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 March 31, 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.
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(Exact name of Registrant as specified in its charter)
North Carolina 56-1928817
- ---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3800 Gateway Boulevard, Suite 310, Morrisville, N.C. 27560
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(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 May 9, 1999 there were 7,004,669 shares of the Registrant's Common Stock,
no par value per share, outstanding.
<PAGE>
C3, Inc.
INDEX
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Statements of Operations - Three Months Ended March 31,
1999 And 1998
Condensed Balance Sheets - March 31, 1999 And December 31, 1998
Condensed Statements Of Cash Flows - Three Months Ended March 31,
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
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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 March 31,
---------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 3,229,464 $ 250,555
Cost of goods 2,095,578 155,076
----------- -----------
Gross profit 1,133,886 95,479
Operating expenses:
Marketing and sales 603,304 761,136
General and administrative 798,934 627,330
Research and development 803,056 1,322,512
----------- -----------
Total operating expenses 2,205,294 2,710,978
----------- -----------
Operating loss (1,071,408) (2,615,499)
Interest income, net 364,977 520,495
----------- -----------
Net loss $ (706,431) $(2,095,004)
=========== ===========
Basic and diluted net loss
per share $ (0.10) $ (0.30)
=========== ===========
Weighted-average common
shares, basic and diluted 6,997,726 6,938,476
=========== ===========
</TABLE>
See notes to Condensed Financial Statements.
3
<PAGE>
C3, Inc.
Condensed Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------------- --------------
<S> <C> <C>
ASSETS (Unaudited)
Current Assets:
Cash and equivalents $ 30,304,859 $ 32,004,045
Accounts receivable, net 440,965 546,921
Interest receivable 106,264 121,276
Inventories 4,224,844 3,092,448
Prepaid expenses and other assets 306,875 294,797
------------ ------------
Total current assets 35,383,807 36,059,487
Equipment, net 3,783,747 3,832,019
Patent and license rights, net 285,781 276,817
------------ ------------
Total assets $ 39,453,335 $ 40,168,323
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Cree Research, Inc. $ 1,483,764 $ 1,679,600
Other 343,319 250,157
Accrued expenses 236,226 223,248
Deferred revenue 1,110 18,986
------------ ------------
Total current liabilities 2,064,419 2,171,991
Commitments
Shareholders' Equity:
Common stock 48,179,964 48,149,406
Additional paid-in capital - stock options 1,978,825 1,910,368
Accumulated deficit (12,769,873) (12,063,442)
------------ ------------
Total shareholders' equity 37,388,916 37,996,332
------------ ------------
Total liabilities and shareholders' equity $ 39,453,335 $ 40,168,323
============ ============
</TABLE>
See notes to Condensed Financial Statements
4
<PAGE>
C3, Inc.
Condensed Statements Of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------
1999 1998
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (706,431) $ (2,095,004)
Adjustments:
Depreciation and amortization 130,467 15,499
Compensation expense related to stock options 68,457 50,879
Change in operating assets and liabilities:
Net change in assets (1,023,506) (512,308)
Net change in liabilities (107,572) 420,152
---------------- ---------------
Net cash used by operating activities (1,638,585) (2,120,782)
---------------- ---------------
INVESTING ACTIVITIES:
Purchase of equipment (77,744) (114,181)
Patent costs (13,415) (22,479)
---------------- ---------------
Net cash used by investing activities (91,159) (136,660)
---------------- ---------------
FINANCING ACTIVITIES:
Stock options exercised 30,558 ----
---------------- ---------------
Net cash provided by financing activities 30,558 ----
---------------- ---------------
Net change in cash and equivalents (1,699,186) (2,257,442)
Cash and equivalents, beginning of period 32,004,045 43,980,385
---------------- ---------------
Cash and equivalents, end of period $ 30,304,859 $ 41,722,943
================ ===============
</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 fiscal 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 March 31, 1999 finished goods includes $850,398 of test
instruments, net of a $244,000 reserve for excess inventory. At December 31,
1998 finished goods includes $1,018,465 of test instruments, net of a $132,000
reserve for excess inventory. Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
Raw materials $ 855,347 $ 140,411
Work in process 1,299,836 819,953
Finished goods 2,069,661 2,132,084
----------------- -----------------
Total inventory $ 4,224,844 $ 3,092,448
================= =================
</TABLE>
6
<PAGE>
3. NON-CASH OPERATING EXPENSES
During the quarter ended March 31, 1999, in accordance with Accounting
Principles Board Opinion No. 25, the Company recorded compensation expense of
approximately $68,457 relating to stock options. Compensation expense related to
stock options for the quarter ended March 31, 1998 was approximately $51,000.
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 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999. The
Company has not evaluated the impact of the adoption of this Statement on the
financial statements.
5. SUBSEQUENT EVENT
In May 1999 the Company entered into a letter agreement ("Letter Agreement")
with its exclusive supplier, Cree Research, Inc. ("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 silicon carbide ("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 September 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.
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 consumer-focused advertising and promotion activities in those areas.
Since mid-1998 the Company has expanded the number of authorized retail jewelers
primarily located in the southeastern states of North Carolina, South Carolina,
Georgia and Florida and increased the number of exclusive international
distributors. To date marketing and promotion activities have been focused
primarily in these southeastern states. Domestically, during 1999, the Company
will focus on the market introduction of moissanite in other areas of the United
States and as a result of these efforts expects moissanite may be available in
as many as 500 retail locations by the end of 1999, although there can be no
assurance that the Company will be successful in its efforts to expand its
domestic distribution. As the Company develops a sufficient network of
authorized retail jewelers, it expects to begin a national advertising campaign,
which could begin as early as the second half of 1999. The Company will seek to
expand the international distribution of moissanite and believes international
sales could represent 2/3 of total sales for 1999.
The Company believes that its sales volumes will increase as the yield of
salable gemstones from each crystal provided by Cree increases, additional
crystal growth capacity is added, and as the market introduction of moissanite
gemstones expands geographically. As distribution of moissanite expands, the
Company will incur increasing spending levels as it continues to make
investments in development efforts with Cree to increase production volumes and
yields, as it makes investments in receivables, inventory and manufacturing
equipment, and as it increases advertising, marketing and personnel
expenditures. The Company expects to continue operating at a loss through at
least part of 1999. Moreover, there can be no assurance that the Company will
ever achieve the expected sales increases or profitability or that if
profitability is achieved, that such profitability can be sustained.
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
Net sales increased by $2,978,909 from $250,555 for the three months ended March
31, 1998 to $3,229,464 for the three months ended March 31, 1999. The Company
generated net sales of approximately $2,952,000 from moissanite for the three
months ended March 31, 1999. During the first three months of 1998, prior to
emerging from the development stage, the Company generated net sales of
approximately $81,000 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 $250,555 for the three months ended March 31, 1998 to $162,000 for
the three months ended March 31, 1999.
Gross profit increased by $1,038,407 from $95,479 or 38% of sales for the three
months ended March 31, 1998 to $1,133,886 or 35% of sales for the three months
ended March 31, 1999. Gross profit for the three months ended March 31, 1998
related entirely to sales of the Company's proprietary test instrument. The
Company will seek to increase gross margins for moissanite gemstones as the
Company realizes improved yields from each SiC crystal produced by Cree. Gross
margins for test instruments will likely decrease over time as the Company
enters into additional volume distribution agreements and if it experiences
pricing pressures on its testers from competitive test instruments.
Marketing and sales expenses decreased by $157,832 from $761,136 for the three
months ended March 31, 1998 to $603,304 for the three months ended March 31,
1999. The decrease was primarily due to non-recurring expenditures for market
research and initial development of advertising and marketing materials in the
first quarter of 1998.
General and administrative expenses increased by $171,604 from $627,330 for the
three months ended March 31, 1998 to $798,934 for the three months ended March
31, 1999. The increase resulted primarily from compensation and other expenses
related to additional staff, occupancy expenses and investor relations expenses
associated with business expansion and SEC compliance obligations incurred as a
public company.
Research and development expenses decreased by $519,456 from $1,322,512 for the
three months ended March 31, 1998 to $803,056 for the three months ended March
31, 1999. The decrease resulted primarily from the more focused development
effort under the Company's July 1998 Amended and Restated Development Agreement
with Cree Research, Inc. 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 $155,518 from $520,495 for the three months
ended March 31, 1998 to $364,977 for the three months ended March 31, 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>
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 first quarter of
1999, the Company used $1,638,585 to fund operations and $91,159 to fund capital
expenditures and patent expenses. At March 31, 1999, the Company had $30,304,859
of cash and cash equivalents and $33,319,388 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 aggregate $1-1.5 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 Research, Inc. ("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 September 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 has selected and
is in the process of implementing an enterprise-wide information technology
system to support the long-term information
10
<PAGE>
needs of the Company. The Company has received written confirmation from the
software vendor that the information technology system selected by the Company
is fully Year 2000 compliant. The Company anticipates that the implementation of
this system and testing of the Year 2000 compliance of the system will be
completed by mid 1999 and that the Year 2000 issue will not pose significant
operational problems for its computer systems. The Company is in the process of
reviewing its non-information technology systems for Year 2000 compliance and
expects this review to be complete by mid 1999. The Company 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 us 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 March 31, 1999
the Company has approximately $29.6 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.
11
<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 March 31,
1999, the Company had approximately $22,530,600 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 $5,594,800 of the proceeds has been used in research and
development, of which $173,225 was paid to officers, directors or shareholders
owning more than ten percent (10%) of the Common Stock outstanding. The Company
has also used approximately $5,475,100 to fund sales, marketing and
administrative expenses, of which $383,000 was paid to officers, directors or
shareholders owning more than ten percent (10%) of the Common Stock outstanding.
The Company also expended approximately $3,517,500 to build inventory of its
products. In addition, the Company acquired $3,955,000 of production equipment,
including $3,375,000 of crystal growth systems from Cree, certain computerized
wafering and preform development equipment, and other equipment.
ITEM 5: OTHER INFORMATION
The Company has entered into a number of agreements with specialty retail
jewelers with an aggregate of over 150 locations in 31 states. Additionally, the
Company has entered into 21 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 $16 million during calendar 1999 and approximately $18 million
during calendar 2000.
In May 1999, the Company announced the addition of Mary Katherine Rafferty as
Director of Marketing and Public Relations. Ms. Rafferty has 20 years of
marketing and public relations experience primarily in the jewelry and cosmetics
industries.
Additionally, in May 1999 the Company entered into a letter agreement ("Letter
Agreement") with its exclusive supplier, Cree Research, Inc. ("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 fully obligated to transfer title to Cree; the
first of these systems will come on-line in September 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.
12
<PAGE>
Consistent with the Company's efforts to improve and secure its products, the
Company has obtained certain rights for manufacturing gemstone products and
gemological instrumentation which may arise from inventions made by C. Eric
Hunter related to wide-band gap compound semiconductor materials. Mr. Hunter is
the lead author on U.S. patents owned by the Company for synthetic SiC
gemstones. Under a Licensing Agreement effective as of October 10, 1998, C. Eric
Hunter granted the Company an irrevocable, exclusive and perpetual license to
utilize certain new patent applications for compound semiconductor materials
that potentially have use in the manufacture of synthetic gemstones and
gemological instrumentation. Under the Licensing Agreement, the Company agreed
to pay for the cost of filing, prosecuting and maintaining those patent
applications in the United States and to indemnify C. Eric Hunter from any
claims made against Mr. Hunter relating to any patent infringement for gemstone
and gemological instrumentation or relating to his involvement with C3 through
December 31, 2003.
Mr. Hunter has filed a number of patent applications on technology covered under
the Licensing Agreement, one of which has been issued (US Patent Number
5858086), and the Company has paid or reimbursed legal expenses relating to the
patent and patent applications of approximately $58,000 to date. The Company
also has the right to license other technology developed by Mr. Hunter through
December 31, 2003 under the same terms and conditions.
The Company entered into the License Agreement in order to assure itself of
rights to future gemstone technology developed by C. Eric Hunter. The
technologies are covered by existing patent applications and are in the very
early stages of development. Based on the development to date, the Company is
unable to assess the extent to which these technologies may enable the Company
to pursue new gemstone products or improve existing products. Should the Company
ever use any of these technologies in its products, the Company has agreed to
pay Mr. Hunter a royalty based on net sales of those products. If Mr. Hunter
manufactures gemstone materials or gemological instrumentation using the
inventions, he has agreed to sell those materials or instruments exclusively to
C3 at his cost plus an agreed upon margin. The Company believes the terms of the
royalty and product purchases to be no less favorable than they could obtain
from a third party. The Company has no obligation to fund any development
expenses other than legal fees, including filing, prosecuting and maintaining
said patents and patent applications.
C. Eric Hunter is the brother of Jeff N. Hunter, the Chairman and Chief
Executive Officer of the Company, and according to information obtained from his
Schedule 13G dated January 18, 1999 was also the beneficial owner of
approximately 9.4% of the Company's common stock.
13
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.33 Employment Agreement, dated May 1, 1999, between Mary
Katherine Rafferty and C3, Inc.+
10.34 Letter Agreement, dated May 3, 1999 between Cree
Research, Inc. and C3, Inc.*
10.35 Licensing Agreement, dated October 10, 1998, between
C. Eric Hunter and C3, Inc.*
27.1 Financial Data Schedule
* The Company has requested that certain portions of this exhibit be
given confidential treatment. An unredacted version of this Exhibit
has been filed with the Commission.
+ Denotes a management contract or compensatory plan or arrangement.
(b) Report on Form 8-K
The Company filed a current Report on Form 8-K on March 11, 1999 to
report the Company's adoption of a Shareholder Rights Agreement.
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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: May 17, 1999 /s/ Jeff N. Hunter
-------------------
Jeff N. Hunter
Chief Executive Officer and Chairman of the Board
and Director
(Principal Executive Officer)
Date: May 17, 1999 /s/ Mark W. Hahn
----------------
Mark W. Hahn
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement"), dated as of May 1,
1999 is entered into by and between C3, Inc, a North Carolina corporation with
its principal office at 3800 Gateway Boulevard, Suite 310 Morrisville, NC 27560
(the "Company") and Mary Katherine Rafferty an individual currently residing at
16 West 16th Street, Apt. 12HS, New York, New York, 10011 ("Employee").
Statement of Purpose
The Company wishes to obtain the services of the Employee on the terms
and conditions and with the benefits set forth in this Agreement. Employee
desires to be employed by the Company on such terms and conditions and to
receive such additional consideration as set out herein.
Therefore, in consideration of the mutual covenants contained in this
Agreement, the grant of certain options to purchase common stock of the Company
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Employee agree as follows:
1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby accepts such employment, on the terms and
conditions set forth in this Agreement.
2. Term of Employment. The term of Employee's employment under this
Agreement shall commence as of the date of this Agreement and
shall continue on and through April 30, 2000. Termination of
employment shall be governed by Paragraph 7 of this Agreement, and
unless terminated by either party as provided in Paragraph 7, this
Agreement shall automatically, at the expiration of each existing
term, renew for successive one year terms.
3. Position and Duties. The Employee shall serve as Director of
Marketing and Public Relations of the Company. Employee will,
under the direction of the President and COO of the Company,
faithfully and to the best of her ability perform the duties as
may be reasonably assigned by the President and COO. Employee
agrees to devote her entire working time, energy and skills to the
Company while so employed.
4. Compensation and Benefits. Employee shall receive compensation and
benefits for the services performed for the Company under this
Agreement as follows:
A) BASE SALARY. Employee shall receive a base salary of $100,000
per year, payable in regular and equal semi-monthly
installments ("Base Salary").
B) EMPLOYEE BENEFITS. Employee shall receive such benefits as
are made available to the other employees of the Company,
including, but not limited to, life, medical and disability
insurance, retirement benefits and three weeks paid vacation
annually (the "Employee Benefits").
C) INCENTIVE COMPENSATION. Employee will receive a cash bonus of
$30,000 if the net revenues of the company equal or exceed
$30 million for the year ending December 31, 1999. Employee
shall receive a cash bonus of $20,000 if the net revenues of
the company are equal to or in excess of $20 million, and
less than $30 million for the year ending December 31, 1999.
If the net revenues of the company are less than $20 million
for the year ending
16
<PAGE>
December 31, 1999, any cash bonus awarded the employee shall
be at the sole discretion of the President of the company.
For all periods after December 31, 1999, Employee shall
participate in such incentive plans as may be approved by the
Board of Directors for the senior management of the company
from time-to-time.
D) RELOCATION EXPENSES. Employee shall receive a one time
$20,000 payment in compensation for all costs associated with
the relocation of employee's domicile from New York, New York
to the Raleigh, North Carolina area. This payment will be
subject to income tax withholding and other taxes as provided
by federal and state statute. The payment will be due and
payable on May 30, 1999. Additionally, the Company will pay
the brokerage commission payable on the sale of Employee's
current residence if sold during the term of this agreement
or any extension thereof for an additional one-year period.
The company will provide temporary housing for the Employee
for a period not to exceed six months beginning May 15, 1999.
5. Reimbursement of Expenses. The Company shall reimburse Employee
for all reasonable out-of-pocket expenses incurred by Employee
specifically and directly related to the performance of the
Employee of the services under the Agreement.
6. Withholding. The Company may withhold from any payments or
benefits under this Agreement all federal, state or local taxes or
other amounts as may be required pursuant to applicable law,
government regulation or ruling.
7. Termination of Employment.
A) DEATH OF EMPLOYEE. If the Employee shall die during the Term,
this Agreement and the employment relationship hereunder will
automatically terminate on the date of death, which shall be
the last day of the Term.
B) TERMINATION FOR JUST CAUSE. The Company shall have the right
to terminate the Employee's employment under this Agreement
at any time for Just Cause, which termination shall be
effective immediately. Termination for "Just Cause" shall
include termination for the Employee's personal dishonesty,
gross incompetence, willful misconduct, breach of fiduciary
duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule,
regulation (other than traffic violations or similar
offenses), written Company policy or final cease-and-desist
order, conviction of a felony or of a misdemeanor involving
moral turpitude, unethical business practices, in connection
with the Company's business, misappropriation of the
Company's assets (determined on a reasonable basis),
disability or material breach of any other provision of this
Agreement, provided that the Employee has received written
notice from the Company of such material breach and such
breach remains uncured thirty days after the delivery of such
notice. For purposes of this subsection, the term
"disability" means the inability of Employee, due to the
condition of his physical, mental, or emotional health, to
satisfactorily perform the duties of his employment hereunder
for a continuous three month period; provided further that if
the Company furnishes long term disability insurance for the
Employee, the term "disability" shall mean that continuous
period sufficient to allow for the long term disability
payments to commence pursuant to the Company's long term
disability insurance policy. In the event the Employee's
employment under this Agreement is terminated for Just Cause,
the Employee shall have no
17
<PAGE>
right to receive compensation or other benefits under this
Agreement for any period after such termination.
C) TERMINATION WITHOUT CAUSE. The Company may terminate the
Employee's employment other than for "Just Cause," as
described in Subsection (b) above, at any time upon written
notice to the Employee, which termination shall be effective
immediately. In the event the Company terminates Employee
pursuant to this Subsection (c), (i) the Employee will
receive the Base Salary for the remainder of the then
existing term, or for a period of seven calendar months,
whichever is greater, regardless of the contract term
("Termination Compensation"), so long as the Employee
complies with Sections 8, 9 and 10 of the Agreement and (ii)
the Company shall take such action as may be required to vest
any unvested benefits of the Employee under any employee
stock-based or other benefit plan or arrangement, not
withstanding any provision in any applicable plan. Such
amounts shall be payable at the times such amounts would have
been paid in accordance with Section 4 In addition, Employee
shall continue to participate in the same group
hospitalization plan, health care plan, dental care plan,
life or other insurance or death benefit plan, and any other
present or future similar group employee benefit plan or
program for which officers of the Company generally are
eligible, on the same terms as were in effect prior to the
Employee's termination, either under the Company's plans or
comparable coverage, for all periods Employee receives
Termination Compensation. Notwithstanding anything in this
Agreement to the contrary, if Employee breaches Sections 8, 9
or 10 of this Agreement, the Employee will not be entitled to
receive any further compensation or benefits pursuant to this
Section 7(c).
D) CHANGE OF CONTROL SITUATIONS. In the event of a Change of
Control of Company at any time after the date hereof,
Employee may voluntarily terminate employment with Company up
until twelve (12) months after the Change of Control for
"Good Reason" and, subject to Section 7(f), (y) be entitled
to receive in a lump sum (i) any compensation due but not yet
paid through the date of termination and (ii) in lieu of any
further salary payments from the date of termination to the
end of the then existing term, an amount equal to the
Termination Compensation times 2.99, and (z) shall continue
to participate in the same group employee benefit plans or
programs for which officers of the Company generally are
eligible, or comparable plans or coverage, for a period of
two years following termination of employment by the
Employee, on the same terms as were in effect either (A) at
the date of such termination, or (B) if such plans and
programs in effect prior to the Change of Control of Company
are, considered together as a whole, materially more generous
to the offices of Company, then at the date of Change of
Control. Any equity based incentive compensation (including
but not limited to stock options, SARs, etc.) shall fully
vest and be immediately exercisable in full upon a Change in
Control, not withstanding any provision in any applicable
plan. The Company shall pay any such benefits to the same
extent as they were so paid prior to the termination or the
Change of Control of Company.
"Good Reason" shall mean the occurrence of any of the
following events without the Employee's express written
consent:
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<PAGE>
(i) The assignment to the Employee of duties inconsistent
with the position and status of the Employee with the
Company immediately prior to the Change of Control;
(ii) A reduction by the Company in the Employee's pay grade
or base salary as then in effect, or the exclusion of
Employee from participation in the Company's benefit
plans in which he previously participated as in effect
at the date hereof or as the same may be increased from
time-to-time during the Term, or Company's failure to
increase (within twelve (12) months of the Employee's
last increase in base salary) the Employee's base salary
in an amount which at least equals, on a percentage
basis, the average percentage increase in base salary
for all executives entitled to participate in Company's
executive incentive plans for which the Employee was
eligible in the preceding 12 months; or
(iii) An involuntary relocation of the Employee more than
fifty (50) miles from the location where the Employee
worked immediately prior to the Change in Control or the
breach by the Company of any material provision of this
Agreement; or
(iv) Any purported termination of the employment of Employee
by Company which is not effected in accordance with this
Agreement.
A "Change of Control" shall be deemed to have occurred if (i)
any person or group of persons (as defined in Section 13(d)
and 14(d) of the Securities Exchange Act of 1934) together
with its affiliates, excluding employee benefit plans of
Company, becomes, directly or indirectly, the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange
Act of 1934) of securities of Company representing 20% or more
of the combined voting power of Company's then outstanding
securities; or (ii) during the then existing term of the
Agreement, as a result of a proxy contest, merger,
consolidation or sale of assets, or as a result of any
combination for the foregoing individuals who at the beginning
of any year period during such term constitute the Company's
Board of Directors, plus new directors whose election by
Company's shareholders is approved by a vote of at least two
thirds of the outstanding voting shares of the Company, cease
for any reason during such year period to constitute at least
two thirds of the members of such Board of Directors; or (iii)
the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation or
entity which regardless of which entity is the survivor, other
than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or being converted into voting securities of the
surviving entity) at least 60% of the combined voting power of
the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or
(iv) the shareholders of the Company approve a plan of
complete liquidation or winding-up of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets; or (v) any event
which the Company's Board of Directors determines should
constitute a Change of Control.
E) EMPLOYEE'S RIGHT TO PAYMENTS. In receiving any payments
pursuant to this Section 7, Employee shall not be obligated
to seek other employment or take
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<PAGE>
any other action by way of mitigation of the amounts payable
to the Employee hereunder, and such amounts shall not be
reduced or terminated whether or not the Employee obtains
other employment.
F) REDUCTION IN AGREEMENT PAYMENTS. Notwithstanding anything in
this Agreement to the contrary, if any of the payments
provided for under this Agreement (the "Agreement Payments"),
together with any other payments that the Employee has the
right to receive (such other payments together with the
Agreement Payments are referred to as the "Total Payments"),
would constitute a "parachute payment" as defined in Section
280G(b)(2) of the Internal Revenue code of 1986, as amended
(the "Code") (a "Parachute Payment"), the Agreement Payments
shall be reduced by the smallest amount necessary so that no
portion of such Total Payments would be Parachute Payments.
In the event the Company shall make an Agreement Payment to
the Employee that would constitute a Parachute Payment, the
Employee shall return such payment to the Company (together
with interest at the rate set forth in Section 1274(b)(2)(B)
of the Code). For purposes of determining whether and the
extent to which the Total Payments constitute the Parachute
Payments, no portion of the Total Payments the receipt of
which Employee has effectively waived in writing shall be
taken into account.
8. Covenant Not to Compete. Employee agrees that during his
employment with the Company and for a period of one (1) year
following the termination of his employment with the Company, for
whatever reason:
a) Employee shall not, directly or indirectly, own any interest
in, manage, operate, control, be employed by , render
advisory services to, or participate in the management or
control of any business that operates in the same business as
the Company, which Employee and the Company specifically
agree as the business of fabricating (wafering, preforming,
and faceting), marketing and distributing moissanite
gemstones or other diamond simulants to the gem and jewelry
industry (the "Business"), unless Employee's duties,
responsibilities and activities for and on behalf of such
other business are not related in any way to such other
business's products which are in competition with the
Company's products at the time of termination. For purposes
of this Section, "competition with the Company" shall mean
competition for customers in the United States and in any
country in which the Company is selling the Company's
products at the time of termination. Employee's ownership of
less than one percent of the issued and outstanding stock of
a corporation engaged in the Business shall not by itself be
deemed to be a violation of this Agreement. Employee
recognizes that possible restriction on his activities which
may occur as a result of his performance of his obligations
under Paragraph 8(a) are substantial, but that such
restriction is required for the reasonable protection of the
Company.
b) Employee shall not, directly or indirectly, influence or
attempt to influence any customer of the Company to
discontinue its purchase of any product of the Company which
is manufactured or sold by the Company at the time of
termination of Employee's employment or to divert such
purchases to any other person, firm or employer.
20
<PAGE>
c) Employee shall not, directly or indirectly, interfere with,
disrupt or attempt to disrupt the relationship, contractual
or otherwise between the Company and any of its suppliers.
d) Employee shall not, directly or indirectly, solicit any
employee of the Company to work for any other person, firm or
employer.
9. Confidentiality. In the course of his employment with the Company,
Employee will have access to confidential information, records,
data, customer lists, lists of product sources, specifications,
trade secrets and other information which is not generally
available to the public and which the Company and Employee hereby
agree is proprietary information of the Company ("Confidential
Information"). During and after his employment by the Company,
Employee shall not, directly or indirectly, disclose the
Confidential Information, except as is required in the course of
his Employment under this Agreement. All confidential Information
as well as records, files, memoranda, reports, plans, drawings,
documents, models, equipment and the like, including copies
thereof, relating to the Company's business, which Employee shall
prepare or use or come into contact with during the course of his
employment, shall be and remain the Company's sole property, and
upon termination of Employee's employment with the Company,
Employee shall return all such materials to the Company.
10. Proprietary Information. Employee shall assign to Company, its
successors or assigns all of the Employee's rights to
copyrightable works and inventions which, during the period of
Employee's employment by the Company or its successors in
business, Employee makes or conceives, either solely or jointly
with others, relating to any subject matter with which Employee's
work for the Company is or may be concerned ("Proprietary
Information"). Employee shall promptly disclose in writing to the
Company such copyrightable works and inventions and, without
charge to the Company, to execute, acknowledge and deliver all
such further papers, including applications for copyrights and
patents for such copyrightable works and inventions, if any, in
all countries and to vest title thereto in the Company, it's
successors, assigns, or nominees. Upon termination of Employee's
employment hereunder, Employee shall return to the Company or its
successors or assigns, as the case may be, any Proprietary
Information. The obligation of Employee to assign the rights to
such copyrightable works and inventions shall survive the
discontinuance or termination of this Agreement for any reason.
11. Severability. In the event that any provision of any paragraph of
this Agreement shall be deemed to be invalid or unenforceable for
any reason whatsoever, it is agreed such invalidity or
unenforceability shall not affect any other provision of such
paragraph of this Agreement, and the remaining terms, covenants,
restrictions, or provisions in such paragraph and in the Agreement
shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provision to make it
valid, reasonable and enforceable.
12. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of North Carolina. Each of
the parties hereto irrevocably submits to the exclusive
jurisdiction of the courts located in North Carolina for the
purposes of any suit, action or other proceeding contemplated
hereby or any transaction contemplated hereby.
13. Notices. Any notice to be given under this Agreement shall be
deemed sufficient if addressed in writing and delivered
personally, by telefax with receipt acknowledged,
21
<PAGE>
or by registered or certified U.S. mail to the address first above
appearing, or to such other address as a party may designate by
notice from time-to-time.
14. Amendment. This Agreement may be amended only by an agreement in
writing signed by each of the parties hereto.
15. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to Employee's employment with the Company
and supercedes any prior agreements between them, whether written
or oral.
16. Waiver. The failure of either party to insist in any one or more
instance, upon performance of the terms and conditions of this
Agreement, shall not be construed as a waiver or a relinquishment
of any right granted hereunder or of the future performance of any
such term or condition.
17. Arbitration. Any controversy or claim arising out of or relating
to this Agreement, or breach thereof, shall be settled by
arbitration in Raleigh, North Carolina in accordance with the
expedited procedures of the Rules of the American Arbitration
Association, and judgment upon the award may be rendered by the
arbitrator and may be entered in any court having jurisdiction
thereof.
18. Benefit. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against the Company,
it's successors and assigns, and Employee, his heirs,
beneficiaries and legal representatives. It is agreed that the
rights and obligations of Employee may not be delegated or
assigned except as may be specifically agreed to by the parties
hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
C3, Inc.
By: _____________________________
Robert S. Thomas, President
----------------------------
Mary Katherine Rafferty
EXHIBIT 10.34
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT BE GIVEN
CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS EXHIBIT HAS BEEN FILED
WITH THE COMMISSION.
LETTER AGREEMENT
DATED MAY 3, 1997
BETWEEN CREE RESEARCH, INC. AND C3, INC.
<PAGE>
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
May 3, 1999
Robert S. Thomas
President
C3, Inc.
P.O. Box 13533
Research Triangle Park, NC
27709-3533
This letter, if accepted by C3, will serve as an agreement between Cree and C3
to the following terms:
1. Cree agrees to supply production crystals and C3 agrees to purchase
production crystals according to the terms outlined in this letter
agreement for a period of one year beginning July 1, 1999.
2. C3 agrees to purchase *****, 3" production crystal growth systems according
to the terms outlined in the June 6, 1997 Amended and Restated Exclusive
Supply Agreement (the "Supply Agreement") with a condition that the maximum
price per system will not exceed $*****. C3 will issue a purchase order for
these ***** systems concurrently with the execution of this agreement. The
systems are being built as new for use by Cree on behalf of C3 in
accordance with the Supply Agreement. These ***** systems represent the
growth systems in excess of ***** as outlined in section *****. The first
***** systems will be brought on-line as 3" systems and the second *****
systems will be brought on-line as 2" systems.
3. C3 will purchase the output of crystal growers according to the following
schedule:
------------------------------------- --------------------------
DATE # OF CRYSTAL GROWTH
SYSTEMS
------------------------------------- --------------------------
July 1, 1999 - August 31, 1999 *****
------------------------------------- --------------------------
August 31, 1999 - September 30, 1999 *****
------------------------------------- --------------------------
October 1, 1999 - June 30, 2000 *****
------------------------------------- --------------------------
4. Cree will supply crystals from the systems outlined in Section 3 according
to the pricing schedule outlined in Exhibit A.
5. C3 will continue funding of the development program at Cree under the July
1, 1998 Amended and Restated Development Agreement (the "Development
Agreement] at the current funding level of $240,000 per month until *****
new 3" systems are on line or October 1, 1999, whichever is sooner, and
thereafter, at $120,000 per month.
6. C3 may switch growers from 2" to 3" diameter crystals or from 3" to 2"
diameter crystals provided it gives Cree at least 30 days notice and such
additional time as reasonably required to address any conversion and
ramp-up issues. C3 agrees to pay for any upgrade costs, not to exceed
$***** associated with converting systems owned by C3.
7. As used in Exhibit A, 'usable mm' means light or medium light material, as
previously defined by both parties, judged versus the master crystal. Any
discrepancies in usable material will be mutually resolved by Cree and C3.
All grading will be concluded in a timely manner consistent with past
practice.
<PAGE>
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
8. During the term of this agreement, the parties will negotiate in good faith
a mutually acceptable method and process for quantifying micropipe defects
in the crystals. The parties will then negotiate a mutually acceptable
means to include these defects in the grading specifications for production
crystals.
9. Except as provided above, purchases will be subject to the terms and
conditions of the Supply Agreement and the development program will be
subject to the terms and conditions of the Development Agreement.
10. If the parties do not agree in writing, prior to July 1, 2000, on a
mutually acceptable definition of "Repeatable Process" for purposes of
Sections 1.1 and 2.4 of the Supply Agreement, then unless otherwise agreed
in writing by the parties, thereafter C3 will purchase from Cree and Cree
will sell to C3, material in accordance with the pricing and other terms
and conditions set forth in the Supply Agreement and no minimum
specifications shall be applicable to such material.
11. The contents of this letter shall be considered 'Confidential Information'
of each party subject to the provisions of Section 5 of the Supply
Agreement."
If acceptable, please sign below and date to indicate C3's binding agreement to
these terms.
/s/ Charles M. Swoboda /s/ Robert S. Thomas
- ---------------------- ---------------------
Charles M. Swoboda Robert S. Thomas
President & COO President & COO
<PAGE>
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
EXHIBIT A
C3 CRYSTAL PRICING SCHEDULES
PERIOD 1 - JULV 1, 1999 THROUGH DECEMBER 31, 1999
2" crystals will be sold according to 2" Schedule A
3" crystals will be sold according to 3" Schedule C
PERIOD 2 - JANUARY 1, 2000 THROUGH JUNE 30, 2000
The pricing will be according to the same schedules as Period 1, unless Cree's
monthly product revenue has increased by at least *****% versus any prior 2
month average covered by this agreement due to;
1. Yield as defined by comparing the average crystal price charged to C3
for any month beginning in July 1999 versus any single month covered
by this letter agreement, or
2. C3's conversion of the existing 2" growers to 3" growers, or
3. The issuance of a purchase order by C3 to Cree for the purchase of
additional grower capacity not committed in this agreement.
2" crystals will be sold according to 2" Schedule B
3" crystals will be sold according to 3" Schedule D subject to Cree achieving
yields, which are in-line with comparable 2" yields.
Terms of Pricing
The 'usable mm' is calculated by adding the 'net light material plus the 'net
medium light material' protoype yield. 'Net materials' are defined as total
material minus the % volume yield loss caused by inclusions and defects
including *****, *****, *****, *****, *****, etc. as previously defined by both
parties and in accordance with past practice. In the case where the 'usable mm'
results in <***** mm, the medium light price will be calculated as [(L Price -
Scrap)*ML Yield + Scrap] The 'medium light material' prototype yield will be
based on a rolling month average of stones not greater than 1 carat (7 mm).
* The >*****mm cap for 2" is subject to increase as yield improvements warrant
according to the following schedule; $*****/mm of length >*****mm for
schedule A and $*****/mm of length >*****mm for schedule B
** The >*****mm cap for 3" is subject to increase as yield improvements warrant
according to the following schedule: $*****/mm of length >*****mm for
schedule C and $*****/mm of length >*****mm for schedule D
<TABLE>
<CAPTION>
- ------------------------------ -------- ------- ------------ ------------------------------ ---------- -------- -----------
2" Schedule A 2" Schedule B
USABLE MM LIGHT PRICE MM CM3 $/CM3 USABLE MM LIGHT PRICE MM CM 3 $/CM3
<***** $***** ***** ***** $***** <***** $***** ***** ***** $*****
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
>***** $***** ***** ***** $***** >***** $***** ***** ***** $*****
- ---------------- ------------- -------- ------- ------------ ---------------- ------------- ---------- -------- -----------
- ------------------------------ -------- ------- ------------ ------------------------------ ------- ---- ------ ----------
3" Schedule C 3" Schedule D
USABLE MM LIGHT PRICE MM CM3 $/CM3 USABLE MM LIGHT PRICE MM CM3 $/CM3
<***** $***** ***** ***** $***** <***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
***** - ***** $***** ***** ***** $***** ***** - ***** $***** ***** ***** $*****
>***** $***** ***** ***** $***** >***** $***** ***** ***** $*****
- ---------------- ------------- -------- ------- ------------ ---------------- ------------- ---------- -------- ----------
</TABLE>
Cree Research, Inc.
Company Confidential
EXHIBIT 10.35
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT BE GIVEN
CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS EXHIBIT HAS BEEN FILED
WITH THE COMMISSION.
LICENSING AGREEMENT
DATED OCTOBER 10, 1998
BETWEEN C. ERIC HUNTER AND C3, INC.
<PAGE>
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
LICENSING AGREEMENT
This LICENSING AGREEMENT is entered into effective as of the 10th day of October
1998 by and between C. Eric Hunter ("Eric Hunter") and C3, Inc. ("C3").
Whereas, Eric Hunter has filed United States (U.S.) patent applications
regarding inventions related to wide-band gap semiconductors that have potential
advantages in certain gemstone applications ("THE TECHNOLOGY") and C3 is a
manufacturer of synthetic gemstones and gemological instrumentation, both
parties agree to the following terms and conditions:
1. Eric Hunter agrees to grant C3 an irrevocable, exclusive and perpetual
license to manufacture gemstone products and gemological instrumentation
utilizing the following pending U.S. patent applications (as titled):
o *****
o *****
o *****
o *****
o *****
2. C3 agrees to pay the cost for filing, prosecution and maintenance of the
patent applications in the U.S. C3 may at its own expense file the patent
applications in foreign countries if Eric Hunter elects not to pursue
foreign filings for any of the patent applications.
3. Eric Hunter agrees not to grant licenses to any other entity to use THE
TECHNOLOGY for the manufacture of gemstone products and gemological
instrumentation. Eric Hunter retains the right to use the inventions to
manufacture gemstone material for C3. In this circumstance, Eric Hunter
agrees to sell material manufactured for use as gemstones or gemological
instrumentation exclusively to C3 at *****% gross margins (***** times
manufacturing cost).
4. C3 may elect to use the inventions itself or sublicense the inventions to
another supplier. C3 agrees to pay Eric Hunter a royalty of *****% of its
net sales of gemstone products and gemological instrumentation
manufactured by C3 or its suppliers utilizing THE TECHNOLOGY.
5. C3 agrees to indemnify against and pay the cost of defending Eric Hunter
from any infringement claims related to C3's use of THE TECHNOLOGY for
gemstone and gemological instrumentation or any other claim made against
Eric Hunter related to his involvement (including any unpaid
non-contractual work) and ownership of C3 at any time previously and
through December 31, 2003.
<PAGE>
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
6. Eric Hunter agrees to license to C3 under the same terms and conditions
all technology he develops that relates to the manufacture of gemstones
and gemological instrumentation through December 31, 2003.
7. Eric Hunter agrees to assign this agreement to any designee as requested
in writing by an officer of C3.
Agreed and acknowledged by:
C3, Inc. Eric Hunter
/s/ Robert S. Thomas /s/ C. Eric Hunter
_______________________ ________________________
Robert S. Thomas C. Eric Hunter
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From The
Condensed Balance Sheet As Of March 31, 1999 And The Condensed Statement Of
Operations For The Three Months Ended March 31, 1999 And Is Qualified In Its
Entirety By Reference To Such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 30,304,859
<SECURITIES> 0
<RECEIVABLES> 440,965
<ALLOWANCES> 0
<INVENTORY> 4,224,844
<CURRENT-ASSETS> 35,383,807
<PP&E> 4,141,776
<DEPRECIATION> 358,029
<TOTAL-ASSETS> 39,453,335
<CURRENT-LIABILITIES> 2,064,419
<BONDS> 0
0
0
<COMMON> 48,179,964
<OTHER-SE> (10,791,048)
<TOTAL-LIABILITY-AND-EQUITY> 39,453,335
<SALES> 3,229,464
<TOTAL-REVENUES> 3,229,464
<CGS> 2,095,578
<TOTAL-COSTS> 2,095,578
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (706,431)
<INCOME-TAX> 0
<INCOME-CONTINUING> (706,431)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (706,431)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
