ITEM 1. BUSINESS
General
ITEX Corporation and its subsidiaries ("ITEX" or the "Company") operates what it believes is one of the leading retail trade exchanges in the United States and has licensees who operate trade exchanges in international markets in Mexico, 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 exchanges contractually agree to sell their goods or services to other members at the same price as cash customers pay but to receive payment in trade credits. These trade credits can then be exchanged for other goods or services offered by other members of the exchange and that are used in the operation of the member's business. Exchange members have access to both printed and Internet-based directories that list goods and services available for purchase for trade credits, by category, on a local and national basis. Such directories are frequently updated so they are current as to available goods and services. The Company may grant, on behalf of the exchange, trade lines of credit to clients who wish to purchase goods or services for trade credits prior to selling goods or services to other members of the exchange. The trade credits of the ITEX retail trade exchange are referred to as "ITEX Trade Dollars." An "ITEX Trade Dollar" is an accounting unit used by the ITEX retail trade exchange to record the value of trades as determined by the parties in trade exchange transactions. ITEX Trade Dollars denote the right to receive goods or services available from other ITEX Trade Exchange members, or the obligation to provide goods or services to other Exchange members. In general, Trade Dollars can only be used by members of the exchange to purchase the goods and services offered by members of the exchange. However, the Company has "reciprocal" relations with various other trade exchanges pursuant to which it is possible for a member of the ITEX trade exchange to purchase goods or services offered by members of those other trade exchanges, and members of other trade exchanges with reciprocal agreements may acquire goods and services from the ITEX trade exchange.
Trade Dollars may not be redeemed for cash. Trade Dollars may be used only in the manner and for the purpose set forth in the Rules of the exchange. Trade Dollars are not legal tender, securities, or commodities.
The Internal Revenue Service considers trade credit income to be equivalent to cash income and a trade dollar expense to be equal to a cash dollar of expense. The Company is obliged under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) to send Forms 1099-B to each of the Company's clients and to the Internal Revenue Service (which the Company does electronically). The Form 1099-B reflects the total trade credit sales made by the client for the calendar year, less the amount of any returns. Trade credits received must be reported as gross income in tax returns. Expenditures of trade credits may be reported as deductions in tax returns if they qualify as deductible business expenses or as other deductions that are permitted by the Internal Revenue Code (e.g., medical expenses, charitable contributions, and the like).
Members of the exchange are serviced by trade brokers who are independent contractors with respect to the Company or, in the case of ITEX regional offices, are employees of the Company. The Company provides brokers with training, help in facilitating transactions, marketing materials, computer services, computer software systems, and Internet-based resources including directories, listings of goods and services currently available from and the opportunity to advertise to members locally, nationally and internationally. ITEX is in the process of upgrading and broadening these services to clients and brokers.
Independent Brokers
Members of the exchange have a contractual relationship with the Company and are assigned to an independent broker or a Company operated regional office. A broker's responsibilities are to enroll new ITEX clients, train them in the use of the system, facilitate business among clients, monitor the delivery of goods and services between clients and assure payment of dues and fees to ITEX. 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 during the three years and eight months.
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):
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 the option to acquire up to an additional 25,000 shares of restricted common stock at an exercise price of $0.75 per share. The owner of the operation has remained as an ITEX employee to manage the Houston office. The primary identifiable assets of the acquired business were accounts receivable, furniture and equipment and the right to service ITEX clients as represented by the Independent Retail Broker Agreement for that office.
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.
Executive Officers of the Registrant
The directors and executive officers of the Company as of October 15, 2000 are as follows:
NAME AGE POSITION - --------------------------- ------- ------------------------------------ Dr. Evan B. Ames 60 Director John Castoro Vice President, Corporate Offices Collins M. Christensen 42 President, Chief Executive Officer, Director 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 May 1999. (See Item 1, Business, General, Purchase of Independent Broker Offices.
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 ________. Prior to coming to work as Vice President of Corporate Offices, Mr. Castoro worked as a Vice President of Barter Advantage, 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 director 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., age 40, Chief Operating Officer. Mr. Humer joined the Company in March 1999 as Director of Training and was named Vice President of Operations in June 1999. Prior to joining the Company Mr. Humer was a Vice President of Operations and was an Operations Manager of two manufacturing companies. In 2000 he was named Vice President of Operations and Chief Operating Officer.
Robert Nelson, CPA, age 52, Director since 1995. Mr. Nelson is a Certified Public Accountant in private practice in Portland, Oregon specializing in tax accounting. He is a member of the American Institute of CPAs and the Oregon Society of CPAs.
Charles T. Padbury, age 61, Director since 1992. Dr. Padbury is a Beaverton, Oregon dentist and has been a member of the ITEX Retail Trade Exchange since 1985. During 1996 and again in 1999, Dr. Padbury served briefly as Chairman of the Board of Directors. In March 1999, Dr. Padbury served as acting CEO until the appointment of Mr. Christensen to that office in May 1999.
Mary Scherr, CTB, age 62, 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.
As of August 1, 1996, Outside Directors (i.e., Directors who are not employees of the Company) have received $500 per Board meeting attended in person or by telephone and members of Board committees have received $250 per committee meeting attended. In addition, all Directors serving on January 1, 1997 were issued 1,000 shares of the Company's restricted common stock and received the option to acquire a minimum of 2,500 additional shares pursuant to an Employees Incentive Stock Option Plan with the exercise price being the closing bid price of the stock on the trading day before the grant is made.
In September 1997 the Board approved payment to Directors of the sum of $20,000 annually, payable monthly in advance, and issuance on January 2 of each year in which a Director is serving as such of 2,500 shares of the Company's common stock and grant of the option to acquire up to 10,000 additional shares with the exercise price being set as described above. In addition, attendance of Outside Directors at committee meeting is compensated at the rate of $750 per meeting with the chair of the committee receiving $1,000 per committee meeting.
No funds have been set aside or accrued by the Company to provide pension, retirement or similar benefits for Directors or Executive Officers, other than those who are covered by the Company's 401(K) plan as employees of the Company.
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.
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:
(1) Includes 1,300 square feet of office space sublet to a third party at an annual rent of $26,500.
ITEM 3.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
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.
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."
ITEM 7.
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:
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:
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, nor will it be in the future, other than those transactions that will benefit the retail trade exchanges. As a result, no revenue or costs were incurred in fiscal 1999 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. The decrease was further offset by an increase in salaries of approximately $___________. 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.
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.
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
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. Christense, 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/ Robert Nelson October 30, 2000 - ----------------- Robert Nelson, Director
/s/ Dr. Charles Padbury October 30, 2000 - ----------------------- Dr. Charles Padbury, 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
ITEX CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
The accompanying notes are an integral part of the consolidated financial statements.
ITEX CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
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)
The accompanying notes are an integral part of the consolidated financial statements.
ITEX CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
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, --------
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:
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 --- -------- 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.
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 4,152 ======= =======
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 1,573 $0.82 $1.94 - $3.75 1,415 3.35 $5.50 - $6.13 669 6.02 ------ 3,657 ======
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) Tax refund from prior years (1,885) --- --- Change in deferred tax valuation allowance (3,916) 3,594 2,053 Other, net 4,062 (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, 1999 and 2000 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 679 860 ---------- -------- 7,859 11,468 ---------- -------- Deferred tax liabilities: Amortization (311) --- ---------- -------- Net deferred tax assets 7,548 11,468 Valuation allowance (7,548) (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 $___, $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.
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 ________ 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.