For ease of reading, I'm putting our point-counter-points in the form of a dialogue. Italics are my comments from yesterday.
Me: even if someone else controls the company, Molex will have non-exclusive rights to manufacturing. Would an acquirer be likely to accept this condition?
UR: Yes, an acquirer would most likely accept this condition as long as Lumenon's personnel were part and parcel of the acquisition. It is the brain-power, the intellectual property, that is most important here. We also have to ask if Molex would rather have an on-going, profitable, expanding relationship with Lumenon, or would they rather have $200 a share?
Me: By asking if Molex would rather have $200 a share are you suggesting their manufacturing relationship isn't their primary objective and their real reason for investing is to participate in a hot sector--- and they'll bail when the party's over? I was basing my comments on Molex's partnership being a sincere desire to have the products Lumenon is developing. Now I'm confused. As for intellectual property, from my reading of the documents, they license from two other parties.
Me: (SEC doc says:) "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." 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.
UR: You gloss over the word may in that sentence. Obviously Molex and Lumenon are tied together, for better or for worse, but as with most marriages there is no point in forcing the other party to do something against their will. If Lumenon does receive an offer, there is no way that Molex can block the offer, Molex can exercise their right of first refusal, or they can accept the offer. I'm certain that Molex stockholders would want the company to maximize their investment return on Lumenon's stock also.
Me: The SEC document clearly says Molex has the right of first refusal if the company sells any shares. That means they can buy any shares being offered and over-ride any decision Lumenon makes. The Sheldahl deal is a good example of how even a 22% position can give enormous power.
Me: Under these conditions, is there any conceivable way Molex will not maintain control?
UR: Actually this paragraph refers to a "poison pill" provision that many companies have to thwart an unwanted take-over attempt. This allows Lumenon to issue the preferred stock, not Molex. This does not allow Molex to "maintain control" at all; it allows Lumenon to fend off any unsuitable pursuer.
Me: I concede this point.
Me: 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?
UR: What makes you think that OEMs do not have access to the current chips? To repeat my point: There is nothing in the molex agreement that precludes Lumenon designing other chips for others. And if Lumenon can do it faster, cheaper, and with a product that meets the OEMs specifications, why wouldn't they be getting the business, despite the teaming agreement with Molex?
Me: Are you saying OEMs are co-designing different chips, ones that Molex has no rights to? I've assumed they have access to the Molex chips (for design purposes) but can't imagine any OEM wanting access to them considering Molex's control. Now,if LUMM is designing different chips, this is new information and it would be helpful to know when they'll be completed and ready for volume shipment.
Me: 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.
UR: Yes, it is possible for Lumenon to sell their DWDM offerings as off-the-shelf products. The packaged DWDM is basically a passive component that can be used by virtually anyone, providing it meets that company's specs.
Me: I take it you're referring to DWDM products that aren't included in the Molex agreement. What products are these? What percentage of their business do they represent? What are their estimated ASPs? Are they shipping now? If not, when will they ship? But my concern is with the Molex-controlled products -- the 8-channel (and above) chips. Can an OEM buy these as-is, without being designed in? If they can't, what is the time-frame for the design process?
Me: 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?
UR: Yes, I believe you have misunderstood the development schedule. Delivery will commence in July, the testing by Molex has been done (but testing continues on an ongoing basis both by Molex and by Lumenon), as can be inferred from the press release announcing Molex's second closing: (bolding is mine): >>>>>Lumenon: Second Closing with Molex: This Agreement included $1,500,000 cash investment by Molex in Lumenon, in two phases. The first closing, for $750,000, took place on June 4, 1999. The second closing of $750,000, scheduled for 9 months after the first closing, was contingent upon Lumenon's progress in proving its technology and its ability to manufacture certain DWDM devices. >>>>>
Me: The above doesn't say the testing is complete. The sentence reads: "(The second closing) was contingent upon Lumenon's progress in proving its technology and its ability to manufacture certain DWDM devices." In other words the closing was contingent on Lumenon making progress.
Me: True, you can learn from your mistakes but if you've signed away significant control of your company, the learning is theoretical. 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.
UR: You will in time.
Me: "In time" is too vague. Considering Molex's control, I'd like a statement from the company saying X number of OEMS of X market-cap are at a given stage of development on a given product, and name the stage and product. They would not have to give away any vendors's names as I know they have NDAs. Having other customers is critical. No responsible investor would invest in a company dependent on just one. This is why the SEC requires companies to list all their customers who represent over 10% of sales.
Me: 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.
UR: And why should I do all the work? There have been projections on revenue growth from many posters on the RB board, or the Yahoo Lumenon chat room, or from Groome Capital. Regardless of whose projections you look at, the obvious conclusion is that revenue will start to sky rocket in fiscal year 2002.
Me: Clearly if you're willing to engage in this debate, you have time to work out some numbers. It's easy to say revenue will sky rocket in FY 2002, but it's also possible the company won't make it to 2002 if their relationship with Molex doesn't turn out as they hope.
Me: (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.
UR: What you are reading, and putting too much emphasis on, in my opinion, are the SEC documents that were written almost four months ago. And a lot of your references are to the original Molex agreement. You have to realize that when those documents were drafted that Lumenon was a much smaller, weaker company that it is today. It has progressed much more quickly than even the management thought possible, or Molex for that matter. If Lumenon were only interested in serving Molex, and the terms of the original teaming agreement, there would be no need for a new factory; there would be no need for a Director of Strategic Planning; there would be no need for a NASDAQ listing; there would be no need to attend trade shows to talk with potential customers; in short they could abandon their dreams of greatness and just fulfill that teaming agreement. No, Pat, this company is now strong enough to forge ahead without Molex (not that Lumenon wants to abandon Molex). It is strong enough to have customers other than Molex and that will mean that the terms of engagement between Molex and Lumenon are most likely to be in a state of flux, and not written in stone.
Me: If anything in the SEC documents has changed, Lumenon has to file with the SEC (I believe an S-8). Are you absolutely certain the Molex agreement has changed? If so, in what way and when will LUMM be filing the requisite documents? I'm also not sure how you can say there would be no reason for a new factory, new Dir of Strategic Planning, or NASDAQ listing if Lumenon were only interested in serving Molex. Based on all my reading, it seems quite clear that Lumenon and Molex both want the company to become a real operating enterprise and that they both believe the Molex business will be enough to make them successful during the first critical years. If Lumenon seriously wanted other OEM business, they wouldn't have agreed to give Molex the control they did. Now, you indicate the Molex agreement is not written in stone. Are you suggesting the agreement can be broken? If so, when would this be likely to happen? Such a change would certainly have to be reported to the SEC and if I were a shareholder, I'd want to know if this really is a possibility. The thought of headlines stating Molex and Lumenon have terminated their agreement is a bit unsettling.
Back to you ---
Pat |
