SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________to______________________
COMMISSION FILE NUMBER: 000-23329
C3, Inc.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
North Carolina 56-1928817
- ------------------------------------ -----------------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) (Identification No.)
3800 Gateway Boulevard, Suite 310, Morrisville, N.C. 27560
- -------------------------------------------------------------------------------
(Address of principal executive offices)
919-468-0399
--------------------------------------------------
(Registrant's telephone number, including area
code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of August 3, 1999 there were 7,019,361 shares of the Registrant's Common
Stock, no par value per share, outstanding.
<PAGE>
C3, Inc.
INDEX
PART I. FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
Item 1. Financial Statements
Condensed Statements of Operations - Three Months and Six Months
Ended June 30, 1999 And 1998
Condensed Balance Sheets - June 30, 1999 And December 31, 1998
Condensed Statements Of Cash Flows - Six Months Ended June 30, 1999
And 1998
Notes To Condensed Financial Statements
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Item 3. Quantitative And Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 2. Changes In Securities And Use Of Proceeds
Item 5. Other Information
Item 6. Exhibits And Reports On Form 8-K
Signatures
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C3, Inc.
Condensed Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 3,533,612 $ 202,010 $ 6,763,076 $ 452,565
Cost of goods 1,631,677 135,476 3,727,255 290,552
--------------- ---------------- ---------------- ---------------
Gross profit 1,901,935 66,534 3,035,821 162,013
Operating expenses:
Marketing and sales 1,172,334 512,863 1,775,638 1,273,999
General and administrative 641,876 714,874 1,440,810 1,342,204
Research and development 789,694 1,088,331 1,592,750 2,410,843
--------------- ---------------- ---------------- ---------------
Total operating expenses 2,603,904 2,316,068 4,809,198 5,027,046
--------------- ---------------- ---------------- ---------------
Operating loss (701,969) (2,249,534) (1,773,377) (4,865,033)
Interest income, net 321,364 473,690 686,341 994,185
--------------- ---------------- ---------------- ---------------
Net loss (380,605) $ (1,775,844) (1,087,036) $ (3,870,848)
=============== ================ ================ ===============
Basic and diluted net loss
per share $ (0.05) $ (0.26) $ (0.16) $ (0.56)
=============== ================ ================ ===============
Weighted-average common
shares, basic and diluted 7,011,284 6,941,315 7,004,543 6,939,904
=============== ================ ================ ===============
</TABLE>
See Notes to Condensed Financial Statements.
3
<PAGE>
C3, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
--------------------- ----------------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and equivalents $ 27,841,676 $ 32,004,045
Accounts receivable, net 980,785 546,921
Interest receivable 100,555 121,276
Inventories 6,176,892 3,092,448
Prepaid expenses and other assets 390,875 294,797
--------------------- ---------------------
Total current assets 35,490,783 36,059,487
Equipment, net 3,693,810 3,832,019
Patent and license rights, net 319,370 276,817
===================== ======================
Total assets $ 39,503,963 $ 40,168,323
===================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Cree Research, Inc. $ 1,434,641 $ 1,679,600
Other 737,793 250,157
Accrued expenses 203,176 223,248
Deferred revenue 6,031 18,986
--------------------- ----------------------
Total current liabilities 2,381,641 2,171,991
Commitments
Shareholders' Equity:
Common stock 48,218,280 48,149,406
Additional paid-in capital - stock options 2,054,520 1,910,368
Accumulated deficit (13,150,478) (12,063,442)
--------------------- ----------------------
Total shareholders' equity 37,122,322 37,996,332
--------------------- ----------------------
Total liabilities and shareholders' equity $ 39,503,963 $ 40,168,323
===================== ======================
</TABLE>
See Notes to Condensed Financial Statements
4
<PAGE>
C3, Inc.
Condensed Statements Of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(1,087,036) $(3,870,848)
Adjustments:
Depreciation and amortization 262,013 43,917
Compensation expense related to stock options 151,831 146,778
Change in operating assets and liabilities:
Net change in assets (3,593,665) (1,365,303)
Net change in liabilities 209,650 485,078
------------------ ------------------
Net cash used by operating activities (4,057,207) (4,560,378)
------------------ ------------------
INVESTING ACTIVITIES:
Purchase of equipment (114,875) (286,492)
Patent costs (51,482) (63,334)
------------------ ------------------
Net cash used by investing activities (166,357) (349,826)
------------------ ------------------
FINANCING ACTIVITIES:
Stock options exercised 61,195 ----
------------------ ------------------
Net cash provided by financing activities 61,195 ----
------------------ ------------------
Net change in cash and equivalents (4,162,369) (4,910,204)
Cash and equivalents, beginning of period 32,004,045 43,980,385
================== ==================
Cash and equivalents, end of period $27,841,676 $39,070,181
================== ==================
</TABLE>
See Notes to Condensed Financial Statements.
5
<PAGE>
C3, Inc.
Notes To Condensed Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include all
normal recurring adjustments which are necessary for the fair presentation of
the results of the interim periods presented. Interim results are not
necessarily indicative of results for the year. Certain reclassifications have
been made to prior year's financial statements to conform to the classifications
used in fiscal 1999. These financial statements should be read in conjunction
with the Company's audited financial statements for the year ended December 31,
1998, as set forth in the Company's Form 10-K, filed with the Securities and
Exchange Commission on March 18, 1999.
Prior to July 1, 1998 C3, Inc. was a development stage company which devoted
substantially all of its efforts to research and product development and
development of its initial markets and did not, through June 30, 1998, generate
significant revenues from its planned principal operations.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and amounts of
revenues and expenses reflected during the reporting period. Actual results
could differ from those estimates.
2. INVENTORIES
Inventories are stated at the lower of cost or market determined on a first in,
first out basis. At June 30, 1999 finished goods includes $636,000 of test
instruments, net of a $356,000 reserve for excess inventory. At December 31,
1998 finished goods includes $1,018,000 of test instruments, net of a $132,000
reserve for excess inventory. Inventories consisted of the following:
June 30, December 31,
1999 1998
----------------- -----------------
Raw materials $ 94,346 $ 140,411
Work in process 2,647,177 819,953
Finished goods 3,435,369 2,132,084
----------------- -----------------
Total inventory $ 6,176,892 $ 3,092,448
================= =================
6
<PAGE>
3. NON-CASH OPERATING EXPENSES
During the quarter and six months ended June 30, 1999, in accordance with
Accounting Principles Board Opinion No. 25, the Company recorded compensation
expense of approximately $83,374 and $151,831, respectively, relating to stock
options. Compensation expense related to stock options for the quarter and six
months ended June 30, 1998 was approximately $95,899 and $146,778, respectively.
This compensation expense is recorded in general and administrative expense in
the statements of operations.
4. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("FAS 133"),
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133, as amended by
FAS 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company has not evaluated the impact of the adoption of
this Statement on the financial statements.
7
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 that relate to the Company's future plans, objectives, estimates and
goals. These statements are subject to numerous risks and uncertainties,
including macro and micro economic factors that affect businesses operating in
the international economy, the Company's reliance on Cree Research, Inc.
("Cree") as a developer and supplier of SiC crystals, the level of growth in
domestic and international gemstone jewelry markets, the level of market
acceptance of and demand for the Company's products, and the actions of existing
and potential competitors. These and other risks and uncertainties are described
under the heading "Business Risks" in the Company's Form 10-K for the year ended
December 31, 1998, which was filed with the Securities and Exchange Commission
on March 18, 1999. These risks and uncertainties could cause actual results and
developments to be materially different from those expressed or implied by any
of the forward-looking statements included herein.
OVERVIEW
From its inception in June 1995 through June 30, 1998, the Company was a
development stage enterprise that devoted its resources to funding research and
development of colorless lab-created moissanite gemstones, market research,
developing initial consumer marketing themes and assembling a management team.
The Company's principal business is the manufacture, marketing and distribution
of lab-created moissanite gemstones (hereinafter referred to as moissanite or
moissanite gemstones). Moissanite is being marketed as an exclusive new gemstone
with properties, including brilliance, fire and hardness, that rival other fine
gemstones like diamond, sapphire, ruby and emerald.
The Company began shipping moissanite to authorized retail jewelers in Atlanta
and Miami/Ft. Lauderdale during the second quarter of 1998, and in July 1998
launched targeted consumer-focused advertising and promotion activities in those
areas. Since mid-1998, the Company has focused on introducing moissanite
domestically in other selected markets following the same model used in Atlanta
and Miami/Ft. Lauderdale. The Company has expanded the number of specialty
retail jewelry store locations authorized to sell moissanite to 193. During the
second half of 1999, the Company will continue product introduction in other US
markets. The Company expects moissanite to be available in as many as 400 to 500
retail locations by the end of 1999. In conjunction with the broader
introduction of moissanite, the Company expects to begin a national advertising
campaign as early as the fourth quarter of 1999. The Company also has developed
relationships with distributors in certain international territories. In the
second half of 1999, the Company will seek to expand the international
distribution of moissanite and believes international sales could represent as
much as 2/3 of total sales for 1999.
In the first half of 1999 efforts to expand the distribution of moissanite were
limited in line with the availability of product. During the second quarter of
1999, Cree showed marked improvement in silicon carbide crystal quality
resulting in increased yield of salable gemstones. Throughout the remainder of
the year, particularly as the new 3-inch diameter crystal growth systems come
on-line, yields may vary. Any significant increases or decreases in yields would
have a corresponding material impact on gross margins. As the Company continues
to expand its distribution channels, it is developing a deeper understanding of
the impacts that seasonality will have on its quarterly sales. Although the
Company is confident it will meet its second-half sales goals, the summer season
is typically slow in the worldwide jewelry industry which could cause the
Company's sequential quarter's sales to be flat for the third quarter of 1999.
As the Company is expanding its marketing and promotion activities, it expects
to continue operating at a loss through at least the third quarter of 1999.
Moreover, there can be no
8
<PAGE>
assurance that the Company will ever achieve sales increases or profitability,
or that if profitability is achieved, that such profitability can be sustained.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998.
Net sales increased by $3,331,602 from $202,010 for the three months ended June
30, 1998 to $3,533,612 for the three months ended June 30, 1999. The Company
generated net sales of approximately $3,224,000 from gemstones for the three
months ended June 30, 1999. During the quarter ended June 30, 1998, prior to
emerging from the development stage, the Company generated net sales of
approximately $243,000 from gemstones, which have been netted against research
and development expenses on the operating statement because many of the
gemstones sold were associated with the Company's research and development
program. Net sales from the Company's proprietary test instrument decreased from
approximately $202,010 for the three months ended June 30, 1998 to $159,662 for
the three months ended June 30, 1999.
Gross profit increased by $1,835,401 from $66,534 or 33% of sales for the three
months ended June 30, 1998 to $1,901,935 or 54% of sales for the three months
ended June 30, 1999. Gross profit for the three months ended June 30, 1998
related entirely to sales of the Company's proprietary test instrument and gross
profit for the three months ended June 30, 1999 related primarily to sales of
moissanite gemstones. Gross margins increased in the second quarter of 1999
primarily as a result of significant improvement in yields of salable gemstones
from silicon carbide crystals during the second quarter of 1999. Throughout the
remainder of the year, particularly as the new 3-inch diameter crystal growth
systems come on-line yields may vary. Any significant yield changes would have a
material impact on gross profit.
Marketing and sales expenses increased by $659,471 from $512,863 for the three
months ended June 30, 1998 to $1,172,334 for the three months ended June 30,
1999. The increase was primarily due to advertising and promotion activities
supporting the product launch activities in selected domestic cities and
compensation and other expenses related to additional staff.
General and administrative expenses decreased by $72,998 from $714,874 for the
three months ended June 30, 1998 to $641,876 for the three months ended June 30,
1999. The decrease resulted primarily from the Company moving a significant
portion of its SEC compliance activities in-house.
Research and development expenses decreased by $298,637 from $1,088,331 for the
three months ended June 30, 1998 to $789,694 for the three months ended June 30,
1999. The decrease resulted primarily from the more focused development effort
under the Company's July 1998 Amended and Restated Development Agreement with
Cree. The July 1998 agreement replaced the June 1997 Development Agreement and
the January 1998 Supplemental Development Agreement between C3 and Cree and
provides both parties increased flexibility to pursue further color and yield
improvements on both 2-inch and 3-inch diameter crystals.
Net interest income decreased by $152,326 from $473,690 for the three months
ended June 30, 1998 to $321,364 for the three months ended June 30, 1999. This
decrease resulted from lower interest income earned on lower cash balances due
primarily to the use of the invested proceeds from the Company's initial public
offering in November 1997. See Part II, Item 2.
9
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998.
Net sales increased by $6,310,511 from $452,565 for the six months ended June
30, 1998 to $6,763,076 for the six months ended June 30, 1999. The Company
generated net sales of approximately $6,175,499 from moissanite gemstones for
the six months ended June 30, 1999. During the first six months of 1998, prior
to emerging from the development stage, the Company generated net sales of
approximately $324,000 from gemstones, which have been netted against research
and development expenses on the operating statement because many of the
gemstones sold were associated with the Company's research and development
program. Net sales from the Company's proprietary test instrument decreased from
approximately $452,565 for the six months ended June 30, 1998 to $321,834 for
the six months ended June 30, 1999.
Gross profit increased by $2,873,808 from $162,013 or 36% of sales for the six
months ended June 30, 1998 to $3,035,821 or 45% of sales for the six months
ended June 30, 1999. Gross profit for the six months ended June 30, 1998 related
entirely to sales of the Company's proprietary test instrument. Gross profit for
six months ended June 30, 1999 related primarily to sales of moissanite
gemstones. The increase in gross margins is primarily related to a significant
improvement in yields of salable gemstones from silicon carbide crystals during
the second quarter of 1999. Throughout the remainder of the year, particularly
as the new 3-inch diameter crystal growth systems come on-line yields may vary.
Any significant yield changes would have a material impact on gross profit.
Marketing and sales expenses increased by $501,639 from $1,273,999 for the six
months ended June 30, 1998 to $1,775,638 for the six months ended June 30, 1999.
The increase was primarily due to advertising and promotion activities
supporting the product launch activities in selected domestic cities and
compensation and other expenses related to additional staff.
General and administrative expenses increased by $98,606 from $1,342,204 for the
six months ended June 30, 1998 to $1,440,810 for the six months ended June 30,
1999. The increase resulted primarily from compensation and other expenses
related to additional staff.
Research and development expenses decreased by $818,093 from $2,410,843 for the
six months ended June 30, 1998 to $1,592,750 for the six months ended June 30,
1999. The decrease resulted primarily from the more focused development effort
under the Company's July 1998 Amended and Restated Development Agreement with
Cree. The July 1998 agreement replaced the June 1997 Development Agreement and
the January 1998 Supplemental Development Agreement between C3 and Cree and
provides both parties increased flexibility to pursue further color and yield
improvements on both 2-inch and 3-inch diameter crystals.
Net interest income decreased by $307,844 from $994,185 for the six months ended
June 30, 1998 to $686,341 for the six months ended June 30, 1999. This decrease
resulted from lower interest income earned on lower cash balances due primarily
to the use of the invested proceeds from the Company's initial public offering
in November 1997. See Part II, Item 2.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the
net proceeds of its initial public offering of Common Stock in November 1997
and, prior to such offering, through private equity sales. Net proceeds from the
Company's initial public offering were $41,072,982. During the second quarter of
1999, the Company used $2,418,622 to fund operations and $75,198 to fund capital
expenditures and patent expenses. At June 30, 1999, the Company had $27,841,676
of cash and equivalents and $33,109,142 of working capital. The Company
anticipates that its existing capital resources will be adequate to satisfy its
capital requirements for at least the next 12 months.
The Company has entered into a number of agreements with specialty retail
jewelry stores in the United States and with international distributors. See
Item 5 of Part II of this Quarterly Report. To support this expansion of its
distribution network, the Company has begun to build inventory levels and
intends to significantly increase its advertising and marketing expenditures as
it develops and implements a national advertising campaign. The advertising
campaign could total $1.5 - 2 million in the second half of 1999. The Company
intends to fund these inventories and advertising and marketing expenditures
from its existing cash and equivalents.
Additionally, in May 1999, the Company entered into a letter agreement ("Letter
Agreement") with its exclusive supplier, Cree. Under the Letter Agreement the
Company has agreed to purchase $2.8 million of crystal growth equipment from
Cree and to purchase all crystals produced by existing crystal growers and the
new crystal growers through June 30, 2000 at a price based upon a sliding scale
depending on the quality of each crystal received. Additionally the two
companies agreed to reduce the Company's monthly funding commitment under the
Amended and Restated Development Agreement from $240,000 to $120,000. A portion
of the crystal growers will be built to grow 3-inch diameter crystals and the
rest will grow 2-inch diameter crystals.
The Company will pay the purchase price of the systems on a monthly basis as the
systems are manufactured. Once completed the systems will remain at Cree where
Cree will use them to produce SiC crystals for the Company. When the systems are
fully depreciated, the Company is obligated to transfer title to Cree. The first
of these systems will come on-line in August 1999 with the balance coming
on-line through the remainder of 1999. The Company intends to fund the purchase
of these systems from its existing cash and equivalents.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept entries to distinguish 21st century dates from 20th century
dates. The inability to recognize or properly treat dates subsequent to December
31, 1999 may cause a company's systems and applications to process critical
financial and operational information incorrectly. The Company has undertaken a
program to address the Year 2000 issue with respect to the following: (i) the
Company's information technology and operating systems; and (ii) certain systems
of the Company's major suppliers, including Cree (insofar as such systems relate
to the Company's business activities with such parties).
As part of its evolution to an operating company, the Company selected and
implemented an enterprise-wide information technology system to support the
information needs of the Company. The Company has received written confirmation
from the software vendor that the information technology system
11
<PAGE>
selected by the Company is fully Year 2000 compliant. The Company has
substantially completed the implementation of this system and the testing of the
Year 2000 compliance of the system and does not expect the Year 2000 issue to
pose significant operational problems for its computer systems. The Company has
also substantially completed reviewing its non-information technology systems
for Year 2000 compliance and believes the Year 2000 exposure with respect to
those systems is not material.
The Company believes that its greatest risk with respect to the Year 2000 issue
stems from the potential non-compliance of our suppliers. The Company depends on
one supplier of SiC crystals, Cree, and on a limited number of suppliers of
other components services necessary for the manufacture of moissanite gemstones.
Accordingly, if those suppliers are unable to process or fill the Company's
orders or otherwise interact with the Company because of Year 2000 problems, the
Company could experience material adverse effects to its business. The Company
has initiated communications with its significant suppliers and vendors,
including Cree. The Company is coordinating efforts with these parties to
minimize the extent to which the Company's business will be vulnerable to their
failure to remediate their own Year 2000 issues. The Company has received
confirmation from its significant suppliers and vendors that they have developed
plans to address the Year 2000 compliance issues of their systems prior to
December 31, 1999.
The crystal growth systems, which Cree uses to produce SiC crystals for the
Company, are dependent upon microprocessors. The Company has received written
confirmation from Cree that it has evaluated the crystal growth systems and
determined that they are fully Year 2000 compliant. Cree has also evaluated and
remediated its other business systems that rely on microprocessors. According to
Cree's Form 10Q for the quarter ended March 28, 1999, Cree has completed all
Year 2000 compliance efforts with respect to its business systems. Any
unexpected Year 2000 issues at Cree could cause delays in the receipt of SiC
crystals which would, in turn, delay deliveries of moissanite gemstones to the
Company's customers. Any significant delay in the Company's receipt of SiC
crystals or resulting delay in delivery of moissanite gemstones would have a
material adverse effect on the Company's business, operating results and
financial condition.
There can be no assurance that the systems of third parties on which the
Company's business relies will be modified on a timely basis. Additionally, to
the extent that the general economy slows down as a result of Year 2000
compliance issues, the Company's operations could be affected. The Company's
business, financial condition and results of operations could be materially
adversely affected by the failure of its systems or those operated by other
parties to operate properly beyond December 31, 1999. Although there is
currently no alternative source for SiC crystals, to the extent possible, the
Company will develop and execute contingency plans designed to allow continued
operation in the event of failure of the Company's or third parties' systems.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk for changes in interest
rates is not significant because the Company's investments are limited to highly
liquid instruments with maturities of three months or less. At June 30, 1999 the
Company has approximately $27.2 million of short-term investments classified as
cash and equivalents. All of the Company's transactions with international
customers and suppliers are denominated in US dollars.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 14, 1997, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-36809) to be
effective. The net proceeds of this offering were $41,072,982. As of June 30,
1999, the Company had approximately $17,378,000 of the remaining net proceeds of
the offering invested in money market accounts, debt instruments having an
original maturity of three months or less and other highly liquid investments.
Approximately $6,380,000 of the proceeds has been used in research and
development, of which $209,131 was paid to officers, directors or shareholders
owning more than ten percent (10%) of the Common Stock outstanding. The Company
has also used approximately $7,548,000 to fund sales, marketing and
administrative expenses, of which $478,000 was paid to officers, directors or
shareholders owning more than ten percent (10%) of the Common Stock outstanding.
The Company also expended approximately $5,770,000 to fund working capital. In
addition, the Company acquired $3,992,000 of production equipment, including
$3,375,000 of crystal growth systems from Cree, certain computerized wafering
and preform development equipment, and other equipment.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of C3, Inc. was held on May 17, 1999. At the
meeting, the shareholders voted on the election of directors and the selection
of independent auditors. The following three nominees were elected to the Board
of Directors for a three year term: Jeff N. Hunter, Kurt Leutzinger and Barbara
Kotlikoff. Additionally, the appointment of Deloitte & Touche LLP as independent
auditors for the Company for the fiscal year ending December 31, 1999 was
ratified. The number of votes cast for, against or withheld, as well as the
number of abstentions, for each proposal are as follows:
A. Election of Directors
- ------------------------------------------------------------------------------
Votes Votes
Director Nominee For Withheld
- ------------------------------------------------------------------------------
Jeff N. Hunter 5,112,065 6,770
Kurt Leutzinger 5,111,690 7,145
Barbara Kotlikoff 5,093,050 27,785
A. Ratification of Deloitte & Touche LLP as auditors for fiscal year ending
December 31, 1999
Votes For Votes Against Abstentions
- -------------------------------------------------------------------------------
Ratification of
Deloitte & Touche LLP 5,104,305 12,255 2,275
ITEM 5: OTHER INFORMATION
The Company has entered into a number of agreements with specialty retail
jewelers with an aggregate of over 193 locations in 35 states. Additionally, the
Company has entered into 28 international agreements for distribution of
moissanite gemstones in 27 countries and various areas in the Caribbean. The
international agreements require aggregate annual moissanite purchases of
approximately $11 million during the remainder of 1999 and approximately $12
million during calendar year 2000.
13
<PAGE>
In June 1999, the Company entered into a third amendment to its agreement with
John M. Bachman, Inc. ("JMB"). The amendment provides for the Company to advance
JMB additional funds to expand the production facilities of its affiliate which
facets the Company's moissanite gemstone preforms. These funds will be repaid
through reductions to future cutting charges. The amendment extends the term of
the Company's agreement with JMB to December 31, 2001. The Company has the right
to terminate the agreement at any time after January 1, 2001 upon 90 days
written notice.
14
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10.36 Third Amendment to Agreement, dated June 16, 1999,
between John M. Bachman, Inc. and C3, Inc.*
27.1 Financial Data Schedule
* The Company has requested that certain portions of this exhibit be
given confidential treatment.
+ Denotes a management contract or compensatory plan or arrangement.
(b) Report on Form 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1999.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C3, Inc.
Date: August 16, 1999 /s/ Jeff N. Hunter
-------------------
Jeff N. Hunter
Chief Executive Officer and Chairman of the Board
and Director
(Principal Executive Officer)
Date: August 16, 1999 /s/ Mark W. Hahn
----------------
Mark W. Hahn
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****.
EXHIBIT NO. 10.36
THIRD AMENDMENT TO AGREEMENT
THIS THIRD AMENDMENT TO AGREEMENT (this "Amendment") is entered into as
of June 16, 1999 by and among C3, INC., a North Carolina corporation ("C3"),
JOHN M. BACHMAN, INC. ("JMB").
Statement of Purpose
C3 and JMB entered into an Ageement dated Septemer 24, 1997 (the
"Agreement") to formalize the terms upon which JMB will cut moissanite gemstones
for C3, a First Amendment to the Agreement dated March 23, 1998 (the "First
Amendment") and a Second Amendment to the Agreement dated September 28, 1998
(the "Second Amendment"). C3 and JMB now desire to amend the Agreement to
provide additional expansion funds to JMB, to provide for JMB to perform certain
preform identification and finished gemstone grading services, to extend the
term of the Agreement as forth below.
Therefore, in consideration of the foregoing, the mutual covenants and
agreements contained herein, and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Additional Expansion Funds. Within 3 business days after the date of
this Amendment, C3 will advance to JMB by certified check delivered to the
address set forth in Section 7 of the Agreement, additional expansion funds in
the amount of $*******, which will make the total expansion funds advances by C3
equal $*******(the "Expansion Funds"), which funds will be utilized by JMB
solely to expand its affiliate's production facility and procure additional
equipment and labor as needed to enable JMB and its affiliate to satisfy the
production volumes contemplated by the Agreement. The entire amount of the
Expansion Funds will be an advance against production charges payable by C3
pursuant to Section 2, below, and C3 will be credited against production charges
for the entire amount of the Expansion Funds pursuant to Section 2, below.
2. Cutting Charges. C3 will pay JMB for Moissanite Gemstone cutting
services at rates as set forth on Exhibit A to the Second Amendment. Beginning
with the invoice reflecting cutting services provided by JMB from and after June
1, 1999 through January 31, 2000, the amount payable to JMB by C3 reflected on
each invoice will be reduced by **% and from and after February 1, 2000 by **%
until the aggregate amount of such reductions prior to and after this Amendment
equals $******* and C3 has received full credit against production charges for
the amount of the Expansion Funds. In all other respects the cutting charges and
payment procedures in the Agreement, the First Amendment and the Second
Amendment are hereby confirmed.
3. Extension of Term. The initial term of the Agreement will be
extended from the date
1
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****.
first set forth in the Agreement through December 31, 2001, however, C3 may
terminate the Agreement at any time after January 1, 2001 with 90 days prior
written notice.
4. Production Procedures: Standards
a. The monthly production volumes (in finished pieces)
will be as follows:
June 1999 *****
July 1999 *****
Aug 1999 *****
Sep 1999 *****
Oct 1999 *****
Nov 1999 *****
Dec 1999 *****
Jan 2000 *****
Feb 2000 *****
March 2000 *****
April 2000 *****
May 2000 *****
Jun-Dec 2001 *****
b. In all other respects the production procedures and
standards in the Agreement, the First Amendment and the Second
Amendment are hereby confirmed.
5. Confirmation of Agreement. In all other respects the parties hereto
confirm the terms of the Agreement, the First Amendment and the Second
Amendment. JMB will obtain in writing, and provide to C3, the consent of its
affiliate to be bound by the terms of this Amendment.
IN WITNESS WHEREOF, each of the parties has executed and delivered this
Amendment by its duly authorized officer, as of the date first above written.
C3, INC.
By: /s/ Mark W. Hahn
----------------------------
Name: Mark W. Hahn
Title: Chief Financial Officer
JOHN M. BACHMAN, INC.
By: /s/ John M. Bachman
-----------------------------
Name: John M. Bachman
Title: Managing Director
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From The
Condensed Balance Sheet As Of June 30, 1999 And The Condensed Statement Of
Operations For The Six Months Ended June 30, 1999 And Is Qualified In Its
Entirety By Reference To Such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> Jun-30-1999
<CASH> 27,841,676
<SECURITIES> 0
<RECEIVABLES> 980,785
<ALLOWANCES> 0
<INVENTORY> 6,176,892
<CURRENT-ASSETS> 35,490,783
<PP&E> 4,178,907
<DEPRECIATION> 485,097
<TOTAL-ASSETS> 39,503,963
<CURRENT-LIABILITIES> 2,381,641
<BONDS> 0
0
0
<COMMON> 48,218,280
<OTHER-SE> (11,095,958)
<TOTAL-LIABILITY-AND-EQUITY> 39,503,963
<SALES> 6,763,076
<TOTAL-REVENUES> 6,763,076
<CGS> 3,727,255
<TOTAL-COSTS> 3,727,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,087,036)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,087,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,087,036)
<EPS-BASIC> (.016)
<EPS-DILUTED> (.016)
</TABLE>
