UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(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, 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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<S> <C>
North Carolina 56-1928817
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(State or other jurisdiction of incorporation) (I.R.S. Employer Identification No.)
3800 Gateway Boulevard, Suite 311, Morrisville, N.C. 27560
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(Address of principal executive offices) (Zip Code)
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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 ___
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 or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of January 31, 2000 was $48,364,881. On January 31, 2000 there
were 7,098,911 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 to be held on May 15, 2000 have been incorporated by reference
into Part III of this Annual Report on Form 10-K.
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FORWARD LOOKING STATEMENTS
This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Company's judgment on future events. Because the Company is in the early stages
of its key supplier's establishment of manufacturing processes and capacity and
of building the Company's own distribution channels and has not yet engaged in
significant revenue-producing activities, the Company is subject to risks and
uncertainties that could cause the Company's actual performance and results to
differ materially from those projected or discussed herein. These risks and
uncertainties are discussed in "Business Risks" in Item 1 below and in "Risk
Factors" in the Company's Prospectus dated November 14, 1997.
PART I
ITEM 1. BUSINESS
INTRODUCTION
C3, Inc., a North Carolina corporation, currently doing business as Charles &
Colvard, manufactures, markets and distributes Charles & Colvard created
moissanite jewels (hereinafter referred to as moissanite or moissanite jewels)
for sale in the worldwide jewelry market. Moissanite, also known by its chemical
name, silicon carbide (SiC), is a rare, naturally occurring mineral found
primarily in meteorites. See "--Moissanite." As the sole manufacturer of
scientifically-made moissanite jewels, the Company is creating 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, durability and rarity. See
"--Marketing and Distribution."
The Company's moissanite jewels are made from SiC crystals grown by Cree, Inc.
("Cree"). Cree has an exclusive license to a patent related to a process for
growing large single crystals of SiC. To the Company's knowledge, there are
currently no producers of SiC other than Cree that could readily supply
lab-grown SiC crystals in qualities, sizes or volumes suitable for use as
moissanite jewels. The Company has certain exclusive licenses and supply rights
with Cree for SiC materials to be used for gemstone applications. See "--
Products and Product Development" and "Business Risks." The Chief Executive
Officer of the Company is a brother of the Chief Executive Officer of Cree. As
of August 13, 1999, based on the shareholdings reported in Cree's Proxy
Statement dated October 1, 1999, certain of Cree's officers and directors own
approximately 1.5% of the Company's outstanding common stock.
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. At that time it launched limited consumer-focused advertising
and promotion activities in those areas. In addition, the Company entered into
exclusive distribution agreements with a number of international distributors.
Through the first half of 1999, the Company limited its efforts to expand the
distribution of moissanite jewels as a result of insufficient product
availability and the lack of confidence the Company had regarding the quality of
the SiC crystals it was receiving. Late in the second quarter, the Company began
to receive indications that the quality of the SiC crystals it was receiving was
improving rapidly. The rate of improvement in the quality of the SiC crystals
continued to accelerate through the end of 1999, far exceeding the Company's
expectations. At the same time, the Company experienced a decline in sales of
moissanite jewels during the third quarter as a result of a slower than expected
rate of adding retailers domestically, lack of targeted retailer-driven
marketing programs abroad, and poor overall jewelry market performance in
certain international markets. The improved supply of SiC crystals along with
the decrease in sales led to a significant increase in inventories of moissanite
jewels. In December 1999, the Company and Cree agreed to reschedule
approximately 50% of the expected shipments of SiC
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crystals from Cree to the second half of 2000 from the first half of 2000.
With the improvements in the supply of salable moissanite jewels, the Company
launched its strategic global marketing program in the fourth quarter of 1999 to
spur consumer awareness of moissanite jewels. See --"Marketing and Distribution,
Marketing". In addition, in March 2000, the Company entered into distribution
agreements with Stuller Settings, Inc. ("Stuller") and Rio Grande, two of the
largest suppliers of jewelry-related products to the jewelry industry, for the
North American distribution of moissanite. The Company has also sought and has
entered into several agreements with domestic jewelry manufacturers. The
Company's decision to enter into agreements with Stuller, Rio Grande and jewelry
manufacturers is intended to rapidly increase the introduction of moissanite
into the domestic jewelry market. See "--Marketing and Distribution,
Distribution." No assurance can be given that these agreements will accelerate
the introduction of moissanite into the domestic jewelry market.
The Company believes that its sales volumes will increase as the distribution of
moissanite jewels expands domestically and internationally. As distribution of
moissanite expands, the Company will incur increasing spending levels from
advertising and marketing expenditures to create brand awareness for Charles &
Colvard created moissanite, to make investments in development efforts with Cree
to increase production volumes and yields, and to finance required investments
in receivables, inventory and manufacturing equipment. The Company expects to
continue operating at a loss through at least 2000. Moreover, there can be no
assurance that the Company will ever achieve the expected sales increases or
profitability or that if profitability is achieved, that such profitability can
be sustained. See "--Business Risks."
THE JEWELRY MARKET
In 1998, worldwide retail jewelry sales were estimated to be in excess of $100
billion and jewelry sales in the United States were estimated to be
approximately $45 billion. The volume of natural diamond, ruby, emerald and
sapphire imported into the U.S. for jewelry consumption exceeded 33 million
carats in 1998. More than 175 million carats of other precious and semi-precious
gemstones were imported into the US in 1998. For the same year, 275 million
carats of synthetic gemstones were imported into the US. In comparison, slightly
more than 55,000 carats of moissanite were shipped worldwide in 1999,
demonstrating the rarity of this product.
DIAMOND JEWELRY. In 1998, worldwide retail diamond jewelry sales were estimated
to be in excess of $54 billion and diamond jewelry sales in the United States
were estimated to be over $22 billion. In 1998, approximately 70 million pieces
of diamond jewelry were sold worldwide of which nearly 34 million were sold in
the United States. Over 90% of the diamond jewelry pieces sold domestically used
settings other than engagement rings (i.e., pendants, bracelets, other rings,
earrings, etc.).
DISTRIBUTION CHANNELS. Traditionally, jewelry has been sold to consumers through
independent and chain jewelry stores and department stores. However, in the past
two decades, non-traditional distribution channels have emerged including
catalog showrooms, mass-market discounters, price clubs, mail order, TV shopping
channels and electronic commerce on the Internet. Moissanite currently is sold
through single and multiple location independent jewelry stores in the U.S. and
exclusive distributors internationally. In 2000, the Company has entered into
distribution agreements with Stuller and Rio Grande for the sale of moissanite
jewels in North America. Independent jewelry stores comprise approximately half
of the estimated 40,000 retail jewelry outlets in the United States.
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MOISSANITE
Moissanite is a rare, naturally occurring mineral found primarily in meteorites.
The naturally occurring moissanite that has been found has generally been very
small in size and dark green or black in color and is not a commercially viable
gemstone material. Therefore, only lab-grown SiC crystals are expected to
provide a meaningful source of moissanite for jewels.
It is generally accepted that, in addition to carat size, the most important
characteristics of a gemstone are its beauty, durability and rarity. The beauty
of a gemstone is determined by its color, brilliance, "fire" and luster. The
brilliance of a gemstone is measured by its refractive index or the extent to
which it reflects light. The "fire" of a gemstone, or the breaking of light rays
into the spectrum of colors, is measured by its dispersion. Luster is the amount
of light that is reflected back to the observer from the surface of the
gemstone. The durability of a gemstone is determined by its hardness, or
resistance to scratching, and its toughness, or resistance to chipping or
cleaving. The gemstone's hardness also determines the extent to which brilliance
and "fire" can be highlighted by cutting with sharp, highly polished facets.
Rarity is the availability or perceived availability of a gemstone.
The Company believes that moissanite jewels have unique features distinct from
all other jewels based on its fire, brilliance, luster, durability and rarity.
The refractive index and dispersion of moissanite jewels are higher than other
fine gemstones. The Company believes that the hardness of moissanite jewels is
greater than all known gemstone materials except diamond. As a result, the
Company believes that moissanite jewels, like diamond, can be cut with sharp,
highly polished facets that accentuate their brilliance and "fire." The cutting
specifications for moissanite jewels are designed to maximize the brilliance and
fire inherent in the material. Additionally, the Company evaluates the finished
jewels to exacting standards with automated video-imaging equipment and
specially trained quality control personnel. In light of the very rare natural
occurrence of moissanite and the proprietary and technical limitations in
producing mass quantities of jewel quality moissanite, the Company believes that
moissanite is among the rarest of jewels.
The Company believes that other physical properties of moissanite jewels compare
favorably to fine gemstones, like diamond, ruby, emerald and sapphire, and will
aid in jewelers' acceptance of its products. Moissanite jewels, like diamond,
can withstand high temperatures, which allow jewelers to make extensive repairs
to the jewelry setting without removing the jewel and to use the same basic
methods that are used to repair diamond jewelry.
The Company believes these characteristics make moissanite attractive for use as
a jewel, which will result in market demand for the Company's products. Because
of its unique atomic structure, moissanite can be grown in a variety of colors
including blue, green or yellow. Additionally, although none have been produced
to date, the color red is theoretically possible to grow. To date, the Company
has focused its development, manufacturing and distribution efforts on the
colorless form of moissanite although it has sold limited quantities of green
moissanite.
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The following table compares the physical properties of moissanite jewels with
other fine gemstone materials:
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Comparison Chart (1)
Hardness Refractive Specific
Description (Mohs Scale) (2) Toughness Index Dispersion Gravity
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Diamond 10 Excellent* 2.42 .044 3.52
C&C Created
Moissanite (3) 9.25-9.50 Excellent 2.65-2.69 .090-.104 3.14-3.22
Sapphire & Ruby 9 Excellent 1.76-1.78 .018 3.90-4.00
Emerald 7.5 Poor to Good 1.56-1.60 .014 2.69-2.75
*Except in cleavage directions.
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1. Sources: Gemological Institute Of America, Gem Reference Guide For The GIA
Colored Stones, Gem Identification And Colored Stone Grading Courses 32-35,
65-82, 87-90 (1995); Cornelius S. Hurlburt, Jr. & Robert C. Kammerling,
Gemology 320-324 (2d Ed. 1991); Kirk-Othmer Encyclopedia Of Chemical
Technology 891-906 (4th Ed. 1994); Institution Of Electrical Engineers,
Properties Of Silicon Carbide (Gary L. Harris, Ed., 1995); Robert Webster,
Gems: Their Sources, Descriptions and Identification 889-940 (5th Ed.
1994); W. Von Muench, "Silicon Carbide" in Landolt-Boemstein Numerical Data
and Functional Relationships in Science and Technology, New Series, Group
III, Vol. 17C, pp. 403-416 and 585-592 (M. Schultz And H. Weiss, Eds.,
1984); Kurt Nassau, Shane F. McClure, Shane Elen & James E. Shigley,
"Synthetic Moissanite: A New Diamond Substitute" Gems & Gemology, Winter
1997, 260-275; Kurt Nassau. "Moissanite: A New Synthetic Gemstone
Material", Journal of Gemmology, 1999, 425-438; Kurt Nassau.
2. The Mohs Scale is approximately logarithmic, and quantitative comparisons
of different gemstone materials cannot be made directly using the Mohs
Scale. Moissanite gemstones are approximately one-half to one-third as hard
as diamond.
3. With the exception of the "Moissanite: A New Synthetic Gemstone Material"
and "Synthetic Moissanite: A New Diamond Substitute" articles, the physical
properties of moissanite jewels set forth in the preceding table utilized
materials from SiC crystals produced by parties other than the Company or
Cree. These crystals had various sizes, colors and atomic structures that
the Company believes made them unsuitable for use as a gemstone. The
Company has conducted tests on the hardness, toughness and refractive index
of samples of its jewels, and the results of these tests are consistent
with the results reported in this table. Because the Company, through
development programs with Cree, continues to work toward improved quality
of SiC crystals, the specific properties of the moissanite jewels that may
eventually be commercialized are not now known. However, the Company
believes that the physical properties of its moissanite jewels will fall
within the ranges of the moissanite shown in this table.
PRODUCTS AND PRODUCT DEVELOPMENT
MOISSANITE JEWELS. The Company currently sells primarily colorless moissanite
jewels cut in the round brilliant shape in sizes ranging from 2 to 9mm
(approximately .05 to 2.3 carats). For the foreseeable future, the Company
intends to continue to sell primarily loose round brilliant cut jewels in sizes
of 2 carats or less. Over time, the Company intends to market a greater
percentage of larger carat moissanite jewels depending on continued progress
made by Cree in improving the quality of SiC crystals. In 1999, the Company
began distribution of a limited quantity of green moissanite jewels to evaluate
the market potential of colored moissanite. In addition, the Company introduced
a limited quantity of "fancy" cuts, including princess, oval, radiant and
triangular-shaped moissanite jewels. The Company may elect to offer, from time
to time, additional cuts or colors of moissanite jewels.
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JEWELRY. The Company has developed and currently offers for sale a limited
number of pieces of custom designed jewelry featuring moissanite jewels. The
Company developed and offers this jewelry as a result of customer demand, to
demonstrate the marketability of moissanite jewels and to explore other means of
distributing moissanite jewels. The Company does not currently anticipate
continuing the sale of jewelry on a long-term basis, but will focus on its core
business of the sale of moissanite jewels. The Company currently intends to
continue to make limited quantities of custom jewelry for promotional and public
relations purposes.
AMENDED AND RESTATED EXCLUSIVE SUPPLY AGREEMENT WITH CREE. On June 6, 1997, the
Company and Cree entered into the Amended and Restated Exclusive Supply
Agreement (Exclusive Supply Agreement) whereby 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 during
the term of the Agreement, and Cree is obligated to supply this amount of
crystals to the Company. Although the Company is obligated to purchase only 50%
of its requirements from Cree, the Company does not believe there are currently
any other alternative sources of supply for SiC crystals suitable for gemstones.
Therefore, at the present time, the Company is dependent on Cree as its sole
source of supply of lab-grown SiC crystals. Under the Exclusive Supply
Agreement, Cree has agreed not to sell SiC crystals for gemstone applications to
anyone other than the Company. The Exclusive Supply Agreement sets the price for
SiC crystals at Cree's loaded manufacturing cost plus a margin, which margin may
increase if the price of crystals declines below a specified amount. In December
of 1999, the Company and Cree agreed to reschedule approximately 50% of the
expected shipments of SiC crystals from Cree to the second half of 2000 from the
first half of 2000. Through December 31, 2000, the Company has agreed to
purchase approximately $10.6 million of crystals produced by existing crystal
growers, and the Company and Cree have agreed that the price paid to Cree for
SiC crystals will be based upon a sliding scale depending on the quality of each
crystal received.
Under the terms of the Exclusive Supply Agreement, when the Company's orders for
SiC crystals exceeds the capacity of the existing crystal growth systems, Cree
may, at its sole discretion, elect to have the Company purchase the additional
growth systems that will be needed or to fund the cost of the systems on its own
and recoup its costs by incorporating the costs of the additional systems into
the cost of the SiC crystals purchased by the Company. If the Company funds the
costs of the crystal growth systems, Cree must supply the Company with 100% of
the output from these systems, unless Cree gives notice of certain production
time available in excess of the Company's then-current demand and the Company
does not demonstrate a need for the excess production capacity, in which case
Cree may sell SiC crystals produced by these systems to any of its other
customers for any use other than jewel applications. The title to these crystal
growth systems passes to Cree once they are fully depreciated by the Company. If
Cree elects to fund the cost of additional growth systems on its own, there can
be no assurance that Cree will supply the Company with all of the output from
these crystal growth systems or fill all of the Company's orders, however it
will be obligated to use the capacity to supply the quantities that the Company
is required to purchase from Cree. Additionally, when new crystal growth systems
are added, the Company must commit to purchase all of the output of the new
systems for at least six months. Any delay or reduction in the availability of
SiC crystals could delay or limit the Company's ability to deliver and sell its
moissanite jewels, which would have a material adverse effect on the Company.
See "--Business Risks--Reliance on Cree, Inc."
In May 1999 the Company ordered quantities of SiC crystals exceeding the
capacity of the existing crystal growth systems. Cree elected to have the
Company purchase $2.8 million of additional crystal growers to produce 3-inch
diameter crystals. The first of these crystal growers became operational in
August 1999 with all the ordered growers on-line by December 1999. The Company
funded this purchase on a monthly basis as the systems were manufactured. The
Company's December 1999 agreement with Cree sets the quarterly dollar volume of
production shipments of SiC to be purchased by the Company for the year 2000. It
is the Company's belief that such volume of production can be obtained from the
crystal growth systems it has purchased.
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The Exclusive Supply Agreement also restricts the Company from entering into
numerous types of arrangements with identified parties. See "--Marketing and
Distribution" and "Business Risk--Anti-Takeover and Certain Other Provisions."
The Exclusive Supply Agreement has an initial term through June 2005, 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
$1.0 million. The Company has met this order threshold and expects to extend the
term of the Agreement.
AMENDED AND RESTATED DEVELOPMENT AGREEMENT WITH CREE. On July 1, 1998, the
Company entered into an Amended and Restated Development Agreement (Development
Agreement) with Cree, which is focused on increasing the yield of usable
material in each SiC crystal manufactured by Cree for use by C3 in the
production of moissanite jewels. In June 1998, Cree began to produce 2-inch
crystals and in March 1999 Cree produced a 3-inch crystal, in development,
meeting mutually agreed upon volumes of useable material. A 3-inch crystal can
produce approximately twice as many moissanite jewels as a 2-inch crystal with
the same percentage yield of useable material. Future activities under the
development program will be focused on improving the manufacturing process for
3-inch crystals, with continued efforts to maximize the crystal volume and
quality. The Development Agreement establishes performance milestones, primarily
focused on yield improvement, 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. In conjunction with the May 1999 order of additional
crystal growth systems, effective October 1999, the Company's funding obligation
under this agreement was reduced to $1.44 million annually. The Company expensed
$2.4 million, $3.1 million and $1.7 million under development arrangements with
Cree in 1999, 1998 and 1997, respectively.
MOISSANITE/DIAMOND TEST INSTRUMENT. Gemstone test instruments most commonly used
by jewelry industry employees rely on thermal properties to distinguish diamond
from other gemstones or diamond simulants such as synthetic cubic zirconia.
Because the thermal properties of moissanite jewels are relatively close to
those of diamond, such instruments have not, to date, been able to reliably
differentiate between diamond and moissanite jewels. Although gemologists
trained in the physical properties of moissanite jewels may find a number of
ways to distinguish moissanite from diamond, the Company believes that a
moissanite/diamond test instrument must be available to jewelers and pawnbrokers
to help prevent fraud.
The Company began shipping its moissanite/diamond test instrument, the Tester
Model 590, during the first quarter of 1998. This instrument, which
distinguishes moissanite jewels from diamonds in the colors and clarities most
commonly sold by retail jewelers, is used in conjunction with existing thermal
test instruments. A number of other companies have introduced devices that claim
to distinguish moissanite jewels from diamonds at retail prices comparable to
the Tester Model 590. There can be no assurance that a significant market will
develop for the Company's test instrument, that other competing devices will not
be introduced or that other readily available means will not be developed which
can effectively distinguish moissanite jewels from diamond.
The Company's goal of insuring a reliable means for the jewelry industry to
distinguish moissanite from diamond has been achieved. Therefore, the Company
may seek other distribution opportunities for the test instrument to allow the
Company to focus primarily on the marketing and distribution of moissanite
jewels.
MOISSANITE/DIAMOND TEST INSTRUMENT COMPONENT. Under a letter agreement
(Instrument Agreement) dated February 12, 1996, Cree is the sole supplier of a
component proprietary to Cree used in the Company's Tester Model 590. The
Instrument Agreement, which expires in 2016, obligates the Company to purchase
all of its requirements for that component from Cree and gives the Company the
exclusive right to purchase those components from Cree. The Company is also
obligated to pay Cree a royalty of 2.5% of net sales of all test instruments
incorporating the Cree component. Although to date Cree has supplied a
sufficient quantity of this component, if Cree were to fail to deliver this
component,
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as required, the Company would not be able to manufacture additional test
instruments.
INTELLECTUAL PROPERTY
INTELLECTUAL PROPERTY OF THE COMPANY. The Company has been issued U.S. product
and method patents for moissanite jewels, which expire in 2015, under which the
Company has broad, exclusive rights to manufacture, use and sell moissanite
jewels in the United States. The Company has applications pending in a number of
foreign jurisdictions for these same patents. In addition, the Company has been
issued a U.S. apparatus and method patent for the Tester Model 590, which
expires in 2016, that covers the physical structure and the testing techniques
so employed in the Tester Model 590. This patent gives the Company exclusive
rights to manufacture and sell the Tester Model 590 in the United States. The
Company also has other patents and patent applications pending related to
certain methods of producing moissanite jewels and related technologies. In
addition, the Company has been issued certain trademarks and has other pending
trademark applications that support the Charles & Colvard moissanite branding
strategy. Although the Company intends to enforce its patent and trademark
rights and vigorously prosecute all its patent applications, there can be no
assurance that such actions will be successful, that any additional patents will
be issued, that any issued patent will not be challenged, invalidated or
circumvented or that any issued patent will have any competitive or commercial
value.
The Company's success and ability to compete successfully is heavily dependent
upon its proprietary technology. In addition to its patents and pending patents,
the Company relies on trade secret laws and employee, consultant and customer
confidentiality agreements to protect certain aspects of its technology. There
can be no assurance that the Company will be able to protect its proprietary
technology from disclosure or that others will not develop technologies that are
similar or superior to its technology. See "-- Business Risks -- Dependence on
Intellectual Property."
While the Company has not received any claims that its products or processes
infringe on the proprietary rights of third parties, there can be no assurance
that third parties will not assert such claims against the Company with respect
to its existing and future products. In the event of litigation to determine the
validity of any third party's claims, such litigation could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel, whether or not such litigation is determined
in favor of the Company. In the event of an adverse result of any such
litigation, the Company could be required to expend significant resources to
develop non-infringing technology or to obtain licenses to, and pay royalties on
the use of, the technology, which is the subject of the litigation. There can be
no assurance that the Company would be successful in such development or that
any such license would be available on commercially reasonable terms.
PROPRIETARY TECHNOLOGY OF CREE. Cree, the Company's current source for
development and supply of lab-grown SiC crystals, has developed or licensed
numerous proprietary processes for the growth of SiC crystals that it uses in
semiconductor, laser and other applications. The founders of the Company
recognized the potential use of SiC as a moissanite jewel, and the Company has
obtained the exclusive right to purchase SiC crystals from Cree for moissanite
jewels and gemological instrumentation. The Company believes that Cree is
currently the only producer of SiC crystals in sizes and qualities suitable for
commercial production of moissanite jewels. In addition, Cree is the only
producer of SiC known by the Company to be developing colorless SiC crystals
suitable for moissanite jewel use at the present time. Cree has significant
proprietary rights related to its processes for growing SiC crystals. Cree has
an exclusive license on a patent for a process of growing large single crystals
of SiC. This patent expires in years ranging from 2006 to 2011, depending on the
country in which issued. In addition, Cree has a patent for a process for
growing colorless SiC and other patents relating to certain aspects of its SiC
crystal growth process. To further protect its proprietary SiC crystal growth
process, Cree internally produces the crystal growth systems used to produce its
SiC crystals. The Company has a royalty-free, perpetual license for the use in
moissanite jewel applications of the technology covered by Cree's patent for
growing colorless SiC.
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At the present time, the Company's success and ability to compete is heavily
dependent upon Cree's ability to successfully produce SiC crystals suitable for
the production of Charles & Colvard created moissanite and on Cree's proprietary
technology. See "--Business Risk--Dependence on Intellectual Property."
MANUFACTURING
The production of moissanite jewels includes (i) growing SiC crystals, (ii)
designing shapes with proportions unique to moissanite jewels, (iii) cutting
crystals into preforms that will yield jewels of an approximate carat weight and
millimeter size, (iv) faceting preforms into jewels, and (v) inspecting, sorting
and grading faceted jewels.
GROWTH OF SIC CRYSTALS. SiC crystals are grown for the Company by Cree in
accordance with the terms of the Exclusive Supply Agreement, as amended. Under
the Exclusive Supply Agreement, Cree is required to sell to the Company all of
the crystals grown in a specified number of crystal growth systems without
charging the Company for such crystal growth systems and all the crystals grown
in the crystal growth systems acquired by the Company from Cree, unless Cree
gives notice of certain production time available in excess of the Company's
then-current demand and the Company does not demonstrate a need for the excess
production capacity, in which case Cree may sell SiC crystals produced by these
systems to any of its other customers for any use other than moissanite jewel
applications. At the current time, the Company is not using 100% of its
available crystal growth capacity at Cree. The Company may increase its
production capacity from Cree upon appropriate notice to Cree. Upon its receipt
of an order from the Company for a quantity of crystals that will require the
acquisition of additional crystal growth systems, Cree may elect, in its sole
discretion, to have the Company purchase the additional growth systems that will
be needed or to fund the costs 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. See "--Products and Product Development -- Amended and Restated
Exclusive Supply Agreement with Cree."
The Company routinely evaluates Cree's progress under the Development Agreement
and the yield and quality of salable moissanite jewels from SiC crystals being
produced by Cree. The yield of salable moissanite jewels from each crystal is
the most significant factor affecting the volume and cost of moissanite jewels
available for sale. Yield of salable moissanite jewels is dependent on the
quality of the crystals. Improvements in crystal quality increase the volume, or
yield, of moissanite jewels from a crystal and decrease the cost of each
moissanite jewel produced.
During the second quarter of 1999, Cree showed marked improvement in SiC crystal
quality resulting in increased yield of salable jewels from 2-inch diameter
crystals. The improvements in SiC crystal yield continued through the second
half of 1999, far exceeding the Company's expectations. 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 yields from the 3-inch diameter crystals have also
exceeded the Company's expectations. The Company expects the yields of the
3-inch diameter crystals to vary throughout the year 2000 as a manufacturing
process evolves. Any significant increases or decreases in yields would have a
corresponding material impact on gross margins.
DESIGNING SHAPES WITH PROPORTIONS UNIQUE TO MOISSANITE JEWELS. To maximize the
light reflecting from a faceted moissanite jewel requires the design of shapes
with unique proportions and angles. The Company creates proprietary designs,
using computer modeling, to display the maximum light reflection based on the
optical properties (i.e., refractive index, dispersion and luster) of moissanite
jewels. A unique version of the round brilliant cut was the first shape
developed applying these computer models. Most recently, the Company has
designed oval and marquise fancy shapes that eliminate dark areas commonly found
in other gemstones with oval and marquise cuts. The Company believes these
proprietary designs are the basis for the superior optical performance quality
observed in faceted moissanite jewels.
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PREFORMS. The Company divides all SiC crystals through slicing and dicing
processes into preforms in sizes suitable for faceting into predetermined
calibrated-size moissanite jewels. The Company uses readily available automated
and computerized equipment along with proprietary technology developed in-house
to slice and dice crystals into preforms. The Company believes that this
equipment will enable it to maximize the number of preforms obtained from each
SiC crystal.
FACETING MOISSANITE JEWELS. The faceting of preforms is a critical stage in
obtaining quality jewels. The techniques and skills used in faceting moissanite
jewels differ somewhat from those used in faceting diamonds and other gemstones.
The Company is, and expects to continue, outsourcing the faceting of its
moissanite jewels, other than faceting for research and product development
purposes, which it conducts internally. The Company currently has three
suppliers of volume faceting services, which are located in Asia. During 1999
the Company significantly expanded production capacity for cutting moissanite
with two of these vendors. To date the Company has been satisfied with the
capabilities and performance of these three suppliers. The Company intends
during 2000 to source faceting services primarily from its three existing
suppliers and will be dependent on their ability to provide an adequate quantity
of quality faceted moissanite jewels. There is no assurance that they will be
able to expand and continue to produce the Company's quality specifications for
faceting and within the Company's quantity and time requirements.
The Company has entered into a multi-year agreement with its primary supplier of
faceting services, John M. Bachman, Inc. (JMB). Pursuant to this agreement and
related amendments thereto, the Company advanced $380,000 to JMB to expand the
production facilities of its affiliate which facets the Company's moissanite
jewel preforms. Approximately $180,000 of the advanced funds remains
outstanding, and these funds are being repaid through reductions to the per
piece cutting charges through approximately June 30, 2001. The Company has a
right of first refusal to acquire any excess gemstone cutting capacity that
occurs at JMB's affiliate and any equity securities offered by JMB or its
affiliate. The term of the Company's agreement with JMB is through December 31,
2002; however, the Company has the right to terminate the agreement at any time
after January 1, 2002 upon 90 days written notice. Under this agreement, JMB has
agreed to grant, and to cause its affiliates to grant, to the Company a
perpetual, non-exclusive, royalty-free license to use any inventions or
proprietary information developed by or for JMB or its affiliates that is useful
in the faceting of moissanite jewels.
INSPECTION, SORTING AND GRADING. Faceted moissanite jewels are currently
returned to the Company for inspection, sorting and grading. During this stage,
specially trained personnel individually examine and grade each moissanite jewel
against certain quality parameters. In addition, a sample of each batch is
processed through an image analyzer for exacting quality control. This phase of
manufacturing is relatively labor-intensive and requires skills not readily
available in the general work force. In the future, the Company may elect to
outsource certain portions of this stage of the manufacturing process to an
independent third party. Any third parties to which these processes are
outsourced will be required to adhere to the same rigorous quality control and
monitoring standards presently used at the Company. There can be no assurance
that the Company will be able to hire or retain sufficient numbers of
appropriately skilled personnel for this phase of manufacturing, find and enter
into acceptable agreements with third party vendors or that such vendors will be
able to provide accurate inspection, sorting and grading services on a timely
basis.
MOISSANITE/DIAMOND TEST INSTRUMENT. The Company contracted with an unaffiliated
third party for the assembly of its moissanite/diamond test instrument from
components produced by third parties. The initial production runs are complete
and the Company believes that, other than with respect to a component containing
a proprietary semiconductor chip that the Company obtains from Cree under the
Instrument Agreement, the components and assembly functions would be readily
available from a wide variety of other suppliers for additional production
volumes.
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MARKETING AND DISTRIBUTION
MARKETING
GLOBAL MARKETING STRATEGY. As the Company continues to expand its distribution
channels, it is developing a deeper understanding of the dynamics of the market
for jewelry in general and moissanite specifically. The Company identified
several issues that affected the decline in sales in the second half of 1999.
These issues include a slower than expected rate of adding retailers in the
U.S., lack of targeted retailer-driven marketing programs abroad, and poor
overall jewelry market performance in certain 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 and demand for
moissanite jewels.
This program is focused on creating consumer demand for the Charles & Colvard
created moissanite brand and is based on new insight into the Company's target
consumer. As the sole manufacturer of scientifically-made moissanite jewels, the
Company is creating 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, durability and rarity. Webster's 3rd International Dictionary defines
"jewel" as an article with intrinsic value used for adornment; an ornament of
precious metal often set with stones; and, worn as an accessory of dress, or a
badge of order. The underlying implication is that a jewel has been crafted -
that some or all of it is man-made. The Company believes that moissanite jewels
are a unique blend of science and art.
The global strategic marketing campaign opened November 1999. This global
campaign targets working women ages 25-54 with an annual household income in
excess of $50,000 and features a new corporate logo. The aim of the global
marketing strategy is to inspire the target group of successful women to seek
out moissanite. Market research indicates that this positioning will create the
best possible image for the product and provide the Company with great pricing
and marketing flexibility. 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 and is consistent with the long-term branding and
marketing strategy initiated in the fourth quarter of 1999 and continuing today.
PUBLIC RELATIONS. The Company launched the domestic portion of its global
marketing strategy through events targeting stylists, trade press, fashion press
and other influencers of lifestyle products at events in Los Angeles and New
York in late 1999. As a result of these events, Brooke Shields wore moissanite
jewelry for her role in the Costume Guild Awards (February 12, 2000). The
musical group "After Dark" will be wearing moissanite in an upcoming music video
to air on MTV, and finally, international soccer star Mia Hamm wore moissanite
during the February 14, 2000 ESPY awards and will continue to wear moissanite
jewelry at select events throughout the year. Hunter Tylo, a spokesperson for
the Company, was recently featured wearing moissanite jewelry in PEOPLE magazine
(January 31, 2000 issue), STAR magazine (February 1, 2000 issue) and on the
front cover of her new book, Making a Miracle. Additionally, Ms. Tylo will be
featured throughout the year on behalf of the Company at public appearances and
media interviews. The value of celebrities wearing moissanite lies in the
trend-setting ability of these individuals which the Company believes will drive
consumer demand and help the Company in its efforts to expand distribution.
Press coverage on the Company and moissanite jewels during 1999 included 109
television stories, 176 newspaper articles and 73 magazine articles (consumer,
jewelry trade and marketing trade). The corresponding gross consumer impressions
from this coverage exceeded 28 million in the U.S. alone.
DOMESTIC. Pursuant to the global marketing campaign, which began in November
1999, the Company initiated a substantial consumer communications blitz which
targeted the Company's target audience on national cable television and in
HARPER'S BAZAAR, and included local market special events and promotions. In
addition, the Company placed advertisements on more than 2300 screens in movie
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theaters in 10 of the leading media markets. Furthermore, the Company's
integrated marketing program, which includes retail point-of-purchase materials,
became available to the Company's authorized retailers in the second half of
October 1999. The advertising campaign for Charles & Colvard created moissanite
invited consumers to seek out the Company's Internet web site
(www.moissanite.com). During the domestic advertising campaign, the number of
visitors to the Company's web site grew thirty fold - from a previous monthly
average of 2,700 for the first 10 1/2 months of 1999 to over 65,000 for February
2000. Additionally, hits on the Company's web site have averaged 1 million per
month since the new advertising campaign began in mid November 1999.
An estimated advertising and promotional budget of $6 million is projected for
2000. The Company scheduled additional consumer-advertising for the first
quarter of 2000 including the January and February editions of HARPER'S BAZAAR,
national network television advertising for the first two weeks in February
during "The Today Show" and "Good Morning America," and cable television
advertising in a number of media markets for the first two weeks in February
during primetime hours. In concert with the advertising program, the Company's
sales efforts are focused on these leading media markets in the U.S. to further
capitalize upon placement of the product in influential, trend-setting cities.
The Company plans to advertise in PROFESSIONAL JEWELER and similar jewelry trade
publications during 2000. In addition, the Company participated or plans to
participate in the following jewelry trade shows for the first half of 2000:
o JCK Orlando (late January)
o Professional Jeweler, Fine Jewelry Show at Tucson (early February)
o American Gem Society's Annual Conclave in Philadelphia (mid to late
March)
o JCK Las Vegas (early June)
INTERNATIONAL. Internationally, the Company works with its distributors to
develop appropriate advertising and marketing campaigns targeting specific
geographic regions, building on the marketing themes developed in the US.
Pursuant to its international distribution agreements, the Company provides
co-op incentives to use approved advertising that supports the brand image for
Charles & Colvard created moissanite. To this end, the Company has engaged
Emisphere, a marketing and communications company in Milan, Italy for public
relations services in certain European countries. The exclusive distributors are
responsible for all advertising and marketing efforts and expenses in their
territories. The Company may provide other advertising and promotion incentives
in other international markets to grow jewelry trade and consumer awareness.
The Company plans to advertise to the international jewelry trade through GEMKEY
and JEWELRY NEWS ASIA. During the first half of 2000, the Company plans to
participate in Messe Basel, the largest and most prestigious international
jewelry show.
As the Company expands its marketing and promotion activities, it expects to
continue operating at a loss through at least the end of 2000. 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.
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DISTRIBUTION
DOMESTIC. The Company believes that moissanite is best sold through independent
retail jewelers, where their staffs can most effectively educate the consumer on
Charles & Colvard created moissanite's unique qualities. In addition, these
jewelers are generally known for selling custom-designed products with high-end
images and providing other specialty jewelry and watch services.
The Company began shipping moissanite to its authorized retail jewelers in
Atlanta and Miami/Ft. Lauderdale during the second quarter of 1998, and, in July
1998, launched limited consumer-focused advertising and promotion activities in
those areas. During the second half of 1998, and through the first half of 1999,
the Company limited its efforts to expand the distribution of moissanite jewels
as a result of insufficient product availability and the lack of confidence the
Company had regarding the quality of the SiC crystals it was receiving. As the
Company's confidence in its supply of moissanite increased, it attempted to
expand the number of retailers carrying moissanite during the second half of
1999. However, the Company was not able to increase the number of these jewelers
necessary to achieve its business objectives.
The Company has entered into agreements with 237 domestic independent jewelers
to carry Charles & Colvard created moissanite. Sales in 1999 to Charles &
Colvard's independent jewelers totaled approximately $4.1 million. In order to
more rapidly expand the distribution of moissanite, effective in March 2000 the
Company will transition from selling moissanite jewels directly to independent
retail jewelers to allowing independent retail jewelers to access loose
moissanite jewels and moissanite jewelry through respected, established jewelry
distributors. The Company has entered into distribution agreements for North
America with two large distributors and certain jewelry manufacturers. The
Company has entered into non-exclusive distribution arrangements with Stuller
Settings, Inc. (Stuller) and Rio Grande. Established in 1970, Stuller is one of
the world's largest suppliers of jewelry-related products, providing over
100,000 different items to the jewelry industry. Through its innovative
manufacturing and distribution techniques, Stuller provides just in time
delivery of their products to over 40,000 retail jewelry customers, primarily in
North America. Their products include findings (a piece of jewelry ready to have
a gemstone mounted in it), finished jewelry, loose diamonds and colored
gemstones, tools and supplies and metals. Rio Grande was started over 50 years
ago and is a respected industry leader in jewelry manufacture and distribution.
Rio Grande carries over 24,000 products for the jewelry trade and the Rio Grande
Gems & Findings catalog is the largest catalog of its type in the world. Rio
Grande's customer base is primarily focused on manufacturers of jewelry from
independent jewelers that create custom jewelry to the largest manufacturers of
jewelry in North America.
Additionally, the Company has entered into arrangements with several jewelry
manufacturers that will design and manufacture lines of jewelry containing
Charles & Colvard created moissanite jewels. The Company has granted these
jewelry manufacturers non-exclusive rights to sell their lines of jewelry to
independent retail jewelers as well as jewelry store chains and department
stores that meet certain predetermined criteria. Independent retail jewelers
will have access to loose moissanite jewels from Stuller and Rio Grande and to
jewelry containing moissanite jewels from Stuller and these jewelry
manufacturers. The Company is also exploring opportunities with certain
designers to create specialty pieces of jewelry containing moissanite jewels for
sale to selected classes of the jewelry trade.
The Company believes that moissanite jewels provide retailers with an
opportunity to earn a profit margin that compares favorably to other jewelry
products and will allow the retailer to distinguish its product line from other
jewelers in the highly competitive retail jewelry market. The Company also
believes that the profit margins associated with its products will create
incentives for these retailers to maximize their sales and promotional efforts,
resulting in additional consumer demand for the Company's moissanite jewels. To
date, those jewelers that carry and promote moissanite have reported significant
success with the product.
The Company believes that the distribution of moissanite jewels through Stuller
and Rio Grande as well
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as certain jewelry manufacturers and designers will provide the retail jeweler
with maximum flexibility to develop their business with moissanite. Those
jewelers that prefer to create their own jewelry to meet the needs of their
individual market areas will be able to purchase the loose jewels through
Stuller or Rio Grande with which many of them already have a relationship. Those
jewelers that wish to purchase finished jewelry for sale in their store may do
so either through Stuller or any of the jewelry manufacturers working with
moissanite. Consumer perception and acceptance of the Company's products will be
affected by the quality, design and workmanship of the settings chosen by
Stuller, manufacturers, designers and retailers, however, the Company will have
no control over these elements, except through the Company's pricing policy.
Beyond that, the Company believes that the success of Charles & Colvard created
moissanite will be determined by the power and the precision of its
brand-building program. The Company continues to evaluate the most appropriate
structure for distribution in the U.S. and may, in certain circumstances, enter
into additional distribution arrangements such as through selected department
stores, company-owned retail stores, internet sales or otherwise.
INTERNATIONAL. The Company has also entered into 27 international agreements for
distribution of moissanite jewels covering 42 countries and various areas in the
Caribbean. Sales under these agreements are aggregated approximately $6.3
million during calendar 1999. All sales to international customers are
denominated in U.S. dollars, and the Company generally requires full payment
before the merchandise is shipped.
The Company has refined its international distribution methods, beginning with
Western Europe. The Company has appointed Breebaart Trading BV of Rotterdam as
the master distributor for northern Europe and ArsAurea Gems as the master
distributor for southern Europe. In addition, the Company has named JewelNet
Corp. as the master distributor for various areas of the Caribbean, Latin
America and South America. TechThai Jewelry Supply has been appointed the master
distributor for various areas in Southeast Asia. These four master distributors
have the right to appoint sub-distributors in their respective territories, and
these new agreements provide the Company with more control over the positioning
and advertising of moissanite in their respective territories.
The Company's Exclusive Supply Agreement with Cree prohibits the Company,
without Cree's consent, from entering into an exclusive marketing or
distribution agreement with DeBeers or any party that Cree reasonably believes
is affiliated with DeBeers; the Central Selling Organization (the international
cartel of diamond producers); any party whose primary business is the
development, manufacture, marketing or sale of diamond gemstones; or any
non-gemstone and non-jewelry industry competitor of Cree. These provisions may
limit the avenues of distribution potentially available to the Company and could
prevent the Company from entering into certain potentially profitable
transactions.
DIAMOND/MOISSANITE TEST INSTRUMENT. The Company is selling its
moissanite/diamond test instrument directly to jewelers, gemologists and
pawnbrokers through direct mailings, advertisements in trade publications and at
trade shows. Approximately 3,100 instruments were shipped in 1999. In addition,
the Company has retained non-exclusive distributors to distribute the test
instrument in some U.S. markets and through exclusive distribution agreements in
certain territories internationally. The Company may enter into other
distribution agreements, as it deems appropriate, or may if appropriate license,
joint venture or sell certain rights to the test instrument.
COMPETITION
MOISSANITE JEWELS. Gemstone materials can be grouped into three types: (i)
natural gemstone, which is found in nature; (ii) synthetic gemstone, which has
the same chemical composition and characteristics of natural gemstone but is
created in a lab; and (iii) simulated or substitute material, which is similar
in appearance to natural gemstone but does not have the same chemical
composition. The Company's moissanite jewels, which are positioned as a unique
new jewel, may compete with fine gemstones such as ruby, sapphire, emerald and
tanzanite as well as with natural and treated diamonds and existing synthetic
gemstones such as synthetic cubic zirconia presently in commercial distribution.
The Company
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may also face competition from additional gemstones such as synthetic diamonds,
synthetic diamond films and other sources of synthetic moissanite not presently
available in qualities, sizes and volumes suitable for use as gemstones. Most of
the suppliers of diamonds and other fine gemstones, as well as the suppliers of
synthetic gemstones, have substantially greater financial, technical,
manufacturing and marketing resources and greater access to distribution
channels than the Company.
The worldwide market for large, uncut high-quality diamonds is significantly
consolidated through the Central Selling Organization, a cartel led by DeBeers.
The cartel has a major impact on the worldwide supply and pricing of these
diamonds at both the wholesale and retail levels. Although the Company believes
that its jewels will appeal primarily to the consumer who would not otherwise
purchase comparable diamond jewelry, diamond producers may undertake additional
marketing or other activities designed to protect the diamond jewelry market
against sales erosion from consumer acceptance of moissanite jewels.
The Company may also face competition from treated diamonds. Treated diamonds,
which are natural diamonds with imperfections or flaws that have been altered in
some manner to enhance their appearance, are presently available in the jewelry
industry and are generally less expensive than diamonds of similar size, cut and
color, which have not been altered. Synthetic diamond in gemstones or film form
may also become available in the marketplace and compete with the Company's
jewels. Synthetic diamonds are regularly produced for industrial applications,
but the Company believes that gemstone quality synthetic diamonds presently
cannot be produced at prices competitive with those currently offered for the
Company's colorless moissanite jewels. The primary producers of these synthetic
diamonds are DeBeers, Sumitomo and GE. There are also a number of Russian
producers of synthetic diamonds for industrial uses. In addition,
development-stage companies like the Gemesis Corporation headquartered in
Florida, are working to develop cost effective means of producing gem quality
synthetic diamonds. Synthetic diamond films can be grown at commercially viable
prices in thicknesses that can be applied to other surfaces but these films
adhere well to only a few minerals such as diamond, silicon and SiC
(moissanite). There could, however, be technological advances that would enable
competitively priced synthetic diamond in gemstone or film form to be offered.
Although the Company believes that its products have a proprietary position, it
could face competition from other companies that develop competing SiC
technologies. Some of these technologies could be developed by producers of SiC
used for other industrial applications. Manufacturers of industrial SiC products
include The Carborundum Corporation, for abrasive uses, and Cree, Siemens AG,
ABB and Northrup Grumman Corporation, for semiconductor uses. The Company
believes that Cree is presently the only supplier of SiC crystals in colors,
sizes and volumes suitable for gemstone applications and believes that the
patents owned or pending by Cree or the Company provide substantial
technological, legal and cost barriers to other companies' development of
colorless moissanite jewels. It is possible, however, that these or other
producers of SiC could develop SiC crystals suitable for gemstone applications
and produce moissanite jewels until the Company could obtain judicial
enforcement of its patent rights.
The Company's products may also face competition from synthetic cubic zirconia,
the principal existing diamond simulant and, to a lesser degree, other synthetic
gemstones. The largest producer of synthetic cubic zirconia gemstones is
Signity, a new company formed by the merger of Swarogem (a subsidiary of D.
Swarovski & Co.) and Golay Buchel. In addition, there are a significant number
of other producers of jewelry containing synthetic gemstones. Three of the
largest retailers of synthetic cubic zirconia jewelry in the United States are
QVC, Home Shopping Network and Wal-Mart. Some of the major retailers of
synthetic cubic zirconia, including QVC, have captive manufacturing divisions
that produce synthetic cubic zirconia jewelry. These producers and sellers may
see their markets being eroded by the introduction of the Company's moissanite
jewels. The Company believes that price is the primary basis upon which these
products will compete with its moissanite jewels.
The Company intends to compete primarily on the basis that the unique qualities
of its moissanite jewels
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are distinct from all other jewels based on its fire, brilliance, luster and
durability. In addition, the Company believes that the Charles & Colvard created
moissanite brand, which is being developed pursuant to the Company's strategic
global marketing program, will create a long-term competitive advantage for the
Company's products. Additionally, the Company believes that moissanite jewels
have a significant cost advantage over other fine gemstones, especially in the
one-carat size and larger. The Company's ability to compete successfully is
dependent on its ability to: (i) achieve jeweler and consumer acceptance of its
products; (ii) obtain quantities of lab-grown SiC crystals in acceptable
qualities and prices; (iii) obtain reliable and high quality faceting services
from third parties; (iv) respond to market entries of other gemstone materials
with technological or cost improvements; and (v) meet consumer demand for its
moissanite jewels. There can be no assurance that the Company will be able to
obtain the materials and services needed to deliver its products or to otherwise
be able to compete successfully in the marketplace.
MOISSANITE/DIAMOND TEST INSTRUMENT. The Company's proprietary, patented
moissanite/diamond test instrument, the Tester Model 590, faces competition from
other devices that distinguish moissanite jewels from diamond. The Tester Model
590, working in conjunction with existing thermal test instruments, readily
distinguishes loose moissanite jewels and moissanite jewels set in jewelry from
diamond in the colors and clarities most often sold by jewelers. The Presidium
Corporation markets a test instrument that is capable of distinguishing
primarily loose moissanite jewels from diamond. The Ceres and Moissketeer
Corporations have released electrical conductivity measuring devices that they
claim are capable of distinguishing moissanite from diamond. Another company has
introduced a reflectivity meter that is capable of distinguishing primarily
large loose moissanite jewels from diamond, however, while the Company does not
plan to sell such moissanite jewels, a certain process can permanently change
the refractive index of moissanite such that moissanite would measure as a
diamond on such reflectivity meters. Other competitors may also introduce
devices that compete with the Company's Tester Model 590 or gemologists trained
in the physical properties of moissanite jewels may develop less expensive
methods of distinguishing moissanite jewels from diamond. There can be no
assurance that a market for moissanite/diamond test instruments will develop or
that the Company will be able to successfully compete in that market, if it
develops.
GOVERNMENT REGULATION
The Company's products are subject to regulation by the Federal Trade Commission
(FTC). The FTC has issued regulations and guidelines governing the marketing of
synthetic gemstones and other gemstones that have physical properties similar to
diamond that require synthetic gemstones and other gemstones to be clearly
identified in any promotional or marketing materials. While the Company intends
to comply fully with all FTC regulations, there can be no assurance that the FTC
or a competitor will not challenge the Company's promotional or marketing
activities. Such a challenge could result in significant expense to the Company
and divert the efforts of the Company's management, whether or not such
challenge is resolved in favor of the Company. If the Company's actions were
found to be in violation of FTC regulations, the Company could be forced to
suspend marketing and sales of its products and could incur significant expenses
in developing new marketing strategies and materials that would not violate FTC
regulations. There can be no assurance that the Company would be successful in
developing new marketing strategies and materials that would comply with FTC
regulations or that such strategies, once developed, would enable the Company to
market its products profitably.
EMPLOYEES
At February 28, 2000, the Company had 68 employees. The Company believes that
its future prospects will depend, in part, on its ability to obtain additional
management, marketing, sales, manufacturing, scientific and technical personnel.
Competition for such personnel is substantial, and the number of persons with
relevant experience is limited. None of the Company's employees is represented
by a labor union. The Company believes that its employee relations are good.
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BUSINESS RISKS
In addition to the other information in this Form 10-K, readers should carefully
consider the following important factors that in some cases have affected, and
in the future could affect, the Company's actual performance and results and
could cause the Company's actual results of operations to differ materially from
those expressed in any of the forward-looking statements made by, or on behalf
of, the Company.
LIMITED RELEVANT OPERATING HISTORY
The Company, which was incorporated in June 1995, was in the development stage
through June 30, 1998. The Company is now in the process of commercializing
moissanite jewels, building consumer brand awareness and growing its
distribution channels. The timing or existence of any significant revenues is
dependent on market acceptance of moissanite jewels, increasing distribution and
sales, and continued improvements in the yield of jewels in the qualities, sizes
and volumes desired from each SiC crystal. The Company's business is also
subject to the risks inherent in the rapid increase in production levels.
Likewise, the Company's products are subject to the risks inherent in the
development and marketing of new products, including unforeseen design,
manufacturing or other problems or failure to develop market acceptance. Failure
by the Company to achieve market acceptance of its products or to develop the
ability to produce its products in higher quantities and qualities would have a
material adverse effect on the Company's business, operating results and
financial condition. Accordingly, the Company's prospects must be considered in
light of the risks and difficulties frequently encountered by companies in their
early stage of development, particularly technology-based companies operating in
the early stages of manufacturing and distributing unproven products.
NEED FOR FURTHER PRODUCT DEVELOPMENT
Although the Company is selling production volumes of colorless moissanite
jewels and Cree, the Company's sole supplier of SiC crystals, achieved a fully
repeatable process in July 1998 for two-inch crystals, Cree has not yet
established a manufacturing process for producing lab-grown SiC crystals in the
qualities, sizes and volumes desired for the Company's products. In addition,
Cree has not yet achieved a fully repeatable process for growing three-inch
diameter crystals in the qualities, sizes and volumes desired to produce
moissanite jewels. If Cree is unable to improve crystal yields and develop a
manufacturing process for growing SiC crystals in the desired qualities, sizes
and volumes, the Company's business, operating results and financial condition
would be materially adversely affected.
RELIANCE ON CREE, INC.
The Company is currently dependent on a single source, Cree, for development and
supply of SiC crystals. Cree has certain proprietary rights relating to its
process for growing large single crystals of SiC and its process for growing
colorless SiC crystals. Under the Company's Exclusive Supply Agreement with
Cree, the Company is obligated to buy from Cree, and Cree is obligated to sell
to the Company, 50%, by dollar volume, of the Company's requirements for SiC
material for the production of gemstones in each calendar quarter. Although the
Company is only required to purchase 50% of its SiC requirements from Cree, the
Company does not currently believe that any other SiC producer could readily
supply crystals in the qualities, sizes and volumes needed for the Company's
products. Therefore, at the present time, the Company is dependent on Cree as
its sole source for its principal raw material.
The Company's effort to develop colorless SiC crystals in qualities, sizes and
volumes desired for use as moissanite jewels is currently concentrated entirely
with Cree and is dependent on Cree's expertise in SiC technology, which Cree
uses in connection with semiconductor, laser and other applications. A primary
focus of the development programs with Cree has been to improve the yield of
salable jewels from each SiC crystal that the Company purchases from Cree. The
yield of salable jewels from each crystal is the most significant factor
affecting the volume and cost of jewels available for sale and is
17
<PAGE>
dependent on the quality of the crystals. Improvements in crystal quality
increase the volume, or yield of jewels from a crystal, and decrease the cost of
each jewel produced. The yields of salable jewels produced from two-inch
diameter crystals increased throughout the last three quarters of 1999. While
Cree is producing a limited quantity of three-inch diameter crystals, Cree has
not achieved a repeatable process for these crystals in the qualities, sizes and
volumes desired for the Company's moissanite jewels. To reach profitability the
Company must receive increasingly higher quality SiC crystals from Cree that
yield more salable jewels. Any delay in achieving higher quality crystals or any
decline in average crystal quality could limit the Company's ability to expand
distribution of its products and increase the cost of goods sold which would
have a material adverse effect on the Company's business, operating results and
financial condition. See "--Business--Products and Product Development."
When the Company does elect to order quantities of crystals that would require
additional crystal growth systems, Cree may, under the Exclusive Supply
Agreement, elect to have the Company purchase the additional crystal growth
systems that will be needed, and Cree would be obligated to supply the Company
with 100% of the output from systems funded by the Company. If, however, Cree
elects to fund the cost of these additional growth systems on its own, then
there can be no assurance that Cree will supply the Company with all of the
output from these crystal growth systems or fill all of the Company's orders for
SiC crystals. Any delay or reduction in the availability of SiC crystals could
delay or limit the Company's ability to deliver and sell its jewels, which would
have a material adverse effect on the Company's business, operating results and
financial condition.
The Company also obtains from Cree a component proprietary to Cree used in the
production of the Company's moissanite/diamond test instrument. See
"--Business--Products and Product Development--Moissanite/Diamond Test
Instrument." If Cree were unable to deliver this component in the quantities and
at the times needed by the Company, the Company's ability to provide the market
with its test instrument would be adversely affected.
As a result of the Company's reliance on Cree, Cree's failure to complete the
desired development objectives under the Development Agreement and to supply the
Company with SiC crystals or components for its moissanite/diamond test
instrument would have a material adverse effect on the Company's business,
operating results and financial condition and could result in a curtailment,
suspension, cessation or significant change in the strategic direction of the
Company's business. See --"Business--Products and Product Development."
RELIANCE ON STULLER SETTINGS, INC. AND RIO GRANDE
The Company has entered into distribution agreements with Stuller and Rio
Grande, for distribution of moissanite throughout the entire North American
market. There is no assurance, however, that the Company's distribution
arrangements with Stuller and Rio Grande will increase, or even maintain sales.
Although the Company has entered into arrangements with certain jewelry
manufacturers which contemplate the distribution of moissanite jewelry to United
States jewelry retailers, the Company anticipates that the vast majority of
moissanite jewels sold by the Company in North America will be distributed
through Stuller and Rio Grande. Therefore, the Company is substantially
dependent upon Stuller and Rio Grande for distribution of moissanite jewels in
North America.
Historically, the North American market has accounted for a substantial portion
of the Company's moissanite jewel sales. In the event that the Company's
distribution arrangements with Stuller and Rio Grande fail to maintain and
increase the current level of North American sales, the Company's revenues would
be materially adversely affected.
UNDEVELOPED MARKETS; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS
The market for colorless moissanite jewels among retail jewelers and consumers
is in the early stages of development as the Company shipped approximately
55,000 carats in 1999. The Company believes that
18
<PAGE>
many retail jewelers and most consumers are generally unaware of the existence
and attributes of moissanite jewels. As is the case with any new product, market
acceptance and demand are subject to a significant amount of uncertainty. The
Company's future financial performance will depend upon consumer acceptance of
the Company's moissanite jewels that are distinct from all other jewels based on
their fire, brilliance, luster, durability and rarity. In addition, consumer
acceptance may be impacted by jewelers' acceptance of moissanite jewels. The
Company has conducted limited market tests to predict retail jeweler and
consumer reaction to its products. The Company markets loose jewels while
jewelry distributors, manufacturers and retailers select the jewelry into which
the jewels will be set. The quality, design and workmanship of the jewelry
settings selected by retail jewelers, which will not be within the Company's
control, could impact the consumer's perception and acceptance of the Company's
jewels. Thus, the Company's future financial performance may be impacted by (i)
the ability of selected jewelry distributors, jewelry suppliers, jewelry
manufacturers and designers to market and promote moissanite jewels to the
retail jewelry trade (ii) the willingness of retail jewelers to purchase
moissanite jewelry or to purchase loose jewels and undertake setting of the
loose jewels, (iii) the ability of retail jewelers to select jewelry settings
that encourage consumer acceptance of and demand for the Company's jewels (iv)
the ability of jewelry manufacturers and retail jewelers to set loose moissanite
jewels in jewelry with high quality workmanship and (v) the ability of retail
jewelers to effectively market and sell moissanite jewelry to consumers.
The market for the Company's jewels may develop at a slower pace than expected
as a result of lack of acceptance of moissanite jewels by selected jewelry
distributors, jewelry manufacturers, designers, retail jewelers or by consumers.
If the market fails to develop or develops more slowly than expected, or if the
Company's products do not achieve significant market acceptance, the Company's
business, operating results and financial condition would be materially
adversely affected. See "--Business--Products and Product Development" and
"Business--Distribution, Marketing and Sales."
LIMITED DISTRIBUTION CHANNELS
The Company began shipping moissanite to jewelry retailers in June 1998, which
grew to 237 locations primarily concentrated in certain cities along the eastern
seaboard, Texas and California by the end of 1999. While the Company is
attempting to expand the domestic distribution of moissanite jewels through the
distribution agreements with Stuller and Rio Grande and agreements with jewelry
manufacturers and jewelry designers, there can be no assurance that the Company
will be successful in expanding distribution through such agreements. Neither
can there be any assurance that the Company will be able to enter into
additional agreements with other distributors on terms acceptable to the Company
or that such other distributors will be successful in their efforts to market
the Company's jewels to retailers or consumers. The inability of the Company to
achieve its desired distribution of its moissanite jewels or the inability of
the Company's distributors to successfully market moissanite jewels to jewelers
or consumers would have a material adverse effect on the Company's business,
operating results and financial condition. See "--Business--Distribution,
Marketing and Sales."
DEPENDENCE ON INTELLECTUAL PROPERTY
The Company has been issued U.S. product and method patents for moissanite
jewels under which the Company has broad, exclusive rights to manufacture, use
and sell moissanite jewels in the United States. The Company has applications
pending in a number of foreign jurisdictions for these same patents. In
addition, the Company has been issued a U.S. apparatus and method patent for the
Tester Model 590 that covers the physical structure and the testing techniques
so employed. This patent gives the Company exclusive rights to manufacture and
sell the Tester Model 590 in the United States. The Company believes that these
patents create substantial technological barriers to its potential competitors.
The Company also has other patents and patent applications pending related to
certain methods of producing moissanite jewels and related technologies. There
can be no assurance that any other patents will be granted or that any issued
patent will have any commercial or competitive value.
19
<PAGE>
At the present time, the Company is also dependent on Cree's technology for the
production of SiC crystals. Cree is exclusively licensed to use a patent
concerning a process for growing large single crystals of SiC, has certain
patents of its own relating to growth of large single crystals of SiC and has a
patent for a process for growing colorless SiC crystals.
There can be no assurance that any patents issued to or licensed by or to the
Company or Cree will provide any significant commercial protection to the
Company or Cree, that the Company or Cree will have sufficient resources to
prosecute its respective patents or that any patents will be upheld by a court
should the Company, Cree or Cree's licensor seek to enforce their respective
rights against an infringer. The existence of valid patents does not prevent
other companies from independently developing competing technologies. Existing
producers of SiC or others may refine existing processes for growing SiC
crystals or develop new technologies for growing large single crystals of SiC or
colorless SiC crystals in a manner that does not infringe patents owned or
licensed by or to the Company or Cree. In addition, existing producers of SiC,
existing producers of other synthetic or natural gemstones or other parties may
develop new technologies for producing moissanite jewels in a manner that does
not infringe patents owned or licensed by or to the Company or Cree.
As a result of the foregoing factors, existing and potential competitors may be
able to develop products that are competitive with or superior to the Company's
products, and such competition could have a material adverse effect on the
Company's business, operating results and financial condition. See
"--Business--Competition."
DEPENDENCE ON THIRD PARTIES
In addition to its current dependence on Cree and on third party distribution
channels, the Company's prospects depend upon its ability to identify, reach
agreements with and work successfully with other third parties. In particular,
the Company relies on third parties to facet its jewels. Faceting moissanite
jewels requires different techniques than faceting diamond and other gemstones.
There can be no assurance that the Company can enter into additional contracts
with faceting vendors on terms satisfactory to the Company or that faceting
vendors will be able to provide faceting services in the quality and quantities
required by the Company. In addition, the Company relies on third parties to
manufacture components for and assemble its moissanite/diamond test instrument.
There can be no assurance that the Company will be successful in maintaining its
relationships with these component manufacturers and assemblers or that the
Company will be able to find suitable replacements if the Company is unable to
maintain such relationships. Failure by the Company to achieve any of the above
would have a material adverse effect on the Company's business, operating
results and financial condition. See "--Business--Manufacturing" and
"Business--Marketing and Distribution."
COMPETITION
See "--Business--Competition."
INTERNATIONAL OPERATIONS
The Company has entered into 27 international agreements for distribution of
moissanite jewels in 42 countries and territories and in various areas in the
Caribbean. The Company intends to expand the number of international markets for
its products. In addition, it expects to continue to use certain companies based
outside the United States to facet its moissanite jewels. Due to the Company's
reliance on development of foreign markets and use of foreign vendors, the
Company is subject to the risks of conducting business outside of the United
States. These risks include unexpected changes in, or impositions of,
legislative or regulatory requirements, delays resulting from difficulty in
obtaining export licenses, tariffs and other trade barriers and restrictions and
the burdens of complying with a variety of foreign laws and other factors beyond
the Company's control. Additionally, while all foreign transactions are
denominated in U.S. dollars, foreign currency fluctuations could impact demand
for the
20
<PAGE>
Company's products or the ability of the Company's foreign suppliers to continue
to perform. The Company is also subject to general geopolitical risks in
connection with its international operations, such as political, social,
religious and economic instability, potential hostilities and changes in
diplomatic and trade or business relationships. There can be no assurance that
such factors will not adversely affect the Company's operations in the future or
require the Company to modify its anticipated business practices.
GOVERNMENTAL REGULATION
The Company is subject to governmental regulations in the manufacture and sale
of moissanite jewels and the moissanite/diamond test instrument. In particular,
the FTC has the power to restrict the offer and sale of products that could
deceive or have the tendency or effect of misleading or deceiving purchasers or
prospective purchasers with regard to the type, kind, quality, character, origin
or other characteristics of a diamond. The Company may be under close scrutiny
both by governmental agencies and by competitors in the gemstone industry, any
of which may challenge the Company's promotion and marketing of its moissanite
jewel products. If the Company's production or marketing of moissanite jewels is
challenged by governmental agencies or competitors, or if regulations are issued
that restrict the ability of the Company to produce and market its products, the
Company's business, operating results and financial condition could be
materially adversely affected. See "--Business--Government Regulation."
IMITATION MOISSANITE
If market acceptance of the Company's products continues to grow, it is possible
that low-quality gemstones or synthetics could be marketed as moissanite. The
sale of low-quality products as moissanite could damage the perception of
moissanite as a unique jewel that compares favorably to other fine gemstones
like diamond, ruby and emerald. This could damage the Company's reputation among
retail jewelers and consumers and result in a loss of consumer confidence in the
Company's products. The introduction of low-quality imitation moissanite jewels
and the inability of the Company to limit the adverse effects thereof could have
a material adverse effect on the Company's business, operating results and
financial condition.
MANAGEMENT OF RAPID GROWTH
The Company has recently experienced a period of rapid and significant growth
and expects such growth to continue in the future with the commercialization of
moissanite jewels. Periods of rapid growth place a significant strain on the
Company's resources. The Company's ability to manage its growth effectively will
require it to implement and improve operational and financial systems and to
expand, train and manage its employee base. The Company also will be required to
manage multiple relationships with various suppliers, customers and other third
parties. The Company's future operating results will also depend on its ability
to expand its sales and marketing, research and development and administrative
support organizations. The Company's executive officers have no significant
experience in managing rapidly growing businesses. If the Company is unable to
manage growth effectively, the Company's business, financial condition and
results of operations would be materially adversely affected.
21
<PAGE>
DEPENDENCE UPON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's success depends in part upon retaining the services of certain
executive officers and other key employees. The Company has entered into
employment agreements with the Company's Chief Executive Officer, Jeff N.
Hunter, President and Chief Operating Officer, Robert S. Thomas, Chief Financial
Officer, Mark W. Hahn, Director of Technology, Dr. Mark Kellam, Director of
Manufacturing, Earl R. Hines and Vice President of Sales, David Fudge. The
Company does not maintain "key man" life insurance policies on any of its
executive officers or key employees. The loss of the services of the Company's
executive officers or other key employees could have a material adverse effect
on the Company's business, operating results and financial condition.
Because of the Company's early stage of development, the Company is also
dependent on its ability to recruit, retain and motivate personnel with
technical, manufacturing and gemological skills. There are a limited number of
personnel with these qualifications and competition for such personnel is
intense. The inability of the Company to attract and retain additional qualified
personnel would materially adversely affect the Company's business, operating
results and financial condition.
OPERATING LOSSES
Since its inception the Company has incurred net losses aggregating
approximately $17.3 million. The Company expects to incur substantial additional
costs marketing and advertising its products and expanding the distribution of
such products. The Company expects to incur losses through at least 2000, and
there can be no assurance that the Company will ever achieve profitability or,
if achieved, that such profitability will be sustained. See "--Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
GLOBAL STRATEGIC MARKETING PROGRAM: NEED FOR CAPITAL
The Company has embarked on a global strategic marketing program to create a
brand image for Charles & Colvard created moissanite jewels. To successfully
complete this program the Company must commit significant capital to
advertising, public relations and other marketing programs. The Company does not
currently have committed capital resources to fund its desired level of
expenditures for the global strategic marketing program. Therefore the Company
has engaged, a Virginia-based investment banking firm, Scott & Stringfellow
Inc., to assist the Company in its capital raising activities. If the Company is
not able to secure capital, it will be necessary for the Company to conserve
cash by decreasing advertising expenditures, deferring or decreasing other
operating expenditures and attempting to renegotiate its agreements with Cree.
There can be no assurance that the Company will be able to secure the required
financing to execute its new domestic distribution strategy, or, if available,
that it will be available on terms acceptable to the Company. Additionally,
there can be no assurance that if the Company does secure the desired capital
resources that its new domestic distribution strategy will be successful.
POTENTIAL FOR FLUCTUATIONS IN QUARTERLY RESULTS
Because the Company has limited operating history, management has very little
data upon which to estimate operating revenues and expenses. The Company's
revenues will be affected by many factors, including those discussed in
"Business Risks." At the same time, the Company's expenses will be growing to
support anticipated rapid expansion. The Company will likely experience
substantial quarterly fluctuations in its operating results. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an indication of
future performance. Moreover, it is likely that in some future quarters the
Company's operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Company's common stock
would likely be materially adversely affected.
22
<PAGE>
VOLATILITY OF STOCK PRICE
Since its initial public offering, the trading price of the common stock has
experienced significant volatility and substantial and sudden fluctuations. The
trading price of the common stock may continue to be subject to wide
fluctuations in response to quarterly variations in operating results, changes
in financial estimates by securities analysts, announcements of technological
innovations or new products by the Company or its competitors, or other events
or factors. In addition, the stock market has experienced extreme price and
volume fluctuations that have particularly affected the market prices for many
technology and small capitalization companies. These broad market fluctuations
may materially and adversely affect the market price of the common stock.
ANTI-TAKEOVER AND CERTAIN OTHER PROVISIONS
ARTICLES OF INCORPORATION AND BYLAWS
A number of provisions of the Company's articles of incorporation and bylaws
deal with matters of corporate governance and the rights of shareholders.
Certain of these provisions may be deemed to have an anti-takeover effect and
may delay or prevent takeover attempts not first approved by the Board of
Directors (including takeovers that certain shareholders may deem to be in their
best interests). These provisions also could delay or frustrate the removal of
incumbent directors or the assumption of control by shareholders. The Company
believes that these provisions are appropriate to protect the interests of the
Company and all of its shareholders.
EXCLUSIVE SUPPLY AGREEMENT
Under the terms of the Exclusive Supply Agreement, the Company is prohibited
from entering into an exclusive marketing or distribution agreement with DeBeers
or its affiliates or the Central Selling Organization (the international cartel
of diamond producers) or any party whose primary business is the development,
manufacture, marketing or sale of diamond gemstones or any non-gemstone and
non-jewelry industry competitor of Cree (collectively, the "Prohibited
Parties"). The agreement also prohibits the Company from entering into certain
merger, acquisition, sale of assets, or similar transactions with a Prohibited
Party. These provisions of the Exclusive Supply Agreement could limit the price
that third parties might be willing to pay in the future for some or all of the
shares of the Company's common stock. In addition, this agreement could prevent
the Company from entering into certain potentially profitable transactions with
Prohibited Parties.
SHAREHOLDER RIGHTS PLAN
On February 21, 1999 the Company adopted a Shareholder Rights Plan under which
all shareholders of record as of March 8, 1999, received rights to purchase
shares of a new series of Preferred Stock.
The Rights Plan is designed to enable all of the Company's shareholders to
realize the full value of their investment and to provide for fair and equal
treatment for all shareholders in the event that an unsolicited attempt is made
to acquire the Company. The adoption of the Rights Plan is intended as a means
to guard against abusive takeover tactics and is not in response to any
particular proposal.
The rights, which expire in 2009, will be exercisable only if a person or group
acquires 20% or more of the Company's common stock or announces a tender offer
for 20% or more of the common stock. If a person or group acquires 20% or more
of the Company's common stock, all shareholders except the purchaser will be
entitled to acquire the Company's common stock at a 50% discount. The effect
will be to discourage acquisitions of more than 20% of the Company's common
stock without negotiations with the Board.
The rights will trade with the Company's common stock, unless and until they are
separated upon the
23
<PAGE>
occurrence of certain future events. The Company's Board of Directors may redeem
the rights prior to the expiration of a specified period following the
acquisition of more than 20% of the Company's common stock.
ITEM 2. PROPERTIES
The Company leases approximately 26,500 square feet of mixed-use space (general
office, light manufacturing and laboratory) in the Research Triangle Park area
of North Carolina from an unaffiliated third party. This space houses the
Company's executive offices, sales offices and research and development
facilities. The Company believes that comparable mixed-use space could be
obtained from other parties on terms substantially the same as the Company's
current lease. This space is considered by management to be sufficient for the
Company's foreseeable needs over the next 12 months. From February 1997 through
January 1998, the Company leased approximately 3,000 square feet of mixed-use
space from a subsidiary of Cree. This space previously housed the Company's
offices and research and development facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
24
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Jeff N. Hunter 43 Chief Executive Officer and Chairman of the Board
Robert S. Thomas 52 President and Chief Operating Officer
Mark W. Hahn 37 Chief Financial Officer, Treasurer and Secretary
Mark D. Kellam 43 Director of Technology
Earl R. Hines 63 Director of Manufacturing
David Fudge 40 Vice President of Sales
JEFF N. HUNTER, one of the founders of the Company, has served as the Company's
Chief Executive Officer and Chairman of the Board since June 1996, and as a
director since the Company's inception in June 1995. From June 1996 to June
1998, Mr. Hunter served as President of the Company and from June 1995 to June
1996 he served as Secretary and Treasurer of the Company. From July 1980 to May
1996, he was employed in various capacities with North Carolina State
University, most recently as Director of Business, Finance and Research
Administration for the College of Engineering. Mr. Hunter received his Master of
Science degree in management science from North Carolina State University.
ROBERT S. THOMAS has served as the President and Chief Operating Officer of the
Company since June 1998. From November 1996 to June 1998 Mr. Thomas served as a
consultant to the Company on various financing and sales related matters. From
October 1977 to November 1996 Mr. Thomas was employed with Morven Partners, one
of the nations largest processors and distributors of both raw and processed
edible nuts, and its predecessor companies in various capacities including
President and Chief Executive Officer. Mr. Thomas earned his Bachelor of Science
degree in Business Administration from West Virginia University.
MARK W. HAHN has served as the Chief Financial Officer of the Company since
October 1996 and as Treasurer and Secretary since August 1997. From January 1984
to October 1996, Mr. Hahn was employed with Ernst & Young LLP, most recently as
Senior Manager in the Entrepreneurial Services Group. He earned his Bachelor of
Business Administration degree with concentrations in accounting and finance
from the University of Wisconsin in Milwaukee and is a Certified Public
Accountant.
MARK D. KELLAM has served as Director of Technology for the Company since May
1998. From August 1995 to May 1998, Dr. Kellam was employed in various
capacities with the Microelectronics Center of North Carolina, most recently as
Director of Manufacturing and Quality Assurance. Dr. Kellam earned his Ph.D. in
Solid State Physics from the University of North Carolina at Chapel Hill.
EARL R. HINES has served as Director of Manufacturing for the Company since
March 1997. From April 1996 to March 1997, Mr. Hines was a lapidary consultant
to the Company. From March 1990 to March 1997, Mr. Hines owned and operated
GemCrafters of Raleigh, a business that focused on cutting colored gemstones and
repairing and appraising jewelry.
DAVID FUDGE has served as the Vice President of Sales of the Company since
November 1999. From September 1996 to October 1999, Mr. Fudge was the President
of Business Systems International, Inc., a sales and management consulting firm.
From May 1987 to August 1996, Mr. Fudge was employed with Healthcare Suppliers,
Inc., most recently as Eastern Regional Sales Manager. Mr. Fudge earned his
Bachelor of Engineering Degree in Chemical Engineering from Vanderbilt
University.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is traded on the NASDAQ National Market under the
symbol "CTHR." The following table presents, for the periods indicated, the high
and low sales prices of the Company's common stock, as reported by the NASDAQ
National Market. As of March 1, 2000, there were 242 shareholders of record of
the common stock.
1999 1998
----------------------------- -----------------------------
High Low High Low
---- --- ---- ---
First Quarter $ 17.88 $ 8.13 $ 12.38 $ 8.50
Second Quarter 18.00 10.00 10.00 7.25
Third Quarter 17.25 10.00 9.75 4.75
Fourth Quarter 11.00 5.88 14.50 9.88
The Company has never paid dividends on its capital stock. The Company intends
to retain earnings, if any, for use in its business and does not anticipate
paying any cash dividends in the foreseeable future.
USE OF PROCEEDS
On November 14, 1998, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-36809) to be
effective. Paulson Investment Company was the principal underwriter for this
offering. The net proceeds of this offering were $41,072,982. As of December 31,
1999, the Company had used all of these proceeds. Approximately $7,500,000 of
the proceeds have been used in research and development, of which $290,000 was
paid to officers, directors or shareholders owning more than 10% of the common
stock outstanding. The Company has also used approximately $12,300,000 to fund
sales, marketing and administrative expenses, of which $780,000 was paid to
officers, directors or shareholders owning more than 10% of the common stock
outstanding. The Company also expended approximately $13,850,000 to fund working
capital. In addition, the Company acquired $7,000,000 of production equipment,
including $6,000,000 of crystal growth systems from Cree, certain computerized
wafering and preform development equipment, and other equipment. Other
expenditures include $450,000 for intangible assets.
RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable
26
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected statement of operations data for the years ended December
31, 1999, 1998 and 1997, and the selected balance sheet data at December 31,
1999 and 1998 have been derived from, and are qualified by reference to, the
Company's financial statements included elsewhere in this report which have been
audited by Deloitte & Touche LLP, independent auditors. The selected statement
of operations data for the years ended December 31, 1997 and 1996 and for the
period from inception through December 31, 1995 and the selected balance sheet
data at December 31, 1997, 1996 and 1995 have been derived from audited
financial statements not included herein. The selected financial data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and Notes thereto included elsewhere in this report.
C3, INC.
<TABLE>
<CAPTION>
Period
from
Inception
(June 28,
1995 to
Year Ended December 31 December
------------------------------------------------------------------- 31,
1999 1998 1997 1996 1995
-------------- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net sales $ 12,272,907 $ 4,026,309 $ --- $ --- $ ---
Cost of goods sold 6,405,887 2,913,208 --- --- ---
-------------- -------------- --------------- ------------ ------------
Gross profit 5,867,020 1,113,101 --- --- ---
Operating expenses:
Marketing and sales 6,410,042 2,989,737 535,329 47,019 10,313
General and administrative (1) 3,039,595 2,671,445 2,744,898 134,715 10,822
Research and development 2,710,692 4,001,740 2,111,062 236,047 6,052
-------------- -------------- --------------- ------------ ------------
Total operating expenses 12,160,329 9,662,922 5,391,289 417,781 27,187
-------------- -------------- --------------- ------------ ------------
Operating loss 6,293,309 8,549,821 5,391,289 417,781 27,187
Interest income, net (1,141,626) (1,816,333) (471,130) (35,173) ---
-------------- -------------- --------------- ------------ ------------
Net loss $ 5,151,683 $ 6,733,488 $ 4,920,159 $ 382,608 $ 27,187
============== ============== =============== ============ ============
Basic and diluted net loss per share $ 0.73 $ 0.97 $ 1.73 $ 0.19 $ 0.02
============== ============== =============== ============ ============
Shares used in computing basic and
diluted net loss per share (2) 7,040,891 6,954,600 2,845,773 2,036,813 1,704,000
============== ============== =============== ============ ============
<CAPTION>
December 31
- -------------------------------------- ----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------- ----------- ----------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and equivalents $ 13,161,665 $ 32,004,045 $ 43,980,385 $ 1,167,458 $ 9,109
Working capital 26,709,142 33,887,496 43,687,405 1,161,603 8,355
Total assets 36,780,902 40,168,323 44,873,089 1,226,134 32,913
Shareholders' equity 33,494,143 37,996,332 44,046,281 1,213,279 22,813
</TABLE>
1. Compensation expense related to the issuance of stock options for 1999,
1998 and 1997 was $282,572, $527,811 and $1,632,804, respectively. In
addition, for the year ended December 31, 1997, general and administrative
expense includes $66,000 of compensation expense related to the January 2,
1997 issuance of common stock to Cree pursuant to a stock option. See Note
6 of Notes to Financial Statements.
2. The calculation of shares for all periods reflects a 2.13-for-1 common
stock split effected in September 1997. The calculation also gives effect
to the automatic conversion of the Series A Preferred Stock and Series B
Preferred Stock into 2.13 shares of common stock for each share of
Preferred Stock effective upon completion of the Company's initial public
offering. See Notes 2, 4 and 5 of Notes to Financial Statements.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
The Company manufactures, markets and distributes Charles & Colvard created
moissanite jewels (hereinafter referred to as moissanite or moissanite jewels)
for sale in the worldwide jewelry market. Moissanite, also known by its chemical
name, silicon carbide (SiC), is a rare, naturally occurring mineral found
primarily in meteorites. As the sole manufacturer of scientifically-made
moissanite jewels, the Company is creating 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, durability and rarity.
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. At that time it launched limited consumer-focused advertising
and promotion activities in those areas. In addition, the Company entered into
exclusive distribution agreements with a number of international distributors.
Through the first half of 1999, the Company limited its efforts to expand the
distribution of moissanite jewels as a result of limited product availability
and the lack of confidence the Company had regarding the quality of the SiC
crystals it was receiving. Late in the second quarter, the Company began to
receive indications that the quality of the SiC crystals it was receiving was
improving rapidly. The rate of improvement in the quality of the SiC crystals
continued to accelerate through the end of 1999, far exceeding the Company's
expectations. At the same time, the Company experienced a decline in shipments
of moissanite jewels during the third quarter as a result of a slower than
expected rate of adding retailers domestically, lack of targeted retailer-driven
marketing programs abroad, and poor overall jewelry market performance in
certain international markets. The improved supply of SiC crystals along with
the decrease in sales led to a significant increase in inventories of moissanite
jewels. In December 1999, the Company and Cree agreed to reschedule
approximately 50% of the expected shipments of SiC crystals from Cree to the
second half of 2000 from the first half of 2000.
With the improvements in the supply of salable moissanite jewels, the Company
launched its strategic global marketing program in the fourth quarter of 1999 to
spur consumer awareness of this new category of jewel. In addition, in March
2000, the Company entered into distribution agreements with Stuller Settings,
Inc. ("Stuller") and Rio Grande, two of the largest suppliers of jewelry-related
products to the jewelry industry, for the North American distribution of
moissanite. The Company has also sought and has entered into several agreements
with domestic jewelry manufacturers. The Company's decision to enter into
agreements with Stuller, Rio Grande and jewelry manufacturers is intended to
rapidly increase the introduction of moissanite into the domestic jewelry
market.
As discussed below, the shift in the Company's domestic distribution strategy
may affect the Company's historical relationships between revenues and expenses
as well as the Company's liquidity and capital requirements.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998.
Net sales were $12,272,907 for the year ended December 31, 1999 compared to
$4,026,309 for the year ended December 31, 1998, an increase of $8,246,598 or
204.8%. The Company's net sales of moissanite jewels and jewelry increased to
approximately $11,680,000 in 1999 from approximately $3,285,000 in 1998.
Additionally, during the first half of 1998, the company operated as a
development stage enterprise and sales of moissanite jewels during that period
of $324,000 were netted against research and
28
<PAGE>
development expenses on the operating statement because many of the jewels were
associated with the Company's research and development program. The increase
resulted primarily from expanded distribution of moissanite jewels. The Company
will seek to add more distribution outlets both domestically and internationally
in 2000 and beyond.
The Company's gross profit margin was 47.8% for the year ended December 31, 1999
compared to 27.6% for the year ended December 31, 1998. The increase resulted
from higher yields of moissanite jewels from SiC crystals purchased from Cree,
thereby lowering the cost per carat. During 2000, particularly as the Company
works with Cree to develop the 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. In addition, although the Company's new
domestic distribution strategy is designed to increase sales, it also is
expected to decrease gross profit margin as a result of the discounts that will
be made available for volume purchases.
Marketing and sales expenses were $6,410,042 for the year ended December 31,
1999 compared to $2,989,737 for the year ended December 31, 1998, an increase of
$3,420,305 or 114.4%. The increase was due primarily to the development and
introduction of the strategic global marketing program, including the creative
and production efforts supporting the specific advertising messages that were
launched in the fourth quarter of 1999, as well as compensation and other
expenses related to additional staff. The Company has currently budgeted
approximately $6 million for increased advertising and other marketing in 2000
as compared to approximately $3 million spent in 1999.
General and administrative expenses were $3,039,595 for the year ended December
31, 1999 compared to $2,671,445 for the year ended December 31, 1998, an
increase of $368,150 or 13.8%. The increase resulted primarily from increased
use of professional services and increased insurance and taxes on the Company's
increasing fixed assets.
Research and development expenses were $2,710,692 for the year ended December
31, 1999 compared to $4,001,740 for the year ended December 31, 1998, a decrease
of $1,291,048 or 32.3%. The decrease resulted primarily from cost savings
related to a more focused development effort late in 1998 and from the reduction
of development efforts effective September 1, 1999, from a funding level of
$240,000 per month to $120,000 per month.
Net interest income was $1,141,626 for the year ended December 31, 1999 compared
to $1,816,333 for the year ended December 31, 1998, a decrease of $674,707 or
37.1%. 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.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997.
Net sales for the year ended December 31, 1998, were $4,026,309. The Company
generated net sales of approximately $3,285,000 from moissanite jewels and
jewelry, and approximately $741,000 from the Company's proprietary test
instrument. In addition, 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 were netted against research and
development expenses on the operating statement because many of the jewels were
associated with the Company's research and development program. There were no
sales for the year ended December 31, 1997.
Gross profit was $1,113,101 or 27.6% of net sales for the year ended December
31, 1998. There were no sales for the year ended December 31, 1997.
Marketing and sales expenses were $2,989,737 for the year ended December 31,
1998 compared to $535,329 for the year ended December 31, 1997, an increase of
$2,454,408 or 458.5%. The increase was primarily due to development and
execution of consumer-focused advertising and marketing expenses
29
<PAGE>
associated with the initial launch of moissanite, increased market research and
compensation and travel expenses associated with the expansion of the Company's
sales staff.
General and administrative expenses were $2,671,445 for the year ended December
31, 1998 compared to $2,744,898 for the year ended December 31, 1997, a decrease
of $73,453 or 2.7%. The decrease resulted primarily from an approximate
$1,200,000 decrease in compensation expense related to the issuance of stock
options. Stock option compensation expense aggregated approximately $530,000 in
1998 compared to approximately $1,700,000 in 1997. This decrease was partially
offset by an increase of approximately $1,100,000 resulting from compensation
and other expenses related to additional staff, occupancy expenses, investor
relations and legal expenses associated with business expansion and additional
SEC compliance obligations incurred as a public company.
Research and development expenses were $4,001,740 for the year ended December
31, 1998 compared to $2,111,062 for the year ended December 31, 1997, an
increase of $1,890,678 or 89.6%. The majority of the increase was attributable
to development expenses incurred under the Company's June 1997 Development
Agreement, January 1998 Supplemental Development Agreement and July 1998 Amended
and Restated Development Agreement with Cree, Inc. In addition, production costs
of moissanite jewels during the first half of 1998 while the Company was in the
development stage, increased expenditures for the Company's internal development
of prototype jewel pre-forming and faceting operations and compensation expense
for Company research and development staff contributed to the increased expense.
Net interest income was $1,816,333 for the year ended December 31, 1998 compared
to $471,130 for the year ended December 31, 1997, an increase of $1,345,203 or
285.5%. This increase resulted from higher interest income earned on higher cash
balances due primarily to the investment of proceeds from the Company's initial
public offering in November 1997.
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. In 1999, the Company used
$15,721,801 to fund operations and $3,487,501 to fund capital expenditures and
patent expenses. At December 31, 1999, the Company had $13,161,665 of cash and
cash equivalents and $26,709,142 of working capital.
In addition to the use of all of the crystal growth systems that Cree is
required to provide at its expense under the Exclusive Supply Agreement, during
1999 the Company ordered a quantity of crystals that required additional crystal
growth systems to be added. As permitted under the Exclusive Supply Agreement,
Cree elected to have C3 purchase those systems. During 1999 the Company paid
approximately $2.6 million to Cree for these systems which were placed in
operation at various dates from August through December. The Company routinely
evaluates Cree's progress under the Development Agreement and the size and
quality of SiC crystals being produced by Cree in assessing its plans for larger
orders which will require the acquisition of additional crystal growth systems.
Under the terms of the Exclusive Supply Agreement, Cree has the option, in its
sole discretion, of building the growth systems at its own cost or requiring the
Company to purchase the growth systems from Cree. Under a letter agreement dated
December 22, 1999, the Company and Cree agreed to shift approximately 50% of the
SiC crystal purchases scheduled for the first half of 2000 to the second half of
2000. The Company has committed to purchase $10.6 million of SiC crystals during
2000. The Company's agreement with Cree concerning the pricing of moissanite
under the Exclusive Supply Agreement will expire as of December 31, 2000 and
will need to be renegotiated prior to that time. See
"--Business--Manufacturing--Growth of SiC Crystals." The Company plans to engage
in increasingly substantial marketing activities to support the expanding
distribution of moissanite jewels. Such activities may include advertising
campaigns, cooperative advertising with retail jewelers and distributors,
point-of-
30
<PAGE>
purchase displays, educational materials and individualized jeweler training.
The Company has currently budgeted approximately $6 million for increased
advertising and other marketing in 2000 as compared to approximately $3 million
spent in 1999.
The 4-year Development Agreement, as amended, between the Company and Cree
requires the Company to fund a development program at Cree for $1.44 million
annually through June 30, 2002. Either party may terminate the agreement if Cree
does not meet the annual performance milestone or if the Company and Cree do not
mutually agree on the performance milestones for the ensuing year. See
"--Business--Products and Product Development-Amended and Restated Development
Agreement with Cree."
The Company has no committed external sources of additional capital and has
experienced negative cash flow from operating activities since inception. As
indicated above, the Company used approximately $15.7 million in cash to fund
operating activities in 1999, which primarily resulted from an increase in
inventories of approximately $11.6 million and a net loss of approximately $5.2
million. Inventories increased due to dramatic improvements in the production of
useable SiC crystals from the Company's sole supplier, Cree, as well as the
slower than expected rate of growth in sales explained above.
The Company's new domestic distribution strategy, together with a continuation
of its advertising strategy which commenced in the fourth quarter of 1999, is
designed to substantially increase the sales volume of Charles & Colvard created
moissanite and to allow the Company to slow the growth of inventories. The
Company does not currently have committed capital resources to fund its desired
level of expenditures. To continue pursuing this strategy, the Company believes
that it will be required to seek additional capital resources during 2000.
Therefore, the Company has engaged Scott & Stringfellow, Inc., a Virginia-based
investment banking firm, to assist the Company in its capital raising
activities. If the Company is not able to secure capital, it will be necessary
for the Company to conserve cash by decreasing advertising expenditures,
deferring or decreasing other operating expenditures and attempting to
renegotiate its agreements with Cree. There can be no assurance that the Company
will be able to secure the required financing to execute its new domestic
distribution strategy, or, if available, that it will be available on terms
acceptable to the Company. Additionally, there can be no assurance that if the
Company does secure the desired capital resources that its new domestic
distribution strategy will be successful.
NET OPERATING LOSS CARRYFORWARD
As of December 31, 1999 the Company had a net operating loss ("NOL")
carryforward of approximately $15.3 million, which expires between 2010 and
2014. In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended, a change in equity ownership of greater than 50% of the Company within
a three-year period results in an annual limitation on the Company's ability to
utilize its NOL carryforwards that were created during tax periods prior to the
change in ownership. As a result of various equity offerings and certain
shareholder transactions, the utilization of the Company's NOL carryforwards has
become limited, however, the Company does not believe this limitation will have
a material effect on the Company's ability to utilize the NOL carryforward.
31
<PAGE>
YEAR 2000 COMPLIANCE
The year 2000 issue was a result of computer systems and software products not
being coded to accept four digit entries in the date code field. As a result,
these date code fields would not distinguish between dates in the 20th or 21st
century. As part of its evolution to an operating company, the Company selected
and implemented an enterprise-wide information technology system to support the
long-term information needs of the Company. The Company selected a system that
was year 2000 compliant. The procedures the Company undertook to prepare for the
year 2000 for its other systems appear to be successful. The Company has
experienced no significant disruptions due to this issue. The total costs
associated with the Company's preparation for this issue were not significant.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("FAS 133"),
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company has not evaluated the impact of the adoption of this Statement on the
financial statements.
ITEM 7A. 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 December 31, 1999
the Company has approximately $11.5 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.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 34
Statements of Operations for the years ended December 31, 1999, 1998 and 1997 35
Balance Sheets as of December 31, 1999 and 1998 36
Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 37
Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 38
Notes to Financial Statements 39
Financial Statement Schedule
- ----------------------------
Schedule II - Valuation and Qualifying Accounts 48
</TABLE>
All other schedules are omitted due to the absence of the conditions under which
they are required or because the required information is included within the
financial statements or the notes thereto included in Item 8.
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
C3, Inc. d/b/a Charles & Colvard
Research Triangle Park, North Carolina
We have audited the accompanying balance sheets of C3, Inc., d/b/a Charles &
Colvard (the "Company") as of December 31, 1999 and 1998, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 8. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
February 21, 2000
34
<PAGE>
C3, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Net sales $ 12,272,907 $ 4,026,309 $ --
Cost of goods sold 6,405,887 2,913,208 --
------------ ------------ ------------
Gross profit 5,867,020 1,113,101 --
Operating expenses:
Marketing and sales 6,410,042 2,989,737 535,329
General and administrative (Note 6) 3,039,595 2,671,445 2,744,898
Research and development 2,710,692 4,001,740 2,111,062
------------ ------------ ------------
Total operating expenses 12,160,329 9,662,922 5,391,289
------------ ------------ ------------
Operating loss 6,293,309 8,549,821 5,391,289
Interest income, net (1,141,626) (1,816,333) (471,130)
------------ ------------ ------------
Net loss $ 5,151,683 $ 6,733,488 $ 4,920,159
============ ============ ============
Basic and diluted net loss per share
(Note 2) $ 0.73 $ 0.97 $ 1.73
============ ============ ============
Weighted-average common shares,
basic and diluted (Note 2) 7,040,891 6,954,600 2,845,773
============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
C3, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 13,161,665 $ 32,004,045
Accounts receivable, net of allowance for doubtful accounts
of $70,000 and $77,000 respectively 1,331,528 546,921
Interest receivable 74,999 121,276
Inventory, net (Note 2) 14,767,888 3,092,448
Prepaid expenses and other assets 659,821 294,797
------------ ------------
Total current assets 29,995,901 36,059,487
Equipment, net (Note 3) 6,292,221 3,832,019
Patent and license rights, net (Note 3) 492,780 276,817
------------ ------------
$ 36,780,902 $ 40,168,323
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Cree, Inc. (Note 8) $ 2,305,218 $ 1,679,600
Other 627,704 250,157
Accrued expenses and other liabilities 235,107 223,248
Deferred revenue 118,730 18,986
------------ ------------
Total current liabilities 3,286,759 2,171,991
Commitments (Note 8)
Shareholders' Equity (Notes 4, 5, and 6):
Common stock, no par value; 50 million shares authorized;
7,098,911 and 6,993,309 shares issued and outstanding at
December 31, 1999 and 1998, respectively 48,757,702 48,149,406
Additional paid-in capital--stock options 1,951,566 1,910,368
Accumulated deficit (17,215,125) (12,063,442)
------------ ------------
Total shareholders' equity 33,494,143 37,996,332
------------ ------------
$ 36,780,902 $ 40,168,323
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
<TABLE>
<CAPTION>
C3, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
1996 Series A 1997 Series B
Preferred Stock Preferred Stock Common Stock Additional
------------------ ---------------- -------------------- Paid-in
Number Number Number Capital Total
Of Of Of Stock Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Options Deficit Equity
------- --------- ------- -------- --------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 105,000 $ 593,271 -- $ -- 2,236,500 $ 1,029,803 $ -- $ (409,795) $ 1,213,279
Exercise of stock
option -- -- -- -- 24,601 66,000 -- -- 66,000
Issuance of 1997
Series B preferred
stock, net of
offering costs of
$34,999 -- -- 682,500 4,981,375 -- -- -- -- 4,981,375
Compensation expense
related to stock
options -- -- -- -- -- -- 1,632,804 -- 1,632,804
Proceeds from IPO,
net of offering
costs of $3,927,018 -- -- -- -- 3,000,000 41,072,982 -- -- 41,072,982
Conversion of
preferred stock to
common stock (105,000) (593,271) (682,500) (4,981,375) 1,677,375 5,574,646 -- -- --
Net loss -- -- -- -- -- -- -- (4,920,159) (4,920,159)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 -- -- -- -- 6,938,476 47,743,431 1,632,804 (5,329,954) 44,046,281
Exercise of stock
options -- -- -- -- 54,833 405,975 (250,247) -- 155,728
Compensation expense
related to stock
options -- -- -- -- -- -- 527,811 -- 527,811
Net loss -- -- -- -- -- -- -- (6,733,488) (6,733,488)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 -- -- -- -- 6,993,309 48,149,406 1,910,368 (12,063,442) 37,996,332
Exercise of stock
options -- -- -- -- 105,602 608,296 (241,374) -- 366,922
Compensation expense
related to stock
options -- -- -- -- -- -- 282,572 -- 282,572
Net loss -- -- -- -- -- -- -- (5,151,683) (5,151,683)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1999 -- $ -- -- $ -- 7,098,911 $48,757,702 $1,951,566 $(17,215,125) $33,494,143
===================================================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
C3, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (5,151,683) $ (6,733,488) $ (4,920,159)
Adjustments:
Depreciation and amortization 741,402 223,708 26,154
Stock option compensation 282,572 527,811 1,698,804
Loss on disposal of long term assets 69,934 -- --
Changes in assets and liabilities:
Accounts receivable (784,607) (542,623) (4,298)
Interest receivable 46,277 56,378 (177,654)
Inventory (11,675,440) (2,813,846) (278,602)
Prepaid expenses and other assets (365,024) (221,523) (66,274)
Accounts payable 1,003,165 1,125,461 791,441
Accrued expenses and other liabilities 11,859 223,248 --
Deferred revenue 99,744 (3,526) 22,512
------------ ------------ ------------
Net cash used in operating activities (15,721,801) (8,158,400) (2,908,076)
INVESTING ACTIVITIES
Purchases of equipment (3,159,625) (3,827,322) (221,177)
Patent and license rights costs (327,876) (146,346) (112,177)
------------ ------------ ------------
Net cash used in investing activities (3,487,501) (3,973,668) (333,354)
FINANCING ACTIVITIES
Stock options exercised 366,922 155,728 --
Proceeds from common stock
offerings, net of costs -- -- 41,072,982
Proceeds from preferred stock
offerings, net of costs -- -- 4,981,375
------------ ------------ ------------
Net cash provided by financing activities 366,922 155,728 46,054,357
------------ ------------ ------------
Net change in cash and equivalents (18,842,380) (11,976,340) 42,812,927
Cash and equivalents at beginning of year 32,004,045 43,980,385 1,167,458
------------ ------------ ------------
Cash and equivalents at end of year $ 13,161,665 $ 32,004,045 $ 43,980,385
============ ============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
C3, INC.
NOTES TO FINANCIAL STATEMENTS--YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
C3, Inc. ("C3" or the "Company"), was incorporated in North Carolina on June 28,
1995, and manufactures, markets and distributes scientifically-created
moissanite jewels (hereinafter referred to as moissanite or moissanite jewels)
for sale in the jewelry market. Moissanite, also known by its chemical name,
silicon carbide (SiC), is a rare, naturally occurring mineral found primarily in
meteorites. Moissanite is being positioned as a jewel in its own right, distinct
from all other jewels based on its fire, brilliance, luster, durability and
rarity and it is being marketed to working women ages 25-54 with an annual
household income in excess of $50,000. As part of its transition from a
technology-focused manufacturing company to a consumer-focused marketing
company, C3 began doing business as Charles & Colvard in the fall of 1999. In
addition to moissanite jewels, the Company has developed and began selling, in
1998, a test instrument, which distinguishes colorless moissanite jewels from
diamond.
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. At that time it launched limited consumer-focused advertising
and promotion activities in those areas. In addition, the Company entered into
exclusive distribution agreements with a number of international distributors.
Through the first half of 1999, the Company limited its efforts to expand the
distribution of moissanite jewels as a result of limited product availability
and the lack of confidence the Company had regarding the quality of the SiC
crystals it was receiving. Late in the second quarter, the Company began to
receive indications that the quality of the SiC crystals it was receiving was
improving rapidly. The rate of improvement in the quality of the SiC crystals
continued to accelerate through the end of 1999, far exceeding the Company's
expectations. At the same time, the Company experienced a decline in shipments
of moissanite jewels during the third quarter as a result of a slower than
expected rate of adding retailers, lack of targeted retailer-driven marketing
programs abroad, and poor overall jewelry market performance in certain
international markets. The improved supply of SiC crystals along with the
decrease in sales led to a significant increase in inventories of moissanite
jewels. With the improvements in the supply of salable moissanite jewels, the
Company launched its strategic global marketing program in the fourth quarter of
1999 to spur consumer awareness of this new category of jewel. In addition, in
2000, the Company has entered into business relationships with certain domestic
jewelry manufacturers and gemstone distributors to accelerate the distribution
of moissanite jewels.
The ability of the Company to successfully develop, manufacture and market its
proprietary products is dependent upon many factors, and during the period
required to develop and market these products, the Company may require
additional funds which may not be available to it. Accordingly, there can be no
assurance of the Company's future success.
All the Company's activities are within a single business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND EQUIVALENTS
The Company considers all money market accounts, debt instruments purchased with
an original maturity of three months or less, and other highly liquid
investments to be cash equivalents.
39
<PAGE>
INVENTORY
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 $242,000 and $132,000, respectively.
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Moissanite
Raw materials $ 371,843 $ 140,411
Work-in-process 5,779,326 819,953
Finished goods 8,127,119 1,113,619
----------- -----------
14,278,288 2,073,983
Test instruments 489,600 1,018,465
----------- -----------
Total Inventory $14,767,888 $ 3,092,448
=========== ===========
</TABLE>
EQUIPMENT
Equipment is recorded at cost and depreciated on the straight-line method based
on estimated useful lives of three to 12 years. Leasehold improvements are
amortized on the straight-line method over the life of the related lease.
PATENTS AND LICENSE RIGHTS
The Company capitalizes costs associated with obtaining patents issued or
pending for inventions and license rights related to the manufacture of
moissanite jewels and moissanite jewel test instruments. Such costs are
amortized over 17 years.
ACCOUNTING FOR LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with Statement of
Financial Accounting Standards No. 121 ("FAS 121"), ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. The
Company evaluates the recoverability of its long-lived assets for financial
impairment whenever events or changes in circumstances indicate that the
carrying value of such assets may not be fully recoverable. Based on these
evaluations, there were no significant adjustments to the carrying value of
long-lived assets in 1999 or 1998.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk are primarily cash equivalents and trade receivables. The Company
places its cash equivalents with high quality financial institutions and invests
in low risk securities including U.S. Treasury bills and money market funds,
government agency notes and commercial paper.
Trade receivables are generated from a broad and diverse group of customers,
primarily independent retail jewelry stores. The Company extends credit to its
customers based upon an evaluation of the customer's financial condition and
credit history and generally does not require collateral. During 1999 one
customer accounted for approximately 11.7% of the revenue. During 1998, no
customer accounted for 10% or more of the Company's revenue. At December 1999
and 1998, no customer accounted for more than 10% of total accounts receivable.
REVENUE RECOGNITION
Revenue is generally recognized when products are shipped. From time to time,
the Company ships certain items on "memo" terms. For goods shipped on memo
terms, the customer receives title to the goods and assumes the risk of loss,
however they have absolute right of return during the specified memo period. The
Company recognizes revenue on these transactions upon the earlier of 1) the
customer informing the Company that it will keep the product or 2) the
expiration of the memo period.
40
<PAGE>
ADVERTISING COSTS
Advertising production costs are expensed as incurred. Media placement costs are
expensed over the period the advertising appears. Advertising expenses for the
years ended December 31, 1999, 1998 and 1997 amounted to approximately
$2,920,000, $750,000 and $69,000, respectively. At December 31, 1999, prepaid
expenses and other assets included approximately $215,000 of prepaid advertising
costs.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred.
STOCK COMPENSATION
The Company's stock option plans are accounted for in accordance with Accounting
Principles Board Opinion No. 25 ("APB 25"), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123 ("FAS 123"), ACCOUNTING FOR
STOCK BASED COMPENSATION.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 ("FAS 109"), ACCOUNTING FOR INCOME TAXES.
Under FAS 109, deferred income taxes are recognized for the tax consequences of
"temporary" differences by applying enacted statutory tax rates applicable to
future years to difference between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount that is
more likely than not expected to be realized. As of December 31, 1999 and 1998,
the net deferred tax assets have been fully reserved.
NET LOSS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards No. 128
("FAS 128"), EARNINGS PER Share. FAS 128 requires the presentation of both basic
and diluted earnings per share, regardless of materiality, unless per share
amounts are equal. Basic loss per share computations are based on the
weighted-average common shares outstanding. Diluted loss per share computations
include the dilutive effect, if any, of stock options and warrants using the
treasury stock method.
Warrants to purchase 300,000 shares of common stock at $18 per share, options
outstanding at December 31, 1999 to purchase 1,229,118 shares of common stock
(exercise prices ranging from $1.88 - $16.44), and retroactive conversion of the
Series A and Series B preferred stock into common shares as of the date of
issuance were excluded from the computation of diluted loss per share because
either the options' exercise price was greater than the average market price of
the common shares or the effect of inclusion of such amounts would be
anti-dilutive to loss per share.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("FAS 133"),
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company has not evaluated the impact of the adoption of this statement on the
financial statements.
41
<PAGE>
RECLASSIFICATION
Certain 1998 and 1997 amounts have been reclassified to conform with the 1999
presentation.
3. EQUIPMENT AND PATENT AND LICENSE RIGHTS
Equipment balances are summarized as follows:
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Machinery and equipment $6,391,946 $3,614,984
Computer equipment 435,847 310,054
Furniture and fixtures 212,412 55,209
Leasehold improvements 101,890 44,345
Construction in progress 28,227 39,440
----------- -----------
Total 7,170,322 4,064,032
Accumulated depreciation (878,101) (232,013)
----------- -----------
Total equipment, net $6,292,221 $3,832,019
=========== ===========
</TABLE>
Depreciation expense for 1999, 1998 and 1997 was $648,565, $210,293 and $20,268,
respectively.
Patent and license rights balances are summarized as follows:
<TABLE>
<CAPTION>
December 31
------------------------
1999 1998
---------- ---------
<S> <C> <C>
Patent and license rights $ 605,049 $298,182
Accumulated amortization (112,269) (21,365)
---------- ---------
Patent and license rights, net $ 492,780 $276,817
========== =========
</TABLE>
4. COMMON STOCK
On September 25, 1997, the Company effected a 2.13-for-1 stock split of its
common stock. The effect of this stock split is reflected as if it had occurred
at the beginning of the earliest period presented.
On November 14, 1997, the Company completed an initial public offering of
3,000,000 shares of its common stock with net proceeds of $41,072,982 (net of
offering costs of $3,927,018).
5. PREFERRED STOCK
The Company has authorized 10 million shares of preferred stock, no par value.
The preferred stock may be issued from time to time in one or more series.
1996 Series A Preferred Stock--The Board designated 105,000 shares of its
preferred stock as 1996 Series A preferred stock. In September 1996, the Company
issued 105,000 shares of Series A preferred stock with net proceeds of
approximately $593,000 (net of offering costs of $10,479). All of the 1996
Series A preferred stock was converted to common stock concurrent with the
initial public offering at a ratio of 2.13 common shares for each share of
preferred stock.
1997 Series B Preferred Stock--The Company designated 682,500 shares of its
preferred stock as 1997 Series B preferred stock. Effective March 7, 1997, the
Company completed the offering of 682,500 shares of its 1997 Series B preferred
stock with net proceeds of approximately $5 million. All of the 1997 Series B
preferred stock was converted to common stock concurrent with the 1997 initial
public offering at a ratio of 2.13 common shares for each share of preferred
stock.
On February 21, 1999 the Company adopted a Shareholder Rights Plan under which
all shareholders of record as of March 8, 1999 received rights to purchase
shares of a new series of Preferred Stock. The
42
<PAGE>
adoption of this plan is intended as a means to guard against abusive takeover
tactics. The rights will be exercisable only if a person or group acquires or
announces a tender offer to acquire 20% or more of the Company's common stock.
Under the plan all shareholders except the purchaser will be entitled to acquire
the Company's common stock at a 50% discount. The rights will trade with the
Company's common stock, unless and until they are separated upon the occurrence
of certain future events.
6. STOCK OPTION PLANS
In 1996, the Company adopted the 1996 Stock Option Plan of C3, Inc. ("1996
Option Plan") under which options to acquire 777,450 common shares, reduced by
the number of options granted outside the 1996 Option Plan, may be granted to
key employees, directors and independent consultants. Under the 1996 Option
Plan, both incentive and non-qualified options may be granted under terms and
conditions established by the compensation committee of the board of directors.
The exercise price for incentive options will be the fair market value of the
related common stock on the date the option is granted. Options granted under
the 1996 Option Plan generally vest equally over a three-year period and have
terms of 10 years. The Company currently has no plans to award additional
options under the 1996 Option Plan.
In September 1997, the Company adopted the 1997 Omnibus Stock Plan of C3, Inc.
(the "1997 Omnibus Plan"). The 1997 Omnibus Plan authorizes the Company to grant
stock options, stock appreciation rights and restricted awards (collectively,
"awards") to selected employees, independent contractors and directors of the
Company and related corporations in order to promote a closer identification of
their interests with those of the Company and its shareholders. The maximum
number of shares of common stock for which awards may be granted under the 1997
Omnibus Plan may be increased from time to time to a number of shares equal to
(i) 20% of the shares of common stock outstanding as of that time less (ii) the
number of shares of common stock subject to outstanding options under the 1996
Option Plan. The number of shares reserved for issuance under the 1997 Omnibus
Plan may also be adjusted upon certain events affecting the Company's
capitalization. Options granted under the 1997 Omnibus Plan generally vest over
three to five-year periods and have terms of 10 years. The Board of Directors
has reserved 930,912 shares for the 1997 Omnibus Plan.
43
<PAGE>
The following is a summary of activity for the Company's two stock option plans:
<TABLE>
<CAPTION>
1996 Option Plan 1997 Omnibus Plan
---------------------- ----------------------
Weighted Weighted
Number Average Number Average
Of Exercise of Exercise
Shares Price Shares Price
--------- -------- --------- ---------
<S> <C> <C> <C>
1997
Outstanding at beginning of year 200,220 $ 2.37 -- $ --
Granted 461,571 4.64 477,000 14.61
--------- ------- ---------- ------
Outstanding at end of year 661,791 3.95 477,000 14.61
1998
Granted ---- ---- 195,000 8.94
Exercised 93,379 4.97 -- --
Canceled 13,547 3.66 48,366 14.67
--------- ------- ---------- ------
Outstanding at end of year 554,865 3.78 623,634 12.83
1999
Granted ---- ---- 175,800 11.19
Exercised 92,620 3.49 2,333 10.10
Canceled ---- ---- 56,853 13.09
--------- ------- ---------- ------
Outstanding at end of year 462,245 $ 3.83 740,248 $ 12.43
========= ======= ========== ======
</TABLE>
During 1996, the Company granted options to acquire 37,275 shares of common
stock to certain consultants. These options, which were granted prior to the
establishment of formal plans, are immediately exercisable, have a term of five
years, and an exercise price of $1.88 per share. During 1999, 10,650 of these
options were exercised.
During 1995, the Company issued Cree, Inc. ("Cree"), a related company, an
option to acquire 1% of the outstanding shares of common stock on the date of
exercise at an exercise price of $500 at any time through July 1, 1997. However,
the Company retained the right to waive the $500 option fee and issue the stock
at any time during the option period. The Company issued 24,601 shares of common
stock to Cree pursuant to this right on January 2, 1997. The Company recorded
compensation expense of approximately $66,000 in 1997 related to this
transaction.
The following summarizes information about stock options outstanding at December
31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------ -------------------------------
Weighted-Average Weighted-
Outstanding Remaining Exercisable Average
Range of as of Contractual Weighted-Average as of Exercise
Exercise Price 12/31/1999 Life Exercise Price 12/31/1999 Price
- ---------------------------- -------------- ------------- ---------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
$1.64- $3.28 170,755 6.6 $ 2.2404 170,755 $ 2.2404
$3.29- $4.93 318,115 7.0 $ 4.5247 306,755 $ 4.5519
$6.58- $8.22 65,300 7.2 $ 7.8331 30,431 $ 8.0120
$8.23- $9.86 199,200 8.1 $ 9.1482 73,499 $ 8.8977
$9.87-$11.51 17,498 7.2 $ 10.8100 16,664 $ 10.8100
$13.15-$14.79 176,000 8.0 $ 13.8659 111,431 $ 13.8696
$14.80-$16.44 282,250 7.5 $ 15.0076 47,600 $ 15.0000
----------- ------ --------- ---------- ---------
1,229,118 7.4 $ 8.9668 757,135 $ 6.7575
=========== ====== ========= ========== =========
</TABLE>
In accordance with APB 25, and the provision of FAS 123 as applicable to
consultants, the Company recorded compensation expense of approximately
$280,000, $530,000 and $1,633,000 during 1999, 1998 and 1997, respectively,
relating to stock options granted with exercise prices less than market value or
44
<PAGE>
granted to consultants. Had compensation expense for all stock options been
determined consistent with FAS 123, rather than APB 25, the Company's net loss
and loss per share for the years ended December 31, 1999, 1998 and 1997 would
have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss, as reported $5,151,683 $6,733,488 $4,920,159
Pro forma net loss $6,029,709 $7,525,000 $5,561,000
Basic and diluted net loss per share:
As reported $ 0.73 $ 0.97 $ 1.73
Pro forma $ 0.86 $ 1.08 $ 1.95
</TABLE>
The fair value of each option grant is estimated on the grant date. Options
granted during 1997 were valued using the minimum value method and 1998 and 1999
grants were valued using a Black-Scholes option pricing model. The valuations
for the years ended December 31, 1999, 1998 and 1997 were based on the following
assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Weighted-average grant date fair value $ 8.46 $ 7.46 $ 10.28
Weighted-average expected lives (in years) 7.00 9.98 3.04
Risk-free interest rate 6.65% 5.13% 5.50%
Dividend yield 0% 0% 0%
Volatility factor .766 .782 0%
</TABLE>
In connection with the Company's initial public offering on November 14, 1997,
the Company granted the underwriters options to purchase 450,000 shares of
common stock at $15 per share solely to cover over-allotments in the sale of
common stock in the offering. The options had an exercise term of 45 days and
expired as of December 31, 1997. Also in connection with the offering, the
Company issued warrants to the underwriter to purchase 300,000 shares of common
stock at a price of $18 per share. The warrants are exercisable for a period of
four years beginning November 14, 1998.
7. INCOME TAXES
The Company accounts for income taxes under the liability method in accordance
with FAS 109. Under the liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Federal and state loss carryforwards $ 5,993,000 $ 3,716,000
Benefit of research tax credits 360,000 234,000
Reserves and accruals 189,000 131,000
Depreciation (366,000) (168,000)
------------ ------------
Total deferred tax assets 6,176,000 3,913,000
Less valuation allowance (6,176,000) (3,913,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
A reconciliation between expected income taxes, computed at the statutory
federal income tax rate applied to pretax accounting income, and the income
taxes included in the statements of operations for the years ended December 31,
1999, 1998 and 1997 follows:
45
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Anticipated income tax
benefit at the statutory federal rate $(1,752,000) $(2,290,000) $(1,673,400)
State income tax benefit,
net of federal tax effect (264,000) (344,000) (252,000)
Research tax credits (126,000) (142,000) ----
Compensation expense--stock options 111,000 164,000 640,000
Other 71,000 9,000 33,000
Increase in valuation allowance 1,960,000 2,603,000 1,252,400
-------------- ------------- ------------
Income tax (benefit) expense $ -- $ -- $ --
============== ============= ============
</TABLE>
At December 31, 1999, the Company has operating and economic loss carryforwards
of approximately $15,300,000 expiring through 2014, which can be offset against
future federal and state taxable income. In accordance with Section 382 of the
Internal Revenue Code of 1986, as amended, a change in equity ownership of
greater than 50% of the Company within a three-year period results in an annual
limitation on the Company's ability to utilize its NOL carryforwards that were
created during tax periods prior to the change in ownership. As a result of
various equity offerings and certain shareholder transactions, the utilization
of the Company's NOL carryforwards has become limited, however, the Company does
not believe this limitation will have a material effect on the Company's ability
to utilize the NOL carryforward.
Based on the Company's assessment of the future net realizable value of deferred
tax assets, a valuation allowance has been provided as it is more likely than
not that sufficient taxable income will not be generated to realize certain
temporary differences and tax credit carryforwards. Additionally, at December
31, 1999, approximately $345,000 of the valuation allowance was attributable to
the potential tax benefit of stock option transactions, which will be credited
directly to common stock if realized.
8. COMMITMENTS
OPERATING LEASE
The Company leases approximately 12,700 square feet of mixed use space from an
unaffiliated third party at a base cost of approximately $10,400 per month, plus
contingent rentals based on the Company's proportionate share of the lessor's
operating costs, as defined in the lease agreement. The lease expires August 31,
2004, however, the Company may cancel the lease effective August 31, 2002 by
delivering to the lessor written notice nine months prior to the cancellation
date and by paying a cancellation fee of $36,000. The lease provides for
escalations of the base rent throughout the lease term, up to $11,700 at
September 1, 2003.
In September 1999, the Company entered into an agreement to sublease
approximately 13,807 square feet of office space, contiguous to its existing
space, from an unaffiliated third party at a base cost of approximately $12,100
per month, plus contingent rentals based on the Company's proportionate share of
the lessor's operating costs, as defined in the lease agreement. The lease
expires on October 30, 2002.
The future minimum lease payments, including the $36,000 cancellation fee, are
as follows: $271,000 in 2000, $275,000 in 2001, $245,000 in 2002, totaling
$791,000. Rental expense incurred for operating leases and leases whose terms
are less than one year in duration for 1999, 1998 and 1997 was approximately
$215,000, $153,000 and $69,000, respectively.
46
<PAGE>
PURCHASE COMMITMENT
On June 6, 1997, the Company entered into an Amended and Restated Exclusive
Supply Agreement ("Exclusive Supply Agreement") and a Development Agreement with
Cree, a related company. 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. The Company has met this order threshold
and expects to extend the term of the Exclusive Supply Agreement. In connection
with the Exclusive Supply Agreement, the Company has committed to purchase a
minimum of 50% (by dollar volume) of its requirements for SiC crystals from
Cree. If the Company's orders require Cree to expand beyond specified production
levels, the Company must commit to purchase certain minimum quantities. Through
December 31, 2000 the Company has agreed to purchase approximately $10.56
million of crystals produced by existing crystal growers and the Company and
Cree have agreed that the price paid to Cree for each SiC crystal will be based
on a sliding scale depending on the quality of each crystal received. The
Company is totally dependent on Cree to supply SiC crystals for its production
process. If the Company is unable to obtain SiC crystals from Cree, its
operations would be materially adversely affected.
The July 1, 1998 Development Agreement, which replaces the June 1997 Development
Agreement and the 1998 Supplemental Development Agreement, provides for a
four-year development effort by Cree to increase the yield of usable material in
each SiC crystal manufactured by Cree for use by C3 in the production of
moissanite jewels. The Company was initially obligated to pay Cree approximately
$2.88 million annually through June 30, 2002 under this agreement which was
reduced to $1.44 million annually effective October 1, 1999. However, 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 1999, 1998, and 1997, the Company made purchases from Cree of
approximately $16,219,900 $7,568,500 and $2,022,700, respectively, for SiC
materials and research and development costs.
47
<PAGE>
SCHEDULE II
C3, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Collections of
Balance at Charged to Accounts
Beginning of Costs and Previously Deductions/ Balance at
Year ended December 31 Period Expenses Written Off Write Offs End of Period
- ---------------------- --------------- --------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Allowance for
Doubtful Accounts
1999 $ 77,000 $ 2,298 $ ---- $ 9,298(1) $ 70,000
1998 ---- 77,607 ---- 607(1) 77,000
Reserve for Excess
Inventory
1999 $ 132,000 $ 224,083 $ ---- $ 113,768(2) $ 242,115
1998 ---- 132,000 ---- ---- 132,000
</TABLE>
(1) Accounts written off as uncollectible.
(2) Adjustments to reserve to reflect estimated net realizable value of
remaining inventory.
48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for in items 10 through 13 is incorporated by reference
from the Company's definitive proxy statement relating to its annual meeting of
shareholders, which will be filed with the Securities and Exchange Commission
within 120 days after the end of fiscal 1999.
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 this report (see Index to Financial Statements
at Part II Item 8 on page 30 of this Form 10-K).
(a) (3) The following exhibits have been or are being filed herewith and are
numbered in accordance with Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
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.
49
<PAGE>
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).+
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).*
50
<PAGE>
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).+
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.*
51
<PAGE>
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. which is hereby incorporated by
reference to Exhibit 10.30 to the Annual Report of Form 10K of C3, Inc. for the fiscal year ended
December 31, 1998. +
10.31 1998 Declaration of Amendment to 1997 Omnibus Stock Plan of C3, Inc., which is hereby incorporated by
reference to Exhibit 10.31 to the Annual Report of Form 10K of C3, Inc. for the fiscal year ended
December 31, 1998. +
10.32 Employment Agreement, dated March 1, 1999, between Robert Thomas and C3, Inc., which is hereby
incorporated by reference to Exhibit 10.32 to the Annual Report of Form 10K of C3, Inc. for the fiscal
year ended December 31, 1998. +
10.33 Employment Agreement, dated May 1, 1999, between Mary Katherine Rafferty and C3, Inc., which is hereby
incorporated by reference to Exhibit 10.33 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended March 31, 1999. +
10.34 Letter Agreement, dated May 3, 1999 between Cree Research, Inc. and C3, Inc., which is hereby
incorporated by reference to Exhibit 10.34 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended March 31, 1999. *
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. *
10.36 Third Amendment to Agreement, dated June 16, 1999, between John M. Bachman, Inc. and C3, Inc., which
is hereby incorporated by reference to Exhibit 10.36 to the Quarterly Report on Form 10-Q of C3, Inc.
for the quarter ended June 30, 1999. *
10.37 Fourth Amendment to Agreement, dated October 5, 1999, between John M. Bachman, Inc. and C3, Inc.,
which is hereby incorporated by reference to Exhibit 10.37 to the Quarterly Report on Form 10-Q of C3,
Inc. for the quarter ended September 30, 1999. *
10.38 Employment Agreement, dated November 1, 1999 between David Fudge and C3, Inc., which is hereby
incorporated by reference to Exhibit 10.38 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended September 30, 1999. +*
52
<PAGE>
10.39 Letter Agreement dated December 22, 1999 between Cree, Inc. and C3, Inc. *
10.40 Letter Agreement dated March 16, 2000 between Stuller Settings, Inc. and C3, Inc. *
10.41 Letter Agreement dated March 15, 2000 between The Bell Group, d/b/a Rio Grande and C3, Inc. *
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule - Fiscal year ended December 31, 1999.
</TABLE>
* The registrant has requested that certain portions of this exhibit be given
confidential treatment.
+ Denotes a management contract or compensatory plan or arrangement.
53
<PAGE>
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/ Robert S. Thomas Date: 3/20/00
---------------------- -------
Robert S. Thomas, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Jeff N. Hunter Date: 3/20/00
------------------ -------
Jeff N. Hunter
Chairman of the Board and Director
(Principal executive officer)
By: /s/ Mark W. Hahn Date: 3/21/00
---------------- -------
Mark W. Hahn
Chief Financial Officer
(Principal financial and accounting officer)
By: /s/ Richard Hartigan, Jr. Date: 3/22/00
------------------------- -------
Richard Hartigan, Jr.
Director
By: /s/ Barbara Kotlikoff Date: 3/21/00
--------------------- -------
Barbara Kotlikoff
Director
By: /s/ Kurt Nassau
Kurt Nassau Date: 3/21/00
-------
Director
By: /s/ Cecil D. Raynor Date: 3/21/00
------------------- -------
Cecil D. Raynor
Director
By: /s/ Howard Rubin Date: 3/21/00
---------------- -------
Howard Rubin
Director
By: /s/ Frederick A. Russ Date: 3/21/00
--------------------- -------
Frederick A. Russ
Director
By: /s/ Ollin B. Sykes Date: 3/21/00
------------------ -------
Ollin B. Sykes
Director
54
<PAGE>
EXHIBIT INDEX
TO
ANNUAL REPORT ON FORM 10-K
OF
C3, INC.
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
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).+
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).+
55
<PAGE>
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).*
56
<PAGE>
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).+
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 From 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 10Q 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. which is hereby incorporated by
reference to Exhibit 10.30 to the Annual Report of Form 10K of C3, Inc. for the fiscal year ended
December 31, 1998. +
10.31 1998 Declaration of Amendment to 1997 Omnibus Stock Plan of C3, Inc., which is hereby incorporated by
reference to Exhibit 10.31 to the Annual Report of Form 10K of C3, Inc. for the fiscal year ended
December 31, 1998. +
10.32 Employment Agreement, dated March 1, 1999, between Robert Thomas and C3, Inc., which is hereby
incorporated by reference to Exhibit 10.32 to the Annual Report of Form 10K of C3, Inc. for the fiscal
year ended December 31, 1998. +
10.33 Employment Agreement, dated May 1, 1999, between Mary Katherine Rafferty and C3, Inc., which is hereby
incorporated by reference to Exhibit 10.33 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended March 31, 1999. +
10.34 Letter Agreement, dated May 3, 1999 between Cree Research, Inc. and C3, Inc., which is hereby
incorporated by reference to Exhibit 10.34 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended March 31, 1999. *
57
<PAGE>
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. *
10.36 Third Amendment to Agreement, dated June 16, 1999, between John M. Bachman, Inc. and C3, Inc., which
is hereby incorporated by reference to Exhibit 10.36 to the Quarterly Report on Form 10-Q of C3, Inc.
for the quarter ended June 30, 1999. *
10.37 Fourth Amendment to Agreement, dated October 5, 1999, between John M. Bachman, Inc. and C3, Inc.,
which is hereby incorporated by reference to Exhibit 10.37 to the Quarterly Report on Form 10-Q of C3,
Inc. for the quarter ended September 30, 1999. *
10.38 Employment Agreement, dated November 1, 1999 between David Fudge and C3, Inc., which is hereby
incorporated by reference to Exhibit 10.38 to the Quarterly Report on Form 10-Q of C3, Inc. for the
quarter ended September 30, 1999. +*
10.39 Letter Agreement dated December 22, 1999 between Cree, Inc. and C3, Inc.*
10.40 Letter Agreement dated March 16, 2000 between Stuller Settings, Inc. and C3, Inc. *
10.41 Letter Agreement dated March 15, 2000 between The Bell Group, d/b/a Rio Grande and C3, Inc.*
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule - Fiscal year ended December 31, 1999.
</TABLE>
* The registrant has requested that certain portions of this exhibit be given
confidential treatment.
+ Denotes a management contract or compensatory plan or arrangement.
58
EXHIBIT 10.39
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT BE
GIVEN CONFIDENTIAL TREATMENT. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE COMMISSION.
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND
IS DENOTED HEREIN BY *****.
December 22, 1999
Robert S. Thomas
President
Charles and Colvard
P.O. Box 13533
Research Triangle Park, NC 27709-3533
This letter, if accepted by C3 Inc., doing business as Charles & Colvard, will
serve as an amendment to the May 3, 1999 agreement between Cree and Charles &
Colvard according to the following terms:
1. Cree agrees to supply production crystals and Charles and Colvard
agrees to purchase production crystals according to the terms outlined
in this letter for a period of one year beginning January 1, 2000.
2. Charles & Colvard will purchase the production crystals according to
the following schedule:
--------------------------------------- ----------------------------------
$ Value of
Date Production Shipments
--------------------------------------- ----------------------------------
--------------------------------------- ----------------------------------
January 1, 2000 - $*****
March 26, 2000
--------------------------------------- ----------------------------------
--------------------------------------- ----------------------------------
March 26, 2000 - $*****
June 25, 2000
--------------------------------------- ----------------------------------
--------------------------------------- ----------------------------------
June 25, 2000 - $*****
September 24, 2000
--------------------------------------- ----------------------------------
--------------------------------------- ----------------------------------
September 24, 2000 - $*****
December 24, 2000
--------------------------------------- ----------------------------------
3. Cree will supply all crystals delivered to Charles & Colvard during
this period according to the pricing schedule in Exhibit A.
4. All crystals supplied under this agreement will be produced using
systems owned by Charles & Colvard. If Cree receives orders for
production crystals from Charles & Colvard in excess of the production
capacity owned by Charles & Colvard, Cree will supply up to *** crystal
growth systems to meet the product demand of Charles & Colvard with a
conversion time for these systems not to exceed four months.
<PAGE>
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT BE
GIVEN CONFIDENTIAL TREATMENT. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE COMMISSION.
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND
IS DENOTED HEREIN BY *****.
5. Charles & Colvard will continue funding of the development program at
Cree under the July 1, 1998 Amended and Restated Development Agreement
(the "Development Agreement") at $120,000 per month.
6. Charles & Colvard may switch growers from 2" to 3" diameter crystals or
from 3" to 2" diameter crystals provided it gives Cree at least *****
days notice and such additional time as reasonably required to address
any conversion and ramp-up issue. Charles & Colvard agrees to pay for
any upgrade costs, not to exceed $***** per system associated with
converting systems owned by Charles & Colvard.
7. As used in Exhibit A, "usable mm" means light or medium light material,
as previously defined by both parties, judged versus the master
crystal. Any discrepancies in usable material will be mutually resolved
by Cree and Charles & Colvard. All grading will be concluded in a
timely manner and consistent with past practice.
8. During the term of this agreement, the parties will negotiate in good
faith a mutually acceptable method and process for quantifying
micropipe defects in the crystals. The parties will then negotiate a
mutually acceptable means to include these defects in the grading
specifications for production crystals.
9. Except as provided above, purchases will be subject to the terms and
conditions of the Supply Agreement, and the development program will be
subject to the terms and conditions of the Development Agreement.
10. If the parties do not agree in writing, prior to December 22, 2000, on
a mutually acceptable definition of "Repeatable Process" for purposes
of Sections 1.1 and 2.4 of the Supply Agreement, then unless otherwise
agreed in writing by the parties, thereafter Charles & Colvard will
purchase from Cree, and Cree will sell to Charles & Colvard, material
in accordance with the pricing and other terms and conditions set forth
in the Supply Agreement, and no minimum specifications shall be
applicable to such material.
11. The contents of this letter shall be considered "Confidential
Information" of each party subject to the provisions of Section 5 of
the Supply Agreement.
If acceptable, please sign below and date to indicate Charles & Colvard's
binding agreement to these terms.
/s/Charles M. Swoboda /s/Robert S. Thomas
- ------------------------ ---------------------------
Charles M. Swoboda Robert S. Thomas
President & COO President & COO
<PAGE>
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT BE
GIVEN CONFIDENTIAL TREATMENT. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH
THE COMMISSION.
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND
IS DENOTED HEREIN BY *****.
EXHIBIT A
C3 Crystal Pricing Schedule
January 1, 2000 through December 31, 1999
2" crystals will be sold according to 2" Schedule A
3" crystals will be sold according to 3" Schedule C
Terms of Pricing
The "usable mm" is calculated by adding the "net light material" plus the
"net medium light material" are defined as total material minus the %
volume yield loss caused by inclusions and defects including seed fur,
spots, cracks, poly, spokes, etc. as previously defined by both parties
and in accordance with past practice.
In the case where the "usable mm" results in < ***** mm, the medium light price
will be calculated as *****.
The "medium light material" prototype yield will be based on a rolling
month average of stones not greater than 1 carat (7 mm).
* The > ***** mm cap for 2" is subject to increase as yield improvements
warrant according to the following schedule: $*****/mm of length *****
mm for schedule A.
** The > ***** mm cap for 3" is subject to increase as yield improvements
warrant according to the following schedule: $*****/mm of length *****
mm for schedule C.
<TABLE>
<CAPTION>
- ----------------------------- ---------------------- ----------------------- ---------------------- ----------------------
2" Schedule A
<S> <C> <C> <C> <C>
Usable mm Light Price mm cm3 $/cm3
< ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
- ----------------------------- ---------------------- ----------------------- ---------------------- ----------------------
- ----------------------------- ---------------------- ----------------------- ---------------------- ----------------------
2" Schedule C
Usable mm Light Price mm cm3 $/cm3
< ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
** - ** ***** ***** ***** *****
> ** ***** ***** ***** *****
- ----------------------------- ---------------------- ----------------------- ---------------------- ----------------------
</TABLE>
EXHIBIT 10.40
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
CHARLES & COLVARD(TM)
------------CREATED-------------
M O I S S A N I T E
SENT VIA FACSIMILE AND PRIORTY MAIL
March 16, 2000
Mr. Ray Stroup Jr.
Vice President of Marketing
Stuller Settings, Inc.
302 Rue Louis XIV
Lafayette, Louisiana 70508
Dear Mr. Stroup,
Attached is the requested Stuller Vendor Data Sheet, with the C&C price list
attached.
Additionally, for the Term of the appointment, C3, Inc., DBA Charles & Colvard,
(C&C), hereby;
1. Appoints Stuller Settings Inc., (Stuller) the rights to sell Charles &
Colvard created moissanite in the territory comprised of the North American
Continent from the present date until December 31, 2001. (The appointment
Term)
2. Warrants that Stuller will be charged no more than the lowest price charged
to any customer worldwide. Warrants that Stuller will be charged no more
than level 5 in attached Very Good pricing schedule. Further, if at any
time the pricing of moissanite is decreased, C&C shall provide Stuller with
a credit toward additional purchases of moissanite equal to the amount of
such price decrease on the lesser of (a) Stuller's net purchases of
moissanite during the prior 90 days or (b) Stuller's actual inventory at
such time.
3. Agrees to provide the funds for the marketing of moissanite equal to *****%
of Stuller's purchases from C&C, paid quarterly in arrears, in the form of
credits against future purchases of moissanite from C&C.
4. Agrees to maintain a backup inventory of 100% of the previous quarters
purchases by Stuller.
5. Agrees to provide stock rebalancing quarterly on a dollar value per dollar
value basis.
6. Agrees to provide the Stuller staff with any required training concerning
the product, the marketing strategy, and the product positioning being
implemented by C&C.
7. Will indemnify and hold harmless Stuller against any claims from existing
C&C customers to territorial exclusivity arising from their current
relationship with C&C.
Stuller hereby recognizes and agrees to cooperate with C&C in the protection of
all C&C trademarks, copyrights and intellectual property. Further, Stuller
agrees to include Charles & Colvard created moissanite in its catalog and trade
show presentations for the term of the agreement, and to make commercially
reasonable efforts to market moissanite to its' customers consistent with the
brand identity guidelines supplied by C&C.
If the forgoing meets with your understanding of our agreement, please sign and
return one copy of this letter for my files.
Agreed and accepted:
C3, Inc. DBA Charles & Colvard Stuller Settings, Inc.
/s/ Robert S. Thomas /s/ Ray Stroup
- -------------------- ---------------------------
Robert S. Thomas Ray Stroup Jr.
President & COO Vice President of Marketing
3800 Gateway Boulevard, Suite 311 Morrisville, NC 27560 Telephone 919.468.0399
Facsimile 91.468.0486 www.moissanite.com
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
VERY GOOD
PRICING
This information is confidential.
All prices are subject to change without notice.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ROUND APPROX. CT. WT. PRICE LEVEL 1 PRICE LEVEL 2 PRICE LEVEL 3 PRICE LEVEL 4 PRICE LEVEL 5
- --------------------------------------------------------------------------------------------------------------------------
2mm 0.03 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
2.5mm 0.05 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
3mm 0.09 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
3.5mm 0.14 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
4mm 0.2 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
4.5mm 0.29 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
5mm 0.4 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
5.5mm 0.53 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
6mm 0.69 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
6.5mm 0.87 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
7mm 1.09 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
7.5mm 1.34 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
8mm 1.63 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
8.5mm 1.95 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
9mm 2.31 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
9.5mm 2.72 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
10mm 3.17 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
10.5mm 3.67 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
11mm 4.22 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
11.5mm 4.83 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
12mm 5.48 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
OVAL APPROX. CT. WT. PRICE LEVEL 1 PRICE LEVEL 2 PRICE LEVEL 3 PRICE LEVEL 4 PRICE LEVEL 5
- ---------------------------------------------------------------------------------------------------------------------
6x4 0.48 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
7x5 0.82 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
8x6 1.32 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
PRINCESS APPROX. CT. WT. PRICE LEVEL 1 PRICE LEVEL 2 PRICE LEVEL 3 PRICE LEVEL 4 PRICE LEVEL 5
- ---------------------------------------------------------------------------------------------------------------------
3x3 0.16 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
3.5x3.5 0.23 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
4x4 0.35 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
4.5x4.5 0.5 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
5x5 0.68 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
5.5x5.5 0.86 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
6x6 1.12 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
6.5x6.5 1.41 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
7x7 1.72 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Triangular Approx. Ct. Wt. Price Level 1 Price Level 2 Price Level 3 Price Level 4 Price Level 5
- ---------------------------------------------------------------------------------------------------------------------
3.5x3.5x3.5 0.14 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
4x4x4 0.2 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
4.5x4.5x4.5 0.29 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
5x5x5 0.36 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
5.5x5.5x5.5 0.51 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
6x6x6 0.69 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
6.5x6.5x6.5 0.88 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
7x7x7 1.11 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
7.5x7.5x7.5 1.3 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
8x8x8 1.6 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1 of 2
(C)2000 Charles & Colvard(TM)All Rights Reserved.
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
VERY GOOD
PRICING
This information is confidential.
All prices are subject to change without notice.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Radiant Approx. Ct. Wt. Price Level 1 Price Level 2 Price Level 3 Price Level 4 Price Level 5
- -----------------------------------------------------------------------------------------------------------------------
6x4 0.6 ***** ***** ***** ***** *****
- -----------------------------------------------------------------------------------------------------------------------
7x5 1.02 ***** ***** ***** ***** *****
- -----------------------------------------------------------------------------------------------------------------------
8x6 1.6 ***** ***** ***** ***** *****
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Price Level 1: Distributor price minimum order ***** carats per calendar quarter
Price Level 2: Distributor price minimum order ***** carats per calendar quarter
Price Level 3: Distributor price minimum order ***** carats per calendar quarter
Price Level 4: Distributor price minimum order ***** carats per calendar quarter
Price Level 5: Distributor price minimum order ***** carats per calendar quarter
2 of 2
(C)2000 Charles & Colvard(TM)All Rights Reserved.
EXHIBIT 10.41
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT BE
GIVEN CONFIDENTIAL TREATMENT. SUCH PORTIONS HAVE BEEN FILED SEPARATELY WITH THE
COMMISSION.
CHARLES & COLVARD(TM)
------------CREATED-------------
M O I S S A N I T E
LETTER AGREEMENT
THIS LETTER AGREEMENT ("Agreement") is entered into March 15, 2000 between C3,
INC., d/b/a Charles & Colvard, 3800 Gateway Boulevard, Suite 311, Morrisville,
North Carolina 27560 ("C&C"), and The Bell Group, d/b/a Rio Grande, 7500
Bluewater Road, NW, Albuquerque, New Mexico 87121-1962 ("Rio Grande").
RECITALS
C&C is engaged in the business of designing, manufacturing, marketing, and
selling finished created jewels made of silicon carbide known as Charles &
Colvard created moissanite jewels ("Moissanite") and certain pieces of jewelry
containing Moissanite. Rio Grande is engaged in the business of manufacturing,
marketing and selling jewelry, jewelry findings, supplies, and gemstones. The
parties wish to enter into a business relationship whereby Rio Grande will
purchase Moissanite from C&C, in exchange for distribution rights to sell
Moissanite on the terms set out herein.
Now, therefore, in consideration of the mutual terms set forth herein, the
parties hereby agree as follows:
1. APPOINTMENT. Subject to the terms of this Agreement, C&C hereby appoints
Rio Grande as a nonexclusive distributor of Moissanite to all classes of
trade in the United States of America, Canada, Mexico and the Caribbean
("Territory") during the term of this Agreement. Notwithstanding such
appointment, Rio Grande acknowledges and agrees that the parties shall
honor C&C's existing agreements pursuant to their terms.
2. LIMITATIONS. Rio Grande shall not solicit sales of Moissanite, sell
Moissanite or otherwise represent C&C in any geographic area other than the
Territory, or solicit sales or sell Moissanite directly to consumers.
3. TERM. Subject to earlier termination pursuant to Section 10 of this
Agreement, the term of this Agreement shall commence as of the date of this
Agreement and terminate on December 31, 2001. This Agreement shall
automatically be renewed for successive additional one-year terms unless
either party gives notice to the other party of intent to terminate this
Agreement at least 90 days prior to the end of the then current term.
4. BRAND DEVELOPMENT. C&C shall be responsible for developing, maintaining and
delivering the Moissanite brand image to consumers. Rio Grande agrees to
support the C&C brand development efforts as set out in Section 6.
1 of 6
(C)2000 Charles & Colvard(TM)All Rights Reserved.
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
5. TRADEMARKS. C&C and Rio Grande shall enter into the Licensing Agreement
attached as Exhibit A which provides Rio Grande during the term of this
Agreement with the non-exclusive, royalty-free right and license to use the
C&C trademarks solely for the purpose of marketing, advertising, promoting,
and selling Moissanite in the Territory.
6. MARKETING, ADVERTISING AND PROMOTION. Rio Grande shall use its best efforts
to market, promote, distribute, and sell Moissanite in the Territory as a
unique new jewel and shall use its best efforts to recruit independent
retail jewelers in the Territory to purchase Moissanite. Rio Grande shall
be responsible for advertising and promotion to the jewelry trade. Rio
Grande shall encourage the retail jewelers that carry Moissanite to
advertise Moissanite to consumers. Rio Grande has specifically committed to
the marketing, advertising and promotional activities set out on Schedule 6
hereto for the year 2000. No less than 90 days prior to the end of the then
current term, the parties shall mutually agree in writing on a proposed
marketing, advertising and promotional plan for the succeeding annual term.
Rio Grande agrees that it shall sell Moissanite only as "Charles & Colvard
created Moissanite jewels" and in compliance with the C&C Brand Identity
Guidelines, as may be amended by C&C from time to time. Rio Grande shall
only make such representations or warranties with respect to Moissanite in
marketing, advertising or promotional materials, or otherwise, as
specifically approved and authorized by C&C in writing. Rio Grande shall
comply with all applicable laws and regulations during the course of its
performance of this Agreement and shall not sell Moissanite to any customer
whom it knows or has reason to know intends to misrepresent Moissanite. C&C
shall contribute to the marketing, advertising and promotion of Moissanite
in the Territory in the form of a credit toward future purchases of
Moissanite by Rio Grande from C&C. Credits shall be deemed earned quarterly
upon receipt by C&C of a quarterly report from Rio Grande showing Rio
Grande's compliance with the agreed upon plan. The amount of the credit
granted by C&C to Rio Grande shall be ***** percent (*****%) of the net
receipts of Rio Grande's purchases of Moissanite from C&C in the prior
quarter.
7. TRAINING. Within 30 days of the date of this Agreement, Rio Grande shall
provide to its staff formal training with respect to Moissanite as
described in Schedule 7.
8. AVAILABILITY AND PRICING. C&C agrees to use commercially reasonable efforts
to supply such Moissanite as requested by Rio Grande to Rio Grande. Rio
Grande agrees to purchase as many carats of Moissanite as it may require
from C&C using the pricing and minimum order requirements set forth in
Schedule 8. Moissanite will be cut in available shapes per C&C's standard
production practices and will range in size from 2.0 mm to 9.5 mm, with the
average size 5.5 mm. The grade of Moissanite initially available shall be
"Very Good" which includes possible slight color saturations. There will be
no inclusions that are visible to the naked eye sold in this grade. Other
Moissanite cuts and grades may be made available from time to time at C&C's
discretion. C&C reserves the right to amend at any time the pricing and
minimum order requirements set forth in Schedule 8, provided that if the
pricing of Moissanite is decreased, C&C shall provide Rio Grande with a
credit toward additional purchases of Moissanite equal to the amount of
such price decrease on the lesser of (a) Rio Grande's net purchased
Moissanite during the prior 90 days or (b) Rio Grande's actual inventory at
such time.
2 of 6
(C)2000 Charles & Colvard(TM)All Rights Reserved.
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
9. TERMS. Except as otherwise provided herein, the terms of delivery hereunder
shall be FOB C&C's warehouse, and Rio Grande will provide all shipping and
insurance fees for the Moissanite. C&C agrees to ship the Moissanite by
whatever carrier Rio Grande designates, offering any carrier discounts that
C&C has available to it. C&C shall invoice Rio Grande upon shipment with
payment required in 30 days. Prices contained herein do not include any
taxes, and Rio Grande shall be solely responsible for collecting,
reporting, and/or paying all income (other than United States and North
Carolina income taxes imposed on C&C), sales, excise, property, value-added
tax, duty or tariff imposed by any governmental authority arising from the
performance of either party under this Agreement.
10. TERMINATION. Upon the failure of a party to fulfill a material term of this
Agreement, or to cure a failure to fulfill any term of this Agreement
within 30 days of written notice of such failure by the other party, the
nondefaulting party may immediately terminate this Agreement by notice to
the defaulting party. Either party may terminate this Agreement immediately
by notice to the non-terminating party in the event that the
non-terminating party enters or is placed in bankruptcy, receivership, or
liquidation, becomes insolvent, or makes an assignment for the benefit of
its creditors.
11. EFFECT OF TERMINATION. Upon termination of this Agreement, Rio Grande's
rights under this Agreement shall immediately terminate, and Rio Grande
shall immediately cease marketing, promoting, distributing, or selling
Moissanite (other than as may be allowed herein to dispose of inventory),
and otherwise representing in any manner that Rio Grande is authorized to
distribute Moissanite. Upon the termination of this Agreement for any
reason, C&C shall, at its option, (i) repurchase Rio Grande's inventory of
Moissanite at the price paid to C&C by Rio Grande for such products, less a
reasonable restocking charge; or (ii) permit Rio Grande to sell such
inventory; provided, that Rio Grande must complete all such distribution
and sales of Moissanite within six (6) months of the termination date and
fully perform all its obligations required by this Agreement. Termination
of this Agreement shall not relieve either party from its duty to discharge
in full all obligations accrued or due prior to the effective date of
termination. Furthermore, the provisions of Sections 5, 6, and 11 through
23 shall survive any termination of this Agreement. Neither party to this
Agreement shall be liable to the other party by reason of the valid
termination of this Agreement, for compensation, reimbursement, or damages
on account of any loss of goodwill, anticipated sales, or prospective
profits, or on account of expenditures, investments, or other commitments
relating to the performance of this Agreement or the business of either
party. The foregoing provision shall not be construed to limit the
liability of either party for a default in the performance of any provision
or obligation under this Agreement of the other party, which results in the
nondefaulting party's election to terminate this Agreement in accordance
with Section 10 above.
12. DISCLAIMER OF WARRANTY. Other than as may be set out in writing to Rio
Grande by C&C from time to time, C&C makes no warranty or other
representation concerning Moissanite; and, other than as specifically
provided in this Agreement, C&C's liability is limited to replacement of
any Moissanite not conforming
3 of 6
(C)2000 Charles & Colvard(TM)All Rights Reserved.
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
to the specifications set out in Section 8 of this Agreement upon its
return to C&C in compliance with the then existing standard policy of C&C
governing returned goods. Rio Grande reserves the right to return any
product not conforming to the specifications set out herein to C&C. The
warranty set forth in this Section 12 is intended solely for the benefit of
Rio Grande. All claims hereunder shall be made by Rio Grande and may not be
made directly by Rio Grande's customers to C&C. The warranty set forth
above is in lieu of all other warranties, expressed or implied, which are
hereby disclaimed and excluded by C&C, including, without limitation, any
warranty of merchantability or fitness for a particular purpose or use.
13. INDEMNIFICATION. Rio Grande shall defend, indemnify, and hold harmless C&C
and its officers, directors, agents and employees from and against any and
all claims, causes of action, damages, losses, costs, and expenses
(including reasonable attorneys' fees), judgments and liabilities made
against or incurred by C&C arising out of the acts or omissions of Rio
Grande, its employees and agents in the performance of this Agreement. C&C
shall defend, indemnify, and hold harmless Rio Grande and its officers,
directors, agents and employees from and against any and all claims, causes
of action, damages, losses, costs, and expenses (including reasonable
attorneys' fees), judgments and liabilities made against or incurred by Rio
Grande arising out of the acts or omissions of C&C, its employees and
agents in the performance of this Agreement, specifically including any
claims from C&C's existing customers to territorial exclusivity arising
from their current relationship with C&C.
14. CONFIDENTIALITY. Each of Rio Grande and C&C shall treat the terms of this
Agreement as confidential and shall not disclose such terms to any third
party for any purpose without the prior written consent of the other party
or as required by applicable law.
15. INSURANCE. Throughout the term of this Agreement, Rio Grande shall maintain
general liability and property damage liability insurance coverage
underwritten by a Best-A rated insurance carrier in a minimum amount of $1
million. Such policy shall name C&C as an additional insured and loss
payee, and shall include a provision requiring the carrier to notify C&C in
writing at least thirty (30) days prior to any cancellation, termination or
amendment of such insurance coverage. Rio Grande shall deliver to C&C a
certificate of insurance verifying the foregoing insurance coverage.
16. EVENTS BEYOND PARTY'S CONTROL. Neither party shall be liable to the other
party for delay or failure of performance of this Agreement if the delay or
failure is caused by acts of God or events completely beyond the control of
the parties. If a delay or failure of performance caused by force majeure
shall continue for a period of more than six (6) months, either party shall
have the right to terminate this Agreement by written notice to the other
party.
17. LIMITATION OF LIABILITY. C&C shall not be liable in contract, in tort
(including negligence or strict liability) or otherwise for damage or loss
of property, loss of profits or revenue, loss of use of property, cost of
capital, claims of customers of Rio Grande or for any special, indirect,
incidental, or consequential damages whatsoever. The remedies of Rio Grande
set forth herein are exclusive and the total cumulative liability of C&C
with respect to this agreement, or action taken or inaction in connection
herewith such as the performance or breach thereof, or from the
manufacture, sale, delivery, resale, or use of any product covered by or
furnished under this Agreement, whether in contract, in tort (including
negligence or strict liability) or otherwise, shall not exceed the price of
the product on which such liability is based.
4 of 6
(C)2000 Charles & Colvard(TM)All Rights Reserved.
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
No action, regardless of form, arising out of the transactions under this
Agreement may be brought by Rio Grande more than one (1) year after the
cause of action has accrued.
18. RELATIONSHIP OF PARTIES. This Agreement does not establish a joint venture
or legal partnership between the parties. Rio Grande is and shall be an
independent contractor and shall not be deemed to be an agent, employee or
legal representative of C&C. Rio Grande, its agents, employees and
customers shall not have or represent themselves as having any authority to
enter into contracts or make any commitments on behalf of C&C.
19. ENTIRE AGREEMENT; VALIDITY; WAIVER. This Agreement constitutes the entire
agreement between the parties and supersedes all previous agreements,
negotiations and commitments between the parties, and shall not be changed
or modified in any manner, except by mutual written consent signed by duly
authorized representatives of each of the parties. Should any provisions of
this Agreement be invalid or unenforceable under any applicable laws or
regulations, all other provisions of the Agreement shall remain in effect.
The terms and conditions of this Agreement may only be waived in writing by
the party waiving compliance. The failure of either party to require
performance of any provision of this Agreement or to exercise any right
hereunder shall not constitute a waiver or prejudice that party's right to
enforce the same at any later date. This Agreement may be executed in one
or more counterparts, each of which will be deemed an original, but all of
which together shall constitute one and the same instrument.
20. ASSIGNABILITY. Neither party shall have the right to assign, delegate,
sublicense or otherwise transfer its rights and obligations under this
Agreement without the prior written consent of the other party.
21. NOTICE. Any notice required or permitted in this Agreement shall be in
writing and be given by facsimile or an express mail delivery service,
which is able to track and confirm delivery, properly addressed to the
party to be notified at its last known address, and shall be deemed
delivered when so transmitted, if sent by facsimile and receipt is
acknowledged in writing or otherwise when actually received, or on the
second day after mailing, if sent via an express mail delivery service.
22. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina, without regard to
its conflicts-of-law rules, and the laws of the United States of America.
Rio Grande consents to the jurisdiction of the courts of the State of North
Carolina in connection with all disputes or controversies arising under
this Agreement.
5 of 6
(C)2000 Charles & Colvard(TM)All Rights Reserved.
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
IN WITNESS WHEREOF, the parties hereto, through their duly authorized officers,
have executed this Agreement as of the date first written above.
C3, Inc., d/b/a Charles & Colvard
/s/ Robert S. Thomas
-----------------------------------------------
Robert S. Thomas, President
The Bell Group, d/b/a Rio Grande
/s/ Hugh Bell
-----------------------------------------------
Hugh Bell, Chairman and Chief Executive Officer
6 of 6
(C)2000 Charles & Colvard(TM)All Rights Reserved.
<PAGE>
SCHEDULE 6
RIO GRANDE'S INTENDED MOISSANITE MARKETING EFFORTS
Insertion within our 2000-2001 Gems and Findings catalog. Moissanite will be
featured on a full page in the front of our annual catalog, that will be
released in July of this year. Our catalog is sent to 200,000+ customers and
prospects.
We will write a comprehensive article about Moissanite, and feature it in our
quarterly newsletter, News & Product Review. This newsletter is sent to all of
our customers. We can feature Moissanite in our next issue.
We will feature Moissanite in future jewelry-trade shows, including:
JCK Las Vegas, in June
Prime Time Las Vegas, in September
Catalog in Motion Tucson, in February 2001
MJSA New York, in March 2001
<PAGE>
SCHEDULE 7
Rio Grande shall provide a formal moissanite training program for its customer
service, marketing and other personnel as designated by Rio Grande. This
training program includes the following general topics:
>> Manufacturing Specifications (jewelry manufacturing and repair)
>> Branding (product positioning, advertising and promotion)
>> Gemological Characteristics and Identification
>> Product Selection and Availability (shapes, sizes, colors and grades)
>> Operating Procedures (selected employees only)
C&C shall conduct a series of two-hour training sessions for Rio Grande
personnel designated as "trainers" within 30 days of the date of this Agreement.
Furthermore, C&C agrees to provide each participant with a training guide. C&C
will provide a master copy of the training guide that Rio Grande can use to copy
for future internal training of its employees.
Rio Grande agrees to train all appropriate employees, using the materials
developed and refined for the initial training, within 30 days of the date of
the last training session provided by C&C for Rio Grande's trainers. Rio Grande
agrees to incorporate the formal moissanite training program as part of its new
employee orientation training for appropriate employees, and agrees to provide
such employees with a refresher course on moissanite as needed or requested by
C&C.
C&C agrees to provide additional training up to one week to the Rio Grande
"trainers" twice during the first year and annually thereafter.
Rio Grande and C&C agree to review the formal moissanite training program at the
request of either party.
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
SCHEDULE 8
This information is confidential.
All prices are subject to change without notice.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
ROUND APPROX. CT. WT. PRICE LEVEL 1 PRICE LEVEL 2 PRICE LEVEL 3 PRICE LEVEL 4 PRICE LEVEL 5
- --------------------------------------------------------------------------------------------------------------------------
2mm 0.03 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
2.5mm 0.05 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
3mm 0.09 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
3.5mm 0.14 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
4mm 0.2 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
4.5mm 0.29 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
5mm 0.4 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
5.5mm 0.53 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
6mm 0.69 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
6.5mm 0.87 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
7mm 1.09 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
7.5mm 1.34 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
8mm 1.63 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
8.5mm 1.95 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
9mm 2.31 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
9.5mm 2.72 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
10mm 3.17 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
10.5mm 3.67 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
11mm 4.22 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
11.5mm 4.83 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
12mm 5.48 ***** ***** ***** ***** *****
- --------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
OVAL APPROX. CT. WT. PRICE LEVEL 1 PRICE LEVEL 2 PRICE LEVEL 3 PRICE LEVEL 4 PRICE LEVEL 5
- ---------------------------------------------------------------------------------------------------------------------
6x4 0.48 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
7x5 0.82 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
8x6 1.32 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
PRINCESS APPROX. CT. WT. PRICE LEVEL 1 PRICE LEVEL 2 PRICE LEVEL 3 PRICE LEVEL 4 PRICE LEVEL 5
- ---------------------------------------------------------------------------------------------------------------------
3x3 0.16 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
3.5x3.5 0.23 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
4x4 0.35 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
4.5x4.5 0.5 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
5x5 0.68 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
5.5x5.5 0.86 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
6x6 1.12 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
6.5x6.5 1.41 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
7x7 1.72 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
TRIANGULAR APPROX. CT. WT. PRICE LEVEL 1 PRICE LEVEL 2 PRICE LEVEL 3 PRICE LEVEL 4 PRICE LEVEL 5
- ---------------------------------------------------------------------------------------------------------------------
3.5x3.5x3.5 0.14 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
4x4x4 0.2 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
4.5x4.5x4.5 0.29 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
5x5x5 0.36 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
5.5x5.5x5.5 0.51 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
6x6x6 0.69 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
6.5x6.5x6.5 0.88 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
7x7x7 1.11 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
7.5x7.5x7.5 1.3 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
8x8x8 1.6 ***** ***** ***** ***** *****
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
1 of 2
(C)2000 Charles & Colvard(TM)All Rights Reserved.
<PAGE>
REDACTED - OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
SCHEDULE 8
This information is confidential.
All prices are subject to change without notice.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
Radiant Approx. Ct. Wt. Price Level 1 Price Level 2 Price Level 3 Price Level 4 Price Level 5
- -----------------------------------------------------------------------------------------------------------------------
6x4 0.6 ***** ***** ***** ***** *****
- -----------------------------------------------------------------------------------------------------------------------
7x5 1.02 ***** ***** ***** ***** *****
- -----------------------------------------------------------------------------------------------------------------------
8x6 1.6 ***** ***** ***** ***** *****
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Price Level 1: Distributor price minimum order ***** carats per calendar quarter
Price Level 2: Distributor price minimum order ***** carats per calendar quarter
Price Level 3: Distributor price minimum order ***** carats per calendar quarter
Price Level 4: Distributor price minimum order ***** carats per calendar quarter
Price Level 5: Distributor price minimum order ***** carats per calendar quarter
2 of 2
(C)2000 Charles & Colvard(TM)All Rights Reserved.
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-43613 of C3, Inc. on Form S-8 of our report dated February 2000 appearing in
this Annual Report on Form 10-K of C3, Inc. for the year ended December 31,
1999.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Raleigh, North Carolina
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From The Balance
Sheet As Of December 31, 1999 And The Statement Of Operations For The Year Ended
December 31, 1999 And Is Qualified In Its Entirety By Reference To Such
Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,161,665
<SECURITIES> 0
<RECEIVABLES> 1,467,528
<ALLOWANCES> 136,000
<INVENTORY> 14,767,888
<CURRENT-ASSETS> 29,995,901
<PP&E> 7,170,322
<DEPRECIATION> 878,101
<TOTAL-ASSETS> 36,780,902
<CURRENT-LIABILITIES> 3,286,759
<BONDS> 0
0
0
<COMMON> 48,757,702
<OTHER-SE> (15,263,559)
<TOTAL-LIABILITY-AND-EQUITY> 36,780,902
<SALES> 12,272,907
<TOTAL-REVENUES> 12,272,907
<CGS> 6,405,887
<TOTAL-COSTS> 6,405,887
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,151,683)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,151,683)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,151,683)
<EPS-BASIC> (0.73)
<EPS-DILUTED> (0.73)
</TABLE>
