UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
(Amendment No. 1 to Form 10-K as amended December 6, 1996)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended
July 31, 1996
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 Identification No.)
incorporation or organization)
10300 SW Greenburg Road, Suite 370, Portland, Oregon 97223
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(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 10K/A or any amendment of
this Form 10K/A. [ ]
The approximate market value of stock held by non-affiliates is $28,345,000
based upon 6,129,000 shares held by such persons and the close price of $4.63 on
November 11, 1996. The number of shares outstanding of the Registrant's $0.01
par value common stock at November 11, 1996 was 6,853,000.
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 10K/A includes 76 pages)
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ITEX CORPORATION
FORM 10K/A
For the Fiscal Year Ended
July 31, 1996
INDEX
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS 3
ITEM 2. DESCRIPTION OF PROPERTIES 11
ITEM 3. LEGAL PROCEEDINGS 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY 13
HOLDERS
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S 15
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED DATA 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 17
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND 62
REPORTS ON FORM 8-K
SIGNATURES 76
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ITEX CORPORATION
FORM 10-K/A
For the Fiscal Year Ended
July 31, 1996
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
ITEX Corporation (hereinafter referred to "ITEX" or as 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 it's 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 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 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 transaction accounting between members of
the group including the allocation of trade dollars and the Company attempts to
maximize trade through 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 represents a
$7.5 billion a year industry which is growing at an annual rate of 8%. There are
over 600 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.
Management believes that the Company is the largest of the six hundred barter
exchanges 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. BarterNews, the barter industry's primary
magazine, has referred to the Company as the "World's Largest Exchange".
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THE COMPANY
The Company is engaged in international operations in both the retail barter
exchange and corporate barter areas of the commercial barter industry. The
Company administers the ITEX Retail Barter Exchange (the Exchange), which is an
association of business owners and professionals who trade goods and services
with other members of the Exchange. 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, (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. ITEX trade dollars may not be redeemed for cash. ITEX trade
dollars may be used only in the manner and for the purpose set forth in the ITEX
Trading Rules that govern 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. For these services, the Company typically receives a cash
commission of 5% or 6% on the purchases and sales made 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
either sells for cash or ITEX trade dollars or holds in inventory for further
trades in the corporate barter area or for trading to members of the Exchange.
The Company owns and operates retail barter 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. There are
presently 124 broker offices located in 36 states. In addition, there are also
approximately 20 foreign broker offices, including 14 in Canada. One of the
Company's current objectives is aggressive international expansion of the ITEX
retail trade network. The Company bears no financial responsibility for the
financing of an independent broker office.
The Company acts as an intermediary for the exchange of goods and services
between major companies, through the formation of 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 of the Company's
corporate barter division. 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, now
used in accounting for transactions in the ITEX Retail Trade Exchange System.
The revenues generated from those inventories when sold for cash will be divided
between the Company and ITEX USA. This is the first and primary profit center in
each ITEX corporate barter transaction. The second profit center is a 12%
transaction fee paid by the ITEX Corporate Barter client on the Cash Equivalent
Credit portion of each purchase. This revenue will also be divided between the
Company and ITEX USA.
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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 companies invested in are able to use the ITEX trade dollars
received in payment for the stock issued to purchase goods and services used in
the operation of their businesses.
As a result of this utilization of trade dollars, the Company has accumulated an
investment portfolio of equity securities totaling $3,877,000 at July 31, 1996,
stated at the lower of cost or market. Also at July 31, 1996, the Company owned
inventories of goods and services totaling $7,844,000, stated at the lower of
cost or market, which was available for corporate trading or trading to members
within the Exchange, which increases cash commissions earned by the Company, for
exchange for equity securities of other companies, or for consumption by the
Company in providing for its own operating needs.
In 1993 the Company purchased a 49% interest in Associated Reciprocal Traders
("ART"), a trading company located in Zug, Switzerland. ART acts as a buyer and
seller of goods and services using barter, usually dealing with parties outside
the U.S. Through its interest in ART, the Company has a presence in the
international corporate barter marketplace. The Company's share of ART's net
assets and results of operations are included in the Company's financial
statements using the equity method of accounting.
All of the undistributed earnings of the foreign affiliate were reinvested and
were not expected to be remitted to the Company for an indefinite period.
However, 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 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.
The assets of ART as of July 31, 1996 cons-ist primarily of available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to distribute the assets on a basis expected to result in the
Company realizing an amount not less than the carrying value of the Company's
investment. The Company expects to be able to meet any requirements to pay the
current deferred tax liability by selling a portion of the available-for-sale
securities to be received.
During the last several years, the Company started and operated a media
department, which exchanged media products owned by the Company for due bills
for prepaid advertising credits on radio stations across the U.S. The four
Company-owned products included the Image Audio Music Production Library, , the
Golden Age of Radio Theatre, the New Rock Countdown, and Flashback ... Moments
in Time. 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.
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TECHNOLOGY
The Company has developed a comprehensive training program for its brokers. New
brokers come to the training center at the Company's Portland, Oregon 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. 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."
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 on the Internet.
During Fiscal Year 1995, the Company completed an agreement with International
Trade Exchange Corp, a Vancouver B.C. based company, to operate the Canadian
barter company. International Trade Exchange Corp does business in Canada under
the names ITEX and Bartercard. In spite of the similarity of names, ITEX
Corporation (U.S.) and ITEX/Bartercard (Canada) have never had a business
relationship in the past. Under the terms of the agreement ITEX acquired the
rights to the name and trademarks of International Trade Exchange of Vancouver,
B.C. Canada together with the right to acquire its client base and assets. The
addition of the affiliation with ITEX/Bartercard and TROC/Canada (described
below) will more fully enable ITEX clients to do business coast-to-coast in both
the U.S. and Canada.
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,
complete with its own gateway and web server. 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.
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 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)
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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, Internet
access, 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.
The Company believes that new technologies and the emerging electronic
marketplace have the potential to profoundly affect the way business is
conducted. As this new marketplace emerges, the Company is positioning itself to
take full advantage of this trend. The Company is already becoming recognized as
an industry leader in this field. As the transition to electronic business takes
place, ITEX intends to play a major role.
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, 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 and $17,000 was charged to expense. During the fiscal years ended
July 31, 1995 and 1994, the Company spent a total of $169,000 and $131,000,
respectively, all of which was charged to expense.
The terms "Barter is Good ... Responsible Barter is Better" and "BarterWire" are
registered service marks of the Company. The ITEX symbol and name are registered
trademark-service marks of the Company.
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 has
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 $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 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, 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.
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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 April 30, 1996, defendants Yarmak, Friedland, Business Exchange International
Corp., and BX International, Inc., filed an answer denying the material
allegations and asserting a counterclaim for attorney fees.
On October 11, 1996, ITEX Corporation moved for dismissal of its claims
(business defamation, unlawful trade practices and interference with economic
relationships), without prejudice, against defendants. On that same date the
motion was granted and leave granted to file an Amended Complaint. That
complaint is styled SLI, Inc. v. Saul Yarmak, Stephen Friedland, Business
Exchange International Corp. and BX International, Inc. The Amended Complaint
restates the claims against defendants for breach of contract, specific
performance, declaratory judgment and fraud. By dismissing ITEX Corporation's
claims without prejudice, ITEX may, if it chooses, reinstitute its claims for
business defamation, unlawful trade practices and interference with economic
relationships. Proceeding under the Amended Complaint permits an expedited
determination of the core contract issues raised, that is, whether BXI breached
its contract with SLI by asserting that the BXI Trade Exchange is not an asset
of BXI.
The potential outcome of this lawsuit is uncertain. However, the Company
believes that SLI has meritorious arguments in favor of its contract positions.
The Company believes that a solution will be reached either through negotiation
or through completion of the litigation process. The trial date has been set for
February 24, 1997. Legal counsel is unable to evaluate the probability of a
favorable or unfavorable outcome or to estimate the range of potential recovery
on the plaintiff's claims or any potential loss on the defendant's
counterclaims.
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. During fiscal 1994, TROC Canada, the largest barter
exchange in Canada, took steps to join the ITEX barter system as an independent
licensee. TROC is located in Montreal, Quebec with most of its operations in
eastern Canada. Subsequently, the Company entered into an International License
Agreement with 3264076 Canada, Inc., governing the use of the ITEX System in
Canada. These two actions thus gave ITEX coast-to-coast name recognition in
Canada as well as in the U.S.
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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.
Strategy
The Company plans to continue focusing on opportunities for acquisitions of
pre-existing trade exchanges that enable conversion of a membership base to
Company-affiliated independent brokers and continued expansion and development
of the Company's independent broker network. The Company intends to continue its
programs for improving the performance of brokers.
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
The Company employs 51 persons, of which 48 are full time employees.
Additionally each of the Exchange's 147 broker offices mentioned above is
managed by an ITEX Licensed Broker who is an independent contractor that employs
support staff of their own. This results in a total network of approximately 500
persons working as either consultants, independent contractors, or employees of
the Company.
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
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Graham H. Norris 54 Chairman of the Board Of Directors
President and Chief Executive Officer
Mary Scherr 59 Vice President of Broker Development, Director
Michael A. Neal 27 Vice President of Marketing
Joseph M. Morris, CPA 47 Vice President and Chief Financial Officer
Cynthia Pfaltzgraff, CMA 42 Controller
Donovan Snyder, Esq. 46 Corporate Counsel, Corporate Secretary
Dr. Evan B. Ames 57 Director
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Thomas G. Baer 63 Director
Dr. Sherry L. Meinberg 55 Director
Robert Nelson 48 Director
Dr. Charles Padbury 58 Director
Business Experience, Directorships, and Legal Proceedings:
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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. 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 credential of Certified
Trade Broker.
Ms. Scherr has over fourteen years of experience within the barter industry.
Upon joining ITEX in 1984 as an independent broker, Ms. Scherr was recognized
for outstanding sales performance, including being recognized as Broker of the
Year. In 1993, Ms. Scherr agreed to join the Company as Vice President of Broker
Development and Director. Ms. Scherr holds a Masters Degree from the University
of Iowa.
Mr. Neal has experience in many operational aspects of the Company, with
primary focus on travel and media. Previously, Mr. Neal served as President of
TravelGuide, Inc. and as a special projects coordinator for IBM Corporation,
where he was responsible for bidding contracts to the federal government. Mr.
Neal is the son of the founder of the Company, Mr. Terry Neal. Dr. Sherry L.
Meinberg, a Director of the Company, is his aunt.
Mr. Morris became Vice President and Chief Financial Officer and a Director
in January 1996. Previously, he was a consultant to the Company and a Director
since February 1995. He has over 15 years experience in and around the barter
industry, including serving as technical liaison between the International
Reciprocal Trading Association (IRTA) and the Financial Accounting Standards
Board (FASB). He was Vice President-Controller of Software-Intercomp, Inc., a
NASDAQ company, from 1984 through 1995, except for the period 1988 to 1990, when
he was a technical project manager with the FASB. He has authored numerous books
for practicing accountants and financial professionals, several of which have
received recognition as Best Professional Accounting Practice Book of the Year.
Earlier in his career, Mr. Morris was an audit manager with Coopers & Lybrand.
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 15 years experience in accounting and financial management.
Ms. Pfaltzgraff has a Bachelors 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 17 years
experience as an attorney, including 10 years as corporate in-house counsel to
several companies in Salt Lake
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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. Ames received a Ph.D. in 1971 from Princeton University, majoring in near
eastern and soviet studies. He has served with the Central Intelligence Agency.
In 1985 Mr. Ames became affiliated with R.L. Ball & Associates as an investment
researcher, analyst, and investment strategist. He is currently a Registered
Investment Adviser with the U.S. Securities & Exchange Commission. He has been a
Director of the Company since August 1995.
Mr. Baer is Vice President of Operations for Patrick Industries, a
manufacturing company headquartered in Elkhart, Indiana. Mr. Baer has been with
that company for 27 years and has served as Vice President and member of the
Board since 1970. Patrick Industries is a publicly held company with shares
traded on NASDAQ. He attended Indiana University and is active in community and
charitable organizations such as the United Way. He has been a Director of the
Company since August 1995.
Dr. Meinberg, served as Secretary and a Director of The ITEX Corporation from
1982 to 1986, when the Company acquired the assets and liabilities of that
company. She served as Secretary and a Director of the Company from 1986 to May
3, 1996, and continues to serve as a Director. Dr. Meinberg has two masters
degrees and a Ph.D. in Instructional Science. She is a published author and
appears widely as a professional speaker. Dr. Meinberg retired in January, 1995
after 34 years on the faculty of Long Beach Unified School.
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.
Dr. Padbury was elected Chairman of the Board of Directors on September 6,
1996. He 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.
Committees
- ----------
The ITEX Board of Directors has had standing audit, nominating and compensation
committees since May 1996. In the last fiscal year (August 1, 1995 - July 31,
1996) there were 10 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.
11
<PAGE>
Based solely on its review of the copies of such forms received by the Company,
or written representations from certain reporting persons that no Form 5s were
required for those persons, the Company believes that the following persons were
delinquent as listed below:
Forms 4 and 5 were not filed for Mary Scherr, Charles Padbury, or Joseph Morris.
Those forms would have reflected the following transactions:
(a) Mary Scherr: Exercise of stock options and sale of shares on January
30, 1996 (30,000 shares) and March 12, 1996 (15,000 shares)
(b) Charles Padbury: Exercise of stock options on January 4, 1996 (1,000
shares)
(c) Joseph Morris: Exercise of stock options and sale of shares on August
30, 1995 (6,000 shares), October 11, 1995 (1,500 shares), November 17,
1995 (1,250 shares, and November 29 (1,250 shares)
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 7,400 $136,000
Westminster, California December 31, 1996 3,700 45,000
St. Louis, Missouri October 31, 1998 1,100 17,000
The Portland, Oregon lease is payable entirely in cash. The Westminster,
California lease is payable in cash of $3,000 and 42,000 ITEX trade dollars per
year. The St. Louis, Missouri lease is payable in cash of $8,500 and 8,500 ITEX
trade dollars per year.
ITEM 3. LEGAL PROCEEDINGS
On January 24, 1996, the Company acquired a 100% common stock interest in SLI,
Inc. ("SLI"), a Nevada corporation, in exchange for the issuance to SLI's former
shareholders of 60,000 shares of its 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
12
<PAGE>
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 April 30, 1996, defendants Yarmak, Friedland, Business Exchange International
Corp., and BX International, Inc., filed an answer denying the material
allegations and asserting a counterclaim for attorney fees.
On October 11, 1996, ITEX Corporation moved for dismissal of its claims
(business defamation, unlawful trade practices and interference with economic
relationships), without prejudice, against defendants. On that same date the
motion was granted and leave granted to file an Amended Complaint. That
complaint is styled SLI, Inc. v. Saul Yarmak, Stephen Friedland, Business
Exchange International Corp. and BX International, Inc. The Amended Complaint
restates the claims against defendants for breach of contract, specific
performance, declaratory judgment and fraud. By dismissing ITEX Corporation's
claims without prejudice, ITEX may, if it chooses, reinstitute its claims for
business defamation, unlawful trade practices and interference with economic
relationships. Proceeding under the Amended Complaint permits an expedited
determination of the core contract issues raised, that is, whether BXI breached
its contract with SLI by asserting that the BXI Trade Exchange is not an asset
of BXI.
The potential outcome of this lawsuit is uncertain. However, the Company
believes that SLI has meritorious arguments in favor of its contract positions.
The Company believes that a solution will be reached either through negotiation
or through completion of the litigation process. The trial date has been set for
Febuary 24, 1997. Legal counsel is unable to evaluate the probability of a
favorable or unfavorable outcome or to estimate the range of potential recovery
on the plaintiff's claims or any potential loss on the defendant's
counterclaims.
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 Breach of Contract and Action on Guaranty and
seeks a total of $89,726 on three claims for breach of contract. 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 expects
each counterclaim to be dismissed. Both the Company's claims and the defense of
the counterclaims is being vigorously prosecuted by the Company. As with all
litigation, the potential outcome of this lawsuit is uncertain. However, the
Company believes that its claims against the defendants are meritorious and that
the defendants' counterclaims are wholly without merit. In any event, this
litigation does not present scenarios which would be expected to result in a
materially adverse effect on the Company's financial position or results of
operations.
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;
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<PAGE>
Michael Baer; Graham Norris; Oxford Transfer, Inc.; David Christensen, C.P.A.;
Andersen, Andersen & Strong, L.C., Donavan 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 compensatory and punitive
damages.
The company considers each of the claims in the complaint to be totally without
merit and will vigorously defend against each and every allegation of the
complaint. No answer has yet been filed by the Company. As wih all litigation,
the potential outcome of this lawsuit is uncertain. 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 or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 3, 1996, the Company held its annual meeting of shareholders. At that
meeting, five items were presented for consideration by the shareholders:
(1) To elect nine directors to serve for a term of one year or until their
successors are elected and qualified. The Board of Directors has nominated
Michael T. Baer, Mary Scherr, Dr. Evan Ames, Graham Norris, Dr. Sherry
Meinberg, Robert Nelson, Dr. Charles Padbury, Thomas Baer and Joseph
Morris to serve as Directors.
(2) To ratify the appointment of Andersen, Andersen & Strong, L.C. as
independent auditors of the Company for the 1995-1996 fiscal year.
(3) To approve a new Incentive Stock Option Plan for employees, officers,
directors and consultants of the Company.
(4) To approve a two for one (2 for 1) forward split of the Company's issued
and outstanding common stock. Approval of this action will require an
amendment to the Company's Articles of Incorporation which is described in
detail in the accompanying Proxy Statement.
(5) To transact any other business might properly come before the Annual
Meeting or any adjournment of the Annual Meeting.
14
<PAGE>
The number of common shares issued, outstanding and entitled to vote at such
Annual Meeting was 6,420,555. There were present at the meeting common
shareholders holding a total of 5,383,443 of the Company's common stock. Thus a
quorum was present and the business of the Meeting properly proceeded.
(1) The votes cast in person or by proxy on the resolution to elect a Board of
Directors was:
Abstain/
Nominee For Against Withhold
- ----------------------- ---------- ---------- -----------
Michael T. Baer 4,319,473 0 22,678
Mary Scherr 4,003,507 0 338,553
Graham H. Norris, Sr. 4,004,798 0 337,353
Dr. Sherry L. Meinberg 4,004,798 0 337,353
Dr. Charles Padbury 3,987,415 0 354,645
Robert Nelson 3,987,415 0 354,645
Dr. Evan B. Ames 3,987,415 0 354,645
Thomas G. Baer 4,001,007 0 340,953
Joseph Morris 4,003,007 0 339,053
(2) The votes cast in person and by proxy on the resolution to ratify and
approve the selection of Andersen, Andersen & Strong L.C. to serve as
auditor of the accounts of the Company for the 1995-96 fiscal year were
common shares voted 4,324,682 For the resolution; 8,203 common shares voted
Against the resolution; and 7,765 common shares abstained or withheld votes
on the resolution.
(3) The votes cast in person and by proxy on the resolution to approve an
Incentive Stock Option Plan adopted by the Board of Directors on December
15, 1995 were 1,994,304 common shares voted For the resolution; 123,536
common shares voted Against the resolution; and 70,480 common shares
abstained or withheld votes on the resolution.
(4) The votes cast in person and by proxy on the resolution to approve an
amendment to the articles of incorporation of the Company to effect a
two-for-one (2 for 1) forward split of the Company's issued and outstanding
common stock were 3,963,603 common shares voted For the resolution; 123,536
common shares voted Against the resolution; and 15,040 common shares
abstained or withheld votes on the resolution.
(5) No further business was transacted at the Annual Meeting.
15
<PAGE>
PART II
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, 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
July 31, 1995............. 6.75 4.00
April 9, 1995............. 6.78 2.38
January 15, 1995.......... 4.63 1.88
October 23, 1994.......... 2.63 2.00
A stockholder's list was prepared by the transfer agent, OTR Inc., in Portland
Oregon, as of July 31, 1996. The list indicated 829 registered shareholders of
the 6,804,000 shares issued and outstanding. It is estimated another 3,000
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
3,829.
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.
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<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal Years Ended July 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------- ---------- ---------- ----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
Sales arranged.................... $ 3,055 $ 1,807
========= ========
Corporate trading revenue......... $ 13,881 $ 12,403 $ 8,427 $ 4,446 $ 538
Commissions on sales
arranged....................... 329 291
Trade exchange revenue............ 14,020 9,418 6,339 3,488 4,123
--------- --------- --------- --------- ---------
Total revenue................... 28,230 22,112 14,766 7,934 4,661
--------- --------- --------- --------- ---------
Costs and expenses:
Costs of corporate trading........ 10,749 9,621 6,409 2,891 ---
Costs of trade exchange revenue 7,153 4,361 2,806 2,125 1,409
Selling, general and administrative 8,146 7,185 5,257 2,768 2,833
--------- --------- --------- --------- ---------
Total costs and expenses........ 26,048 21,167 14,472 7,784 4,242
--------- --------- --------- --------- ---------
Costs and espenses:
Income (loss) from operations........ 2,182 945 294 150 419
Other income (expense)............... 200 454 19 74 9
--------- --------- --------- --------- ---------
Income (loss) before income taxes.... 2,382 1,399 313 224 428
Provision for income taxes........... 908 522 101 (8) ---
--------- --------- --------- --------- ---------
Income before equity in net income
of foreign affiliate.............. 1,474 877 212 232 428
Equity in net income (loss) of
foreign affiliate.................. 958 632 --- ---
(90)
========= ========= ========= ========= =========
Net income........................... $ 1,384 $ 1,835 $ 844 $ 232 $ 428
========= ========= ========= ========= =========
--------- --------- --------- --------- ---------
Primary net income per share......... $ 0.19 $ 0.41 $ 0.26 $ 0.08 $ 0.21
=========
Primary net income per share......... $ 0.18
=========
Balance Sheet Data:
Working capital (deficit)............ $ 261 $ 1,507 $ 503 $ 452 $ 1,428
Total assets......................... 23,406 15,578 10,051 6,157 4,346
Long-term debt, net of current
portion............................ 192 156 189 98 38
Stockholders' equity................. $ 20,383 $ 13,783 $ 7,432 $ 5,046 $ 3,576
</TABLE>
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS, LIQUIDITY, AND CAPITAL RESOURCES
Business and Plan of Operation
The Company is engaged in international operations in both the retail barter
exchange and corporate barter areas of the commercial barter industry. The
Company administers the ITEX Retail Barter Exchange (the Exchange), which is an
association of business owners and professionals who trade goods and services
with other members of the Exchange. 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, (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. ITEX trade dollars may not be redeemed for cash. ITEX trade
dollars may be used only in the manner and for the purpose set forth in the ITEX
Trading Rules that govern 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. For these services, the Company typically receives a cash
commission of 5% or 6% on the purchases and sales made 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
either sells for cash or ITEX trade dollars or holds in inventory for further
trades in the corporate barter area or for trading to members of the Exchange.
The Company owns and operates retail barter 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. There are
presently 124 broker offices located in 36 states. In addition, there are also
approximately 20 foreign broker offices, including 14 in Canada. One of the
Company's current objectives is aggressive international expansion of the ITEX
retail trade network. The Company bears no financial responsibility for the
financing of an independent broker office.
The Company acts as an intermediary for the exchange of goods and services
between major companies, through the formation of 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 of the Company's
corporate barter division. 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, now
used in accounting for transactions in the ITEX Retail Trade Exchange System.
The revenues generated from those inventories when sold for cash will be divided
between the Company and ITEX USA. This is the first and primary profit center in
each ITEX corporate barter transaction. The second profit center is a
18
<PAGE>
12% transaction fee paid by the ITEX Corporate Barter client on the Cash
Equivalent Credit portion of each purchase. This revenue will also be 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 companies invested in are able to use the ITEX trade dollars
received in payment for the stock issued to purchase goods and services used in
the operation of their businesses.
As a result of this utilization of trade dollars, the Company has accumulated an
investment portfolio of equity securities totaling $3,877,000 at July 31, 1996,
stated at the lower of cost or market. Also at July 31, 1996, the Company owned
inventories of goods and services totaling $7,844,000, stated at the lower of
cost or market, which was available for corporate trading or trading to members
within the Exchange, which increases cash commissions earned by the Company, for
exchange for equity securities of other companies, or for consumption by the
Company in providing for its own operating needs.
In 1993 the Company purchased a 49% interest in Associated Reciprocal Traders
("ART"), a trading company located in Zug, Switzerland. ART acts as a buyer and
seller of goods and services using barter, usually dealing with parties outside
the U.S. Through its interest in ART, the Company has a presence in the
international corporate barter marketplace. The Company's share of ART's net
assets and results of operations are included in the Company's financial
statements using the equity method of accounting. 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 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.
The assets of ART as of July 31, 1996 consist primarily of available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to distribute the assets on a basis expected to result in the
Company realizing an amount not less than the carrying value of the Company's
investment.
During the last several years, the Company started and operated a media
department, which exchanged media products owned by the Company for due bills
for prepaid advertising credits on radio stations across the U.S. The four
Company-owned products included the Image Audio Music Production Library, , the
Golden Age of Radio Theatre, the New Rock Countdown, and Flashback ... Moments
in Time. 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.
19
<PAGE>
Although the Statement of Cash Flows indicates negative cash flow from
operations, 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 wealth building
and shareholder value. Furthermore, the Company is presently incurring negative
cash flow with respect to several areas of business development that would be
expected to contribute in the future to long-range wealth building. At the
Company's discretion, it could conserve cash by suspending or terminating these
activities. However, there can be no assurance that operating conditions will
enable the Company to continue to operate as described above or that adequate
funds from any sources will continue to be available on terms acceptable to the
Company.
Development Activities
The Company has developed a comprehensive training program for its brokers. New
brokers come to the training center at the Company's Portland, Oregon 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. 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."
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 on the Internet.
During the fiscal year of Fiscal Year 1995, the Company completed an agreement
with International Trade Exchange Corp, a Vancouver B.C. based company, to
operate the Canadian barter company. The International Trade Exchange Corp does
business in Canada under the names ITEX and Bartercard. In spite of the
similarity of names, ITEX Corporation (U.S.) and ITEX/Bartercard (Canada) have
never had a business relationship in the past. Under the terms of the agreement
ITEX acquired the rights to the name and trademarks of the International Trade
Exchange of Vancouver, B.C. Canada together with the right to acquire its client
base and assets. The addition of the affiliation with ITEX/Bartercard and
TROC/Canada will more fully enable ITEX clients to do business coast-to-coast in
both the U.S. and Canada.
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,
complete with its own gateway and web server. This enables Exchange members to
enjoy the advantages of
20
<PAGE>
the latest version of BarterWire together with savings on long distance charges
and a larger electronic marketplace.
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 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, Internet
access, 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.
The Company believes that new technologies and the emerging electronic
marketplace have the potential to profoundly affect the way business is
conducted. As this new marketplace emerges, the Company is positioning itself to
take full advantage of this trend. The Company is already becoming recognized as
an industry leader in this field. As the transition to electronic business takes
place, ITEX intends to play a major role.
At July 31, 1996, Other assets includes costs of purchasing and developing
certain of the Company's information and communication systems. During fiscal
1996, the Company continued work on development projects that had been commenced
in prior years. Since these are mature projects and systems, technological
feasibility was present, resulting in the capitalization of most of the
development costs incurred in fiscal 1996, in accordance with the Company's
accounting policy. The increase in the level of research and development costs
was attributable to the nature of the activities in fiscal 1996, which
essentially consisted of coding and other activities connected with constructing
the systems. A large portion of the development costs were paid to independent
consultants and specialists in the particular systems areas and are not fixed
costs of the Company.
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, 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 and $17,000 was charged to expense. During the fiscal years ended
July 31, 1995 and 1994, the Company spent a total of $169,000 and $131,000,
respectively, all of which was charged to expense.
The terms "Barter is Good ... Responsible Barter is Better" and "BarterWire" are
registered service marks of the Company. The ITEX symbol and name are registered
trademark-service marks of the Company.
21
<PAGE>
Liquidity and Capital Resources
Overall Financial Position. At July 31, 1996, the Company's working capital
ratio was 1.1 to 1, based on current assets of $2,827,000 and current
liabilities of $2,566,000. The Company's working capital ratio at July 31, 1995,
was 2.0 to 1, based on current assets of $3,016,000 and current liabilities of
$1,509,000. The working capital ratio decreased because the Company provided
$1,247,000 in current deferred taxes for earnings to be remitted tas a result of
the unexpected termination of the ART foreign venture. The net assets to be
received, consisting primarily of avaliable-for-sale securities, are included in
the long-term classification of investment in foreign equity affiliate of
$3,197,000. The Company expects to be able to meet any requirements to pay the
current deferred tax liability by selling a portion of the available-for-sale
securities to be received.
Total stockholders' equity increased by $6,600,000 to $20,383,000 at July 31,
1996, from $13,783,000 at July 31, 1995. The primary increases in stockholders'
equity were from continued profitable operations and private placements of the
Company's equity securities. In addition, the Company issued common stock in
exchange for prepaid printing services, of which $640,000 had not been performed
as of July 31, 1996. The Company has classified this balance as a reduction of
stockholders' equity at July 31, 1996, rather than as a prepaid expense and an
increase to equity. The Company expects to use these printing services in future
periods.
Even though the Statement of Cash Flows indicates negative cash flow from
operations, 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. 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.
Private Placements. During the fiscal year ended July 31, 1996, the Company
completed a private placement with Newcastle Services Ltd. ("Newcastle"), a
foreign corporation, which owns a 51% interest in Associated +Reciprocal
Traders, Inc., the Company's 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
22
<PAGE>
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 purchase price that would
have been due for the calendar quarter ended September 30, 1996, and therefore
the Company has canceled 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 Option Plan. 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. During the fiscal year ended July 31,
1996, the Company received proceeds totaling $895,000 from the exercise of stock
options to purchase 470,000 shares of common stock pursuant to 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. 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 plan.
23
<PAGE>
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, of which $640,000 had not been performed as of July 31, 1996.
The Company has classified this balance as a reduction of stockholders' equity
at July 31, 1996, rather than as a prepaid expense and an increase to equity.
The Company expects to use these printing services in future periods.
Stock Split. At the annual meeting of the Company's shareholders on May 3, 1996,
the Company's shareholders approved a two-for-one forward stock split with
respect to the Company's common stock. The stock split has not yet been
implemented by the Company. Upon implementation of the stock split, all share
and per share data included in the Company's financial statements would be
restated to give effect to the stock split.
Bank Line of Credit. The Company has a line of credit facility with a bank.
Pursuant to the line of credit, the Company is able to 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, 1996, the Company had no
borrowings outstanding under the bank credit facility. The credit facility
expires December 31, 1997.
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 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, 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.
Subsequent to the transactions described above, the owner of the other 50%
interest in BXI issued a series of press releases and widespread communications
throughout the commercial barter industry stating, among other things, that BXI
was not the owner of the assets of the BXI barter exchange, which assertion is
in direct contradiction to explicit contractual representations made by that
party. Despite having made such assertion and despite having made what the
Company considers to be unjustified negative statements about the Company, the
owner of the other 50% and the Company engaged in extensive negotiations with
regard to one party purchasing a 1% interest from the other and future
management and operation of the BXI barter
24
<PAGE>
exchange. On several occasions, the Company believed that resolution was
imminent. However, each time, the subsequent actions of the owner of the other
50% interest in BXI demonstrated unwillingness to abide by the contractual terms
of the applicable agreement, accompanied by the contradictory action of
unwillingness to refund to the Company the funds that had been paid for the 50%
interest in BXI and the loan that was made to BXI. Also, the owner of the other
50% interest in BXI continued to publicly make what the Company considers to be
hostile and unjustified allegations about the Company and its actions.
On February 12, 1996, the Company filed suit in the Circuit Court of Multnomah
County, Oregon against BXI, BX International, Inc., the company which BXI
alleged in its press releases was the actual owner of the BXI Trade Exchange,
Saul Yarmak, president of BXI and author of the hostile allegations against the
Company and Stephen Friedland, an officer of BXI. The suit seeks damages for
breach of contract, fraud, business defamation (disparagement), unlawful trade
practices and interference with economic relationships and includes claims for
specific performance of the contract to acquire the 50% interest in BXI and a
request for a declaratory judgment. The defendants answered the Complaint on
April 30, 1996 by denying all allegations and asking for their attorney's fees.
On October 11, 1996, ITEX Corporation moved for dismissal of its claims
(business defamation, unlawful trade practices and interference with economic
relationships), without prejudice, against defendants. On that same date the
motion was granted and leave granted to file an Amended Complaint. That
complaint is styled SLI, Inc. v. Saul Yarmak, Stephen Friedland, Business
Exchange International Corp. and BX International, Inc. The Amended Complaint
restates the claims against defendants for breach of contract, specific
performance, declaratory judgment and fraud. By dismissing ITEX Corporation's
claims without prejudice, ITEX may, if it chooses, reinstitute its claims for
business defamation, unlawful trade practices and interference with economic
relationships. Proceeding under the Amended Complaint permits an expedited
determination of the core contract issues raised, that is, whether BXI breached
its contract with SLI by asserting that the BXI Trade Exchange is not an asset
of BXI.
The potential outcome of this lawsuit is uncertain. However, the Company
believes that SLI has meritorious arguments in favor of its contract positions.
The Company believes that a solution will be reached either through negotiation
or through completion of the litigation process. The trial date has been set for
February 24, 1997. Legal counsel is unable to evaluate the probability of a
favorable or unfavorable outcome or to estimate the range of potential recovery
on the plaintiff's claims or any potential loss on the defendant's
counterclaims.
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 absorb 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. During fiscal 1994, TROC Canada, the largest barter
exchange in Canada, took steps to join the ITEX barter system as an independent
licensee. TROC is located in Montreal, Quebec with most of its operations in
eastern Canada.
25
<PAGE>
Subsequently, the Company entered into an International License Agreement with
3264076 Canada, Inc., governing the use of the ITEX System in Canada. These two
actions thus gave ITEX coast-to-coast name recognition in Canada as well as in
the U.S.
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.
26
<PAGE>
RESULTS OF OPERATIONS
Comparison of Fiscal Years Ended July 31, 1996 and July 31, 1995
- ----------------------------------------------------------------
Overall Operating Results
Total revenue increased 28% to $28,230,000 in the fiscal year ended July 31,
1996 ("fiscal 1996") from $22,112,000 in the fiscal year ended July 31, 1995
("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 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.
The assets of ART as of July 31, 1996 consist primarily of available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to distribute the assets on a basis expected to result in the
Company realizing an amount not less than the carrying value of the Company's
investment. The Company expects to be able to meet any requirements to pay the
current deferred tax liability by selling a portion of the available-for-sale
securities to be received.
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 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. Total revenue increased 28% to $28,230,000 in fiscal 1996 from
$22,112,000 in fiscal 1995. Corporate trading revenue increased 12% to
$13,881,000 in fiscal 1996 from $12,403,000 in fiscal 1995. Trade exchange
revenue increased 49% to $14,020,000 in fiscal 1996 from $9,418,000 in fiscal
1995.
27
<PAGE>
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 1,878 ---
--------------- --------------
13,881 12,403
--------------- --------------
Commissions on Sales Arranged
Trade 121
Cash 208 291
--------------- --------------
329 291
--------------- --------------
Trade Exchange Revenue
Trade 5,427 4,204
Cash 8,593 5,214
--------------- --------------
14,020 9,418
--------------- --------------
Total Revenue
Trade 17,551 16,607
Cash 10,679 5,505
--------------- --------------
$ 28,230 $ 22,112
=============== ==============
The above reported revenue amounts include only the portions considered as
commissions earned with respect to sales by ITEX USA, in accordance with Section
1200.01 of the AICPA Technical Practice Aids. Total sales arranged by the
Company in connection with ITEX USA were $3,055,000 and $1,807,000 in the years
ended July 31, 1996 and 1995, respectively.
Corporate Trading Revenue. 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. 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 $10,749,000
in fiscal 1996 from $9,621,000 in fiscal 1995 because of the higher revenue
level. Costs of corporate trading revenue were 77% in fiscal 1996 and 78% in
fiscal 1995.
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.
28
<PAGE>
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. 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.
Comparison of Fiscal Years Ended July 31, 1995 and July 31, 1994
- ----------------------------------------------------------------
Overall Operating Results
Total revenue increased 50% to $22,112,000 in the fiscal year ended July 31,
1995 ("fiscal 1995") from $14,766,000 in the fiscal year ended July 31, 1994
("fiscal 1994"). Income from operations increased to $945,000 in fiscal 1995
from $294,000 in fiscal 1994. Equity in net income from foreign affiliate was
$958,000 in fiscal 1995 as compared to $632,000 in fiscal 1994.
Net income more than doubled to $1,835,000, or $0.41 per share in fiscal 1995
from $844,000, or $0.26 per share, in fiscal 1995. The rate of increase in
income per share was less than the rate of increase in net income because of a
greater number of shares outstanding in fiscal 1995.
Revenue
Total Revenue. Total revenue increased 50% to $22,112,000 in fiscal 1995 from
$14,766,000 in fiscal 1994. Corporate trading revenue increased 47% to
$12,403,000 in fiscal 1995 from $8,427,000 in fiscal 1994. Trade exchange
revenue increased 49% to $9,418,000 in fiscal 1995 from $6,339,000 in fiscal
1994.
29
<PAGE>
The following table summarizes the cash and trade (consisting of ITEX trade
dollars and other noncash consideration) components of revenue for fiscal years
1995 and 1994:
Fiscal Years Ended July 31,
------------------------------
1995 1994
---------- ----------
(in thousands)
Corporate Trading Revenue
Trade $ 12,403 $ 8,266
Cash 161
---------- ----------
12,403 8,427
---------- ----------
Commissions on Sales Arranged
Trade
Cash 291
---------- ----------
291
---------- -----------
Trade Exchange Revenue
Trade 4,204 1,942
Cash 5,214 4,397
---------- -----------
9,418 6,339
---------- -----------
Total Revenue
Trade 16,607 10,208
Cash 5,505 4,558
----------
===========
$ 22,112 $ 14,766
========== ===========
The above reported revenue amounts include only the portions considered as
commissions earned with respect to sales by ITEX USA, in accordance with Section
1200.01 of the AICPA Technical Practice Aids. Total sales arranged by the
Company in connection with ITEX USA were $1,807,000 in the year ended July 31,
1995.
Corporate Trading Revenue. The increase in corporate trading revenue was
attributable to continued operation of the Company's corporate trade department,
which was established in fiscal 1994 and continued corporate barter transactions
by the Company's affiliate, ITEX USA. Management expects continuing significant
contributions to revenue from its corporate trading activities.
Trade Exchange Revenue. The increase in trade exchange revenue was attributable
to an array of factors. 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
external expansion by acquisitions and 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 $9,621,000
in fiscal 1995 from $6,409,000 in fiscal 1994 because of the increase in
corporate trading revenue. Costs of corporate trading revenue were 78% in fiscal
1995 and 76% in fiscal 1994.
Costs of Trade Exchange Revenue. Costs of trade exchange revenue increased to
$4,361,000 in fiscal 1995 from $2,806,000 in fiscal 1994. Costs of trade
exchange revenue, which consists of brokers' fees and commissions, were 46% of
trade exchange revenue in fiscal 1995 and 44% in fiscal 1994.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $1,928,000 to $7,185,000 in fiscal 1995
from $5,257,000 in fiscal 1994. The
30
<PAGE>
increase resulted from the Company's higher scope of operations, including
expansion Company-owned and operated local trade exchanges.
Total advertising and promotion was $2,985,000 in fiscal 1995 as compared to
$1,591,000 in fiscal 1994. 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 1995, the Company paid
$2,746,000 of its advertising costs by ITEX trade dollars or other trade
consideration, representing 92% 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 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 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 of 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.
31
<PAGE>
ITEX CORPORATION
FORM 10K/A
For the Fiscal Year Ended
July 31, 1996
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 33
CONSOLIDATED BALANCE SHEETS AT JULY 31, 1996 AND 1995 34
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE YEARS
ENDED JULY 31, 1996, 1995, AND 1994 35
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE
THREE YEARS ENDED JULY 31, 1996, 1995, AND 1994 36
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
YEARS ENDED JULY 31, 1996, 1995, AND 1994 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39
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.
32
<PAGE>
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, 1996, 1995, and 1994. 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, 1996 and 1995, and the results of their
operations and their cash flows for the years ended July 31, 1996, 1995, and
1994, in accordance with generally accepted accounting principles.
Andersen, Andersen & Strong
December 3, 1996
Salt Lake City, Utah
33
<PAGE>
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts )
July 31,
---------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash ................................................................. $ 1,301 $ 1,524
Accounts receivable, net of allowance for doubtful
accounts of $96 and $132.......................................... 847 1,117
Notes receivable...................................................... 360 ---
Deferred tax asset.................................................... --- 51
Prepaids and other current assets..................................... 319 324
----------- -----------
Total current assets.............................................. 2,827 3,016
Inventory for Principal Party Trading...................................... 7,844 5,696
Available for Sale Equity Securities....................................... 3,877 3,332
Investment in Foreign Equity Affiliate..................................... 3,197 2,040
Investment in Business Exchange International Corp......................... 2,418 ---
Goodwill and Purchased Member Lists, net................................... 1,299 1,067
Deferred Tax Asset......................................................... --- 26
Notes Receivable, Long-Term Portion........................................ 997 ---
Other Assets............................................................... 947 401
----------- -----------
$ 23,406 $ 15,578
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable...................................................... $ 183 $ 133
Portion of receivables due to brokers ................................ 508 580
Trade credits issued in excess of earned.............................. 41 4
Income taxes payable.................................................. 94 474
Deferred tax liability................................................ 1,253 43
Current portion of long-term indebtedness............................. 138 61
Other current liabilities............................................. 349 214
----------- -----------
Total current liabilities......................................... 2,566 1,509
----------- -----------
Deferred Income Taxes...................................................... 265 130
----------- -----------
Long-term Indebtedness..................................................... 192 156
----------- -----------
Stockholders' Equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 6,804,000 and 5,212,000 shares
issued and outstanding............................................. 68 52
Paid-in capital....................................................... 16,386 10,625
Net unrealized gain on marketable securities.......................... 132 92
Treasury stock, at cost (10,000 and 20,000 shares).................... (29) (68)
Retained earnings..................................................... 4,466 3,082
Prepaid Printing...................................................... (640) ---
----------- -----------
Total stockholders' equity........................................ 20,383 13,783
----------- -----------
$23,406 $ 15,578
=========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Fiscal Years Ended July 31,
--------------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
<S> <C> <C> <C>
Revenue
Sales arranged.................................... $ 3,055 $ 1,807 $ ---
=================== ================== ==================
Corporate trading revenue......................... $ 13,881 $ 12,403 $ 8,427
Commissions on sales arranged..................... 329 291 ---
Trade exchange revenue............................ 14,020 9,418 6,339
------------------- ------------------ ------------------
28,230 22,112 14,766
------------------- ------------------ ------------------
Costs and Expenses
Costs of corporate trading........................ 10,749 9,621 6,409
Costs of trade exchange revenue................... 7,153 4,361 2,806
Selling, general, and administrative.............. 8,146 7,185 5,257
------------------- ------------------ ------------------
26,048 21,167 14,472
------------------- ------------------ ------------------
Income from Operations................................ 2,182 945 294
Other Income (Expense)
Interest income (expense), net...................... 72 3 (16)
Dividends and subordination fees.................... 204 229 ---
Gain (loss) on sale of securities................... (76) 222 12
Miscellaneous, net................................ --- --- 23
------------------- ------------------ ------------------
200 454 19
------------------- ------------------ ------------------
Income Before Taxes and Equity in Net
Income (Loss) of Foreign Affiliate.................. 2,382 1,399 313
Provision for Income Taxes............................ 908 522 101
------------------- ------------------ ------------------
Income Before Equity in Net Income
(Loss) of Foreign Affiliate......................... 1,474 877 212
Equity in Net Income (Loss) of Foreign
Affiliate (net of tax provision of
$1,247 in 1996)..................................... (90) 958 632
------------------- ------------------ ------------------
Net Income ........................................... $ 1,384 $ 1,835 $ 844
=================== ================== ==================
Average Common and Equivalent Shares:
Primary............................................ 7,346 4,658 3,292
=================== ================= =================
Fully diluted...................................... 7,617
===================
Net Income Per Common Share:
Primary............................................ $ 0.19 $ 0.41 $ 0.26
=================== ================= =================
Fully diluted...................................... $ 0.18
===================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Fiscal Years Ended July 31, 1996, 1995, and 1994
Unrealized
Common Stock Additional Gain(Loss)
---------------------- Paid-in Retained on Treasury Prepaid
Shares Amount Capital Earnings Securities Stock Printing Total
---------- ---------- ------------- ------------ ------------ ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, August 1,
1993 3,035 $ 30 $ 5,143 $ 403 $ (380) $ (150) $ $ 5,046
Stock sold for cash 130 1 129 130
Stock issued in
exchange
for member lists 5 42 42
Stock exchanged for
interest in 450
equity affiliate 150 2 448
Stock exchanged for
goods, services 96 1 462 81 544
Unrealized Gain
(Loss) 376 376
Net income, fiscal
1994 844 844
----------- ----------- ----------- ----------- ----------- ------------ ------------ --------------
Balance, July 31, 7,432
1994 3,416 34 6,224 1,247 (4) (69)
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 services 300 3 1,076 1,079
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 1,480
Prepaid printing (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
=========== =========== =========== =========== =========== ============ ============ ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Years Ended July 31,
-------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income............................................ $ 1,384 $ 1,835 $ 844
Adjustments:
Equity in net income of foreign affiliate.......... (1,157) (958) (632)
Depreciation and amortization...................... 290 215 142
Services paid for in stock......................... 740 660 451
Net (gain) on sale of investments.................. (452) (12)
Net (loss) on sale of investments.................. (2) (13)
Net trade revenue earned over trade costs ........ (2,974) (1,683) (936)
Changes in operating assets and liabilities:
Accounts and notes receivable...................... (596) 288 (351)
Deferred taxes..................................... 1,422 (48) 94
Prepaids and other assets.......................... (224) 189 46
Accounts payable and other current liabilities..... 239 13 69
Portion of receivables due to brokers.............. (73) (32) 226
Income taxes payable............................... (469) 388 82
Deferred revenue................................... (1,000)
------------------ ------------------- ------------------
Net cash (used in) operating activities.......... (1,418) (587) 10
------------------ ------------------- ------------------
Cash Flows From Investing Activities
Acquisitions of SLI, Inc. and Global Exchange
Network, Inc...................................... (2,158)
Additions to equipment and information systems........ (53) (227) (68)
Other................................................. (397) (25)
------------------ ------------------- ------------------
Net cash (utilized in) investing activities..... (2,608) (227) (93)
------------------ ------------------- ------------------
Cash Flows From Financing Activities
Proceeds from sales of common stock................... 3,691 2,010 130
Proceeds from notes payable........................... 237 814 224
Repayments of notes payable........................... (125) (937) (99)
------------------ ------------------- ------------------
Net cash provided by financing activities....... 3,803 1,887 255
------------------ ------------------- ------------------
Net increase (decrease) in cash and equivalents........... ( 223) 1,073 172
Cash and cash equivalents at beginning of period.......... 1,524 451 279
------------------ ------------------- ------------------
Cash and Cash Equivalents at End of Period................ $ 1,301 $ 1,524 $ 451
================== =================== ==================
Supplemental Cash Flow Information
Cash paid for interest.................................... $ 29 $ 30 $ 20
Cash paid for income taxes................................ 610 180 5
Non-Cash Investing and Financing Activities
Equipment, inventory, information systems
development services, prepaids, customer lists,
marketable securities and goodwill acquired for
common stock and ITEX trade dollars..................... 3,951 3,770 1,831
Stock issued in acquisition of SLI, Inc................... 645
Available-for-sale securities purchased with ITEX trade
dollars................................................ 250 500 500
</TABLE>
37
<PAGE>
The accompanying notes are an integral part of the consolidated financial
statements.
38
<PAGE>
ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
The Company is engaged in international operations in both the retail barter
exchange and corporate barter areas of the commercial barter industry. The
Company administers the ITEX Retail Barter Exchange (the Exchange), which is an
association of business owners and professionals who trade goods and services
with other members of the Exchange. 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, (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. ITEX trade dollars may not be redeemed for cash. ITEX trade
dollars may be used only in the manner and for the purpose set forth in the ITEX
Trading Rules that govern 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. For these services, the Company typically receives a cash
commission of 5% or 6% on the purchases and sales made 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
either sells for cash or ITEX trade dollars or holds in inventory for further
trades in the corporate barter area or for trading to members of the Exchange.
The Company owns and operates retail barter 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. There are
presently 124 broker offices located in 36 states. In addition, there are also
approximately 20 foreign broker offices, including 14 in Canada. One of the
Company's current objectives is aggressive international expansion of the ITEX
retail trade network. The Company bears no financial responsibility for the
financing of an independent broker office.
The Company acts as an intermediary for the exchange of goods and services
between major companies, through the formation of ITEX USA, Inc., a corporate
barter management company, which is the Company's exclusive agent for marketing
the
39
<PAGE>
Company's corporate and industrial trading business of the Company's corporate
barter division. 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, now used in accounting for
transactions in the ITEX Retail Trade Exchange System. The revenues generated
from those inventories when sold for cash will be divided between the Company
and ITEX USA. This is the first and primary profit center in each ITEX corporate
barter transaction. The second profit center is a 12% transaction fee paid by
the ITEX Corporate Barter client on the Cash Equivalent Credit portion of each
purchase. This revenue will also be 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 companies invested in are able to use the ITEX trade dollars
received in payment for the stock issued to purchase goods and services used in
the operation of their businesses.
As a result of this utilization of trade dollars, the Company has accumulated an
investment portfolio of equity securities totaling $3,877,000 at July 31, 1996,
stated at the lower of cost or market. Also at July 31, 1996, the Company owned
inventories of goods and services totaling $7,844,000, stated at the lower of
cost or market, which was available for corporate trading or trading to members
within the Exchange, which increases cash commissions earned by the Company, for
exchange for equity securities of other companies, or for consumption by the
Company in providing for its own operating needs.
In 1993 the Company purchased a 49% interest in Associated Reciprocal Traders
("ART"), a trading company located in Zug, Switzerland. ART acts as a buyer and
seller of goods and services using barter, usually dealing with parties outside
the U.S. Through its interest in ART, the Company has a presence in the
international corporate barter marketplace. The Company's share of ART's net
assets and results of operations are included in the Company's financial
statements using the equity method of accounting. 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. As a result of the 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.
During the last several years, the Company started and operated a media
department, which exchanged media products owned by the Company for due bills
for prepaid
40
<PAGE>
advertising credits on radio stations across the U.S. The four Company-owned
products included the Image Audio Music Production Library, , the Golden Age of
Radio Theatre, the New Rock Countdown, and Flashback ... Moments in Time. 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.
41
<PAGE>
NOTE 2 - 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 to a significant
extent, any adjustments to trade dollar revenue would be offset by corresponding
adjustments to expenses paid when corresponding trade dollars are spent for
goods and services that are charged to costs and expenses.
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 or issued by the Company and U.S.
dollars--in tandem--to pay for goods and services used by the Company in its
operations. Because of the effectiveness of its purchasing programs, the Company
has not accumulated significant trade dollar balances on its balance sheets.
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
42
<PAGE>
realizable value. The Company would adjust the carrying value of the trade
dollars if the 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 for in 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 in 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 purchases and sells inventories for trade
dollars, 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
43
<PAGE>
from Cash Equivalent Credits. The Company arranges the sale of the inventory for
cash, which is retained by the Company subject to no future contingencies.
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 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
44
<PAGE>
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 restricted 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.
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. For fiscal years 1996 and 1995, the Company
is required to file its income tax returns on the accrual basis.
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. All of
the undistributed earnings of the foreign affiliate were reinvested and were not
expected to be remitted to the parent company. Accordingly, no federal income
taxes were provided on such earnings. 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 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.
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.
45
<PAGE>
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. Intangible assets, consisting of "excess of cost over
net assets of company acquired," "noncompete covenants," and "member lists", are
stated at cost and are being amortized over 20 and 5-year periods, respectively.
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 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, 1996.
NOTE 3 - 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, 1996, 1995, and 1994:
46
<PAGE>
Fiscal Years Ended July 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
(in thousands)
Corporate Trading Revenue
Trade $ 12,003 $ 12,403 $ 8,266
Cash 1,878 161
---------- ---------- ----------
13,881 12,403 8,427
Commissions on Sales Arranged
Trade 121
Cash 208 291
---------- ---------- ----------
329 291
---------- ---------- ----------
Trade Exchange Revenue
Trade 5,427 4,204 1,942
Cash 8,593 5,214 4,397
---------- ---------- ----------
14,020 9,418 6,339
---------- ---------- ----------
Total Revenue
Trade 17,551 16,607 10,208
Cash 10,679 5,505 4,558
---------- ---------- ----------
$ 28,230 $ 22,112 $ 14,766
========== ========== ==========
The above reported revenue amounts include only the portions considered as
commissions earned with respect to sales by ITEX USA, in accordance with Section
1200.01 of the AICPA Technical Practice Aids. Total sales arranged by the
Company in connection with ITEX USA were $3,055,000 and $1,807,000 in the years
ended July 31, 1996 and 1995, respectively.
NOTE 4 - NOTES RECEIVABLE
At July 31, 1996 and 1995, notes receivable consisted of the following:
July 31,
----------------------
1996 1995
---------- ----------
(in thousands, except monthly
payment amounts)
Note receivable in five equal annual
installments, including interest at 6% per
annum $ 600 $ ---
Note receivable from Business Exchange
International, Inc., payable over a fifteen-
year period in monthly installments of
$3,513, including interest at 8% per annum 300 ---
Note receivable from former officer of SLI,
Inc., due January 24, 1997, with interest at
8% per annum 125 ---
Note receivable from ITEX USA, Inc., due
October 15, 1996, with interest at 9% per
annum 106 ---
Other 226 29
---------- ----------
1,357 29
47
<PAGE>
Less, current portion (360) (29)
========== ==========
$ 997 $ ---
========== ==========
NOTE 5 - INVENTORY FOR PRINCIPAL PARTY TRADING
Following are the components of inventory for principal party trading:
July 31,
-----------------------
1996 1995
---------- ----------
(in thousands)
Prepaid media advertising duebills $ 3,530 $ 3,402
Image production inventory --- 292
Art work 2,642 245
Foreign hotel roomnights --- 226
Domestic hotel roomnights 1,482 1,531
Miscellaneous inventory 190 ---
---------- ----------
$ 7,844 $ 5,696
========== ==========
48
<PAGE>
NOTE 6 - AVAILABLE-FOR-SALE SECURITIES
Following is information about the value of available-for-sale securities at
July 31, 1996 and 1995:
Gross Gross Market
Carrying Unrealized Unrealized Value
Value Gains Losses (Discounted)
July 31, 1996:
Convertible preferred stock $ 3,163 $ $ $ 3,301
Stock dividends receivable 327 327
Common stock (restricted) 255 (6) 249
-------- -------- -------- --------
$ 3,745 $ 138 $ (6) $ 3,877
-------- -------- -------- --------
July 31, 1995:
Convertible preferred stock $ 3,011 $ 92 $ $ 3,103
Stock dividends receivable 123
Subordination fee receivable 106
-------- -------- -------- --------
$ 3,240 $ 92 $ $ 3,332
======== ======== ======== ========
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 Company recognizes realized gains and losses from the disposition of
available-for-sale securities in results of operations. The Company recognized
gains of $470,000 and losses of $248,000 in the year ended July 31, 1995. The
Company recognized gains of $231,000 and losses of $219,000 in the year ended
July 31, 1994.
In May 1994, the Company acquired $2,500,000 face value of Class A Convertible
Preferred Stock of Sky Scientific Financial Services, Inc. The terms of the
preferred stock include a 4 3/4% cumulative annual dividend rate payable
quarterly. The stock is convertible one-third of face value every twelve months
to common stock of Sky Scientific, Inc. (the parent company). The conversion
rate is 80% of the average bid price of the common stock. Sky Scientific
Financial Services, Inc. has the right to call any stock not converted. The
preferred stock is valued at the face value, discounted by the present value of
shares convertible into common in the future. Included in unrealized gains is
the value of the lapse of one year of a conversion restriction of $91,670 in
fiscal 1995 and the value of the lapse of the final conversion restriction of
$138,000 in fiscal 1996.
In July 1995, the Company acquired $1,650,000 face value of Class A Convertible
Preferred Stock (of which $1,500,000 was sold during the same month) of North
American Resorts, Inc. ("NAR"). Such shares accrue interest at the rate of 9%
per annum payable in common shares. The preferred shares are convertible
one-fourth of the original face value any time after each consecutive
twelve-month period, at 80% of the average traded price of NAR's common stock.
In August 1994, the Company acquired $500,000 face value of Class B Preferred
Stock of Softpoint, Inc. Such shares accrue interest at the rate of 9% per
annum, payable in
49
<PAGE>
cash or common shares at Softpoint's discretion. The preferred shares are
convertible any time, after one year until ten years for shares of restricted
common stock of Softpoint, Inc. at the average bid price. The preferred stock is
valued at the face value, discounted by the present value of shares convertible
into common in the future.
In April 1996, the Company acquired 15,121 shares of preferred stock of North
American Resorts, Inc. The preferred shares are convertible to common shares in
18 months based on the 30-day average stock price at the time of conversion.
In April 1995, the Company agreed to subordinate its preferred stock position in
Softpoint, Inc. to that of another investor. In exchange for the subordination,
Softpoint agreed to issue 25,000 common shares to the Company. The shares were
received by the Company during fiscal 1996.
Also included in the noncurrent marketable equity securities for fiscal 1994,
are investments in restricted or legend stock. Quoted prices for unrestricted
shares of the same class of stock that is restricted are used in determining
fair market values. Market values of other noncurrent marketable equity
securities are determined based on quoted prices.
NOTE 7 - INVESTMENT IN FOREIGN EQUITY AFFILIATE
The Company owns a 49% interest in Associated Reciprocal Traders, Inc. ("ART"),
a foreign corporation based in Switzerland with international commercial barter
operations. ART engages in commercial barter transactions as a buyer and seller
of goods and services with companies and businesses that are based in countries
outside the United States, as well as U.S. companies. The Company accounts for
its investment in and share of net income or loss of ART by the equity method.
The Company's equity share of ART's net income (loss), after amortization of the
difference between investment cost and the Company's proportionate share of
underlying assets, was ($90,000) for the fiscal year ended July 31, 1996,
$958,000 for the fiscal year ended July 31, 1995, and $632,000 for the fiscal
year ended July 31, 1994.
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 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.
50
<PAGE>
Following is summary balance sheet data of ART as of July 31, 1996 and July 31,
1995:
July 31,
---------------------------
1996 1995
----------- -----------
(in thousands)
Total assets $ 5,679 $ 4,543
=========== ===========
Current liabilities $ 84 $ 469
Stockholders' equity 5,595 4,074
----------- -----------
Total liabilities and equity $ 5,679 $ 4,543
=========== ===========
The assets of ART as of July 31, 1996 consist primarily of available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to distribute the assets on a basis expected to result in the
Company realizing an amount not less than the carrying value of the Company's
investment. The Company expects to be able to meet any requirements to pay the
current deferred tax liability by selling a portion of the available-for-sale
securities to be received.
NOTE 8 - INVESTMENT 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, 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 April 30, 1996, defendants Yarmak, Friedland, Business Exchange International
Corp., and BX International, Inc., filed an answer denying the material
allegations and asserting a counterclaim for attorney fees.
51
<PAGE>
On October 11, 1996, ITEX Corporation moved for dismissal of its claims
(business defamation, unlawful trade practices and interference with economic
relationships), without prejudice, against defendants. On that same date the
motion was granted and leave granted to file an Amended Complaint. That
complaint is styled SLI, Inc. v. Saul Yarmak, Stephen Friedland, Business
Exchange International Corp. and BX International, Inc. The Amended Complaint
restates the claims against defendants for breach of contract, specific
performance, declaratory judgment and fraud. By dismissing ITEX Corporation's
claims without prejudice, ITEX may, if it chooses, reinstitute its claims for
business defamation, unlawful trade practices and interference with economic
relationships. Proceeding under the Amended Complaint permits an expedited
determination of the core contract issues raised, that is, whether BXI breached
its contract with SLI by asserting that the BXI Trade Exchange is not an asset
of BXI.
The potential outcome of this lawsuit is uncertain. However, the Company
believes that SLI has meritorious arguments in favor of its contract positions.
The Company believes that a solution will be reached either through negotiation
or through completion of the litigation process. The trial date has been set for
February 24, 1997. Legal counsel is unable to evaluate the probability of a
favorable or unfavorable outcome or to estimate the range of potential recovery
on the plaintiff's claims or any potential loss on the defendant's
counterclaims.
NOTE 9 - 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, 1996 and 1995, the unamortized balance of member lists consisted of
the following:
July 31,
---------------------------
1996 1995
----------- -----------
(in thousands)
Cost $ 142 $ 142
Accumulated amortization (60) (32)
----------- -----------
$ 82 $ 110
=========== ===========
Amortization expense for member lists was $28,000, $21,000 and $11,000 for the
fiscal years ended July 31, 1996, 1995, and 1994, 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, 1996 and 1995, the unamortized balance consisted of the following:
52
<PAGE>
July 31,
---------------------------
1996 1995
----------- -----------
(in thousands)
Cost $ 348 $ 348
Accumulated amortization (104) (35)
----------- -----------
$ 244 $ 313
=========== ===========
Amortization expense was $70,000, $35,000 and $10,000 for the fiscal years ended
July 31, 1996, 1995, and 1994, 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, 1996 and 1995, the unamortized cost consisted of the following:
July 31,
---------------------------
1996 1995
----------- -----------
(in thousands)
Cost $ 658 $ 658
Accumulated amortization (47) (14)
----------- -----------
$ 611 $ 644
=========== ===========
Amortization expense was $33,000 and $14,000 for the fiscal years ended July 31,
1996 and 1995, respectively.
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, 1996, the unamortized balance consisted of the following:
(in thousands)
Cost $ 385
Accumulated amortization (23)
-----------
$ 362
===========
Amortization expense was $22,000 for the fiscal year ended July 31, 1996.
NOTE 10 - OTHER ASSETS
At July 31, 1996 and 1995, property and equipment, which are included in Other
assets, consisted of the following:
53
<PAGE>
July 31,
---------------------------
1996 1995
----------- -----------
(in thousands)
Office furniture and fixtures $ 111 $ 110
Computer equipment 486 446
Vehicles 29 ---
Leasehold improvements 118 151
----------- -----------
744 707
Less, accumulated depreciation (491) (487)
----------- -----------
$ 253 $ 220
=========== ===========
Depreciation expense for property and equipment was $91,000, $68,000 and $91,000
for the fiscal years ended July 31, 1996, 1995, and 1994, respectively.
At July 31, 1996 and 1995, capitalized equipment leases, which are included in
Other assets, consisted of the following:
July 31,
---------------------------
1996 1995
----------- -----------
(in thousands)
Vehicles $ --- $ 69
Computer equipment 175 193
----------- -----------
175 262
Less, accumulated depreciation (72) (92)
----------- -----------
$ 103 $ 170
=========== ===========
Depreciation expense for capitalized equipment leases was $41,000, $31,000 and
$11,000 for the fiscal years ended July 31, 1996, 1995, and 1994, respectively.
At July 31, 1996, Other assets includes costs of purchasing and developing
certain of the Company's information and communication systems. During fiscal
1996, the Company continued work on development projects that had been commenced
in prior years. Since these are mature projects and systems, technological
feasibility was present, resulting in the capitalization of most of the
development costs incurred in fiscal 1996, in accordance with the Company's
accounting policy. The increase in the level of research and development costs
was attributable to the nature of the activities in fiscal 1996, which
essentially consisted of coding and other activities connected with constructing
the systems. A large portion of the development costs were paid to independent
consultants and specialists in the particular systems areas and are not fixed
costs of the Company.
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, 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 and $17,000 was charged to expense. During the fiscal years ended
July 31, 1995 and
54
<PAGE>
1994, the Company spent a total of $169,000 and $131,000, respectively, all of
which was charged to expense.
The projects were still in progress at July 31, 1996. Several of the systems and
enhancement projects were nearing completion at the end of fiscal 1996. When the
projects are completed and ready for general use, the costs will be amortized
over a four-year period.
NOTE 11 - BROKER PORTION OF ACCOUNTS RECEIVABLE
The Company maintains brokers in offices around the country to service its
customers. The broker is entitled to a split of any collections the Company
makes on that broker's customers, which is then payable within 35 days. The
liability for amounts estimated to be collected in the future was $508,000 and
$580,000 at July 31, 1996 and 1995, respectively.
NOTE 12 - EXCESS OF TRADE DOLLARS ISSUED OVER TRADE CREDITS
EARNED
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."
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.
NOTE 13 - BANK LINE OF CREDIT
Bank Line of Credit. The Company has a line of credit facility with a bank.
Pursuant to the line of credit, the Company is able to 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, 1996, the Company had no
borrowings outstanding under the bank credit facility. The credit facility
expires on December 31, 1997.
55
<PAGE>
NOTE 14 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Notes Payable
At July 31, 1996 and 1995, long-term debt consisted of the following:
<TABLE>
<CAPTION>
July 31,
---------------------------
1996 1995
----------- -----------
(in thousands)
<S> <C> <C>
Note payable at $1,000 per month, including interest
at 7% per annum, collateralized by property of a
related party $ 11 $ 21
Note payable at $8,300 per month, including interest
at 6% per annum 185
Note payable at $600 per month, including interest
at 8% per annum, collateralized by a vehicle 26
----------- -----------
222 21
Less, current maturities (96) (11)
----------- -----------
$ 126 $ 10
=========== ===========
</TABLE>
The annual maturities of long-term debt for the next five years are as follows:
(in thousands)
Fiscal Year Ending July 31,
1997 $ 96
1998 102
1999 14
2000 7
2001 3
Capital Leases
The Company leases vehicles and equipment under seven noncancellable capital
leases. The leases, which expire during the years 1996 through 1999, have terms
from three to five years and provide for aggregate monthly payments of $4,600.
The Company is obligated under the vehicle leases to pay executory costs such as
insurance, maintenance and other related expenses.
Minimum future lease payments under capital leases for the next five years are
as follows:
56
<PAGE>
(in thousands)
Fiscal Year Ending July 31,
1997 $ 54
1998 45
1999 24
2000 4
-------
127
Less, imputed interest (19)
-------
Present value of minimum lease payments 108
Less, current portion (42)
-------
$ 66
=======
NOTE 15 - CAPITAL STOCK
Private Placements. During the fiscal year ended July 31, 1996, the Company
completed a private placement with Newcastle Services Ltd. ("Newcastle"), a
foreign corporation, which owns a 51% interest in Associated Reciprocal Traders,
Inc., the Company's 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.
57
<PAGE>
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 purchase price that would
have been due for the calendar quarter ended September 30, 1996, and therefore
the Company has canceled 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 Option Plan. 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. During the fiscal year ended July 31,
1996, the Company received proceeds totaling $895,000 from the exercise of stock
options to purchase 470,000 shares of common stock pursuant to 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. 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 plan.
Following is a summary of activity under both stock option plans for the three
year period ended July 31, 1996:
58
<PAGE>
Option Price (equal to
Market Value)at Date of
Grant
Number of ------------------------
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....................... 730,000 1.94-2.50 1,517,000
Exercises.................... (10,000) 1.00 (10,000)
----------- -----------
Balance at July 31, 1995......... 1,098,000 1.00-3.38 2,368,000
Grants....................... 1,295,000 6.13 7,938,000
Exercises.................... (470,000) 1.94-2.50 ( 895,000)
----------- -----------
Balance at July 31, 1996......... 1,923,000 1.00-6.13 $9,411,000
=========== ===========
Number of shares exercisable:
July 31, 1996................ 1,923,000
===========
July 31, 1995................ 1,098,000
===========
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, of which $640,000 had not been performed as of July 31, 1996.
The Company has classified this balance as a reduction of stockholders' equity
at July 31, 1996, rather than as a prepaid expense and an increase to equity.
The Company expects to use these printing services in future periods.
Stock Split. At the annual meeting of the Company's shareholders on May 3, 1996,
the Company's shareholders approved a two-for-one forward stock split with
respect to the Company's common stock. The stock split has not yet been
implemented by the Company. Upon implementation of the stock split, all share
and per share data included in the Company's financial statements would be
restated to give effect to the stock split.
59
<PAGE>
NOTE 16 - INCOME TAXES
Comparative analysis of the provisions for income taxes follows:
Fiscal Years Ended July 31,
------------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
(in thousands)
Current:
Federal $ 607 $ 475 $ 76
State 125 94 16
-------------- -------------- --------------
732 569 92
-------------- -------------- --------------
Deferred
Federal 147 (40) 8
State 29 (7) 1
-------------- -------------- --------------
176 (47) 9
-------------- -------------- --------------
$ 908 $ 522 $ 101
============== ============== ==============
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,
-----------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
(in thousands)
Taxes at U.S. Federal
statutory rate $ 1,160 $ 746 $ 307
Share of net income of
foreign equity affiliate (451) ( 316) (209)
State income taxes 170 137 28
Other 29 (45) (25)
-------------- -------------- -------------
$ 908 $ 522 $ 101
============== ============== =============
At July 31, 1996 and 1995, deferred tax (assets) liabilities consisted of the
following:
July 31,
-------------------------
1996 1995
---------- ----------
(in thousands)
Current deferred tax liabilities $ 1,253 $ 43
Noncurrent deferred tax liabilities 265 130
Current deferred tax assets --- (51)
Noncurrent deferred tax assets --- (26)
Valuation allowance --- ----
---------- ----------
$ 1,518 $ 96
---------- ----------
All of the undistributed earnings of Associated Reciprocal Traders, Inc., the
Company's 49% owned 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
60
<PAGE>
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 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.
NOTE 17 - 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 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. 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
============
61
<PAGE>
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. The
purchase price was allocated as follows:
(in thousands)
Fixed assets $ 35
Goodwill 293
------------
$ 328
============
The accompanying consolidated financial statements include operations of TAHG
for the period from February 10, 1995, the date of acquisition.
NOTE 18 - 401(k) SAVINGS 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
$10,000, $7,000 and $5,000 for the plan years ended December 31, 1995, 1994, and
1993, respectively.
NOTE 19 - BUSINESS CONCENTRATIONS
One customer accounted for approximately $3,200,000 or 20% of corporate trading
revenue and 20% of total revenue. for the year ended July 31, 1996.
Three customers accounted for approximately $6,200,000 or 48% of corporate trade
revenue and 26% of total operating revenues for the year ended July 31, 1995.
One customer accounted for approximately $2,361,000 or 28% of corporate trade
revenue and 16% of total operating revenues (not including revenues included in
the net income of the foreign affiliate) for the year ended July 31, 1994.
N0TE 20 - 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 Year Ending July 31,
1997 $ 170
1998 151
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1999 140
2000 140
2001 140
Of the minimum rental commitment due in fiscal 1997, $144,000 is payable in cash
and $26,000 is payable in ITEX trade dollars.
On April 9, 1994, the Company issued 150,000 shares of common stock as partial
payment for a 49% interest in a foreign affiliate. (See Notes 9 and 20.) The
Company shall pay the seller a maximum of $1,650,000. In addition to the common
stock, the remaining amount due shall be paid by the issuance of up to 400,000
shares of a new class of stock to be issued upon the approval of a shareholders
meeting and referred to as Class "A" Convertible Preferred Stock. Delivery of
the shares is subject to the foreign affiliate fulfilling specified performance
criteria.
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 10K/A:
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 S-8 effective August 24, 1995, File No. 33-95900)
10.3 ITEX Corportion 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.
21. Subsidiaries of the Company: Barter Exchange, Inc., incorporated in
Nevada SLI, Inc., incorporated in Nevada
23.1 Consent of Independent Certified Public Accountants
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EHIBIT 10.5
THE UNITS REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 IN RELIANCE UPON REGULATION S PROMULGATED UNDER THAT ACT AND MAY NOT BE
TRANSFERRED EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF REGULATION S. THE UNITS
MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE TRANSFERRED TO A U.S. PERSON OR
FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON (OTHER THAN A DISTRIBUTOR) EXCEPT IN
ACCORDANCE WITH THE PROVISIONS OF REGULATION S, PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, OR PURSUANT TO AN EXEMPTION FROM
REGISTRATION UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO
THE SATISFACTION OF THE CORPORATION.
AGREEMENT FOR PURCHASE OF
ITEX UNITS
THIS AGREEMENT FOR PURCHASE OF ITEX UNITS (the "Agreement") effective
as of January 1, 1996 by and between ITEX Corporation, a Nevada Corporation with
principal offices at One Lincoln Center, P.O. Box 2309, Portland, OR 97208-2309
U.S.A. ("Seller") and Wycliff Fund, Inc., a corporation formed under the laws of
the Bahamas, with offices located at c/o McKinney, Bancroft & Hughes, #4 George
Street, N-3937, Nassau, BAHAMAS ("Purchaser").
1. PURPOSE.
A. The Units. On the basis of the representations and warranties
contained herein, and subject to the terms and conditions set forth
herein, Purchaser agrees to purchase from Seller one million
twenty-two thousand four hundred ninety-five (1,022,495) units (the
"Units"), each Unit consisting of one (1) share of its authorized but
previously unissued common stock, par value $0.01 per share, and two
(2) warrants, each to purchase an additional share of ITEX common
stock on terms set forth hereafter and more particularly set forth in
such warrants. The purchase price for the Units is Five Million United
States Dollars (US$5,000,000.00) or US$4.89 per Unit (the "Purchase
Price").
B. Concerning the Warrants. One warrant attached to each share of common
stock shall be exercisable from and after two (2) years from the date
of issuance at a price of US$4.89 per share and will expire five (5)
years from the date of issuance. The other warrant shall be
exercisable from and after four (4) years from the date of issuance at
a price of US$6.12 per share and will expire ten (10) years from the
date of issuance. Specimen forms of such warrants are attached
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hereto marked Exhibit "A" and Exhibit "B" and incorporated herein by
this reference.
2. DELIVERY OF THE UNITS AND THE PURCHASE PRICE.
It is intended that Purchaser shall pay for and receive not less that
$625,000 worth of the Units (approximately 127,812 Units) in each calendar
quarter commencing January 1, 1996. Seller hereby agrees that it shall deliver
to Purchaser the Units as soon as practicable after receipt by Seller of all or
any portion of the Purchase Price by delivering good funds in United States
Dollars to the Seller for closing by delivery of securities versus acceptable
payment to Seller or such other terms are acceptable to Seller. In no event
shall Seller be required to issue any fractional Units but rather may defer
further issuances until such time as sufficient of the Purchase Price is
received to permit delivery of convenient blocks of Units.
If, however, Purchaser pays the entire Purchase Price on or before
December 31, 1996, Purchaser will receive an additional 250,000 warrants
exerciseable at $4.89 per share (Exhibit B warrants). On the other hand, if
Purchaser has not paid the entire Purchase Price on or before December 31, 1996,
the remaining unpaid balance shall bear interest at the rate of eight percent
(8%) per annum until the entire purchase price is paid. Furthermore, if
Purchaser fails to pay at least $625,000 in any calendar quarter for the
purchase of Units, Seller may, at its sole option, declare this Agreement at an
end and shall not be obliged to sell any further Units to Purchaser.
3. REGISTRATION OF SHARES.
Seller agrees to register the shares making up the Units any time so
requested in writing by Purchaser from and after June 30, 1996, and will use its
best efforts to register any shares which may be issued to Purchaser based upon
exercise by Purchaser of the Warrants granted to Purchaser as follows:
A. If at any time after issuance of the Units Seller proposes to register
any of its equity securities under the Securities Act of 1933, as
amended (the "Act") on Form S-1, S-2, S-3, S-8 or any other
registration form at the time in effect on which shares of its stock
could be registered for sale by the holders therof, the Seller shall
give written notice to Purchaser of its intention to so register and,
upon the written request of Purchaser within 30 days after receipt of
any such notice and exercise of the Warrants for all or a portion of
the total number of shares of stock of the Seller for which Purchaser
has warrants ("Registration Shares"), the Seller will register the
Registration Shares under the Act and and under the same registration
statement proposed to be filed by Seller, all to the extent requisite
to permit the sale or other disposition by the Purchaser of the
Registration Shares; provided, however that if the offering to which
the proposed registration statement relates is to be distributed by or
through underwriter(s) selected by Seller, Purchaser shall agree to
sell the Registration Shares through such underwriter(s) on the same
terms and conditions as the underwriter(s) agrees to sell securities
on behalf of Seller; and provided, futher, that if a greater number of
shares of stock of the Seller (including the Registration
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Shares) is offered for participation in the proposed underwriting
than, in the opinion of the managing underwriter proposing to
underwrite the securities to be sold can be accomodated without
adversely affecting the proposed underwriting, the Seller may elect to
reduce ratably (based upon the relative proportions of the shares
owned which carry registration rights) the amount of all securities
proposed to be offered in the underwriting for the accounts of all
persons other than the Seller to a number deemed satisfactory by the
managing underwriter. For purposes of the foregoing, Purchaser shall
not bear reduction on account of shares to be registered on behalf of
officers and directors of Seller.
B. All expenses incurred by Seller in complying with the registration
requirements hereof (except fees and disbursements of counsel for any
shareholder and underwriting discounts, commissions, or similar
expenses to be incurred in connection with the sale of Purchaser's
shares) shall be borne by Purchaser in such proportion as the
Purchaser shares bear to the total number of shares to be registered.
All registration rights granted herein may apply only to shares of
common stock issued by Seller. Seller is under no obligation to
maintain the effectiveness of any Registration Statement for more than
an aggregate of 90 days.
C. In connection with the filing of any Registration Statement or
offering statement under this section, Seller covenants and agrees
that it will take all necessary action which may be required in
qualifying or registering the Purchaser's shares included in a
Registration Statement or offering statement for the offer and sale
under the securities or blue sky laws of such states as may be
reasonably requested by the holders of the Purchaser's shares;
provided, that Seller shall not be obligated to execute or file any
general consent to service of process or to qualify as a foreign
corporation to do business under the laws of any such jurisdiction.
D. In the event of any registration of any Seller common stock under the
Securities Act pursuant to this section, Seller shall indemnify and
hold harmless Purchaser or any subsequent transferee of the
Purchaser's shares against any losses, claims, damages or liabilities,
joint or several, to which such holder may become subject under the
Securities Act or any other statute or at common law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any alleged untrue statement of any
material fact contained, on the effective date thereof, in any
Registration Statement under which such securities were registered
under the Securities Act, any preliminary prospectus or final
prospectus contained therein, or any amendment required to be stated
therein or necessary to make the statements therein not misleading,
and shall reimbursesuch holder for any legal or any other expenses
reasonably incurred by such holder in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that Seller shall not be labile in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon any alleged untrue statement or
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alleged omission made in such Registration Statement, preliminary
prospectus, prospectus or amendment or supplement in reliance upon and
in conformity with written information furnished to Seller by
Purchaser or such holder specifically for use therein. Such indemnity
shall remain in full force and effect regardless of any investigation
made by or on behalf of such holder and shall survive the transfer of
such securities by such holder and consummation of the transactions
contemplated by this Agreement.
E. The reimbursements required by Section 3 E shall be made by periodic
payments during the course of the investigation or defense, as and
when bills are received or expense incurred; provided, however, that
to the extent that an indemnified party receives periodic payments for
legal or other expenses during the course of an investigation or
defense, and such party subsequently receives payment for such
expenses from the other parties to the proceeding, such payments shall
be used by the indemnified party to reimburse the indemnifying party
for such periodic payments.
F. Seller further agrees that in the event that counsel to Purchaser is
of the reasonable opinion that the Purchaser's shares may be
transferred and/or sold in full compliance with the provisions of the
Act, without the need for filing a Registration Statement, Seller will
fully cooperate in connection with such transfer and/or sale.
G. Seller further agrees and represents that while any of the Purchaser's
shares are outstanding and held by Purchaser or Purchaser's
affiliates, Seller will timely file all reports and documents required
under the Exchange Act and the Securities Act.
H. Purchaser agrees that the ITEX common shares making up the Units will
be subject to a voting trust in favor of ITEX which shall remain in
force with respect to each such share until each shall be sold by
Purchaser or the holder thereof. Nothing in said voting trust shall in
any way restrict or limit the ability of the holder thereof to sell
such shares.
4. REPRESENTATIONS AND WARRANTIES OF SELLER.
Seller hereby represents and warrants to Purchaser that:
A. Organization. Seller is a corporation duly organized and validly
existing and in good standing under the laws of the state of Nevada,
and it has all corporate power necessary to engage in the business in
which it presently engages;
B. Authority. This Agreement has been duly executed by Seller and the
execution and performance of this Agreement will not violate or result
in a breach of, or constitute a default in any agreement, instrument,
judgment, order or decree to which Seller is a party or to which
Purchaser is subject;
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C. Legal Status. The Units are genuine, validly issued and outstanding,
fully paid and nonassessable and are not issued in violation of any
agreement by which the Seller is bound. All issued and outstanding
shares of Seller and the shares represented in the Units and
underlying the warrants are, and will be, legally issued, fully paid,
and nonassessable and not issued in violation of the preemptive or
other right of any person. There are no dividends or other amounts due
or payable with respect to any of the shares of capital stock of
Seller.
D. Offshore Transaction. Seller has not offered these securities to any
person in the United States or to any U.S. person or for the account
or benefit of any U.S. person.
E. No Directed Selling Efforts. In regard to this transaction, Seller has
not conducted any "directed selling efforts" as that term is defined
in Rule 902 of Regulation S promulgated under the Securities Act of
1933, nor has Seller conducted any general solicitation relating to
the offer and sale of the Warrants to persons resident within the
United States or elsewhere.
F. Reporting Company Status. The Seller has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and has been subject to such filing
requirements for the past 90 days.
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER.
Purchaser hereby represents and warrants to Seller that:
A. Organization. Purchaser is a bona fide business entity organized under
the laws of the Bahamas and is in good standing with the regulatory
authorities therein;
B. Authority. This Agreement has been duly executed by Purchaser and the
execution and performance of this Agreement will not violate, or
result in a breach of, or constitute a default in any agreement,
instrument, judgment, order or decree to which Purchaser is a party or
to which Purchaser is subject nor will such execution and performance
constitute a violation of or conflict with any fiduciary to which
Purchaser is subject;
C. Further Documents. Purchaser warrants to Seller that it will complete
and answer all applicable questions contained in the attached
Suitability Letter, Information and Confirmation Letter and
Subscription Agreement and return a signed copy to Seller
contemporaneously with this Agreement.
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D. Sale/Title. Purchaser warrants that it will not sell or transfer title
to the Units unless sold or transferred in compliance with Regulation
S of the Securities Act of 1933 and all other U.S. securities laws.
E. Offshore Transaction. Purchaser represents and warrants to Seller as
follows:
(i) Purchaser is not a U.S. person (whenever such term is used
herein, it shall have the meaning given in Regulation S);
(ii) As of the effective date this Agreement was entered into,
Purchaser was outside the United States and is outside the United
States as of the date of the execution and delivery of this
Agreement;
(iii)Purchaser is not purchasing the Units on behalf of any U.S.
person and the sale has not been pre-arranged with a purchaser in
the United States;
(iv) Each distributor participating in the offering of the securities,
if any, has agreed in writing that all offers and sales of the
securities prior to the expiration of a period commencing on the
date of the final closing of the offering of Shares and ending
one (1) year thereafter (the "Restricted Period") shall only be
made in compliance with the safe harbor contained in Regulation
S, pursuant to registration of Shares under the Securities Act of
1933 or pursuant to an exemption from registration.
(v) Purchaser represents and warrants and hereby agrees that all
offers and sales of the Units prior to the expiration of the
Restricted Period shall only be made in compliance with the safe
harbor contained in Regulation S, pursuant to registration of
securities under the Securities Act of 1933 or pursuant to an
exemption from registration, and all offers and sales after the
Restricted Period shall be made only pursuant to such a
registration, and all offers and sales after the Restricted
Period shall be made only pursuant to such a registration or to
such exemption from registration.
(vi) All offering documents received by Purchaser include statements
to the effect that the Units have not been registered under the
Securities Act of 1933 and may not be offered or sold in the
United States or to U.S. Person (other than distributors as
defined in Regulation S) during the Restricted Period unless the
Units are registered under the Securities Act of 1933 or an
exemption from the registration requirements is available.
(vii)Purchaser acknowledges that the purchase of the Units involves a
high degree of risk and further acknowledges that it can bear the
economic risk of the purchase of the Units, including the total
loss of its investment.
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(viii) Purchaser understands that the Units are being offered and sold
to it in reliance on specific exemptions from the registration
requirements of Federal and State Securities laws and that the
Seller is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgements and
understandings of Purchaser set forth herein in order to
determine the applicability of such exemptions and the
suitability of Purchaser to acquire the Units.
(ix) Purchaser is sufficiently experienced in financial and business
matters to be capable of evaluating the merits and risks of its
investment, and to make an informed decision relating thereto.
(x) In evaluating its investment, Purchaser has consulted its own
investment and/or legal and/or tax advisors.
(xi) Purchaser understands that in the view of the SEC the statutory
basis for the exemption claimed for the transaction would not be
present if the offering of the Units, although in technical
compliance with Regulation S, is part of a plan or scheme to
evade the registration S, is part of a plan or scheme to evade
the registration provisions of the 1933 Act and Purchaser
confirms that its purchase is not part of any such plan or
scheme. Purchaser is acquiring the Units of investment purposes
and has no present intention to sell the Units in the United
States or to a U.S. Person or for the account or benefit of a
U.S. Person either now or promptly after the expiration of the
Restricted Period.
(xii)Purchaser is not an underwriter of, or dealer in, the Units; and
Purchaser is not participating, pursuant to a contractual
agreement, in the distribution of the Units. If Purchaser is
purchasing the Units subscribed for hereby in representative or
fiduciary capacity, the representations and warranties in this
Stock Purchase Agreement shall be deemed to have been made on
behalf of the person or persons for whom Purchaser is so
purchasing.
F. Independent Investigation; Access. Purchaser acknowledges that
Purchaser, in making the decision to purchase the Units subscribed
for, has relied upon independent investigations made by it and it's
purchaser representatives, if any, and Purchaser and such
representatives, if any, have, prior to any sale to it, been given the
opportunity to receive answers from Seller or any officer of Seller
acting on its behalf concerning the terms and conditions of this
offering. Purchaser and its advisors, if any, have been furnished with
access to all publicly available materials relating to the business,
finances and operations of the Seller and materials relating to the
offer and sale of the
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Units which have been requested. Purchaser and it's advisors, if any,
have received complete and satisfactory answers to any such inquiries.
G. No Government Recommendation or Approval. Purchaser 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
Units, or has passed or made, or will pass on or make, any
recommendation or endorsement of the Units.
H. Entity Purchases. If Purchaser is a partnership, corporation or trust,
then the person executing this Agreement on its behalf represents and
warrants that:
(i) He or she has made due inquiry to determine the truthfulness of
the representations and warranties made pursuant to this
Agreement.
(ii) He or she is duly authorized (if the undersigned is a trust, by
the trust agreement) to make this investment and to enter into
and execute this Agreement on behalf of such entity.
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 assignment of the Units, and shall survive thereafter. If Purchaser has
knowledge, prior to the acceptance of this Agreement by the Seller, that any
such representations and warranties shall not be true and accurate in any
respect, the Purchaser prior to such acceptance, will give written notice of
such fact to the Seller specifying which representations and warranties are not
true and accurate and the reasons therefor.
Purchaser agrees to fully indemnify, defend and hold harmless Seller,
its officers, directors, employees, agents and attorneys form and against any
and all losses, claims, damages, liabilities and expenses, including reasonable
attorney's fees and expenses, which may result from a breach of Purchaser's
representations, warranties and agreements contained herein.
6. RESTRICTED PERIOD; LEGEND. The transaction restrictions of Regulation S in
connection with the offshore offer and sale restrict Purchaser from offering and
selling to U.S. persons or for the account or benefit of a U.S. person for a
period of forty (40) days commencing upon completion of this offering. Rule
903(c)(2) governs the forty day transaction restriction. In the event that
multiple Agreements for Sale of Stock Units are accepted by the Seller, the
forty day restriction period shall begin only after the closing with respect to
the final such Agreement accepted by Seller. Purchaser understands that Seller
will instruct its transfer agent to place a stop transfer order with respect to
the certificates representing the Units and that such certificates will bear the
following legend: "The Units represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act") in reliance upon
Regulation S promulgated under that Act and may not be transferred except in
accordance with the provisions of Regulation S. The shares may not be offered
for sale, sold or otherwise transferred to a U.S. person or for the account or
benefit of a U.S. person (other than a distributor) except in accordance with
the
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provisions of Regulation S, pursuant to an effective registration statement
under the Act, or pursuant to an exemption from registration under the Act, the
availability of which is to be established by the holder hereof to the
satisfaction of the Corporation."
7. EXEMPTION; RELIANCE ON REPRESENTATIONS. Purchaser understands that the offer
and sale of the Units is not being registered under the 1933 Act and that Seller
is relying on the rules governing offers and sales made outside the United
States pursuant to Regulation S and the representations, warranties and
agreements of Purchaser made herein.
8. MISCELLANEOUS.
A. 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:
If to Seller: If to Purchaser:
ITEX Corporation Wycliff Fund, c/o McKinney, Bancroft & Hughes
P.O. Box 2309 #4 George Street, N-3937
Portland, OR 97208-2309 Nassau
U.S.A. BAHAMAS
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.
B. 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.
C. 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.
D. Assignment. Neither party may assign this Agreement without the
express written consent of the other party, however, any such
Assignment shall be binding on and inure to the benefit of such
successor, or, in the event of death or incapacity, on their heirs,
executors, administrators and successors of any party.
E. Applicable Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Oregon, United States of
America, and in the English language.
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F. Venue. A claim or other dispute among the parties whether or not
arising from any transaction contemplated (whether or not specifically
referred to) by this Agreement, shall not be made the subject of
litigation until submitted for binding arbitration in the nearest
available location as indicated above, or otherwise pursuant to the
applicable arbitration law. The parties agree to the exclusive
personal and subject matter jurisdiction, and venue of the federal and
local courts in Multnomah County, Oregon U.S.A. with respect to all
such disputes to the extent legally permissible. These arrangements
are being made because of the parties mutual desires to remove
uncertainty as to such matters, and the location therein of one or
more of the parties and their property.
G. Attorney's Fees. If any legal action or other proceeding
(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, any successful or prevailing party
will be entitled to recover reasonable attorney's fees (including for
appeals and collection) and other expenses 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 and 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. Further Assurances. At any time and from time to time, after the
effective date, each party will execute such additional instruments
and take such action as may reasonably be requested by the other party
to confirm or perfect title to the subject Units transferred hereunder
or otherwise to carry out the intent and purposes of this Agreement.
K. Broker's or Finder's Fee: Expenses. Purchaser and Seller warrant that
neither has incurred any liability, contingent or otherwise, for
brokers' or 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.
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
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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
consummation if the transactions contemplated hereunder, this
Agreement may be amended by a writing signed by all parties hereto,
with respect to any of the terms contained herein, and any term 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.
M. 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.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
ITEX CORPORATION ("Seller")
By /s/ Michael T. Baer
-----------------------------------------------
Name & Title: Michael T. Baer, President and CEO
WYLIFF FUND, INC. ("Purchaser")
By /s/H.J. Keilman
----------------------------------
Name & Title: H.J Keilman, Director
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EXHIBIT 23.1
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 10K/A) for the fiscal year ended July 31, 1996.
Andersen, Andersen, & Strong, L.C.
Salt Lake City, Utah
December 5, 1996
75
<PAGE>
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: December 6, 1996
ITEX CORPORATION
December 6, 1996 /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. December 6, 1996
Graham H. Norris, Chairman of the Board of Directors, President and
Chief Executive Officer (principal executive officer and director)
/s/ Joseph M. Morris December 6, 1996
Joseph M. Morris, Vice President and Chief Financial Officer
(principal accounting officer and director)
/s/ Mary Sherr December 6, 1996
- ----------------------------------------------
Vice President of Broker Development, Director
/s/ Dr. Evan B. Ames December 6, 1996
- ----------------------------------------------
Director
/s/ Thomas G. Baer December 6, 1996
- ----------------------------------------------
Director
/s/ Dr. Sherry L. Meinberg December 6, 1996
- ----------------------------------------------
Director
/s/ Robert Nelson December 6, 1996
- ----------------------------------------------
/s/ Director
/s/ Dr. Charles Padbury December 6, 1996
- ----------------------------------------------
Director
76
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Jul-31-1996
<PERIOD-END> Jul-31-1996
<CASH> 1,301,000
<SECURITIES> 3,877,000
<RECEIVABLES> 1,207,000
<ALLOWANCES> 0
<INVENTORY> 7,844,000
<CURRENT-ASSETS> 2,827,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 23,406,000
<CURRENT-LIABILITIES> 2,566,000
<BONDS> 0
0
0
<COMMON> 20,383,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 23,406,000
<SALES> 0
<TOTAL-REVENUES> 28,230,000
<CGS> 17,902,000
<TOTAL-COSTS> 26,048,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,382,000
<INCOME-TAX> 908,000
<INCOME-CONTINUING> 1,384,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,384,000
<EPS-PRIMARY> 0.19
<EPS-DILUTED> 0.18
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