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
November 20, 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
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(Address of principal executive offices including zip code)
(Registrant's telephone number including area code) (503) 244-4673
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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, $0.01 Par Value Outstanding
at December 31, 1997:
7,439,000
(This Form 10-Q includes 22 pages)
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ITEX CORPORATION
FORM 10-Q
For the Quarterly Period Ended
November 20, 1997
INDEX
Page
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS AT NOVEMBER 20, 1997 AND
JULY 31, 1997 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIXTEEN
WEEK PERIODS ENDED NOVEMBER 20, 1997 AND 1996 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIXTEEN
WEEK PERIODS ENDED NOVEMBER 20, 1997 AND 1996 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 12
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts )
November 20,
1997 July 31, 1997
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<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...........................$ 1,627 $ 813
Trade dollars....................................... 1,596 786
Accounts receivable, net of allowance for doubtful
accounts of $193 and $115.......................... 1,205 1,084
Notes receivable.................................... 321 285
Prepaids and other current assets................... 361 80
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Total current assets............................ 5,110 3,048
Inventory for Principal Party Trading.................... 5,934 6,939
Available for Sale Equity Securities..................... 4,287 7,088
Natural Resource Interests............................... 6,611 6,576
Investment in Samana Resort ............................. 7,404 ----
Investments in and Advances to Unconsolidated Entities... 3,532 3,092
Goodwill and Purchased Member Lists, net................. 1,006 1,075
Notes Receivable, Long-Term Portion...................... 510 510
Other Assets............................................. 1,570 1,640
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$ 35,964 $ 29,968
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable....................................$ 239 $ 246
Portion of receivables due to brokers .............. 593 552
Income taxes payable................................ 692 840
Current portion of long-term indebtedness........... 100 166
Other current liabilities........................... 658 263
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Total current liabilities....................... 2,282 2,067
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Deferred Income Taxes.................................... 117 101
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Long-term Indebtedness................................... 26 26
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Stockholders' Equity
Common stock, $.01 par value; 20,000,000 shares
authorized; 7,416,000 and 7,207,000 shares
issued and outstanding........................... 74 72
Paid-in capital..................................... 19,827 19,114
Net unrealized gain on marketable securities........ 3,588 60
Retained earnings................................... 10,355 8,938
Prepaid printing.................................... (305) (410)
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Total stockholders' equity...................... 33,539 27,774
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$ 35,964 $ 29,968
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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<TABLE>
<CAPTION>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Sixteen Weeks Ended Sixteen Weeks Ended
November 20, 1997 November 20, 1996
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<S> <C> <C>
Revenue
Corporate trading revenue.............. $ 7,796 $ 1,554
Trade exchange revenue................. 5,234 4,761
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13,030 6,315
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Costs and Expenses
Costs of corporate trading............. 6,970 1,189
Costs of trade exchange revenue........ 2,242 2,346
Selling, general, and administrative... 2,738 2,131
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11,950 5,666
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Income from Operations................... 1,080 649
Other Income (Expense)
Net gains on sale of investments....... 1,097 ---
Interest income (expense), net......... 37 11
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1,134 11
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Income Before Taxes...................... 2,214 660
Provision for Income Taxes............... 797 250
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Net Income .............................. $ 1,417 $ 410
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Average Common and Equivalent Shares .... 10,441 7,394
=================== ===================
Net Income Per Common Share ............. $ 0.15 $ 0.06
=================== ===================
<S> <C> <C> <C> <C> <C> <C>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Sixteen Weeks Ended Sixteen Weeks Ended
November 20, 1997 November 20, 1996
------------------- -------------------
Cash Flows from Operating Activities
Net income............................................ $ 1,417 $ 410
Adjustments:
Depreciation and amortization...................... 190 166
Services paid for in stock......................... 600 170
Gain on sales of available-for-sale securities..... (1,097) ----
Net trade revenue earned over trade costs ........ (267) (834)
Changes in operating assets and liabilities:
Accounts and notes receivable...................... (157) (205)
Deferred taxes..................................... 16 ----
Prepaids and other assets.......................... 109 (13)
Accounts payable and other current liabilities..... 138 (10)
Portion of receivables due to brokers.............. 41 60
Income taxes payable............................... (148) 232
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Net cash provided by (used in) operating
activities................................. 842 (24)
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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.......................................... (240) (77)
Additions to equipment and information systems........ (21) (35)
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Net cash (used in) investing activities......... (168) (112)
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Cash Flows From Financing Activities
Proceeds from sales of common stock................... 204 1
Repayments of notes payable........................... (64) (44)
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Net cash provided by (used in financing
activities................................ 140 (43)
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Net increase (decrease) in cash and equivalents........... 814 (179)
Cash and cash equivalents at beginning of period.......... 813 1,300
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Cash and Cash Equivalents at End of Period................$ 1,627 $ 1,121
=================== ===================
Supplemental Cash Flow Information
Cash paid for interest....................................$ 3 $ 6
Cash paid for income taxes................................ 950 ----
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..................... 40 68
</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
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. 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.
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 November 20, 1997 and 1996 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 sixteen week period ended November 20, 1997 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 November 20, 1997, the Company had earned 1,596,000 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 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. In addition to paying a portion of
the costs of developing the Samana Resort project, the Company intends to use
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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.
NOTE 3 - INVENTORY FOR PRINCIPAL PARTY TRADING
Following are the components of inventory for principal party trading:
November 20,
1997 July 31, 1997
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(in thousands)
Prepaid media advertising duebills $ 3,972 $ 4,190
Hotel roomnights 819 1,006
Health products 651 653
Electronic products ---- 278
Condominium timeshares 228 570
Miscellaneous inventory 264 242
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$ 5,934 $ 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.
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 income
previously reported by the Company into cash and, accordingly, the Company
considers these gains and cash flows to be an intrinsic part of the Company's
operating activities. The Company intends to continue to use this strategy as
part of its basic operations.
Available for sale securities of $4,287,000 at November 20, 1997 includes
securities with market value totaling $6,599,000 less deferred taxes totaling
$2,312,000 that would be payable as a result of gains on the presumed sale of
the securities.
NOTE 5 - INVESTMENT IN SAMANA RESORT
During October 1997, the Company, through its wholly-owned foreign subsidiary,
Associated Reciprocal Traders, Ltd., acquired a 60% interest in 16 acres of
improved but undeveloped resort property known as the Villas Punta Ballena
Samana Resort (the "Samana Resort"), along with associated plans, engineering
7
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drawings, permits and approvals for the resort, and a commitment for a
construction loan of approximately $40,000,000. 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 to the other parties
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 property.
NOTE 6 - INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
Investments in and advances to unconsolidated entities includes $3,132,000 and
$3,092,000 at November 20, 1997 and July 31, 1997, respectively, related to the
Company's interest in Business Exchange International Corp.
During the quarter ended November 20, 1997, the Company 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 early 1998. The
Company received $200,000 of unregistered stock computed at the initial public
offering price. The Company 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. The Company 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. The Company has
agreed to a "lock up period" of nine months after the initial public offering,
during which time the Company may be required to hold such stock.
The Chairman and Chief Executive Officer of GlobalTel is a Director of the
Company.
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. The term of the line of
credit was extended to March 1, 1997 to enable the negotiation of a new credit
facility. 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
8
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and inventory. As of November 20, 1997, the Company had no borrowings
outstanding under the bank credit facility. Based on available collateral, the
entire credit line amount of $250,000 was available to the Company as of
November 20, 1997.
NOTE 8 - CAPITAL STOCK
Stock Option Plan. On September 3, 1997, the Board of Directors adopted a new
stock option plan pursuant to which options to purchase up to 965,000 shares of
the Company's common stock may be granted to employees, officers, directors, and
consultants of the Company. Exercise prices for options granted under the plans
are equal to market value on the date of grant and options may be exercisable
for up to ten years from the date of grant. Pursuant to the new stock option
plan, options to purchase 765,000 shares were granted on September 3, 1997 at an
exercise price of $3.19 per share.
The Company intends to request action by shareholders on stock option plans that
were adopted on December 27, 1996 and September 3, 1997 by the Company's
shareholders at the annual meeting of the Company's shareholders scheduled for
January 8, 1998. It is the intention of the Company to file a Form S-8
registration with the Securities and Exchange Commission with respect to the
shares of common stock underlying options to be issued pursuant to the stock
option plans that were adopted on December 15, 1995, December 27, 1996 and
September 3, 1997.
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 sixteen
week periods ended November 20, 1997 and 1996:
<TABLE>
<CAPTION>
Sixteen Weeks Ended Sixteen Weeks Ended
November 20, 1997, 1996 November 20, 1996
----------------------- -----------------------
(in thousands)
<S> <C> <C>
Corporate Trading Revenue
Trade $ 7,053 $ 776
Cash 743 778
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7,796 1,554
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Trade Exchange Revenue
Trade 2,417 1,615
Cash 2,817 3,146
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5,234 4,761
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Total Revenue
Trade 9,470 2,391
Cash 3,560 3,924
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$ 13,030 $ 6,315
=========== ===========
</TABLE>
9
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NOTE 10 - 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
(4,508,000 shares at November 20, 1997) but an amount equal to only 20% of
shares outstanding (1,483,000 shares at November 20, 1997) may be assumed to be
repurchased, which results in incremental shares for the income per share
computation of 3,025,000 shares, which when added to 7,417,000 shares
outstanding at November 20, 1997, results in a total number of shares of
10,441,000 for the denominator in the income per share computation for the
quarter ended November 20, 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
November 20, 1997, that would result in an increase to net income from interest
income and reduction of interest expense, after tax effect, totaled $112,000.
Because of this increase in net income for computation of income per share is
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 11 - 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
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Business Exchange International Corporation ("BXI"), a Nevada corporation,
pursuant to rights to purchase such interest that had been assigned to SLI by
the former shareholders of SLI. SLI paid $1,750,000 for the common interest in
BXI by the purchase of newly issued common stock of BXI and, in addition, SLI
loaned $300,000 to BXI. BXI owns and operates one of the leading organized
barter exchanges in the United States.
On February 12, 1996, a complaint was filed on behalf of the Company and its
wholly owned subsidiary, SLI, Inc., against Saul Yarmak, Stephen Friedland,
Business Exchange International Corp., BX International, Inc., Joel Sens, and
David Lawson. The complaint, filed in the Circuit Court of the State of Oregon
for Multnomah County, Case No. 9602-01076, asserted claims for breach of
contract, specific performance, declaratory judgment, fraud, defamation,
unlawful trade practices, and interference with economic relationships. It
sought to recover damages for allegedly disparaging remarks made by certain of
the defendants against ITEX and for a court ruling that SLI acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.
On December 20, 1996 SLI filed a motion for partial summary judgment requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange. If the court found in favor of SLI on these issues, the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade exchange or, alternatively, order the defendants to take whatever
steps are necessary to transfer the assets of the BXI trade exchange to BXI. On
March 12, 1997 the court ruled from the bench and granted SLI's motion for
partial summary judgment. On April 8, 1997, the court rejected objections filed
by the defendants to the proposed judgment and on April 21, 1997, a formal
judgment was entered in favor of SLI. The critical portion of the judgment
declares that BEI is the owner of the BXI Trade Exchange. The judgment also
awards certain supplemental relief to effectuate this declaration, including
requiring the defendants: (a) transfer all assets of the BXI Trade Exchange to
BEI, (b) to provide the court and SLI with certificates of title to reflect the
fact that BEI owns all assets of the BXI Trade Exchange, and (c) to preserve the
status quo by operating the BXI Trade Exchange in the usual and ordinary course
of business in conformity with all applicable laws and regulations.
On May 2, 1997, the defendants filed notices of appeal from the judgment entered
against them. Defendants concurrently filed a "Deposit of Instruments"
consisting of a "Bill of Sale" and a "Certificate of Ownership". The Bill of
Sale purports to convey all the assets of the BXI Trade Exchange to BEI upon
payment of $1,783,000 and if the judgment is affirmed on appeal. The Certificate
states that BEI will own the assets of the BXI Trade Exchange if the judgment is
affirmed on appeal.
The Company believes that these documents do not comply with the requirements of
the judgment. SLI immediately filed an objection to the sufficiency of the
documents and asked that the defendants be required to file a bond in a
sufficient sum to assure SLI that the judgment will be complied with when it is
upheld on appeal. A hearing to require a bond of between $2.5 million and $3.5
million or, alternatively, to appoint a receiver was heard on June 3, 1997.
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By letter ruling dated June 30, 1997, the Circuit court judge: (a) ordered that
in order to obtain a stay pending appeal of the judgment, the defendants must
post a bond totaling $1.2 million and deposit an unconditional certificate of
ownership and bill of sale, and (b) awarded to SLI $193,000 in attorney fees and
$16,000 in costs. Pursuant to legal action subsequent to entry of the judgment,
the Court increased the attorney fees award to $218,000 and the costs award to
$21,000.
On September 15, 1997, the parties participated in a mediation program mandated
by the Oregon Court of Appeals. The parties and their attorneys met for several
hours with a neutral mediator. Mediation does not result in a binding resolution
of the disputes between the parties. However, the Company believes that the
mediation process was fruitful in that it resulted in a framework under which
the parties may yet be able to settle the disputes without exhausting the
litigation process. As part of the efforts at settling, SLI has agreed to
temporarily pause its actions in Nevada and California directed toward
preserving its interest in the BXI Trade Exchange.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At November 20, 1997, the Company's working capital ratio was 2.2 to 1, based on
current assets of $5,110,000 and current liabilities of $2,282,000. 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
$1,627,000 at November 20, 1997, 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. 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 income previously reported by the
Company into cash and, accordingly, the Company considers these gains
and cash flows to be an intrinsic part of the Company's operating
activities. The Company intends to continue to use this strategy as
part of its basic operations.
(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 November 20, 1997 to 1,596,000 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.
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Total stockholders' equity increased to $33,539,000 at November 20, 1997, 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
$3,588,000 at November 20, 1997 from $60,000 at July 31, 1997.
Available for sale securities of $4,287,000 at November 20, 1997
includes securities with market value totaling $6,599,000 less
deferred taxes totaling $2,312,000 that would be payable as a result
of gains on the presumed sale of the securities.
The Company reported positive cash flow from operating activities of $842,000
for the fiscal quarter ended November 20, 1997, as compared to negative cash
flow from operating activities of $24,000 for the fiscal quarter ended November
20, 1996.
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. These securities were
acquired primarily in exchange for Trade Dollars or other nonmonetary
consideration in the Company's operating activities and are an intrinsic part of
the Company's operating strategy for realizing profits and the conversion of
trade profits to cash. The Company has included $2,218,000 in cash flow from
operating activities, which represents the portion of the proceeds that are the
conversion of reported trade income into cash. The Company has included the net
gain on the sale of the available-for-sale securities of $1,097,000 in cash
flows from investing activities.
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.
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Development Activities
Manufacturers Trade Exchange.
- -------------------------------
The Company has formed a partnership with Manufacturers Trade Exchange LLC
("MTX"), to represent and facilitate trade transactions for manufacturers
nationwide. Working with the centers of the Manufacturing Extension Partnership
("MEP"), a program sponsored by the U.S. Department of Commerce, MTX can access
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. The Company
believes that this expansion will provide important growth and market
penetration within the manufacturing sector.
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RESULTS OF OPERATIONS
Comparison of Sixteen-Week Periods Ended November 20, 1997 (First Quarter of
- --------------------------------------------------------------------------------
Fiscal 1998) and Sixteen-Week Period Ended November 20, 1996 (First Quarter of
- ------------
Fiscal 1997)
- ------------
Overall Operating Results
Total revenue more than doubled to $13,030,000 in the first quarter of fiscal
1998 from $6,315,000 in the first quarter of fiscal 1997. Income from operations
increased 66% to $1,080,000 in the first quarter of fiscal 1998 from $649,000 in
the first quarter 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 intrinsic part of the Company's operating strategy for realizing profits and
for the conversion of trade profits to cash.
Net income increased to $1,417,000, or $0.15 per share, in the first quarter of
fiscal 1998, from $410,000, or $0.06 per share in the first quarter of fiscal
1997.
Revenue
Total Revenue. Total revenue more than doubled to $13,030,000 in the first
quarter of fiscal 1998 from $6,315,000 in the first quarter of fiscal 1997.
Following is a summary of the components of revenue for the first quarters of
fiscal 1998 and 1997:
Sixteen Weeks Ended Sixteen Weeks Ended
November 20, 1997, November 20, 1996
------------------- -------------------
(in thousands)
Corporate Trading Revenue
Trade $ 7,053 $ 776
Cash 743 778
----------- ------------
7,796 1,554
----------- ------------
Trade Exchange Revenue
Trade 2,417 1,615
Cash 2,817 3,146
----------- ------------
5,234 4,761
----------- ------------
Total Revenue
Trade 9,470 2,391
Cash 3,560 3,924
----------- ------------
$ 13,030 $ 6,315
=========== ============
Trade Exchange Revenue. In the first quarter of fiscal 1998, the Company's
revenue from its core retail trade exchange business increased 10% to $5,234,000
15
<PAGE>
from $4,761,000 in the first 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 first quarter of fiscal 1998, the Company's revenue from corporate
trading activities increased to $7,796,000 from $1,554,000 in the first quarter
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 and Expenses
Costs of Trade Exchange Revenue.
- ----------------------------------
Costs of trade exchange revenue decreased slightly to $2,242,000 first quarter
of fiscal 1998 from $2,346,000 in the first quarter of fiscal 1997. The gross
margin from trade exchange operations was $2,992,000 in the first quarter of
fiscal 1998 as compared to $2,415,000 in the first quarter of fiscal 1997. Costs
of trade exchange revenue were 43% of trade exchange revenue in the first
quarter of fiscal 1998 and 49% in the first quarter of fiscal 1997.
Costs of Corporate Trading.
- ----------------------------
Costs of corporate trading increased to $6,970,000 in the third quarter of
fiscal 1998 from $1,189,000 in the first quarter of fiscal 1997. The higher cost
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 which
the Company received the 60% interest in the Samana Resort property. The gross
margin from corporate trading was $826,000 in the first quarter of fiscal 1998
as compared to $365,000 in the first quarter of fiscal 1997. Costs of corporate
trading were 89% of trade exchange revenue in the first quarter of fiscal 1998
and 77% in the first quarter of fiscal 1997.
Selling, General and Administrative Expenses.
- -----------------------------------------------------
Selling, general and administrative expenses increased to $2,738,000 in the
first quarter of fiscal 1998 from $2,131,000 in the first quarter of fiscal
1997. The increase was primarily attributable to higher compensation costs
connected with the Company's increasing scope of operations, of which
approximately $250,000 is nonrecurring.
Total advertising and promotion was $640,000 in the first quarter of fiscal 1998
as compared to $644,000 in the first 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 first quarter of fiscal 1998, the Company paid
$584,000 of its advertising costs by ITEX Trade Dollars or other trade
consideration, representing 91% of total advertising costs for the period.
16
<PAGE>
Inflation
- ---------
The Company's results of operations have not been affected by inflation and
management does not expect inflation to have a significant effect on its
operations in the future.
Forward-Looking Information
- ---------------------------
From time to time, the Company or its representatives have made or may make
forward-looking statements, orally or in writing. Such forward-looking
statements may be included in, but not limited to, press releases, oral
statements made with the approval of an authorized executive officer or in
various filings made by the Company with the Securities and Exchange Commission.
Words or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project or projected", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to maximize to the fullest extent possible the protections of
the safe harbor established in the Reform Act. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from such forward-looking statements.
Management is currently unaware of any trends or conditions that could have a
material adverse effect on the Company's consolidated financial position, future
results of operations, or liquidity.
However, investors should also be aware of factors that could have a negative
impact on the Company's prospects and the consistency of progress in the areas
of revenue generation, liquidity, and generation of capital resources. These
include: (i) variations in the mix of corporate trading and trade exchange
revenue, (ii) possible inability of the Company to attract investors for its
equity securities or otherwise raise adequate funds from any source, (iii)
increased governmental regulation of the barter business, (iv) a decrease in the
cash fees and commissions realized by the Company based upon a substantial
decrease in corporate or retail trade exchange transactions, and (v) unfavorable
outcomes to litigation presently involving the Company or to which the Company
may become a party in the future. 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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 24, 1996, the Company acquired a 100% common stock interest in SLI,
Inc. ("SLI"), a Nevada corporation now known as IME, Inc., in exchange for the
issuance to SLI's former shareholders of 60,000 shares of the Company's common
stock valued at approximately $645,000. The Company then made a cash
contribution to the capital of SLI of $1,750,000 and made a loan of $300,000 to
SLI. Also on January 24, 1996, SLI purchased a 50% common stock interest in
Business Exchange International Corporation ("BXI"), a Nevada corporation,
pursuant to rights to purchase such interest that had been assigned to SLI by
the former shareholders of SLI. SLI paid $1,750,000 for the common interest in
BXI by the purchase of newly issued common stock of BXI and, in addition, SLI
loaned $300,000 to BXI. BXI owns and operates one of the leading organized
barter exchanges in the United States.
On February 12, 1996, a complaint was filed on behalf of the Company and its
wholly owned subsidiary, SLI, Inc., against Saul Yarmak, Stephen Friedland,
Business Exchange International Corp., BX International, Inc., Joel Sens, and
David Lawson. The complaint, filed in the Circuit Court of the State of Oregon
for Multnomah County, Case No. 9602-01076, asserted claims for breach of
contract, specific performance, declaratory judgment, fraud, defamation,
unlawful trade practices, and interference with economic relationships. It
sought to recover damages for allegedly disparaging remarks made by certain of
the defendants against ITEX and for a court ruling that SLI acquired a 50%
interest in the BXI trade exchange owned by one or more of the defendants.
On December 20, 1996 SLI filed a motion for partial summary judgment requesting
that the court rule as a matter of law that the contract is unambiguous and that
the defendants had breached the contract for sale of the 50% interest in the BXI
trade exchange. If the court found in favor of SLI on these issues, the motion
asked that the court declare that SLI is 50% owner of the company which owns the
BXI trade exchange or, alternatively, order the defendants to take whatever
steps are necessary to transfer the assets of the BXI trade exchange to BXI. On
March 12, 1997 the court ruled from the bench and granted SLI's motion for
partial summary judgment. On April 8, 1997, the court rejected objections filed
by the defendants to the proposed judgment and on April 21, 1997, a formal
judgment was entered in favor of SLI. The critical portion of the judgment
declares that BEI is the owner of the BXI Trade Exchange. The judgment also
awards certain supplemental relief to effectuate this declaration, including
requiring the defendants: (a) transfer all assets of the BXI Trade Exchange to
BEI, (b) to provide the court and SLI with certificates of title to reflect the
fact that BEI owns all assets of the BXI Trade Exchange, and (c) to preserve the
status quo by operating the BXI Trade Exchange in the usual and ordinary course
of business in conformity with all applicable laws and regulations.
On May 2, 1997, the defendants filed notices of appeal from the judgment entered
against them. Defendants concurrently filed a "Deposit of Instruments"
consisting of a "Bill of Sale" and a "Certificate of Ownership". The Bill of
Sale
18
<PAGE>
purports to convey all the assets of the BXI Trade Exchange to BEI upon payment
of $1,783,000 and if the judgment is affirmed on appeal. The Certificate states
that BEI will own the assets of the BXI Trade Exchange if the judgment is
affirmed on appeal.
The Company believes that these documents do not comply with the requirements of
the judgment. SLI immediately filed an objection to the sufficiency of the
documents and asked that the defendants be required to file a bond in a
sufficient sum to assure SLI that the judgment will be complied with when it is
upheld on appeal. A hearing to require a bond of between $2.5 million and $3.5
million or, alternatively, to appoint a receiver was heard on June 3, 1997. By
letter ruling dated June 30, 1997, the Circuit court judge: (a) ordered that in
order to obtain a stay pending appeal of the judgment, the defendants must post
a bond totaling $1.2 million and deposit an unconditional certificate of
ownership and bill of sale, and (b) awarded to SLI $193,000 in attorney fees and
$16,000 in costs. Pursuant to legal action subsequent to entry of the judgment,
the Court increased the attorney fees award to $218,000 and the costs award to
$21,000.
On September 15, 1997, the parties participated in a mediation program mandated
by the Oregon Court of Appeals. The parties and their attorneys met for several
hours with a neutral mediator. Mediation does not result in a binding resolution
of the disputes between the parties. However, the Company believes that the
mediation process was fruitful in that it resulted in a framework under which
the parties may yet be able to settle the disputes without exhausting the
litigation process. As part of the efforts at settling, SLI has agreed to
temporarily pause its actions in Nevada and California directed toward
preserving its interest in the BXI Trade Exchange.
On 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.
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 AlphaNet and AlphaNet, Inc., an inactive Oregon corporation.
The complaint was for Breach of Contract and Action on Guaranty and sought 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. The company considered each counterclaim to be
totally without merit and vigorously prosecuted both its own claims and the
defense of the counterclaims. Trial of the matter was set for September 16,
1997. Just prior to trial, the parties agreed to settle both in this case and
the "William Bradford" case described below.
On November 21, 1996, the Company was served with a complaint filed in the
Circuit Court for Washington County, Oregon, by William Bradford Financial
19
<PAGE>
Services, Inc. against the Company; Michael Baer; Graham Norris; Donovan Snyder;
Oxford Transfer, Inc.; David Christensen, C.P.A.; Anderson, Anderson & Strong,
L.C., and John Does I-III. William Bradford Financial Services is controlled by
Leslie French, defendant in the litigation described above. The complaint
alleged breach of fiduciary duty, breach of contract, interference with
contract, and fraud and sought compensatory and punitive damages. The Company
filed an answer denying all of the allegations of the complaint and asserted a
vigorous defense.
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 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.
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
ITEX defendants consider each and every claim against them to be without merit
and will vigorously defend against those claims. In connection with a Motion for
Summary Judgment filed by the ITEX defendants but which has not yet been heard
by the Court, the plaintiffs conceded that the claim alleging violation of the
Oregon unfair trade practices statute must be dismissed. The ITEX defendants
have temporarily delayed the hearing on the remainder of their summary judgment
motion based upon the mediation in the SLI, Inc. v. Yarmak, et al. case
described above. Since a global settlement is sought with the defendants in the
SLI case, it may be possible to dispose of this litigation in that context. In
any event, however, this litigation does not present scenarios which would be
expected to result in a materially adverse effect on the Company' s financial
position of results of operations.
On May 6, 1997, SLI, Inc. filed a legal action in Nevada against BEI seeking to
preserve its rights as a 50% shareholder of BEI both under Nevada state law (SLI
and BEI are Nevada corporations) and pursuant to the Stock Purchase Agreement by
which SLI acquired its interest in BEI. Those rights include the right to
conduct an audit of the BEI financial records (including an audit of the
operations
20
<PAGE>
of the BXI Trade Exchange) and the right to representation on the BEI board of
directors.
A hearing on SLI's motion for a mandatory injunction requiring BEI to permit an
audit of its books and records, including the books of the BXI Trade Exchange
and for appointment of a receiver was heard on June 11, 1997. The Nevada court
has initially declined to rule on the requests on the basis that similar relief
was requested in the Oregon action. SLI's attorneys are prepared to file further
motions in this case in order to vindicate its rights as a shareholder of BEI.
However, based upon the mediation in the SLI, Inc. v. Yarmak, et al. case
discussed above, SLI has temporarily delayed any further action on this case
pending possibly reaching a global settlement.
ITEM 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
(1) Dated October 23, 1997 regarding Samana Resort project.
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
January 5, 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)
January 5, 1998 /s/ Joseph M. Morris
- ------------------------- ---------------------------------------------------
Date
Joseph M. Morris, Senior Vice President and Chief
Financial Officer (principal accounting officer and
director)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------------- ------------------------------------------------------
27 Financial Data Schedule for the Sixteen Weeks
Ended November 20, 1997
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jul-31-1997
<PERIOD-END> Nov-20-1997
<CASH> 1,627,000
<SECURITIES> 4,287,000
<RECEIVABLES> 1,526,000
<ALLOWANCES> 0
<INVENTORY> 5,934,000
<CURRENT-ASSETS> 5,110,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 35,964,000
<CURRENT-LIABILITIES> 2,282,000
<BONDS> 0
0
0
<COMMON> 35,539,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 35,964,000
<SALES> 0
<TOTAL-REVENUES> 13,030,000
<CGS> 9,212,000
<TOTAL-COSTS> 11,950,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,214,000
<INCOME-TAX> 797,000
<INCOME-CONTINUING> 1,417,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,417,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
