What is your basis for claiming that Molex can sell the company? That is not true. Molex is not the controlling stockholder. Molex has the option to buy at fair market prices all of the 8, 16, and 32 channel chips that Lumenon produces. Molex does not have the right to take production of other channel count chips, such as 40 or 128 channel chips. If Molex were to take all of Lumenon's production of 500 chips a day at fair market value, just how would that hurt Lumenon's bottom line? It wouldn't. As for "taking over" manufacturing from Lumenon that is only possible if Lumenon cannot produce the chips in quantity and on time. That is not a given. In my view, Lumenon does control much of its destiny, perhaps not every single possible scenario, but enough to guaranty their seccess.
From SEC documents:
Partnerships agreements:
As of the date hereof, our management, Molex, Polyvalor and McGill University collectively own approximately 60.35% of our outstanding common stock. They determine the composition of the Board of Directors and will be able to determine the outcome of corporate actions requiring stockholder approval. This ability may have the effect of delaying or preventing a change in control that may be favorable to other stockholders or causing a change of control that may not be favored by other stockholders. Under agreements with it, Molex will acquire the non-exclusive right to manufacture and sell certain jointly developed optical chip products in the event of a change in the control of the Company. Molex also has rights of first refusal with respect to any sale of stock by certain stockholders of the Company. Such rights of Molex may have the effect of delaying or preventing a change in control of the Company that may be favorable to stockholders other than Molex. Certain provisions of our corporate documents and state law may prevent or hinder a change of control. Certain provisions of our Certificate of Incorporation and By Laws and of Delaware law could make it more difficult for another party to acquire us or discourage another party from attempting to acquire us. For example, our Certificate of Incorporation and By-Laws permit us to issue preferred stock with rights senior to the common stock in respect of voting and dividend rights and rights upon liquidation without any further vote or action by stockholders, and provide for a classified Board of Directors. Although we have no present plans to issue preferred stock, the issuance of preferred stock could have the effect of delaying, deterring or preventing a change of control and could make it more difficult for holders of our common stock to take certain corporate actions, including the replacement of incumbent directors. Additionally, any such preferred stock may have preference over and harm the rights of the holders of common stock.We have a significant number of outstanding warrants and options, which could adversely affect the price of our common stock and our ability to sell additional common stock.As of March 2, 2000, we have outstanding options to purchase a total of 2,407,500 shares of common stock at a weighted average exercise price of US$3.87 per share and outstanding warrants to purchase an aggregate of 3,467,211 shares of our common stock at a weighted average exercise price of US$1.98 per share.The exercise of outstanding options and warrants will dilute the then current stockholders' ownership of common stock. Sales in the public market of commonstock acquired upon such exercise of options and warrants could depress the price of our common stock. The holders of options and warrants can be expected to exercise them at a time when we would be able to sell common stock on terms more favorable than those provided by such options and warrants. This may adversely affect our ability to sell common stock.
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Based on the above agreement, Molex's right of first refusal on any shares offered for sale gives them control of Lumenon's future. They have Lumenon in a corner. They can't force them to sell, but if they tried to sell to anyone else, they can block it. They also have a non-exclusive right to manufacturing should there be a change of control.
What gain are you referring to? Molex has not sold any of its Lumenon shares. They have been a buyer of Lumenon's shares. Any profit is a paper profit at the moment. I don't understand how you feel that the warrants were given away to get business. To get Molex's business, yes, of course. That certainly was the intent of the financing. I see nothing wrong with that. Lumenon would have had to offer the same deal to any company that was funding Lumenon's initial start-up expenses, whether that would be Molex or Alcatel.
I asked a question. And based on Molex's SEC filing, they've taken gains from certain investments. I have no way of knowing if these gains were from Lumenon's shares, but if it hasn't happen yet, it will eventually. This is what corporations do with shares. Based on what I've seen of Molex's financial savvy, I seriously doubt they're asleep at the wheel.
You seem obsessed with the impact of the Molex agreement on Lumenon and keep citing the four-year period. First, the one-year contract calls for sales to Molex on a cost plus 25% margin basis. Those sales are only for a maximum of 400 chips a month. Yes, we all agree that that does limit the amount of income for one-year. However, after that Molex only has the option to take all of Lumenon's 8, 16, and 32 channel chips. It does not allow Molex to take all of Lumenon?s production since it can produce 4, 40, 64, or 128 channel DWDM chips, splitters, cross connects, filters, modulators, or any other product lines they may introduce.. . .With the new production factory coming online in late 2000 and the production of 500 chips a day by the end of the year, Lumenon will be half-way through the one-year Molex agreement. At that point it should be announcing OEM agreements with other companies. . . .
By your admission, Molex is giving 25% margins. That sucks. Pardon my bluntness. The 400 per month maximum protects Lumenon provided their factory is turning out more than that amount during the first year. Their SEC document states:
<<<
The Company is finalizing negotiations for the lease of the 32,000 square foot facility discussed above to be constructed and equipped for production beginning in 2001. The Company estimates the necessary funding for such expansion to be approximately US$20 million(CDN$29 million) and is actively investigating potential sources for such funding. The Company plans to produce chips at the rate of 20 per day in July 2000 and to increase its capacity to 500 chips per day in 2001 and to 1,000 per day in 2002.
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Production will begin in 2001. Before then the company will produce 20 per-day beginning in July. Based on a 22-day month, that pretty much fulfills Molex's maximum.
So, if the new facility won't begin producing until 2001, how many months will they be in production before Molex's first year ends? Molex has the right of first refusal for all Lumenon's chips for the next three years:
<<<<After the first year, Molex will have the option to purchase all of our production of the jointly developed products at fair market value for the succeeding three year period.>>>>>
My point regarding other OEM partners is simply this: if Molex has the right to all production of jointly developed products for three years, who would waste their time co-designing under these circumstances?
You say:
Molex does not have the right to take production of other channel count chips, such as 40 or 128 channel chips.
Considering Lumenon only has an 8-channel chip ready for testing --- with 16 and 32 coming on later --- I'm not sure how strong an argument this is. And I'm not being cute, I honestly don't know. I think if I were considering investing, I'd want to know how successful they are with 8-channel first. I'd probably want to know how long it's taken to get this far and what the estimates are for the 16 and 32-channel products. I don't see much of a window for additional OEMs for the 8, 16, and 32-channel chips. Even if there should be production capacity beyond Molex's maximum, it's hard to imagine anyone designing-in knowing Molex's arrangement for the following three years. That leaves the higher-channel products as the lure for new partners.
You say:
Dr. Najafi has made it quite clear that he is willing to relinquish the reins to a more qualified CEO.
At this point, that's akin to closing the door after the cows have gone.
Too bad the Molex agreement blocks any chance of being acquired. That would have been a beautiful card to play.
Pat |
