UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE Securities Exchange Act of 1934
For The Fiscal Year Ended
July 31, 1999
Commission File Number 0-18275
ITEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-0922994
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State (or other (IRS Employer
jurisdiction of Identification No.)
incorporation or
organization)
10300 SW Greenburg Road, Suite 370, Portland, Oregon
97223
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(Address of principal executive offices including zip code)
(503) 244-4673
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(Registrant's telephone number including area code)
Indicate by check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes No ____X____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
The approximate market value of stock held by non-affiliates is $6,911,453 based
upon 12,297,959 shares held by such persons and the close price of $0.56 on
April 19, 2000. The number of shares outstanding of the Registrant's $0.01 par
value common stock at April 19, 2000 was 14,336,406.
(This Form 10-K includes ____ pages)
<PAGE>
ITEX CORPORATION
FORM 10-K
For The Fiscal Year Ended July 31, 1999
INDEX
Page
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PART I
ITEM 1. BUSINESS
ITEM 2. DESCRIPTION OF PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
Condition and Results of Operations
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
SIGNATURES
<PAGE>
PART I
ITEM 1. BUSINESS
General
ITEX Corporation and its subsidiaries ("ITEX" or the "Company") operates what it
believes is one of the leading retail trade exchanges in the United States and
has licensees who operate trade exchanges in international markets in Mexico,
New Zealand and Turkey. The ITEX retail trade exchange headquartered in
Portland, Oregon has approximately 12,500 members (or "clients") who,
collectively, make up the trade exchange, which operates as an unincorporated
association. The trade exchange contracts with the Company to administer the
exchange and to act as a third-party recordkeeper for transactions entered into
by the members. ITEX works through approximately 90 independent brokers and
seven Company owned and operated regional offices to service existing ITEX
clients and enroll new clients.
From June 25,1998 to January 18, 2000, the Company administered the BXI trade
exchange ("BXI") through its wholly-owned subsidiary, BXI Corporation, based in
Burbank California. The BXI trade exchange has approximately 13,800 members,
which are serviced by approximately 100 independent brokers. On January 18,
2000, the net assets and business of BXI Corporation, including all assets used
in operation of the BXI trade exchange, were sold. See Note 2 to Consolidated
Financial Statements included in this Form 10-K
The Company founded the ITEX Retail Trade Exchange in 1982.
In general, businesses choose to become members of a trade exchange when they
have excess capacity of the goods or services they provide particularly where
those goods or services are time-sensitive or over-abundant. Businesses become
members of trade exchanges to extend their customer base and market reach to
sell these time-sensitive or over-abundant goods or services. If a restaurant or
hotel does not fill a table or room at a particular time, the ability to realize
revenue on that table or room for that time is gone. However, if someone who may
not be willing to pay cash for a meal is willing to use trade credits to dine,
the restaurant has received revenue in the form of trade credits for that table
at that time which it otherwise would not have realized. Those trade credits can
then be spent by the restaurant to purchase goods and services it otherwise
would have to pay for in cash. Goods and services available through the exchange
are also available for cash purchase by members and nonmembers. Naturally,
members would prefer to sell their goods or services for cash, but for items
that are time sensitive, such as restaurant meals or hotel rooms, it makes
economic sense to sell them for trade credits. Slow moving or excess inventory
can also often be traded to achieve better economic results than if they remain
unsold or are sold at liquidation prices.
Members of exchanges contractually agree to sell their goods or services to
other members at the same price as cash customers pay but to receive payment in
trade credits. These trade credits can then be exchanged for other goods or
services offered by other members of the exchange and that are used in the
operation of the member's business. Exchange members have access to both printed
and Internet-based directories that list goods and services available for
purchase for trade credits, by category, on a local and national basis. Such
directories are frequently updated so they are current as to available goods and
services. The Company may grant, on behalf of the exchange, trade lines of
credit to clients who wish to purchase goods or services for trade credits prior
to selling goods or services to other members of the exchange. The trade credits
of the ITEX retail trade exchange are referred to as "ITEX Trade Dollars." An
"ITEX Trade Dollar" is an accounting unit used by the ITEX retail trade exchange
to record the value of trades as determined by the parties in trade exchange
transactions. ITEX Trade Dollars denote the right to receive goods or services
available from other ITEX Trade Exchange members, or the obligation to provide
goods or services to other Exchange members. In general, Trade Dollars can only
be used by members of the exchange to purchase the goods and services offered by
members of the exchange. However, the Company has "reciprocal" relations with
various other trade exchanges pursuant to which it is possible for a member of
the ITEX trade exchange to purchase goods or services offered by members of
those other trade exchanges, and members of other trade exchanges with
reciprocal agreements may acquire goods and services from the ITEX trade
exchange.
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Trade Dollars may not be redeemed for cash. Trade Dollars may be used only in
the manner and for the purpose set forth in the Rules of the exchange. Trade
Dollars are not legal tender, securities, or commodities.
The Internal Revenue Service considers trade credit income to be equivalent to
cash income and a trade dollar expense to be equal to a cash dollar of expense.
The Company is obliged under the Tax Equity and Fiscal Responsibility Act of
1982 (TEFRA) to send Forms 1099-B to each of the Company's clients and to the
Internal Revenue Service (which the Company does electronically). The Form
1099-B reflects the total trade credit sales made by the client for the calendar
year, less the amount of any returns. Trade credits received must be reported as
gross income in tax returns. Expenditures of trade credits may be reported as
deductions in tax returns if they qualify as deductible business expenses or as
other deductions that are permitted by the Internal Revenue Code (e.g., medical
expenses, charitable contributions, and the like).
Members of the exchange are serviced by trade brokers who are independent
contractors with respect to the Company or, in the case of ITEX regional
offices, are employees of the Company. The Company provides brokers with
training, help in facilitating transactions, marketing materials, computer
services, computer software systems, and Internet-based resources including
directories, listings of goods and services currently available from and the
opportunity to advertise to members locally, nationally and internationally.
ITEX is in the process of upgrading and broadening these services to clients and
brokers.
Independent Brokers
Members of the exchange have a contractual relationship with the Company and are
assigned to an independent broker or a Company operated regional office. A
broker's responsibilities are to enroll new ITEX clients, train them in the use
of the system, facilitate business among clients, monitor the delivery of goods
and services between clients and assure payment of dues and fees to ITEX. For
the three years and eight months ended March 23, 2000, the number of member
clients who have left the system as a percent of total member clients at the
beginning of the fiscal year has been approximately 35% annually. New member
client enrollment has basically offset this attrition resulting in the number of
member clients remaining approximately the same during the three years and eight
months.
In the four week accounting cycle ended February 24, 2000, the seven company
owned offices servicing approximately 3,200 clients and the 20 largest
independent broker offices servicing approximately 4,800 clients produced, 36%
and 46% respectively of total net revenue of $685,000. The broker provides
client members with information about goods and services that are available
locally, nationally and internationally. ITEX brokers do not have exclusive
contractual rights to operate in a geographical area. The ITEX broker contract
provides for a five-year term unless the contract is terminated for cause (as
explained in the contract). The contract automatically renews for subsequent
five-year terms so long as the broker is not in breach and otherwise is in
compliance with the contract and any policies and procedures then in place as
adopted by the Company.
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<PAGE>
Independent brokers are paid a percentage of revenue collected from ITEX clients
serviced by those brokers which generally ranges from 50% to 75% depending on
the volume of transactions and net increases in the number of clients enrolled
during each 28-day accounting cycle. For the four week accounting cycle ended
February 24, 2000, payments to Independent brokers were 58% of revenues
collected from ITEX clients which they serviced. New brokers are signed to
standard contracts.
The Company views its commitment to its brokers as critical to its long-term
success. The Company depends on a high rate of repeat business and views the
quality of its brokers' interaction with clients as an important element of its
strategy to continue to successfully develop the Company's business. By
providing training, marketing materials and programs, Internet and computer
related support, it seeks to foster a strong cooperative relationship with
brokers which will then foster a high level of service to clients by brokers.
Sources of Revenue
ITEX Corporation charges each member of the trade exchange an association fee of
$20 cash each four week accounting cycle ($260 annually) and 10 ITEX trade
dollars each cycle. This rate structure has been in place since November 4,
1999, when the cash fee was increased from $15 to $20 and the Trade Dollar fee
was decreased from 15 Trade Dollars to 10 Trade Dollars.
ITEX also receives transaction fees on the value of the transaction, from both
the buyer and the seller. Clients are billed at the end of each accounting cycle
and if a client makes payment automatically by credit card or electronic funds
transfer through the Company's Preferred Member (Autopay) system, the fee is 5%
of the dollar amount of the client's purchases and sales during the billing
period. If a client pays by check or otherwise after receiving a mailed
statement at the end of each four-week cycle, the fee is 7-1/2% of the dollar
amount of that client's purchases and sales during the period. Approximately 80%
of payments are made through electronic funds transfer or by credit cards
automatically using the Preferred Member Autopay system.
The Company prepares its financial statements on an accrual basis. See Notes To
Consolidated Financial Statements for a description of accounting policies. The
Company internally accounts for trade dollars in addition to cash in statements
to clients and brokers and in other ways necessary for operation of the trade
exchanges and the business of the Company. The Company considers the trade
dollars it receives from transactions to be valuable and uses them in the
operation of its business including the payment of obligations. Clients and
brokers use trade dollars in exchange for goods and services and in the
operation of their businesses.
Company Strategies
Key elements of the Company's strategy include the following:
o Increasing the number of new brokers and improving the operation of existing
independent brokers and the number of clients they serve in key markets. This
will require extensive recruiting and training programs. Historically, the
Company has not concentrated its efforts on recruiting independent brokers,
but believes it will be able to attract qualified individuals.
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<PAGE>
o Improving and increasing marketing programs and materials provided to
independent brokers and Company offices to assist them in signing new clients
and increasing services to members of the trade exchanges. Beginning in
mid-1999, the Company instituted a program of broker education known as the
"ITEX Boot Camp." In an interactive educational setting brokers are trained in
methods of recruiting new members for the Exchange and increasing the number
and size of trade transactions participated in by members.
o Upgrading and enhancing computer software and related support, including
improved Internet access to ITEX clients and brokers. Recent advances in
computer and communications technology offers the Company opportunities to
provide clients and brokers with additional tools and simpler computer
applications. Such tools will enable them to more easily engage in trade
exchange transactions. Opportunities include improving the Company's existing
on-line system known as "Trade Flash" which provides clients with information
about goods and services that are immediately available. Another strategy is
to improve client profiles so the system will alert members when products or
services they are seeking become available on the trade exchange. Presently
the system provides listings of members by category and separate category
listings and descriptions of goods and services currently available for sale.
o Strengthening the infrastructure at the trade exchanges and administrative
offices of the Company, including centralized accounting, granting lines of
credits, credit checking, management of client information and other systems
resulting in increased efficiencies and productivity.
Purchase of Independent Broker Offices
Sacramento, California. On October 20, 1999, the Company completed the
acquisition of all of the outstanding stock of California Trade Exchange, Inc.,
a California corporation which operated the business of the Company's largest
independent broker located in Sacramento, California. The purchase price was
paid by issuing 1,966,667 shares of the Company's restricted common stock. The
primary identifiable assets of the acquired business were accounts receivable,
furniture and equipment and the right to service ITEX clients as represented by
the Independent Retail Broker Agreement for that office. Any amount allocated
to the right to serve the Sacramanto customer list will be amortized over a
4 year period. The Company is currently working on its accounting for the
acquisition and has concluded that the transaction will be assigned a value of
less than 10% of the Company's total assets.
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<PAGE>
Operating Income of the Sacramento Brokers operation for the two years and the
nine months ended September 30, 1999 prior to acquisition are as follows
(unaudited):
Nine Months Ended Year Ended Year Ended
September 30, December 31, December 31,
1999 1998 1997
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Revenue
Membership fees $ 164,375 $ 263,487 $ 78,152
Commissions .... 533,434 610,943 325,146
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Total revenue 697,809 874,430 403,298
Operating income
(loss) before
depreciation
and interest .... 139,304 215,983 (4,556)
Number of client
members, end of
period .......... 806 706 496
The Sacramento brokerage office was licensed to Collins M. Christensen on
September 15, 1995. Mr. Christensen, the principal owner of the Sacramento
brokerage business became President, Chief Executive Officer and a Director of
ITEX Corporation after acquisition of the Sacramento business. Gerry Layo,
minority owner of the Sacramento brokerage business served as a vice president
of the Company in charge of broker training until March 7, 2000. Of the shares
issued in the transaction, Mr. Christensen received 1,573,334 shares and Mr.
Layo received 393,333 shares.
Seattle, Washington. In February 2000, the Company acquired all of the issued
and outstanding stock of Seattle Trade Network, Inc., ("STN") a Washington
corporation which operated the business of the independent broker located in
Issaqua (Seattle area), Washington. The purchase price consisted of $150,000
cash, 150,000 ITEX Trade Dollars and 200,000 shares of common stock of the
company. In addition, the Company issued 15,000 warrants to purchase restricted
common stock of the Company at an exercise price of $0.75 per share. One of the
former stockholders of "STN" continued as an ITEX employee to manage the Seattle
office.
Houston, Texas. Also in February 2000, the Company acquired the assets of the
operator of the independent broker office located in Houston, Texas. The
purchase price was $100,000 cash, payable $50,000 at closing and the remainder
over time, 100,000 ITEX Trade Dollars and 100,000 shares of the restricted
common stock of the Company and the option to acquire up to an additional 25,000
shares of restricted common stock at an exercise price of $0.75 per share. The
owner of the operation has remained as an ITEX employee to manage the Houston
office. The primary identifiable assets of the acquired business were accounts
receivable, furniture and equipment and the right to service ITEX clients as
represented by the Independent Retail Broker Agreement for that office.
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<PAGE>
Discontinued Businesses
In recent years the Company engaged in investing in, starting, and acquiring
operations and ventures outside its core business of operating trade exchanges
and related operations. These businesses have not been profitable and the
Company does not intend to make additional investments in them, nor does it
appear that the businesses would be successful if additional management and
capital were devoted to them. The Company is in the process of an orderly
liquidation of these investments. A significant amount of the original
investments will not be recovered. See, Item 7, Management's Discussion and
Analysis.
Competition
The Company competes with a wide range of other companies and individuals who
offer goods and services at retail, wholesale and discount locations as well as
those that offer such items for sale over the Internet. Some of the present and
potential future competitors of the Company have greater financial, technical,
marketing or personnel resources than the Company. The competitive environment
could have one or more of the following adverse effects on the Company:
O Negatively impact the Company's ability to generate greater revenues and
profits from such sources as membership fees and transaction fees
O limit the Company's opportunities to enter into or renew agreements with
brokers
O limit the Company's ability to develop new systems and services
O limit the Company's ability to continue to grow or sustain its membership
base
O Require price reductions in membership or transaction fees, or both, and
require increased spending on marketing and systems development
O Result in a loss of the Company's market share in the retail trade
exchange industry
O Require an increase in the Company's sales and marketing expenditures
Any of the foregoing events could have an adverse effect on revenues or result
in an increase in costs as a percent of revenue, either of which could have a
material adverse effect on the Company's business, financial condition, and
operating results.
The Company is among a relatively few companies that provide opportunities for
customers to trade their goods and services for other goods and services, for a
fee. It believes, however, that as a result of improvements in communication and
computer technology, including use of the Internet, it is likely that trading
will become a more acceptable form of doing business and new competitors will
develop.
Government Regulations
The Company and its independent brokers are subject to various federal, state
and local laws, regulations and administrative practices affecting their
businesses, including, among others, the requirement to obtain business
licenses, tax withholding and remittance of matching contributions for
employees' social security accounts, and other such laws, regulations and
administrative practices required of businesses in general. In addition, the
Company, is a "third party record keeper" (similar to banks) under TEFRA, and is
required to account for and report to the IRS the total of trade sales
transactions of each member of the exchange. The Company believes it has
complied with such laws and regulations in the past, with the exception of
timely filings with the Securities and Exchange Commission, and believes it can
comply with all such regulations in the future.
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<PAGE>
Trademarks and Service Marks
"ITEX and Design" (the ribbon design of the ITEX logo) is a registered trademark
and service mark of the Company on the Principal Register of the United States
Patent and Trademark Office. This registration will expire on December 29, 2007
unless before that date the Company files an application for renewal as required
by Section 9 of the Trademark Act of 1946.
The Company has filed trademark applications for the word mark "ITEX" (that is,
independent of the logo) and for the word mark and design "Intercard". The
Company's policy is to strenuously police the use of its marks and to oppose any
infringement.
Employees
As of March 15, 2000, the Company employed 77 persons. Additionally the
approximately 90 independent ITEX brokers employ support staff estimated to
total approximately 100 additional persons. The independent brokers and their
employees are not employees of the Company.
Executive Officers of the Registrant
The directors and executive officers of the Company as of April 15, 2000 are as
follows:
NAME AGE POSITION
Dr. Evan B. Ames 60 Director
Collins M. Christensen 41 President, Chief Executive
Officer, Director
Wayne E. Harmond 39 Vice President, Travel & Related
Business Development
Lewis A. Humer, Jr. 40 Vice President of Operations
Robert Nelson 52 Director
Dr. Charles T. Padbury 61 Director
Mary J. Scherr 62 Senior Vice President, Director
Business Risks
Characteristics and dynamics of the Company's business and markets in general
create risks to the Company's long-term success and to predictable financial
results. These risks include:
o Operating losses and negative cash flow of primary business.
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Operating losses and negative cash flow have been incurred in each of the last
five fiscal years ended July 31, 1999. Such losses and negative cash flow
resulted in part from increased staffing, marketing and administrative
expenses while revenues remained relatively flat and in part by previous
management focusing on new business ventures which required substantial cash
investments. These non-core businesses have been discontinued. There can be no
assurance that the Company will be able to achieve long-term profitability or
positive cash flow.
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o Ability to shift more revenue from trade dollars to cash.
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A primary strategy of the Company is to increase revenues by strengthening and
expanding its network of independent brokers and to provide more and improved
services to clients and brokers. In the interim the Company may emphasize a
higher percentage of membership and transaction fees be collected in cash
rather than in trade dollars. Such a change was instituted in November 1999.
o Ability to obtain financing.
---------------------------
In November 1998 the Company incurred debt with a face amount of $1,625,000,
bearing interest at 4%, from which the Company realized approximately
$1,100,000 after a 20% discount from the face value and fees paid to brokers
and related expenses.
In July 1999 the Company retired $312,500 of the above notes at the
discounted amount of $250,000 and in January 2000 retired an additional
$62,500 by payment of $50,000. In April 2000, the Company retired the balance
of these notes of $1,250,000 by converting $675,000 plus accrued interest
into 1,133,659 shares of common stock and payment of $575,000 plus accrued
interest in cash.
In May 1999 the Company entered into an agreement with its commercial bank
relative to a line of credit for $250,000, which was at that time in default.
A new agreement provided that $50,000 would be repaid each month for five
months beginning June 15, 1999. The Company has made all five payments,
resulting in the bank note being fully repaid in October 1999. As of the date
hereof, the Company does not have a line of credit with any bank.
In July 1999 at a time when the Company was in need of cash for operations,
the Company raised $480,000 from convertible loans from an individual, who at
that time was Chairman of the Company's Board of Directors and another
individual, the President, CEO and Director of the Company in a private
transaction. Those loans bore interest rates of 10% per annum and were
subsequently paid in full in January 2000.
To finance future expansion of the Company's core business of operating its
retail trade exchange and to retire the notes described above, the Company
concluded it should sell the net assets and business of its wholly-owned
subsidiary, BXI Corporation. This business was acquired by the Company on
June 25, 1998 and was sold on January 18, 2000. See, Item 7, Management's
Discussion and Analysis. There is no assurance that the Company will be
successful in raising additional capital, if required, or in achieving
profitability.
o Investigation by the Securities and Exchange Commission.
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The Company has been the subject of an investigation by this agency of the
U. S. Government for over three years. On September 27, 1999, the SEC filed a
civil Complaint in the United States District Court for the District of Oregon
naming the Company and former officers and/or directors of the Company, Terry
L. Neal, Michael T. Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M.
Morris as defendants and alleging securities fraud and other securities law
violations. In January 2000, the Company reached a settlement with the SEC for
disposition of that litigation. Without admitting or denying the allegations
of the SEC's Complaint, the Company consented to entry of a final judgment of
permanent injunction. See, Item 3, Legal Proceedings.
o Delisting of stock from the Nasdaq Small Cap market.
---------------------------------------------------
Because the Company did not file reports to the Securities and Exchange
Commission in a timely manner and citing public interest concerns, the NASD
delisted the Company's common stock from the Nasdaq Small Cap stock market in
December 1998. When fully compliant with its SEC filing requirements and
eligible under the rules of the Small-Cap Market, the Company will apply for
re-listing. However, there is no assurance that the Company will be able to be
re-listed and management anticipates that the re-listing will, in any event,
take several months to complete once the Company is eligible. This situation
makes it more difficult for the Company to obtain financing.
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<PAGE>
o Ability to recruit brokers and clients in markets now served and in new
markets and to develop marketing programs.
-----------------------------------------
The success of the Company depends on its ability to expand its network of
independent brokers and the number of clients they serve and to improve the
operating and marketing programs it furnishes to brokers. The Company will be
dependent on the ability of its broker network to expand the number of clients
and the volume of transactions through the trade exchange. Competition for
qualified employees and brokers is intense and their ability to enroll new
client members is unknown, thus there is no assurance that the Company will be
successful in achieving these plans.
o Ability to upgrade and improve computer software and internet-based systems to
clients and independent brokers.
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The Company's computer systems are important for providing accounting service
to clients and brokers and communicating the availability of goods and
services offered for trade. To be successful in the future the Company
believes it is important that its computer and Internet systems reflect
improvements in computer and communications technology. There is no assurance
that the Company will be successful in upgrading its computer systems and
Internet applications.
ITEM 2. DESCRIPTION OF PROPERTIES
All of the Company's operations as of April 15, 2000 are conducted in leased
space as follows:
<TABLE>
<CAPTION>
Location Lease Expiration Square Feet Annual Rent
---------------------- ------------------- ------------ --------------------
<S> <C> <C> <C>
Portland, Oregon (2) December 31, 2001 10,900 $ 209,900
Salem, Oregon (4) Month to month 1,500 $ 12,000
Seattle, Washington June 30, 2000 850 $ 26,400(4)
Costa Mesa, California December 31, 2000 1,500 $ 20,000
Sacramento, California November 30, 2001 4,200 63,000 Trade dollars
Denver, Colorado (1) March 31, 2002 4,700 $ 90,000
St. Louis, Missouri March 31, 2002 2,500 $ 21,100
Houston, Texas Month to Month 3,200 29,160 Trade dollars
New York, New York November 30, 2004 1,800 $ 31,500
</TABLE>
(1) Offered for sublease by the Company.
(2) Includes 1,300 square feet of office space sublet to a third party at an
annual rent of $26,500.
(3) One-half cash and one-half ITEX Trade Dollars
(4) Lease assigned to third party as part of the sale of the assets of this
office in February 2000.
In addition, the Company is the guarantor on a lease of office space in Denver,
Colorado formerly occupied by the Company's partly owned subsidiary, Zoring
International. Zoring has discontinued business, vacated those premises and the
landlord is seeking to relet the space. Rental on that space is $4,776 per month
and has not been paid since July 1999.
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ITEM 3. LEGAL PROCEEDINGS
o SEC Inquiry.
-----------
During June 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 subpoenas for the production
of certain documents pursuant to a formal order of private investigation. In
connection with that investigation, the SEC took the deposition of several
individuals. On September 27, 1999, the SEC filed a civil Complaint in the
United States District Court for the District of Oregon naming the Company and
former officers and/or directors of the Company, Terry L. Neal, Michael T.
Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M. Morris, as
defendants and alleging securities fraud and other securities law violations.
In January, 2000, the Company entered into a Consent and Undertaking with the
SEC wherein, without admitting or denying the allegations of the Complaint,
the Company consented to entry of a Final Judgment of Permanent Injunction
which, among other things, (i) permanently restrains and enjoins the Company
from violating Sections 5 and 17(a) of the Securities Act of 1933 and Sections
10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of
1934 and Rules 10b-5, 13a-1, 13a-13 and 12b-20 thereunder, and (ii) orders the
Company to restate its financial statements for the fiscal year ended July 31,
1997. The Final Judgment based upon the Consent was entered by the Court on
February 3, 2000. The Company is given 90 days from that date to file its
amended Form 10K for fiscal 1997 and its Form 10K's for 1998 and 1999.
o Sondra Ames Litigation.
----------------------
In October 1998, the Company was served with summons and complaint for an
action in the Superior Court of Orange County, California styled Sondra Ames
v. ITEX Corporation, Graham H. Norris and John Does I through X. The complaint
alleged (i) fraud in the acquisition by ITEX of plaintiff's trade exchange in
1996; (ii) violation of Rule 10b-5 of the Securities and Exchange Act of 1934
in connection with plaintiff's purchase of ITEX stock on the open market in
1996; (iii) breach of written and oral contracts, (iv) sex discrimination and
harassment; (v) discrimination based on religion; (vi) retaliation and
tortuous discharge; (vii) defamation; and (viii) violation of various
provisions of the California labor code. Plaintiff asked for $5,000,000 actual
damages and for punitive damages along with other statutory relief. The case
was subsequently moved to Federal Court.
Plaintiff was a former employee and former officer of the Company whose
employment agreement expired in April 1998. The parties settled the matter
for an undisclosed amount, which is confidential by the terms of the
agreement, in January 2000 without any admission of liability and the case
has been dismissed in its entirety. The amount for which the matter was
settled was not significant to the Company's financial position.
o Martin Kagan Litigation.
-----------------------
During July 1998, the Company was served with a summons and complaint for a
case in Circuit Court of Multnomah County, Oregon, styled Martin Kagan v. ITEX
Corporation. The complaint alleges breach of a stock option agreement between
the Company and Kagan and seeks to set aside a settlement agreement between
the parties dated January 14, 1997. The Company has answered the complaint
denying its material allegations. Subsequently, the plaintiff filed a first
amended complaint adding Graham H. Norris, the Company's former President and
Chief Executive Officer, as an additional party and modifying somewhat the
allegations of the original complaint. The Company and Mr. Norris have
answered the amended complaint and denied all allegations. The Company has
vigorously defended the action. Trial before a court appointed referee was
held on November 4, 8 and 9, 1999. On April 12, 2000, the referee issued a
decision dismissing all of Kagan's claims except his claim for unlawful sale
and purchase of securities. The referee awarded Kagan $400,000 plus interest
from July 14, 1998, plus reasonable attorneys fees. To be effective, the
referees decision must be confirmed by the Multnamah County Circuit Court. An
unfavorable result is probable; however, the Company will vigorously pursue
this matter an appeal. It is impossible to predict the outcome of an appeal.
- 12 -
<PAGE>
o IBTEX, A.G. Litigation.
----------------------
During September 1998, the Company was served with a summons and complaint for
a case in the Circuit Court of Multnomah County, Oregon, styled IBTEX, A.G. v.
ITEX Corporation, Donovan Snyder and Graham Norris, Sr. The complaint alleges
breach of contract, breach of duty of good faith and fair dealing and
violations of the Oregon Franchise Act. The defendants have answered the
complaint denying its material allegations, demanding that the disputes
between IBTEX and the Company be arbitrated pursuant to an arbitration
agreement between the parties and requiring that the action be stayed until
such time as the arbitration is complete. No arbitration has been set and the
case has been dormant for several months.
o Don Schilz Litigation.
---------------------
During November 1998, a case was filed in the U.S. District Court for the
Northern District of Illinois styled Radio Spirits, Inc. v. Don Schilz and
Pride Communications and Don Schilz v. ITEX Corporation. The case primarily
alleges a common law copyright infringement by the defendants one of whom
(Schilz) claims that the Company is liable for any infringement which is
proven.
The plaintiff claims that the defendants have infringed its claimed
copyrights in old time radio programs "The Life of Riley" and "Lone Ranger".
Those programs were part of The Golden Age of Radio, which ITEX formerly
owned. The defendants are a small radio station (Pride Communications) and an
individual (Schilz) whose show has used elements of the Golden Age of Radio.
Defendant Schilz alleges that, if there was an infringement, it is the
responsibility of the Company as it supplied the allegedly infringing
material. In January 2000, the case was settled without any admission of
liability on the part of the Company and the third-party complaint was
dismissed in its entirety.
o Wade Cook Financial Corporation Litigation.
------------------------------------------
During February 1998, an action was filed in Washington (Seattle) State Court
by Associated Reciprocal Traders, Ltd., ("ART") an ITEX wholly owned
subsidiary, based on Wade Cook Financial Corporation's ("WCFC") refusal to
permit transfer, without restricted legend, of WCFC stock issued to ART in
exchange for a media due bill. ART filed a Motion for Replevin and Preliminary
Injunction requesting delivery and transfer of the certificates of WCFC stock
to ART based upon compliance by ART with the requirements of Rule 144 of the
Securities Act of 1933. After two separate hearings, on October 2, 1998, the
Court ruled that the requirements of Rule 144 had been met, but that issues
raised by WCFC concerning the radio spots, pursuant to the due bill, required
a trial of the merits of the action.
During August 1999, the matter was settled. WCFC has agreed that ART is the
owner of 1,400,000 shares of WCFC unrestricted stock which may be sold by ITEX
at no more than 100,000 shares a month, at current market prices, subject to a
right of first refusal by WCFC. The settlement agreement also provided for the
transfer of 300,000 ITEX trade dollars to WCFC, which the Company has
completed. As of April 28, 2000, the Company had realized approximately
$176,000 from the sale of approximately 451,000 shares of its Wade Cook common
stock.
- 13 -
<PAGE>
o "John Doe" Litigation.
---------------------
In July 1998, the Company filed an action in Multnomah County, Oregon, State
Court against 100 John Doe defendants, that is, individuals whose identities
were, at the time of filing, unknown to the Company. The Complaint arose from
certain anonymous postings on the Internet which the Company believed
constituted intentional interference with the Company's economic
relationships, unfair trade practices, civil conspiracy and, with respect to
then President of the Company Graham H. Norris, defamation. The Complaint
sought monetary damages and injunctive relief.
After filing the Complaint, the Company subpoened certain Internet Service
Providers to determine the true identity of the anonymous posters. Various
amendments to the Complaint were filed naming certain defendants until the
Company's Fifth Amended Complaint was filed naming Leslie L. French and
adding a claim for breach of a settlement agreement previously entered into
between Mr. French and the Company in connection with other litigation in
1997.
Mr. French has answered the Fifth Amended Complaint essentially denying all
of the allegations of the Complaint and asserting counterclaims against the
Company for (1) breach of contract related to a Settlement Agreement
previously entered into between French and the Company; (2) fraud in the
inducement in connection with the Settlement Agreement; (3) securities fraud;
and (4) unlawful trade practices. The Company denied the allegations of the
counterclaims. In April 2000 the parties agreed upon and executed a
settlement of the matter, which will result in the dismissal of the entire
action. However, a stipulated final judgment has not yet been entered. The
amount for which the matter was settled was not significant to the Company's
financial position.
o Desert Rose Foods Litigation.
----------------------------
On April 28, 2000, ITEX Corporation was served with summons and complaint for
an action in the Circuit Court of Fairfax County, Virginia style Desert Rose
Foods, Inc. v. ITEX Corporation and ITEX USA, Inc. The complaint alleges
Breach of Contract, Fraud, and violations of federal law. Plaintiff asks for
$750,000 compensatory damages, punitive damages, other statutory damages,
interest and attorneys fees.
Plaintiff entered into a contract with the Company for delivery of goods
valued at approximately $120,000. The Company has not yet retained local
counsel in this case. The Company believes Plaintiff's complaint is frivolous
and the Company intends to vigorously defend itself. The Company has
successfully defended similar actions. The Company does not believe this
action is significant to the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Public trading of the Company's stock was initiated on June 11, 1992. The
Registrant's common stock currently trades in the United States on the National
Quotation Bureau "Pink Sheets" under the symbol "ITEX". The stock was de-listed
by the NASD from the Nasdaq Small Cap stock market on December 22, 1998 due to
the Company's inability to file its Form 10-K on a timely basis and for public
policy concerns. The Company intends to file for re-listing when it achieves
current status with its Securities and Exchange Commission filings and is
otherwise eligible to do so. (See Item 1, Business Risks)
Previously, the Registrant's common stock traded "over-the counter" in the
United States via the NASD Bulletin Board and on the NASD Small Cap market,
under the symbols "ITXE" and "ITEX", respectively.
The following are the Company's common stock high and low closing sales prices
for fiscal years 1999 and 1998:
Sale Prices
--------------------------
High Low
------------ ----------
1999
- ----------------------
Fiscal quarters ended:
July 31, 1999 $ .88 $ .63
May 7, 1999 1.00 .75
February 12, 1999 1.00 .63
November 20, 1998 2.00 1.81
1998
- ----------------------
Fiscal quarters ended:
July 31, 1998 $6.25 $1.50
May 7, 1998 4.63 4.13
February 12, 1998 6.06 3.56
November 20, 1997 7.00 2.94
- 14 -
<PAGE>
From August 1, 1999 to March 31, 2000 the closing sales prices varied from $.15
to $2.38. As of March 31, 2000, the last quoted price was $.56.
As of July 31, 1999 there were approximately 5,000 holders of record of the
Company's common stock.
The Company has not declared any dividends since its inception. Management
anticipates that any future profits will be retained to finance corporate
growth.
ITEM 6. SELECTED CONSOLIDATED DATA
The following table sets forth a summary of selected consolidated financial data
for the Company as of the dates and for the periods indicated. The data should
be read in conjunction with the Consolidated Financial Statements and the Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
For the fiscal years ended July 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ---------- ---------- ---------- -----------
(in thousands, except per share data)
(Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C>
Total revenue ............... $ 19,173 $ 11,389 $ 11,602 $ 13,526 $ 7,531
Loss from operations ........ (9,649) (6,357) (2,212) (757) (1,039)
Net loss .................... (10,023) (4,777) (1,894) (2,402) (1,660)
Net loss per common share ... (0.87) (0.61) (0.27) (0.37) (0.40)
Total assets ................ 6,629 12,956 8,144 7,466 4,259
Working capital (deficit) ... (4,672) (687) 2,050 1,363 1,398
Long-term debt and capital
lease obligations, including
current portion ............ 1,398 359 164 330 217
Stockholders' equity
(deficiency) ............... 174 9,211 6,922 6,055 2,641
- 15 -
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (in thousands, except per share amounts) Overview
ITEX Corporation and subsidiaries ("ITEX" or the "Company") was incorporated in
October 1985 in the State of Nevada. The Company operates a retail trade
exchange and acts as third-party recordkeeper for transactions between members
of the exchanges. The Company charges association fees for each of 13 four-week
accounting cycles each year, as well as commissions on transactions. ITEX also
receives fees paid in ITEX trade dollars, which the Company uses to pay a
portion of its own operating expenses and to provide merchandise for sale for
trade dollars to trade exchange members.
The BXI trade exchange was acquired by the Company on June 25, 1998. The BXI
trade exchange operations are included in the financial statements for the
period of June 25, 1998 to July 31, 1999. On January 18, 2000 the net assets and
business of BXI Corporation were sold to TAHO Enterprises, Inc., a Massachusetts
corporation, for $4,000 cash.
Additionally, in recent years the Company has engaged in the operation of
several new businesses outside its core business of operating trade exchanges.
These new businesses have not been profitable and commencing in March 1999 the
Company began the process of discontinuing these businesses and, where possible,
liquidating them. A significant amount of the original investments will not be
recovered. It is the intent of the Company not to engage in business
activities or ventures that are not related to the Company's core business of
operating the ITEX Retail Trade Exchange.
The Company has incurred operating losses from its trade exchange operations for
the fiscal years ended July 31, 1999, 1998 and 1997. Such losses have been
increased by costs associated with the discontinued operations discussed above
and costs and expenses of regulatory and litigation matters connected with
disputes about the acquisition of the BXI trade exchange, an SEC investigation,
and other legal and regulatory matters.
Results of Operations
The following table sets forth, for the periods indicated, selected consolidated
financial information of the Company, with amounts also expressed as a
percentage of net revenues:
Fiscal Years Ended July 31,
---------------------------------------------------
1999 1998 1997
---------------- --------------- ----------------
Amount Pct* Amount Pct* Amount Pct*
-------- ----- -------- ----- -------- ------
(Restated) (Restated) (Restated)
Revenue:
Trade exchange:
Association
fees $ 4,998 26% $ 2,825 25% $ 2,368 20%
Transaction
fees 13,875 72% 6,690 59% 7,247 62%
License fees 300 2% 150 1% 401 4%
--------- ----- -------- ----- -------- ------
19,173 100% 9,665 85% 10,016 86%
Corporate trading --- --- 1,724 15% 1,586 14%
--------- ----- -------- ----- -------- ------
19,173 100% 11,389 100% 11,602 100%
--------- ----- -------- ----- -------- ------
- 16 -
<PAGE>
Costs and expenses:
Trade exchange 12,953 68% 6,519 57% 5,937 51%
Corporate trading --- --- 1,589 14% 1,674 14%
Selling, general
and Administrative 7,277 38% 5,587 49% 4,812 42%
Discontinued
operations 2,318 12% 1,693 15% 50 ----
Regulatory and
litigation 1,770 9% 1,584 14% 646 6%
Writedowns of BXI
and Samana and 2,508 13% --- --- --- ---
Depreciation and
Amortization 1,996 10% 774 7% 695 6%
--------- ----- -------- ----- -------- ------
28,822 150% 17,746 156% 13,814 119%
--------- ----- -------- ----- -------- ------
Loss from
operations (9,649) (50%) (6,357) (56%) (2,212) (19%)
Other income
(expense) (369) (2%) 3,417 30% (78) (1%)
--------- ----- -------- ----- -------- ------
Loss before taxes (10,018) (52%) (2,940) (26%) (2,290) (20%)
Tax provision
(credit) 5 --- 1,837 (16%) (396) (4%)
--------- ----- -------- ----- -------- ------
Net (loss) $(10,023) (52%) $ (4,777) (42%) $(1,894) (16%)
========= ===== ======== ===== ======== ======
* Percent of Total Revenue
The following table sets forth selected consolidated financial information of
the Company on a pro forma basis, excluding revenue, costs and expenses related
to BXI Corporation, whose net assets and business were sold by the Company on
January 18, 2000, with amounts also expressed as a percentage of net revenues:
Fiscal Year Ended
July 31, 1999
-----------------------
Amount Pct *
-------- --------
(Pro forma basis
excluding BXI
Corporation)
Revenue:
Trade exchange:
Association fees ...... $ 2,680 25%
Transaction fees ...... 7,911 72%
License fees .......... 300 3%
-------- --------
10,891 100%
Corporate trading ....... -- --
-------- --------
10,891 100%
-------- --------
Costs and expenses:
Trade exchange .......... 6,729 62%
Corporate trading ....... -- --
Selling, general and
Administrative ......... 5,387 49%
Discontinued operations . 2,318 21%
Regulatory and litigation 1,770 17%
Writedowns of BXI and
Samana and ............. 2,508 23%
Depreciation and
Amortization ........... 564 5%
-------- --------
19,276 177%
-------- --------
Loss from operations ..... (8,385) (77%)
Other income (expense) ... (437) (4%)
-------- --------
Loss before taxes ........ (8,822) (81%)
Tax provision (credit) ... 5 --
-------- --------
Net (loss) ............... $ (8,827) (81%)
======== ========
* Percent of Total Revenue
- 17 -
<PAGE>
Trade exchange revenue and costs
From 1997 to 1998 total trade exchange revenue remained flat at approximately
$10,000. From 1997 to 1998, membership continued to grow, resulting in increased
association fees, resulting in increased association fees, but transaction fees
decreased because of a decrease in the trading volume per member in 1998. In
1998, association fees include $193 and transactions fees include $376 from one
month of operation of the BXI trade exchange in July 1998.
Total trade exchange revenue increased $9,508, or 98%, from $9,665 in 1998 to
$19,173 in 1999. Total trade exchange revenue included revenue from the BXI
trade exchange of $569 in 1998 (from one month of operation after the
acquisition of BXI on June 25, 1998) and $8,588 from a full year of operation
of BXI in 1999. In May 1999, the Company decided to sell the net assets and
business of BXI Corporation, which sale was completed in January 2000.
Of the increase in trade exchange revenue from 1998 to 1999, a total of $1,517
was attributable to operation of the ITEX trade exchange. Following are the
components of association fees and transaction fees applicable to the ITEX trade
exchange, which are included in the above consolidated totals:
1999 1998 1997
------- -------- -------
Association fees $2,680 $2,632 $2,368
Transaction fees 7,911 6,314 7,247
Total 10,591 8,946 9,615
The average number of members of the ITEX trade exchange during fiscal 1999,
1998 and 1997 and the average trade exchange revenue per member were as follows:
1999 1998 1997
-------- -------- --------
Average number of members 13,746 13,495 12,146
Average annual revenue per member $770 $663 $792
Total costs of trade exchange revenue as a percentage of total trade exchange
revenue were 67.6%, 68.3% and 59.3% in fiscal 1999, 1998 and 1997, respectively.
The lower percentage in 1997 was partly attributable to the inclusion of the
$401 in foreign license revenue, as such revenues do not result in an increase
in trade exchange costs. As indicated above, 1998 included foreign license
revenue of only $150 in a total revenue base that was at about the same level as
in 1997 and 1999 included only $300 in a total revenue base that was
approximately double those of 1998 and 1997.
Corporate trading revenue and costs
Corporate trading revenue relates to transactions in which the Company has acted
as a principal in the purchase and sale of goods. These transactions often
involve a mixture of cash and trade credits. Only the cash portions of such
transactions are included in the consolidated financial statements as there is
no persuasive evidence that the fair market value of the goods exchanged exceeds
the monetary consideration received for these goods. Profit margins on
individual corporate trading transactions vary widely.
- 18 -
<PAGE>
Corporate trading revenue was at about the same level in 1997 and 1998, which
was significantly lower than levels in prior periods, when the Company had a
relationship with ITEX USA, an unrelated corporate barter management company.
ITEX USA had been the Company's exclusive agent for corporate and industrial
trading.
With the termination of the ITEX USA relationship, management has not emphasized
the corporate and industrial trading market in recent years, nor will it be in
the future, other than those transactions that will benefit the retail trade
exchanges. As a result, no revenue or costs were incurred in fiscal 1999.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $1,690 from 1998 to 1999.
An increase of $1,605 resulted from the operation of the BXI trade exchange for
a full year in 1999 as compared to only one month in 1998. In 1998, the
consolidated total included $187 and in 1999, the consolidated total includes
$1,792 in selling general and administrative costs related to operation of the
BXI trade exchange.
Selling, general and administrative expenses increased $775 from 1997 to 1998.
The following expenses primarily contributed to the increase:
o Salaries and benefits expense of ITEX, excluding BXI and discontinued
operations increased by $260 during fiscal 1998. The ITEX corporate headcount
increased from 64 at July 31, 1997 to 75 at July 31, 1998. Fiscal 1998
employee headcount was primarily increased in the Oregon regional offices;
Missouri regional office; the corporate marketing department; and the
corporate administrative office.
o During fiscal 1998 the Company opened a regional office in Salem, Oregon;
moved its regional office from Westminster, California to Costa Mesa,
California; and moved its St. Louis, Missouri office to a new location. As a
result of the above the Company incurred $43 of additional rent expense
during fiscal 1998.
Costs and expenses of discontinued operations
During 1999 and 1998, the Company incurred costs and expenses of $2,318 and
$1,693, respectively, in connection with activities that have been discontinued.
Following is a summary of the costs and expenses charged in the statement of
operations in fiscal 1999:
o Start-up expenses of $542 relating to Zoring International, Inc. ("Zoring") a
51%-owned subsidiary. The Company is no longer funding this operation which
represented the Company and other U.S. franchisers seeking to expand
internationally.
- 19 -
<PAGE>
o Start-up expenses of $375 relating to a national sales organization. The
national sales organization was discontinued approximately eight months after
start-up. Expenses consisted primarily of salaries and related costs.
o Writeoffs totaling $567 of foreign licensing rights, capitalized software,
and other costs related to a program of international expansion, which was
discontinued in March 1999 by new management of the Company. In this respect,
the Company also wrote off an investment of $233 in IBNET (a program of
expansion through worldwide chambers of commerce), which had been made in
early fiscal 1999.
o Writeoff of $200 of an investment in GlobalTel, a telecommunications company
that had been pursuing an initial public offering, upon determination in
March 1999 that the investee was no longer financially viable.
o Writedown of $119 of the Company's interest in mining claims to estimated net
realizable value of $50.
o General and administrative and other expenses of $282 incurred in connection
with the above operations are included in costs and expenses of discontinued
operations.
Following is a summary of the costs and expenses charged in the statement of
operations in fiscal 1998:
o A $500 investment in Avenir Internet Solutions, Inc., an Internet commerce
company based in Waterloo, Ontario, Canada.
o Start-up expenses of $351 relating to Zoring International, Inc. ("Zoring") a
60% owned subsidiary. The Company is no longer funding this operation which
represented the Company and other U.S. franchisers seeking to expand
internationally.
o Start-up expenses of $500 relating to a national sales organization. The
national sales organization was discontinued approximately eight months after
start-up. Expenses consisted primarily of salaries and related costs.
o General and administrative and other expenses of $342 incurred in connection
with the above operations are included in costs and expenses of discontinued
operations.
Costs and expenses of regulatory and litigation matters.
For the past four years, the Company has was subject to an investigation by the
Securities and Exchange Commission including the Company's accounting for
trading transactions. See Item 3. Legal Proceedings for a discussion of the
settlement of these matters between the Company and the SEC. In addition, the
Company has been involved in various litigation matters as discussed in Item 3.
Legal Proceedings. Costs and expenses of regulatory and litigation matters
consists of costs of settlement and legal and other professional costs related
to these matters.
Other income (expense), net.
In 1999, other expense consists primarily of net interest expense of $302.
- 20 -
<PAGE>
During 1998, the Company sold securities of other companies, primarily Wade Cook
Financial Corporation ("WCFC"), realizing cash proceeds of $3,315. In the
Company's financial statements the gain on sale of these securities was equal
to the entire amount of proceeds of $3,315. The securities were purchased with
ITEX trade dollars and assets obtained in barter transactions with zero
accounting basis. Substantially all the securities were both purchased and sold
in fiscal 1998.
During June 1999, the Company settled a litigation with WCFC which provided for
the unrestricted sale of up to 100 shares per month, up to a maximum of 1,400
shares of WCFC common stock still held by the Company, at market prices at the
time of sale. As of February 21, 2000, the Company has realized proceeds of
approximately $176 from the sale of approximately 451 shares of its Wade Cook
stock. These securities were valued at zero as of July 31, 1999 and 1998 due to
the uncertainty of the outcome of the litigation.
Liquidity and Capital Resources
During fiscal 1999, the Company reported net cash used in operations of $1,535
in the consolidated statements of cash flows, as compared to cash used in
operations of $3,302 and $693 in fiscal years 1998 and 1997, respectively.
Factors contributing to the negative cash flow include unprofitable operations,
discontinued operations, settlements of disputes and litigation and legal and
accounting costs connected with the Company's regulatory matters and
expenditures. Currently management is attempting to reduce such negative cash
flows by discontinuing and liquidating, to the extent possible, operations
outside the Company's core business. To facilitate this effort, management is
refocusing capital resources on its primary business of operating trade
exchanges and related activities. However, there can be no assurance that the
Company will be successful in its efforts.
During the years ended July 31, 1999 and 1998 and subsequently, the Company
raised funds and capital as follows:
o At July 31, 1999, the Company's working capital ratio was 0.3 to 1.0 as
compared to 0.8 to 1.0 at July 31, 1998. This decrease in working capital
ratio was indicative of a continued decrease in the liquidity of the Company.
As a result, management believed that it would be difficult for the Company to
meet its operating cash requirements and fiscal 1999 capital requirements
through existing cash balances, cash provided by operations and its borrowing
arrangements. To finance future expansion of the Company's core business of
operating the ITEX retail trade exchange and to retire certain notes described
below, the Company concluded the sale, for $4,000 cash, of the net assets and
business of its wholly-owned subsidiary, BXI Corporation, which operated the
BXI trade exchange from June 25, 1998 to January 18, 2000.
o During April 1998, the Company sold 53.5 shares of Series A preferred stock to
a small number of non-U.S. persons 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 and net proceeds, after costs, of
approximately $4,730. During July 1998 the Series A preferred stock was
converted into 3,564 shares of common stock. Also during fiscal 1998, the
Company sold a portion of its available for sale securities for cash realizing
proceeds of $3,315. Cash realized from the Series A preferred stock and from
the sale of available for sale securities was primarily used to acquire the
remaining 50% interest in the BXI trade exchange, funding of investments in
businesses or operations that have now been discontinued, and in the Company's
operations.
- 21 -
<PAGE>
o In November 1998 the Company completed a Regulation D private placement of
promissory notes totaling $1,625 at face value. The notes bear interest at the
rate of 4% and were issued at a 20% discount. The Company has the right to
repay the notes and accrued interest in cash or in common stock of the
Company. The maturity date of the notes is November 30, 2000. The Company
realized net proceeds of $1,100, which were used for working capital and
general corporate purposes. In July 1999 the Company retired $313 of the above
notes at the discounted amount of $250 and in January 2000 retired an
additional $63 by payment of $50. In April 2000, the Company retired the
balance of these notes of $1,250 by converting $675 plus accrued into
1,133,659 shares of common stock and payment of $575,000 plus accrued interest
in cash.
At July 31, 1999 the Company had outstanding bank loans totaling $200 pursuant
to bank lines of credit. These outstanding balances have been paid in their
entirety. As of April 2000, the Company does not have a line of credit with any
bank.
In July 1999, when the Company needed working capital, an individual who was at
that time Chairman of the Board of Directors, and another individual who is
President, CEO and a Director of the Company, loaned a total of $480 to the
Company. The transactions were structured as convertible notes bearing interest
at 10% per annum. The Company paid those notes in full together with accrued
interest in January 2000. The conversion privilege was never exercised. The
offering was made in reliance on Section 4(2) of the Securities Act of 1933 on
the basis of the offering having been made to officers and directors of the
Company who had access to sufficient information to make an informed investment
decision.
To finance future expansion of the Company's core business, provide operating
capital for the ITEX retail trade exchange and to retire the notes described
above, the Company sold net assets and the business of its wholly-owned
subsidiary, BXI Corporation, which operated the BXI trade exchange from June 25,
1998 until the sale of the exchange assets on January 18, 2000. The Company
realized cash of $4,000 from the sale.
Trade dollars earned and expended
The Company earns ITEX and BXI (from June 25, 1998 until January 18, 2000) trade
dollars as compensation for management of the trade exchanges and as a result of
transactions entered into by the Company as a member of the exchanges. At July
31, 1999, the Company had a total of 1,209 trade dollars that were available for
future expenditures. In fiscal 1999, the Company earned a total of 12,745 trade
dollars and expended a total of 15,566 trade dollars.
At July 31, 1998, the Company had a total of 4,030 trade dollars that were
available for future expenditures. In fiscal 1998, the Company earned a total of
13,145 trade dollars and expended a total of 9,901 trade dollars. In fiscal
1997, the Company earned a total of 11,309 trade dollars and expended a total of
10,523 trade dollars. These amounts have not been included in the financial
statements for the reasons discussed in Note 1 to Consolidated Financial
Statements.
Inflation
Since inflation has been moderate in recent years, inflation has not had a
significant impact on the Company. Inflation is not expected to have a material
future effect.
Inflation may be a factor within the ITEX Retail Trade Exchange. The viability
of the ITEX Retail Trade Exchange is maintained by the confidence that the
members of the exchange have in the strength and stability of the ITEX Trade
Dollar. To maintain such confidence it is necessary that the exchange be
operated in a sound and economic manner. Toward this end, the Company intends
from time to time to take actions to decrease the number of ITEX Trade Dollars
in the exchange by transferring some of its own holdings of trade dollars to the
Exchange.
- 22 -
<PAGE>
Year 2000 Software Requirements
Background of the Year 2000 issue
.
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 and computer systems including desktop stations and servers that could
have been impacted by the Y2K issue. In addition, the Company has
non-information technology (non-IT) systems upon which it relies in its
operations including, for example, its telephone and voice mail system, which
could have been impacted by the Y2K issue.
Since the efficient operation of the ITEX retail trade exchange depends upon the
proper functioning of these software, hardware and non-IT systems, management
assessed the potential impact of the Y2K issue on the Company's business,
operations and financial condition. For the reasons set out below, management
did not believe that the Company's business, operations or financial condition
would be materially impacted by the Y2K issue as it relates to the Company's
proprietary software, third-party software, computer systems and non-IT systems.
Furthermore, a review of the potential impact of third parties' failure to
remediate those third parties' Y2K issues indicated that such failure would not
have a material impact on the Company's business, operations or financial
condition.
Remediation plans - proprietary software
The Company completed the reprogramming of its Account Information Management
(AIM) broker software and ACCT accounting proprietary software. The cost of such
reprogramming and verification was not material nor did that cost have a
material effect on the Company's results of operations when incurred.
Remediation plans - third-party software
With respect to software supplied by third parties, the Company determined that
such software was already Y2K compliant or would be compliant before the year
2000 or, alternatively, that any such software would be replaced at a cost which
was not material to the Company's results of operations.
Remediation plans - computer systems
Most of the Company's computer systems are of recent manufacture and presented
no Y2K problems. The Company utilized TF2000 software with which it tested all
company computers for Y2K compliance.
- 23 -
<PAGE>
Remediation plans - non-IT systems
The Company's voice mail system was not Y2K compliant. The voice mail system was
modified to work properly at a cost which was not material to the Company's
results of operations.
As of April 15, 2000, the Company has experienced no disruptions or other
problems because of the Y2K issue and it does not anticipate experiencing any in
the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not had significant exposure to interest rate risk primarily
because of having had limited borrowing activities. The Company has not used
derivative financial instruments to hedge its limited borrowing risks. There is
inherent rollover risk for borrowings as they mature and are renewed at current
market rates. The extent of this risk is not quantifiable or predictable because
of the variability of future interest rates and business financing requirements.
At July 31, 1998, the Company's market risk sensitive instruments primarily
included a bank line of credit agreement that totaled $208. Based on borrowing
rates currently available to the Company, the carrying amount of debt
approximates fair value.
During November 1998, the Company issued convertible promissory notes totaling
$1,625 at face value. The notes bear interest at a fixed rate of 4% and were
issued at a 20% discount.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company at July 31, 1999 and July
31, 1998 and for the three fiscal years ended July 31, 1999, and the report of
Ehrhardt, Keefe, Steiner & Hottman, P.C., independent public accountants, and
the report of Andersen, Andersen & Strong, independent public accountants are
included as listed in Item 14 of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company changed its certifying accountants as reported on Form 8-K dated
September 18, 1998 and amended on the Form 8-K/A filed on October 2, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Collins M. Christensen, age 41, President, CEO and Director, Director since
1999.
Mr. Christensen, who was appointed President and Chief Executive Officer
of the Company on May 21, 1999. Prior to becoming President of the Company, he
had been the owner of a cellular telephone company and a limousine service. In
1995 he became an independent licensed broker for the Company and formed and
operated an office in Sacramento, California. That office was acquired by the
Company in May 1999. (See Item 1, Business, General, Purchase of Sacramento
Broker Office).
Mary Scherr, CTB, age 62, Senior Vice President, Director since 1986.
Ms. Scherr joined the Company in 1993 as Vice President of Broker
Development. She was appointed Senior Vice President in 1999.
- 24 -
<PAGE>
Charles T. Padbury, age 61, Director since 1992.
Dr. Padbury is a Beaverton, Oregon dentist and has been a member of the
ITEX Retail Trade Exchange since 1985. During 1996 and again in 1999, Dr.
Padbury served briefly as Chairman of the Board of Directors. In March 1999,
Dr. Padbury served as acting CEO until the appointment of Mr. Christensen to
that office in May 1999.
Robert Nelson, CPA, age 52, Director since 1995.
Mr. Nelson is a Certified Public Accountant in private practice in
Portland, Oregon specializing in tax accounting. He is a member of the American
Institute of CPAs and the Oregon Society of CPAs.
Evan B. Ames, age 60, Director since 1995.
Dr. Ames is a Registered Investment Adviser registered with the Securities
& Exchange Commission.
Wayne E. Harmond, age 39, Vice President of Travel and Related Business
Development.
Mr. Harmond has been employed by the Company since May 1998 and was
appointed Vice President of Travel and related business development in 1999. His
past experience includes five years with Alaska Airlines in reservations and
customer service, five years at Hawaiian Airlines as a station manager,
operations auditor and director of transpacific sales and services. He was also
a director of Hotel Program Development at Rosenbluth International.
Lewis A. Humer, Jr., age 40, Vice President of Operations and Chief Operating
Officer.
Mr. Humer joined the Company in March 1999 as Director of Training and was
named Vice President of Operations in June 1999. Prior to joining the Company
Mr. Humer was a Vice President of Operations and was an Operations Manager of
two manufacturing companies. In 2000 he was named Vice President of Operations
and Chief Operating Officer.
Since July 31, 1999, the following changes occurred in management of the
Company:
Vern O. Curtis served as Chairman of the Board of Directors from May 21, 1999
until he resigned in November 1999.
Joel S. Sternberg served as Senior Vice President, Chief Financial Officer and a
Director from May 21, 1999 until he resigned on December 31, 1999.
Gerry E. Layo served as Vice President of Sales and Marketing from 1999 until
March 7, 2000.
Donovan C. Snyder served as Vice President - Legal and Corporate Secretary from
1995 until April 14, 2000.
- 25 -
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Table No. 1
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------------------
Awards Payouts
Name and Annual Compensation -----------------------------------------
Principal --------------------------------------- Restricted Stock Options/ LTIP All Other
Position Year Salary($) Bonus($) Other($) Award($) SARs(#) Payouts Compensation
- ----------------- ---------- ------------ ---------- ------------- ----------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Graham H. Norris FY99 $126,923 $ -0- $31,731(a) $ 2,559 $-0- $-0-
President & CEO
Joseph Morris FY99 $ 92,423 $ -0- $23,539(a) $ 2,690 $-0- $-0-
Senior VP
Edward Wittman FY99 $ 95,700 $ -0- $23,539(a) $ 2,291- $-0- $-0-
Vice President
Donovan Snyder FY99 $ 98,553 $ -0- $-0- $ 1,500 $-0- $-0-
General Counsel
(a) ITEX trade dollars
</TABLE>
Table No. 2
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Options Percent of Exercise Expiration
Name Granted (#) Total Options Price Date
- ----------------- ---------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Graham H. Norris 100,000 7.8% $0.625 02/04/2009
Joseph Morris 50,000 3.9% $0.625 02/04/2009
Edward Wittman 50,000 3.9% $0.625 02/04/2009
Donovan Snyder 12,500 1.6% $0.625 02/04/2009
</TABLE>
As of August 1, 1996, Outside Directors (i.e., Directors who are not employees
of the Company) have received $500 per Board meeting attended in person or by
telephone and members of Board committees have received $250 per committee
meeting attended. In addition, all Directors serving on January 1, 1997 were
issued 1,000 shares of the Company's restricted common stock and received the
option to acquire a minimum of 2,500 additional shares pursuant to an Employees
Incentive Stock Option Plan with the exercise price being the closing bid price
of the stock on the trading day before the grant is made.
In September 1997 the Board approved payment to Directors of the sum of $20,000
annually, payable monthly in advance, and issuance on January 2 of each year in
which a Director is serving as such of 2,500 shares of the Company's common
stock and grant of the option to acquire up to 10,000 additional shares with the
exercise price being set as described above. In addition, attendance of Outside
Directors at committee meeting is compensated at the rate of $750 per meeting
with the chair of the committee receiving $1,000 per committee meeting.
No funds have been set aside or accrued by the Company to provide pension,
retirement or similar benefits for Directors or Executive Officers, other than
those who are covered by the Company's 401(K) plan as employees of the Company.
- 26 -
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of April 15, 2000 the shareholdings of Directors and Executive Officers and
amount of Registrant's voting securities owned by all officers and directors as
a group were:
Table No. 3
Shareholdings of Directors and Executive Officers
<TABLE>
<CAPTION>
Title of Name of Amount and Nature
Class Beneficial Owner of Beneficial Ownership % of Class
- ------------ ------------------------ ----------------------------- ------------
<S> <C> <C> <C>
Common Collins M. Christensen 1,783,334 shares 11.0%
President, CEO 1,573,334 shares
and Director and 210,000 stock options.
Common Mary Scherr 254,379 1.5%
Senior Vice President, (20,979 shares,
Director 233,400 stock options)
Common Dr. Charles Padbury 129,555 0.7%
Director (26,555 shares,
103,000 stock options)
Common Robert Nelson, CPA 100,047 0.6%
Director (10,047 shares,
90,000 stock options)
Common Dr. Evan B. Ames 100,000 0.6%
Director (10,000 shares, 90,000 stock
options)
Common Wayne Harmond 50,163 0.3%
Vice President (163 shares,
-50,000- stock options)
Common Lewis Humer Vice -0- 0.3%
President -0- shares,
50,000 stock options)
Total Directors and Executive Based upon 16,103,006 15.3%
Officers shares
2,467,748 (14,336,406 shares
(1,641,078 shares, issued, 2,391,933
826,400 options) stock options)
</TABLE>
*
Table No. 4 lists persons or companies holding over 5% beneficial ownership of
Registrant's outstanding stock as of April 15, 2000:
- 27 -
<PAGE>
Table No. 4
5% or Greater Shareholders
Title of Name and Address Amount and Nature % of
Class of Beneficial Owner of Beneficial Ownership Class
- ----------- ------------------------ ------------------------- ---------
Common Collins M. Christensen 1,783,334 11.0%
P.O. Box 2309 (1,573,334 shares
Portland, OR 97223 owned, 210,000 options)
Total Based upon 16,678,339 Outstanding at
5% shares shares 02/01/2000 11.0%
(14,336,406 shares
issued, 2,341,933 stock
options and warrants)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has dealt with Mr. Terry Neal, the founder of the Company and its
former Chairman and Chief Executive Officer, in various transactions in which
Mr. Neal acted as agent or otherwise represented the other parties to the
transactions. At July 31, 1990 Mr. Neal owned (including shares beneficially
owned) approximately 284,000 shares of the Company's common stock and held
options to purchase 450,000 shares of the Company's common stock at exercise
prices ranging from $1.94 per share to $6.13 per share, which were cancelled by
the Company in November 1999. in accordance with the option plan. If Mr. Neal
had exercised all his options and there were no other stock issuances from
exercises of other contingently issuable shares pursuant to options and warrants
held by others or conversions of preferred stock, Mr. Neal would have had a
common equity interest in the Company of approximately 6% at July 31, 1999.
On July 31, 1997, the Company invested in natural resources located on four
mineral properties in the State of Washington. In exchange for these properties,
the Company issued 130,000 shares of common stock valued at $149,000 (as
restated), paid $20,000 in cash and transferred various barter industry
commodities. The Company initially recorded the natural resource interests at
$169,000 (as restated). Subsequent to fiscal 1998, management decided to abandon
the intended use for these properties and recorded a write down of $119,000 to
reflect estimated net realizable value at that time for the mining interests of
$50,000. The four properties contain deposits including limestone and high-grade
calcium carbonate, high-grade and very-high-grade calcium carbonate, limestone
and medium-grade calcium carbonate, quartzite flagstone, and olivine and dunite.
Mr. Terry Neal represented Pacific Mineral Resources, Inc., the other party, in
this transaction. Therefore, this may be considered a related party transaction.
During the fiscal years ended July 31, 1994, 1995, 1996, and 1997, a 49%-owned
affiliate, Associated Reciprocal Traders, Inc. ("ART") conducted trading
transactions outside the United States. These transactions did not generate any
cash for the Company. During those periods, Newcastle Services, Ltd.
("Newcastle"), the owner of a 5.4% beneficial common equity interest in the
Company owned the remaining 51% of ART. During that period, the Company dealt
with Mr. Neal in connection with various transactions involving ART and
Newcastle. This included the transaction on July 30, 1997, in which the Company
completed the purchase of the remaining 51% interest of ART from Newcastle.
Therefore, these may be considered related party transactions.
- 28 -
<PAGE>
In August 1997 the Company entered into a transaction in which it conveyed to
The Bailey Mutual Fund ("Bailey") 976,000 ITEX Trade Dollars and certain
securities of other companies in exchange for shares of Wade Cook Financial
Corporation ("WCFC") with market value of $2,000,000. The Company sold these
shares during the same fiscal quarter in which they were acquired. During the
fiscal year ended July 31, 1994, the Company entered into transactions in which
it sold marketable securities to Bailey for an aggregate amount of 140,000 ITEX
Trade Dollars. During the fiscal year ended July 31, 1995, the Company entered
into transactions in which it sold marketable securities to Bailey for an
aggregate amount of 2,990,000 ITEX Trade Dollars. During the fiscal year ended
July 31, 1996, the Company entered into transactions in which it sold marketable
securities to Bailey for an aggregate amount of 440,000 ITEX Trade Dollars. In
these transactions, the Company dealt with Mr. Neal as agent for Bailey.
Therefore, these may be considered related party transactions.
On March 30, 1998, the Company agreed 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. The warrants were held by Wycliff Fund,
Inc. ("Wycliff") and The Bailey Mutual Fund, Inc. ("Bailey"). Mr. Terry Neal,
the founder of the Company and its former Chairman and Chief Executive Officer
represented Wycliff and Bailey in this transaction. Therefore, this may be
considered a related party transaction. The transaction was completed and the
shares of common stock were issued on July 22, 1998.
During 1996 the Company obtained $750,000 in equity capital from the sale of
200,000 shares of common stock through a private placement with Newcastle
Services Ltd. It also raised $1,250,000 in equity capital from the sale of
255,624 shares of common stock and certain warrants to purchase common stock
through a regulation S transaction with Wycliff Fund, Inc. See Note 15 to the
Consolidated Financial Statements for additional information.
In June 1999 when the company needed working capital, an individual, at that
time Chairman of the Board of Directors, and another individual, the President,
CEO and Director, loaned a total of $480,000 to the Company. The transaction was
structured as a convertible note bearing interest at 10% per annum. The Company
paid those notes in full together with accrued interest in January 2000.
The conversion privilege was never exercised.
- 29 -
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
The following documents are filed as part of this Report:
(a) 1. Financial statements.
Report of Ehrhardt Keefe Steiner & Hottman PC Independent Public
Accountants
Report of Andersen, Andersen & Strong, LC, Independent Public
Accountants
Consolidated balance sheets at July 31, 1999 and 1998
Consolidated statements of operations for the fiscal years ended
July 31, 1999, 1998 and 1997
Consolidated statements of stockholders' equity for the fiscal years
ended July 31, 1999, 1998 and 1997
Consolidated statements of cash flows for the fiscal years ended
July 31, 1999, 1998 and 1997
Notes to consolidated financial statements
2. Financial statement schedules. All schedules have been omitted because the
information required to be set forth therein is not applicable or is shown in
the consolidated financial statements or notes thereto.
3. Exhibits. The Exhibits listed in the accompanying Exhibit Index are filed or
incorporated by reference as part of this Report.
(b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K
during the fourth quarter of fiscal 1999.
- 30 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Date: May 2, 2000
ITEX CORPORATION
May 2, 2000 /s/ Collins M. Christensen
--------------------------------
Collins M. Christensen, Director, President
and Chief Executive Officer (principal
executive officer and director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ Collins M. Christensen May 2, 2000
- -------------------------------------------
Collins M. Christense, Director, President
and Chief Executive Officer (principal
executive officer and director)
/s/ Mary Scherr May 1, 2000
- -------------------------------------------
Mary Scherr, Senior Vice President, Director
/s/ Dr. Evan B. Ames May 1, 2000
- -------------------------------------------
Dr. Evan B. Ames, Director
/s/ Robert Nelson May 1, 2000
- -------------------------------------------
Robert Nelson, Director
/s/ Dr. Charles Padbury May 1, 2000
- -------------------------------------------
Dr. Charles Padbury, Director
- 31 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Itex Corporation
Portland, Oregon
We have audited the accompanying consolidated balance sheets of Itex Corporation
as of July 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Itex Corporation as
of July 31, 1999 and 1998, and the results of their operations and their cash
flows for the years then ended in conformity with generally accepted accounting
principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
April 26, 2000
Denver, Colorado
- 32 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
ITEX Corporation
Portland, Oregon
We have audited the consolidated balance sheets of Itex Corporation and
subsidiaries as of July 31, 1997, and the related consolidated statements of
operations, cash flows for each of the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Itex
Corporation and subsidiaries as of July 31, 1997, and the results of their
consolidated operations and their consolidated cash flows for each of the two
year then ended, in conformity with generally accepted accounting principles.
/s/Andersen Andersen & Strong L.C.
October 28, 1997
Salt Lake City, Utah
- 33 -
<PAGE>
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
July 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ............................... $ 203 $ 936
Accounts receivable ..................................... 1,143 1,325
Notes receivable ........................................ 9 105
Prepaid income taxes and refunds
receivable ............................................. -- 254
Prepaids and other current assets ....................... 219 141
-------- --------
Total current assets ................................... 1,574 2,761
Property and equipment, net of
accumulated depreciation of $635 and $249 ................... 523 427
Goodwill and purchased member lists, net ..................... 3,866 7,713
Investment in Samana Resort .................................. 518 1,026
Other assets ................................................. 148 1,029
-------- --------
Total assets .................................. $ 6,629 $ 12,956
======== ========
Liabilities and stockholders' equity Current liabilities:
Bank line of credit ....................................... $ 200 $ 208
Long-term debt and capital lease
obligations, current portion ............................. 1,189 62
Accounts payable .......................................... 675 525
Portion of receivables due to brokers ..................... 1,167 1,119
Deferred revenue .......................................... 586 647
Notes payable to related parties .......................... 480 --
Other current liabilities ................................. 1,949 887
-------- --------
Total current liabilities .............................. 6,246 3,448
-------- --------
Long-term debt and capital lease obligations ................. 209 297
-------- --------
Commitments and contingencies ................................ -- --
Stockholders' equity:
Common stock, $.01 par value; 50,000
shares authorized; 11,762 and 11,408
shares issued and outstanding .............................. 118 114
Additional paid-in capital .................................. 27,130 26,148
Treasury stock, at cost (2 shares in
1999 and 1998) ............................................. (10) (10)
Accumulated deficit ......................................... (27,064) (17,041)
-------- --------
Total stockholders' equity ............................. 174 9,211
-------- --------
Total liabilities and
stockholders' equity ........................ $ 6,629 $ 12,956
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
- 34 -
<PAGE>
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the fiscal years ended July 31,
--------------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Revenue:
Trade exchange revenue ............ $ 19,173 $ 9,665 $10,016
Corporate trading revenue ......... -- 1,724 1,586
-------- -------- -------
19,173 11,389 11,602
-------- -------- -------
Costs and expenses:
Costs of trade exchange revenue ... 12,953 6,519 5,937
Costs of corporate trading ........ -- 1,589 1,674
Selling, general and administrative 7,277 5,587 4,812
Costs and expenses of discontinued
activities ....................... 2,318 1,693 50
Costs and expenses of regulatory
and litigation matters ........... 1,770 1,584 646
Writedowns of BXI and Samana ...... 2,508 -- --
Depreciation and amortization ..... 1,996 774 695
-------- -------- -------
28,822 17,746 13,814
-------- -------- -------
Loss from operations ................ (9,649) (6,357) (2,212)
-------- -------- -------
Other income (expense):
Interest income (expense), net .... (302) 86 66
Gain on sale of securities ........ -- 3,315 --
Miscellaneous, net ................ (67) 16 (144)
-------- -------- -------
(369) 3,417 (78)
-------- -------- -------
Loss before income taxes ............ (10,018) (2,940) (2,290)
Provision (credit) for income taxes . 5 1,837 (396)
-------- -------- -------
Net loss ............................ $(10,023) $ (4,777) $(1,894)
======== ======== =======
Average common and equivalent shares 11,585 7,912 6,940
======== ======== =======
Net loss per common share
basic and diluted .................. $ (0.87) $ (0.61) $ (0.27)
======== ======== =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
- 35 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the fiscal years
ended July 31, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Common Stock Preferred Stock Additional
--------------------- ---------------------- Paid-in Accumulated Treasury
Shares Amount Shares Amount Capital Deficit Stock Total
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1996 . 6,804 $ 68 $ -- $ -- $ 16,386 $(10,370) $ (29) $ 6,055
Stock sold for cash .... 175 2 -- -- 422 -- -- 424
Stock and options issued
for goods and services 228 2 -- -- 1,214 -- 29 1,245
Tax benefit from stock
options exercised ..... -- -- -- -- 1,092 -- -- 1,092
Net income ............. -- -- -- -- -- (1,894) -- (1,894)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, July 31, 1997 . 7,207 72 -- -- 19,114 (12,264) -- 6,922
Common stock sold
for cash .............. 150 2 -- -- 598 -- -- 600
Preferred stock sold
for cash .............. -- -- 54 1 4,729 -- -- 4,730
Stock, options and
warrants issued for
goods and services .... 237 2 -- -- 744 -- -- 746
Stock for warrants
swap .................. 250 2 -- -- 998 -- -- 1,000
Preferred stock
conversion ............ 3,564 36 (54) (1) (35) -- -- --
Treasury stock
purchased ............. -- -- -- -- -- -- (10) (10)
Net loss ............... -- -- -- -- -- (4,777) -- (4,777)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, July 31, 1998 . 11,408 114 -- -- 26,148 (17,041) (10) 9,211
Common stock
options exercised ..... 10 -- -- -- 10 -- -- 10
Stock, options and
warrants issued for
goods and services .... 19 1 -- -- 235 -- -- 236
Stock for options
and warrants Swap ..... 325 3 -- -- 737 -- -- 740
Net loss ............... -- -- -- -- -- (10,023) -- (10,023)
-------- -------- -------- -------- -------- -------- -------- --------
Balance, July 31, 1999 . 11,762 $ 118 -- -- $ 27,130 $(27,064) $ (10) $ 174
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an
integral part of the consolidated financial statements.
- 36 -
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the fiscal years ended July 31,
------------------------------------
1999 1998 1997
-------- -------- --------
Cash flows from operating activities
Net loss .......................... $(10,023) $ (4,777) $ (1,894)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization ... 1,996 774 695
Asset impairments ............... 3,481 -- --
Stock and options issued for
goods and services ............. 976 1,746 1,245
Tax benefit from stock options
exercised ...................... -- -- 1,092
Gain on sales of securities ..... -- (3,315) --
Changes in operating assets
and liabilities:
Accounts and notes receivable .. 215 (159) (95)
Prepaid income taxes and
refunds receivable ............ 254 (254) --
Deferred taxes ................. -- 1,224 (1,224)
Prepaids and other current
assets ........................ 367 (131) (379)
Accounts payable and other
current liabilities ........... 1,212 376 (177)
Accounts payable to brokers .... 48 567 44
Deferred revenue ............... (61) 647 --
-------- -------- --------
Net cash used in operating
activities ................... (1,535) (3,302) (693)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of securities .. -- 3,315 --
Business Exchange International,
Inc. acquisition .................. -- (3,585) --
Investments in unconsolidated
entities .......................... -- (700) --
Investment in Samana Resort ........ -- (1,026) --
Equipment, information systems
and other ......................... (420) (302) (53)
-------- -------- --------
Net cash used in investing
activities ................... (420) (2,298) (53)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sales of stock ....... 10 5,330 424
Purchase of treasury stock ......... -- (10) --
Proceeds from related party
notes payable ..................... 480 -- --
Proceeds from third party
indebtedness ...................... 1,140 -- --
Repayments of third party
indebtedness ...................... (408) 403 (166)
-------- -------- --------
Net cash provided by financing
activities ................... 1,222 5,723 258
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents ................... (733) 123 (488)
Cash and cash equivalents at
beginning of period ................ 936 813 1,301
-------- -------- --------
Cash and cash equivalents at end of
period ............................. $ 203 $ 936 $ 813
======== ======== ========
Supplemental cash flow information
Cash paid for interest $ 82 $ 14 $ 25
Cash paid for income taxes 5 867 430
Supplemental noncash investing and
financing activities:
None --- --- ---
- 37 -
The accompanying notes are an integral part of the
consolidated financial statements.
<PAGE>
ITEX CORPORATION
nOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company. ITEX Corporation ("ITEX" or the "Company") was incorporated in
October 1985 in the State of Nevada. The Company operates a retail trade
exchange for which it acts as third-party recordkeeper and in many cases a
broker for transactions between members of the exchange. The Company charges
monthly membership fees, as well as commissions on transactions. ITEX also
provides merchandise for sale to its members for trade dollars.
A summary of significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows:
Revenue Recognition. For financial reporting purposes, the Company records its
barter and ITEX trade dollar transactions based on a measure of fair value of
the goods or services involved. The Company participates in numerous barter and
ITEX trade dollar transactions that are described below. The Company enters into
these transactions primarily to generate cash transaction fees for the benefit
of the Company. The Company recognizes cash membership and transaction fees and
commissions on transactions as the related services are performed.
Accounting for Membership and Transaction Fees Received in ITEX Trade Dollars.
In addition to receiving cash membership and transaction fees, the Company also
receives ITEX trade dollars from members of the trade exchange in connection
with its services in operating the exchange. These trade dollars are utilized by
the Company for either the acquisition of goods and services that are then made
available for purchase by members of the exchange (enabling the Company to earn
cash transaction fees) or for use by the Company in its operations. The Company
does not record revenue at the time of earning these trade credits because there
is no persuasive evidence that the value of the services provided by the Company
exceeds the amount of monetary consideration received. Further, the Company does
not record revenue at the time of receiving the ITEX trade dollars because not
all of the Company's performance obligations have been completed; that is, the
Company must continue to successfully operate the exchange in future periods in
order to be able to utilize the ITEX trade dollars.
Accounting for ITEX Trade Dollars Spent by the Company for Goods and Services
Used in the Company's Operations. When ITEX trade dollars are exchanged by the
Company for goods and services that are used by the Company in its own
operations, the Company records an expense or asset equal to the fair value of
the underlying goods or services received. The Company also records a
corresponding revenue amount equal to the fair value of the underlying goods or
services received because at that point, the Company has completed its
performance obligations. Fair value is determined by determining estimated cash
prices for the sale of similar goods and services. If the Company cannot
determine a fair value, no value is assigned to the transaction for financial
reporting purposes. The Company also assigns zero value to ITEX trade dollars
that are exchanged in transactions in which cash is also paid and for which
there is no persuasive evidence that the fair value of the goods or services
received exceeds the amount of monetary consideration paid.
- 38 -
<PAGE>
Historically, a significant portion of ITEX trade dollars expended has been for
advertising in various forms. The Company historically has not conducted
significant advertising transactions in cash; therefore, ITEX trade dollars
expended for these advertising items are not reflected as revenue or costs in
the accompanying financial statements. In implementing its accounting policies
and procedures, the Company has considered the guidance of EITF Issue No. 99-17,
"Accounting for Advertising Barter Transactions", which was written in the
context of Internet companies bartering with one another for web advertising,
but applies to other industries as well. Issue 99-17 was initially considered by
the EITF in November 1999 and was concluded in January 2000. EITF 99-17
specifically addresses advertising barter transactions for which there is no
ultimate realization in cash. It tentatively concludes that revenue and expenses
from such transactions should be recognized in financial statements (at fair
value) only if an entity has a historical practice of receiving or paying cash
for similar transactions. The EITF indicated that the notion of a "historical
practice" should be similar to the guidance in EITF Issue 93-11, "Accounting for
Barter Transactions Involving Barter Credits." EITF 93-11 establishes high
thresholds in accounting for barter transactions such as " . . . if an entity
can convert the barter credits into cash in the near term, as evidenced by a
historical practice of converting barter credits into cash shortly after
receipt, or if independent quoted market prices exist for items to be received .
. ." The Company's barter transactions denominated in ITEX trade dollars do not
meet the high thresholds contemplated in EITF 93-11 as applied with respect to
EITF 99-17 of cash equivalency or convertibility to cash. Also, they are not
transactions for which the Company has a historical practice of receiving or
paying cash for similar transactions. Accordingly, in the restated financial
statements, the Company has not recorded transactions denominated in ITEX trade
dollars. If there are any significant transactions in the future that meet these
high thresholds, the Company will report them in the financial statements at
fair value in accordance with Opinion 29.
Acquisition and Disposition of Barter-Type Commodities. The Company does not
record in its financial statements transactions for acquisition and disposition
of barter-type commodities such as hotel room nights, media due bills and other
barter-type commodities (in exchange for ITEX trade dollars or other barter-type
commodities) because additional performance by the Company is required.
Typically, the Company must arrange one or more other large ITEX trade dollar
transactions to enable the provider of the commodities to utilize the trade
dollars received by the provider. Also, the provider typically must still
fulfill by shipping or otherwise providing the barter-type commodities to the
ultimate users. The culmination of this process occurs and revenue for
transaction fees is recognized by the Company when the commodities are provided
to the ultimate users and the Company earns its cash transaction fees. The
Company does not report the commodities in its financial statements as
inventories because these transactions only represent commitments by the
provider and the Company to perform in the future.
IRS Requirements. While the accounting policies described above are used for
financial reporting purposes, the Internal Revenue Service requires, for
purposes of taxation, that the Company recognize revenues, expenses, assets, and
liabilities for all transactions in which the Company either receives or spends
ITEX trade Dollars using the ratio of one U.S. dollar per ITEX trade dollar. The
Company internally accounts for ITEX trade dollars, in addition to cash, in
statements to clients and brokers and in other ways necessary for the operation
of the trade exchanges and the business of the Company, including payment for
certain operating expenses of the Company.
- 39 -
<PAGE>
Trade Dollar Activity. The following table summarizes the trade dollar activity
of the Company for each of the fiscal years ended July 31, 1999, 1998 and 1997
(unaudited):
Fiscal years ended July 31,
--------------------------------
1999 1998 1997
--------- -------- ---------
Trade dollars earned 12,745 13,145 11,309
Trade dollars expended 15,566 9,901 10,523
--------- -------- ---------
Net increase (decrease) (2,821) 3,244 786
========= ======== =========
Trade dollars at
fiscal year end 1,209 4,030 786
========= ======== =========
The Company does not guarantee the utilization of, or market for ITEX Trade
Dollars. In addition, the Company can expend trade dollars in excess of those
credited to the Company's account.
Principles of Consolidation. The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated.
Net Revenue and Deferred Revenue. The Company charges each client cash
membership fees and individual cash transaction fees from the buyer and seller.
Members of the ITEX retail trade exchange pay a monthly membership fee. Members
of the BXI retail trade exchange, which was owned and operated by the Company
from June 25, 1998 to January 18, 2000, pay an annual fee at the beginning of
the membership year. The Company deferred the BXI membership fees and recognized
the related revenue ratably over the applicable one-year period. If a BXI member
decided to discontinue membership, there was no refund of membership fees paid.
Cash and Cash Equivalents. Cash and cash equivalents includes all cash and
highly liquid investments with maturities at the date of purchase of 90 days or
less.
Concentrations of Credit Risk. At July 31, 1999, the Company maintained its
major cash balances at one financial institution located in Portland, Oregon.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100. At July 31, 1999, the Company's uninsured cash balances totaled $454.
Property and Equipment. Property and equipment are stated at cost and include
those additions and improvements that add to productive capacity or extend
useful life. When property or equipment are sold or otherwise retired, the cost
and related accumulated depreciation are removed from the respective accounts
and the resulting gain or loss is recorded in the statement of operations. The
costs of repair and maintenance are charged to expense as incurred. Depreciation
is computed using the straight-line method over useful lives of three to five
years. Leasehold improvements are amortized on a straight-line basis over the
shorter of the asset life or lease term.
Vehicle and equipment capital leases have been recorded at the present value of
the net minimum lease payments. These assets are amortized using the
straight-line method over lease terms of three to five years.
- 40 -
<PAGE>
Intangible Assets. The Company amortizes costs of customer lists acquired in
business combinations over four years. The Company amortizes the excess of fair
value of net assets acquired (goodwill) using the straight-line method over a
period not to exceed 10 years.
Valuation of Investment in Samana Resort. At July 31, 1998, the carrying value
of the investment in the Samana resort property was equal to its cash cost of
$1,026. During the fiscal year ended July 31, 1999, new management of the
Company decided to liquidate this investment instead of holding it for
development or other means of realizing value. In fiscal 2000, the Company
liquidated this investment by selling the property back to the parties from whom
the Company had originally purchased the property. At July 31, 1999, the
investment in the Samana resort is carried at its net realizable value of $518,
based on the selling price of $550, less related costs of $32. The Company has
received cash of $200 from the buyers (from which the Company paid its costs of
the transaction). The buyers have not paid the remaining amount of $350 in
accordance with the terms of the sale agreement and such payment is overdue. The
Company is contemplating legal action to enforce the terms of the sale
agreement. In any event, the Company has retained title to the property and
believes that it will recover the remaining net book value of $350 either from
the current debtors or from resale of the property to another party.
Long-Lived Assets. The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recovered. The Company looks primarily to the undiscounted
future cash flows in its assessment of whether or not long-lived assets have
been impaired. At July 31, 1999, the Company determined no impairment was
appropriate.
Other Assets. The Company accounts for holdings of equity securities of other
companies pursuant to Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115).
The Company's equity securities generally qualify under the provisions of SFAS
No. 115 as available for sale. The application of SFAS No. 115 has resulted in
the Company not recognizing these securities until sold for cash.
Income Taxes. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109. Under SFAS No. 109, an asset and
liability approach is required. Such approach results in the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and the tax basis of
assets and liabilities.
Income (Loss) Per Share. Effective August 1, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings per
Share", which requires presentation on the face of the statement of operations
of both basic and diluted earnings per share. Basic and diluted earnings per
share have replaced the previously presented primary and fully 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. All prior period income per share data has been restated.
- 41 -
<PAGE>
Fair Value of Financial Instruments. All of the Company's significant financial
instruments are recognized in its balance sheet. The carrying value of financial
assets and liabilities generally approximates fair value as of July 31, 1999.
Estimates and Assumptions. Management uses estimates and assumptions in
preparing financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets, liabilities, revenue, expenses, gains and losses, and also disclosures
about contingent assets and liabilities. Significant estimates include the fair
value of non-monetary transactions, various litigation matters described herein
and the recoverability of certain intangible assets. Actual results may vary
from estimates and assumptions that were used in preparing the financial
statements.
Reclassifications. Certain reclassifications have been made to the financial
statements of prior years to conform to the July 31, 1999 presentation. Such
reclassifications had no effect on the results of operations or stockholders'
equity.
NOTE 2 - ACQUISITION AND DIVESTITURE OF BXI CORPORATION
During January 1996, the Company acquired the common stock of SLI, Inc. ("SLI"),
a Nevada corporation now known as IME, Inc., in exchange for 60 shares of the
Company's common stock valued at approximately $645 and cash of $1,750. The
Company also made a loan to SLI of $300.
During January 1996, SLI purchased a 50% common stock interest in Business
Exchange International Corporation ("BXI"), a barter exchange with corporate
headquarters in Burbank, California. SLI paid $1,750 in cash and loaned $300 to
BXI.
During June 1998, the Company completed the acquisition of the remaining 50%
interest in BXI for $3,725 in cash. In connection with this purchase, the
Company agreed to place 75 shares of common stock and warrants to purchase an
additional 75 shares of common stock at $7 per share, into a fund that will be
distributed to current BXI trade exchange brokers who continue as BXI brokers
for a three-year period after the date of closing. The warrants will be
exercisable for three years after distribution to the brokers. These securities
have been valued at $150 in accounting for the acquisition.
The total cost of the acquisition of BXI, including amounts paid for the initial
50% interest, as well as the remaining 50% interest, and ancillary costs of the
acquisition, totaled $6,749. The transaction has been accounted for using the
purchase method of accounting and the net assets and results of BXI have been
included in the consolidated financial statements since June 25, 1998, the date
of completion of the acquisition. The amount of purchase price allocated to
customer lists was $5,000 and the amount allocated to excess of cost over net
assets acquired (goodwill) amounted to $2,511. The customer lists are being
amortized over a four-year period and the goodwill is being amortized over a
10-year period.
The following unaudited pro forma information represents the results of
operations of the Company as if the acquisition of BXI had occurred on August 1,
1996, after giving effect to amortization of the cost of acquisition in excess
of the fair value of net assets acquired, depreciation of acquired property and
equipment and the assumed issuance on August 1, 1996 of 2,808 shares of common
stock (in conjunction with the preferred stock conversion). The shares represent
the pro rata portion of the total number of shares of common stock issued in the
Company's private placement during the fiscal year ended July 31, 1998 which
provided funds to enable completion of the acquisition.
- 42 -
<PAGE>
Years ended July 31,
-------------------------
1998 1997
----------- -----------
Revenue................ $ 19,169 $18,222
=========== ============
Net loss............... $ (6,173) $(3,218)
=========== ============
Net loss per common share $ (0.90) $ (0.49)
=========== ============
The unaudited pro forma information does not purport to be indicative of the
results which would actually have been achieved had the acquisitions occurred as
of the date of the period indicated or which may be obtained in the future.
In May 1999, the Board of Directors decided to sell the net assets and business
of BXI Corporation. On January 18, 2000, the Company consummated the sale of the
net assets and business of BXI Corporation to an unrelated third party for
$4,000,000, which was paid by the buyer in cash. On the measurement date in May
1999, the Company recorded an estimated loss on the disposal of $2,000 which
includes an estimated loss from operations and disposition of BXI Corporation
from the period May 31, 1999 to January 18, 2000 of approximately $780. The
primary assets included in the consolidated balance sheet as of July 31, 1999
and 1998, with respect to BXI Corporation consisted of customer lists and
goodwill, with net book values of $3,646 and $2,106 for 1999 and $5,000 and
$2,316 for 1998, respectively. These amounts have been further reduced by the
reserve for estimated loss on the disposal of BXI of $2,000 during 1999.
NOTE 3 - PROPERTY AND EQUIPMENT
Depreciation expense for property and equipment was $94, $122, and $108 for the
fiscal years ending July 31, 1999, 1998 and 1997, respectively.
At July 31, 1999 and 1998, assets held under capitalized leases include
computers and other equipment totaling $423 and $341, respectively. Depreciation
expense for capitalized equipment leases was $68, $60, and $42 for the fiscal
years ended July 31, 1999, 1998 and 1997, respectively.
NOTE 4 - GOODWILL AND PURCHASED MEMBER LISTS
At July 31, 1999, the excess of the total BXI acquisition cost over the fair
value of the net assets acquired (goodwill) totaled $2,362, less accumulated
amortization of $256, for a net carrying value of $2,106. At July 31, 1999, the
cost of the BXI acquired member list was $5,000, less accumulated amortization
of $1,354, for a net carrying value of $3,646. At July 31, 1999, the carrying
value of goodwill and purchased member lists has been reduced by a reserve of
$2,000 related to the estimated loss on the disposal of the net assets and
business of BXI. The remaining balances of intangible assets at July 31, 1999
consisted principally of the cost of member lists from acquisitions made in
prior years, with total cost of $1,634, less accumulated amortization of $1,520,
for a net carrying value of $114.
- 43 -
<PAGE>
At July 31, 1998, the excess of the total BXI acquisition cost over the fair
value of the net assets acquired (goodwill) totaled $2,511, less accumulated
amortization of $20, for a net carrying value of $2,491. At July 31, 1998, the
cost of the BXI acquired member list was $5,000, less accumulated amortization
of $104, for a net carrying value of $4,896. The remaining balances of
intangible assets at July 31, 1998 consisted principally of the cost of member
lists from acquisitions made in prior years, with total cost of $1,634, less
accumulated amortization of $1,308, for a net carrying value of $326.
NOTE 5 - OTHER ASSETS
Other assets consists of the following:
July 31,
July 31,
-----------------
1999 1998
------ ------
Natural resource interests of
four mineral properties located
in the State of Washington .... $ 50 $ 169
Capitalized software costs ..... -- 278
Foreign licensing rights ....... -- 376
Note receivable from GlobalTel . -- 200
Other .......................... 98 6
------ ------
$ 148 $1,029
====== ======
During the fiscal year ended July 31, 1999, the investment in natural resource
interests were written down to $50 and the capitalized software costs and
foreign licensing rights were written off. The events causing writedowns
writeoffs were the decision of the Company's new management in March 1999
to offer the mineral properties for sale and the decision to suspend
international expansion in order to focus on the Company's domestic trade
operations. The note receivable from GlobalTel was written off in fiscal 1999
upon the determination that GlobalTel was no longer financially viable.
NOTE 6 - BANK LINE OF CREDIT
The Company had a line of credit arrangement with its primary bank payable upon
demand. Pursuant to the line of credit, the Company was able to borrow up to
$250 on a short-term basis for working capital purposes. The interest rate
applicable to borrowings pursuant to the facility was equal to the bank's prime
rate of interest plus 1.5%. Borrowings were collateralized by the Company's
accounts receivable, fixed assets and inventory. As of July 31, 1998, the
Company had outstanding borrowings of $208 under the line of credit.
In May 1999 the Company entered into an agreement with its commercial bank
relative to the $250 line-of-credit for which it was in default. The new
agreement provided that $50 would be repaid each month for five months beginning
June 15, 1999. The Company has made all five payments, resulting in the bank
note being fully repaid in October 1999. As of February 2000, the Company does
not have a line of credit with any bank.
- 44 -
<PAGE>
NOTE 7 - NOTES PAYABLE TO RELATED PARTIES
In July 1999, when the Company needed working capital, an individual who was at
that time Chairman of the Board of Directors, and another individual who is
President, CEO and a Director of the Company, loaned a total of $480 to the
Company. The transactions were structured as convertible notes bearing interest
at 10% per annum. The Company paid those notes in full together with accrued
interest in January 2000. The conversion privilege was never exercised.
NOTE 8 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
In November 1998 the Company completed a Regulation D private placement of
promissory notes totaling $1,625 face value realizing approximately $1,100 after
a 20% discount and issuance costs. The notes bear interest at 4%. The Company
has the right to repay the notes and accrued interest in cash or in common stock
of the Company. The maturity date of the notes is November 30, 2000.
In July 1999 the Company retired $313 of the above notes at the discounted
amount of $250 and entered into an agreement to retire an additional $62 by the
payment of $50 and is seeking to retire the balance of the notes with a face
value of $1,250 by the payment of $1,000, but has not yet reached an agreement
with the holder. Warrants to purchase 195 shares of stock at an average price of
$3 a share, issued in connection with this financing, remain outstanding. The
Company deferred approximately $130 of debt acquisition costs based on the fair
value of the warrants.
At July 31, 1999, the Company was in default of certain covenants contained in
the promissory note agreement. Therefore, the total amount owed at July 31, 1999
of $1,057 is classified as a current liability in the balance sheet.
Long-term debt and capital lease obligations consist of the following:
July 31,
-----------------------
1999 1998
--------- ---------
Convertible promissory notes,
less unamortized discount
bearing interest at 4%, due
November 30, 2000. The note was
paid in full subsequent to year
end. $ 1,057 $ ---
Note payable at $5 per month,
including interest at 10% per
annum 130 140
Capital leases 211 219
--------- ---------
1,398 359
Less, current maturities (1,189) (62)
--------- ---------
$ 209 $ 297
========= =========
- 45 -
<PAGE>
The annual maturity of long-term debt and capital lease obligations are as
follows:
Fiscal year ending July 31,
2000 $ 1,445
2001 94
2002 85
2003 73
2004 13
Thereafter ---
-----------
1,710
Less, imputed interest on
capital leases and unamortized
discount on promissory note
agreements (312)
-----------
Present value of minimum lease
payments 1,398
Less, current portion 1,189
-----------
$ 209
===========
The Company's noncancellable capital leases have terms from three to ten years,
expire during the years 2000 through 2005, and currently provide for aggregate
monthly payments ranging from $120 to $1,595.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company conducts a majority of its business utilizing leased facilities in
various cities in which it operates. The Company also leases office space for
its corporate headquarters. Certain lease agreements provide for payment of
insurance, maintenance and other expenses related to the leased property.
Certain lease agreements also provide an option for renewal at varying terms.
The aggregate future minimum commitments under operating leases are as follows:
Fiscal years ending July 31,
2000 $ 459
2001 413
2002 144
2003 33
2004 31
-------
Total $ 1,080
=======
- 46 -
<PAGE>
Rent expense for the periods ended July 31, 1999, 1998 and 1997 amounted to
$613, $250, and $200, respectively.
In the ordinary course of its business, the Company may be subject to litigation
matters and claims that are normal for its operations. While the results of
litigation and claims cannot be predicted with certainty, management believes,
based on advice of counsel, the final outcome of such matters will not have a
materially adverse effect on the consolidated financial position.
NOTE 11 - STOCKHOLDERS' EQUITY
Private Placements.
Year ended July 31, 1998. During the year ended July 31, 1998, the Board of
Directors authorized up to 65 shares of Series A convertible preferred stock
("Series A preferred stock") for sale at $100 per share. During April 1998, the
Company closed the sale of 54 shares of Series A preferred stock 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 and net
proceeds, after costs, totaling $4,730. The primary use of the proceeds was for
the acquisition of the remaining 50% common equity interest in BXI (see note 2).
During the fiscal year ended July 31, 1998, all the Series A preferred stock was
converted into 3,612 shares of the Company's common stock.
Year ended July 31, 1997. During the year ended July 31, 1997, the Company
received proceeds of $179 from a private placement of 55,000 units at $3.25 per
unit, each unit consisting of one share of common stock and one warrant. Each
warrant entitles the holder to purchase one share of common stock for $3.25
through June 18, 1999 and for $4.00 thereafter through June 18, 2000.
- 47 -
<PAGE>
Stock Options. During the five years ended July 31, 1998, the Company adopted
the following incentive stock option plans under which common stock may be
granted to employees, officers, directors and consultants of the Company. All
option prices are at market price at the date of grant.
Number of
Date of Shares Date of
Plan Adoption Authorized Grant Period Shareholder Approval
- ------------------ ----------- ------------- ---------------------
February 11, 1994 200 10 years February 10, 1995
October 26, 1994 750 10 years February 10, 1995
December 15, 1995 1,250 10 years May 3, 1996
December 27, 1996 1,000 5 years February 9, 1999
January 1, 1997 755 10 years February 9, 1999
September 3, 1997 965 10 years February 9, 1999
- 48 -
<PAGE>
The following summarizes activity for the five years ended July 31, 1999:
Number of Options Granted
------------------------- Option Price
Available Granted Per Share
------------ ----------- ------------------
Balance, July 31, 1994 322 378 $1.00 - $3.38
New plan 750 --- ---
Granted (955) 955 $1.94 - $2.50
Exercised --- (10) $1.00
--------- ----------
Balance, July 31, 1995 117 1,323 $1.00 - $3.38
New plan 1,250 --- ---
Granted (905) 905 $6.13
Exercised --- (687) $1.94 - $2.50
--------- ----------
Balance, July 31, 1996 462 1,541 $1.00 - $6.13
New plans 1,755 --- ---
Granted (775) 775 $3.50 - $3.75
Exercised --- (120) $1.00 - $2.50
--------- ----------
Balance, July 31, 1997 1,442 2,196 $1.00 - $6.13
New plan 965 --- ---
Granted (1,005) 1,005 $1.00 - $6.13
Exercised --- (91) $1.00 - $3.38
----------- -----------
Balance, July 31, 1998 1,402 3,110 $1.00 - $6.13
Granted (1,273) 1,273 $ .63 - $ .75
Exercised --- (10) $1.00
Cancelled 531 (531) $3.19 - $3.75
----------- -----------
Balance, July 31, 1999 660 3,842
=========== ===========
Prior to July 1999, options granted became exercisable immediately and were not
cancelled if unexercised within 90 days of termination. Effective July 1999,
options granted become exercisable over a period of time, typically four years,
and are forfeited by the employee if not exercised within 90 days of termination
of employment. In October 1999 the Company informed terminated employees of its
intent to follow the provisions of the options plans as to the expiration of
options of terminated employees, if it had the contractual right to do.
Depending on the former employee's length of employment, effective October 1,
1999, the Company has given terminated employees from four months to two years
to exercise their options. Options of certain former officers totaling 1,100
shares were cancelled in their entirety in November 1999.
The weighted average contractual life of options granted through July 31, 1999,
is 10 years. The weighted average exercise prices for the options outstanding
at July 31, 1999 are as follows:
Weighted
Average
Exercise Common Stock Exercise
Price Range Options Prices
- --------------- ------------ ------------
$0.63 - $1.00 1,273 $0.71
$1.94 - $3.75 1,590 3.26
$5.50 - $6.13 979 6.05
-----
3,842
=====
Warrants. As of July 31, 1999, the following warrants to purchase common stock
were outstanding:
Number of Exercise
Shares Per Share Expiration Date
--------------- ------------- ------------------
55 $3.35 June 19, 2000
20 $3.50 January 27, 2002
129 $3.75 June 16, 2003
2 $5.25 April 1, 2001
50 $4.94 June 15, 2000
67 $2.00 September 30, 2003
67 $3.00 September 30, 2003
67 $4.00 September 30, 2003
- 49 -
<PAGE>
Repurchase of Outstanding Options and Warrants. On March 30, 1998, the Company
agreed to issue 250 shares of unregistered common stock in exchange for the
retirement of outstanding warrants to purchase 1,011 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.
The warrants were held by Wycliff Fund, Inc. ("Wycliff") and The Bailey Mutual
Fund, Inc. ("Bailey"). Mr. Terry Neal, the founder of the Company and its former
Chairman and Chief Executive Officer represented Wycliff and Bailey in this
transaction. The transaction was completed and the shares of common stock were
issued on July 22, 1998.
In November 1998, the Company issued 275 shares of common stock pursuant to a
settlement agreement in order cancel options to purchase 600 shares of common
stock that had been issued in a prior year.
Stock-Based Compensation. The Company accounts for stock-based compensation in
accordance with. FASB Statement No. 123, "Accounting for Stock-Based
Compensation." Statement 123 allows for the Company to account for its stock
option plans in accordance with APB Opinion No. 25, "Accounting for Stock Issued
to Employees" using the intrinsic value method. The Company granted options to
purchase 1,293, 1,005 and 775 shares of common stock to employees and directors
during the years ended July 31, 1999, 1998 and 1997, respectively.
The following table summarizes the difference between the fair value and
intrinsic value methods and the pro forma net income and net income per share
amounts for the years ended July 31, 1999, 1998 and 1997 had the Company adopted
the fair value-based method of accounting for stock-based compensation.
Years ended July 31,
---------------------------------
1999 1998 1997
----------- --------- ---------
Difference between fair value
and intrinsic value methods
(additional compensation
expense) $ 840 $ 1,647 $ 576
Net (loss) (10,863) (6,424) (2,470)
Net (loss) per share (0.94) (0.82) (0.36)
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model, with the following weighted average
assumptions used for grants in fiscal 1999, 1998 and 1997: dividend yield of
zero, expected average annual volatility of 63%, average annual risk-free
interest rate of 6.0%, and expected lives of four years and nine years,
respectively.
Because the Statement 123 method of accounting has not been applied to options
granted prior to August 1, 1996, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The impact on
future years is not known or reasonably estimable.
Statement 123 also applies to transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. Accordingly, the
implementation of Statement 123 may have a material effect on the Company's
financial statements and the pro forma disclosures in the notes thereto in
future periods.
- 50 -
NOTE 12 - INCOME TAXES
Comparative analysis of the provisions for income taxes follows:
Fiscal years ended
July 31,
--------------------------------
1999 1998 1997
--------- ---------- ----------
Current:
Federal $ --- $ 509 $ ---
State 5 104 ---
------- -------- --------
5 613 ---
------- -------- --------
Deferred:
Federal --- 1,016 (329)
State --- 208 (67)
------- -------- --------
--- 1,224 (396)
------- -------- --------
Tax provision (credit) $ 5 $1,837 $ (396)
======= ======== ========
The computed income tax expense (benefit) differs from applying the U.S. federal
income tax rate due to losses before income taxes for the years ended July 31,
1998, 1997 and 1996 as a result of the following:
Fiscal years ended July 31,
-------------------------------
1999 1998 1997
--------- ---------- ---------
Taxes at U.S. federal
statutory rate $ (3,406) $ (660) $ (779)
Change in deferred tax
valuation allowance
allowance 3,594 2,053 526
Other, net (183) 444 (143)
---------- ------- -------
Tax provision (credit) $ 5 $ 1,837 $ (396)
========== ======= =======
- 51 -
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at July 31, 1998 and 1997 are presented
below:
July 31,
---------------------------
1999 1998
----------- ----------
Deferred tax assets:
Net trade activity included for
income tax purposes not recognized
for financial reporting purposes $6,018 $ 5,808
Investments and assets impaired
for books, not disposed of for tax
Amortization 1,345 222
606 ---
Net operating loss carryforward 2,415 1,077
Capital loss carryforward 224 224
Other 860 553
-------- ----------
11,468 7,884
Deferred tax liabilities:
Amortization --- (12)
-------- ----------
Net deferred tax assets 11,468 7,872
Valuation allowance (11,468) (7,872)
-------- ----------
$ --- $ ---
======== ==========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generating of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and projections for future taxable income over the periods in which the deferred
tax assets are deductible. At this time, management has concluded that it is not
likely that the Company will realize the benefits of these deductible
differences as there can be no assurance that the Company will generate the
necessary taxable income in any future periods.
The Company's 1996 and 1997 income tax returns are currently under examination
by the Internal Revenue Service ("IRS"). During preliminary meetings related to
the examination, the IRS has indicated that it may challenge various
transactions. If such challenges are successful, there could be a significant
change in the taxable income or loss reported in these years. The Company
believes that its returns and the tax positions taken were appropriate and has
filed a claim for refund of $1,900 related to these and later years. The Company
has not reflected any refunds receivable or any additional tax liabilities in
its balance sheet as a result of the IRS examination. The Company cannot predict
the outcome of this contingency.
- 52 -
<PAGE>
NOTE 13 - 401(k) SAVINGS PLAN AND BONUS PLAN
Employees of the Company may participate in a 401(k) savings plan, whereby the
employees may elect to make contributions pursuant to a salary reduction
agreement upon meeting age and length of service requirements. The Company makes
matching contributions of 50% of electing employees' deferrals, up to a ceiling
amount of 3% of gross annual wages. Matching contributions to the plan were $21,
$15, and $18 for the years ended December 31, 1999, 1998 and 1997, respectively.
The Company has a bonus plan for its officers. Bonuses applicable to the fiscal
years ended July 31, 1999, 1998 and 1997 were $0, $40 and $109, respectively.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessarily required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Financial Accounting Standards Board Statement No. 107 requires the disclosure
of fair value for financial instruments. The following disclosures are made in
accordance with the requirements of that Statement. The estimated fair value has
been determined by the Company using appropriate valuation methodologies and
available or quoted market information.
July 31, 1999 July 31, 1998
----------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- -------- ----------
Assets:
Cash $ 203 $ 203 $ 936 $ 936
Accounts receivable 1,143 1,143 1,325 1,325
Notes receivable,
current portion 9 9 105 105
Liabilities:
Bank line of credit 200 200 208 208
Accounts payable 675 675 525 525
Portion of receivables
due to brokers 1,167 1,167 1,119 1,119
Current portion of
long-term indebtedness 1,189 1,189 62 62
Long-term portion of
long-term Indebtedness 209 209 297 297
- 53 -
<PAGE>
Cash, accounts receivable, notes receivable, accounts payable, and portion of
receivables due to brokers. The carrying value of such items approximates their
fair value at July 31, 1999 and 1998.
Bank line of credit and current and long-term portions of long-term
indebtedness. Fair value of such debt is based on rates currently available to
the Company for debt of similar terms and remaining maturities. There are no
quoted market prices for the debt or similar debt.
NOTE 15 - RELATED PARTY TRANSACTIONS
The Company has dealt with Mr. Terry Neal, the founder of the Company and its
former Chairman and Chief Executive Officer, in various transactions in which
Mr. Neal acted as agent or otherwise represented the other parties to the
transactions. Mr. Neal owns (including shares beneficially owned) approximately
284 shares of the Company's common stock and held options to purchase 450 shares
of the Company's common stock at exercise prices ranging from $1.94 per share to
$6.13 per share. Those options were cancelled by the Company in November 1999 in
accordance with the provisions of the option plans. If Mr. Neal had exercised
all his options and there were no other stock issuances from exercises of other
contingently issuable shares pursuant to options and warrants held by others or
conversions of preferred stock, Mr. Neal would have had a common equity interest
in the Company of approximately 6%, 6% and 9% at July 31, 1999, 1998 and 1997,
respectively.
On March 30, 1998, the Company agreed to issue 250 shares of unregistered common
stock in exchange for the retirement of outstanding warrants to purchase 1,011
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. The warrants were held by Wycliff Fund, Inc.
("Wycliff") and The Bailey Mutual Fund, Inc. ("Bailey"). Mr. Terry Neal, the
founder of the Company and its former Chairman and Chief Executive Officer
represented Wycliff and Bailey in this transaction. The transaction was
completed and the shares of common stock were issued on July 22, 1998. As a
result of this transaction $1,000 was charged to expense in the accompanying
financial statements.
On July 31, 1997, the Company invested in natural resources located on four
mineral properties in the State of Washington. In exchange for these properties,
the Company issued 130 shares of common stock valued at $149 (as restated), paid
$20 in cash and transferred various barter industry commodities. The Company
initially recorded the natural resource interests at $169 (as restated).
Subsequent to fiscal 1998, management decided to abandon the intended use for
these properties and recorded a write down of $119 to reflect net realizable
value at that time for the mining interests of $50. The four properties contain
deposits including limestone and high-grade calcium carbonate, high-grade and
very-high-grade calcium carbonate, limestone and medium-grade calcium carbonate,
quartzite flagstone, and olivine and dunite. Mr. Terry Neal represented Pacific
Mineral Resources, Inc., the other party, in this transaction.
During the fiscal years ended July 31, 1994, 1995, 1996, and 1997, a 49%-owned
affiliate, Associated Reciprocal Traders, Inc. ("ART"), conducted trading
transactions outside the United States. These transactions did not generate any
cash for the Company. During those periods, Newcastle Services, Ltd.
("Newcastle"), the owner of a 5.4% beneficial common equity interest in the
Company owned the remaining 51% of ART. During that period, the Company dealt
with Mr. Terry Neal in connection with various transactions involving ART and
Newcastle. This included the transaction on July 30, 1997, in which the Company
completed the purchase of the remaining 51% interest of ART from Newcastle.
- 54 -
<PAGE>
In August 1997 the Company entered into a transaction in which it conveyed to
The Bailey Mutual Fund ("Bailey") 976 ITEX Trade Dollars and certain securities
of other companies in exchange for shares of Wade Cook Financial Corporation
("WCFC") with a market value of $2,000 which resulted in a gain of approximately
$3.2 million. The Company sold these shares during the same fiscal quarter in
which they were acquired. During the fiscal year ended July 31, 1994, the
Company entered into transactions in which it sold marketable securities to
Bailey for an aggregate amount of 140 ITEX Trade Dollars. During the fiscal year
ended July 31, 1995, the Company entered into transactions in which it sold
marketable securities to Bailey for an aggregate amount of 2,990 ITEX Trade
Dollars. During the fiscal year ended July 31, 1996, the Company entered into
transactions in which it sold marketable securities to Bailey for an aggregate
amount of 440 ITEX Trade Dollars. In these transactions, the Company dealt with
Mr. Neal as agent for Bailey.
During the fiscal year ended July 31, 1996, the Company completed a private
placement with Newcastle Services Ltd. ("Newcastle"), a foreign corporation,
which then owned a 51% interest in Associated Reciprocal Traders, Ltd., the
Company's then 49% owned foreign affiliate, pursuant to which Newcastle
purchased 200 shares of the Company's common stock for $750. Effective January
1, 1996, the Company entered into a Regulation S transaction with Wycliff Fund,
Inc. ("Wycliff"), a foreign corporation pursuant to which Wycliff could purchase
units consisting of common stock and warrants up to a total of $5,000. Through
July 31, 1996, the Company received $1,250 from Wycliff and issued: (a) 255
shares of common stock, (b) warrants to purchase 255 shares of common stock at
an exercise price of $4.89 per share, exercisable from two years from the date
of issuance until expiration five years from the date of issuance, and (c)
warrants to purchase 255 shares of common stock at an exercise price of $6.12
per share, exercisable from four years from the date of issuance until
expiration ten years from the date of issuance. The rights of Wycliff to
purchase additional common stock and warrants have expired. In these
transactions, the Company dealt with Mr. Neal as agent for Newcastle and
Wycliff. Therefore, these may be considered related party transactions.
In July 1999, when the Company needed working capital, an individual who was at
that time Chairman of the Board of Directors, and another individual who is
President, CEO and a Director of the Company, loaned a total of $480 to the
Company. The transactions were structured as convertible notes bearing interest
at 10% per annum. The Company paid those notes in full together with accrued
interest in January 2000. The conversion privilege was never exercised.
NOTE 16 - SUBSEQUENT EVENTS
Wade Cook Settlement. In August 1999, a settlement agreement was reached between
the Company and Wade Cook Financial Corporation ("WCFC") related to WCFC's
refusal to permit transfer, without restricted legend, of WCFC stock issued to a
Company subsidiary in exchange for a media due bill. Under the settlement
agreement, WCFC has agreed that the Company subsidiary is the owner of 1,400
shares of WCFC unrestricted stock which may be sold by ITEX at no more than 100
shares a month, at current market prices, subject to a right of first refusal by
WCFC. The settlement agreement also provides for the transfer of 300 ITEX trade
dollars to WCFC which has been accomplished. Through April 28, 2000, the Company
has sold approximately 451 shares of the Wade Cook, stock from which it realized
net proceeds of approximately $176.
- 55 -
<PAGE>
Purchase of Sacramento, California, Broker Office. In October 2000, the Company
acquired all of the outstanding stock of California Trade Exchange, Inc., a
California corporation which operated the business of the Company's largest
independent broker located in Sacramento, California. The purchase price was
paid by issuing 1,966,667 shares of the Company's restricted common stock. The
primary identifiable assets of the acquired business were accounts receivable,
furniture and equipment and the right to service ITEX clients as represented by
the Independent Retail Broker Agreement for that office. The Company is
currently working on its accounting for the acquisition and expects the value
assigned to the transaction to be less than 10% of the Company's total assets.
The principal owner of the Sacramento brokerage business became President, Chief
Executive Officer and a Director of ITEX Corporation after acquisition of the
Sacramento business and a minority owner of the Sacramento brokerage business
served as a vice president of the Company in charge of broker training until
March 7, 2000.
Purchase of Seattle, Washington, Broker Office. In February 2000, the Company
acquired all of the issued and outstanding stock of Seattle Trade Network, Inc.,
("STN") a Washington corporation which operated the business of the independent
broker located in Issaqua (Seattle area), Washington. The purchase price
consisted of $150 cash, 150 ITEX Trade Dollars and 200 shares of common stock of
the company. In addition, the Company issued 15 warrants to purchase restricted
common stock of the Company at an exercise price of $0.75 per share. One of the
former stockholders of "STN" continued as an ITEX employee to manage the Seattle
office.
Purchase of Houston, Texas, Broker Office. Also in February 2000, the Company
acquired the assets of the operator of the independent broker office located in
Houston, Texas. The purchase price was $100 cash, payable $50 at closing and the
remainder over time, 100 ITEX Trade Dollars and 100,000 shares of the restricted
common stock of the Company and the option to acquire up to an additional 25
shares of restricted common stock at an exercise price of $0.75 per share. The
owner of the operation has remained as an ITEX employee to manage the Houston
office. The primary identifiable assets of the acquired business were accounts
receivable, furniture and equipment and the right to service ITEX clients as
represented by the Independent Retail Broker Agreement for that office.
Note 17 - LEGAL PROCEEDINGS
o SEC Inquiry.
-----------
During June 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 subpoenas for the production
of certain documents pursuant to a formal order of private investigation. In
connection with that investigation, the SEC took the deposition of several
individuals. On September 27, 1999, the SEC filed a civil Complaint in the
United States District Court for the District of Oregon naming the Company and
former officers and/or directors of the Company, Terry L. Neal, Michael T.
Baer, Graham H. Norris, Cynthia Pfaltzgraff and Joseph M. Morris, as
defendants and alleging securities fraud and other securities law violations.
In January, 2000, the Company entered into a Consent and Undertaking with the
SEC wherein, without admitting or denying the allegations of the Complaint,
the Company consented to entry of a Final Judgment of Permanent Injunction
which, among other things, (I) permanently restrains and enjoins the Company
from violating Sections 5 and 17(a) of the Securities Act of 1933 and Sections
10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of
1934 and Rules 10b-5, 13a-1, 13a-13 and 12b-20 thereunder, and (ii) orders the
Company to restate its financial statements for the fiscal year ended July 31,
1997. The Final Judgment based upon the Consent was entered by the Court on
February 3, 2000. The Company is given 90 days from that date to come into
compliance.
- 56 -
<PAGE>
o Sondra Ames Litigation.
----------------------
In October 1998, the Company was served with summons and complaint for an
action in the Superior Court of Orange County, California styled Sondra Ames
v. ITEX Corporation, Graham H. Norris and John Does I through X. The complaint
alleged (i) fraud in the acquisition by ITEX of plaintiff's trade exchange in
1996; (ii) violation of Rule 10b-5 of the Securities and Exchange Act of 1934
in connection with plaintiff's purchase of ITEX stock on the open market in
1996; (iii) breach of written and oral contracts, (iv) sex discrimination and
harassment; (v) discrimination based on religion; (vi) retaliation and
tortuous discharge; (vii) defamation; and (viii) violation of various
provisions of the California labor code. Plaintiff asked for $5,000,000 actual
damages and for punitive damages along with other statutory relief. The case
was subsequently moved to Federal Court.
Plaintiff was a former employee and former officer of the Company whose
employment agreement expired in April 1998. The parties settled the matter
for an undisclosed amount, which is confidential by the terms of the
agreement, in January 2000 without any admission of liability and the case
has been dismissed in its entirety. The amount for which the matter was
settled was not significant to the Company's financial position.
o Martin Kagan Litigation.
-----------------------
During July 1998, the Company was served with a summons and complaint for a
case in Circuit Court of Multnomah County, Oregon, styled Martin Kagan v. ITEX
Corporation. The complaint alleges breach of a stock option agreement between
the Company and Kagan and seeks to set aside a settlement agreement between
the parties dated January 14, 1997. The Company has answered the complaint
denying its material allegations. Subsequently, the plaintiff filed a first
amended complaint adding Graham H. Norris, the Company's former President and
Chief Executive Officer, as an additional party and modifying somewhat the
allegations of the original complaint. The Company and Mr. Norris have
answered the amended complaint and denied all allegations. The Company has
vigorously defended the action. Trial before a court appointed referee was
held on November 4, 8 and 9, 1999. On April 12, 2000, the referee issued a
decision dismissing all of Kagan's claims except his claim for unlawful sale
and purchase of securities. The referee awarded Kagan $400 plus interest
from July 14, 1998, plus a reasonable attorneys fee. To be effective, the
referees decision must be confirmed by the Multnamah County Circuit Court. An
unfavorable result is probable; however, the Company will vigorously pursue
this matter an appeal. It is impossible to predict the outcome of an appeal.
o IBTEX, A.G. Litigation.
----------------------
During September 1998, the Company was served with a summons and complaint for
a case in the Circuit Court of Multnomah County, Oregon, styled IBTEX, A.G. v.
ITEX Corporation, Donovan Snyder and Graham Norris, Sr. The complaint alleges
breach of contract, breach of duty of good faith and fair dealing and
violations of the Oregon Franchise Act. The defendants have answered the
complaint denying its material allegations, demanding that the disputes
between IBTEX and the Company be arbitrated pursuant to an arbitration
agreement between the parties and requiring that the action be stayed until
such time as the arbitration is complete. No arbitration has been set and the
case has been dormant for several months.
o Desert Rose Foods Litigation.
----------------------------
On April 28, 2000, ITEX Corporation was serviced with summons and complaint
for an action in the Circuit Court of Fairfax County, Virginia style Desert
Rose Foods, Inc. v. ITEX Corporation and ITEX USA, Inc. The complaint alleges
Breach of Contract, Fraud and violations of federal law. Plaintiff asks for
$750,000.00 compensatory damages, punitive damages, other statutory damages,
interest and attorney fees.
- 57 -
<PAGE>
Plaintiff entered into a contract with the Company for delivery of goods
valued at approximately $120. The Company has not yet retained local
counsel in this case. The Company believes Plaintiff's complaint is frivolous
and the Company intends to vigorously defend itself. The Company has
successfully defended similar actions. The Company does not believe this
action is significant to the Company's financial position.
The Company believes that it has accrued adequate reserves to cover potential
losses on all litigation as of July 31, 1999.
- 58 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 203
<SECURITIES> 0
<RECEIVABLES> 1,152
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,574
<PP&E> 1,158
<DEPRECIATION> 635
<TOTAL-ASSETS> 6,629
<CURRENT-LIABILITIES> 6,246
<BONDS> 0
0
0
<COMMON> 118
<OTHER-SE> 56
<TOTAL-LIABILITY-AND-EQUITY> 6,629
<SALES> 0
<TOTAL-REVENUES> 19,173
<CGS> 12,953
<TOTAL-COSTS> 28,822
<OTHER-EXPENSES> (369)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,018)
<INCOME-TAX> 5
<INCOME-CONTINUING> (10,023)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,023)
<EPS-BASIC> (.87)
<EPS-DILUTED> (.87)
</TABLE>
