I received a call from Paul Henry earlier today to clarify the last couple of points from our conversation on Tuesday. While my main focus was on Gordon's share ownership, we had a wide-ranging conversation.
Q. I understand that Robert Gordon did not draw his salary during much of 1998 and has drawn none in 1999. Is his accrued salary being paid in cash or with shares?
A. "I think he would be paid in cash when we can afford to pay him. He needs money to live like the rest of us."
Q. Does Gordon (and family) own 14 million shares or 20.7 million shares?
A. "14 million shares"
Q. Does the 14 million share total include the 6.6 million shares converted in Feb., 1999?
A. "Yes."
Q. The balance sheet contains an item "Loan payable, stockholder" in the amount of $1,351,095. What were the proceeds from the loan used for?
A. "To fund negative cash flow." Mr. Henry went on to say that in the process of ramping up the Lifetime Learning deal, the company had had some additional expenses. The company is expecting higher revenues in May and hopes to have positive cash flow this fall.
Q. Mr. Gordon converted $1,000,000 of the "Loan payable, stockholder" to shares in Feb.,1999. What is the current unconverted balance of that loan?
A. "About $350,000"
Q. Does Mr. Gordon intend to convert this balance into shares?
A. "If the cash is available, I think he would like to take the cash. But it would possibly be converted into shares." Note: the option to take cash versus shares is totally up to Mr. Gordon per the "Revolving Credit Line" agreement. At 15 cents, $350,000 converts into 2.3 million shares.
Mr. Henry and I then had a discussion about the "Revolving Credit Line" agreement which allows Mr. Gordon to convert up to $5 million of loan into shares at $.15 per share. The essence of this discussion is as follows. If the disinterested directors ask Mr. Gordon to put money into the company and he has the money, if disaster strikes and the market goes down to 6,000 and there's no other source of financing, there is a "theoretical possibility" that Mr. Gordon would loan the company money under the above terms. I asked wouldn't the company be better off eliminating the credit line agreement which makes it appear as if Gordon owns 26.6 million more shares than he actually does. Mr. Henry agreed it would improve the 10K. He added when business conditions improve, the agreement would almost definitely be removed. Mr. Gordon's concern is if he removed the agreement now, and the worst scenario occurred, putting the agreement back in place would cause the shareholders additional anguish. Mr. Henry pointed out that he personally hoped that 26.6 million shares was never converted because it diluted the value of his investment also. He thinks the agreement will be eliminated eventually, but doesn't feel that now is the best time to do it. He added, however, that if a group of shareholders got together and asked Gordon to remove the agreement, he may do it.
The Board of Directors currently consists of Robert Gordon, his brother Michael Gordon, Paul Henry, and John Hwang. I assume that "disinterested directors" (to use the phraseology of the credit line agreement) would include all of the above except Robert Gordon. It seems to me that adding a 5th person the board would strengthen the group and provide more balance. If that person were Marty Frankel, I believe shareholder confidence would go up.
I personally am at ease with the total number of shares Robert Gordon owns outright—14 million. Am I perfectly informed about and comfortable with every share grant, every option, every share conversion, every share sell which was really collateral, every share transaction that Mr. Gordon has engaged in? No. I do not understand some of these events well enough to say that I'm perfectly comfortable with all that has happened. But Mr. Gordon's outright ownership of 14 million shares total is not inappropriate in my opinion.
Mr. Henry had some comments about financing which I will address in a later post.
Regards, Suzanne
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