UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
(Amendment No. 1 to Form 10-K as amended November 28, 2000)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE Securities Exchange Act of 1934
For The Fiscal Year Ended
July 31, 2000
Commission File Number 0-18275
ITEX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Nevada 93-0922994
---------------------------------- -----------------------
State (or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
3400 Cottage Way, Sacramento, California 95825
(Address of principal executive offices including zip code)
(916) 679-1111
(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 $5,008,000 based
upon 13,911,000 shares held by such persons and the close price of $0.36 on
October 27, 2000. The number of shares outstanding of the Registrant's $0.01 par
value common stock at October 27, 2000 was 16,200,000.
(This Form 10-K includes 45 pages)
ITEX CORPORATION
FORM 10-K/A
For The Fiscal Year Ended July 31, 2000
INDEX
Page
----------
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
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 trade exchanges in the United States and has
licensees who operate trade exchanges in international markets in Canada,
Mexico, Kuwait and Turkey. The ITEX retail trade exchange headquartered in
Sacramento, California, has approximately 15,308 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 72 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 trade 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 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.
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 trade 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, and on-line transaction processing and CRM product 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. In
recent years, 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.
In the four week accounting cycle ended July 13, 2000, the seven company owned
offices servicing approximately 3,935 clients and the 20 largest independent
broker offices servicing approximately 6,081 clients produced, 26.3% and 46.3%
respectively of total net revenue of $643,000. 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.
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
July 13, 2000, payments to Independent brokers were 34.6% 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.
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 that
were assigned a value of $669,000. 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 member list). Of the total purchase price,
$390,000 was assigned to the right to service the member list, which is being
amortized over a four-year period.
Operating Income of the Sacramento brokerage for the two years and the nine
months ended September 30, 1999 prior to acquisition are as follows (unaudited):
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended Year Ended
September 30, December 31, December 31,
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Revenue
Membership fees ............. $ 164,375 $ 263,487 $ 78,152
Commissions ................. 533,434 610,943 325,146
--------- --------- ---------
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
========= ========= =========
</TABLE>
The Sacramento brokerage office was licensed to Collins M. Christensen on
September 15, 1995. Mr. Christensen, the principal owner of the Sacramento
brokerage business, is now President, Chief Executive Officer and a Director of
the Company. 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 warrants 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.
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.
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 October 15, 2000, the Company employed approximately 90 persons.
Additionally the approximately 72 independent ITEX brokers employ support staff
estimated to total approximately 300 additional persons. The independent brokers
and their employees are not employees of the Company.
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.
Operating losses and negative cash flow have been incurred in each of the last
five fiscal years ended July 31, 2000. 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.
o Ability to shift more revenue from trade dollars to cash.
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.
The Company was 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 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.
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.
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
In February 2000, the Company purchased an office building in Sacramento,
California and the Company moved its corporate headquarters to that location in
June 2000. The consideration paid consisted of: (a) $200,000 cash, a promissory
note for $300,000 with interest at 10%, with monthly interest payments only
until August 29, 2001 at which time the entire principle is due, (c) 333,333
shares of common stock of the Company that will be increased, if necessary, at a
future date to enable the seller to realize $1,500,000 from the sale of the
stock, and (d) 200,000 ITEX Trade Dollars. The Company has recorded the building
at the total of the cash paid, the promissory note, and the value of the stock
of $1,500,500 to be provided, altogether totaling $2,000,000. The arrangement
provides that if the seller is unable to sell the stock, the Company may satisfy
this obligation by paying cash. In the event that the stock cannot be sold and
the Company does not pay cash, the seller may foreclose on the building. The
Company has recorded the arrangement with respect to the stock as "common stock
subject to a put" in the balance sheet, which is not included in stockholders'
equity.
As of October 15, 2000, the Company had leased facilities as follows:
<TABLE>
<CAPTION>
Location Lease Expiration Square Feet Annual Rent
---------------------- ------------------- ------------ --------------------
<S> <C> <C> <C>
Portland, Oregon (1) December 31, 2001 10,900 $ 209,900
Seattle, Washington June 30, 2000 850 $ 26,400(4)
Costa Mesa, California December 31, 2000 1,500 $ 20,000
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) Includes 1,300 square feet of office space sublet to a third party at an
annual rent of $26,500.
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
was given 90 days from that date to file its amended Form 10K for fiscal 1997
and its Form 10K's for 1998 and 1999. The Company complied with this requirement
on May 3, 2000.
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 settlement
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 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 referee's decision must be confirmed by
the Multnamah County Circuit Court Judgment has been entered and a bond filed
for $550,000. The company has bonded the judgment that has been entered and
guaranteed the bond with a certificate of deposit for $550,000. The company has
appealed and has been advised by its counsel that it has a reasonable chance for
success in overturning the decision.
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. The proceeding has been
abated and no arbitration has been set and the case has been dormant for many
months.
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 ight 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.
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 resulted in the dismissal of the
entire action. 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 retained local
counsel in this case. and is vigorously defending the matter. The Company
believes Plaintiff's complaint is frivolous. The Company has successfully
defended similar actions. The Company does not believe this action is
significant to the Company's financial position. The matter is set for trial in
April 2001.
o Antelope Company v. Zoring.
The Company was served with a summons and complaint on June 1, 2000, in the
matter of Antelope Company v. Zoring International Incorporated and ITEX
Corporation, filed in the District Court of the City and County of Denver,
olorado. The complaint alleges that in December 1997, the plaintiff entered into
a lease with Zoring of certain office space in Denver, Colorado, and that ITEX
guaranteed the lease. Zoring is alleged to have defaulted on the lease and the
plaintiff is seeking to enforce the lease guaranty. The Company agrees that the
lease was breached, but contends that the plaintiff failed to mitigate its
damages. The Company intends to defend the action and has set up a reserve for
loss in the event that the plaintiff is successful. The matter is presently
pending the assignment of a trial date and the completion of discovery.
o Metro Sales v ITEX.
On May 28, 2000, the Company was served with a summons and complaint out of the
Circuit Court of Multnomah County, Oregon, in the matter of Metro Sales v. ITEX.
The complaint alleges breach of contract and violation of an Oregon Blue Sky
statute. The Company denies all the allegations and intends to vigorously defend
this action.
o Skiers Edge Litigation.
On June 19, 2000, the Company was served with a summons and complaint out of the
District Court for Summit County, Colorado, in the matter of Skiers Edge
Condominium Association v. George Owens. The complaint alleges that the Company
owes plaintiff association fees relating to interval timeshares that the Company
is alleged to own. The Company is defending this matter and does not foresee any
material impact from this matter.
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 2000 and 1999:
Sale Prices
------------------------
High Low
--------- ------------
Fiscal 2000
-------------------------------
Fiscal quarters ended:
July 31, 2000 $0.60 $0.42
May 7, 2000 1,78 0.35
February 12, 2000 0.72 0.22
November 20, 1999 0.40 0.22
Fiscal 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
As of July 31, 2000 there were approximately 4,000 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,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ---------- ---------- ---------- -----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenue ............... $13,642 $ 19,173 $ 11,389 $ 11,602 $ 13,526
Loss from operations ........ (973) (9,649) (6,357) (2,212) (757)
Net income (loss) ............. 1,455 (10,023) (4,777) (1,894) (2,402)
Net income (loss)
loss per common share
Basic .................... 0.11 (0.87) (0.61) (0.27) (0.37)
Diluted .................... 0.09 (0.87) (0.61) (0.27) (0.37)
Total assets ................ 8,533 6,629 12,956 8,144 7,466
Working capital (deficit) ... 1,610 (4,672) (687) 2,050 1,363
Long-term debt and capital
lease obligations, including
current portion ............ 571 1,398 359 164 330
Stockholders' equity
(deficiency) ............... 3,630 174 9,211 6,922 6,055
</TABLE>
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.
Although the Company has incurred operating losses from its trade exchange
operations for the fiscal years ended July 31, 2000, 1999 and 1998, the
operating loss for fiscal 2000 was greatly reduced from those of the prior
years. The prior year losses were 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:
<TABLE>
<CAPTION>
Fiscal Years Ended July 31,
---------------------------
2000 1999 1998
---- ---- ----
Amount Pct* Amount Pct* Amount Pct*
------ ---- ------- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Trade exchange:
Association fees $ 4,074 30% $ 4,998 26% $ 2,825 25%
Transaction fees 9,568 70% 13,875 72% 6,690 59%
License fees -- -- 300 2% 150 1%
------- ----- ------- ------ ------- ------
13,642 100% 19,173 100% 9,665 85%
------- ----- ------- ------ ------- ------
13,642 100% 19,173 100% 11,389 100%
------- ----- ------- ------ ------- ------
Costs and expenses:
Trade exchange 7,075 52% 12,953 68% 6,519 57%
Corporate trading -- -- -- -- 1,589 14%
Selling, general and
administrative 7,211 53% 7,277 38% 5,587 49%
Discontinued operations 49 -- 2,318 12% 1,693 15%
Regulatory and litigation 569 4% 1,770 9% 1,584 14%
Writedowns (BXI and Samana) -- -- 2,508 13% -- --
Change in estimate for loss
on disposal of BXI (785) (6%) -- -- -- --
Depreciation and amortization 496 3% 1,996 10% 774 7%
------- ----- ------- ------ ------- ------
14,615 107% 28,822 150% 17,746 156%
------- ----- ------- ------ ------- ------
Loss from operations (973) (7%) (9,649) (50%) (6,357) (56%)
Other income (expense) 543 4% (369) (2%) 3,417 30%
------- ----- ------- ------ ------- ------
Loss before taxes (430) (3%) (10,018) (52%) (2,940) (26%)
Tax provision (credit) (1,885) (14%) 5 -- 1,837 (16%)
------- ----- ------- ------ ------- ------
Net income (loss) $1,455 11% ($10,023) (52%) $ (4,777) (42%)
======= ===== ======= ====== ======= ======
* Percent of Total Revenue
</TABLE>
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:
<TABLE>
<CAPTION>
Fiscal Years Ended July 31,
2000 1999
---- ----
Amount Pct* Amount Pct*
------ ---- ------ ----
<S> <C> <C> <C> <C>
Revenue:
Trade exchange:
Association fees $ 3,384 30% $ 2,680 25%
Transaction fees 6,917 70% 7,911 72%
License fees -- -- 300 3%
------- ----- ------- -----
10,301 100% 10,891 100%
Corporate trading -- -- -- --
------- ----- ------- -----
10,301 100% 10,891 100%
------- ----- ------- -----
Costs and expenses:
Trade exchange 4,454 43% 6,729 62%
Selling, general and
administrative 5,365 52% 5,387 49%
Discontinued operations 49 -- 2,318 21%
Regulatory and litigation 609 6% 1,770 17%
Writedowns (BXI and Samana) -- -- 2,508 23%
Depreciation and amortization 496 4% 564 5%
------- ----- ------- -----
10,973 106% 19,276 177%
------- ----- ------- -----
Loss from operations (627) (6%) (8,385) (77%)
Other income (expense) 543 6% (437) (4%)
------- ----- ------- -----
Loss before taxes (1,215) (12%) (8,822) (81%)
Tax provision (credit) (1,885) (18%) 5 --
------- ----- ------- -----
Net income (loss) $ 670 6% ($8,827) (81%)
======= ===== ======= =====
* Percent of Total Revenue
</TABLE>
Trade exchange revenue and costs
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.
Total trade exchange revenue decreased $5,531, or 29%, from $19,173 in 1999 to
$13,642 in 2000. Total trade exchange revenue included revenue from the BXI
trade exchange of $8,588 in 1999 from the full-year operation of BXI and $3,341
in 2000 from operation of BXI from August 1, 1999 until the disposal of the
business and net assets of BXI Corporation on January 18, 2000.
Following are the components of association fees and transaction fees applicable
to the ITEX trade exchange, which are included in the above consolidated totals:
2000 1999 1998
-------- ------- ------
Association fees $ 3,384 $2,680 $2,632
Transaction fees 6,917 7,911 6,314
-------- ------ ------
Total 10,301 10,591 8,946
======== ====== ======
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:
2000 1999 1998
-------- ------- ------
Average number of members 13,927 13,746 13,495
Average annual revenue per member $740 $770 $663
Total costs of trade exchange revenue as a percentage of total trade exchange
revenue were 52%, 68%, and 67% in fiscal 2000, 1999 and 1998, respectively. The
increase from 1998 to 1999 resulted primarily from the inclusion of the full
year of operation in 1999 of the BXI trade exchange (which has a higher broker
commission structure that the ITEX trade exchange. The decrease from 1999 to
2000 resulted from operation of the BXI trade exchange for only part of fiscal
2000 up to January 18, 2000 and also from lower independent broker commissions
in the ITEX trade exchange resulting from the Company's acquisition and
operation of the formerly independent brokerages in Sacramento, Seattle, and
Houston.
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.
Management has not emphasized the corporate and industrial trading market in
recent years, but will be in the future. As a result, no revenue or costs were
incurred in fiscal 1999 and 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased $66 from 1999 to 2000. A
decrease of $1,024 resulted from the operation of the BXI trade exchange for a
full year in 1999 as compared to only part of fiscal 2000 up to January 18,
2000. In 2000, the consolidated total included $768 and in 1999, the
consolidated total includes $1,792 in selling general and administrative costs
related to operation of the BXI trade exchange. This decrease was primarily
offset by costs of Company owned and operated brokerages that were acquired
during fiscal 2000. This increase is due to an increase in the number of
employees as well as a new officer bonus plan implemented in fiscal 2000. During
fiscal 2000, there was $339 in expenses related to this plan.
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.
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.
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
51% 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.
Change in estimate for loss on disposal of BXI.
Upon completion of the sale of the net assets and business of BXI Corporation,
the Company determined that the actual loss on disposal was $1,515 and,
accordingly, in 2000, the Company recorded a change in estimate to eliminate the
remaining balance in the reserve of $485, which is shown separately as a
reduction of costs and expenses in the statement of operations. The Company also
reversed an additional liability of $100 that was no longer necessary after the
disposal of BXI, increasing the gain on change in estimate to $585.
Depreciation and amortization.
Depreciation and amortization decreased to $496 in 2000 from $1,996 in 1999
primarily as a result of depreciation and amortization in 1999 related to BXI.
The net assets and business of BXI Corporation were disposed of on January 18,
2000. Depreciation and amortization for 2000 includes $192 related to the newly
purchased assets of the Sacramento headquarters office building and the
independent brokerages in Sacramento, Houston, and Seattle. Total depreciation
and amortization was also decreased in 2000 by certain customer lists becoming
fully amortized.
Other income (expense).
Interest (expense) was ($271) in 2000 as compared to ($302) in 1999. In fiscal
2000, the Company accrued interest income of $331 related to income tax refund
receivable. In 2000, the Company realized gains on sales of portions of its Wade
Cook stock, realizing $235, all of which has been recognized as gain because the
stock had no carrying value in the financial statements. Also in 2000, the
Company realized a gain of $100 from the sale of the rights to publish its
barter industry magazine and another gain of $100 from an extension fee with
regard to the sale of the assets and business of BXI Corporation. Additionally,
in 2000 the Company received a net fee of $150 for the transfer of certain
marketing information to a third party.
In 1999, other expense consists primarily of net interest expense of $302.
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.
Liquidity and Capital Resources
During fiscal 2000, the Company reported net cash (used in) operations of
($1,187) in the consolidated statements of cash flows, as compared to cash used
in operations of ($1,535) and (3,302) in fiscal years 1999 and 1998,
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, assets and 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, 2000, 1999 and 1998, 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.
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, 2000, the Company had a total of 698 trade dollars that were
available for future expenditures. In fiscal 2000, the Company earned a total of
12,773 trade dollars and expended a total of 13,284 trade dollars.
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 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.
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, 2000 and 1999
and for the three fiscal years ended July 31, 2000, and the report of Ehrhardt,
Keefe, Steiner & Hottman, P.C., independent public accountants are included as
listed in Item 14 of this Form 10-K.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Following is certain information about the directors and the executive officers
of the Company, including their ages and present positions with the Company as
of October 15, 2000:
Name Age Position
----------------------- ------- --------------------------------------------
Collins M. Christensen 42 President, Chief Executive Officer, Director
Dr. Evan B. Ames 60 Director
John Castoro 42 Vice President, Corporate Offices
Robert I. Harris 53 Secretary and General Counsel
Lewis A. Humer, Jr. 40 Chief Operating Officer and Director
Robert Nelson 52 Director
Dr. Charles T. Padbury 61 Director
Mary Scherr 62 Director
Collins M. Christensen, 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
October 1999.
Evan B. Ames, Director since 1995.
Dr. Ames is a Registered Investment Adviser registered with the Securities
& Exchange Commission.
John Castoro, Vice President, Corporate Offices since 2000.
Prior to joining the Company as Vice President of Corporate Offices, Mr.
Castoro worked as a Vice President of one of the leading independent exchanges
in the United States, located in New York. There, he managed both for sales and
trading. Prior to that Mr. Castoro was a trade broker for the Company for three
years.
Robert I. Harris, Esq., Secretary and General Counsel since May 1, 2000.
Mr. Harris joined the Company on May 1, 2000 as General Counsel. In July
2000, he became secretary of the corporation. Prior to joining the Company, Mr.
Harris was in private practice in Sacramento for 20 years.
Lewis A. Humer, Jr., Chief Operating Officer since 2000.
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.
Robert Nelson, CPA, 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.
Charles T. Padbury, 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.
Mary Scherr, CTB, Director since 1986.
Ms. Scherr served as Vice President of Broker Development and Director from
1993 to midyear 2000, and which time she ceased being an employee and officer,
while remaining a Director. She had been appointed Senior Vice President in 1999
and so served until midyear 2000.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation paid or accrued during the
fiscal years ended July 31, 2000, 1999 and 1998 to the Company's President and
Chief Executive Officer and the only other executive officers whose annual
compensation exceeded $100,000 for fiscal year 2000.
<TABLE>
<CAPTION>
Annual Compensation Long-term Compensation
------------------------------------------- --------------------------------
Number of
Shares
Name and Principal Year Ended Restricted Underlying
Position July 31, Salary Bonus Other Stock Awards Option Grants
------------------------ ------------- ---------- ---------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Collins M. Christensen 2000 $190,986 $169,427 $ $140,000 200,000
President and Chief 1999
Executive Officer 1998
Lewis A. Humer, Jr. 2000 $ 84,441 $ 97,000 $ 35,000 300,000
Chief Operating 1999
Officer 1998
</TABLE>
COMPENSATION OF DIRECTORS
Members of the Board of Directors are compensated at the rate 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 the closing bid price of the stock on the trading day
before the grant is made. 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.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning grants of stock options to
each of the executive officers named in the Summary Compensation Table above
during the fiscal year ended July 31, 2000. The percent of the total options set
forth below is based on an aggregate of 790,000 options granted to employees
during the fiscal year ended July 31, 2000. All options were granted at the then
fair market value as determined by the Company's Board of Directors on the date
of grant.
Potential realizable value represents hypothetical gains that could be achieved
for the options if exercised at the end of the option term assuming that the
fair market value of the common stock on the date of grant appreciates at 5% and
10% over the option term (ten years) and that the option is exercised and sold
on the last day of its option term for the appreciated stock price. The assumed
5% and 10% rates of stock price appreciation are provided in accordance with
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the Company's future common stock price. The
calculation includes the difference, if any, between the fair market value on
the date of grant and the exercise price for such options. Actual gains, if any,
on stock option exercises will depend on the future performance of the Company's
common stock.
To date, the Company has issued no SARs.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual
Percentage of Rates of Stock Price
Number of Total Appreciation For Option
Shares Granted to Exercise Term
Underlying Employees in Price Expiration --------------------------
Name Option Grants Fiscal Year Per Share Date 5% 10%
------------------------ --------------- -------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Collins M. Christensen 200,000 25% $0.75 5/1/05 -(a) -(a)
Lewis A. Humer, Jr. 300,000 38% $0.75-$1.50 5/1/05-5/20/05 -(a) -(a)
</TABLE>
(a) All options had exercise prices substantially greater than market value at
date of grant. After applying 5% and 10% growth, the cost of exercise would
still be in excess of value at the end of the option terms.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
No options were exercised by officers and directors during the fiscal year ended
July 31, 2000 and there were no "in-the-money" options held by any officers or
directors as of July 31, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of October 15, 2000, the shareholdings of directors and executive officers
and the amount of the Company's voting securities owned by all officers and
directors as a group were as follows. The percentages are based on the aggregate
of 16,170,065 shares of Common Stock outstanding as of October 15, 2000. The
Company does not know of any arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change of control of the Company.
<TABLE>
<CAPTION>
Common Stock
-------------------------------------
Number of Shares Percent of
Name of Beneficial Owner Class
------------------------------------------------ ----------------- --------------
<S> <C> <C>
Collins M. Christensen 2,383,334 (a) 14.4%
Dr. Evan B. Ames 100,000 (b) 0.6%
Robert I. Harris, Esq. 50,000 (c) 0.3%
Lewis A. Humer, Jr. 450,000 (d) 2.7%
Robert Nelson 100,047 (e) 0.6%
Dr. Charles T. Padbury 129,555 (f) 0.8%
Mary Scherr 253,779 (g) 1.6%
All directors and executive officers as a group 3,467,315 (h) 19.6%(i)
(8 persons)
</TABLE>
(a) Based on 1,973,334 common shares owned and options to purchase 410,000
common shares.
(b) Based on 10,000 common shares owned and options to purchase 90,000 common
shares.
(c) Based on options to purchase 50,000 common shares.
(d) Based on 100,000 common shares owned and options to purchase 350,000 common
shares.
(e) Based on 10,047 common shares owned and options to purchase 90,000 common
shares.
(f) Based on 26,555 common shares owned and options to purchase 103,000 common
shares.
(g) Based on 20,979 common shares owned and options to purchase 233,400 common
shares.
(h) Based on 2,140,915 shares owned and options to purchase 1,326,400 shares.
(i) Based on 16,170,065 shares outstanding and options to purchase 1,326,400
shares held by all directors and officers as a group.
The only known beneficial owner of more than 5% of any class of the Company's
securities is Collins M. Christensen, Director, President and Chief Executive
Officer, with respect to the Company's common stock, and for whom information is
provided above.
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.
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. The transaction was
completed and the shares of common stock were issued on July 22, 1998. As a
result of this transaction $1,000,000 was charged to expense in the accompanying
financial statements.
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 a market value of $2,000,000 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 140,000 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. y 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 $480,000 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.
<PAGE>
PART V
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
Consolidated balance sheets at July 31, 2000 and 1999
Consolidated statements of operations for the fiscal years ended
July 31, 2000, 1999 and 1998
Consolidated statements of stockholders' equity for the fiscal years
ended July 31, 2000, 1999 and 1998
Consolidated statements of cash flows for the fiscal years ended July
31, 2000, 1999 and 1998
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.
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: October 30, 2000
ITEX CORPORATION
October 30, 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 October 30, 2000
--------------------------
Collins M. Christensen, Director, President
and Chief Executive Officer (principal
executive officer and director)
/s/ Dr. Evan B. Ames October 30, 2000
--------------------
Dr. Evan B. Ames, Director
/s/ Lewis A. Humer, Jr. October 30, 2000
-----------------------
Lewis A. Humer, Jr., Chief Operating
Officer and Director
/s/ Robert Nelson October 30, 2000
-----------------
Robert Nelson, Director
/s/ Dr. Charles Padbury October 30, 2000
-----------------------
Dr. Charles Padbury, Director
/s/ Mary Scherr October 30, 2000
---------------
Mary Scherr, Director
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, 2000 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
ended July 31, 2000. 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, 2000 and 1999, and the results of their operations and their cash
flows for each of the three year period ended July 31, 2000 in conformity with
generally accepted accounting principles.
/s/Ehrhardt Keefe Steiner & Hottman PC
Ehrhardt Keefe Steiner & Hottman PC
October 10, 2000
Denver, Colorado
<PAGE>
ITEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
July 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Assets
Current assets:
Cash and equivalents ............................................... $ 960 $ 203
Restricted cash .................................................... 556 --
Accounts receivable ................................................ 659 1,143
Income tax refund and related interest receivable .................. 2,216 --
Prepaids and other current assets .................................. 117 228
-------- --------
Total current assets ........................................... 4,508 1,574
Property and equipment, net of accumulated depreciation of
$772 and $635 ......................................................... 2,698 523
Goodwill and purchased member lists, net ................................ 792 3,866
Note receivable from sale of Investment in Samana Resort ................ 350 518
Available for sale securities ........................................... 113 --
Other assets ............................................................ 72 148
-------- --------
Total assets ............................................. $ 8,533 $ 6,629
======== ========
Liabilities and stockholders' equity and Current liabilities:
Bank lines of credit ............................................... -- $ 200
Long-term debt and capital lease obligations, current portion ...... 66 1,189
Accounts payable ................................................... 723 675
Accounts payable to brokers ........................................ 813 1,167
Accrued incentive compensation ....................................... 339 --
Deferred revenue ................................................... -- 586
Notes payable to related parties .................................. -- 480
Other current liabilities .......................................... 957 1,949
-------- --------
Total current liabilities ...................................... 2,898 6,246
-------- --------
Long-term debt and capital lease obligations ............................ 505 209
-------- --------
Total liabilities ....................................................... 3,403 6,455
-------- --------
Common stock subject to a put (333,333 shares outstanding) .............. 1,500 --
-------- --------
Commitments and contingencies ........................................... -- --
-------- --------
Stockholders' equity:
Common stock, $.01 par value; 50,000 shares authorized;
15,838 and 11,762 shares issued and outstanding ................... 159 118
Additional paid-in capital ......................................... 28,977 27,130
Unrealized gain on marketable securities ........................... 113
Treasury stock, at cost (2 shares in 2000 and 1999) ................ (10) (10)
Accumulated deficit ................................................ (25,609) (27,064)
-------- --------
Total stockholders' equity ..................................... 3,630 174
-------- --------
Total liabilities and stockholders' equity .............. $ 8,533 $ 6,629
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the fiscal years ended July 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Trade exchange revenue ....................... $ 13,642 $ 19,173 $ 9,665
Corporate trading revenue .................... -- -- 1,724
-------- -------- --------
13,642 19,173 11,389
-------- -------- --------
Costs and expenses:
Costs of trade exchange revenue .............. 7,075 12,953 6,519
Costs of corporate trading ................... -- -- 1,589
Selling, general and administrative .......... 7,211 7,277 5,587
Costs and expenses of discontinued
activities .................................. 49 2,318 1,693
Costs and expenses of regulatory and
litigation matters .......................... 569 1,770 1,584
Writedowns of BXI and Samana ................ -- 2,508
Change in estimate for loss on BXI disposal . (785) -- --
Depreciation and amortization ............... 496 1,996 774
-------- -------- --------
14,615 28,822 17,746
-------- -------- --------
Loss from operations ............................. (973) (9,649) (6,357)
-------- -------- --------
Other income (expense):
Interest income on tax refunds ................. 331 -- --
Other interest income (expense), net ........... (271) (302) 86
Gain on sale of securities ..................... 235 -- 3,315
Miscellaneous, net ............................. 248 (67) 16
-------- -------- --------
543 (369) 3,417
-------- -------- --------
Income (loss) before income taxes ................ (430) (10,018) (2,940)
Income taxes (benefit) expense ................... (1,885) 5 1,837
-------- -------- --------
Net income (loss) ................................ $ 1,455 $(10,023) $ (4,777)
======== ======== ========
Other comprehensive income - unrealized gain on
securities, net of $0 iincome tax 113 - -
-------- -------- --------
Comprehensive income (loss) 1,568 10,023 (4,777)
======== ======== ========
Average common and equivalent shares:
Basic ........................................... 13,840 11,585 7,912
======== ======== ========
Diluted ......................................... 15,775
========
Net income (loss) per common share:
Basic $ 0.11 $ (0.87) $ (0.61)
======== ======= =========
Diluted $ 0.09 $ (0.87) $ (0.61)
======== ======= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the fiscal years ended July
31, 1999, 1998 and 1997 (in thousands)
<TABLE>
<CAPTION>
Unrealized
Common Stock Preferred Stock Additional Gain on
-------------------- -------------------- paid-in Marketable Accumulated Treasury
Shares Amount Shares Amount Capital Securities Deficit Stock Total
-------- -------- -------- -------- ---------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 sold for cash .. 10 -- -- -- 10 -- -- -- (10)
Stock, options and warrants
issued for goods and
services .................. 19 1 -- -- 235 -- -- -- 236
Stock for 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
Acquisition of Houston,
Seattle, and Sacramento
brokerages and
Sacramento building ...... 2,309 24 -- -- 917 -- -- -- 941
Common stock issued to pay
convertible promissory
notes .................... 1,134 11 -- -- 702 -- -- -- 713
Stock, options and warrants
issued for goods and
services ................. 633 6 -- -- 228 -- -- -- 234
Increase in unrealized
gain ...................... -- -- -- -- -- 113 113
Net income .................. -- -- -- -- -- -- 1,455 -- 1,455
-------- -------- -------- -------- ---------- --------- -------- ------- --------
Balance, July 31, 2000 ...... 15,838 $ 159 $ -- $ -- $ 28,977 $ 113 $(25,609) $ (10) $ 3,630
======== ======== ======== ======== ========== ========= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ITEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the fiscal years ended July 31,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) ................................... $ 1,455 $ (10,023) $ (4,777)
Items to reconcile to net cash (used in) operations:
Depreciation and amortization ...................... 1,265 1,996
774
Writeoffs and writedowns ........................... -- 3,481 --
Gain on sales of securities ........................ (235) -- (3,315)
Stock and options given for goods and services ..... 234 976 1,746
Costs charged to reserve for loss on BXI disposal .. (769) -- --
Change in estimate for loss on BXI disposal ........ (785) -- --
Changes in operating assets and liabilities:
Accounts and notes receivable ..................... (144) 215 (159)
Income tax refund receivable ..................... (2,216) 254 (254)
Deferred taxes ................................... -- -- 1,224
Prepaids and other assets ......................... (55) 367 (131)
Accounts payable and other liabilities ............ (115) 1,212 376
Accounts payable to brokers ....................... 178 48 567
Deferred revenue .................................. -- (61) 647
-------- -------- --------
Net cash (used in) operating activities ......... (1,187) (1,535) (3,302)
-------- -------- --------
Cash flows from investing activities:
Proceeds from disposal of BXI ..................... 4,000 -- --
Payments received on disposal of Samana ........... 168 -- --
Sacramento building and purchased brokerages ...... (400)
Proceeds from sales of securities ................. 235 -- (3,315)
BXI Corporation acquisition ....................... -- -- (3,585)
Investments in Samana and other entities .......... -- -- (1,726)
Equipment, information systems and other .......... (125) (420) (302)
-------- -------- --------
Net cash provided by (used in) investing
activities ...................................... 3,878 (420) (2,298)
-------- -------- --------
Cash flows from financing activities:
Proceeds from sales of stock ........................ -- 10 5,320
(Payments) proceeds of related party notes payable .. (480) 480 --
Proceeds from third party indebtedness .............. -- 1,140 403
Repayments of third party indebtedness .............. (898) (408) --
-------- -------- --------
Net cash provided by (used in) financing activities (1,378) 1,222 5,723
-------- -------- --------
Net increase (decrease) in cash and equivalents ....... 1,313 (733) 123
Cash and equivalents at beginning of period ........... 203 936 813
-------- -------- --------
Cash and cash equivalents at end of period ............ $ 1,516 $ 203 $ 936
======== ======== ========
Supplemental cash flow information
Cash paid for interest $ 289 $ 82 $ 14
Cash paid for income taxes --- 5 867
Supplemental noncash investing and financing
Stock issued for purchases of Sacramento, Houston
and Seattle brokerages and Sacramento office
building, including common stock subject to a put
of $1,500 $ 2,441 $ --- $ ---
Debt and preferred stock converted to common stock 713 --- 4,730
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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.
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, 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.
Trade Dollar Activity. The following table summarizes the trade dollar activity
of the Company for each of the fiscal years ended July 31, 2000, 1999 and 1998
(unaudited):
Fiscal years ended July 31,
-----------------------------
2000 1999 1998
------- ------- -------
Trade dollars earned ............ 12,773 12,745 13,145
Trade dollars expended .......... 13,284 15,566 9,901
------- ------- -------
Net (decrease) increase ......... (511) (2,821) 3,244
======= ======= =======
Trade dollars at fiscal year end 698 1,209 4,030
======= ======= =======
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 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, 2000, 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, 2000, the Company's uninsured cash balances totaled $647.
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 for furniture and equipment and 20 years for buildings. 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.
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 was 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, 2000, 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.
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. The Company prepares its financial statements in
accordance with 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
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.
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, 2000.
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,
collectibility of notes receivable 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, 2000 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 make certain shares of common stock and options available to
BXI Brokers who will 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,
1997, after giving effect to amortization of the cost of the customer list and
acquisition cost in excess of the fair value of net assets acquired,
depreciation of acquired property and equipment and the assumed issuance on
August 1, 1997 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.
Year ended
July 31,
1998
--------
Revenue ................. $ 19,169
Net loss ................ (6,173)
Net loss per common share (0.90)
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, 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
included 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 and accounts receivable with net book value of
approximately $730. These amounts were further reduced by the reserve for
estimated loss on the disposal of BXI of $2,000 at July 31, 1999.
During the period from August 1, 2000 to January 18, 2000, $769 was charged to
the reserve of $2,000 that was established during fiscal 1999. On January 18,
2000, the Company sold the assets and business of BXI Corporation for $4,000
cash. Upon completion of the sale, the Company determined that the actual loss
on disposal was $1,515 and, accordingly, the Company recorded a change in
estimate to eliminate the remaining balance in the reserve of $585, which is
shown separately as a reduction of costs and expenses in the statement of
operations.
NOTE 3 - SALES OF OTHER ASSETS
Samana. During fiscal 2000, the Company sold its investment in the Samana resort
property to the parties from whom the Company had originally purchased the
property for $550. The property was previously written down in fiscal 1999 to
$518, based on the selling price less related costs of $32. The purchasers have
paid a total of $200. The remaining balance due of $350 has not been paid in
accordance with the terms of the sale and the Company is contemplating legal
action to enforce the terms of the sale agreement. The Company believes that it
will recover the unpaid balance of $350 either from the current debtors or from
resale of the property to another party.
Magazine Publishing Rights. During fiscal 2000, the Company sold the rights to
publish its magazine related to the commercial barter industry for $100, which
was received in cash. There were no assets with book value in the balance sheet
with respect to the magazine publishing rights. The gain of $100 has been
included in other income.
Marketing Information. During fiscal 2000, the Company conveyed certain
marketing information to a third party for a net fee of $150, which has been
included in other income as these were no assets with book value included in the
balance sheet.
NOTE 4 - PURCHASE OF SACRAMENTO OFFICE BUILDING
In February 2000, the Company purchased an office building in Sacramento,
California and moved its corporate headquarters to that location in June 2000.
The consideration paid consisted of: (a) $200 cash, (b) a promissory note for
$300 with interest at 10%, with only monthly interest only payments until August
29, 2001 at which time the entire principle is due, (c) 333 shares of common
stock of the Company that will be increased, if necessary, at a future date to
enable the seller to realize $1,500 from the sale of the stock, and (d) 200 ITEX
Trade Dollars. The Company has recorded the building at the total of the cash
paid, the promissory note, and the value of the stock of $1,500 to be provided,
altogether totaling $2,000. The arrangement provides that if the seller is
unable to sell the stock, the Company may satisfy this obligation by paying
cash. In the event that the stock cannot be sold and the Company does not pay
cash, the seller may foreclose on the building. The Company has recorded the
arrangement with respect to the stock as "common stock subject to a put" in the
balance sheet, which is classified outside of stockholders' equity.
NOTE 5- PROPERTY AND EQUIPMENT
Depreciation expense for property and equipment was $137, $94 and $122, for the
fiscal years ending July 31, 2000, 1999 and 1998, respectively.
At July 31, 2000 and 1999, assets held under capitalized leases include
computers and other equipment totaling $471 and $423, respectively. Depreciation
expense for capitalized equipment leases was $69, $68 and $60 for the fiscal
years ended July 31, 2000, 1999 and 1998, respectively.
NOTE 6 - GOODWILL AND PURCHASED MEMBER LISTS
At July 31, 2000, the cost of acquired member lists was $2,499, less accumulated
amortization of $1,707, for a net carrying value of $792. These amounts
primarily include the new member lists acquired in the purchases of the
Sacramento, Houston and Seattle brokerages.
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.
NOTE 7 - OTHER ASSETS
Other assets consists of the following:
July 31,
-----------------
2000 1999
------- -------
Natural resource interests of
four mineral properties located
in the State of Washington .... $ 50 $ 50
Other .......................... 22 98
---- ----
$ 72 $148
==== ====
During the fiscal year ended July 31, 1999, the investment in natural resource
interests were written down from $169 to $50 and the capitalized software costs
of $278 and foreign licensing rights of $386 were written off. The events
causing writedown and 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. In addition, a note receivable from GlobalTel
totaling $200, a start up company planning to attempt a public offering, was
written off in fiscal 1999 upon the determination that it was no longer
financially viable.
NOTE 8 - BANK LINES 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, 1999, the
Company had outstanding borrowings of $150 under the line of credit and a bank
loan of a majority-owned subsidiary of $50 was also outstanding. All these
outstanding bank loans were repaid in fiscal 2000. The Company does not
currently have a line of credit with any bank.
NOTE 9 - 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 10 - 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 had stated interest at 4%. The
Company had the right to repay the notes and accrued interest in cash or in
common stock of the Company. The maturity date of the notes was 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, which was completed in fiscal 2000. During fiscal 2000, the
holder of the remaining outstanding convertible debentures requested conversion
of one-half of the outstanding amount into common stock pursuant to which the
Company issued 1,134 shares of common stock. At that time, the Company repaid
the remaining amount outstanding of $673, resulting in complete retirement of
the convertible debentures.
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, which were initially amortized and then charged off completely
upon payments of the debentures and conversion to common stock
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 was classified as a current liability in the balance sheet.
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
July 31,
----------------------
2000 1999
------- ------
<S> <C> <C>
Convertible promissory notes,
less unamortized discount
bearing interest at 4% $ --- $ 1,057
Note payable from purchase of
Sacramento office building bearing interest at
10% with interest only payments of $2,500 per
month until maturity all principle, due August 2001 300 ---
Note payable from purchase of
Houston brokerage no interest
due August 2001 or when certain
operational levels have been achieved. 50 ---
Note payable at $5 per month,
including interest at 10% per
annum --- 130
Capital leases 221 211
------- ------
571 1,398
Less, current portion (66) (1,189)
------- ------
$ 505 $ 209
======= ======
</TABLE>
The annual maturity of long-term debt and capital lease obligations are as
follows:
Fiscal year ending July 31,
2001 $ 432
2002 96
2003 76
2004 29
2005 --
Thereafter --
--------
633
Less, imputed interest on capital leases
and unamortized discount on promissory
note agreements (62)
-------
Present value of minimum lease payments 571
Less, current portion (66)
-------
$ 505
=======
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company conducts a portion of its business utilizing leased facilities in
various cities in which it operates. 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 year ending July 31,
2001 $ 314
2002 149
2003 23
2006 4
2007 --
Thereafter --
--------
$ 490
========
Rent expense for the periods ended July 31, 2000, 1999 and 1998 amounted to
$359, $613 and $250, , respectively.
In fiscal year 2000, the Company adopted a bonus plan for officers of the
Company. Pursuant to the Plan, officers will be paid a total of 30% of quarterly
net revenues as defined by the Plan. For fiscal 2000, $339,000 was accrued under
the terms of the Plan.
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 12 - STOCKHOLDERS' EQUITY
Private Placements. 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
Series A preferred stock was converted into 3,564 shares of the Company's common
stock.
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.
<TABLE>
<CAPTION>
Number of
Date of Shares Date of
Plan Adoption Authorized Grant Period Shareholder Approval
-------------------------- --------------- ----------------- -------------------------
<S> <C> <C> <C>
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
</TABLE>
The following summarizes activity for the three fiscal years ended July 31,
2000:
Number of Options
------------------------ Option Price
Available Granted Per Share
-------- ------- -------------
Balance, August 1, 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
Granted (790) 790 $0.75 - $1.50
Cancelled 475 (475) $0.63 - $6.13
-------- -------
Balance, July 31, 2000 345 4,157
======= =======
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 option plans as to the expiration of
options of terminated employees, if it had the contractual right to do so.
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.
The weighted average contractual life of options granted through July 31, 2000,
is 10 years. The weighted average exercise prices for the options outstanding at
July 31, 2000 are as follows:
Weighted
Average
Exercise Common Stock Exercise
Price Range Options Prices
------------ -------------- -----------
$0.63 - $1.50 2,073 $0.82
$1.94 - $3.75 1,415 3.35
$5.50 - $6.13 669 6.02
------
4,157
======
Warrants. As of July 31, 2000, the following warrants to purchase common stock
were outstanding:
Number of Exercise
Shares Per Share Expiration Date
-------------- --------------- ----------------------
20 $3.50 January 27, 2002
129 $3.75 June 16, 2003
2 $5.25 April 1, 2001
67 $2.00 September 30, 2003
67 $3.00 September 30, 2003
67 $4.00 September 30, 2003
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 750, 1,293 and 1,005 shares of common stock to employees and directors
during the years ended July 31, 2000, 1999 and 1998, 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, 2000, 1999 and 1998 had the Company adopted
the fair value-based method of accounting for stock-based compensation.
Years ended July 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Difference between fair value and intrinsic
value methods (additional compensation
expense) $ 68 $ 840 $ 1,647
Net income (loss) 1,249 (10,863) (6,424)
Net income (loss) per share - basic .09 (0.94) (0.82)
Net income (loss) per share - diluted .08 (0.94) (0.82)
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 2000, 1999 and 1998: 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.
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.
NOTE 13 - INCOME TAXES
Comparative analysis of the tax (benefit) expense for income taxes for the
fiscal years ended July 31, 2000, 1999 and 1998 follows:
Years ended July 31,
---------------------------------------
2000 1999 1998
------- -------- --------
Current:
Federal $(1,885) $ -- $ 509
State -- 5 104
------- -------- --------
(1,885) 5 613
------- -------- --------
Deferred:
Federal -- -- 1,016
State -- -- 208
------- -------- --------
-- -- 1,224
------- -------- --------
Tax (benefit) expense $(1,885) $ 5 $1,837
======= ======== ========
The computed income tax expense (credit) differs from applying the U.S. federal
income tax rate due to losses before income taxes for the years ended July 31,
2000, 1999 and 1998 and because of realization of net operating loses in the
year ended July 31, 2000. The following reconciles expected income tax effects
at a rage of 34% to the provision (credit) for income taxes:
Years ended July 31,
--------------------------------
2000 1999 1998
--------- --------- ---------
Taxes at U.S. federal statutory rate $(146) $(3,406) $ (660)
Change in deferred tax valuation
allowance other than realization
of net operating loss (1,906) 3,594 2,053
Other, net 167 (183) 444
--------- --------- ---------
Tax (benefit) expense $(1,885) $ 5 $ 1,837
========= ========= =========
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and liabilities at July 31, 2000 and 1999 are presented
below:
July 31,
----------------------
2000 1999
---------- --------
Deferred tax assets:
Net trade activity included for income tax
purposes not recognized for financial
reporting $ 2,236 $6,018
Investments and assets impaired for
financial reporting, not disposed of
for tax purposes 1,105 1,345
Amortization 685 606
Net operating loss carryforward 3,052 2,415
Capital loss carryforward 102 224
Other 708 860
---------- --------
7,888 11,468
---------- --------
Deferred tax liabilities:
Amortization (211) ---
---------- --------
Net deferred tax assets 7,677 11,468
Valuation allowance (7,677) (11,468)
---------- --------
$ --- $ ---
========== ========
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 have been examined by the
Internal Revenue Service ("IRS"). The Company and the IRS have reached a
tentative agreement pursuant to which the Company will receive refunds of taxes
totaling $1,359. In addition, the Company has substantially completed its income
tax returns for the fiscal years ended July 31, 1998 and 1999 and has concluded
that the filing of those returns will result in additional refunds of taxes
totaling $526. The Company has also accrued interest income of $331 related to
the total refunds of $1,885.
NOTE 14 - 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
$14, $21 and $15 for the years ended December 31, 2000, 1999 and 1998,
respectively.
The Company has a bonus plan for its officers. Bonuses applicable to the fiscal
years ended July 31, 2000, 1999 and 1998 were $339, $0 and $40, respectively.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
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.
<TABLE>
<CAPTION>
July 31, 2000 July 31, 1999
-------------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Assets:
Cash ......................... $1,516 $1,516 $ 203 $ 203
Accounts receivable .......... 659 659 1,143 1,143
Liabilities:
Bank line of credit .......... -- -- 200 200
Accounts payable ............. 723 723 675 675
Accounts payable to brokers
due to brokers .............. 813 813 1,167 1,167
Current portion of long-term
indebtedness ............. 66 66 1,189 1,189
Long-term portion of long-term
indebtedness ............... 505 505 209 209
</TABLE>
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, 2000 and 1999.
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 16 - 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.
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.
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.
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 17 - BUSINESS COMBINATIONS
Sacramento. In October 1999, the Company exchanged 1,967 shares of the its
restricted common stock for all of the outstanding stock of California Trade
Exchange, Inc., a California corporation, which operated the business of the
Company's largest independent brokerage located in Sacramento, California. The
total value assigned to the acquisition, which is being accounted for by the
purchase method, was $669 less related costs of $217. A total of $399 was
allocated to the right to service the member lists, which is being amortized
over a four-year life. The principal owner of the Sacramento brokerage business
is now the President, Chief Executive Officer and a Director of the Company 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.
Seattle. 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. The total value assigned to the acquisition, which is being accounted
for by the purchase method, was $305. Substantially all of the purchase price
was allocated to the right to service the member lists, which is being amortized
over a four-year life.
Houston. Also in February 2000, the Company acquired the assets 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 total value assigned to the
acquisition, which is being accounted for by the purchase method, was $184.
Substantially all of the purchase price was allocated to the right to service
the member lists, which is being amortized over a four-year life.
Unaudited Proforma Information. The following unaudited pro forma information
represents the results of operations of the Company as if the acquisitions of
the Sacramento, Houston and Seattle brokerages had occurred on August 1, 1998,
and the eliminating of the intercompany transactions after giving effect to
amortization of the cost allocated to member lists, depreciation of acquired
property and equipment and the assumed issuance on August 1, 1998 of 2,309
shares of common stock that were issued in connection with the acquisitions.
Years ended July 31,
-------------------------
2000 1999
------------ ----------
Revenue................ $ 13,642 $ 19,173
Net income (loss)............... 1,491 (9,827)
Net income (loss) per common share .10 (.70)
The unaudited pro forma information does not purport to be indicative of the
results which would actually have been achieved for the periods indicated had
the acquisitions occurred as of August 1, 1998 or results which may be achieved
in the future.
Note 18 - 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
was given 90 days from that date to file its amended Form 10K for fiscal 1997
and its Form 10K's for 1998 and 1999. The Company complied with this requirement
on May 3, 2000.
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 settlement
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 answered thecomplaint 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. The company has bonded the judgment that has been entered and guaranteed
the bond with a ertificate of deposit for $550,000. The company has appealed and
has been advised by its counsel that it has a reasonable chance for success in
overturning the decision.
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. The proceeding has been
abated and no arbitration has been set and the case has been dormant for many
months.
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 471,000 shares of its Wade Cook common stock.
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 resulted in the dismissal of the
entire action. 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 retained local
counsel in this case. and is vigorously defending the matter. The Company
believes Plaintiff's complaint is frivolous. The Company has successfully
defended similar actions. The Company does not believe this action is
significant to the Company's financial position. The matter is set for trial in
April 2001.
o Antelope Company v. Zoring.
The Company was served with a summons and complaint on June 1, 2000, in the
matter of Antelope Company v. Zoring International Incorporated and ITEX
Corporation, filed in the District Court of the City and County of Denver,
olorado. The complaint alleges that in December 1997, the plaintiff entered into
a lease with Zoring of certain office space in Denver, Colorado, and that ITEX
guaranteed the lease. Zoring is alleged to have defaulted on the lease and the
plaintiff is seeking to enforce the lease guaranty. The Company agrees that the
lease was breached, but contends that the plaintiff failed to mitigate its
damages. The Company intends to defend the action and has set up a reserve for
loss in the event that the plaintiff is successful. The matter is presently
pending the assignment of a trial date and the completion of discovery.
o Metro Sales v ITEX.
On May 28, 2000, the Company was served with a summons and complaint out of the
Circuit Court of Multnomah County, Oregon, in the matter of Metro Sales v. ITEX.
The complaint alleges breach of contract and violation of an Oregon Blue Sky
statute. The Company denies all the allegations and intends to vigorously defend
this action.
o Skiers Edge Litigation.
On June 19, 2000, the Company was served with a summons and complaint out of the
District Court for Summit County, Colorado, in the matter of Skiers Edge
Condominium Association v. George Owens. The complaint alleges that the Company
owes plaintiff association fees relating to interval timeshares that the Company
is alleged to own. The Company is defending this matter and does not foresee any
material impact from this matter.
