1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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 September 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ____________________ to _____________________
COMMISSION FILE NUMBER: 000-23329
C3, Inc.
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(Exact name of Registrant as specified in its charter)
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North Carolina 56-1928817
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(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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3800 Gateway Boulevard, Suite 311, Morrisville, N.C. 27560
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(Address of principal executive offices)
919-468-0399
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(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 October 31, 1999 there were 7,098,911 shares of the Registrant's Common
Stock, no par value per share, outstanding.
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C3, Inc.
INDEX
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Statements of Operations - Three Months and Nine Months Ended September 30, 1999 And 1998
Condensed Balance Sheets - September 30, 1999 And December 31, 1998
Condensed Statements Of Cash Flows - Nine Months Ended September 30, 1999 And 1998
Notes To Condensed Financial Statements
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
Item 3. Quantitative And Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
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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
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C3, Inc.
Condensed Statements Of Operations
(Unaudited)
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<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
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1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net sales $ 2,169,539 $ 1,326,373 $ 8,932,615 $ 1,778,938
Cost of goods 949,535 1,089,648 4,676,790 1,380,200
--------------- ---------------- ---------------- ---------------
Gross profit 1,220,004 236,725 4,255,825 398,738
Operating expenses:
Marketing and sales 1,461,286 928,598 3,236,924 2,202,597
General and administrative 815,843 543,018 2,256,653 1,885,224
Research and development 682,237 785,869 2,274,987 3,196,711
--------------- ---------------- ---------------- ---------------
Total operating expenses 2,959,366 2,257,485 7,768,564 7,284,532
--------------- ---------------- ---------------- ---------------
Operating loss (1,739,362) (2,020,760) (3,512,739) (6,885,794)
Interest income, net 291,949 467,532 978,290 1,461,718
--------------- ---------------- ---------------- ---------------
Net loss $ (1,447,413) $ (1,553,228) $ (2,534,449) $ (5,424,076)
=============== ================ ================ ===============
Basic and diluted net loss
per share $ (0.21) $ (0.22) $ (0.36) $ (0.78)
=============== ================ ================ ===============
Weighted-average common
shares, basic and diluted 7,054,383 6,956,071 7,021,339 6,945,356
=============== ================ ================ ===============
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See Notes to Condensed Financial Statements.
3
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C3, Inc.
Condensed Balance Sheets
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September 30, 1999 December 31, 1998
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ASSETS (Unaudited)
Current Assets:
<S> <C> <C>
Cash and equivalents $ 21,973,656 $ 32,004,045
Accounts receivable, net 881,031 546,921
Interest receivable 123,024 121,276
Inventories 10,312,033 3,092,448
Prepaid expenses and other assets 596,585 294,797
------------------------ ----------------------
Total current assets 33,886,329 36,059,487
Equipment, net 6,418,795 3,832,019
Patent and license rights, net 536,021 276,817
======================== ======================
Total assets $ 40,841,145 $ 40,168,323
======================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Cree Research, Inc. $ 3,532,119 $ 1,679,600
Other 970,234 250,157
Accrued expenses 267,119 223,248
Deferred revenue 32,372 18,986
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Total current liabilities 4,801,844 2,171,991
Commitments
Shareholders' Equity:
Common stock 48,757,702 48,149,406
Additional paid-in capital - stock options 1,879,490 1,910,368
Accumulated deficit (14,597,891) (12,063,442)
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Total shareholders' equity 36,039,301 37,996,332
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Total liabilities and shareholders' equity $ 40,841,145 $ 40,168,323
======================== ======================
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See Notes to Condensed Financial Statements
4
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C3, Inc.
Condensed Statements Of Cash Flows
(Unaudited)
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<CAPTION>
Nine Months Ended September 30,
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1999 1998
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OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $(2,534,449) $(5,424,076)
Adjustments:
Depreciation and amortization 474,811 106,345
Compensation expense related to stock options 210,496 276,648
Change in operating assets and liabilities:
Net change in assets (7,857,231) (2,263,796)
Net change in liabilities 2,629,853 754,901
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Net cash used in operating activities (7,076,520) (6,549,978)
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INVESTING ACTIVITIES:
Purchase of equipment (3,010,790) (2,980,066)
Patent costs (310,001) (72,534)
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Net cash used in investing activities (3,320,791) (3,052,600)
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FINANCING ACTIVITIES:
Stock options exercised 366,922 23,694
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Net cash provided by financing activities 366,922 23,694
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Net change in cash and equivalents (10,030,389) (9,578,884)
Cash and equivalents, beginning of period 32,004,045 43,980,385
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Cash and equivalents, end of period $21,973,656 $34,401,501
================== ==================
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See Notes to Condensed Financial Statements.
5
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C3, Inc.
Notes To Condensed Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include all
normal recurring adjustments which are necessary for the fair presentation of
the results of the interim periods presented. Interim results are not
necessarily indicative of results for the year. Certain reclassifications have
been made to prior year's financial statements to conform to the classifications
used in fiscal 1999. These financial statements should be read in conjunction
with the Company's audited financial statements for the year ended December 31,
1998, as set forth in the Company's Form 10-K, filed with the Securities and
Exchange Commission on March 18, 1999.
Prior to July 1, 1998 C3, Inc. was a development stage company which devoted
substantially all of its efforts to research and product development and
development of its initial markets and did not, through June 30, 1998, generate
significant revenues from its planned principal operations. As part of the
Company's transition from a technology-focused manufacturing company to a
consumer-focused marketing company, C3 began doing business as Charles & Colvard
in October 1999. The name reflects the heritage of the Company as well as the
long-term binding and marketing strategy.
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. Test instruments are shown net of a reserve for excess
inventory of $356,000 at September 30, 1999 and $132,000 at December 31, 1998.
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September 30, December 31,
1999 1998
----------------- -----------------
Moissanite
<S> <C> <C>
Raw materials $ 397,516 $ 140,411
Work-in-process 3,937,308 819,953
Finished goods 5,435,612 1,113,619
----------------- -----------------
9,770,436 2,073,983
Test Instruments 541,597 1,018,465
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Total Inventory $10,312,033 $ 3,092,448
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6
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3. STOCK BASED COMPENSATION
During the quarter and nine months ended September 30, 1999, in accordance with
Accounting Principles Board Opinion No. 25, the Company recorded compensation
expense of $58,665 and $210,496, respectively, relating to stock options.
Compensation expense related to stock options for the quarter and nine months
ended September 30, 1998 was $129,870 and $276,648, respectively. This
compensation expense is recorded in general and administrative expense in the
statements of operations.
4. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("FAS 133"),
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133, as amended by
FAS 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company has not evaluated the impact of the adoption of
this Statement on the financial statements.
5. ADVERTISING COSTS
Advertising production costs are expensed as incurred. Media placement costs are
expensed over the period the advertising appears. Advertising expenses for the
quarter and nine months ended September 30, 1999 amounted to approximately
$383,000 and $905,000 respectively. Advertising expenses for the quarter and
nine months ended September 30, 1998 amounted to approximately $319,000 and
$440,000 respectively.
7
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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
The Company's principal business is to manufacture moissanite jewels and market
them on a worldwide basis. As the sole manufacturer of scientifically-made
moissanite jewels, the Company plans to create a unique brand image which
positions moissanite as a jewel in its own right, distinct from all other jewels
based on its fire, brilliance, luster and durability.
From its inception in June 1995 through June 30, 1998, the Company was a
development stage enterprise that devoted its resources to fund research and
development of colorless, scientifically-made moissanite jewels. At the same
time, the Company assembled a management team, conducted market research and
developed its strategic business plans.
The Company began shipping moissanite to authorized retail jewelers in Atlanta
and Miami/Ft. Lauderdale during the second quarter of 1998. Through the first
half of 1999, the Company's distribution of moissanite was inhibited by limited
product availability.
During the second quarter of 1999, Cree showed marked improvement in silicon
carbide crystal quality resulting in increased yield of salable jewels from
2-inch diameter crystals. The improvements in SiC crystal yield continued
through the third quarter of 1999. All of the new 3-inch diameter crystal growth
systems came on-line during the third quarter. Although the yields of the 3-inch
diameter crystals are much lower than the yields on the 2-inch diameter
crystals, the yield of the initial deliveries of 3-inch diameter crystals
exceeded the Company's expectations. The Company expects the yields of the
3-inch diameter crystals to vary over the next several quarters as a
manufacturing process evolves. Any significant increases or decreases in yields
would have a corresponding material impact on gross margins.
As the Company continues to expand its distribution channels, it is developing a
deeper understanding of the dynamics of the market, especially the impact of
seasonality on quarterly sales. The Company identified several issues in the
third quarter, including a slower than expected rate of adding retailers in the
U.S., lack of targeted retailer-driven marketing programs abroad, and third
quarter seasonality, particularly in international markets. The Company has
developed a global, strategic marketing program which it believes will address
these issues as well as increase consumer awareness of moissanite jewels.
8
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This program is focused on creating consumer demand for the moissanite brand and
is based on new insight into the Company's target consumer. Its aim is to
inspire the target group to seek out moissanite. The Company believes that
seasonality will continue to have a meaningful impact on its results of
operations.
The global strategic marketing campaign opened November 1999. The first 100 days
is a consumer communications blitz greater than any in the Company's history. It
targets the Company's consumers on national cable television, in Harper's
Bazaar, local market special events and promotions. And, in a non-traditional
media purchase, advertising will appear in movie theaters in 10 of the leading
media markets. An estimated advertising and promotional budget of $6 million is
projected for 2000, with an additional expenditure of $2 million in the fourth
quarter of 1999. Furthermore, the Company's integrated marketing program, which
includes point-of-purchase materials, became available to the Company's
exclusive retailers in the second half of October. This global campaign will
target early adapter working women ages 25-54 with an annual household income in
excess of $50,000, will feature a new corporate logo, and will expand into
international markets next year. Additionally, as part of the Company's
transition from a technology-focused manufacturing company to a consumer-focused
marketing company, C3 has begun doing business as Charles & Colvard. This name
reflects the heritage of the Company as well as the long-term branding and
marketing strategy to be executed in the fourth quarter and beyond.
In concert with the advertising program, the Company's sales efforts are focused
on ten of the leading media markets in the U.S. to capitalize upon placement of
the product in influential, trend-setting cities. The Company will continue to
add qualified retailers domestically and expects carat shipments to increase in
the fourth quarter. However, the Company will not meet previously announced
estimates for the second half of the year. As the Company is expanding its
marketing and promotion activities, it expects to continue operating at a loss
through at least the end of 1999. Moreover, there can be no assurance that the
Company will ever achieve sales increases or profitability, or that if
profitability is achieved, that such profitability can be sustained.
The Company is in the process of refining its international distribution
methods, beginning with Western Europe. The Company is in discussions with
certain of its exclusive international distributors to expand their distribution
territories and provide the Company with more control over the positioning and
advertising of moissanite in their respective territories. The Company
anticipates that the distribution of moissanite in Western Europe will be
performed by two independent distributors.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1998.
Net sales were $2,169,539 for the quarter ended September 30, 1999 compared to
$1,326,373 for the quarter ended September 30, 1998, an increase of 843,166 or
63.6%. The increase resulted primarily from expanded distribution of moissanite
jewels. The Company will continue to add qualified retailers domestically and
expects carat shipments to increase in the fourth quarter. However, the Company
will not meet previously announced estimates for the second half of the year.
The Company's gross profit margin was 56.2% for the quarter ended September 30,
1999 compared to 17.8% for the quarter ended September 30, 1998. The increase
resulted from higher yields of moissanite jewels from SiC crystals purchased
from Cree, thereby lowering the cost per carat. Throughout the remainder of
1999, particularly as the Company works with Cree to develop a manufacturing
process for the new 3-inch diameter crystal growth systems, yields may vary. Any
significant yield changes would have a material impact on gross profit.
9
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Marketing and sales expenses were $1,461,286 for the quarter ended September 30,
1999 compared to $928,598 for the quarter ended September 30, 1998, an increase
of $532,688 or 57.4%. The increase was due primarily to the development of the
strategic global marketing program, including the creative and production
efforts supporting the specific advertising messages and materials to be
launched in the fourth quarter of 1999, as well as compensation and other
expenses related to additional staff.
General and administrative expenses were $815,843 for the quarter ended
September 30, 1999 compared to $543,018 for the quarter ended September 30,
1998, an increase of $272,825 or 50.2%. The increase resulted primarily from
compensation and other expenses related to additional staff and increased
insurance and taxes on the Company's increasing fixed assets.
Research and development expenses were $682,237 for the quarter ended September
30, 1999 compared to $785,869 for the quarter ended September 30, 1998, a
decrease of $103,632 or 13.2%. The decrease resulted primarily from the
reduction of development efforts effective September 1, 1999, as provided in the
May 1999 letter agreement between the Company and Cree.
Net interest income was $291,949 for the quarter ended September 30, 1999
compared to $467,532 for the quarter ended September 30, 1998, a decrease of
$175,583 or 37.6%. 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998.
Net sales were $8,932,615 for the nine months ended September 30, 1999 compared
to $1,778,938 for the nine months ended September 30, 1998, an increase of
$7,153,677 or 402%. The increase resulted primarily from expanded distribution
of moissanite jewels. During the first six months of 1998, prior to emerging
from the development stage, the Company generated net sales of approximately
$324,000 from moissanite jewels, which have been netted against research and
development expenses on the operating statement because many of the jewels sold
were associated with the Company's research and development program. Net sales
from the Company's proprietary test instrument decreased from approximately
$560,075 for the nine months ended September 30, 1998 to $436,472 for the nine
months ended September 30, 1999, primarily as a result of a market driven
decrease in the selling price. The Company will continue to add qualified
retailers domestically and expects carat shipments to increase in the fourth
quarter. However, the Company will not meet previously announced estimates for
the second half of the year.
Gross margin was 47.6% for the nine months ended September 30, 1999 compared to
22.4% for the nine months ended September 30, 1998. The increase resulted from
higher yields of moissanite jewels from SiC crystals purchased from Cree,
thereby lowering the cost per carat. Throughout the remainder of 1999,
particularly as the Company works with Cree to develop a manufacturing process
for the new 3-inch diameter crystal growth systems, yields may vary. Any
significant yield changes would have a material impact on gross profit.
Marketing and sales expenses were $3,236,924 for the nine months ended September
30, 1999 compared to $2,202,597 for the nine months ended September 30, 1998, an
increase of $1,034,327 or 47.0%. The increase was due primarily to the
development of the strategic global marketing program, including the creative
and production efforts supporting the specific advertising messages and
materials to be launched in the fourth quarter of 1999, as well as advertising
expenses in selected markets and compensation and other expenses related to
additional staff.
10
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General and administrative expenses were $2,256,653 for the nine months ended
September 30, 1999 compared to $1,885,224 for the nine months ended September
30, 1998, an increase of $371,429 or 19.7%. The increase resulted primarily from
compensation and other expenses related to additional staff and increased
insurance and taxes on the Company's increasing fixed assets.
Research and development expenses were $2,274,987 for the nine months ended
September 30, 1999 compared to $3,196,711 for the nine months ended September
30, 1998, a decrease of $921,724 or 28.8%. The decrease resulted primarily from
the more focused development effort under the Company's July 1998 Amended and
Restated Development Agreement with Cree. The July 1998 agreement replaced the
June 1997 Development Agreement and the January 1998 Supplemental Development
Agreement between C3 and Cree and provides both parties increased flexibility to
pursue further color and yield improvements on both 2-inch and 3-inch diameter
crystals.
Net interest income was $978,290 for the nine months ended September 30, 1999
compared to $1,461,718 for the nine months ended September 30, 1998, a decrease
of $483,428 or 33.1%. 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.
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 third quarter of
1999, the Company used $3,019,313 to fund operations and $3,154,434 to fund
capital expenditures and patent expenses. At September 30, 1999, the Company had
$21,973,656 of cash and equivalents and $29,084,485 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 substantial inventory
levels and intends to significantly increase its advertising and marketing
expenditures as it implements the domestic launch of its global strategic
marketing program during the fourth quarter 1999. The Company expects its
advertising and promotional expenditures to exceed $2 million in the fourth
quarter of 1999 and $6 million in the year 2000. If the Company is unable to
significantly increase sales of moissanite jewels, inventories will increase
substantially. The Company intends to fund these increased inventories and
advertising and marketing expenditures from its existing cash and equivalents.
In May 1999, the Company entered into a letter agreement ("Letter Agreement")
with its exclusive supplier, Cree. Under the Letter Agreement the Company 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. All of the crystal growers were
built to grow 3-inch diameter crystals and came on-line during the third
quarter. Through September 30, 1999 the Company paid approximately one-half of
the cost of these growers. The balance will be paid during the fourth quarter
from the Company's existing cash and equivalents.
11
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YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept entries to distinguish 21st century dates from 20th century
dates. The inability to recognize or properly treat dates subsequent to December
31, 1999 may cause a company's systems and applications to process critical
financial and operational information incorrectly. The Company has undertaken a
program to address the Year 2000 issue with respect to the following: (i) the
Company's information technology and operating systems; and (ii) certain systems
of the Company's major suppliers, including Cree (insofar as such systems relate
to the Company's business activities with such parties).
As part of its evolution to an operating company, the Company selected and
implemented an enterprise-wide information technology system to support the
information needs of the Company. The Company has received written confirmation
from the software vendor that the information technology system selected by the
Company is fully Year 2000 compliant. The Company has substantially completed
the implementation of this system and the testing of the Year 2000 compliance of
the system and does not expect the Year 2000 issue to pose significant
operational problems for its computer systems. The Company has also
substantially completed reviewing its non-information technology systems for
Year 2000 compliance and believes the Year 2000 exposure with respect to those
systems is not material.
The Company believes that its greatest risk with respect to the Year 2000 issue
stems from the potential non-compliance of our suppliers. The Company depends on
one supplier of SiC crystals, Cree, and on a limited number of suppliers of
other component services necessary for the manufacture of moissanite jewels.
Accordingly, if those suppliers are unable to process or fill the Company's
orders or otherwise interact with the Company because of Year 2000 problems, the
Company could experience material adverse effects to its business. Although the
Company cannot control whether and how third parties will address the Year 2000
issue, the Company has contacted critical vendors, including Cree, and have been
informed that they have the ability to ensure smooth delivery of products
without disruptions caused by Year 2000 problems. Based on the responses of
these vendors, the Company believes that all vendors are either substantially
Year 2000 compliant or that any noncompliance will not have a material effect on
the Company's operations.
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 10-Q for the quarter ended September 26, 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 could, in turn, delay deliveries of moissanite jewels to the
Company's customers. The Company has developed a significant inventory of
finished moissanite jewels and work-in-process that the Company believes could
fulfill its needs if there is a short-term delay in receipt of SiC crystals from
Cree. However, any significant delay in the Company's receipt of SiC crystals or
resulting delay in delivery of moissanite jewels to the Company's retailers
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.
12
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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 September 30,
1999 the Company has approximately $21.3 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.
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 September
30, 1999, the Company had approximately $10,500,000 of the remaining net
proceeds of the offering invested in money market accounts, debt instruments
having an original maturity of three months or less and other highly liquid
investments. Approximately $6,850,000 of the proceeds has been used in research
and development, of which $250,000 was paid to officers, directors or
shareholders owning more than 10 percent (10%) of the Common Stock outstanding.
The Company has also used approximately $9,375,000 to fund sales, marketing and
administrative expenses, of which $640,000 was paid to officers, directors or
shareholders owning more than ten percent (10%) of the Common Stock outstanding.
The Company also expended approximately $8,500,000 to fund working capital. In
addition, the Company acquired $5,525,000 of production equipment, including
$4,625,000 of crystal growth systems from Cree; certain computerized wafering
and preform development equipment, and other equipment. Other expenditures
include $325,000 for intangible assets.
ITEM 5: OTHER INFORMATION
The Company has entered into a number of agreements with specialty retail
jewelers with an aggregate of over 221 locations in 35 states. Additionally, the
Company has entered into 28 international agreements for distribution of
moissanite jewels in 46 countries and various areas in the Caribbean.
In October 1999, the Company entered into a fourth amendment to its agreement
with John M. Bachman, Inc. ("JMB"). The amendment provides for the Company to
advance JMB additional funds to expand the production facilities of its
affiliate which facets the Company's moissanite jewel preforms. These funds will
be repaid through reductions to future cutting charges. The amendment extends
the term of the Company's agreement with JMB to December 31, 2002. The Company
has the right to terminate the agreement at any time after January 1, 2002 upon
90 days written notice.
In October 1999, the Company entered into an employment agreement with David
Fudge, who will be employed in the capacity of Vice President of Sales effective
as of November 1, 1999. Mr. Fudge has 14 years experience in business, sales
management and sales training.
On November 4, 1999, the Company's board of directors elected Cecil D. Raynor as
a director. Mr. Raynor has more than 26 years of manufacturing and engineering
management experience primarily in the telecommunications industry, both
domestically and internationally. Mr. Raynor is currently Vice President of
Manufacturing at Nortel Networks, a telecommunications equipment manufacturer.
13
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10.37 Fourth Amendment to Agreement, dated October 5, 1999, between John
M. Bachman, Inc. and C3, Inc.*
10.38 Employment Agreement, dated November 1, 1999 between David Fudge
and C3, Inc.+*
27.1 Financial Data Schedule
+ Denotes a management contract or compensatory plan or arrangement.
* The Company has requested that certain portions of this exhibit be given
confidential treatment.
(b) Report on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C3, Inc.
Date: November 15, 1999 /s/ Jeff N. Hunter
-------------------
Jeff N. Hunter
Chief Executive Officer and Chairman of the Board
and Director
(Principal Executive Officer)
Date: November 15, 1999 /s/ Mark W. Hahn
----------------
Mark W. Hahn
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****.
FOURTH AMENDMENT TO AGREEMENT
THIS FOURTH AMENDMENT TO AGREEMENT (this "Amendment") is entered into
as of October 5, 1999 by and among C3, INC., a North Carolina corporation
("C3"), JOHN M. BACHMAN, INC. ("JMB").
Statement of Purpose
C3 and JMB entered into an Ageement dated September 24, 1997 (the
"Agreement") to formalize the terms upon which JMB will cut moissanite gemstones
for C3, a First Amendment to the Agreement dated March 23, 1998 (the "First
Amendment"), a Second Amendment to the Agreement dated September 28, 1998 (the
"Second Amendment") and a Third Amendment to the Agreement dated June 16, 1999
(the "Third Amendment"). C3 and JMB now desire to amend the Agreement to provide
additional expansion funds to JMB, to provide for JMB to perform certain preform
identification and finished gemstone grading services, to extend the term of the
Agreement as forth below.
Therefore, in consideration of the foregoing, the mutual covenants and
agreements contained herein, and other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Additional Expansion Funds. Within 3 business days after the date of
this Amendment, C3 will advance to JMB by certified check delivered to the
address set forth in Section 7 of the Agreement, additional expansion funds in
the amount of $******, which will make the total expansion funds advances by C3
equal $****** (the "Expansion Funds"), which funds will be utilized by JMB
solely to expand its affiliate's production facility and procure additional
equipment and labor as needed to enable JMB and its affiliate to satisfy the
production volumes contemplated by the Agreement. The entire amount of the
Expansion Funds will be an advance against production charges payable by C3
pursuant to Section 2, below, and C3 will be credited against production charges
for the entire amount of the Expansion Funds pursuant to Section 2, below.
2. Cutting Charges. C3 will pay JMB for Moissanite Gemstone cutting
services at rates as set forth on Exhibit A to the Second Amendment. For cutting
services provided by JMB through January 31, 2000, the amount payable to JMB by
C3 reflected on each invoice will be reduced by **% and from and after February
1, 2000 by **% until the aggregate amount of such reductions prior to and after
this Amendment equals $****** and C3 has received full credit against production
charges for the amount of the Expansion Funds. In all other respects the cutting
charges and payment procedures in the Agreement, the First Amendment and the
Second Amendment are hereby confirmed.
3. Extension of Term. The initial term of the Agreement will be
extended from the date first set forth in the Agreement through December 31,
2002, however, C3 may terminate the Agreement at any time after January 1, 2002
with 90 days prior written notice.
1
<PAGE>
4. Production Procedures: Standards
a. The monthly production volumes (in finished pieces)
will be as follows:
Sep 1999 *****
Oct 1999 *****
Nov 1999 *****
Dec 1999 *****
Jan 2000 *****
Feb 2000 *****
March 2000 *****
April 2000 *****
May 2000 *****
Jun 2000 *****
July 2000 *****
Aug 2000 *****
Sep 2000 *****
Oct 2000 *****
Nov 2000 *****
Dec 2000-Dec 2002 *****
b. In all other respects the production procedures and
standards in the Agreement, the First Amendment and the Second
Amendment are hereby confirmed.
5. Confirmation of Agreement. In all other respects the parties hereto
confirm the terms of the Agreement, the First Amendment, the Second Amendment
and the Third Amendment. JMB will obtain in writing, and provide to C3, the
consent of its affiliate to be bound by the terms of this Amendment.
IN WITNESS WHEREOF, each of the parties has executed and delivered this
Amendment by its duly authorized officer, as of the date first above written.
C3, INC.
By: /s/ Mark W. Hahn
------------------------------------
Name: Mark W. Hahn
----------------------------------
Title: Chief Financial Officer
---------------------------------
JOHN M. BACHMAN, INC.
By: /s/ John M. Bachman
------------------------------------
Name: John M. Bachman
----------------------------------
Title: Managing Director
---------------------------------
2
<PAGE>
CONSENT
Beehive Industries PVT, Ltd. has reviewed the Fourth Amendment dated
October 5, 1999 to the Agreement dated September 24, 1997 by and between C3, Inc
and John M. Bachman, Inc. and agrees to be bound by the terms as set out
therein.
This the 5 day of October, 1999.
Beehive Industries PVT, Ltd.
By:____________________
Its: Managing Director
3
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
effective as of November 1, 1999 by and between C3, Inc., a North Carolina
company, DBA Charles & Colvard, with its principal office at 3800 Gateway
Boulevard, Suite 310, Morrisville, North Carolina, 27560 (the "Company), and
David Fudge, an individual currently residing at 107 Planter Place, Oxford,
North Carolina, 27565 ("Employee").
Statement of Purpose
The Company wishes to obtain the services of 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 October 31, 2002. This Agreement shall automatically, at the
expiration of the then current term, renew for successive one year terms, unless
terminated by either party upon no less than 30 days prior written notice to the
other, or is otherwise terminated pursuant to Paragraph 7.
3. Position and Duties. The Employee shall serve as Vice President of
Sales of the Company. As such, it is understood and agreed that Employee lives
in Oxford, North Carolina and shall not be required to change his place of
residence to fulfill the duties of his employment. Employee will, under the
direction of the President and CEO of the Company, faithfully and to the best of
his ability perform the duties as set out in his job description on Exhibit A
hereto and such additional duties as may be reasonably assigned by the President
and Board of Directors. Employee agrees to devote his 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
$125,000, payable in regular and equal monthly installments ("Base
Salary"); provided, however, that the Base Salary shall be adjusted as
per the description and example shown on Exhibit B hereto. The
<PAGE>
adjustment shall occur after the annual audit of the companies books is
concluded by the company's outside auditors, with the first adjustment
occurring in 2001.
(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 such vacation as is provided to the other employees of the
Company (the "Employee Benefits").
(c) Incentive Compensation. Employee shall participate in such
incentive plans as may be approved by the Board of Directors from
time-to-time for the officers of the Company. Additionally, the
Employee shall receive a "commission" of $0.30 per carat of moissanite
sold by the Company in the twenty four target US Media markets, as
defined by the Neilson Rating Service, identified on Exhibit C, list
"B", to this agreement and $0.10 per carat of moissanite sold by the
Company in any other markets. Exhibit C is incorporated herein by
reference as if it were a part hereof. Such commissions shall be paid
quarterly, after the review of the Company's books by the outside
auditors for the quarter then ending. This provision shall be in effect
until the company achieves it's sales objective for the year 2000 or
2001, or 2002, as approved by the Company's Board of Directors. Upon
that event, the commissions shall become $0.20 per carat on all sales
irrespective of the market where sold.
(d) Employee Stock Option Participation. Employee shall be
granted, as additional consideration for entering into this Agreement,
an option to purchase 60,000 shares of the Company's common stock in
accordance with the terms and conditions of the Employee Stock Option
Agreement annexed hereto as Exhibit D and incorporated herein by
reference as if it were a part hereof. Employee shall receive options
to purchase an additional 40,000 shares of the shares of the common
stock of the Company if increased distribution goals are met. Those
options can be earned and granted according to the following schedule.
(i) If within six (6) months of the date of this agreement, 8,000
options will be earned and granted if the number of retailers in the
targeted markets identified on Exhibit C, list "A" domestic markets
doubles from the current ** to ***. An additional 2,000 options will be
earned and granted if at least 25% of the retailers added are "AGS" or
"AGTA" or similar retailers; (ii) if within 12 months, 8,000 options
will be earned and granted if the total number of retail outlets in the
targeted markets (Exhibit C, List B) reaches ***. An additional 2,000
options will be earned and granted if at least 25% of the retailers
added are "AGS" or "AGTA" or similar retailers; (iii) if within 18
months, 8,000 options will be earned and granted if the Company has ***
retail stores in the 24 targeted markets, (Exhibit C, List B). An
additional 2,000 options will be earned and granted 25% of those added
are "AGS" or "AGTA" or similar retailers; (iv) if within 30 months
10000 options will be earned and granted if the total number of
retailers in the targeted markets (Exhibit C, List B) becomes ***; or
in the event the options set out above are not earned. (v) Employee
shall receive options to purchase an additional 20,000 shares of the
shares of the common stock
<PAGE>
of the Company if within twelve (12) months from the effective date of
this Agreement the number of retail outlets in the United States
increase by one hundred percent, or to ***, from the current level of
*** such retail outlets. Further, Employee shall receive options to
purchase 20,000 shares of the common stock of the Company within thirty
(30) months from the effective date of this Agreement if the number of
retail outlets in the United States increase by three hundred percent,
or to ***, from the current level of *** such retail outlets. The
granting of the second 20,000 options described herein shall not be
conditional upon the grant of the initial 20,000 options. In no event
may the number of options earned pursuant to this paragraph exceed
40,000. All references to "retailers" in this paragraph shall mean
retail distribution outlets actively selling Charles & Colvard created
moissanite. All references to "AGS" retailers in this document, shall
mean retailers which are members of the industry trade group, the
American Gem Society, and all references to "AGTA" in this document,
shall mean retailers which are members of the industry trade group, the
American Gem Trade Association. Similar retailers shall mean retailers
that conduct their business to the ethical standards of either AGS or
AGTA member retailers, but are not members of either association.
All options which may be earned under the incentive to open additional
retail outlets for the Company's products shall be granted when the targeted
levels of retail outlets is achieved, as the case may be, and shall be vested
when granted. The price of all such options shall be the publicly traded stock
price at closing on the day proceeding the date the options are granted.
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 by Employee of the services under this
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 date 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 for "Just
Cause". Termination for "Just Cause" shall mean termination for Employee's gross
incompetence, failure, after written notice, to perform stated duties covered by
the Employee's written job description (as in effect as the effective date of
this Agreement), material breach of a fiduciary duty related to the Employee's
job description and involving personal gain, willful violation of a material
written company policy of general applicability, unethical business practices in
connection with the Company's business, conviction of a felony or misdemeanor
involving moral turpitude, theft of Company assets or disability or
<PAGE>
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 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 highest
amount of the annual cash compensation (including cash bonuses and other
cash-based benefits, including for these purposes amounts earned or payable
whether or not deferred) received from the Company during any of the five
calendar years immediately preceding such termination ("Termination
Compensation") in each year until the end of the Term, 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.
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 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 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, 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
<PAGE>
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 officers of Company, then at the date of the 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. Any
such benefits shall be paid by the Company 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:
(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 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 Employee was
eligible in the preceding 12 months; or
(iii) an involuntary relocation of the Employee more
than 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 promulgated 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 tender offer or
exchange offer for the purchase of securities of Company (other than such an
offer by the Company for its own securities), or as a result of a proxy contest,
merger, consolidation or sale of assets, or as a result of any combination of
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
<PAGE>
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 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 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 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. For purposes of
this section, "competition with the Company" shall
<PAGE>
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 the 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.
(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 to any person or use any 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 the Company, its
successors or assigns, all of 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, its successors, assigns or nominees.
Upon termination of Employee's employment hereunder, Employee shall return to
the Company or its
<PAGE>
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. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to Employee's employment by the Company and supersedes
any prior agreements between them, whether written or oral.
12. 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.
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, 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. 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 or of this Agreement, and the remaining
terms, covenants, restrictions or provisions in such paragraph and in this
Agreement shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provision as to make it valid,
reasonable and enforceable.
15. Amendment. This Agreement may be amended only by an agreement in
writing signed by each of the parties hereto.
16. 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.
17. 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.
18. Benefit. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against the Company, its 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.
<PAGE>
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
_______________________________
David Fudge
<PAGE>
Exhibit A
JOB DESCRIPTION
Vice President of Sales
SUMMARY
Develops the policies, procedures and objectives for sales of the Company's
products. Leads and directs the activities of the sales personnel. Continually
evaluates the Company's sales efforts and develops and implements programs to
strengthen the Company's sales efforts. Provides sales expertise to other
members of the Company's management team, and coordinates the Company's sales
efforts with other Company activities including but not limited to marketing and
manufacturing.
PRIMARY RESPONSIBILITIES
1. Directs activities of the sales function of the Company to achieve Company
objectives for sales volume and market penetration. Responsible for
advancing the Company's performance management system, especially in sales.
2. Directs activities of the sales function. This includes competitive
analysis, product and consumer research, establishing sales budgets and
quotas, product pricing and distribution.
3. Leads and directs activities of the Company's sales force and any
representatives and/or distributors of the Company's products. Provides
leadership, training (including coaching), management and sales support.
Coordinates field sales efforts to enhance ability of sales personnel to
work effectively and achieve goals.
4. Directs product and customer service activities. Responsible for
maintaining satisfactory customer perception of Company services and
products by working with the marketing staff to insure that the Company's
branding and positioning strategy is consistent with the Company's sales
activities.
5. Works closely with members of the management team, especially
manufacturing, to ensure that the product mix and availability is in synch
with customer demand.
6. Analyzes actual sales and marketing performance against budgeted sales
volume and market penetration levels.
7. Manages all sales promotion activities, including planning and executing
the Company's participation in industry trade shows. Responsible for the
coordination of all sales efforts with the marketing department and public
relations and advertising agencies of record.
8. Establishes and maintains contact with potential customers and actively
participates in the selling effort to support key accounts and with a high
level of sales.
9. Responsible for submitting annual projected sales forecast, including the
necessary product mix, and budget for inclusion in the Company's annual
business plan for approval by the Company's Board of Directors. Is
accountable for the execution of the sales plan as presented in the annual
business plan, which includes the management of the sales budgets for both
planned sales income and planned sales expenses.
10. Presents updates to the Board of Directors during quarterly meetings and
management briefings.
<PAGE>
11. Performs such activities consistent with the position of Vice President of
Sales as may be reasonably delegated by the CEO, COO, President or the
Board of Directors of the Company.
<PAGE>
Exhibit B
Base Salary Adjustment
Base Salary to increase at twenty five percent (25%) of the rate of
growth of the company's top line net sales growth. The calculation will be done
on the calendar and fiscal year ending December 31 of each year, beginning with
the comparison between 1999 and 2000. The salary adjustment will be effective on
January 1 of each year of the contract period, with the first adjustment
occurring effective January 1, 2001.
Example:
1. 1999/2000 Base Salary equals $125,000.00
2. Adjustment percentage equals 25%
3. 1999 Net Sales equals $12,500,000.00
4. 2000 Net Sales equals $30,000,000.00
5. Company Sales growth equals 140% (#4 minus #3, divided by #3)
6. The salary adjustment becomes 35%. (#5 (140%) times #2 (25%))
7. 2001 Base salary becomes $168,750.00. (#1 times #6, plus #1)
<PAGE>
EXHIBIT C
Targeted United States Media Markets*
List A List B
New York New York
Washington DC Washington DC
Atlanta Atlanta
Charlotte Charlotte
Miami Miami
Dallas Dallas
Houston Houston
Raleigh/Durham Baltimore
Los Angeles Los Angeles
San Diego San Diego
San Francisco San Francisco
Greensboro/Winston Salem Boston
Philadelphia
Cincinnati
Cleveland
Detroit
Chicago
Denver
Phoenix
New Orleans
Las Vegas
Minneapolis
Orlando
Seattle
* Media markets as defined by the Neilson Rating Service
<PAGE>
EXHIBIT D
1997 OMNIBUS STOCK PLAN
OF C3, INC.
(EMPLOYEE OPTION AGREEMENT)
THIS AGREEMENT (the "Agreement"), made the 1st day of November 1999,
between C3, INC., a North Carolina corporation doing business as Charles &
Colvard (the "Corporation"), and David Fudge an employee of the Corporation or a
related corporation (the "Optionee");
R E C I T A L S :
In furtherance of the purposes of the 1997 Omnibus Stock Plan of C3,
Inc., as it may be hereafter amended (the "Plan"), the Corporation and the
Optionee hereby agree as follows:
1. The rights and duties of the Corporation and the Optionee under this
Agreement shall in all respects be subject to and governed by the provisions of
the Plan, a copy of which is delivered herewith or has been previously provided
to the Optionee and the terms of which are incorporated herein by reference.
2. The Corporation hereby grants to the Optionee pursuant to the Plan,
as a matter of separate inducement and agreement in connection with his
employment or service to the Corporation, and not in lieu of any salary or other
compensation for his services, the right and Option (the "Option") to purchase
all or any part of an aggregate of Sixty Thousand (60,000) shares (the "shares")
of the Common Stock of the Corporation, at the purchase price of Nine and 75/100
Dollars ($9.75) per share. The option to purchase the shares shall be designated
as an Incentive Option. To the extent that any Option is designated as an
Incentive Option and such Option does not qualify as an Incentive Option, it
shall be treated as a Nonqualified Option. Except as otherwise provided in the
Plan, the Option will expire if not exercised in full before October 31, 2009.
3. The Option shall become exercisable on the date or dates set forth
on Schedule A attached hereto. To the extent that an Option which is exercisable
is not exercised, such Option shall accumulate and be exercisable by the
Optionee in whole or in part at any time prior to expiration of the Option. The
minimum number of shares that may be purchased under the Option at one time
shall be ten (10). Upon the exercise of an Option in whole or in part, the
Optionee shall pay the Option price to the Corporation in accordance with the
provisions of Section 6 of the Plan, and the Corporation shall as soon
thereafter as practicable deliver to the Optionee a certificate or certificates
for the shares purchased.
4. Nothing contained in this Agreement or the Plan shall require the
Corporation or a related corporation to continue to employ the Optionee for any
particular period of time, nor shall it require the Optionee to remain in the
employ of the Corporation or such related corporation for any particular period
of time. Except as otherwise expressly provided in the Plan, all rights of the
Optionee under the Plan with respect to the unexercised portion of his Option
shall terminate upon termination of the employment of the Optionee with the
Corporation or a related corporation.
<PAGE>
5. This Option shall not be transferable other than by will or the laws
of intestate succession or pursuant to a qualified domestic relations order.
This Option shall be exercisable during the Optionee's lifetime only by the
Optionee.
6. This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective executors, administrators,
next-of-kin, successors and assigns.
7. Except as otherwise provided in the Plan or herein, this Agreement
shall be construed and enforced according to the laws of the State of North
Carolina.
IN WITNESS WHEREOF, this Agreement has been executed in behalf of the
Corporation and by the Optionee on the day and year first above written.
C3, INC.
By:________________________________
Robert S. Thomas
President
Attest:
________________________________
Mark W. Hahn
Secretary
[Corporate Seal]
OPTIONEE
_________________________________(SEAL)
David Fudge
<PAGE>
1997 OMNIBUS STOCK PLAN
OF C3, INC.
(EMPLOYEE OPTION AGREEMENT)
SCHEDULE A
Date Option granted: November 1, 1999
Date Option expires: October 31, 2009
Number of shares subject to Option: 60,000
Option price (per share): $9.75
<TABLE>
<CAPTION>
Date Installment Percentage of Incentive or
First Exercisable Shares In Installment Nonqualified Stock Option
--------------------- ------------------------ -------------------------
<S> <C> <C>
October 28, 2000 20,000 shares or 33 1/3% Incentive Option
October 28, 2001 20,000 shares or 33 1/3% Incentive Option
October 28, 2002 20,000 shares or 33 1/3% Incentive Option
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From The
Condensed Balance Sheet As Of September 30, 1999 And The Condensed Statement Of
Operations For The Nine Months Ended September 30, 1999 And Is Qualified In Its
Entirety By Reference To Such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 21,973,656
<SECURITIES> 0
<RECEIVABLES> 1,004,055
<ALLOWANCES> 104,000
<INVENTORY> 10,312,033
<CURRENT-ASSETS> 33,886,329
<PP&E> 7,074,822
<DEPRECIATION> 656,027
<TOTAL-ASSETS> 40,841,145
<CURRENT-LIABILITIES> 4,801,844
<BONDS> 0
0
0
<COMMON> 48,757,702
<OTHER-SE> (12,718,401)
<TOTAL-LIABILITY-AND-EQUITY> 40,841,145
<SALES> 8,932,615
<TOTAL-REVENUES> 8,932,615
<CGS> 4,676,790
<TOTAL-COSTS> 4,676,790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,534,449)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,534,449)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,534,449)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
