Let's read the SEC filing again:
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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.
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i.e., even if someone else controls the company, Molex will have non-exclusive rights to manufacturing. Would an acquirer be likely to accept this condition?
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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.
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This pertains to Molex, not the combined powers of majority directors. I didn't make it up. Molex has the power to prevent or delay a change of control.
The document goes on to say:
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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.
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Under these conditions, is there any conceivable way Molex will not maintain control?
I feel that Lumenon management did not err in giving the first year's production to Molex. It guaranteed a certain cash-flow and eliminated any need to have a marketing department. And a net margin of 25% does not suck. A normal margin of 40% or more would be whittled down by other SGA expenses anyhow.
Their error was not merely in lowering their margins. It created an environment that would discourage other vendors' willingness to co-develop. Now, as I understand it, being designed-in takes time and isn't a process that would be entered into without some guarantee of success. What are the chances vendors would sign co-development agreements on the advanced channel products when they have no access to the current products --- the only proof they'd have of their quality and suitability?
You say:
Well if Lumenon starts shipments to Molex in July, 2000 then by January, 2001 (when they will be producing 500 chips a day versus 20 chips a day), Lumenon will still have six months left to continue shipping at the maximum of 400 a month. In effect, Lumenon will be ramping up their sales volume significantly, even while still under the terms of the one-year agreement with Molex. When the 500 chips a day are being produced Molex will either have to buy the additional production, or allow Lumenon to sell them in the open market. In either case, the increase in revenues will be significant.
Perhaps I misunderstand the process. Is it possible that Lumenon could sell anything over 500 a day to other vendors without having them designed-in with the OEM in question? Is it an off-the-shelf chip that can be used by anyone without being tweaked to their specifications? If so, then your assessment is correct and mine wrong. In which case LUMM could sell the additional products for the remaining months of the one-year period. At the end of that period, Molex regains control of all products, except, of course, the advanced channels.
Actually Lumenon has 8, 16, and 32 channel chips available for testing now: From Lumenon's press releases:
At OFC, the Company also introduced its fully packaged 100 GHz 8-channel DWDM along with its suite of wafer level 16 and 32 channel DWDM components.
SEC filiing says testing will begin in July:
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The Company is perfecting the materials and processes for its DWDM products in its existing pilot facility in preparation for the expansion of production. Under the Teaming Agreement, the Company will produce and deliver to Molex up to a maximum of 400 units per month, upon satisfactory testing of such devices commencing in July 2000. All of the Company's production of the jointly developed products (the 8, 16 and 32-channelDWDM devices) for the first year is reserved for Molex, and thereafter Molex will have the option to purchase all of such products at fair market value for the succeeding three year period.
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Have I misunderstood their development schedule? If testing is commencing in July, how long will it take to be ready for shipping? And what benefit will this readiness be if Molex is taking all their current facility will be able to produce?
Again, from the SEC:
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As of February 2000, Lumenon does not sell a finished product in the open market, as its entire first year of production of 8, 16 and 32-channel DWDM devices has been reserved for Molex under the Teaming Agreement. The current generation of 8-channel devices is undergoing testing, with 16 and 32-channel models to follow by the end of June 2000. Upon completion of testing,
satisfactory to Molex, the 8-channel devices manufactured to date will be delivered to Molex for its use or for resale and distribution. As each channel device completes its testing phase to the satisfaction of Molex, it will be delivered to Molex. The Company has also entered development and test phases for pigtailing optical fiber to its DWDM devices, and for housing its optical chips in hermetic, semi-hermetic and non-hermetic packages.
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If I understand this correctly, testing on the 8-channel will be complete by the end of June at which time 16 and 32-channels will begin the same process. I don't know when the 8-channel began testing, but judging by the schedules noted, I'm guessing it takes a minimum of 5 months. That puts availability of the 16 and 32-channel products at late November, providing there are no set-backs. Do you know when Molex's one-year clock begins? I believe with a little effort, you could drill down the dates and numbers and come to a pretty good estimate of possible revenues from other sources.
. It is never too late to learn from our mistakes. Lumenon is only on the verge of going into production. Why would anyone consider them a lost cause?
True, you can learn from your mistakes but if you've signed away significant control of your company, the learning is theoretical.
In my opinion Lumenon is already working with OEMs other than Molex and sales of these products will commence in 2001 after the bugs are worked out in the new factory.
I'd be very interested to know who these other vendors are and I'd also be interested to know their opinions regarding Molex's 3-year agreement.
Even so, with the available information I believe you can drill down and get a fairly good estimate of possible revenues from other vendors. Let's not discuss the 40-channel and above possibilities until the 12, 16, and 32 are certified.
When you say,
The Molex agreement does not hinder Lumenon from dealing with other OEMs,
I take exception. All the above documentation shows just how much control Molex has and while it's not spelled out that other vendors can't enter co-development agreements, the circumstances certainly discourage it.
Pat |
