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, 1998
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 24, 1998
7,439,000
(This Form 10-Q includes 28 pages)
<PAGE>
ITEX CORPORATION
FORM 10-Q
For the Quarterly Period Ended
November 20, 1997
INDEX
Page
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AT NOVEMBER 20, 1997 AND
JULY 31, 1997 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIXTEEN
WEEK PERIODS ENDED NOVEMBER 20, 1997 AND 1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIXTEEN
WEEK PERIODS ENDED NOVEMBER 20, 1997 AND 1996 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 13
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
2
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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,
1998 July 31, 1997
-------------- --------------
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents............................................. $ 1,255 $ 813
Trade dollars......................................................... 3,350 786
Accounts receivable, net of allowance for doubtful
accounts of $193 and $115............................................ 1,250 1,084
Notes receivable...................................................... 393 285
Prepaids and other current assets..................................... 373 80
-------------- --------------
Total current assets.............................................. 6,621 3,048
Inventory for Principal Party Trading...................................... 6,175 6,939
Available for Sale Equity Securities....................................... 3,918 7,088
Natural Resource Interests................................................. 6,688 6,576
Investment in Samana Resort ............................................... 7,404 ----
Investments in and Advances to Unconsolidated Entities..................... 3,642 3,092
Goodwill and Purchased Member Lists, net................................... 954 1,075
Notes Receivable, Long-Term Portion........................................ 510 510
Other Assets............................................................... 1,515 1,640
-------------- --------------
$ 37,427 $ 29,968
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Bank note payable..................................................... $ 250 $ ----
Accounts payable...................................................... 271 246
Portion of receivables due to brokers ................................ 607 552
Income taxes payable.................................................. 1,080 840
Current portion of long-term indebtedness............................. 66 166
Other current liabilities............................................. 444 263
-------------- --------------
Total current liabilities......................................... 2,718 2,067
-------------- --------------
Deferred Income Taxes...................................................... 117 101
-------------- --------------
Long-term Indebtedness..................................................... 26 26
-------------- --------------
Stockholders' Equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 7,439,000 and 7,207,000 shares
issued and outstanding............................................. 74 72
Paid-in capital....................................................... 19,900 19,114
Net unrealized gain on marketable securities.......................... 3,219 60
Treasury stock, at cost (2,000 shares)................................ (10) ----
Retained earnings..................................................... 11,653 8,938
Prepaid printing...................................................... (270) (410)
-------------- --------------
Total stockholders' equity........................................ 34,566 27,774
-------------- --------------
$ 37,427 $ 29,968
============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
3
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<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Twelve Twelve Twenty-eight Twenty-eight
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
February 12, February 12, February 12, February 12,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Revenue
<S> <C> <C> <C> <C>
Corporate trading revenue............... $ 1,050 $ 542 $ 8,846 $ 1,697
Trade exchange revenue.................. 5,856 4,853 11,090 9,613
------------ ------------ ------------ ------------
6,906 5,395 19,936 11,310
------------ ------------ ------------ ------------
Costs and Expenses
Costs of corporate trading.............. 792 376 7,762 1,583
Costs of trade exchange revenue......... 2,150 1,802 4,392 3,730
Selling, general, and administrative.... 2,264 1,722 5,002 3,853
------------ ------------ ------------ ------------
5,206 3,900 17,156 9,166
------------ ------------ ------------ ------------
Income (Loss) from Operations............... 1,700 1,495 2,780 2,144
Other Income (Expense)
Net gains on sales of investments ---- 5 1,097 16
Miscellaneous, net...................... 23 --- 60 ---
------------ ------------ ------------ ------------
23 5 1,157 16
------------ ------------ ------------ ------------
Income Before Taxes ........................ 1,723 1,500 3,937 2,160
Provision (Credit) for Income Taxes......... 423 599 1,220 849
------------ ------------ ------------ ------------
Net Income (Loss)........................... $ 1,300 $ 901 $ 2,717 $ 1,311
============ ============ ============ ============
Average Common and Equivalent Shares:
Basic.................................... 7,434 6,854 7,392 6,854
============ ============ ============ ============
Diluted.................................. 7,784 6,854 7,827 7,007
============ ============ ============ ============
Net Income Per Common Share:
Basic................................... $ 0.17 $ 0.13 $ 0.37 $ 0.19
============ ============ ============ ============
Diluted.................................. $ 0.17 $ 0.13 $ 0.35 $ 0.19
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Twenty-Eight Weeks Twenty-Eight Weeks
Ended Ended
February 12, 1998 February 12, 1997
------------------- -------------------
Cash Flows from Operating Activities
<S> <C> <C>
Net income............................................ $ 2,717 $ 1,311
Adjustments:
Depreciation and amortization...................... 330 285
Services paid for in stock......................... 650 190
Gain on sales of available-for-sale securities..... (1,097) ----
Net trade revenue earned over trade costs ........ (3,564) (2,532)
Changes in operating assets and liabilities:
Accounts and notes receivable...................... (274) ( 360)
Deferred taxes..................................... 16 ----
Prepaids and other assets.......................... 367 (4)
Accounts payable and other current liabilities..... 205 26
Portion of receivables due to brokers.............. 55 114
Income taxes payable............................... 103 849
------------------- -------------------
Net cash provided by (used in) operating
activities................................. (492) (121)
------------------- -------------------
Cash Flows From Investing Activities
Gain on sales of available-for sale securities........ 1,097 ----
Investment in Samana Resort........................... (1,004) ----
Investments in and advances to unconsolidated
entities.......................................... (350) (155)
Additions to equipment and information systems........ (18) ( 112)
------------------- -------------------
Net cash (used in) investing activities......... (275) ( 267)
------------------- -------------------
Cash Flows From Financing Activities
Proceeds from sales of common stock................... 244 5
Bank credit line borrowings........................... 250 ----
Repayments of notes payable........................... (99) (104)
------------------- -------------------
Net cash provided by (used in financing
activities................................ 395 (99)
------------------- -------------------
Net increase (decrease) in cash and equivalents........... (372) (487)
Cash and cash equivalents at beginning of period.......... 1,627 1,301
------------------- -------------------
Cash and Cash Equivalents at End of Period................$ 1,255 $ 814
=================== ===================
Supplemental Cash Flow Information
Cash paid for interest.................................... 6 $ 12
Cash paid for income taxes................................ 1,085 ----
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..................... 591 1,300
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
5
<PAGE>
ITEX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - UNAUDITED INTERIM INFORMATION
ITEX Corporation (the "Company" or "ITEX") and its wholly-owned subsidiaries
prepare and report financial results using a fiscal year ending July 31. The
Company closes its books 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. Accordingly, the dates for the fiscal ends
of the Company's quarters for public reporting are as follows: first quarter,
November 20; second quarter, February 12; third quarter, May 7; fourth quarter,
July 31. The Board of Directors has determined that commencing with the first
quarter of the fiscal year ending July 31, 1999, the Company will use calendar
quarters with three months each for financial reporting.
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,
1997 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 February 12, 1998 and 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, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending July 31, 1998.
The Notes to Consolidated Financial Statements included in the Company's July
31, 1997 Annual Report on Form 10-K should be read in conjunction with these
consolidated financial statements.
NOTE 2 - TRADE DOLLARS
At February 12, 1998, the Company had earned 3,350,000 ITEX Trade Dollars in
excess of the amount of Trade Dollars expended by the Company. At July 31, 1997,
the Company had earned 786,000 ITEX Trade Dollars in excess of the amount of
Trade Dollars expended by the Company. The Company has decreased purchases of
inventory for principal party trading, while accumulating trade dollars for use
in, among other things, paying a portion of the development costs of the Villas
Punta Ballena Samana Resort (the "Samana Resort"), which is described in Note 5
to Consolidated Financial Statements included in this Form 10-Q. Since full cash
financing for the development costs are expected to be obtained, this should
enable the Company to effectively convert ITEX Trade Dollars so expended into
cash. The Company also intends to use these ITEX Trade Dollars for purchasing
investments in equity securities of other companies, as well as for payment of
certain operating expenses.
6
<PAGE>
The Company has classified net positive Trade Dollar balances as a current asset
because the Company expects to utilize the full amount within the 12 months
following the respective balance sheet dates.
NOTE 3 - INVENTORY FOR PRINCIPAL PARTY TRADING
Following are the components of inventory for principal party trading:
February 12,
1998 July 31, 1997
------------- -------------
(in thousands)
Prepaid media advertising duebills $ 4,457 $ 4,190
Hotel roomnights 603 1,006
Health products 50 653
Electronic products --- 278
Timeshares and real estate interests 752 570
Miscellaneous inventory 313 242
------------- -------------
$ 6,175 $ 6,939
============= =============
NOTE 4 - AVAILABLE-FOR-SALE SECURITIES
During the quarter ended November 20 1997, the Company sold a portion of its
available-for-sale securities for cash, realizing proceeds of $3,315,000,
substantially increasing the liquidity of the Company. The cost of the
securities sold amounted to $2,218,000, resulting in net gains totaling
$1,097,000. Generally accepted accounting principles require that these net
gains and cash flows not be included in income from operations in the statement
of operations and in cash provided by operations in the statement of cash flows.
These securities were acquired primarily in exchange for Trade Dollars or other
nonmonetary consideration in the Company's operating activities. The sale of
these securities for cash has resulted in conversion of Trade Dollars into cash
at a gain and, accordingly, the Company considers these gains and cash flows to
be an integral part of the Company's operating activities. The Company intends
to continue to use this strategy as part of its basic operations, and has
accumulated a substantial balance of ITEX Trade Dollars at February 12, 1998,
partially for this purpose.
Available for sale securities of $3,918,000 at February 12, 1998 includes
securities with market value totaling $5,878,000, less deferred taxes totaling
$1,960,000 that would be payable as a result of gains on a presumed sale of the
securities.
The available for sale securities at February 12, 1998 was primarily 1,800,000
shares of common stock of Wade Cook Financial Corporation ("WCFC"). On February
4, 1998, Associated Reciprocal Traders, Ltd., which is a wholly owned subsidiary
of the Company and the owner of the WCFC stock, filed an action against WCFC
seeking, among other things, an injunction compelling WCFC to perform its
obligations under an agreement between the parties and compensatory damages
resulting from WCFC's failure to deliver and permit transfer of WCFC stock. This
matter is discussed in more detail in Part II, Item 1 of this Form 10-Q.
7
<PAGE>
NOTE 5 - INVESTMENT IN SAMANA RESORT
During October 1997, the Company, through its wholly-owned foreign subsidiary,
Associated Reciprocal Traders, Ltd. ("ART"), acquired a 60% interest in 16 acres
of improved but undeveloped resort property known as the Villas Punta Ballena
Samana Resort (the "Samana Resort"), along with associated plans, engineering
drawings, permits and approvals for the resort, and a commitment for a
construction loan of approximately $40,000,000. During the quarter ended
February 12, 1998, the Company determined that it will probably not utilize this
loan commitment, but rather will fund the project on more favorable terms
through a conventional mortgage on the land and other interim financing. The
transaction was structured as the purchase of a 60% equity interest in Villas
Punta Ballena C. por A. ("VPB"), a Dominican Republic corporation, the holder of
the Samana Resort property. The Samana Resort is located in the northeast corner
of the Dominican Republic on the Bay of Samana. VPB has never had any business
operations other than ownership of the Samana Project.
The Company paid cash of $1,000,000 during the quarter ended November 20, 1997
and agreed to pay additional cash of $250,000 upon the finalization of a credit
facility agreement for funding of the project, which has been included in other
current liabilities. The Company conveyed available-for-sale securities totaling
$5,142,000 from the investment portfolio of ART and also agreed to issue to the
other parties ITEX Corporation common stock with market value of $1,000,000 upon
the substantial beginning of construction on the project. The carrying value of
the interest in the Samana Resort was determined by an independent appraisal of
the investment.
NOTE 6 - INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
Investments in and advances to unconsolidated entities includes $3,142,000 and
$3,092,000 at February 12, 1998 and July 31, 1997, respectively, related to the
Company's interest in Business Exchange International Corp, the operatior of the
BXI Trade Exchange.
During the quarter ended November 20, 1997, ITEX invested 200,000 ITEX Trade
Dollars and $200,000 cash in GlobalTel Resources, Inc. ("GlobalTel"), a company
that expects to complete an initial public offering in 1998. ITEX is to receive
$200,000 of unregistered stock computed at the initial public offering price.
ITEX also received a "bridge financing" note receivable for $200,000 with
interest at 10%, payable at the earlier of the date of completion of a firm
commitment underwritten public offering providing gross proceeds of at least
$15,000,000 or January 2, 1999. ITEX also received rights to $200,000 of common
stock computed at the initial public offering price, which is to be registered
in the initial public offering. ITEX has agreed to a "lock up period" of nine
months after the initial public offering, during which time the ITEX may be
required to hold such stock. The Chairman and Chief Executive Officer of
GlobalTel is a Director of ITEX.
8
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NOTE 7 - BANK LINE OF CREDIT
The Company's primary bank agreed to a new line of credit arrangement with a
term through December 31, 1998. 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, 1998, the
Company had borrowed the entire credit line amount of $250,000.
NOTE 8 - CAPITAL STOCK
Stock Option Plan. On September 3, 1997, the Board of Directors adopted a stock
option plan pursuant to which options to purchase up to 965,000 shares of the
Company's common stock may be granted to employees, officers, directors, and
consultants of the Company. Exercise prices for options granted under the plans
are equal to market value on the date of grant and options may be exercisable
for up to ten years from the date of grant. Pursuant to the new stock option
plan, options to purchase 740,000 shares were granted on September 3, 1997 at an
exercise price of $3.19 per share.
The stock option plans that were adopted on December 27, 1996 and September 3,
1997 were approved by the Company's shareholders at the annual meeting of the
Company's shareholders held on January 8, 1998 and reconvened on February 6,
1998. It is the intention of the Company to file a Form S-8 registration with
the Securities and Exchange Commission with respect to the shares of common
stock underlying options to be issued pursuant to the stock option plans that
were adopted on December 15, 1995, December 27, 1996 and September 3, 1997, all
of which have been approved by the Company's shareholders.
9
<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 the twelve
and twenty-eight week periods ended February 12, 1998 and 1997:
<TABLE>
<CAPTION>
Twelve Twelve Twenty-eight Twenty-eight
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
February 12, February 12, February 12, February 12,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands)
Corporate Trading Revenue
<S> <C> <C> <C> <C>
Trade $ 822 $ 353 $ 7,875 $ 730
Cash 228 189 971 967
------------ ------------ ------------ ------------
1,050 542 8,846 1,697
------------ ------------ ------------ ------------
Trade Exchange Revenue
Trade 3,216 2,503 5,633 4,117
Cash 2,640 2,350 5,457 5,496
------------ ------------ ------------ ------------
5,856 4,853 11,090 9,613
------------ ------------ ------------ ------------
Total Revenue
Trade 4,038 2,856 13,508 4,847
Cash 2,868 2,539 6,428 6,463
------------ ------------ ------------ ------------
$ 6,906 $ 5,395 $ 19,936 $ 11,310
============ ============ ============ ============
</TABLE>
NOTE 10 - FOREIGN LICENSES
During the quarter ended November 20, 1998, the Company entered into an
agreement with Kuwait United Company for Advertising & Publishing & Distribution
to license ITEX Retail Trade Exchanges in ten Middle Eastern countries. During
the quarter ended February 12, 1998, the Company completed its performance
requirements under the contract, including delivery of software, training, and
related deliverables. The license fee of $150,000 has been included in trade
exchange revenue for the quarter ended February 12, 1998. The countries covered
by this agreement are Kuwait, Saudi Arabia, Bahrain, Qatar, United Arab
Emirates, Oman, Lebanon, Syria, Jordan, and Egypt.
NOTE 11 - INCOME PER SHARE
During the quarter ended February 12, 1998, the Company adopted FASB Statement
No. 128, Earnings Per Share. Statement 128 requires presentation of basic
earnings per share and diluted earnings per share. Basic earnings per share
excludes potential dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted earnings per share
is computed similarly to fully diluted earnings per share under previous
generally accepted accounting principles in the United States. All prior period
earnings per share data are restated to conform with Statement 128 for
consistent presentation of all periods.
10
<PAGE>
Following is a reconciliation of the numerators of the basic and diluted income
per share:
<TABLE>
<CAPTION>
Twelve Twelve Twenty-eight Twenty-eight
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
February 12, February 12, February 12, February 12,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Net income available to
common stockholders $ 1,300 $ 901 $ 2,717 $ 1,311
============ ============ ============ ============
Weighted average shares 7,434 6,854 7,392 6,854
Dilutive effect of options and
warrants 350 ---- 435 153
------------ ------------ ------------ ------------
Diluted shares 7,784 6,854 7,827 7,007
============ ============ ============ ============
Basic income per share (based
on weighted average shares $ 0.17 $ 0.13 $ 0.37 $ 0.19
============ ============ ============ ============
Diluted income per share (based
on assumed conversions) $ 0.17 $ 0.13 $ 0.35 $ 0.19
============ ============ ============ ============
</TABLE>
For the twelve weeks ended February 12, 1997, options and warrants to purchase
4,031,000 shares were not included in the computation of diluted income per
share because they were antidilutive because their exercise price was greater
than the average market price of the common shares. The options expire on
various dates. In the other quarters presented, the options and warrants were
dilutive.
NOTE 12 - BXI TRADE EXCHANGE
On April 2, 1998, the Company announced the signing of an agreement for the
dismissal of all litigation related to the BXI Retail Trade Exchange and for an
alliance between the BXI Retail Trade Exchange and the ITEX Retail Trade
Exchange under the overall corporate umbrella of ITEX Corporation. The Company
agreed to pay $3,725,000 cash in exchange for the remaining 50% common equity
interest in Business Exchange International Corporation ("BEI") not already
owned by the Company. The Company also agreed to sell, to the owner of the
remaining 50% of BEI, 150,000 shares of newly issued shares of the Company's
common stock (subject to Rule 144) for $600,000 cash, which was completed on
March 30, 1998.
The Company also agreed to place 75,000 shares of common stock and warrants to
purchase an additional 75,000 shares of common stock at $7 per share into a fund
that will be distributed to current brokers of the BXI Trade Exchange who
continue as BXI brokers for a three-year period after the date of closing. The
warrants will be excercisable for three years after distribution to the brokers.
The closing of the purchase of the remaining 50% interest transaction is
expected to take place during April 1998 after the completion of customary due
diligence
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procedures. The transaction will be accounted for using the purchase method of
accounting.
NOTE 13 - FORMATION OF INTERNATIONAL MARKETING SUBSIDARY
In December 1997 the Company formed Zoring International Inc. ("Zoring"), a 51%
owned subsidiary, to provide international marketing expertise to successful
U.S.-based companies in expanding into other countries. Zoring consults with
client companies in developing international marketing strategy, assessing
in-house needs for support of international expansion, and helps implementing
such strategies by identifying, qualifying, and recruiting master franchisees
and licensees globally. Zoring will provide these same services to the Company,
which has become a client of Zoring.
NOTE 14 - INVESTMENT IN AVENIR INTERNET SOLUTIONS, INC.
On March 26, 1998, the Company announced the signing of an agreement to acquire
a 45% common equity interest in Avenir Internet Solutions, Inc. ("Avenir"), an
Internet commerce company based in Waterloo, Ontario, Canada. The Company agreed
to pay $750,000 cash and 250,000 ITEX Trade Dollars for its interest, to be
provided based on a mutually agreed upon cash requirements schedule. If Avenir
does not use the ITEX Trade Dollars to acquire goods and services usable in its
operations, the Company will replace the ITEX Trade Dollars with cash. Through
March 31, 1998, the Company had provided $250,000 cash to Avenir pursuant to the
agreement.
NOTE 15 - SERIES A PREFERRED STOCK
Subsequent to February 12, 1998, the Board of Directors authorized up to 65,000
shares of Series A Convertible Preferred Stock ("Series A Preferred Stock") for
sale at $100 per share. The Series A Preferred Stock is convertible into common
stock at the lower of the average bid price for the five trading days prior to
issuance of the preferred stock or 80% of the average price of the common stock
in public trading for the five days prior to conversion. The Series A Preferred
Stock may be converted into common stock at any time after 41 days from closing.
The Company has the right, but not the obligation, to redeem some or all of the
Series A Preferred Stock in the event that the market price of the Company's
common stock is $3.00 per share or less. The redemption price would be 118% of
the amount originally paid for the Series A Preferred Stock. The Series A
Preferred Stock earns dividends at the rate of 5% per annum, which may be paid
in cash or common stock at the discretion of the Company.
On April 3, 1998, the Company closed the sale of 53,500 shares of Series A
Preferred Stock to a small number of non-U.S. persons (as defined in Rule 902 of
the Securities Act of 1933, as amended) located outside the United States in a
non-registered private placement pursuant to Regulation S under the Securities
Act of 1933, as amended. The Company realized gross proceeds of $5,350,000 and
net proceeds, after costs, totaling approximately $4,800,000. The purchasers of
the Series A Preferred Stock have agreed not to sell at least 50% of the common
stock received upon conversion until at least 75 days after the closing date.
The Company has granted registration rights, under limited conditions, to the
holders of Series A Preferred Stock. The primary use of the proceeds is for
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the acquisition of the remaining 50% common equity interest in Business Exchange
International, Inc.
NOTE 16 - REPURCHASE OF WARRANTS
On March 30, 1998, the Company agreed in principle to issue 250,000 shares of
unregistered common stock in exchange for the retirement of outstanding warrants
to purchase 1,011,000 shares of common stock. The warrants to be retired had
exercise prices ranging from $3.50 per share to $6.12 per share, with expiration
dates ranging from June 29, 2000 to April 11, 2006.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At February 12, 1998, the Company's working capital ratio was 2.4 to 1, based on
current assets of $6,621,000 and current liabilities of $2,718,000. The
Company's working capital ratio at July 31, 1997, was 1.5 to 1, based on current
assets of $3,048,000 and current liabilities of $2,067,000. The improvement in
working capital resulted primarily from the following factors:
(a) An increase in the Company's cash and short-term cash investments to
$1,255,000 at February 12, 1998, from the July 31, 1997 total of
$813,000. This was primarily attributed to the sale of
available-for-sale securities in which the Company realized net
proceeds of $3,315,000.
(b) An increase in the Company's net ITEX retail trade credits earned,
which increased the Company's account in the ITEX Retail Trade
Exchange at February 12, 1998 to 3,350,000 Trade Dollars from
786,000 Trade Dollars at July 31, 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 members of the Exchange for use by the
Company in its operations or for the purchase of other assets,
including equity securities of other companies and for construction
costs of the Samana Resort project.
Total stockholders' equity increased to $34,566,000 at February 12, 1998, from
$27,774,000 at July 31, 1997. The increase in stockholders' equity was primarily
attributable to the following two factors:
(a) Continued profitable operations of the Company.
(b) An increase in the unrealized gain on available-for-sale securities
to $3,219,000 at February 12, 1998 from $60,000 at July 31, 1997.
Available for sale securities of $3,918,000 at February 12, 1998
includes securities with market value totaling $5,878,000 less
deferred taxes totaling $1,960,000 that would be payable as a result
of gains on the presumed sale of the securities.
13
<PAGE>
During the first two quarters of fiscal 1998, the Company reported net cash used
in operations of $492,000 in the statement of cash flows, as compared to cash
used in operations of $121,000 in the first two quarters of fiscal 1997. The
increase in cash used in operations was primarily attributable to increased
expenditures in start-up operations including the Company's new foreign
licensing subsidiary, Zoring International Inc., and additional business
development activities.
During the quarter ended November 20, 1997, the Company sold a portion of its
available-for-sale securities for cash, realizing proceeds of $3,315,000,
substantially increasing the liquidity of the Company. The cost of the
securities sold amounted to $2,218,000, resulting in net gains totaling
$1,097,000. Generally accepted accounting principles require that these net
gains and cash flows not be included in income from operations in the statement
of operations and in cash provided by operations in the statement of cash flows.
However, these securities were acquired primarily in exchange for Trade Dollars
or other nonmonetary consideration in the Company's operating activities. The
sale of these securities for cash has resulted in conversion of Trade Dollars
into cash at a gain and, accordingly, the Company considers these gains and cash
flows to be an integral part of the Company's operating activities. The Company
intends to continue to use this strategy as part of its basic operations, and
has accumulated a substantial balance of ITEX Trade Dollars at February 12,
1998, partially for this purpose.
Available for sale securities of $3,918,000 at February 12, 1998 includes
securities with market value totaling $5,878,000, less deferred taxes totaling
$1,960,000 that would be payable as a result of gains on the presumed sale of
the securities.
The available for sale securities at February 12, 1998, consisted primarily of
1,800,000 shares of common stock of Wade Cook Financial Corporation ("WCFC"). On
February 4, 1998, Associated Reciprocal Traders, Ltd., which is a wholly owned
subsidiary of the Company and the owner of the WCFC stock, filed an action
against WCFC seeking, among other things, an injunction compelling WCFC to
perform its obligations under an agreement between the parties and compensatory
damages resulting from WCFC's failure to deliver and permit transfer of WCFC
stock. This matter is discussed in more detail in Part II, Item 1 of this Form
10-Q.
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.
On April 3, 1998, the Company closed the sale of 53,500 shares of Series A
Preferred Stock to a small number of non-U.S. persons (as defined in Rule 902 of
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the Securities Act of 1933, as amended) located outside the United States in a
non-registered private placement pursuant to Regulation S under the Securities
Act of 1933, as amended. The Company realized gross proceeds of $5,350,000 and
net proceeds, after costs, totaling approximately $4,800,000. The purchasers of
the Series A Preferred Stock have agreed not to sell at least 50% of the common
stock received upon conversion until at least 75 days after the closing date.
The Company has granted registration rights, under limited conditions, to the
holders of Series A Preferred Stock. The primary use of the proceeds is for the
acquisition of the remaining 50% common equity interest in Business Exchange
International, Inc.
Development Activities
BXI Trade Exchange. On April 2, 1998, the Company announced the signing of an
agreement for the dismissal of all litigation related to the BXI Retail Trade
Exchange and for an alliance between the BXI Retail Trade Exchange and the ITEX
Retail Trade Exchange under the overall corporate umbrella of ITEX Corporation.
The Company agreed to pay $3,725,000 cash in exchange for the remaining 50%
common equity interest in Business Exchange International Corporation ("BEI")
not already owned by the Company. The Company also agreed to sell, to the owner
of the remaining 50% of BEI, 150,000 shares of newly issued shares of the
Company's common stock (subject to Rule 144) for $600,000 cash, which was
completed on March 30, 1998.
The Company also agreed to place 75,000 shares of common stock and warrants to
purchase an additional 75,000 shares of common stock at $7 per share into a fund
that will be distributed to current brokers of the BXI Trade Exchange who
continue as BXI brokers for a three-year period after the date of closing. The
warrants will be excercisable for three years after distribution to the brokers.
The closing of the purchase of the remaining 50% interest transaction is
expected to take place during April 1998 after the completion of customary due
diligence procedures. The transaction will be accounted for using the purchase
method of accounting.
Manufacturers Trade Exchange. The Company signed an agreement with Manufacturers
Trade Exchange LLC ("MTX"), to represent and facilitate transactions for
manufacturers nationwide. Working with centers of the Manufacturing Extension
Partnership ("MEP"), a program sponsored by the U.S. Department of Commerce, MTX
can market ITEX services to a data base of approximately 381,000 U.S.
manufacturers. MTX will, among other things, facilitate electronic commerce,
non-cash exchange and trade of products and services between U.S. manufacturers
and service providers through themedium of the Itex Retail Trade Exchabge and
otherwise. The Company believes that this expansion will provide important
growth and market penetration within the manufacturing sector.
Foreign Licensing. During the first two quarters of fiscal 1998, the Company
entered into an agreement with Kuwait United Company for Advertising &
Publishing & Distribution to license ITEX Retail Trade Exchanges in ten Middle
Eastern countries. The countries covered by this agreement are Kuwait, Saudi
Arabia, Bahrain, Qatar, United Arab Emirates, Oman, Lebanon, Syria, Jordan, and
Egypt.
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In December 1997 the Company formed Zoring International Inc. ("Zoring"), a 51%
owned subsidiary, to provide international marketing expertise to successful
U.S.-based companies in expanding into other countries. Zoring consults with
client companies in developing international marketing strategy, assessing
in-house needs for support of international expansion, and helps implementing
such strategies by identifying, qualifying, and recruiting master franchisees
and licensees globally. Zoring will provide these same services to the Company,
which has become a client of Zoring. Zoring, which is based in Denver, Colorado,
has been staffed with experts in the fields of international marketing,
franchise development, licensing, countertrade, and networking through
government channels both domestically and abroad. The Company expects moderate
negative cash flow and operating losses to result from its investment of
working capital in Zoring's start up period, after which positive cash flow and
profitability is expected.
Samana Resort Project. During October 1997, ART acquired a 60% interest in 16
acres of improved but undeveloped resort property known as the Villas Punta
Ballena Samana Resort (the "Samana Resort"), along with associated plans,
engineering drawings, permits and approvals for the resort, and a commitment for
a construction loan of approximately $40,000,000. During the quarter ended
February 12, 1998, the Company determined that it will probably not utilize this
loan commitment, but rather will fund the project on more favorable terms
through a conventional mortgage on the land and other interim financing. The
Samana Resort is located in the northeast corner of the Dominican Republic on
the Bay of Samana. The transaction was structured as the purchase of a 60%
equity interest in Villas Punta Ballena C. por A. ("VPB"), a Dominican Republic
corporation, the holder of the Samana Resort property. VPB has never had any
business operations other than ownership of the Samana Project.
The total consideration consisted of cash of $1,250,000, ITEX Corporation common
stock to have a market value at time of issuance of $1,000,000, and
available-for-sale securities totaling $5,142,000 from the portfolio of ART. The
consideration is being paid in installments ranging from payments at the time of
contract signing to the final payment of ITEX Corporation common stock which is
due within five days of the commencement of substantial construction on the
property. The value of the acquired assets has been determined by independent
appraisal of the property.
The Company intends to proceed with construction of the resort facility pursuant
to the plans for development of the property, which have been approved by the
appropriate authorities. When completed, the Samana Resort is expected to
include more than 250 condominium and hotel units, as well as a casino, swimming
pools, tennis courts, restaurants, and most other amenities associated with a
high quality Caribbean resort.
Communication and Information Systems. During the twelve and twenty-eight week
periods ended February 12, 1998, the Company spent a total of $24,000 and
$61,000, respectively, on research and development for its communication and
information systems, all of which was charged to expense.
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On March 26, 1998, the Company announced the signing of an agreement to acquire
a 45% common equity interest in Avenir Internet Solutions, Inc. ("Avenir"), an
Internet commerce company based in Waterloo, Ontario, Canada. The Company agreed
to pay $750,000 cash and 250,000 ITEX Trade Dollars for its interest, to be
provided based on a mutually agreed upon cash requirements schedule. If Avenir
does not use the ITEX Trade Dollars to acquire goods and services usable in its
operations, the Company will replace the ITEX Trade Dollars with cash. Through
March 31, 1998, the Company had provided $250,000 cash to Avenir pursuant to the
agreement.
RESULTS OF OPERATIONS
Comparison of Twelve-Week Period Ended February 12, 1998 (Second Quarter of
- --------------------------------------------------------------------------------
Fiscal 1998) and Twelve-Week Period Ended February 12, 1997 (Second Quarter of
- --------------------------------------------------------------------------------
Fiscal 1997)
- ------------
Overall Operating Results
Total revenue increased 28% to $6,906,000 in the second quarter of fiscal 1998
from $5,395,000 in the second quarter of fiscal 1997. Income from operations
increased to $1,700,000 in the second quarter of fiscal 1998 from $1,495,000 in
the second quarter of fiscal 1997.
Net income increased to $1,300,000, or $0.17 per share, in the second quarter of
fiscal 1998, from $901,000, or $0.13 per share in the second quarter of fiscal
1997.
Revenue
Total Revenue. Total revenue increased 28% to $6,906,000 in the second quarter
of fiscal 1998 from $5,395,000 in the second quarter of fiscal 1997. Following
is a summary of the components of revenue for the second quarters of fiscal 1998
and 1997:
Twelve Weeks Ended Twelve Weeks Ended
February 12, 1998 February 12, 1997
------------------ ------------------
(in thousands)
Corporate Trading Revenue
Trade $ 822 $ 353
Cash 228 189
------------- -------------
1,050 542
------------- -------------
Trade Exchange Revenue
Trade 3,216 2,503
Cash 2,640 2,350
------------- -------------
5,856 4,853
------------- -------------
Total Revenue
Trade 4,038 2,856
Cash 2,868 2,539
------------- -------------
$ 6,906 $ 5,395
============= =============
Trade Exchange Revenue. In the second quarter of fiscal 1998, the Company's
revenue from its core retail trade exchange business increased 21% to $5,856,000
from $4,853,000 in the second quarter of fiscal 1997. Trade exchange revenue
included revenue from foreign licenses totaling $150,000 in the second quarter
of fiscal 1998 and $398,000 in the second quarter of fiscal 1997. Revenue from
the
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U.S. retail trade exchange in the second quarter of fiscal 1998 increased
28% to $5,706,000 from $4,455,000 in the second quarter of fiscal 1997.
The Company has continued its commitment to improved broker training programs
which, in the view of the Company, 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. In the second quarter of fiscal 1998, the Company's
revenue from corporate trading activities increased to $1,050,000 from $542,000
in the second quarter of fiscal 1997. The Company continues to focus increased
resources on the corporate trading area and continued significant contributions
to revenue are expected.
Costs, Expenses, and Gross Margins
Costs of Trade Exchange Revenue. Costs of trade exchange revenue increased to
$2,150,000 in the second quarter of fiscal 1998 from $1,802,000 in the second
quarter of fiscal 1997. The gross margin from U.S. trade exchange operations was
$3,556,000 in the second quarter of fiscal 1998 as compared to $2,653,000 in the
second quarter of fiscal 1997. Costs of U.S. trade exchange revenue were 38% of
trade exchange revenue in the second quarter of fiscal 1998 and 40% in the
second quarter of fiscal 1997.
Costs of Corporate Trading. Costs of corporate trading increased to $792,000 in
the second quarter of fiscal 1998 from $376,000 in the second quarter of fiscal
1997. The gross margin from corporate trading was $258,000 in the second quarter
of fiscal 1998 as compared to $166,000 in the second quarter of fiscal 1997.
Costs of corporate trading were 75% of trade exchange revenue in the second
quarter of fiscal 1998 and 69% in the second quarter of fiscal 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2,264,000 in the second quarter of fiscal
1998 from $1,722,000 in the second quarter of fiscal 1997. The increase was
primarily attributable to higher compensation costs connected with the Company's
increasing scope of operations.
Total advertising and promotion expense was $243,000 in the second quarter of
fiscal 1998 as compared to $403,000 in the second quarter of fiscal 1997. 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 1998, the Company paid
$231,000 of its advertising costs by ITEX Trade Dollars or other trade
consideration, representing 95% of total advertising costs for the period.
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Comparison of Twenty-Eight Week Period Ended February 12, 1998 (First Two
- --------------------------------------------------------------------------------
Quarters of Fiscal 1998) and Twenty-Eight Week Period Ended February 12, 1997
- --------------------------------------------------------------------------------
(First Two Quarters of Fiscal 1997)
- -----------------------------------
Overall Operating Results
Total revenue increased 76% to $19,936,000 in the first two quarters of fiscal
1998 from $11,310,000 in the first two quarters of fiscal 1997. Income from
operations increased to $2,780,000 in the first two quarters of fiscal 1998 from
$2,144,000 in the first two quarters of fiscal 1997.
During the quarter ended November 20, 1997, the Company sold a portion of its
available-for-sale securities for cash, realizing proceeds of $3,315,000,
substantially increasing the liquidity of the Company. The cost of the
securities sold amounted to $2,218,000, resulting in net gains totaling
$1,097,000. Generally accepted accounting principles require that these net
gains not be included in income from operations in the statement of operations.
However, these securities were acquired primarily in exchange for Trade Dollars
or other nonmonetary consideration in the Company's operating activities and are
an integral part of the Company's operating strategy for realizing profits and
for the conversion of trade profits to cash.
Net income increased to $2,717,000, or $0.37 per share, in the first two
quarters of fiscal 1998, from $1,311,000, or $0.19 per share in the first two
quarters of fiscal 1997.
Revenue
Total Revenue. Total revenue increased 76% to $19,936,000 in the first two
quarters of fiscal 1998 from $11,310,000 in the first two quarters of fiscal
1997. Following is a summary of the components of revenue for the first two
quarters of fiscal 1998 and 1997:
Twenty-Eight Weeks Twenty-Eight Weeks
Ended Ended
February 12, 1998 February 12, 1997
----------------- -----------------
(in thousands)
Corporate Trading Revenue
Trade $ 7,875 $ 730
Cash 971 967
----------------- -----------------
8,846 1,697
----------------- -----------------
Trade Exchange Revenue
Trade 5,633 4,117
Cash 5,457 5,496
----------------- -----------------
11,090 9,613
----------------- -----------------
Total Revenue
Trade 13,508 4,847
Cash 6,428 6,463
----------------- -----------------
$ 19,936 $ 11,310
================= =================
Trade Exchange Revenue. In the first two quarters of fiscal 1998, the Company's
revenue from its core retail trade exchange business increased 15% to
$11,090,000 from $9,613,000 in the first two quarters of fiscal 1997. Trade
exchange revenue included revenue from foreign licenses totaling $150,000 in the
first two quarters of fiscal 1998 and $398,000 in the first two quarters of
fiscal
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1997. Revenue from the U.S. retail trade exchange in the first two
quarters of fiscal 1998 increased 19% to $10,940,000 from $9,215,000 in the
first two quarters of fiscal 1997.
The Company has continued its commitment to improved broker training programs
which, in the view of the Company, 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. In the first two quarters of fiscal 1998, the
Company's revenue from corporate trading activities increased to $8,846,000 from
$1,697,000 in the first two quarters of fiscal 1997. During the first quarter of
fiscal 1998, the Company, through its wholly-owned subsidiary, Associated
Reciprocal Traders, Ltd., exchanged a portfolio of available-for-sale securities
totaling $5,142,000 as part of the consideration for the 60% interest in the
Samana Resort property. The Company continues to focus increased resources on
the corporate trading area and continued significant contributions to revenue
are expected.
Costs, Expenses, and Gross Margins
Costs of Trade Exchange Revenue. Costs of trade exchange revenue increased to
$4,392,000 in the first two quarters of fiscal 1998 from $3,730,000 in the first
two quarters of fiscal 1997. The gross margin from U.S. trade exchange
operations was $6,548,000 in the first two quarters of fiscal 1998 as compared
to $5,485,000 in the first two quarters of fiscal 1997. Costs of trade exchange
revenue were 40% of trade exchange revenue in the first two quarters of both
fiscal 1998 and fiscal 1997.
Costs of Corporate Trading. Costs of corporate trading increased to $7,762,000
in the first two quarters of fiscal 1998 from $1,583,000 in the first two
quarters of fiscal 1997. The gross margin from corporate trading was $1,084,000
in the first two quarters of fiscal 1998 as compared to $114,000 in the first
two quarters of fiscal 1997. Costs of corporate trading were 88% of corporate
trading revenue in the first two quarters of fiscal 1998 and 93% in the first
two quarters of fiscal 1997. The higher cost in the first two quarters of fiscal
1998 was primarily attributable to the cost of the portfolio of
available-for-sale securities totaling $5,142,000 that was exchanged in the
transaction in the first two quarters of fiscal 1998 in which the Company
received the 60% interest in the Samana Resort property.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $5,002,000 in the first two quarters of
fiscal 1998 from $3,853,000 in the first two quarters of fiscal 1997. The
increase was primarily attributable to higher costs for personnel connected with
the Company's increasing scope of operations.
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Total advertising and promotion expense was $884,000 in the first two quarters
of fiscal 1998 as compared to $1,048,000 in the first two quarters of fiscal
1997. 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 1998, the Company
paid $815,000 of its advertising costs by ITEX Trade Dollars or other trade
consideration, representing 92% of total advertising costs for the period.
Discussion of the Year 2000 Issue
Background. The Year 2000 (Y2K) Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Scope and Impact of the Y2K Issue on the Company. The Company utilizes both
proprietary software and software provided by outside vendors which may be
impacted by the Y2K Issue. Since the efficient operation of the ITEX Retail
Trade Exchange depends upon the proper functioning of this software, Management
has assessed the potential impact of the Y2K Issue on the Company's business,
operations and financial condition. For the reasons set out below, Management
does not believe that the Company's business, operations or financial condition
will be materially impacted by the Y2K Issue as it relates to the Company's
proprietary software. Furthermore, a review of the potential impact of third
parties' failure to remediate those third parties' Y2K issues indicates that
such failure would not have a material impact on the Company's business,
operations or financial condition.
Remediation Plans. The Company has scheduled reprogramming of its AIM and ACCT
proprietary software for the month of June 1998. It is estimated that such
reprogramming will require approximately 30 days of programming effort and an
additional 30 to 60 days to test to verify Y2K compliance. In any event, it is
contemplated that the Y2K project will be completed not later than December 31,
1998. The cost of such reprogramming and verification is not material nor will
that cost have a material effect on the Company's results of operations when
incurred. With respect to software supplied by third parties, the Company has
determined that such software is already Y2K compliant or will be compliant well
before the year 2000 or, alternatively, that any such software will be replaced
at a cost which is not material to the Company's results of operations.
Uncertainties and Contingencies. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue can be mitigated. However, even if such modifications or conversions
are not made, or are not completed timely, the Company would be able to continue
operations manually as it did during its earliest operations. This would result
in more cumbersome and less efficient operations but would not have a material
effect on the Company's business, operations or financial condition.
There is no guarantee that the software of other companies on which the
Company's software relies will be timely converted, or that a failure to convert
by
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<PAGE>
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company and its
operations. However, the Company believes that in such event, the Company would
be able to continue operations, even if at a lower efficiency.
The materiality of the costs of becoming Y2K compliant and the date upon which
the Company plans to complete the Year 2000 modifications are based on
Management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans. Specific factors that might cause such differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer codes, and similar
uncertainties.
Inflation
The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.
Forward-Looking Information
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
Words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to maximize to the fullest extent possible the protections of
the safe harbor established in the Reform Act. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from such forward-looking statements.
Management is currently unaware of any trends or conditions that could have a
material adverse effect on the Company's consolidated financial position, future
results of operations, or liquidity.
However, investors should also be aware of factors that could have a negative
impact on the Company's prospects and the consistency of progress in the areas
of revenue generation, liquidity, and generation of capital resources. These
include: (i) variations in the mix of corporate trading and trade exchange
revenue, (ii) possible inability of the Company to attract investors for its
equity securities or otherwise raise adequate funds from any source, (iii)
increased governmental regulation of the barter business, (iv) a decrease in the
cash fees and commissions realized by the Company based upon a substantial
decrease in corporate or retail trade exchange transactions, and (v) unfavorable
outcomes to
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litigation presently involving the Company or to which the Company may become a
party in the future. See Part II, Item 1, Legal Proceedings.
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
BXI Litigation. On April 2, 1998, the Company announced the signing of an
agreement for the dismissal of all litigation related to the BXI Retail Trade
Exchange and for an alliance between the BXI Retail Trade Exchange and the ITEX
Retail Trade Exchange under the overall corporate umbrella of ITEX Corporation.
The company agreed to invest $3,125,000 cash and 150,000 shares of the Company's
common stock in exchange for the remaining 50% common equity interest in
Business Exchange International Corporation, the owner of the BXI Trade
Exchange. The Company also agreed to fund $300,000 cash to be paid to current
brokers of the BXI Trade Exchange who continue as BXI brokers for a three-year
period after the date of closing. The transaction, which is expected to close
during April 1998 after the completion of customary due diligence procedures,
will be accounted for using the purchase method of accounting.
SEC Inquiry. 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 pursuant to a formal order of private investigation. The
Company is cooperating fully with the Securities and Exchange Commission.
French et al. Litigation. On November 6, 1997, a Settlement Agreement and Mutual
General Release was entered between the Company and Leslie L. and Linda French,
AlphaNet, Inc. and William Bradford Financial Services, Inc. Without either
party admitting liability, the ITEX v. French, et al. and William Bradford v.
ITEX, et al . cases were dismissed in their entirety with each party bearing
his, her or its own costs and attorneys' fees. Certain payments were made by
ITEX to French, AlphaNet or William Bradford Financial Services and a
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<PAGE>
nominal number of shares of ITEX common stock were issued to William Bradford
Financial Services. The parties mutually agreed to refrain from making any
comments of any nature about the others and gave a general release of the
others. In addition, French and William Bradford agreed to stop using the "ITEX"
name in connection with any of their businesses.
WCFC Litigation. On February 4, 1998, Associated Reciprocal Traders, Ltd., a
British Virgin Islands corporation ("ART") which is a wholly owned subsidiary of
the Company, filed an action (the "ART Action") in the Superior Court of the
State of Washington, King County against Wade Cook Financial Corporation, a
Nevada Corporation ("WCFC"). ART seeks a declaratory judgment establishing the
rights of ART and WCFC under an agreement between them which is described in
more detail below; an injunction compelling WCFC to perform its obligations
under that agreement, as amended; compensatory damages resulting from WCFC's
failure to deliver and permit transfer of WCFC stock owned by ART; and,
statutory damages resulting from WCFC's violation of Washington law.
Also on February 4, 1998, WCFC filed an action (the "WCFC Action") in the
Superior Court of the State of Washington, King County against the Company and
ART. WCFC alleges that ART and the Company have not performed under the same
agreement described below. WCFC seeks a declaratory judgment establishing the
relative rights and obligations of WCFC, the Company, and ART; recission of any
contract between WCFC, the Company, and ART; and an award of WCFC's damages and
litigation costs.
The two cases have been consolidated under the general case number of the WCFC
Action.
The common, underlying facts surrounding the ART Action and the WCFC Action are
as follows: Pursuant to an agreement dated December 29, 1995 (the "1995
Agreement"), ART and Profit Financial Corporation ("PFC"), agreed to an exchange
of PFC stock for certain media credits. PFC subsequently changed its name to
Wade Cook Financial Corporation. PFC, now WCFC, issued 100,000 shares of its
restricted stock to ART. In consideration for issuance of the stock, ART
provided a media due bill (credit) for 20,000 15-second radio airtime
advertising spots.
As of the date of the ART Action and the WCFC Action, the shares issued to ART
had undergone several stock splits and now number 1,800,000 shares. The shares
were restricted pursuant to Rule 144 under the Securities Act of 1933. In
October 1997, ART placed an order to sell some of the WCFC shares and requested
that WCFC instruct its stock transfer agent to remove the Rule 144 restrictive
legend as permitted by Rule 144. WCFC refused to comply with ART's request and
WCFC issued a "stop transfer notice" preventing sale of the stock by ART.
Pursuant to an amendment to the 1995 Agreement dated January 28, 1998, ART
agreed to provide 20,000 60-second radio airtime spots instead of the 20,000
15-second airtime spots. In return, WCFC confirmed that the 1,800,000 shares
owned by ART could be sold at any time in compliance with Rule 144 and agreed to
instruct its stock transfer agent to remove the stop transfer previously ordered
by WCFC. Notwithstanding that agreement, WCFC subsequently refused and failed
and continues to refuse to direct its stock transfer agent to permit transfer of
the shares.
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The Company and ART are vigorously prosecuting their claims against WCFC. In
addition, the Company is fully defending the WCFC Action and considers it to be
without merit. The consolidated action has been set for trial on June 11, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the security holders of the Company was held on January 8,
1998 in Portland, Oregon. Shareholders were presented with the following
proposals:
1. To ratify adoption of Amended and Restated By-Laws for the Company.
2. To elect two directors to serve for a term of one year; three
directors to serve a term of two years; and three directors to serve a
term of three years, or until their successors are elected and qualified.
The Board of Directors nominated Mary Scherr and Dr. Charles Padbury to
serve a one year term; Robert Nelson, Dr. Evan Ames and Ronald P.
Erickson to serve a two year term; and Graham Norris, Joseph Morris and
G. Dale Weight to serve a three year term.
3. To adopt an Amendment to the Articles of Incorporation of the Company
changing the authorized capital of the Company from 20 million shares to
50 million shares.
4. To adopt Amended and Restated Articles of Incorporation for the
Company.
5. To ratify the 1997 Incentive Stock Option Plan for employees,
officers, directors and consultants of the Company.
6. To ratify the 1998 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 the
Annual Meeting was 7,361,496 as of the record date of the Meeting, November 21,
1997. There were present at the meeting in person or by proxy common
shareholders holding a total of 5,306,996 of the Company's common stock. While
this number exceeded the number necessary for a quorum, there were questions
about the quorum requirements for Proposals 5 and 6 and, therefore, the Annual
Meeting was adjourned to February 6, 1998. At that time, the Meeting was
reconvened and the business of the Meeting properly proceeded.
(1) The votes cast in person or by proxy on the resolution to ratify the prior
adoption by the Board of Directors of the Company of Amended and Restated
By-Laws for the Company were 2,627,018 For; 76,352 Against; and 37,053
Abstain/Withheld. Shareholder approval of this Proposal was not necessary in
that the By-Laws of the Company provide that the By-Laws can be amended only by
the Board of Directors. Thus, whatever the vote on this Proposal, the By-Laws
have been amended and restated. A clear majority of the shares which voted on
this Proposal were in favor.
25
<PAGE>
(2) The votes cast in person or by proxy on the resolution to elect a Board of
Directors was:
Nominee For Against Abst/With
------------------- --------- ------- ---------
Mary Scherr 5,247,910 19,326 36,360
Dr. Charles Padbury 5,266,295 5,591 31,710
Robert Nelson 5,275,326 5,491 32,779
Dr. Evan Ames 5,251,200 22,817 32,979
Robert P. Erickson 5,245,255 19,917 38,424
Graham H. Norris 5,264,626 3,410 35,560
Dr. G. Dale Weight 5,258,995 2,591 42,010
Joseph Morris 5,268,491 3,445 31,660
Each nominee having received a majority of the votes cast was elected a Director
of the Company. (The name of Vern O. Curtis was included in the proxy materials.
However, it was discovered after those materials were sent that Mr. Curtis had
declined to stand for election and so no votes in connection with his name were
counted.)
(3) The votes cast in person and by proxy on the resolution to adopt an
Amendment to the Articles of Incorporation of the Company changing the
authorized capital of the Company from 20 million shares to 50 million shares
were 4,595,088 For; 273,351 Against; and 79,886 Abstain/Withheld. The proposal
therefore passed.
(4) The votes cast in person and by proxy of the resolution to adopt Amended and
Restated Articles of Incorporation for the Company were 2,432,176 For; 87,587
Against; and 40,063 Abstain/Withheld. Because this Proposal required a majority
of the total votes present and voting, it did not pass.
(5) The votes cast in person and by proxy on the resolution to approve the 1997
Incentive Stock Option Plan adopted by the Board of Directors on December 27,
1996 were 2,007,705 For; 370,758 Against; and 94,026 common shares
Abstain/Withheld. This Proposal must have been adopted by a majority of the
votes voting on this Proposal, and therefore passed.
(6) The votes cast in person and by proxy on the resolution to approve the 1998
Incentive Stock Option Plan adopted by the Board of Directors on September 3,
1997 were 2,002,801 For; 374,462 Against; and 95,226 common shares
Abstain/Withheld. This Proposal must have been adopted by a majority of the
votes voting on this Proposal, and therefore passed.
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.
26
<PAGE>
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
April 6, 1998 /s/ Graham H. Norris
--------------------- ------------------------------------------------
Date
Graham H. Norris, Chairman of the Board of
Directors, President and Chief Executive Officer
(principal executive officer and director)
April 6, 1998 /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 Twenty-Eight
Weeks Ended February 12, 1998
28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> FEB-12-1998
<CASH> 1,255,000
<SECURITIES> 3,918,000
<RECEIVABLES> 1,250,000
<ALLOWANCES> 0
<INVENTORY> 6,175,000
<CURRENT-ASSETS> 6,621,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,427,000
<CURRENT-LIABILITIES> 2,718,000
<BONDS> 0
0
0
<COMMON> 34,566,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 37,427,000
<SALES> 0
<TOTAL-REVENUES> 19,936,000
<CGS> 12,154,000
<TOTAL-COSTS> 17,156,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,937,000
<INCOME-TAX> 1,220,000
<INCOME-CONTINUING> 2,717,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,717,000
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.35
</TABLE>