SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
February 12, 1997
Commission File Number 0-18275
ITEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-0922994
- ------------------------------- ----------------------------
State (or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10300 SW Greenburg Road, Suite 370, Portland, Oregon 97223
- -------------------------------------------------------------------------------
(Address of principal executive offices including zip code)
(503) 244-4673
-------------------------------
(Registrant's telephone number including area code)
Indicate by check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
past 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
----- -----
Number of Shares of Common Stock, $0.01 Par Value Outstanding
at March 26, 1997:
6,884,000
(This Form 10-Q includes 29 pages)
<PAGE>
ITEX CORPORATION
FORM 10-Q
For the Quarterly Period Ended
February 12, 1997
INDEX
Page
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AT FEBRUARY 12, 1997
AND JANUARY 15, 1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE AND
TWENTY-EIGHT WEEK PERIODS ENDED FEBRUARY 12, 1997 AND FOR
THE TWELVE AND TWENTY-FOUR WEEK PERIODS ENDED JANUARY 15,
1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE TWENTY-
EIGHT WEEK PERIOD ENDED FEBRUARY 12, 1997 AND FOR THE
TWENTY-FOUR WEEK PERIOD ENDED JANUARY 15, 1996 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION 25
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts )
February 12, July 31,
1997 1996
<S> <C> <C>
-------------- --------------
ASSETS
Current Assets
Cash ............................................... $ 814 $ 1,301
Accounts receivable, net of allowance for doubtful
accounts of $115 and $96........................ 1,247 847
Notes receivable.................................... 257 360
Prepaids and other current assets................... 316 319
-------------- --------------
Total current assets............................ 2,634 2,827
Inventory for Principal Party Trading.................... 9,141 7,844
Trade credits earned in excess of expended............... 1,186 ---
Available for Sale Equity Securities..................... 3,877 3,877
Investment in Foreign Equity Affiliate................... 3,197 3,197
Investment in Business Exchange International Corp....... 2,612 2,418
Goodwill and Purchased Member Lists, net................. 1,183 1,299
Notes Receivable, Long-Term Portion...................... 997 997
Other Assets............................................. 886 947
-------------- --------------
$ 25,713 $ 23,406
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable.................................... $ 287 $ 183
Portion of receivables due to brokers .............. 622 508
Trade credits issued in excess of earned............ --- 41
Income taxes payable................................ 855 94
Deferred tax liability.............................. 1,253 1,253
Current portion of long-term indebtedness........... 60 138
Other current liabilities........................... 314 349
-------------- --------------
Total current liabilities....................... 3,391 2,566
-------------- --------------
Deferred Income Taxes.................................... 265 265
-------------- --------------
Long-term Indebtedness................................... 167 192
-------------- --------------
Stockholders' Equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 6,855,000 and 6,804,000 shares
issued and outstanding........................... 69 68
Paid-in capital..................................... 16,565 16,386
Net unrealized gain on marketable securities........ 133 132
Treasury stock, at cost (3,900 and 10,000 shares)... (14) (29)
Retained earnings................................... 5,777 4,466
Prepaid Printing.................................... (640) (640)
-------------- --------------
Total stockholders' equity...................... 21,890 20,383
-------------- --------------
$ 25,713 $ 23,406
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
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<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Twelve Twelve Twenty-eight Twenty-four
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
February 12, January 15, February 12, January 15,
1997 1996 1997 1997
------------ ----------- ------------ -----------
Revenue
Corporate trading revenue............... $ 542 $ 5,623 $ 1,697 $ 10,818
Trade exchange revenue.................. 4,853 3,010 9,613 5,174
------------ ----------- ------------ -----------
5,395 8,633 11,310 15,992
------------ ----------- ------------ -----------
Costs and Expenses
Costs of corporate trading.............. 376 4,978 1,583 8,978
Costs of trade exchange revenue......... 1,802 1,287 3,730 2,276
Selling, general, and administrative.... 1,722 1,774 3,853 3,742
------------ ----------- ------------ -----------
3,900 8,039 9,166 14,996
------------ ----------- ------------ -----------
Income (Loss) from Operations............... 1,495 594 2,144 996
Other Income (Expense)
Interest income (expense), net............ 5 19 16 41
Miscellaneous, net...................... --- 2 --- 8
------------ ----------- ------------ -----------
5 21 16 49
------------ ----------- ------------ -----------
Income Before Taxes and Equity in Net
Income (Loss) of Foreign Affiliate........ 1,500 615 2,160 1,045
Provision (Credit) for Income Taxes......... 599 185 849 366
------------ ----------- ------------ -----------
Income Before Equity in Net Income
(Loss) of Foreign Affiliate............... 901 430 1,311 679
Equity in Net Income (Loss) of Foreign
Affiliate................................. --- 413 --- 956
------------ ----------- ------------ -----------
Net Income (Loss)........................... $ 901 $ 843 $ 1,311 $ 1,635
============ =========== ============ ===========
Average Common and Equivalent Shares:
Primary.................................. 9,845 7,041 8,620 6,951
============ =========== ============ ===========
Fully diluted............................ 7,447 7,357
=========== ===========
Net Income Per Common Share:
Primary.................................. $ 0.11 $ 0.12 $ 0.17 $ 0.24
============ =========== ============ ===========
Fully diluted............................ $ 0.11 $ 0.22
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
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<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<S> <C> <C>
Twenty-eight Weeks Twenty-four Weeks
Ended Ended
February 12, 1997 January 15, 1996
------------------ ------------------
Cash Flows from Operating Activities
Net income........................................... $ 1,311 $ 1,635
Adjustments:
Equity in net income of foreign affiliate......... --- (956)
Depreciation and amortization..................... 285 102
Services paid for in stock........................ 190 224
Net trade revenue earned over trade costs ....... (2,532) (1,704)
Changes in operating assets and liabilities:
Accounts and notes receivable..................... (360) (54)
Deferred taxes.................................... --- 36
Prepaids and other assets......................... (4) 160
Accounts payable and other current liabilities.... 26 (53)
Portion of receivables due to brokers............. 114 110
Income taxes payable.............................. 849 (260)
------------------ ------------------
Net cash (used in) operating activities......... (121) (760)
------------------ ------------------
Cash Flows From Investing Activities
Acquisition of Business Exchange International...... (155) ---
Additions to equipment, systems, and other........... (112) (127)
------------------ ------------------
Net cash (utilized in) investing activities.... (267) (127)
------------------ ------------------
Cash Flows From Financing Activities
Proceeds from sales of common stock.................. 5 1,349
Repayments of notes payable.......................... (104)
(5)
------------------ ------------------
Net cash provided by financing activities...... (99) 1,344
------------------ ------------------
Net increase (decrease) in cash and equivalents.......... (487) 437
Cash and cash equivalents at beginning of period......... 1,301 1,524
------------------ ------------------
Cash and Cash Equivalents at End of Period............... $ 814 $ 1,961
================== ==================
Supplemental Cash Flow Information
Cash paid for interest................................... $ 12 $ 7
Cash paid for income taxes............................... --- 562
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.................... 1,300 358
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
5
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ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNAUDITED INTERIM INFORMATION
ITEX Corporation (the "Company") and its wholly-owned subsidiaries prepare and
report financial results using a fiscal year ending July 31. The Company closes
its books at the end of 13 "accounting cycles," which consist of four weeks
each. The Company reports quarterly results using three quarters consisting of
three of the four-week accounting cycles each and one quarter consisting of four
of the four-week accounting cycles. In prior years, the Company had reported the
four cycle, or 16-week quarter as the fourth quarter of each fiscal year.
Commencing with the first quarter of the fiscal year ending July 31, 1997, the
Company reports the four cycle, or 16-week quarter as the first quarter of each
fiscal year. This practice is being implemented to provide better management of
Company operations and to more evenly space the periodic reporting of financial
information to the public. Accordingly, the new dates for the fiscal ends of the
Company's quarters for public reporting will be as follows: first quarter,
November 20; second quarter, February 12; third quarter, May 7; fourth quarter,
July 31.
This Form 10-Q includes the consolidated financial statements of the Company and
its wholly-owned subsidiaries. The consolidated balance sheet as of July 31,
1996 is excerpted from the Company's audited financial statements for the fiscal
year then ended. The Company's consolidated financial statements included in
this Form 10-Q for the interim periods ended January 15, 1996 and February 12,
1997 include all normal recurring adjustments which, in the opinion of the
Company, are necessary for a fair statement of the results of operations,
financial position, and cash flows as of the dates and for the periods
presented. The Company's operating results for the twelve and twenty-eight week
periods ended February 12, 1997 are not necessarily indicative of the results
that may be expected for the fiscal year ending July 31, 1997.
The Notes to Consolidated Financial Statements included in the Company's July
31, 1996 Annual Report on Form 10-K/A should be read in conjunction with these
consolidated financial statements.
NOTE 2 - DESCRIPTION OF BUSINESS
The Company is engaged in domestic and 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.
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As such, the Company acts as a third-party record-keeper of members'
transactions and balances, which are denominated in ITEX trade dollars. An ITEX
trade dollar is an accounting unit used by the Exchange to record the value of
trades as determined by the buying and selling parties in barter transactions.
ITEX trade dollars denote the right to receive goods or services available from
other Exchange members or the obligation to provide goods or services to other
Exchange members. The Company does not redeem trade dollars for cash. ITEX trade
dollars may be used only in the manner and for the purpose set forth in the 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. The Company typically receives a cash commission of 5% 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 over 150 broker offices worldwide. One of the Company's current
objectives is aggressive international expansion of the ITEX retail trade
network. The Company has license arrangements with international licensees in
Canada, South Africa, and Australia that were established in prior fiscal years.
During fiscal 1997, the Company has signed new agreements with international
licensees in Turkey, Norway, and Romania and has extended the license
arrangements in South Africa and Australia. The Company bears no financial
responsibility for the financing of an independent broker office.
Additionally, the Company acts as an intermediary for the exchange of goods and
services between major companies, through ITEX USA, Inc., a corporate barter
management company, which is the Company's exclusive agent for marketing the
Company's corporate and industrial trading business. 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 are 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 is also divided
between the Company and its licensee, 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,
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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 marketable equity securities totaling $3,877,000 at
February 12, 1997, stated at the lower of cost or market. Also at February 12,
1997, the Company owned inventories of goods and services totaling $9,141,000,
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.
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 quarters ended February 12, 1997 and January 15, 1995:
<TABLE>
<CAPTION>
Twelve Twelve Twenty-eight Twenty-four
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
February 12, January 15, February 12, January 15,
1997 1996 1997 1996
------------ ----------- ------------ -----------
(in thousands)
<S> <C> <C> <C> <C>
Corporate Trading Revenue
Trade $ 353 $ 5,185 $ 730 $ 9,448
Cash 189 438 967 1,370
------------ ----------- ------------ -----------
542 5,623 1,697 10,818
------------ ----------- ------------ -----------
Trade Exchange Revenue
Trade 2,503 1,067 4,117 1,874
Cash 2,350 1,943 5,496 3,300
------------ ----------- ------------ -----------
4,853 3,010 9,613 5,174
------------ ----------- ------------ -----------
Total Revenue
Trade 2,856 6,252 4,847 11,322
Cash 2,539 2,381 6,463 4,670
------------ ----------- ------------ -----------
$ 5,395 $ 8,633 $ 11,310 $ 15,992
============ =========== ============ ===========
</TABLE>
NOTE 4 - INVENTORY FOR PRINCIPAL PARTY TRADING
Following are the components of inventory for principal party trading:
February 12,
1997 July 31, 1996
------------- -------------
(in thousands)
Prepaid media advertising duebills $ 4,580 $ 3,530
Art work 2,645 2,642
Hotel roomnights 1,569 1,482
Miscellaneous 347 190
------------- -------------
$ 9,141 $ 7,844
============= =============
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NOTE 5 - 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. Through July 31, 1996, the
Company accounted 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. 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 was reported as a reduction of the
Company's share of equity in net income (loss) of foreign affiliate in the
statement of operations for the fiscal quarter ended July 31, 1996.
The assets of ART as of February 12, 1997 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. The Company is also
considering alternative ways of dealing with the resolution of this issue.
Commencing August 1, 1996, the Company is accounting for its investment in ART
by the cost method.
NOTE 6 - BANK LINE OF CREDIT
On December 4, 1996, the Company's primary bank agreed to a new line of credit
arrangement with a term through December 31, 1997. Pursuant to the line of
credit, the Company may borrow up to $250,000 on a short-term basis for working
capital purposes. The interest rate applicable to borrowings pursuant to the
facility is equal to the bank's prime rate of interest plus 1.5%. The maximum
amount of cash borrowings that may be outstanding at any time is determined by a
borrowing base formula related to available collateral. Borrowings are
collateralized by the Company's accounts receivable, fixed assets and inventory.
As of February 12, 1997, the Company had no borrowings outstanding under the
bank credit facility. Based on available collateral, the entire facility amount
of credit of $250,000 was available to the Company as of February 12, 1997.
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NOTE 7 - TRADE DOLLARS EARNED AND TRADE DOLLARS EXPENDED
At February 12, 1997, the Company had earned 1,186,000 ITEX trade dollars in
excess of the amount of trade dollars expended by the Company. The Company
intends to use these trade dollars to purchase goods and services from the
Exchange for use by the Company in its operations or for the purchase of equity
securities of other companies.
At the end of a period, the Company may have expended more trade dollars than
earned. This situation is commonly referred to in the commercial barter industry
as a "negative trade balance."
Trade dollars expended 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 expend 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 expended in excess of earned. This could be accomplished by the sale for
trade dollars of the inventories for which acquisition resulted in the trade
dollars issued in excess of earned or other inventories, by otherwise earning
trade dollars, or a combination of both.
NOTE 8 - CAPITAL STOCK
PRIVATE PLACEMENT. The terms of the Wycliff 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 may cancel the remaining portion of the private placement.
STOCK OPTION PLAN. The Board of Directors adopted a new stock option plan
applicable to directors, officers, employees, and consultants of the Company
effective December 27, 1996, pursuant to which 1,000,000 shares of common stock
were reserved for issuance, all of which were granted to optionees at an
exercise price of $3.75 per share. Exercise prices for the options granted under
the new plan are equal to market value on the date of grant and may be
exercisable for up to five years. The Company intends to present the new plan
for approval by the Company's shareholders at the annual meeting. 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.
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, and it is not anticipated that the split will be
implemented.
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NOTE 9 - ACQUISITION OF 50% INTEREST IN BUSINESS EXCHANGE
INTERNATIONAL CORPORATION AND RELATED LITIGATION
On January 24, 1996, the Company acquired a 100% common stock interest in SLI,
Inc. ("SLI"), a Nevada corporation now known as IME, Inc., in exchange for the
issuance to SLI's former shareholders of 60,000 shares of the Company's common
stock valued at approximately $645,000. The Company then made a cash
contribution to the capital of SLI of $1,750,000 and made a loan of $300,000 to
SLI. Also on January 24, 1996, SLI purchased a 50% common stock interest in
Business Exchange International Corporation ("BXI"), a Nevada corporation,
pursuant to rights to purchase such interest that had been assigned to SLI by
the former shareholders of SLI. SLI paid $1,750,000 for the common interest in
BXI by the purchase of newly issued common stock of BXI and, in addition, SLI
loaned $300,000 to BXI. BXI owns and operates one of the leading organized
barter exchanges in the United States.
On February 12, 1996, a complaint was filed on behalf of the Company and its
wholly owned subsidiary, SLI, Inc., against Saul Yarmak, Stephen Friedland,
Business Exchange International Corp., BX International, Inc., Joel Sens, and
David Lawson. The complaint, filed in the Circuit Court of the State of Oregon
for Multnomah County Case No. 9602-01076, asserted claims for breach of
contract, specific performance, declaratory judgment, fraud, defamation,
unlawful trade practices, and interference with economic relationships. It
sought to recover damages for allegedly disparaging remarks made by certain of
the defendants against ITEX and for a court ruling that SLI acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.
On 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 permitted 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 defendants have asserted counterclaims for attorney's fees and fraud
against SLI in defendants' amended answer and counterclaims.
On December 20, 1996 SLI filed a motion for partial summary judgment requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange. If the court found in favor of SLI on these issues, the motion
asked that the court declare that SLI is 50% owner of the company which owns
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the BXI trade exchange or, alternatively, order the defendants to take whatever
steps are necessary to transfer the assets of the BXI trade exchange to BXI.
On March 12, 1997 the court ruled from the bench and granted SLI's motion for
partial summary judgment. A formal order has now been submitted to the court for
the actual entry of judgment. Because the initial ruling by the court was oral,
a hearing on the form of the judgment has been set for April 4, 1997.
The financial outcome of the ruling in favor of SLI is presently unclear. If it
results in SLI being the 50% owner of a company which owns the BXI trade
exchange, SLI will be expected to share in the successes and growth of that
exchange. However, the litigation has resulted in some uncertainty about the
financial conditions of the BXI trade exchange due to the inability of SLI to
obtain operating data concerning the exchange. Further litigation may be
necessary for SLI to fully enjoy the benefits of its acquisition. However, the
Company considers the court's ruling to be a complete vindication of the
position that ITEX Corporation has consistently taken in the face of allegations
that BXI was not the owner of the BXI trade exchange assets.
NOTE 10 - FOREIGN LICENSE AGREEMENTS
On December 19, 1996, the Company announced the signing of an agreement with
Ihlas Holdings, a major Turkish corporation, to license an ITEX Barter Exchange
in Turkey, to be called Ihlas ITEX Barter SA. Under the agreement, which is
effective January 1, 1997, Ihlas Holdings receives exclusive use of the ITEX
name, trademarks, and proprietary barter accounting and management software for
use in Turkey. The Company will receive royalties based on trade transactions
generated through the new system, which will enable Ihlas ITEX clients to trade
with ITEX members in other countries. Ihlas Holdings is one of Turkey's largest
corporations, has 57 subsidiaries, which include interests in chemicals,
textiles, food, electronics, health care, construction, media, banking,
insurance, and international trade. Ihlas has already taken steps to expand the
Ihlas ITEX barter network into the nearby states of Kazakhstan, Turkistan, and
Azerbijan.
During the quarter ended February 12, 1997, the Company entered into a new
international license arrangement for operations in Norway and renewed previous
arrangements in Australia and South Africa. Trade exchange revenue for the
second quarter includes revenue from foreign license agreements totaling
$398,000. Subsequent to the quarter ended February 12, 1997, the Company entered
into a license agreement with an international licensee in Romania.
NOTE 11 - INCOME PER SHARE
Income per share of common stock is computed on the basis of the weighted
average shares of common stock outstanding, plus common equivalent shares
arising from the effect of dilutive stock options using the modified treasury
stock method, and net income increased for debt reduction and investment in
short-term paper from the hypothetical exercise of options. This modified
version of the treasury stock method, also referred to as "the 20% provision,"
is required if the number of shares issuable from the exercise of all
outstanding options and warrants exceeds 20% of the number of shares outstanding
at the end of the period.
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Under the 20% provision, all options and warrants are assumed to be exercised
(4,361,000 shares at February 12, 1997) but an amount equal to only 20% of
shares outstanding (1,371,000 shares at February 12, 1997) may be assumed to be
repurchased, which results in incremental shares for the income per share
computation of 2,990,000 shares, which when added to 6,855,000 shares
outstanding at February 12, 1997, results in a total number of shares of
9,845,000 for the denominator in the income per share computation for the
quarter ended February 12, 1997.
The numerator for the computation is equal to net income increased by a
hypothetical amount for interest income or reduction in interest expense from
the assumed use of funds received from the conversion that were not used to
repurchase stock because of the 20% limitation. For the quarter ended February
12, 1997, the hypothetical increase to net income from interest income and
reduction of interest expense, after tax effect, totaled $134,000. For the year
to date income per share computation, the hypothetical increase to net income
from interest income and reduction of interest expense, after tax effect,
totaled $174,000. Because of these presumed increases in income required by the
20% provision, income per share cannot be directly computed using net income as
reported in the statement of operations.
ITEM 2. 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 domestic and 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.
As such, the Company acts as a third-party record-keeper of members'
transactions and balances, which are denominated in ITEX trade dollars. An ITEX
trade dollar is an accounting unit used by the Exchange to record the value of
trades as determined by the buying and selling parties in barter transactions.
ITEX trade dollars denote the right to receive goods or services available from
other Exchange members or the obligation to provide goods or services to other
Exchange members. The Company does not redeem trade dollars for cash. ITEX trade
dollars may be used only in the manner and for the purpose set forth in the 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. The Company typically receives a cash commission of 5% on
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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 over 150 broker offices worldwide. One of the Company's current
objectives is aggressive international expansion of the ITEX retail trade
network. The Company has license arrangements with international licensees in
Canada, South Africa, and Australia that were established in prior fiscal years.
During fiscal 1997, the Company has signed new agreements with international
licensees in Turkey, Norway, and Romania and has extended the license
arrangements in South Africa and Australia. The Company bears no financial
responsibility for the financing of an independent broker office.
Additionally, the Company acts as an intermediary for the exchange of goods and
services between major companies, through ITEX USA, Inc., a corporate barter
management company, which is the Company's exclusive agent for marketing the
Company's corporate and industrial trading business. 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 are 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 is also divided
between the Company and its licensee, 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 marketable equity securities totaling $3,877,000 at
February 12, 1997, stated at the lower of cost or market. Also at February 12,
1997, the Company owned inventories of goods and services totaling $9,141,000,
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
14
<PAGE>
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 attained a presence in the
international corporate barter marketplace. The Company's share of ART's net
assets and results of operations were included in the Company's financial
statements using the equity method of accounting through July 31, 1996. 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.
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 fiscal quarter ended July 31, 1996.
The assets of ART as of February 12, 1997 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. The assets of ART as of
February 12, 1997 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. The Company is also considering alternative ways of dealing with the
resolution of this issue. Commencing August 1, 1996, the Company is accounting
for its investment in ART by the cost method. Commencing August 1, 1996, the
Company is accounting for its investment in ART by the cost method.
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.
15
<PAGE>
DEVELOPMENT ACTIVITIES
On December 19, 1996, the Company announced the signing of an agreement with
Ihlas Holdings, a major Turkish corporation, to license an ITEX Barter Exchange
in Turkey, to be called Ihlas ITEX Barter SA. Under the agreement, which is
effective January 1, 1997, Ihlas Holdings receives exclusive use of the ITEX
name, trademarks, and proprietary barter accounting and management software for
use in Turkey. The Company will receive royalties based on trade transactions
generated through the new system, which will enable Ihlas ITEX clients to trade
with ITEX members in other countries. Ihlas Holdings is one of Turkey's largest
corporations, has 57 subsidiaries, which include interests in chemicals,
textiles, food, electronics, health care, construction, media, banking,
insurance, and international trade. Ihlas has already taken steps to expand the
Ihlas ITEX barter network into the nearby states of Kazakhstan, Turkistan, and
Azerbijan.
The Company has developed a comprehensive training program for its brokers. New
brokers come to the training center at the Company's Portland, Oregon
headquarters for an intensive week of initial training before receiving the
credential of "Associate Broker." They are then permitted to set up offices and
act as barter brokers for the Company's clients. After demonstrating adequate
competence and achieving specified performance levels, they return to the
training center for an additional week of training before receiving the
credential of "ITEX Licensed Broker."
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 1995, the Company completed an agreement with
International Trade Exchange (ITEX) 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 together with the right to acquire its client base and assets. The
addition of the affiliation with ITEX/Bartercard and the ITEX licensee in 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
16
<PAGE>
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. The Company has
the same internet connection capability as that of many typical internet service
providers.
Another electronic trading feature introduced by the Company is a "fax-back"
system for Exchange clients, which enables Exchange members to request and
receive their account records, company data, ITEX business forms, product and
service lists, and other information by fax.
The ITEX Express card continues to enhance trade among ITEX clients,
particularly when taken in concert with other electronic trading innovations.
The ITEX Express card 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.
During the fiscal quarter ended February 12, 1997, the Company spent a total of
$29,000 on research and development for its communication and information
systems, all of which was charged to expense. During the twenty-eight week
period ended February 12, 1997, the Company spent a total of $82,000 on research
and development for its communication and information systems, of which $22,000
was capitalized and $60,000 was charged to expense.
The ITEX symbol and name have, in the past, been registered trademarks of the
Company. A new application for the ITEX symbol and name has been filed with the
Patent and Trademark Office.
Liquidity and Capital Resources
OVERALL FINANCIAL POSITION. At February 12, 1997, the Company's working capital
ratio was 0.78 to 1, based on current assets of $2,634,000 and current
liabilities of $3,391,000. The Company's working capital ratio at July 31, 1996,
was 1.1 to 1, based on current assets of $2,827,000 and current liabilities of
$2,566,000. The
17
<PAGE>
change in the working capital ratio occurred because at February 12, 1997
current liabilities includes income taxes payable of $855,000 related to current
year earnings. Current liabilities also includes deferred taxes of $1,247,000
related to the distribution of assets, primarily available-for-sale securities
from ART, the Company's foreign affiliate. The net assets to be received,
consisting primarily of available-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 to $21,890,000 at February 12, 1997, from
$20,383,000 at July 31, 1996. The primary increase in stockholders' equity was
from the Company's continued profitable operations.
The Statement of Cash Flows indicates negative cash flow from operations of
$121,000 for the twenty-eight week period ended February 12, 1997, which is a
significant improvement from negative cash flow from operations of $760,000 for
the twenty-four week period ended January 15, 1996. The Company believes that
cash fees and commissions, cash that can be obtained from the sale of
inventories and available-for-sale equity securities at the discretion of the
Company, and cash that would be available from the sale of equity and debt
securities of the Company will be sufficient to fund cash operating needs of the
Company while continuing to follow the strategy of mixing cash and trade
activities so as to maximize long-term equity building and shareholder value.
Furthermore, the Company is presently incurring negative cash flow with respect
to several development projects. At the Company's discretion, it could conserve
cash by suspending or terminating these activities. 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 PLACEMENT. The terms of the Wycliff 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 may cancel the remaining portion of the private placement.
STOCK OPTION PLAN. The Board of Directors adopted a new stock option plan
applicable to directors, officers, employees, and consultants of the Company
effective December 27, 1996, pursuant to which 1,000,000 shares of common stock
were reserved for issuance, all of which were granted to optionees at an
exercise price of $3.75 per share. Exercise prices for the options granted under
the new plan are equal to market value on the date of grant and may be
exercisable for up to five years. The Company intends to present the new plan
for approval by the Company's shareholders at the annual meeting. 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.
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
18
<PAGE>
implemented by the Company, and it is not anticipated that the split will be
implemented.
BANK LINE OF CREDIT. On December 4, 1996, the Company's primary bank agreed to a
new line of credit arrangement with a term through December 31, 1997. Pursuant
to the line of credit, the Company may borrow up to $250,000 on a short-term
basis for working capital purposes. The interest rate applicable to borrowings
pursuant to the facility is equal to the bank's prime rate of interest plus
1.5%. The maximum amount of cash borrowings that may be outstanding at any time
is determined by a borrowing base formula related to available collateral.
Borrowings are collateralized by the Company's accounts receivable, fixed assets
and inventory. As of February 12, 1997, the Company had no borrowings
outstanding under the bank credit facility. Based on available collateral, the
entire facility amount of credit of $250,000 was available to the Company as of
February 12, 1997.
ACQUISITION OF 50% INTEREST IN BUSINESS EXCHANGE INTERNATIONAL CORPORATION AND
RELATED LITIGATION. On January 24, 1996, the Company acquired a 100% common
stock interest in SLI, Inc. ("SLI"), a Nevada corporation now known as IME,
Inc., in exchange for the issuance to SLI's former shareholders of 60,000 shares
of the Company's common stock valued at approximately $645,000. The Company then
made a cash contribution to the capital of SLI of $1,750,000 and made a loan of
$300,000 to SLI. Also on January 24, 1996, SLI purchased a 50% common stock
interest in Business Exchange International Corporation ("BXI"), a Nevada
corporation, pursuant to rights to purchase such interest that had been assigned
to SLI by the former shareholders of SLI. SLI paid $1,750,000 for the common
interest in BXI by the purchase of newly issued common stock of BXI and, in
addition, SLI loaned $300,000 to BXI. BXI owns and operates one of the leading
organized barter exchanges in the United States.
On February 12, 1996, a complaint was filed on behalf of the Company and its
wholly owned subsidiary, SLI, Inc., against Saul Yarmak, Stephen Friedland,
Business Exchange International Corp., BX International, Inc., Joel Sens, and
David Lawson. The complaint, filed in the Circuit Court of the State of Oregon
for Multnomah County Case No. 9602-01076, asserted claims for breach of
contract, specific performance, declaratory judgment, fraud, defamation,
unlawful trade practices, and interference with economic relationships. It
sought to recover damages for allegedly disparaging remarks made by certain of
the defendants against ITEX and for a court ruling that SLI acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.
On 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
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<PAGE>
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 defendants have asserted counterclaims for attorney's fees and fraud
against SLI in defendants' amended answer and counterclaims.
On December 20, 1996 SLI filed a motion for partial summary judgment requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange. If the court found in favor of SLI on these issues, the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade exchange or, alternatively, order the defendants to take whatever
steps are necessary to transfer the assets of the BXI trade exchange to BXI.
On March 12, 1997 the court ruled from the bench and granted SLI's motion for
partial summary judgment. A formal order has now been submitted to the court for
the actual entry of judgment. Because the initial ruling by the court was oral,
a hearing on the form of the judgment has been set for April 4, 1997.
The financial outcome of the ruling in favor of SLI is presently unclear. If it
results in SLI being the 50% owner of a company which owns the BXI trade
exchange, SLI will be expected to share in the successes and growth of that
exchange. However, the litigation has resulted in some uncertainty about the
financial conditions of the BXI trade exchange due to the inability of SLI to
obtain operating data concerning the exchange. Further litigation may be
necessary for SLI to fully enjoy the benefits of its acquisition. However, the
Company considers the court's ruling to be a complete vindication of the
position that ITEX Corporation has consistently taken in the face of allegations
that BXI was not the owner of the BXI trade exchange assets.
RESULTS OF OPERATIONS
Comparison of Twelve-Week Period Ended February 12, 1997 (Second Quarter of
- --------------------------------------------------------------------------------
Fiscal 1997) and Twelve-Week Period Ended January 15, 1996 (Second Quarter of
- --------------------------------------------------------------------------------
Fiscal 1996)
- ------------
Overall Operating Results
Total revenue decreased to $5,395,000 in the second quarter of fiscal 1997 from
$8,633,000 in the second quarter of fiscal 1996. Income from operations
increased to $1,495,000 in the second quarter of fiscal 1997 from $594,000 in
the second quarter of fiscal 1996. Net income increased to $901,000, or $0.11
per share, in the second quarter of fiscal 1997, from $843,000, or $0.12 per
share on a primary basis and $0.11 on a fully diluted basis, in the second
quarer of fiscal 1996.
In the second quarter of fiscal 1997, the Company's revenue and profit from its
core retail trade exchange business increased significantly. This higher-margin
revenue more than offset the effects of lower revenue from decreased activity in
corporate trading in the current quarter. Trade exchange revenue for the second
quarter includes revenue from foreign license agreements totaling $398,000. The
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Company expects revenue from international licensees to continue to make
contributions to revenue in future periods.
The increase in trade exchange earnings and foreign license revenue also more
than offset the elimination of earnings from ART, the Company's foreign
affiliate, which totaled $413,000 in the second quarter of fiscal 1996. 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. Accordingly, effective August 1, 1996, the
Company commenced accounting for its investment in ART by the cost method, and
has not recognized any earnings with respect to ART in the current quarter.
Revenue
TOTAL REVENUE. Total revenue decreased to $5,395,000 in the second quarter of
fiscal 1997 from $8,633,000 in the second quarter of fiscal 1996. Following is a
summary of the components of revenue for the second quarters of fiscal 1997 and
1996:
Twelve Twelve
Weeks Ended Weeks Ended
February 12, January 15,
1997 1996
------------ -----------
(in thousands)
Corporate Trading Revenue
Trade $ 353 $ 5,185
Cash 189 438
------------ -----------
542 5,623
------------ -----------
Trade Exchange Revenue
Trade 2,503 1,067
Cash 2,350 1,943
------------ -----------
4,853 3,010
------------ -----------
Total Revenue
Trade 2,856 6,252
Cash 2,539 2,381
------------ -----------
$ 5,395 $ 8,633
============ ===========
TRADE EXCHANGE REVENUE. In the second quarter of fiscal 1997, the Company's
revenue from its core retail trade exchange business increased to $4,853,000
from $3,010,000 in the second quarter of fiscal 1996. The increase in trade
exchange revenue was attributable to an array of factors. The Company has
continued its expansion internally, by acquisition, and entering into foreign
license agreements. In the second quarter of fiscal 1997, the Company reported
revenue from foreign licensees totaling $398,000. 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 and higher
performance levels by brokers. Further, the Company continues to invest in its
ongoing broad-based marketing and advertising program targeted at recruitment of
additional brokers and members of the Exchange.
CORPORATE TRADING REVENUE. The decreased level of corporate trading revenue was
attributable to the Company devoting less of its resources to corporate trading
activities during the current year. Significant management and staff time was
spent on litigation and other regulatory matters, on further development of the
retail trade
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exchange, and on international expansion. Management is now beginning to refocus
more resources on corporate trading activities and expects increases in
operating results from corporate trading activities in future periods.
Costs and Expenses
COSTS OF TRADE EXCHANGE REVENUE. Costs of trade exchange revenue increased to
$1,802,000 in the second quarter of fiscal 1997 from $1,287,000 in the second
quarter of fiscal 1996. Costs of trade exchange revenue, which consists of
brokers' fees and commissions, were 37% of trade exchange revenue in the second
quarter of fiscal 1997 and 43% in the second quarter of fiscal 1996. The
decrease in the cost percentage is partially attributable to revenue from
foreign licensees, on which the Company does not pay brokers' fees and
commissions.
COSTS OF CORPORATE TRADING. Costs of corporate trading decreased to $376,000 in
the second quarter of fiscal 1997 from $4,978,000 in the second quarter of
fiscal 1996 because of the lower revenue level. Costs of corporate trading
revenue were 69% in the second quarter of fiscal 1997 and 89% in the second
quarter of fiscal 1996. The cost percentage incurred during the second quarter
of 1996 is more indicative of normal ongoing cost percentages from corporate
trading.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $1,722,000 in the second quarter of fiscal 1997 and
$1,774,000 in the second quarter of fiscal 1996. Higher professional fees are
expected to be incurred at least during the next quarter.
Total advertising and promotion was $403,000 in the second quarter of fiscal
1997 as compared to $484,000 in the second quarter of fiscal 1996. 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 the second quarter of fiscal 1997, the Company paid
$380,000 of its advertising costs by ITEX trade dollars or other trade
consideration, representing 94% of total advertising costs for the period.
Comparison of Twenty-Eight-Week Period Ended February 12, 1997 (First 2 Quarters
- --------------------------------------------------------------------------------
of Fiscal 1997) and Twenty-Four-Week Period Ended January 15, 1996 (First 2
- --------------------------------------------------------------------------------
Quarters of Fiscal 1996)
- ------------------------
Overall Operating Results
Total revenue decreased to $11,310,000 in the first two quarters of fiscal 1997
from $15,992,000 in thefirst two quarters of fiscal 1996. Income from operations
increased to $2,144,000 in the first two quarters of fiscal 1997 from $996,000
in the first two quarters of fiscal 1996. Net income increased to $1,311,000, or
$0.17 per share, in the first two quarters of fiscal 1997, from $1,635,000, or
$0.24 per share on a primary basis or $0.22 on a fully diluted basis, in the
first two quarters of fiscal 1996.
In the first two quarters of fiscal 1997, the Company's revenue and profit from
its core retail trade exchange business increased significantly. This
higher-margin revenue more than offset the effects of lower revenue from
decreased activity in corporate trading in the first two quarters of fiscal
1997. Trade exchange revenue for the first two quarters of fiscal 1997 includes
revenue from foreign license
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agreements totaling $398,000. The Company expects revenue from international
licensees to continue to make contributions to revenue in future periods.
The increase in trade exchange earnings and foreign license revenue also more
than offset the elimination of earnings from ART, the Company's foreign
affiliate, which totaled $956,000 in the first two quarters of fiscal 1996. 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. Accordingly, effective August 1, 1996, the
Company commenced accounting for its investment in ART by the cost method, and
has not recognized any earnings with respect to ART in the current quarter.
Revenue
Total Revenue. Total revenue decreased to $11,310,000 in the first two quarters
of fiscal 1997 from $15,992,000 in the first two quarters of fiscal 1996.
Following is a summary of the components of revenue for the first two quarters
of fiscal 1997 and 1996:
Twenty-eight Twenty-four
Weeks Ended Weeks Ended
February 12, January 15,
1997 1996
------------ -----------
(in thousands)
Corporate Trading Revenue
Trade $ 730 $ 9,448
Cash 967 1,370
------------ -----------
1,697 10,818
------------ -----------
Trade Exchange Revenue
Trade 4,117 1,874
Cash 5,496 3,300
------------ -----------
9,613 5,174
------------ -----------
Total Revenue
Trade 4,847 11,322
Cash 6,463 4,670
------------ -----------
$ 11,310 $ 15,992
============ ===========
TRADE EXCHANGE REVENUE. In the first two quarters of fiscal 1997, the Company's
revenue from its core retail trade exchange business increased to $9,613,000
from $5,174,000 in the first two quarters of fiscal 1996. The increase in trade
exchange revenue was attributable to an array of factors. The Company has
continued its expansion internally, by acquisition, and entering into foreign
license agreements. In the first two quarters of fiscal 1997, the Company
reported revenue from foreign licensees totaling $398,000. 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
and higher performance levels by brokers. Further, the Company continues to
invest in its ongoing broad-based marketing and advertising program targeted at
recruitment of additional brokers and members of the Exchange.
CORPORATE TRADING REVENUE. The decreased level of corporate trading revenue was
attributable to the Company devoting less of its resources to corporate trading
activities during the current year. Significant management and staff time was
spent on litigation and other regulatory matters, on further development of the
retail trade
23
<PAGE>
exchange, and on international expansion. Management is now beginning to refocus
more resources on corporate trading activities and expects increases in
operating results from corporate trading activities in future periods.
Costs and Expenses
COSTS OF TRADE EXCHANGE REVENUE. Costs of trade exchange revenue increased to
$3,730,000 in the first two quarters of fiscal 1997 from $2,276,000 in the first
two quarters of fiscal 1996. Costs of trade exchange revenue, which consists of
brokers' fees and commissions, were 39% of trade exchange revenue in the first
two quarters of fiscal 1997 and 44% in the first two quarters of fiscal 1996.
The decrease in the cost percentage is partially attributable to revenue from
foreign licensees, on which the Company does not pay brokers' fees and
commissions.
COSTS OF CORPORATE TRADING. Costs of corporate trading decreased to $1,583,000
in the first two quarters of fiscal 1997 from $8,978,000 in the first two
quarters of fiscal 1996 because of the lower revenue level. Costs of corporate
trading revenue were 93% in the first two quarters of fiscal 1997 and 83% in the
first two quarters of fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $3,853,000 in the first two quarters of fiscal 1997
and $3,742,000 in the first two quarters of fiscal 1996. The increase was
attributable to amortization expense related to acquisitions and higher
professional fees connected with various litigation and regulatory matters.
Also, the year-to-date period for fiscal 1997 includes twenty-eight weeks,
whereas the year-to-date period for fiscal 1997 includes twenty-four weeks.
Higher professional fees are expected to be incurred at least during the next
quarter.
Total advertising and promotion was $1,048,000 in the first two quarters of
fiscal 1997 as compared to $1,290,000 in the first two quarters of fiscal 1996.
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 the first two quarters of fiscal 1997, the Company paid
$1,010,000 of its advertising costs by ITEX trade dollars or other trade
consideration, representing 96% 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-
24
<PAGE>
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 24, 1996, the Company acquired a 100% common stock interest in SLI,
Inc. ("SLI"), a Nevada corporation now known as IME, Inc., in exchange for the
issuance to SLI's former shareholders of 60,000 shares of the Company's common
stock valued at approximately $645,000. The Company then made a cash
contribution to the capital of SLI of $1,750,000 and made a loan of $300,000 to
SLI. Also on January 24, 1996, SLI purchased a 50% common stock interest in
Business Exchange International Corporation ("BXI"), a Nevada corporation,
pursuant to rights to purchase such interest that had been assigned to SLI by
the former shareholders of SLI. SLI paid $1,750,000 for the common interest in
BXI by the purchase of newly issued common stock of BXI and, in addition, SLI
loaned $300,000 to BXI. BXI owns and operates one of the leading organized
barter exchanges in the United States.
25
<PAGE>
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 permitted 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 defendants have asserted counterclaims for attorney's fees and fraud
against SLI in defendants' amended answer and counterclaims.
On December 20, 1996 SLI filed a motion for partial summary judgment requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange. If the court found in favor of SLI on these issues, the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade exchange or, alternatively, order the defendants to take whatever
steps are necessary to transfer the assets of the BXI trade exchange to BXI.
On March 12, 1997 the court ruled from the bench and granted SLI's motion for
partial summary judgment. A formal order has now been submitted to the court for
the actual entry of judgment. Because the initial ruling by the court was oral,
a hearing on the form of the judgment has been set for April 4, 1997.
The financial outcome of the ruling in favor of SLI is presently unclear. If it
results in SLI being the 50% owner of a company which owns the BXI trade
exchange, SLI will be expected to share in the successes and growth of that
exchange. However, the litigation has resulted in some uncertainty about the
financial conditions of the BXI trade exchange due to the inability of SLI to
obtain operating data concerning the exchange. Further litigation may be
necessary for SLI to fully enjoy the benefits of its acquisition. However, the
Company considers the court's ruling to be a complete vindication of the
position that ITEX
26
<PAGE>
Corporation has consistently taken in the face of allegations that BXI was not
the owner of the BXI trade exchange assets.
On September 17, 1996 the Company filed an action in the Circuit Court for
Multnomah County, Oregon, against Leslie L. French and Linda French,
individually and dba AlphaNet and AlphaNet, Inc., an inactive Oregon
corporation. The Complaint is for Breach of Contract and Action on Guaranty and
seeks a total of $89,726 on three claims. On October 2, 1996, defendants filed
an Answer denying all claims and a Counterclaim alleging malicious prosecution,
abuse of process, invasion of privacy and libel. The counterclaim seeks
compensatory and punitive damages of $5.5 million. A Reply to defendant's
counterclaims has been filed.
The Company considers each counterclaim to be totally without merit and expects
each counterclaim to be dismissed. Both the Company's claims and the defense of
the counterclaims is being vigorously prosecuted by the Company. A trial date is
scheduled to be set on May 22, 1997. 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; Michael Baer; Graham Norris; Oxford
Transfer, Inc.; David Christensen, C.P.A.; Andersen, Andersen & Strong, L.C.,
Donovan Snyder, and John Does I-III. William Bradford Services is controlled by
Leslie French, plaintiff in the litigation described above. The complaint
alleges breach of fiduciary duty, breach of contract, interference with
contract, and fraud and seeks compensatory and punitive damages.
The Company 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 with 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.
On February 14, 1997 the Company was served with a summons and complaint in a
matter filed in the Circuit Court of Multnomah County, Oregon entitled BXI Trade
Exchange, Inc. and Business Exchange International Corp. v. ITEX Corporation,
Terry L. Neal, Michael T. Baer. Donovan C. Snyder, Joel P. Sens and David
Lawson. This action arises out of the basic fact situation involved in the SLI
matter described above. The complaint contains seven claims for relief, only two
of which relate to the Company, Mr. Neal, Mr. Baer and Mr. Snyder (the "ITEX
defendants"). All other claims relate solely to Mr. Sens and Mr. Lawson.
27
<PAGE>
The claims against the ITEX defendants are for conspiracy to defraud and
unlawful trade practices under the Oregon unfair trade practices statute. The
basic allegation is that the ITEX defendants worked together secretly to obtain
the 50% interest in BXI. The ITEX defendants consider each and every claim
against them to be without merit and will vigorously defend against those
claims. As with 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 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The Exhibits hereto are listed in the accompanying Exhibit Index.
b. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ITEX CORPORATION
March 31, 1997 /s/ Graham H. Norris
- ------------------------ ------------------------------------------------
Date Graham H. Norris, Chairman of the Board of
Directors, President and Chief Executive Officer
(principal executive officer and director)
March 31, 1997 /s/ Joseph M. Morris
- ------------------------ ------------------------------------------------
Date Joseph M. Morris, Vice President and Chief
Financial Officer (principal accounting officer
and director)
28
<PAGE>
EXHBIT INDEX
EXHIBIT DESCRIPTION
---------------------- --------------------------------------------
27 Financial Data Schedule for the Twenty-eight
Weeks Ended February 12, 1997
29
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jul-31-1997
<PERIOD-START> Aug-01-1996
<PERIOD-END> Feb-12-1997
<CASH> 814
<SECURITIES> 3,877
<RECEIVABLES> 1,504
<ALLOWANCES> 0
<INVENTORY> 9,141
<CURRENT-ASSETS> 2,634
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 25,713
<CURRENT-LIABILITIES> 3,391
<BONDS> 0
0
0
<COMMON> 21,890
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 25,713
<SALES> 0
<TOTAL-REVENUES> 11,310
<CGS> 5,313
<TOTAL-COSTS> 5,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,160
<INCOME-TAX> 849
<INCOME-CONTINUING> 1,311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,311
<EPS-PRIMARY> .17
<EPS-DILUTED> .17
</TABLE>