ITEX 2009 Annual Shareholder Meeting Notes
*NOTE: I was not taking notes during the meeting so these notes are entirely reconstructed from memory, in addition I am paraphrasing what was said not directly quoting people. It is possible that information is not entirely accurate. I know for certain the order of the information below in NO way reflects the order of the actual conversations.
Location: Itex headquarters, Bellevue, WA
Attendance: 12 or 13 people including the ITEX board and company operators.
A representative of the Polonitza Group was in attendance, to see who the Polonitza Group represents view this 13D filling. The Polonitza Group among others includes David Polonitza who according to this letter has been an ITEX holder since 2004. Most of the questions were asked by The Polonitza Group. Some specific questions that were asked:
What was the reason for removing from the company by laws the ability for shareholders to call a special meeting? Is there any plan to re-instate this in the future?
They essentially said that this was done as a result of the WEST situation and at the recommendation of the counsel that was helping them during that time period. They believe it is in the interest of shareholders because it prevents management from getting blindsided with issues that have to suddenly take them away from running the business. They also noted that there processes for shareholders to voice concerns and have items brought up at the annual meeting. In addition they noted that they are always available to communicate with shareholders.
It sounded like they have no plans of reinstating the provision to call a special meeting however they did solicit feedback.
Steve White thought the bylaws were amended two years ago, but the Polonitza Group noted that this happened in the past year or at least not publicly disclosed until the past year.
I have yet to go through and track down the filling where the bylaw change is mentioned.
The Polonitza group voiced concerns over the lack of perceived independence in the board and compensation committee. As a publicly company they do not feel ITEX is doing enough to maintain proper independence on the board. They would like to see someone on the board that does not have existing relationships with the board members and they would like that entity to be a shareholder who has a reasonable position in ITEX. The Polonitza group offered up any of its members to sit on the board with no compensation required. It should also be noted that while The Polonitza Group expressed concerns about the lack of independence on the compensation committee they did state that they feel Steve White is properly compensated if not undercompensated.
The board in general tried to emphasize that while they have working relationships they are not very close friends and maintain independent thoughts and ideas.
They wanted to express that felt the board is more independent than the Polonitza Group was implying. They mentioned that while they have known each other and worked with each other for quite some time, they do not frequent each other’s houses or family events.
The Polonitza Group expressed concerns about the track record of return on capital deployed recently by ITEX. They also noted that the having an independent board member with capital allocation experience could be beneficial.
Steve mentioned that ITEX expects to see future returns on capital they have deployed.
The Polonitza Group asked if they would comment on the performance of the “SuperTrader” exchange launched by Idearc Media which is powered by ITEX.
Steve said that they are not disclosing details on this at the moment. I believe he did note that they expect it could be around 10% of revenue.
The Polonitza Group asked if the Idearc Media’s bankruptcy has any effect on deal between Idearc and ITEX, and if they expect that Idearc would attempt to renegotiate or back out.
Steve said that Idearc has been a great partner, they have always paid invoices quickly and after entering bankruptcy they had a small outstanding balance which they have assured ITEX will be paid as soon as they emerge from the bankruptcy. There was no indication that Idearc plans to renegotiate or back out of the deal.
The Polonitza Group asked if the company has thought about paying a dividend in the future.
Steve asked the shareholders for their thoughts on this. I happen to be the first one asked and was caught a little off guard. My response was that I would not opposed to the idea of returning some of the cash back to share holders, however I want to the company to maintain a strong position and be able to take advantage of opportunities to reinvest earnings at decent rates of return should opportunities become available. Most of the shareholders agreed with my statement, The Polonitza Group specifically said they were not interested in dividends being paid, specifically they pointed out the double taxation that happens when you receive dividends in taxable account, meaning the company is taxed on earnings and then the shareholder is taxed as well on the portion of earnings that gets distributed in the form a dividend.
During the dividend discussion the Polonitza Group brought up capital allocation and stated that they believe ITEX would be a good candidate for a holding company structure where the business units return free cash flow up to the parent level and the parent level manages the deployment of capital.
One shareholder asked about a $500,000 bad debt expense recorded on the balance sheet.
This was attributed to unpaid accounts receivable, Steve mentioned that they have an extremely low percentage of monies that go uncollected. I believe the number was 2%. They also mentioned that no commission gets paid until money is received. He also mentioned that franchisees are empowered to collect this money from members which attributes to the high recovery rate.
The Polonitza Group asked the board to comment on the lack of insider purchases by the board during the market turmoil which left ITEX selling at extremely cheap prices.
The board gave some reasons for not buying, Eric Best said he was very tied up in his startup “Mercent”, and was not necessarily financially comfortable or able to deploy cash for stock purchases during these times. Steve commented that he already has a large position in ITEX and stock purchases generally don’t cross his mind. Another board member pointed out that no one on the board has sold any stock in years. The Polonitza Group pointed out that Eric was the last to sell, Steve pointed out that he bought the shares Eric sold.
The Polonitza Group said that they understand people have personal reasons for not buying stocks during this time period, but they noted that even some smaller purchase by the board would go a long way. I pointed out that when ITEX was selling at bargain basement prices and no insiders were buying this is generally interpreted in a negative light because people will often take this as a sign that management does not think the stock is a good deal.
The Polonitza Group expressed that they felt ITEX should have been buying back stock when the stock was cheap and said they felt stock buy backs would yield better returns then their acquisitions.
Steve mentioned that they have the ability to buy back stock without the need for seeking approval, I believe the number was up to 2 million but I can’t be certain. Steve mentioned that thought it might be better to leave stock in the market for investors who want to buy more ITEX instead of reducing the liquidity of the stock and making it less available.
One of the ITEX folks, not sure if he a board member or the CFO mentioned that he has tried to find compelling evidence that stock buy backs provide any benefit or value to shareholders and he said most reports he found say they do not work. Myself and the Polonitza group both commented on the fact that most companies buy back stock at a price that is too high to provide value to their shareholders. It should be a very simple exercise for them to determine at what prices they should consider buying back stock.
That’s all I can remember for now. If I think of anything else I will update it.
I own ITEX stock at the time of this writing.