SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q/A
(Amendment No. 1 to Form 10-Q as Amended October 27, 1997)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
May 7, 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, $0.01 Par Value Outstanding
at June 16, 1997:
6,957,000
(This Form 10-Q includes 28 pages)
<PAGE>
ITEX CORPORATION
FORM 10-Q
For the Quarterly Period Ended
May 7, 1997
INDEX
Page
------------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AT MAY 7, 1997 AND
APRIL 9, 1996 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE TWELVE
AND FORTY WEEK PERIODS ENDED MAY 7, 1997 AND FOR THE
TWELVE AND THIRTY-SIX WEEK PERIODS ENDED APRIL 9, 1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE FORTY
WEEK PERIOD ENDED MAY 7, 1997 AND FOR THE
THIRTY-SIX WEEK PERIOD ENDED APRIL 9, 1996 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 26
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts )
May 7, 1997 July 31,1996
------------------ ------------------
ASSETS (Restated)
<S> <C> <C>
Current Assets
Cash ...............................................$ 611 $ 1,301
Trade Dollars earned in excess of expended.......... 1,105 ---
Accounts receivable, net of allowance for doubtful
accounts of $140 and $96........................ 1,347 847
Notes receivable.................................... 272 360
Prepaids and other current assets................... 203 319
------------------ ------------------
Total current assets............................ 3,538 2,827
Inventory for Principal Party Trading.................... 8,307 5,202
Available for Sale Equity Securities..................... 4,152 3,877
Investment in Foreign Equity Affiliate................... 3,197 3,197
Investment in Business Exchange International Corp....... 2,752 2,418
Investment in Fine Art .................................. 2,645 2,642
Goodwill and Purchased Member Lists, net................. 1,130 1,299
Notes Receivable, Long-Term Portion...................... 997 997
Other Assets............................................. 1,034 947
------------------ ------------------
$ 27,752 $ 23,406
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable....................................$ 387 $ 183
Portion of receivables due to brokers .............. 685 508
Trade Dollars expended in excess of earned.......... --- 41
Income taxes payable................................ 363 94
Deferred tax liability.............................. --- 1,253
Current portion of long-term indebtedness........... 25 138
Other current liabilities........................... 348 349
------------------ ------------------
Total current liabilities....................... 1,808 2,566
------------------ ------------------
Deferred Income Taxes.................................... 425 265
------------------ ------------------
Long-term Indebtedness................................... 167 192
------------------ ------------------
Stockholders' Equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 6,926,000 and 6,804,000 shares
issued and outstanding........................... 69 68
Paid-in capital..................................... 17,801 16,386
Net unrealized gain on marketable securities........ 133 132
Treasury stock, at cost (3,900 and 10,000 shares)... (14) (29)
Retained earnings................................... 7,916 4,466
Prepaid Printing.................................... (553) (640)
------------------ ------------------
Total stockholders' equity...................... 25,352 20,383
------------------ ------------------
$ 27,752 $ 23,406
================== ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Twelve Twelve Forty Weeks Thirty-six
Weeks Ended Weeks Ended Ended Weeks Ended
May 7, 1997 April 9, 1996 May 7, 1997 April 9, 1996
------------------ ----------------- ----------------- -----------------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue
Corporate trading revenue............... $ 2,313 $ 1,162 $ 4,010 $ 11,980
Trade exchange revenue.................. 4,166 5,275 13,779 10,449
------------------ ----------------- ----------------- -----------------
6,479 6,437 17,789 22,429
------------------ ----------------- ----------------- -----------------
Costs and Expenses
Costs of corporate trading.............. 950 841 2,533 9,819
Costs of trade exchange revenue......... 1,927 2,791 5,657 5,067
Selling, general, and administrative.... 1,961 2,014 5,814 5,756
------------------ ----------------- ----------------- --------------
4,838 5,646 14,004 20,642
------------------ ----------------- ----------------- -----------------
Income from Operations...................... 1,641 791 3,785 1,787
Other Income
Interest income, net...................... 4 18 20 59
Miscellaneous income, net............... --- 90 --- 98
------------------ ----------------- ----------------- -----------------
4 108 20 157
------------------ ----------------- ----------------- -----------------
Income Before Taxes and Equity in Net
Income of Foreign Affiliate............... 1,645 899 3,805 1,944
Provision (Credit) for Income Taxes......... 753 387 1,602 753
------------------ ----------------- ----------------- -----------------
Income Before Equity in Net Income
of Foreign Affiliate...................... 892 512 2,203 1,191
Equity in Net Income of Foreign
Affiliate................................. 1,247 234 1,247 1,190
------------------ ----------------- ----------------- -----------------
Net Income.................................. $ 2,139 $ 746 $ 3,450 $ 2,381
================== ================= ================= =================
Average Common and Equivalent Shares:
Primary.................................. 9,846 8,048 9,028 7,534
================== ================= ================= =================
Fully diluted............................ 7,896
=================
Net Income Per Common Share:
Primary.................................. $ 0.23 $ 0.09 $ 0.41 $ 0.32
================= ================== ================= =================
Fully diluted............................ $ 0.30
=================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Thirty-six Weeks
Forty Weeks Ended Ended
May 7, 1997 April 9, 1996
----------------- -----------------
(Restated)
<S> <C> <C>
Cash Flows from Operating Activities
Net income..............................................$ 3,450 $ 2,381
Adjustments:
Equity in net income of foreign affiliate............ --- (1,190)
Depreciation and amortization........................ 404 146
Services paid for in stock........................... 170 225
Net trade revenue earned over trade costs .......... (4,507) (2,296)
Changes in operating assets and liabilities:
Accounts and notes receivable........................ (478) (405)
Deferred taxes....................................... (2) 137
Prepaids and other assets............................ 97 206
Accounts payable and other current liabilities....... 114 (43)
Portion of receivables due to brokers................ 177 124
Income taxes payable................................. 270 (132)
----------------- -----------------
Net cash (used in) operating activities............ (305) (936)
----------------- -----------------
Cash Flows From Investing Activities
Acquisition of 50% of Business Exchange International... (294) (2,175)
Additions to equipment, systems, and other.............. (71) (184)
----------------- -----------------
Net cash (utilized in) investing activities....... (365) (2,359)
----------------- -----------------
Cash Flows From Financing Activities
Proceeds from sales of common stock..................... 150 3,576
Repayments of notes payable............................. (170) (34)
----------------- -----------------
Net cash provided by financing activities......... (20) (3,542)
----------------- -----------------
Net increase (decrease) in cash and equivalents............. (690) 247
Cash and cash equivalents at beginning of period............ 1,301 1,524
----------------- -----------------
Cash and cash equivalents at end of period..................$ 611 $ 1,771
================= =================
Supplemental Cash Flow Information
Cash paid for interest......................................$ 19 $ 16
Cash paid for income taxes.................................. --- 557
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....................... 4,324 4,233
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNAUDITED INTERIM INFORMATION AND RESTATEMENT
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, each consisting of three four-week accounting cycles, and
one quarter consisting of four 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 April 9, 1996 and May 7, 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 forty week periods ended May 7,
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.
Restatement. During fiscal 1997, the Company explored alternative ways of
terminating the relationship with the other stockholder of ART and during the
quarter ended May 7, 1997, it was determined that this could be accomplished by
the Company purchasing the other stockholder's interest, in which case the
Company would not repatriate the foreign assets of ART. In the restated
consolidated financial statements for the quarter ended May 7, 1997, the Company
reversed the deferred liability for income taxes of $1,247,000 that had been
recorded at July 31, 1996. This had previously been accounted for by
reclassifying the deferred tax amount to long-term liabilities.
6
<PAGE>
Also, during the quarter ended May 7, 1997, the Company finalized additional tax
deductions available for filing of the Company's income tax returns for the
fiscal year ended July 31, 1996, consisting mainly of tax deductions allowed to
corporations as a result of exercises of stock options at exercise prices lower
than market price of the stock at the date of exercise. The tax refunds due as a
result total $1,092,000 and are being applied with the Internal Revenue Service
and the State of Oregon as reductions of the Company's income tax liabilities
for the fiscal year ending July 31, 1997. The reduction in taxes payable has
been recorded as an increase to Paid-in capital. The tax benefit was previously
reported as a reduction of the provision for income taxes.
Following is data for net income and net income per share prior to and after the
restatement:
Previously
Reported Restated
-------------- --------------
(in thousands, except per
share amounts)
Quarter ended May 7, 1997:
Net income $ 2,017 2,139
Net income per share 0.22 0.23
Year-to-Date Three Quarters ended
May 7, 1997:
Net income 3,328 3,450
Net income per share 0.40 0.41
NOTE 2 - DESCRIPTION OF BUSINESS
The Company is engaged in domestic and international operations in both the
retail trade exchange and corporate barter areas of the commercial barter
industry. The Company administers the ITEX Retail Trade Exchange (the Exchange),
which is an association of business owners and professionals who trade goods and
services with other members of the Exchange through the medium of the ITEX Trade
Dollar. The Company promotes the maximization of trade through barter
transactions that benefit members within the Exchange by: (a) generating
incremental new business, (b) conserving members' cash by their ability to spend
ITEX Trade Dollars for needed goods and services, (c) serving effectively as an
alternative source of financing, (d) enhancing the lifestyles of members, and
(e) enabling the sale of slow moving or excess inventories at better values than
can be realized in cash markets.
The Company acts as a third-party record-keeper of members' transactions and
balances, which are denominated in ITEX Trade Dollars. An ITEX Trade Dollar is
an accounting unit used by the Exchange to record the value of trades as
determined by the buying and selling parties in barter transactions. ITEX Trade
Dollars denote the right to receive goods or services available from other
Exchange members or the obligation to provide goods or services to other
7
<PAGE>
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 of the ITEX Retail Trade Exchange 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 selling to members of the Exchange.
The Company owns and operates retail trade offices in Portland, Oregon; St.
Louis, Missouri; and Orange County, California. All other ITEX broker offices
are independently owned and operated by ITEX Licensed Brokers. There are
presently over 150 brokers worldwide. One of the Company's current objectives is
aggressive international expansion of the ITEX trade network. The Company has
license arrangements with 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 as described below. ITEX USA
negotiates corporate barter agreements, services these agreements and sells the
inventory it acquires in these transactions. In these transactions, ITEX USA
issues ITEX Cash Equivalent Credits, which are separate and apart from the ITEX
Retail Trade Dollar, 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. Another 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 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.
8
<PAGE>
As a result of this utilization of Trade Dollars, the Company has accumulated an
investment portfolio of marketable equity securities totaling $4,152,000 at May
7, 1997, stated at the lower of cost or market. Also at May 7, 1997, the Company
owned inventories of goods and services totaling $8,307,000, stated at the lower
of cost or market, which was available for corporate trading or selling 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 - TRADE DOLLARS EARNED AND TRADE DOLLARS EXPENDED
At May 7, 1997, the Company had earned 1,105,000 ITEX Trade Dollars in excess of
the amount of Trade Dollars expended by the Company. As of May 7, 1997, the
Company has classified the net positive Trade Dollar balance as a current asset
because the Company expects to utilize the full amount within the next 12
months. The Company intends to use these Trade Dollars to purchase goods and
services from other members of the Exchange for use by the Company in its
operations or for the purchase of equity securities of other companies.
At 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 for sale to Exchange members to offset any amounts of
Trade Dollars expended in excess of earned. This could be accomplished by the
sale for Trade Dollars of the 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 4 - INVENTORY FOR PRINCIPAL PARTY TRADING
Following are the components of inventory for principal party trading:
May 7, 1997 July 31, 1996
--------------- ---------------
(in thousands)
Prepaid media advertising duebills $ 6,490 $ 3,530
Hotel roomnights 1,817 1,482
Miscellaneous --- 190
--------------- ---------------
$ 8,307 $ 5,202
=============== ===============
NOTE 5 - AVAILABLE-FOR-SALE SECURITIES
In April 1997 the Company purchased 25,000 shares of Series B Preferred Stock of
Chartwell International, Inc. with stated value of $250,000 for 250,000 ITEX
9
<PAGE>
Trade Dollars. Chartwell is a publicly-traded company with diversified interests
including mining properties, real estate, and publishing. The preferred stock is
convertible into common stock and, until conversion, bears an annual dividend
rate of 0% for the first year, 2% for the second year, 3% for the third year, 4%
for the fourth year, 5% for the fifth year, and 6% for the sixth year and
thereafter. The stock is callable by Chartwell at the end of each calendar
quarter at 110% of stated value in the first year, 120% in the second, third and
fourth year, and at 110% of stated value thereafter. In the event that Chartwell
calls, the Company would have 15 days to convert to common stock or to accept
the call amount in cash. Should Chartwell issue a call for the preferred stock
in the first four years and the Company elects to receive the cash redemption
payment, the Company would receive a one-year warrant to purchase 100,000 shares
of Chartwell's common stock at the average market price for 30 days prior to the
call date.
NOTE 6 - 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 with 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 Company. On November 27, 1996, the
majority owner of ART informed the Company of its intent to take immediate steps
to distribute all the assets of ART and to end the relationship with the
Company. The Company had previously intended to reinvest its share of the
earnings of this venture indefinitely and, accordingly, had not provided for
income taxes on its share of ART's undistributed earnings. As a result of the
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 May 7, 1997 consist primarily of available-for-sale
securities, none of which are securities of ITEX Corporation. The majority owner
of ART has agreed to complete the termination of the business relationship on a
basis expected to result in the Company realizing an amount not less than the
carrying value of the Company's investment.
During fiscal 1997, the Company explored alternative ways of terminating the
relationship with the other stockholder of ART and during the quarter ended May
7, 1997, it was determined that this could be accomplished by the Company
purchasing the other stockholder's interest, in which case the Company would not
repatriate the foreign assets of ART. In the quarter ended May 7, 1997,
10
<PAGE>
the Company reversed the deferred liability for income taxes of $1,247,000 that
had been recorded at July 31, 1996 as described above. On July 30, 1997, the
Company completed the purchase of the remaining 51% interest. The change in
estimate increased net income per share for the third quarter and first three
quarters of fiscal 1997 by $.13 per share and $.14 per share, respectively.
NOTE 7 - 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 May 7, 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 May 7, 1997.
NOTE 8 - CAPITAL STOCK
Private Placement. The terms of a private placement with Wycliff Fund, Inc.
previously reported by the Company provided that if Wycliff failed to pay at
least $625,000 in any calendar quarter, the Company could, at its sole option,
decline to thereafter sell any of the then unpurchased units to Wycliff. Wycliff
did not pay the purchase price that 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 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. It is the
intention of the company to file a Form S-8 registration statement with the
Securities and Exchange commission with respect to the shares of common stock
underlying options to be issued pursuant to the plan.
Tax Benefit From Stock Options. During the quarter ended May 7, 1997, the
Company finalized additional tax deductions available for filing of the
Company's income tax returns for the fiscal year ended July 31, 1996, consisting
mainly of tax deductions allowed to corporations as a result of exercises of
stock options at exercise prices lower than market price of the stock at the
date of exercise. The tax refunds due as a result total $1,092,000 and are being
applied with the Internal Revenue Service and the State of Oregon as reductions
of the Company's income tax liabilities for the fiscal year ending July 31,
1997. The reduction in taxes payable has been recorded as an increase to Paid-in
capital.
11
<PAGE>
NOTE 9 - 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 and year-to-date periods ended May 7, 1997 and April 9, 1996:
<TABLE>
<CAPTION>
Twelve Twelve Weeks Forty Weeks Thirty-six
Weeks Ended Ended Ended Weeks Ended
May 7, 1997 April 9, 1996 May 7, 1997 April 9, 1996
--------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Corporate Trading Revenue
Trade $ 2,062 $ 387 $ 2,792 $ 9,835
Cash 251 775 1,218 2,145
--------------- --------------- --------------- ---------------
2,313 1,162 4,010 11,980
--------------- --------------- --------------- ---------------
Trade Exchange Revenue
Trade 1,750 2,614 5,867 4,488
Cash 2,416 2,661 7,912 5,961
--------------- --------------- --------------- ---------------
4,166 5,275 13,779 10,449
--------------- --------------- --------------- ---------------
Total Revenue
Trade 3,812 3,001 8,659 14,323
Cash 2,667 3,436 9,130 8,106
--------------- --------------- --------------- ---------------
$ 6,479 $ 6,437 $ 17,789 $ 22,429
=============== =============== =============== ===============
</TABLE>
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 Trade Exchange
in Turkey, to be called Ihlas ITEX Barter SA. Under the agreement, which was
effective January 1, 1997, Ihlas Holdings receives exclusive use of the ITEX
name, trademarks, and proprietary barter accounting and management software for
use in Turkey. The Company will receive royalties based on trade transactions
generated through the new system, which will enable Ihlas ITEX clients to trade
with ITEX members in other countries. Ihlas Holdings is one of Turkey's largest
corporations, 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 third
quarter includes revenue from foreign license agreements totaling $398,000.
During the quarter ended May 7, 1997, the Company entered into a license
agreement with an international licensee in Romania, pursuant to which the
Company recognized license revenue of $25,000. The Company has also started to
realize transaction fee revenue based on activity of the foreign licensees. This
foreign transaction fee revenue amounted to $26,000 in quarter ended May 7,
1997.
12
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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.
Under the 20% provision, all options and warrants are assumed to be exercised
(4,305,000 shares at May 7, 1997) but an amount equal to only 20% of shares
outstanding (1,385,000 shares at May 7, 1997) may be assumed to be repurchased,
which results in incremental shares for the income per share computation of
2,920,000 shares, which when added to 6,926,000 shares outstanding at May 7,
1997, results in a total number of shares of 9,846,000 for the denominator in
the income per share computation for the quarter ended May 7, 1997.
The numerator for the computation is equal to net income increased by a factor
equivalent to interest income or a reduction in interest expense that would
result from the use of funds that would be available from the conversion not
used to repurchase stock because of the 20% limitation. For the quarter ended
May 7, 1997, that would result in an increase to net income from interest income
and reduction of interest expense, after tax effect, totaled $132,000. For the
year to date income per share computation, the increase to net income from
interest income and reduction of interest expense, after tax effect, would be
$266,000. Because of these increases in net income that are required by the 20%
provision, income per share cannot be directly computed using net income as
reported in the statement of operations.
The effect of the calculation of income per share using the 20% provision is to
significantly increase the denominator of the computation and to make a small
increase to the numerator because the earning of only an interest factor is
presumed on available excess funds. This results in a decrease in income per
share in comparison to income per share computed using the normal "treasury
stock method".
NOTE 12 - 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
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by the purchase of newly issued common stock of BXI and, in addition, SLI loaned
$300,000 to BXI. BXI owns and operates one of the leading organized barter
exchanges in the United States.
On February 12, 1996, a complaint was filed on behalf of the Company and its
wholly owned subsidiary, SLI, Inc., against Saul Yarmak, Stephen Friedland,
Business Exchange International Corp., BX International, Inc., Joel Sens, and
David Lawson. The complaint, filed in the Circuit Court of the State of Oregon
for Multnomah County, Case No. 9602-01076, asserted claims for breach of
contract, specific performance, declaratory judgment, fraud, defamation,
unlawful trade practices, and interference with economic relationships. It
sought to recover damages for allegedly disparaging remarks made by certain of
the defendants against ITEX and for a court ruling that SLI acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.
On December 20, 1996 SLI filed a motion for partial summary judgment requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange. If the court found in favor of SLI on these issues, the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade exchange or, alternatively, order the defendants to take whatever
steps are necessary to transfer the assets of the BXI trade exchange to BXI. On
March 12, 1997 the court ruled from the bench and granted SLI's motion for
partial summary judgment. On April 21, a formal judgment was entered in favor of
SLI. The critical portion of the judgment declares that BEI is the owner of the
BXI Trade Exchange. The judgment also awards certain supplemental relief to
effectuate this declaration, including requiring the defendants (1) to transfer
all assets of the Exchange to BEI; (2) to provide the court and SLI with
certificates of title to reflect the fact that BEI owns all assets of the
Exchange; and (3) to preserve the status quo by operating the BXI Trade Exchange
in the usual and ordinary course of business in conformity with all applicable
laws and regulations. On May 2, 1997, the defendants filed notices of appeal
from the judgment entered against them.
A hearing to require a bond of between $2.5 million and $3.5 million or to
appoint a receiver was heard on June 3. The judge took the matter under
advisement along with SLI's request for an award of over $200,000 in attorney's
fees and costs based upon SLI's prevailing on its motion for summary judgment. A
ruling is expected soon.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At May 7, 1997, the Company's working capital ratio was 2.0 to 1, based on
current assets of $3,538,000 and current liabilities of $1,808,000. 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 improvement in
working capital resulted primarily from the following factors:
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(a) An increase in the Company's net ITEX retail trade credits
earned, which increased the Company's account in the ITEX Retail
Trade Exchange to 1,105,000 Trade Dollars. The Company has
classified the net positive Trade Dollar balance as a current
asset because the Company expects to utilize the full amount
within the next 12 months. The Company intends to use these Trade
Dollars to purchase goods and services from members of the
Exchange for use by the Company in its operations or for the
purchase of equity securities of other companies.
(b) During the quarter ended May 7, 1997, the Company finalized
additional tax deductions available for filing of the Company's
income tax returns for the fiscal year ended July 31, 1996,
consisting mainly of tax deductions allowed to corporations as a
result of exercises of stock options at exercise prices lower
than market price of the stock at the date of exercise. The tax
refunds due as a result total $1,092,000 and are being applied
with the Internal Revenue Service and the State of Oregon as
reductions of the Company's income tax liabilities for the fiscal
year ending July 31, 1997. The reduction in taxes payable has
been recorded as an increase to Paid-in capital.
Total stockholders' equity increased to $24,139,000 at May 7, 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
$305,000 for the forty week period ended May 7, 1997, which is a significant
improvement from negative cash flow from operations of $936,000 for the
thirty-six week period ended April 9, 1996. The Company believes that cash fees,
cash 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 and developing areas of its business. 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.
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 Trade 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,
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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
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 in-house 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.
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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 uniquely positioned as the
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 May 7, 1997, the Company spent a total of
$11,000 on research and development for its communication and information
systems, all of which was capitalized. During the forty-week period ended May 7,
1997, the Company spent a total of $34,000 all of which was capitalized.
RESULTS OF OPERATIONS
Comparison of Twelve-Week Period Ended May 7, 1997 (Third Quarter of
- ---------------------------------------------------------------------
Fiscal 1997) and Twelve-Week Period Ended April 9, 1996 (Third Quarter of
- ---------------------------------------------------------------------------
Fiscal 1996)
- ------------
Overall Operating Results
Total revenue increased to $6,479,000 in the third quarter of fiscal 1997 from
$6,437,000 in the third quarter of fiscal 1996. Income from operations increased
to $1,641,000 in the third quarter of fiscal 1997 from $791,000 in the third
quarter of fiscal 1996. Net income increased to $2,139,000, or $0.23 per share,
in the third quarter of fiscal 1997, from $746,000, or $0.09 per share in the
third quarter of fiscal 1996.
In the quarter ended May 7, 1997, the Company reversed the deferred liability
for income taxes of $1,247,000 that had been recorded at July 31, 1996. The
change in estimate increased net income per share for the third quarter of
fiscal 1997 by $.13 per share.
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Revenue
Total Revenue. Total revenue increased to $6,479,000 in the third quarter of
fiscal 1997 from $6,437,000 in the third quarter of fiscal 1996. Following is a
summary of the components of revenue for the third quarters of fiscal 1997 and
1996:
Twelve Twelve
Weeks Ended Weeks Ended
May 7, 1997 April 9,1996
--------------- ---------------
(in thousands)
Corporate Trading Revenue
Trade $ 2,062 $ 387
Cash 251 775
--------------- ---------------
2,313 1,162
--------------- ---------------
Trade Exchange Revenue
Trade 1,750 2,614
Cash 2,416 2,661
--------------- ---------------
4,166 5,275
--------------- ---------------
Total Revenue
Trade 3,812 3,001
Cash 2,667 3,436
--------------- ---------------
$ 6,479 $ 6,437
=============== ===============
Trade Exchange Revenue. In the third quarter of fiscal 1997, the Company's
revenue from its core retail trade exchange business decreased to $4,166,000
from $5,275,000 in the third quarter of fiscal 1996. Trade exchange revenue for
the third quarter of 1996 included an unusually high amount of new member
enrollment fee revenue. Because most of this portion of trade exchange revenue
is paid out as commissions to brokers, the profitability of trade exchange
operations did not decrease in proportion to the decrease in revenue. The
Company has continued its expansion by entering into foreign license agreements.
In the third quarter of fiscal 1997, the Company reported revenue from foreign
licensees totaling $25,000. The Company has also started to realize transaction
fee revenue based on activity of the foreign licensees. This foreign transaction
fee revenue amounted to $26,000 in quarter ended May 7, 1997.
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. During the third quarter of fiscal 1997, the
Company's refocusing of more resources on corporate trading activities resulted
in an increase in corporate trading revenue to $2,313,000, representing a
significant increase over corporate trading revenue in the first and second
quarters of fiscal 1997 of $1,155,000 and $542,000, respectively. Corporate
trading revenue was $1,162,000 in the third quarter of fiscal 1996. Management
is continuing to focus on increasing corporate trading activities through its
Central Trade Department and through its corporate trading affiliate, ITEX USA,
Inc. Continued increases in corporate trading revenue are expected in future
quarters.
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Costs and Expenses
Costs of Trade Exchange Revenue. Costs of trade exchange revenue decreased to
$1,927,000 in the third quarter of fiscal 1997 from $2,791,000 in the third
quarter of fiscal 1996. The decrease was attributable to the reduction in trade
exchange revenue because of the unusually high amount of enrollment fee revenue
in the third quarter of fiscal 1996. Because most of this portion of trade
exchange revenue is paid out as commissions to brokers, the profitability of
trade exchange operations did not decrease in proportion to the decrease in
revenue. The gross margin from trade exchange operations was $2,239,000 in the
third quarter of fiscal 1997 as compared to $2,484,000 in the third quarter of
fiscal 1996. Costs of trade exchange revenue were 46% of trade exchange revenue
in the third quarter of fiscal 1997 and 53% in the third quarter of fiscal 1996.
Costs of Corporate Trading. Costs of corporate trading were at approximately the
same level at $950,000 in the third quarter of fiscal 1997 and $841,000 in the
third quarter of fiscal 1996, despite the significant increase in corporate
trading revenue to $2,313,000 in the third quarter of fiscal 1997 from
$1,162,000. Costs of corporate trading revenue, which consists of brokers' fees
and commissions, were 41% in the third quarter of fiscal 1997 and 72% in the
third quarter of fiscal 1996. The cost percentage incurred during the third
quarter of 1997 was unusually low because the Company was able to complete
several corporate trades in which it incurred little or no cost.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were at approximately the same level at $1,961,000 in
the third quarter of fiscal 1997 and $2,014,000 in the third quarter of fiscal
1996.
Total advertising and promotion was $467,000 in the third quarter of fiscal 1997
as compared to $656,000 in the third 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 third quarter of fiscal 1997, the Company paid
$444,000 of its advertising costs by ITEX Trade Dollars or other trade
consideration, representing 95% of total advertising costs for the period.
Comparison of Forty-Week Period Ended May 7, 1997 (First 3 Quarters of
- ------------------------------------------------------------------------
Fiscal 1997) and Thirty-Six-Week Period Ended April 9, 1996 (First 3
- ----------------------------------------------------------------------
Quarters of Fiscal 1996)
- ------------------------
Overall Operating Results
Total revenue decreased to $17,789,000 in the first three quarters of fiscal
1997 from $22,429,000 in the first three quarters of fiscal 1996. Income from
operations increased to $3,785,000 in the first three quarters of fiscal 1997
from $1,787,000 in the first three quarters of fiscal 1996. Net income increased
to $3,450,000, or $0.41 per share, in the first three quarters of fiscal 1997,
from $2,381,000, or $0.32 per share, in the first three quarters of fiscal 1996.
In the quarter ended May 7, 1997, the Company reversed the deferred liability
for income taxes of $1,247,000 that had been recorded at July 31, 1996. The
change
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in estimate increased net income per share for the first three quarters of
fiscal 1997 by $.14 per share.
Revenue
Total Revenue. Total revenue decreased to $17,789,000 in the first three
quarters of fiscal 1997 from $22,429,000 in the first three quarters of fiscal
1996. Following is a summary of the components of revenue for the first three
quarters of fiscal 1997 and 1996:
Forty Thirty-six
Weeks Ended Weeks Ended
May 7, 1997 April 9,1996
----------------- ----------------
(in thousands)
Corporate Trading Revenue
Trade $ 2,792 $ 9,835
Cash 1,218 2,145
----------------- ----------------
4,010 11,980
----------------- ----------------
Trade Exchange Revenue
Trade 5,867 4,488
Cash 7,912 5,961
----------------- ----------------
13,779 10,449
----------------- ----------------
Total Revenue
Trade 8,659 14,323
Cash 9,130 8,106
----------------- ----------------
$ 17,789 $ 22,429
================= ================
Trade Exchange Revenue. In the first three quarters of fiscal 1997, the
Company's revenue from its core retail trade exchange business increased to
$13,779,000 from $10,449,000 in the first three 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 three quarters of fiscal 1997, the
Company reported revenue from foreign licensees totaling $423,000. The Company
has also started to realize transaction fee revenue based on activity of the
foreign licensees. This foreign transaction fee revenue amounted to $26,000 in
quarter ended May 7, 1997.
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 decrease in corporate trading revenue to
$4,010,000 in the first three quarters of fiscal 1997 as compared to $11,980,000
in the first three quarters of fiscal 1996 was attributable to the Company
devoting less of its resources to corporate trading activities during first two
quarters of fiscal 1997. Significant management and staff time was spent on
litigation and other regulatory matters, on further development of the retail
trade exchange, and on international expansion.
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During the third quarter of fiscal 1997, the Company's refocusing of more
resources on corporate trading activities resulted in an increase in corporate
trading revenue to $2,313,000, representing a significant increase over
corporate trading revenue in the first and second quarters of fiscal 1997 of
$1,155,000 and $542,000, respectively. Corporate trading revenue was $1,162,000
in the third quarter of fiscal 1996. Management is continuing to focus on
increasing corporate trading activities through its Central Trade Department and
through its corporate trading affiliate, ITEX USA, Inc. Continued increases in
corporate trading revenue are expected in future quarters.
Costs and Expenses
Costs of Trade Exchange Revenue. Costs of trade exchange revenue increased to
$5,657,000 in the first three quarters of fiscal 1997 from $5,067,000 in the
first three quarters of fiscal 1996. Costs of trade exchange revenue, which
consists of brokers' fees and commissions, were 41% of trade exchange revenue in
the first three quarters of fiscal 1997 and 48% in the first three quarters of
fiscal 1996. The decrease in the cost percentage is partially attributable to
revenue from foreign licenses, on which the Company does not pay brokers' fees
and commissions.
Costs of Corporate Trading. Costs of corporate trading decreased to $2,533,000
in the first three quarters of fiscal 1997 from $9,819,000 in the first three
quarters of fiscal 1996 because of the lower revenue level. Costs of corporate
trading revenue were 63% in the first three quarters of fiscal 1997 and 82% in
the first three quarters of fiscal 1996. The cost percentage incurred during the
first three quarters of 1997 was unusually low because the Company was able to
complete several corporate trades in which it incurred little or no cost.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were at approximately the same level at $5,814,000 in
the third quarter of fiscal 1997 and $5,756,000 in the third quarter of fiscal
1996.
Total advertising and promotion was $1,516,000 in the first three quarters of
fiscal 1997 as compared to $1,945,000 in the first three 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 three quarters of fiscal 1997, the Company
paid $1,454,000 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
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<PAGE>
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. See Part II, Item 4, Litigation.
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 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
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<PAGE>
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.
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 permission 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 was 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 was set for April 4, 1997.
On April 8, 1997, the court rejected objections filed by the defendants to the
proposed judgment and on April 21, a formal judgment was entered in favor of
SLI. The critical portion of the judgment declares that BEI is the owner of the
BXI Trade Exchange. The judgment also awards certain supplemental relief to
effectuate this declaration, including requiring the defendants (1) to transfer
all assets of the Exchange to BEI; (2) to provide the court and SLI with
certificates of title to reflect the fact that BEI owns all assets of the
Exchange; and (3) to preserve the status quo by operating the BXI Trade Exchange
in the usual and ordinary course of business in conformity with all applicable
laws and regulations.
On May 2, 1997, the defendants filed notices of appeal from the judgment entered
against them. Defendants concurrently filed a "Deposit of Instruments"
consisting of a "Bill of Sale" and a "Certificate of Ownership". The "Bill of
Sale" purports to convey all of the assets of the BXI Trade Exchange to BEI upon
payment of $1,782,750.65 and if the judgment is affirmed on appeal. The
"Certificate" states that BEI will own the assets of the BXI Trade Exchange if
the judgment is affirmed on appeal.
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These documents in no way comply with the requirements of the judgment. The
$1.78 million "purchase price" for the Exchange is totally fictitious and no
reference to this sum is found either in the Stock Purchase Agreement or the
court's judgment. SLI immediately filed an objection to the sufficiency of the
documents and asked that the defendants be required to file a bond in a
sufficient sum to assure SLI that the judgment will be complied with when it is
upheld on appeal. As an alternative to the bond, SLI indicated its willingness
to accept the appointment of a receiver to operate the BXI Trade Exchange until
the appeal can be completed.
A hearing to require a bond of between $2.5 million and $3.5 million or to
appoint a receiver was heard on June 3. The judge took the matter under
advisement along with SLI's request for an award of over $200,000 in attorney's
fees and costs based upon SLI's prevailing on its motion for summary judgment. A
ruling is expected soon.
The primary focus of ITEX is to continue to grow its core business on the
retail, corporate and international levels. 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.
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
tentatively set for July 17, 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
24
<PAGE>
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. The matter has been referred to court-annexed arbitration. 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.
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.
On May 6, 1997, SL filed a legal action in Nevada against BEI seeking to
preserve its rights as a 50% shareholder of BEI both under Nevada state law (SLI
and BEI are Nevada corporations) and pursuant to the Stock Purchase Agreement by
which SLI acquired its interest in BEI. Those rights include the right to
conduct an audit of the BEI financial records (including an audit of the
operations of the BXI Trade Exchange) and the right to representation on the BEI
board of directors.
A hearing on SLI's motion for a mandatory injunction requiring BEI to permit an
audit of its books and records, including the books of the BXI Trade Exchange
and for appointment of a receiver was heard on June 11, 1997. The Nevada court
has initially declined to rule on the requests on the basis that similar relief
was
25
<PAGE>
requested in the Oregon action. SLI's attorneys are preparing a further filing
aimed at showing the Nevada court that the lawsuit filed there is completely
separate and distinct from the Oregon action in that it is based on Nevada law
and on SLI's status as a shareholder of a Nevada corporation (BEI).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An annual meeting of the security holders of the Company was held on April 24,
1997 in Portland, Oregon. Shareholders were presented with the following
proposals:
1. To elect directors to serve for a term of one year or until their
successors are elected and qualified. The Board of Directors
nominated Graham Norris, Mary Scherr, Dr. Evan Ames, Dr. Sherry
Meinberg, Robert Nelson, Dr. Charles Padbury 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 1996-1997 fiscal year.
3. To approve a new Incentive Stock Option Plan for employees, officers,
directors and consultants of the Company.
The number of common shares issued, outstanding and entitled to vote at such
Annual Meeting was 6,875,246. There were present at the meeting common
shareholders holding a total of 4,728,947 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
- ------------------------ ------------ ------------ ---------------
Dr. Evan B. Ames 4,668,772 36,115 23,660
Dr. Sherry L. Meinberg 4,684,437 23,300 21,210
Joseph Morris 4,677,822 27,465 23,660
Robert Nelson 4,679,022 26,656 23,360
Graham H. Norris, Sr. 4,677,462 29,900 21,585
Dr. Charles Padbury 4,683,387 22,050 23,510
Mary Scherr 4,677,537 29,000 22,410
(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 1996-97 fiscal year were
4,698,282 For the resolution; 20,160 Against the resolution; and 12,305
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
26
<PAGE>
December 27, 1996 were 1,923,291 For the resolution; 454,266 Against the
resolution; and 73,755 common shares abstained or withheld votes on the
resolution.
No further business came before the annual meeting.
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
October 27, 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)
October 27, 1997 /s/ Joseph M. Morris
- ---------------- -----------------------------------------------------
Date Joseph M. Morris, Senior Vice President and
Chief Financial Officer
(principal accounting officer and director)
27
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------------------------------------------------------------
27 Financial Data Schedule for the Forty Weeks Ended May 7, 1997
28
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Jul-31-1997
<PERIOD-END> May-07-1997
<CASH> 611
<SECURITIES> 4,152
<RECEIVABLES> 1,619
<ALLOWANCES> 0
<INVENTORY> 8,307
<CURRENT-ASSETS> 3,538
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 27,752
<CURRENT-LIABILITIES> 1,808
<BONDS> 0
0
0
<COMMON> 25,352
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 27,752
<SALES> 0
<TOTAL-REVENUES> 17,789
<CGS> 8,190
<TOTAL-COSTS> 14,004
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,805
<INCOME-TAX> 1,602
<INCOME-CONTINUING> 3,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,450
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
