities have not been registered under the
Act, and therefore are subject to restrictions on transfer
such that the securities may not be sold or otherwise
transferred unless they are registered under the Act and any
applicable state securities law or an exemption from such
registration is available.
(iv) Seller is sufficiently experienced in financial and
business matters to be capable of evaluating the merits and
risks of this investment, and to make an informed decision
relating thereto.
(v) In evaluating this investment, Seller acknowledges that
none of the information contained in this Agreement or
received from Purchaser constitutes legal or tax advice from
Purchaser or any of its representatives, and that Seller has
had full and complete opportunity to consult the legal, tax,
financial and other advisors of its choice.
(vi) Seller is acquiring the Shares for investment purposes
and has no present intention to sell the Shares. However,
because Seller has elected to report income under IRS
subchapter S, Seller does intend to convey the Shares to a
maximum of two of its shareholders who will be bound by the
same terms and representations as contained in this Agreement.
Seller agrees not to make any disposition of all or any
portion of the Shares unless and until there is in effect a
registration statement under the Act covering such proposed
disposition and such disposition is made in accordance with
such registration statement, or Seller shall have furnished
Purchaser with an opinion of counsel, satisfactory to
Purchaser and its counsel, that such disposition does not
require registration under the Act.
(vii) Seller is not an underwriter of, or dealer in, the
Shares; and Seller is not participating, pursuant to a
contractual agreement, in the distribution of the Shares other
than as set forth in 4.A.(vi) above.
(viii) The certificate representing the Shares acquired
hereunder will bear a legend on the face thereof in
substantially the following form:
"These securities have not been registered under the
Securities Act of 1933, and may not be offered, offered for
sale, or sold in the absence of an effective registration
statement under the Act or an opinion of counsel satisfactory
to the corporation that registration is not required."
(ix) Seller understands that no federal or state agency has
passed on or made any finding or determination relating to the
fairness for public investment in the Shares, or has passed or
made, or will pass on or make, any recommendation or
endorsement of the Shares.
(x) Seller is an "accredited investor" as defined in
Regulation D inasmuch as Seller is an entity in which all of
the equity owners are accredited investors (check if true):
XX the net worth (or joint net worth with spouse)
of all equity owners of Seller at the time of
execution of this Agreement exceeds $1,000,000.00.
the equity owners of Seller have
individual income in excess of $200,000.00 in each of
the two (2) most recent years or joint income with
spouse in excess of $300,000 in each of those years
and said equity owners of Seller have a reasonable
expectation of reaching the same income level in the
current year.
(xi) Seller acknowledges that it has received copies of all
Forms 10-K and 10-Q it has requested.
(xii) The foregoing representations and warranties are true
and accurate as of the date hereof, shall be true and accurate
as of the date of the delivery of the Shares, and shall
survive thereafter. If Seller has knowledge, prior to the
acceptance of this Agreement that any such representations and
warranties shall not be true and accurate in any respect,
Seller, prior to such acceptance, will give written notice of
such fact to Purchaser specifying which representations and
warranties are not true and accurate and the reasons therefor.
B. Seller the Owner. Seller represents and warrants that it is
the owner of the Properties described in Exhibit "A". Seller
further represents and warrants that the Properties have been
properly physically staked and recorded, that all applicable
fees and charges have been paid, and that all applicable laws
and regulations pertaining to the Properties have been
complied with by Seller.
C. Title and Related Matters. Seller has good and marketable
title to the Properties on Exhibit AA@ to this Agreement free
and clear of all mortgages, security interests, royalties,
liens, pledges, charges, or encumbrances, except (a) statutory
liens or claims not yet delinquent; and (b) such imperfections
of title and easements as do not, and will not, materially
detract from, or interfere with, the present or proposed use
of the properties subject thereto or affected thereby or
otherwise materially impair present business operations on
such properties.
D. Litigation and Proceedings. There are no actions, suits,
administrative or other proceedings pending or, to the
knowledge of Seller threatened by or against Seller affecting
the Properties described on Exhibit AA@ and to be transferred
to Purchaser as set forth in this Agreement, at law or in
equity, before any court or other governmental agency or
instrumentality, domestic or foreign, or before any arbitrator
of any kind. Seller does not have any knowledge of any default
on its part with respect to any judgment, order, writ,
injunction, decree, award, rule, or regulation of any court,
arbitrator, or governmental agency or instrumentality.
E. No Conflict with Other Instruments. The execution of this
Agreement and the consummation of the transaction contemplated
by this Agreement will not result in the breach of any term or
provision of, or constitute an event of default under any
material indenture, mortgage, deed of trust, or other material
contract, agreement, or instrument to which Seller is a party
or to which any of its properties or operations or the
Properties are subject.
F. Compliance with Laws, Rules and Regulations.
-------------------------------------------
With respect to the Properties, Seller is not in default with
respect to any order, writ, injunction, or decree of any court
or federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, and
there are no actions, suits, claims, proceedings or
investigations pending or, to the knowledge of Seller
threatened against it at law or in equity, or before or by any
territorial federal, state, municipal or other governmental
court, department, commission, board, bureau, agency or
instrumentality, in connection with the Properties. Purchaser
has complied in all material respects with all laws,
regulations, orders and state and federal regulatory filings
applicable to the Properties.
G. Consent of Third Parties. Seller will obtain the consent and
approval of any and all third parties for the conveyance
reflected by this Agreement, if any, and will provide
Purchaser with written evidence of all such consents and
approvals, to the reasonable satisfaction of Seller.
H. Information. No representation or warranty contained herein,
nor statement in any document, certificate or schedule
furnished or to be furnished pursuant to this Agreement by
Purchaser or in connection with the transaction contemplated
hereby, contains or contained any untrue statement of a
material fact, nor does or will omit to state a material fact
necessary to make any statement of fact contained herein or
therein not misleading.
I. Substitute Properties. Seller warrants that it will make
available certain Substitute Properties of equivalent or
greater value to Purchaser upon Purchaser's request if any
defect in recording or valuation of the Properties listed on
Exhibit "A" becomes apparent during the first six (6) months
after Closing.
5. Representations and Warranties of Purchaser
A. Seller hereby represents and warrants to Purchaser that:
(i) Organization. Purchaser is, and will be on the Closing
Date, a corporation duly organized, validly existing, and in
good standing under the laws of Nevada and has the corporate
power, and is and will be duly authorized, qualified,
franchised, and licensed under all applicable laws,
regulations, ordinances, and orders of public authorities, to
own all of its properties and assets and to carry on its
business in all material respects as it is now being
conducted, and there are no other jurisdictions in which it is
not so qualified in which the character and location of the
assets owned by it or the nature of the material business
transacted by it requires qualification, except where failure
to do so would not have a material adverse effect on its
business, operations, properties, assets, or condition. The
execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated by this
Agreement in accordance with the terms hereof will not,
violate any provision of Purchaser=s articles of incorporation
or bylaws, or other agreement to which it is a party or by
which it is bound.
(ii) Approval of Agreements. Purchaser has full power,
authority, and legal right and has taken, or shall take, all
action required by law, its articles of incorporation, bylaws,
and otherwise to execute and deliver this Agreement and to
consummate the transaction herein contemplated. The board of
directors of Purchaser has authorized and approved the
execution, delivery, and performance of this Agreement and the
transaction contemplated hereby. This Agreement has been duly
authorized, executed, and delivered by Purchaser and is the
legal, valid and binding obligation of Purchaser, enforceable
in accordance with its terms, except as such enforcement may
be limited by bankruptcy, insolvency, or other laws affecting
enforcement of creditors= rights generally and by general
principles of equity.
(iii) Financial Statements.
(a) Included in the quarterly and annual reports
filed by Purchaser with the Securities and Exchange
Commission are the balance sheets of Purchaser as of
the dates of each such report, and the related
statements of operations, stockholder=s equity and
cash flows for the periods indicated therein.
(b) All such financial statements have been prepared
in accordance with generally accepted accounting
principles consistently applied throughout the
periods involved. The balance sheets of Purchaser
present fairly, as of their respective dates, the
financial position of Purchaser. Purchaser did not
have, as of the date of any such balance sheets,
except as and to the extent reflected or reserved
against therein, any liabilities or obligations
(absolute or contingent) which should be reflected in
a balance sheet or the notes thereto prepared in
accordance with generally accepted accounting
principles, and all assets reflected therein present
fairly the assets of Purchaser, in accordance with
generally accepted accounting principles. The
statements of operations, stockholder=s equity, and
cash flows present fairly the financial position and
results of operations of Purchaser as of their
respective dates and for the respective periods
covered thereby. Purchaser maintains a standard
system of accounting established and maintained in a
manner permitting the preparation of financial
statements in accordance with generally accepted
accounting principles.
(iv) Information. The information concerning Purchaser set
forth in this Agreement is, as of the respective dates of such
information, complete and accurate in all material respects
and did not contain any untrue statement of a material fact or
omit to state a material fact required to make the statements
made, in light of the circumstances under which they were
made, not misleading. Purchaser shall cause all instruments,
documents, and other data to be updated up to and including
the Closing Date.
(v) Warranties Concerning the Shares. Purchaser hereby
warrants that the Shares are free from any and all
encumbrances, claims and restrictions not heretofore disclosed
in writing, or any other fact which would defeat, hinder,
diminish or affect in any way whatsoever the issuance, sale or
value of said Shares to Seller.
B. Title and Related Matters. Purchaser has good and marketable
title to the items on Exhibit AB@ as set forth in this
Agreement free and clear of all mortgages, security interests,
royalties, liens, pledges, charges, or encumbrances, except
(a) statutory liens or claims not yet delinquent; and (b) such
imperfections of title and easements as do not, and will not,
materially detract from, or interfere with, the present or
proposed use of the properties subject thereto or affected
thereby or otherwise materially impair present business
operations on such properties.
C. Litigation and Proceedings.
-----------------------------
There are no actions, suits, administrative or other
proceedings pending or, to the knowledge of Purchaser
threatened by or against Purchaser affecting the items on
Exhibit AB@ as set forth in this Agreement to be transferred
to Seller as set forth in this Agreement, at law or at equity,
before any court or other governmental agency or
instrumentality, domestic or foreign, or before any arbitrator
of any kind. Purchaser does not have any knowledge of any
default on its part with respect to any judgment, order, writ,
injunction, decree, award, rule, or regulation of any court,
arbitrator, or governmental agency or instrumentality.
D. No Conflict with Other Instruments. The execution of this
Agreement and the consummation of the transaction contemplated
by this Agreement will not result in the breach of any term or
provision of, or constitute an event of default under any
material indenture, mortgage, deed of trust, or other material
contract, agreement, or instrument to which Purchaser is a
party or to which any of its properties or operations are
subject.
6. Termination
This Agreement may be terminated any time prior to Closing:
(A) By Purchaser or Seller:
(i) With written notice prior to Closing if there shall
be any actual or threatened action or proceeding by
or before any court or any other governmental body
which shall seek to restrain, prohibit, or invalidate
the transaction contemplated by this Agreement and
which, in the judgment of such party giving notice to
terminate and based upon the advice of legal counsel,
make it inadvisable to proceed with the transactions
contemplated by this Agreement; or
(B) By Seller:
(i) With written notice pursuant hereto, on or prior to
Closing, if Purchaser fails to, or does not appear in
Seller's sole discretion, to be able to comply with
the covenants or agreements contained in this
Agreement, or if any of the representations or
warranties of Purchaser contained herein is, or
becomes, false or misleading or inaccurate in any
material respect.
(C) By Purchaser:
(i) With written notice prior to Closing if Seller fails
to comply with the covenants or agreements contained
in this Agreement; if Purchaser is not satisfied, in
Purchaser's sole discretion, as to the nature of any
contingent liabilities, if any, related to its
acquisition and ownership of the Properties; or if
any of the representations or warranties of Seller
contained herein or in such related agreements are,
or becomes, false or misleading or inaccurate in any
material respect.
7. Costs and Expenses
All costs and expenses in the proposed sale and transfer described in
this Agreement shall be borne by Purchaser and Seller in the following
manner:
(A) Attorneys Fees and Costs. Each party, Seller and Purchaser,
having been represented by their own attorney in this
transaction, shall pay the fees of its attorney, except as may
be expressly set forth herein to the contrary;
(B) Recording, Transfer and Publishing Fees. The cost of
recording, transferring and publishing any notice related to
the Properties required by applicable law and all attorney's
fees relating to compliance with said provisions, shall be
borne by Seller;
(C) Other Costs. Each party shall bear its reasonable share of all
other Closing costs and expenses arising from this Agreement.
9. Miscellaneous
(A) Authority. The persons executing this Agreement are duly
authorized to do so and each party has taken all action
required by law or otherwise to properly and legally execute
this Agreement.
(B) Notices. Any notice under this Agreement shall be deemed to
have been sufficiently given if sent by registered or
certified mail, postage prepaid, addressed as follows:
To Seller: Pacific Mineral Resources, Inc.
1050 Flamingo, Suite 134
Las Vegas, NV 84919
To Purchaser: ITEX Corporation
One Lincoln Center
P.O. Box 2309
Portland, OR 97208-2309
or to any other address which may hereafter be designated by
either party by notice given in such manner. All notices shall
be deemed to have been given as of the date of receipt.
(C) Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and no other prior
written or oral statement or agreement shall be recognized or
enforced.
(D) Severability. If a court of competent jurisdiction determines
that any clause or provision of this Agreement is invalid,
illegal or unenforceable, the other clauses and provisions of
the Agreement shall remain in full force and effect and the
clauses and provision which are determined to be void, illegal
or unenforceable shall be limited so that they shall remain in
effect to the extent permissible by law.
(E) Assignment. Neither party may assign this Agreement without
the express written consent of the other party; provided
however, that any such Assignment shall be binding on and
inure to the benefit of such successor or, in the event of
death or incapacity, on the heirs, executors, administrators
and successors of the assignor.
(F) Applicable Law. This agreement shall be governed by and
construed in accordance with the laws of the State of Oregon.
Venue shall lie only in the State and Federal Courts in and
for the County of Multnomah, State of Oregon as to all
disputes arising under this agreement, and such venue is
hereby consented to by the parties hereto.
(G) Attorneys' Fees. If any legal action or other preceding
(nonexclusively including arbitration) is brought for the
enforcement of or to declare any right or obligation under
this Agreement or as a result of a breach, default or
misrepresentation in connection with any of the provisions of
this Agreement, or otherwise because of a dispute among the
parties hereto, the prevailing party will be entitled to
recover actual attorneys' fees (including costs for appeals
and collection) and other costs incurred in such action or
proceeding, in addition to any other relief to which such
party may be entitled.
(H) No Third Party Beneficiary. Nothing in this Agreement,
expressed or implied, is intended to confer upon any person,
other than the parties hereto, or their successors, any rights
or remedies under or by reason of this Agreement, unless this
Agreement specifically states such intent.
(I) Counterparts. It is understood and agreed that this Agreement
may be executed in any number of identical counterparts, each
of which may be deemed an original for all purposes.
(J) Broker's or Finder's Fee. Purchaser and Seller warrant that
neither has incurred any liability, contingent or otherwise,
for brokers' for finders' fees or commissions relating to this
Agreement for which the other shall have responsibility.
Except as otherwise provided herein, all fees, costs and
expenses incurred by either party relating to this Agreement
shall be paid by the party incurring the same.
(K) Amendment or Waiver.
-------------------
Every right and remedy provided herein shall be cumulative
with every other right and remedy, either conferred herein, at
law, or in equity, and may be enforced concurrently herewith,
and no waiver by any party of the performance of any
obligation by the other shall be construed as a waiver of the
same or any other default then, theretofore, or thereafter
occurring or existing. At any time prior to the Effective
Date, this Agreement may be amended by a writing signed by all
parties hereto, with respect to any of the terms contained
herein, and any terms or condition of this Agreement may be
waived or the time for performance hereof may be extended by a
writing signed by the party or parties for whose benefit the
provision is intended.
(L) Headings. The section and subsection headings in this
Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of this
Agreement.
(M) Schedules: Knowledge. Each party is presumed to have full
knowledge of all information set forth in the other party's
schedules delivered pursuant to this Agreement. Whenever any
negative representation is made to the "knowledge" of any
party, it shall be deemed to be a representation that no
officer or director of such party, after reasonable
investigation, has any knowledge of such matters.
(N) Facsimile Transmission. A facsimile, telecopy or other
reproduction of this Agreement may be executed by one or more
parties hereto and such executed copy may be delivered by
facsimile of similar instantaneous electronic transmission
device pursuant to which the signature of or on behalf of such
party can be seen, and such execution and delivery shall be
considered valid, binding and effective for all purposes. At
the request of any party hereto, all parties agree to execute
an original of this Agreement as well as any facsimile,
telecopy or other reproduction hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
"Seller"
PACIFIC MINERAL RESOURCES, INC.
By /s/
Name & Title
"Purchaser"
ITEX CORPORATION
By /s/
GRAHAM H. NORRIS, President and CEO
EXHIBIT "A"
Properties
Four separate unpatented mineral properties commonly referred to as:
1. BOSSBURG #1
2. SLATE CREEK #1 AND SLATE CREEK #2
3. BANKG MOUNTAIN #1
4. O/S #1 AND O/S #2
Exhibit B
List of Items
1. Fine Art Paintings listed on Schedule 1 hereto and valued at $500,000.00
2. Fine Art Sculptures listed on Schedule 2 hereto and valued at $2,300,000.00
3. Spot radio advertisements listed on Schedule 3 hereto and valued at
$1,000,000.00
4. Other Media credits listed on Schedule 4 hereto and valued at $500,000.00
5. Television time due bills from American Independent Network listed on
Schedule 5 hereto and valued at $1,100,000.00
6. Hotel room night due bill from Palm Villas, Florida, listed on Schedule 6
hereto and valued at $750,000.00
Exhibit 10.7
Acquisition Agreement
THIS ACQUISITION AGREEMENT (AAgreement@) is entered into with an
effective date of July 31, 1997 (the AEffective Date@), by and between ITEX
Corporation, a Nevada Corporation with principal offices at One Lincoln Center,
P.O. Box 2309, Portland, OR 97208-2309 (AITEX@), and Newcastle Services Ltd.,
Inc., a non-U.S. corporation with principal offices at P.O. Box 623, Bank of
Nova Scotia Building, Main Street, Charleston, Nevis, West Indies (ANewcastle@).
Premises
A. ITEX and Newcastle have negotiated a transaction whereby ITEX will
acquire the fifty-one percent (51%) interest in Associated Reciprocal Traders,
(AART@), a foreign corporation, owned by Newcastle in exchange for stock of Sky
Scientific, Inc. and certain art work owned by ITEX and as set forth in this
Agreement.
B. The Parties have reached an agreement as to the business terms of
the transaction and desire to set forth the details in this Agreement.
Agreement
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the Parties agree as follows:
I. ACQUISITION
Newcastle shall sell to ITEX and ITEX shall purchase from Newcastle all
of Newcastle=s interest in ART. Newcastle=s interest constitutes
fifty-one percent (51%) of the issued and outstanding stock of ART and
will hereafter be referred to as the AART Stock@.
II. PURCHASE PRICE
A. The purchase price for the ART Stock shall be US$3,327,000,
payable in the form of:
(i) Transfer to Newcastle of all of ITEX=s right, title and
interest in and to the common and preferred stock of Sky
Scientific, Inc., a U.S. corporation, owned by ITEX, the
precise number and make up of which stock is more particularly
described on Exhibit 1 attached hereto; AND
(ii) Transfer to Newcastle of certain art work from among the
inventory of such owned by ITEX and having a total appraised
value of $590,000, the actual items of which art work are
listed on Exhibit 2 attached hereto, and which will be shipped
at the expense of ITEX as reasonably directed by Newcastle.
III. CLOSING
A. The closing for the transaction shall be ________________,
1997, (the AClosing Date@) at 10:00 am at ITEX=s principal
office in Portland, Oregon, or at such other time and place as
shall be mutually agreed to in writing by the Parties.
B. Deliveries by Newcastle. Newcastle shall deliver the following
to ITEX, in addition to all other steps and actions as ITEX
may reasonably request or as may otherwise by necessary to
consummate the transaction contemplated hereby.
(i) Certificates of good standing from the appropriate
authorities, issued as of a date within five (5) days prior to
the Closing Date, certifying that ART and Newcastle are in
good standing as corporations in the jurisdictions in which
they are incorporated.
(ii) Copies of the resolutions of Newcastle=s board of
directors or other governing body authorizing the execution
and performance of this Agreement.
(iii) All certificates or other documents representing
Newcastle=s ownership of its 51% interest in ART together with
such stock powers or other instruments necessary to transfer
said certificates or documents on the books of ART.
C. Deliveries by ITEX. ITEX shall deliver the following to
Newcastle, in addition to all steps and actions as Newcastle
may reasonably request or as may otherwise be necessary to
consummate the transaction contemplated hereby:
(i) All certificates representing ITEX=s ownership of the Sky
Scientific, Inc. stock, together with such stock powers
necessary to transfer said certificates or documents on the
books of Sky Scientific, Inc.
(ii) A bill of sale transferring the works of art as listed on
Schedule 2 free and clear of all liens and encumbrances. Said
works of art shall be shipped or transferred as reasonably
directed by Newcastle at the sole expense of ITEX. However,
title to and risk of loss of the works of art shall pass to
Newcastle as of the Closing Date.
IV. TERMINATION
A. This Agreement may be terminated by the board of directors of
either Party at any time prior to the Closing Date if:
(i) A review of all financial and corporate information and
proof of ownership of assets transferred and any other
documents that may be reasonably requested by a Party to make
an accurate determination of the status and value of said
assets and to discharge the obligation of due diligence,
causes the Party to make a reasonable determination that the
transaction proposed in this Agreement is not in its best
interests. Should either Party so determine, this Agreement
may be terminated, with no further obligation, or an amendment
hereto agreeable to both Parties may be proposed; OR
(ii) There shall be any actual or threatened action or
proceeding before any court or any governmental body which
shall seek to restrain, prohibit, or invalidate the
transaction contemplated by this Agreement and which, in the
judgment of the board of directors of either Party, made in
good faith and on the advice of legal counsel, makes it
inadvisable to proceed with the acquisition contemplated by
this Agreement; OR
(iii) Any of the transactions contemplated herein are
disapproved by any regulatory authority whose approval is
required to consummate such transactions, or in the judgment
of the board of directors of either Party, made in good faith
and based on the advice of counsel, there is substantial
likelihood that any such approval will not be obtained or will
be obtained only on a condition or conditions which would be
unduly burdensome, making it inadvisable to proceed with the
acquisition.
B. In the event of termination under this Article, no obligation,
right, or liability shall arise hereunder, and each Party
shall bear all of the expenses incurred by it in connection
with the negotiation, preparation, and execution of this
Agreement and the transaction contemplated hereby.
V. REPRESENTATIONS, WARRANTIES, & COVENANTS OF NEWCASTLE
Newcastle represents, warrants and covenants as follows:
A. Organization.
------------
Newcastle and ART are, and will be on the Closing Date,
corporations duly organized, validly existing, and in good
standing under the laws of the jurisdiction in which each is
incorporated and each has the corporate power, and is and will
be duly authorized, qualified, franchised, and licensed under
all applicable laws, regulations, ordinances, and orders of
public authorities to carry on its business in all material
respects as it is now being conducted. The execution and
delivery of this Agreement does not, and the consummation of
the transactions contemplated by this Agreement in accordance
with the terms hereof will not, violate any provision of
Newcastle=s or ART's articles of incorporation or bylaws, or
other agreement to which either is a party or by which either
is bound.
B. Approval of Agreements. Newcastle has full power, authority,
and legal right and has taken, or shall take, all action
required by law, its articles of incorporation, bylaws, and
otherwise to execute and deliver this Agreement and to
consummate the transaction herein contemplated. This Agreement
has been duly authorized, executed, and delivered by Newcastle
and is the legal, valid and binding obligation of Newcastle,
enforceable in accordance with its terms.
C. Capitalization.
--------------
The authorized capitalization of ART consists of
_______________ shares of preferred stock, par value $
________ per share, of which ____________ are issued and
outstanding as of the Closing Date and __________________
shares of Common Stock, par value $_______ per share, of which
__________________ are issued and outstanding as of the
Closing Date, (the AART Stock@). All issued and outstanding
shares of ART are legally issued, fully paid, and
nonassessable and not issued in violation of the preemptive or
other right of any person as of the Closing Date. There are no
dividends or other amounts due or payable with respect to any
of the shares of capital stock of ART.
D. Financial Statements.
(i) Prior to the Closing Date, Newcastle will provide to ITEX
the following with respect to ART:
(1) financial statements (audited, if available), and
financial documentation for the three (3) years prior to the
Effective Date and all historical financial statements and
financial information whether audited or not;
(2) pro-forma financial information;
(3) due-diligence materials;
(4) articles of incorporation and by-laws;
(5) business plans;
(6) proof of ownership of assets, accounts
receivable, bank statements, and copies of deeds, liens,
mortgages;
(7) a certificate of good standing issued by the
jurisdiction of incorporation;
(8) any other documents that may be reasonably
required by ITEX to complete its due diligence for the
transactions contemplated in this Agreement and to permit ITEX
to operate ART upon transfer of the ART stock to ITEX.
(ii) Newcastle warrants that all financial statements it
provides have been prepared in accordance with generally
accepted accounting principles consistently applied throughout
the periods involved as explained in the notes to such
financial statements. The ART balance sheets present fairly,
in all material respects, as of their respective dates, the
financial position of ART. ART did not have, as of the date of
any such balance sheets, except as and to the extent reflected
or reserved against therein, any liabilities or obligations
(absolute or contingent) which should be reflected in a
balance sheet or the notes thereto prepared in accordance with
generally accepted accounting principles under which they were
prepared, and all assets reflected therein present fairly the
assets of ART in accordance with generally accepted accounting
principles under which they were prepared. The consolidated
statements of operations, shareholders= equity and cash flows
present fairly the consolidated financial position and results
of operations of ART as of their respective dates and for the
respective periods covered thereby. Newcastle shall cause ART
to continue to maintain a standard system of accounting
established and maintained in a manner permitting the
preparation of financial statements in accordance with
generally accepted accounting principles under which they were
prepared.
(iii) The books and records, financial and otherwise, of ART
are in all material respects complete and correct and have
been maintained in accordance with sound business and
bookkeeping practices so as to accurately and fairly reflect,
in reasonable detail, the transactions in and dispositions of
the assets of ART. ART has maintained a system of internal
accounting controls sufficient to provide reasonable
assurances that
(1) any transactions have been and are executed in
accordance with management=s general or specific
authorization;
(2) such transactions are recorded as necessary to
permit the preparation of financial statements in conformity
with generally accepted accounting principles or any other
criteria applicable to such statements and to maintain
accountability for assets;
(3) access to assets is permitted only in accordance
with management=s general or specific authorization; AND
(4) the recorded accountability for assets is
compared with the existing assets at reasonable intervals, and
appropriate action is taken with respect to any differences.
(iv) ART has filed or will have filed as of the Closing Date
all tax returns required to be filed by it from inception to
the Closing Date. All such returns and reports are accurate
and correct in all material respects. ART has no liabilities
with respect to the payment of any taxes (including any
deficiencies, interest, or penalties) accrued for or
applicable to the period ended on the date of the most recent
audited balance sheet and adequately provided for, and all
such dates and years and periods prior thereto and for which
ART may at said date have been liable in its own right or as
transferee of the assets of, or as successor to, any other
corporation or entity, except for taxes accrued but not yet
due and payable, and no deficiency assessment or proposed
adjustment of any such tax return is pending, proposed, or
contemplated. ART has not made any election pursuant to the
provisions of any applicable tax laws (other than elections
that relate solely to methods of accounting, depreciation, or
amortization) that would have a material adverse effect on
ART, its financial condition, its business as presently
conducted or proposed to be conducted, or any of its
respective properties or material assets. Except as disclosed,
there are no tax liens upon any of the assets of ART, and
there are no outstanding agreements or waivers extending the
statutory period of limitation applicable to any tax return of
ART.
E. Information. The information concerning ART and Newcastle set
forth in this Agreement and in any Exhibits attached hereto
are, as of the respective dates of such information, complete
and accurate in all material respects and did not contain any
untrue statement of a material fact or omit to state a
material fact required to make the statements made, in light
of the circumstances under which they were made, not
misleading. Newcastle shall cause all instruments, documents,
and other data to be updated after the Effective Date up to
and including the Closing Date.
F. No Options or Warrants. There are no warrants or options,
other calls, or commitments of any character relating to the
authorized and unissued stock of ART as of the Closing Date.
In addition, from and after the execution of this Agreement,
ART will not issue any additional stock without the written
consent of ITEX.
G. Absence of Certain Changes or Events. Except as set forth in
Schedule 5G, herein, since the date of the most recent ART
balance sheet described in Article V.D, including the
additional information referred to in Article V.E:
(i) There has not been:
(1) any material adverse change in the business,
operations, properties, level of inventory, assets, or
condition of ART taken as a whole, OR
(2) any damage, destruction, or loss to ART (whether
or not covered by insurance) materially and adversely
affecting the business, operations, properties, assets, or
conditions of ART taken as a whole;
(ii) ART has not:
(1) amended its articles of incorporation or bylaws;
(2) declared or made, or agreed to declare or make,
any payment or dividends or distributions of any assets of any
kind whatsoever to stockholders or purchased or redeemed, or
agreed to purchase or redeem, any of its capital stock;
(3) waived any rights of value which in the aggregate
are extraordinary or material considering the business of ART;
(4) made any material change in its method of
management, operation, or accounting;
(5) entered into any other material transactions;
(6) made any accrual or arrangement for or payment of
bonuses or special compensation of any kind or any severance
or termination pay to any present or former officer or
employee;
(7) increased the rate of compensation payable or to
become payable by it to any of its officers or directors or
any of its employees whose monthly compensation exceeds One
Thousands Dollars (US$1,000); OR
(8) made any increase in any profit-sharing, bonus,
deferred compensation, insurance, pension, retirement, or
other employee benefit plan, payment, or arrangement made to,
for, or with its officers, directors, or employees;
(iii) ART has not:
(1) granted or agreed to grant any options, warrants,
or other rights for its stocks, bonds, or other corporate
securities calling for the issuance thereof;
(2) borrowed or agreed to borrow any funds or
incurred, or become subject to, any material obligation or
liability (absolute or contingent) except liabilities incurred
in the ordinary course of business;
(3) paid any material obligation or liability
(absolute or contingent) other than current liabilities
reflected in or shown on the most recent ART balance sheet and
current liabilities incurred since that date in the ordinary
course of business;
(4) sold or transferred, or agreed to sell or
transfer, any of its assets, properties, or rights (except
assets, properties, or rights not used or useful in its
business which, in the aggregate, are of a value less than
US$5,000);
(5) made or permitted any amendment or termination of
any contract, agreement, or license to which it is a party if
such amendment or termination is material; OR
(6) issued, delivered, or agreed to issue or deliver
any stock, bonds, or other corporate securities including
debentures (whether authorized and unissued or held as
treasury stock);
AND
(iv) To the best knowledge of ART is not subject to any law or
regulation which materially and adversely affects, or in the
future may adversely affect, the business, operations,
properties, or assets of ART.
H. Title and Related Matters.
-------------------------
Except as disclosed in Schedule 5H hereto or the most recent
ART balance sheet and the notes thereto, ART has good and
marketable title to all of its properties, inventory,
interests in properties, and assets, which are reflected in
the most recent ART balance sheet or acquired after that date
(except those sold or otherwise disposed of since such date in
the ordinary course of business), free and clear of all
mortgages, security interests, royalties, liens, pledges,
charges, or encumbrances, except (a) statutory liens or claims
not yet delinquent; and (b) such imperfections of title and
easements as do not, and will not, materially detract from, or
interfere with, the present or proposed use of the properties
subject thereto or affected thereby or otherwise materially
impair present business operations on such properties.
I. Litigation and Proceedings. Except as set forth in Schedule 5I
hereto, there are no actions, suits, administrative or other
proceedings pending or, to the knowledge of Newcastle or ART
threatened by or against ART or affecting ART or its
properties, at law or at equity, before any court or other
governmental agency or instrumentality, domestic or foreign,
or before any arbitrator of any kind. Newcastle does not have
any knowledge of any default on its part or the part of ART
with respect to any judgment, order, writ, injunction, decree,
award, rule, or regulation of any court, arbitrator, or
governmental agency or instrumentality.
J. Contracts. Except as set forth in Schedule 5J hereto:
(i) All contracts, agreements, franchises, license agreements,
and other commitments to which ART is a party or by which its
properties are bound and which are material to the operations
or financial condition of ART are valid and enforceable by ART
in all material respects;
(ii) Neither Newcastle nor ART is a party to or bound by, and
its properties are not subject to, any material contract,
agreement, other commitment or instrument; any charter or
other corporate restriction; or any judgment, order, writ,
injunction, decree, or award which materially and adversely
affects, or in the future may (as far as Newcastle can now
foresee) materially and adversely affect, the business,
operations, properties, assets, or condition of ART;
AND
(iii) ART is not a party to any oral or written:
(1) contract for the employment of any officer,
director, or employee which is not terminable on thirty (30)
days- (or less) notice;
(2) agreement, contract, or indenture relating to the
borrowing of money;
(3) guarantee of any obligation, other than one on
which ART is a primary obligor, for the borrowing of money or
otherwise, excluding endorsements made for collection and
other guarantees of obligations, which, in the aggregate do
not exceed One Thousand Dollars (US$1,000);
(4) consulting or other similar contract with an
unexpired term for more than one year or providing for
payments in excess of One Thousand Dollars (US$1,000) in the
aggregate;
(5) agreement with any present or former officer of
ART, OR
(6) contract, agreement, or other commitment
involving payments by it of more than One Thousand Dollars
(US$1,000), in the aggregate.
K. Material Contract Defaults. ART is not in default in any
material respect under the terms of any outstanding contract,
agreement, lease, or other commitment which is material to its
business, operations, properties, assets, or condition taken
as a whole, and there is no event of default or other event
which, with notice and lapse of time or both, would constitute
a default in any material respect under any such contract,
agreement, lease, or other commitment in respect under any
such contract, agreement, lease, or other commitment in
respect of which ART has not taken adequate steps to prevent
such a default from occurring.
L. No Conflict with Other Instruments. The execution of this
Agreement and the consummation of the transaction contemplated
by this Agreement will not result in the breach of any term or
provision of, or constitute an event of default under, any
material indenture, mortgage, deed of trust, or other material
contract, agreement, or instrument to which Newcastle or ART
is a party or to which any of the properties or operations of
either is subject.
M. Governmental Authorization. ART has all licenses, franchises,
permits, and other governmental authorizations that are
legally required to enable it to conduct its businesses in all
material respects as conducted on the date of this Agreement.
No authorization, approval, consent, or order of, or
registration, declaration, or filing with, any court or other
governmental body is required in connection with the execution
and delivery by Newcastle of this Agreement and the
consummation by Newcastle or ART of the transactions
contemplated hereby.
N. Compliance with Laws and Regulations. Newcastle and ART have
complied with all applicable statutes and regulations of any
federal, state, or other governmental entity or agency
thereof, except to the extent that noncompliance would not
materially and adversely affect the business, operations,
properties, assets, or condition of ART taken as a whole or
except to the extent that noncompliance would not result in
the occurrence of any material liability for ART.
O. Insurance. All of the insurable properties of ART are insured
for its benefit in the amount of full replacement value
(subject to reasonable deductibles) against losses due to fire
and other casualty, with extended coverage, and other risks
customarily insured against by persons operating similar
properties are located and under valid and enforceable
policies issued by insurers of recognized responsibility. Such
policy or policies containing substantially equivalent
coverage will be outstanding and in full force at the Closing
Date, and copies of said policy or policies have been or will
be, prior to Closing, delivered to ITEX.
VI. REPRESENTATIONS, COVENANTS, & WARRANTIES OF ITEX
ITEX represents and warrants as follows:
A. Organization.
------------
ITEX is, and will be on the Closing Date, a corporation duly
organized, validly existing, and in good standing under the
laws of the State of Nevada, United States of America, and has
the corporate power, and is and will be duly authorized,
qualified, franchised, and licensed under all applicable laws,
regulations, ordinances, and orders of public authorities, to
own all of its properties and assets and to carry on its
business in all material respects as it is now being
conducted, and there are no other jurisdictions in which it is
not so qualified in which the character and location of the
assets owned by it or the nature of the material business
transacted by it requires qualification, except where failure
to do so would not have a material adverse effect on its
business, operations, properties, assets, or condition. The
execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated by this
Agreement in accordance with the terms hereof will not,
violate any provision of ITEX=s articles of incorporation or
bylaws, or other agreement to which it is a party or by which
it is bound.
B. Approval of Agreements.
----------------------
ITEX has full power, authority, and legal right and has taken,
or shall take, all action required by law, its articles of
incorporation, bylaws, and otherwise to execute and deliver
this Agreement and to consummate the transaction herein
contemplated. The board of directors of ITEX has authorized
and approved the execution, delivery, and performance of this
Agreement and the transaction contemplated hereby. This
Agreement has been duly authorized, executed, and delivered by
ITEX and is the legal, valid and binding obligation of ITEX,
enforceable in accordance with its terms, except as such
enforcement may be limited by bankruptcy, insolvency, or other
laws affecting enforcement of creditors= rights generally and
by general principles of equity.
C. Financial Statements.
(i) Included in the quarterly and annual reports files with
the Securities and Exchange Commission are the balance sheets
of ITEX as of the dates of each such report, and the related
statements of operations, stockholder=s equity and cash flows
for the periods indicated therein.
(ii) All such financial statements have been prepared in
accordance with generally accepted accounting principles
consistently applied throughout the periods involved. The
balance sheets of ITEX present fairly, as of their respective
dates, the financial position of ITEX. ITEX did not have, as
of the date of any such balance sheets, except as and to the
extent reflected or reserved against therein, any liabilities
or obligations (absolute or contingent) which should be
reflected in a balance sheet or the notes thereto prepared in
accordance with generally accepted accounting principles. and
all assets reflected therein present fairly the assets of
ITEX, in accordance with generally accepted accounting
principles. The statements of operations, stockholder=s
equity, and cash flows present fairly the financial position
and results of operations of ITEX as of their respective dates
and for the respective periods covered thereby. ITEX maintains
a standard system of accounting established and maintained in
a manner permitting the preparation of financial statements in
accordance with generally accepted accounting principles.
D. Information. The information concerning ITEX set forth in this
Agreement and in any Schedules attached hereto is, as of the
respective dates of such information, complete and accurate in
all material respects and did not contain any untrue statement
of a material fact or omit to state a material fact required
to make the statements made, in light of the circumstances
under which they were made, not misleading. ITEX shall cause
all instruments, documents, and other data to be updated after
the Effective Date up to and including the Closing Date.
E. Title and Related Matters. Except as disclosed in Schedule 6E
hereto or the most recent audited ITEX balance sheet and the
notes thereto, ITEX has good and marketable title to:
(i) the common and preferred stock of Sky Scientific, Inc.
as set forth in this Agreement; and
(ii) all art work as set forth in this Agreement
free and clear of all mortgages, security interests,
royalties, liens, pledges, charges, or encumbrances, except
(a) statutory liens or claims not yet delinquent; and (b) such
imperfections of title and easements as do not, and will not,
materially detract from, or interfere with, the present or
proposed use of the properties subject thereto or affected
thereby or otherwise materially impair present business
operations on such properties.
F. Litigation and Proceedings.
--------------------------
Except as set forth in Schedule 6F hereto, there are no
actions, suits, administrative or other proceedings pending
or, to the knowledge of ITEX threatened by or against ITEX
affecting the property to be transferred to Newcastle as set
forth in this Agreement, at law or at equity, before any court
or other governmental agency or instrumentality, domestic or
foreign, or before any arbitrator of any kind. ITEX does not
have any knowledge of any default on its part with respect to
any judgment, order, writ, injunction, decree, award, rule, or
regulation of any court, arbitrator, or governmental agency or
instrumentality.
G. No Conflict with Other Instruments. The execution of this
Agreement and the consummation of the transaction contemplated
by this Agreement will not result in the breach of any term or
provision of, or constitute an event of default under, any
material indenture, mortgage, deed of trust, or other material
contract, agreement, or instrument to which ITEX is a party or
to which any of its properties or operations are subject.
H. Governmental Authorization. ITEX has all licenses, franchises,
permits, and other governmental authorizations that are
legally required to enable it to conduct its businesses in all
material respects as conducted on the date of this Agreement.
No authorization, approval, consent, or order of, or
registration, declaration, or filing with, any court or other
governmental body is required in connection with the execution
and delivery by ITEX of this Agreement and the consummation by
ITEX of the transactions contemplated hereby.
I. Compliance with Laws and Regulations. ITEX has complied with
all applicable statutes and regulations of any federal, state,
or other governmental entity or agency thereof, except to the
extent that noncompliance would not materially and adversely
affect the business, operations, properties, assets, or
condition of ITEX taken as a whole or except to the extent
that noncompliance would not result in the occurrence of any
material liability for ITEX.
J. Insurance. All of the art work to be transferred to Newcastle,
as set forth in this Agreement, is insured for ITEX=s benefit
in the amount of full appraised value (subject to reasonable
deductibles) against losses due to fire and other casualty,
with extended coverage, and other risks customarily insured
against by persons operating similar properties are located
and under valid and enforceable policies issued by insurers of
recognized responsibility.
VII. SPECIAL COVENANTS TO BE SATISFIED PRIOR TO CLOSING
A. Activities of Newcastle, ART and ITEX.
(i) From and after the date of this Agreement until the
Closing Date and except as set forth in the respective
schedules to be delivered by Newcastle and ITEX pursuant
hereto or as permitted and contemplated by this Agreement,
Newcastle, ART and ITEX shall each:
(1) carry on its business in substantially the same
manner as it has heretofore;
(2) maintain in full force and effect insurance
comparable in amount and in scope of coverage to that now
maintained by it;
(3) perform in all material respects all of its
obligations under material contracts, leases, and instruments
relating to or affecting its assets, properties, and business;
(4) use its best efforts to maintain and preserve its
business organization intact, to retain its key employees, and
to maintain its relationships with its material suppliers and
customers;
(5) duly and timely file for all taxable periods on
or prior to the Closing Date all tax returns required to be
filed by or on behalf of such entity or for which such entity
may be held responsible and shall pay, or cause to pay, all
taxes required to be shown as due and payable during the
period commencing on the date of this Agreement and ending on
the Closing Date. All such tax returns shall be prepared in a
manner consistent with the preparation of prior years= tax
returns except as required by law or as agreed to by the
parties hereto prior to the filing thereof;
(6) fully comply with and perform in all material
respects all obligations and duties imposed on it by all
federal, state, county, and local laws and all rules,
regulations, and orders imposed by federal, state, county, and
local governmental authorities.
(ii) From and after the date of this Agreement and except as
provided herein until the Closing Date, Newcastle shall NOT
permit ART to:
(1) make any change in their articles of
incorporation or bylaws;
(2) take any action described in Article V.F,
regarding options or warrants;
(3) enter into or amend any contract, agreement, or
other instrument of any of the types described in such party=s
schedules, except that a party may enter into or amend any
contract, agreement, or other instrument in the ordinary
course of business; OR
(4) enter into any agreement, waiver, or other
arrangement providing for an extension of time with respect to
payment by, or assessment against, such entity or any of its
subsidiaries of any tax due and payable with respect to the
period commencing on the date of this Agreement and ending on
the Closing Date.
B. Indemnification by ITEX. ITEX shall indemnify and hold
harmless Newcastle and its directors, officers and employees,
from and against any and all losses, claims, damages,
expenses, liabilities, or actions to which any of them may
become subject under applicable law that arise out of or are
based upon actions or omissions of ART subsequent to the
transfer of the ART Stock to ITEX as set forth in this
Agreement.
This indemnity agreement shall remain operative and in full
force and effect, regardless of any investigation made by or
on behalf of Newcastle and shall survive the consummation of
the transaction contemplated by this Agreement.
C. Indemnification by Newcastle. Newcastle shall indemnify and
hold harmless ITEX and its directors, officers and employees,
from and against any and all losses, claims, damages,
expenses, liabilities, or actions to which any of them may
become subject under applicable law that arise out of or are
based upon actions or omissions of ART prior to the transfer
of the ART Stock to ITEX as set forth in this Agreement.
This indemnity agreement shall remain operative and in full
force and effect, regardless of any investigation made by or
on behalf of ITEX and shall survive the consummation of the
transaction contemplated by this Agreement.
D. Third-Party Consents. Newcastle and ITEX agree to cooperate
with each other in order to obtain any third-party consents to
this Agreement and the transaction herein contemplated that
are required.
VIII. CONDITIONS PRECEDENT TO OBLIGATIONS OF ITEX
The obligations of ITEX under this Agreement are subject to the
satisfaction at or before the Closing Date, of the following
conditions:
A. Accuracy of Representations. The representations and
warranties made by Newcastle in this Agreement were true when
made and shall be true at the Closing Date (except for changes
therein permitted by this Agreement), and Newcastle shall have
performed or complied with all covenants and conditions
required by this Agreement to be performed or complied with by
Newcastle prior to or at the Closing.
B. No Material Adverse Change. Prior to the Closing Date, there
shall not have occurred any material adverse change in the
financial condition, business, or operations of ART, nor shall
any event have occurred which, with the lapse of time or the
giving of notice, may cause or create any material adverse
change in the financial condition, business, or operations of
ART.
C. Good Standing. ITEX shall receive a certificate of good
standing from the appropriate authorities, dated within five
(5) days prior to the Closing Date, certifying that ART is in
good standing as a corporation of the jurisdiction wherein it
is incorporated.
D. Other Items. ITEX shall have received such further documents,
certificates, or instruments relating to the transaction
contemplated hereby as ITEX may reasonably request.
IX. CONDITIONS PRECEDENT TO OBLIGATIONS OF NEWCASTLE
The obligations of Newcastle under this Agreement are subject to the
satisfaction at or before the Closing Date, of the following
conditions:
A. Accuracy of Representations. The representations and
warranties made by ITEX in this Agreement were true when made
and shall be true at the Closing Date (except for changes
therein permitted by this Agreement), and ITEX shall have
performed or complied with all covenants and conditions
required by this Agreement to be performed or complied with by
ITEX prior to or at the Closing.
B. No Material Adverse Change. Prior to the Closing Date, there
shall not have occurred any material adverse change in the
financial condition, business, or operations of ITEX, nor
shall any event have occurred which, with the lapse of time or
the giving of notice, may cause or create any material adverse
change in the financial condition, business, or operations of
ITEX.
C. Other Items. Newcastle shall have received such further
documents, certificates, or instruments relating to the
transaction contemplated hereby as Newcastle may reasonably
request.
X. MISCELLANEOUS
A. Survival. All representations, warranties and covenants in
this Agreement or pursuant hereto shall be deemed and
construed to be continuing representations, warranties and
covenants which shall survive the Closing Date and the
execution and delivery of all instruments and documents herein
provided for and any investigation at any time made on behalf
of either party..
B. Headings. Article and Section headings contained in this
Agreement are for reference purposes only and shall not affect
in any way the meaning of this Agreement or its
interpretation.
C. Entire Agreement. This Agreement and the Exhibits hereto
constitute the entire agreement between the parties pertaining
to the subject matter hereof and supersede all prior
agreements, understandings, negotiations and discussions,
whether oral or written, of the parties.
D. Binding Effect. This Agreement shall be binding upon and inure
to the benefit of the respective successors and assigns of the
parties hereto.
E. Notices. Any notices or other communications required or
permitted hereunder shall be sufficiently given if delivered
personally or sent by registered or certified mail, postage
prepaid, as follows:
To ITEX Corp:
One Lincoln Center
P.O. Box 2309
Portland, OR 97208-2309
To Newcastle Services Ltd.
P.O. Box 623, Bank of Nova Scotia Building
Main Street
Charleston, Nevis
West Indies
or at such other address as shall be furnished in writing by
the party to the other, and shall be deemed to have been given
as of the date so delivered or deposited in the United States
mail, as the case may be.
F. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original
instrument and together shall constitute the entire Agreement.
G. Applicable Law. This agreement shall be governed by and
construed in accordance with the laws of the State of Oregon,
United States of America, and in the English language. Venue
shall lie only in the State and Federal Courts in and for the
County of Multnomah, State of Oregon as to all disputes
arising under this agreement, and such venue is hereby
consented to by the parties hereto.
H. No Representation Regarding Tax Treatment. No representation
or warranty is being made by any party to any other regarding
the treatment of this transaction for federal and state income
taxation. Each party has relied exclusively on its own legal,
accounting, and other tax adviser regarding the treatment of
this transaction for federal and state income taxes and on no
representation, warranty, or assurance from any other party or
such other party=s legal, accounting, or other adviser.
I. Attorney=s Fees. In the event that any party institutes any
action or suit to enforce this Agreement or to secure relief
from any default hereunder or breach hereof, the breaching
party or parties shall reimburse the non-breaching party or
parties for all costs, including reasonable attorney=s fees,
incurred in connection therewith and in enforcing or
collecting any judgment rendered therein.
J. Schedules; Knowledge. Whenever in any section of this
Agreement reference is made to information set forth in the
schedules provided by either Party, such reference is to
information specifically set forth in such schedules and
clearly marked to identify the section of this Agreement to
which the information relates. Whenever any representation is
made to the Aknowledge@ of either Party, it shall be deemed to
be a representation that no officer or director of such party,
after reasonable investigation, has any knowledge contrary to
the statements made (or omitted) regarding such matters.
K. Third-Party Beneficiaries. This Agreement is solely between
ITEX and Newcastle and, except as specifically provided, no
director, officer, stockholder, employee, agent, independent
contractor, or any other person or entity shall be deemed to
be a third party beneficiary of this Agreement.
L. Amendment or Waiver.
-------------------
Every right and remedy provided herein shall be cumulative
with every other right and remedy, whether conferred herein,
at law, or in equity, and such remedies may be enforced
concurrently, and no waiver by any party of the performance of
any obligation by the other shall be construed as a waiver of
the same or any other default then, theretofore, or thereafter
occurring or existing. At any time prior to the Closing Date,
this Agreement may be amended by a writing signed by both
Parties, with respect to any of the terms herein, and any term
or condition of this Agreement may be waived or the time of
performance thereof may be extended by a writing signed by the
Party for whose benefit the provision is intended.
M. Brokers. Each party represents that there are no brokers or
finders involved in the contemplated transaction.
IN WITNESS WHEREOF, the parties have duly executed this Acquisition
Agreement on the date above written.
ITEX Corporation
a Nevada corporation
By /s/
Name & Title:
Date:
Newcastle Services Ltd.
a corporation
By /s/
Name & Title:
Date:
Exhibit 1
Description of Sky Scientific Financial Inc. Stock
Two Hundred Fifty Thousand (250,000) shares of Class A Preferred Stock, par
value $0.001 per share, face value Ten Dollars (US$10.00) per share, together
with all accrued dividends.
Exhibit 2
Description of Fine Art
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
ITEX Corporation
Portland, Oregon
We consent to the incorporation by reference in the Registration Statement (Form
S-8 File No. 33-95900) pertaining to the Key Employees' Incentive Stock Option
Plan of ITEX Corporation, of our report with respect to the consolidated
financial statements of ITEX Corporation included in the amended Annual Report
(Form 10-K) for the fiscal year ended July 31, 1997.
Andersen, Andersen, & Strong, L.C.
Salt Lake City, Utah
October 28, 1997
60
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: October 28, 1997
ITEX CORPORATION
October 28, 1997 /s/ Graham H. Norris, Sr.
- ---------------------- ---------------------------------------------------
Graham H. Norris, Chairman of the Board
of Directors, 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/ Graham H. Norris, Sr. October 28, 1997
- --------------------------------------------------------------------------------
Graham H. Norris, Chairman of the Board of Directors, President and
Chief Executive Officer (principal executive officer and director)
/s/ Joseph M. Morris October 28, 1997
- --------------------------------------------------------------------------------
Joseph M. Morris, Senior Vice President and Chief Financial Officer
(principal accounting officer and director)
/s/ Mary Scherr October 28, 1997
- --------------------------------------------------------------------------------
Mary Scherr, Vice President of Broker Development, Director
/s/ Dr. Evan B. Ames October 28, 1997
- --------------------------------------------------------------------------------
Dr. Evan B. Ames, Director
/s/ Robert Nelson October 28, 1997
- --------------------------------------------------------------------------------
Robert Nelson, Director
/s/ Dr. Charles Padbury October 28, 1997
- --------------------------------------------------------------------------------
Dr. Charles Padbury, Director
61