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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-K/A-1
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
3800 Gateway Boulevard, Suite 310,
Morrisville, N.C. 27560
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 468-0399
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K/A-1 or any amendment to
this Form 10-K/A-1 [X].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of January 31, 1999 was $111,892,944. On January 31, 1999 there
were 6,993,309 outstanding shares of the Registrant's common stock.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the Proxy Statement of the Registrant for the Annual Meeting
of Shareholders held on May 17, 1999 have been incorporated by reference into
Part III of this Annual Report on Form 10-K/A-1.
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Part III
Item 13. Certain Relationships and Related Transactions
Transactions with Cree
Jeff N. Hunter, one of the founders of the Company and Chairman of the
Board and Chief Executive Officer, and C. Eric Hunter, one of the founders of
the Company and the beneficial owner of 9.4% of the Common Stock outstanding,
are the brothers of F. Neal Hunter, the Chief Executive Officer of Cree. C. Eric
Hunter was one of the founders of Cree and was the President and Chief Executive
Officer of Cree prior to the time of any transactions between the Company and
Cree. In May 1995, Mr. Hunter entered into a consulting and non-competition
agreement with Cree effective from July 1995 through July 1998 under which Cree
is entitled to request Mr. Hunter to provide consulting services. Mr. Hunter
has agreed that during the term of the agreement, he will not, among other
activities, provide services to, or have certain interests or positions in,
businesses engaged in the production of SiC substrates, the distribution of SiC
substrates not produced or purchased from Cree, or research and development in
SiC substrates. As of August 7, 1998, based on the shareholdings reported in
Cree's proxy statement dated October 1, 1998, Cree and certain of its officers
and directors own approximately five percent (5%) of the Common Stock
outstanding. GEPT, which is the beneficial owner of 8.3% of the Common Stock
was, as of August 7, 1998, the beneficial owner of approximately ten percent
(10%) of the outstanding common stock of Cree.
Exclusive Supply Agreement
On June 6, 1997, the Company and Cree entered into an Exclusive Supply
Agreement (the "Exclusive Supply Agreement"). Under the provisions of the
Exclusive Supply Agreement, the Company has agreed to purchase from Cree at
least 50%, by dollar volume, of the Company's requirements for SiC crystals for
the production of gemstones in each calendar quarter. Cree is obligated to
supply this amount of materials to the Company, and Cree has agreed not to sell
SiC crystals to anyone other than the Company for gemstone use. The price for
SiC crystals is equal to Cree's loaded manufacturing cost plus a margin, which
margin may increase if the price of crystals falls below a specified amount.
Through June 30, 1999 the Company has agreed to purchase all crystals produced
by existing crystal growers and the Company and Cree have agreed that the price
paid to Cree for these SiC crystals will be based upon a sliding scale depending
on the quality of each crystal received.
Cree will have to build additional crystal growth systems in order to meet
the Company's anticipated requirements for SiC crystals. Under the Exclusive
Supply Agreement, Cree may elect, in its sole discretion, to have the Company
purchase the additional growth systems that will be required to meet the
Company's anticipated demand for SiC crystals or Cree may fund the costs of
these systems on its own and recoup its costs by incorporating the costs of the
systems into the cost of the SiC crystals purchased by the Company. If Cree
elects to have the Company purchase the additional crystal growth systems, such
systems must remain at Cree's facilities and ownership of such systems will
transfer to Cree when the Company has fully depreciated their cost.
In May 1998 the Company ordered quantities of SiC crystals exceeding the
capacity of the existing crystal growth system. Cree elected to have the
Company purchase $3.4 million of additional crystal growers. The first of these
crystal growers became operational in August 1998 with all the ordered growers
on-line by December 1998. The Company paid the entire $3.4 million purchase
price to Cree during 1998.
The Exclusive Supply Agreement has an initial term of ten years, which may
be extended for an additional ten years by either party if the Company orders in
any 36-month period SiC crystals with an aggregate purchase price in excess of
$1 million. During the year ended December 31, 1998, the Company made aggregate
payments of approximately $3.4 million to Cree for purchases of SiC crystals
under the Exclusive Supply Agreement.
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Development Agreement
On July 1, 1998, the Company entered into an Amended and Restated
Development Agreement (the "Development Agreement") with Cree which is focused
on increasing the yield of usable material in each silicon carbide crystal
manufactured by Cree for use by C3 in the production of lab-created moissanite
gemstones. The Development Agreement establishes performance milestones for 1999
and contemplates that the Company and Cree will revise the performance
milestones annually to provide both parties with more flexibility to pursue
further color and yield improvements on both 2-inch and 3-inch diameter
crystals. The 4-year Development Agreement replaces the June 1997 Development
Agreement and the 1998 Supplemental Development Agreement between the parties
and requires the Company to fund the program at $2.88 million annually. Either
party may terminate the Agreement if Cree does not meet the annual performance
milestones or if the Company and Cree do not mutually agree on the performance
milestones for the ensuing year. During the year ended December 31, 1998 the
Company made aggregate payments of approximately $2.5 million to Cree under the
Development Agreement, the 1997 Development Agreement and the 1998 Supplemental
Development Agreement.
Other Cree Transactions
In January 1996, the Company and Cree entered into a letter agreement under
which the Company agreed to assist Cree in prosecuting its patent application
for a particular process of producing colorless SiC crystals, and Cree granted
the Company an irrevocable nonexclusive royalty-free license to use that process
in connection with the manufacture, use and sale of lab created moissanite
gemstones. Under this agreement, the Company is obligated to reimburse Cree for
all legal expenses incurred by Cree in preparing, filing, prosecuting and
maintaining any patents issued in connection with that process for producing
colorless SiC crystals. Cree was issued a patent for a process for growing
colorless SiC on February 17, 1998. During the year ended December 31, 1998, the
Company made aggregate payments of approximately $15,000 to Cree in connection
with this letter agreement.
Under a February 1996 letter agreement, the Company has agreed to purchase
all of its requirements for the semiconductor chip component of its
moissanite/diamond test instrument from Cree, and Cree granted the Company the
exclusive right to purchase such chips for use in gemstone analysis and
verification equipment. The Company is obligated to purchase all of its
requirements for such chips from Cree at prices that may not exceed Cree's then
current list price for such chips and to pay Cree a royalty of 2.5% of net sales
of all test instruments incorporating the Cree chip. The letter agreement has a
term of twenty years. During the year ended December 31, 1998, the Company made
aggregate payments of approximately $16,000 to Cree under this letter agreement.
Other Transactions
In November 1996, the Company entered into a consulting agreement with
Robert S. Thomas, now the President and an executive officer of the Company,
pursuant to which Mr. Thomas provided consulting services related to the
business development and sales strategy for moissanite gemstones for fees to be
mutually agreed upon plus expenses. The consulting agreement was terminated in
June 1998 when Mr. Thomas became an employee of the Company. During 1998, the
Company made payments under this agreement of $10,500 to Mr. Thomas. As
additional consideration for the consulting services to be performed by Mr.
Thomas, the Company granted Mr. Thomas options to purchase shares of Common
Stock as follows: November 1996-10,650 shares at an exercise price of $2.69 per
share, vesting in three equal annual installments; August 1997-21,300 shares at
an exercise price of $4.81 per share, vesting in three equal annual
installments; November 1997-15,000 shares at an exercise price of $15.00 per
share, vesting 15% upon completion of the Company's IPO in November 1997 and the
balance vesting on the ninth anniversary of grant, with acceleration if the
Company meets certain performance targets for earnings per share, sales or
margins during 1998, 1999, 2000 and 2001; and December 1997-40,000 shares at an
exercise price of $13.88 per share, vesting in three equal annual installments.
The Company subsequently made the August 1997 options exercisable in full upon
the consummation of the Company's initial public offering. Mr. Thomas' options
expire on the tenth anniversary of the date of grant.
In May 1997, the Company entered into a one-year consulting agreement with
Paula K. Berardinelli pursuant to which Dr. Berardinelli agreed to provide
marketing, sales, management, organizational and other services to the Company
for fees to be mutually agreed upon plus expenses. The consulting agreement
expired on April 30, 1998. During the year ended December 31, 1998, the Company
did not request that Dr. Berardinelli perform consulting services under the
agreement and, consequently, paid no fees to Dr. Berardinelli. Dr.
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Berardinelli is the spouse of Jeff N. Hunter, the Chairman of the Board and
Chief Executive Officer of the Company.
In September 1997, the Company entered into a consulting agreement with C.
Eric Hunter pursuant to which C. Eric Hunter agreed to assist the Company in
filing, prosecuting and maintaining certain patents relating to the Company's
technology. The consulting agreement had an initial term of two years and
entitled C. Eric Hunter to receive a monthly consulting fee of $1,800. Upon the
completion of C. Eric Hunter's consulting obligations to the Company, the
consulting agreement was terminated effective as of March 31, 1998 and the
Company paid C. Eric Hunter accrued consulting fees of $12,600. C. Eric Hunter
is the beneficial owner of 9.4% of the Common Stock outstanding and the brother
of Jeff N. Hunter.
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. C. Eric
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 C. Eric Hunter relating to any patent infringement for
gemstone and gemological instrumentation or relating to his involvement with C3
through December 31, 2003.
C. Eric 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 C. Eric
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 C. Eric Hunter a royalty based on net sales of those products. If
C. Eric 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.
Fairness of Transactions
The Company believes that all of the transactions listed under the caption
"Certain Transactions" were made on terms no less favorable to the Company than
could have been obtained in substantially similar transactions with unaffiliated
third parties. All agreements entered into between the Company, and its
officers and directors and the agreements entered into between the Company and
Cree during 1998 were approved by a majority of the Board. Future transactions
between the Company and any officer, director, five percent shareholder or
affiliate of the Company will be approved by a majority of the Board of
Directors and will be on terms no less favorable to the Company than could be
obtained in substantially similar transactions with unaffiliated third parties.
4
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Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) and (2) Financial statements and financial statement schedule--the
financial statements, financial statements schedule, and report of independent
accountants are filed as part of the Registrant's Annual Report on Form 10-K,
filed on March 18, 1999 (see Index to Financial Statements at Part II Item 8 on
page 30 of the Registrant's Annual Report on Form 10-K, filed on March 18, 1999.
(a) (3) The following exhibits have been or are being filed herewith and are
numbered in accordance with Item 601 of Regulation S-K:
Exhibit
Number Description
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3.1 Amended and Restated Articles of Incorporation of C3, Inc. which is hereby
incorporated by reference to Exhibit 3.1 to the Registration Statement on
Form S-1 of C3, Inc. (File No. 333-36809).
3.2 Articles of Amendment of C3, Inc., as filed with the Secretary of State of
North Carolina on February 23, 1999.
3.3 Amended and Restated Bylaws of C3, Inc. which is hereby incorporated by
reference to Exhibit 3.2 to the Registration Statement on Form S-1 of C3,
Inc. (File No. 333-36809).
4.1 Specimen Certificate of common stock.
4.2 Form of Representative's Warrant which is hereby incorporated by reference
to Exhibit 4.2 to the Registration Statement on Form S-1 of C3, Inc. (File
No. 333-36809).
4.3 Rights Agreement dated as of February 22, 1999 between C3, Inc. and First
Union National Bank as Rights Agent which includes the Form of Rights
Certificate as Exhibit A.
10.1 Consulting Agreement, dated May 1, 1997, between Kurt Nassau and C3, Inc.
which is hereby incorporated by reference to Exhibit 10.1 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+
10.2 Letter Agreement, dated May 17, 1997, between Kurt Nassau and C3, Inc.
which is hereby incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+
10.3 Letter Agreement, dated February 17, 1997, between Howard Rubin and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+
10.4 Independent Contractor Agreement, dated May 1, 1997, between Paula K.
Berardinelli and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.4 to the Registration Statement on Form S-1 of C3, Inc. (File
No. 333-36809).+
10.5 Independent Contractor Agreement, dated September 3, 1997, between C. Eric
Hunter and C3, Inc. which is hereby incorporated by reference to Exhibit
10.5 to the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).
10.6 Independent Contractor Agreement dated July 10, 1997 between Ollin B.
Sykes and C3, Inc. which is hereby incorporated by reference to Exhibit
10.6 to the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).+
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10.7 Employment Agreement, dated June 1, 1997, between Jeff N. Hunter and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.7 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+
10.8 Employment Agreement, dated July 30, 1997, between Mark W. Hahn and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.8 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+
10.9 Employment Agreement, dated September 15, 1997, between Martin J. DeRoy
and C3, Inc. which is hereby incorporated by reference to Exhibit 10.9 to
the Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+
10.10 Employment Agreement, dated March 1, 1997, between Thomas G. Coleman and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.10 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).+
10.11 Amended and Restated Exclusive Supply Agreement, dated June 6, 1997,
between Cree Research, Inc. and C3, Inc. which is hereby incorporated by
reference to Exhibit 10.11 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333-36809).*
10.12 Development Agreement, dated as of June 6, 1997, between Cree Research,
Inc. and C3, Inc. which is hereby incorporated by reference to Exhibit
10.12 to the Registration Statement on Form S-1 of C3, Inc. (File No.
333-36809).*
10.13 Letter Agreement, dated July 14, 1997, between Cree Research, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.13 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).*
10.14 Letter Agreement, dated January 31, 1996, between Cree Research, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).*
10.15 1996 Stock Option Plan of C3, Inc. (as amended October 27, 1997) which is
hereby incorporated by reference to Exhibit 10.15 to the Registration
Statement on Form S-1 of C3, Inc. (File No. 333-36809).+
10.16 1997 Omnibus Stock Plan of C3, Inc. which is hereby incorporated by
reference to Exhibit 10.16 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333- 36809).
10.17 Restricted Stock Agreement, dated June 30, 1995, between Jeff N. Hunter
and Paula K. Berardinelli and C3, Inc. which is hereby incorporated by
reference to Exhibit 10.17 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333-36809).+
10.18 Shareholders Agreement, dated March 18, 1997, between General Electric
Pension Trust, C. Eric Hunter and C3, Inc. which is hereby incorporated by
reference to Exhibit 10.18 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333-36809).
10.19 Registrations Rights Agreement, dated March 18, 1997, between General
Electric Pension Trust and C3, Inc. which is hereby incorporated by
reference to Exhibit 10.19 to the Registration Statement on Form S-1 of
C3, Inc. (File No. 333-36809).
10.20 Agreement, dated September 24, 1997, between John M. Bachman, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.20 to the
Registration Statement on Form S-1 of C3, Inc. (File No. 333-36809).*
10.21 Agreement, dated September 12, 1997, between QMD, Inc. and C3, Inc. which
is hereby incorporated by reference to Exhibit 10.21 to the Registration
Statement on Form S-1 of C3, Inc. (File No. 333-36809).*
10.22 1997 Declaration of Amendment to 1997 Omnibus Stock Plan of C3, Inc.
which is hereby incorporated by reference to Exhibit 99.3 to the
Registration Statement on Form S-8 of C3, Inc. (File No. 333-43613).+
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10.23 Supplemental Development Agreement, dated January 8, 1998, between Cree
Research, Inc. and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.23 to the Annual Report on Form 10-K of C3, Inc. for the fiscal
year ended December 31, 1997.*
10.24 Letter Agreement, dated January 8, 1998, between Cree Research, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.24 to the
Annual Report on From 10-K of C3, Inc. for the Fiscal year ended December
31, 1997.*
10.25 Amended and Restated Development Agreement, dated July 1, 1998 between
Cree Research, Inc. and C3, Inc. which is hereby incorporated by reference
to Exhibit 10.25 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended June 30, 1998.*
10.26 Letter Agreement dated, July 14, 1998, between Cree Research, Inc. and
C3, Inc. which is hereby incorporated by reference to Exhibit 10.26 to the
Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended June 30,
1998.*
10.27 Employment Agreement, dated April 6, 1998, between Mark Kellam and C3,
Inc. which is hereby incorporated by reference to Exhibit 10.27 to the
Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended September
30, 1998.+
10.28 First Amendment to Agreement, dated March 23, 1998 between John M.
Bachman, Inc. and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.28 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended September 30, 1998.*
10.29 Second Amendment to Agreement, dated September 28, 1998 between John M.
Bachman, Inc. and C3, Inc. which is hereby incorporated by reference to
Exhibit 10.29 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended September 30, 1998.*
10.30 1998 Declaration of Amendment to 1996 Stock Option Plan of C3, Inc.+
10.31 1998 Declaration of Amendment to 1997 Omnibus Stock Plan of C3, Inc.+
10.32 Employment Agreement, dated March 1, 1999, between Robert Thomas and C3,
Inc.+
10.35 Licensing Agreement, dated October 10, 1998, between C. Eric Hunter and
C3, Inc., which is hereby incorporated by reference to Exhibit 10.35 to
the Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended March
31, 1999.*
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule - Fiscal year ended December 31, 1998.
* The registrant has requested that certain portions of this exhibit be given
confidential treatment.
+ Denotes a management contract or compensatory plan or arrangement.
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EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K/A-1
OF
C3, INC.
Exhibit
Number Description
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10.35 Licensing Agreement, dated October 10, 1998, between C. Eric Hunter and
C3, Inc., which is hereby incorporated by reference to Exhibit 10.35 to
the Quarterly Report on Form 10-Q of C3, Inc. for the quarter ended March
31, 1999.*
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Jeff N. Hunter Date: 6/1/99
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Jeff N. Hunter
Chairman of the Board and Director
(Principal executive officer)
8
