<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] 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: 0-23589
C2I SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0775687
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6138 NANCY RIDGE DRIVE
SAN DIEGO, CALIFORNIA 92121-3223
(619) 812-5800
(Address and telephone number of principal executive offices)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [_]
The number of shares outstanding of the Issuer's Common Stock, $0.001 par value,
was 3,554,931 as of August 10, 1999.
Transitional Small Business Disclosure Format (check one):
YES [_] NO [X]
<PAGE>
C2i SOLUTIONS, INC.
REPORT ON FORM 10-QSB
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998 (Unaudited) 3
Condensed Statements of Operations for the three and six
months ended June 30, 1999 and 1998 (Unaudited) and for
the period from Inception through June 30, 1999 (Unaudited) 4
Condensed Statements of Stockholders' Equity (Deficit) for
the periods ended December 31, 1996, 1997 and 1998
(Unaudited) and June 30, 1999 (Unaudited) 5
Condensed Statements of Cash Flows for the six months
ended June 30, 1999 and 1998 (Unaudited), and for the
period from Inception through June 30, 1999 (Unaudited) 6
Notes to Condensed Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,545,734 $ 135,954
Short-term investment -- 2,229,247
Accounts receivable, net -- 116,805
Prepaid expenses and other 79,917 69,475
----------- -----------
Total current assets 1,625,651 2,551,481
Property and equipment, net 77,849 117,534
Other assets, net 27,072 54,379
----------- -----------
Total assets $ 1,730,572 $ 2,723,394
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 88,830 $ 136,401
Accrued payroll and related 25,715 35,455
Current portion of capital lease obligations 6,560 6,110
Other current liabilities 15,523 28,876
----------- -----------
Total current liabilities 136,628 206,842
----------- -----------
Capital lease obligations, net of current portion 2,739 6,146
----------- -----------
Stockholders' Equity:
Preferred Stock- $ .001 par value; 1,000,000 shares
authorized; no shares issued and outstanding -- --
Common Stock- $.001 par value; 10,000,000 shares authorized;
3,542,171 shares issued and outstanding at
June 30, 1999 and December 31, 1998 3,542 3,542
Additional paid-in capital 7,453,859 7,466,970
Warrants to acquire common stock 223,100 223,100
Deficit accumulated during the development stage (5,915,806) (4,953,906)
Deferred compensation (173,490) (229,300)
----------- -----------
Total stockholders' equity 1,591,205 2,510,406
----------- -----------
Total liabilities and stockholders' equity $ 1,730,572 $ 2,723,394
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. See notes to condensed financial statements.
3
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period
from
inception
(September 17,
Three Month Periods Six Month Periods 1996) through
Ended June 30, Ended June 30 June 30,
1999 1998 1999 1998 1999
---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Services $ 126,256 $ 87,165 $ 400,593 $ 156,244 $ 1,020,643
Products -- 14,215 -- 14,215 118,848
---------- ---------- ---------- ----------- -----------
Total revenues 126,256 101,380 400,593 170,459 1,139,491
---------- ---------- ---------- ----------- -----------
Cost of revenues:
Services 118,050 42,107 255,074 72,499 522,449
Products:
Customers -- 9,300 -- 9,300 64,852
Former stockholder -- -- -- -- 17,652
---------- ---------- ---------- ----------- -----------
Total cost of revenues 118,050 51,407 255,074 81,799 604,953
---------- ---------- ---------- ----------- -----------
Gross profit 8,206 49,973 145,519 88,660 534,538
Selling, general and administrative 310,285 719,974 1,093,537 1,268,847 5,835,602
expenses ---------- ---------- ---------- ----------- -----------
Operating loss (302,079) (670,001) (948,018) (1,180,187) (5,301,064)
Interest and dividend income (17,296) (59,370) (46,846) (79,281) (267,574)
Interest expense 359 575 812 18,367 44,338
Interest expense to former employees -- -- -- 2,483 3,105
Other expense (income) 4,823 (195) 11,371 120,353 131,567
Loss realized on sale of short-term
investment -- -- 48,545 -- 703,306
---------- ---------- ---------- ----------- -----------
Net loss $ (289,965) $ (611,011) $ (961,900) $(1,242,109) $(5,915,806)
========== ========== ========== =========== ===========
Loss per share (basic and diluted) $ (0.08) $ (0.17) $ (0.27) $ (0.39)
========== ========== ========== ===========
Shares used in computing loss per share 3,542,171 3,542,171 3,542,171 3,182,162
========== ========== ========== ===========
</TABLE>
See accompanying notes.
4
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements of Stockholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Common Stock Additional Warrants During the Stockholders'
------------------- Paid-In to Acquire Development Deferred Equity
Shares Amount Capital Common Stock Stage Compensation (Deficit)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at Inception,
September 17, 1996 -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
for cash and capital
subscriptions receivable 1,050,000 1,050 156,450 -- -- -- 157,500
Net loss and comprehensive loss -- -- -- -- (44,338) -- (44,338)
--------- ------- ---------- --------- ----------- ---------- -----------
Balance at December 31, 1996 1,050,000 1,050 156,450 -- (44,338) -- 113,162
Issuance of common stock for
cash and capital subscriptions
receivable 1,333,332 1,333 1,398,666 -- -- -- 1,399,999
Issuance of common stock for
services rendered 8,006 8 9,075 -- -- -- 9,083
Deferred compensation -- -- 346,325 -- -- (322,812) 23,513
Issuance of warrants -- -- -- 108,000 -- -- 108,000
Net loss and comprehensive loss -- -- -- -- (1,806,438) -- (1,806,438)
--------- ------- ---------- --------- ----------- ---------- -----------
Balance at December 31, 1997 2,391,338 2,391 1,910,516 108,000 (1,850,776) (322,812) (152,681)
Issuance of common stock and warrants 1,150,000 1,150 5,556,157 115,100 -- -- 5,672,407
Exercise of common stock options 833 1 2,082 -- -- -- 2,083
Deferred compensation -- -- (1,785) -- -- 93,512 91,727
Net loss and comprehensive loss -- -- -- -- (3,103,130) -- (3,103,130)
--------- ------- ---------- --------- ----------- ---------- -----------
Balance at December 31, 1998 3,542,171 3,542 7,466,970 223,100 (4,953,906) (229,300) 2,510,406
Deferred compensation -- -- (13,111) -- -- 55,810 42,699
Net loss and comprehensive loss -- -- -- -- (961,900) -- (961,900)
--------- ------- ---------- --------- ----------- ---------- -----------
Balance at June 30, 1999 3,542,171 $ 3,542 $7,453,859 $ 223,100 $(5,915,806) $ (173,490) $ 1,591,205
========= ======= ========== ========= =========== ========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
(Sept. 17,
Six Month Periods 1996) through
Ended June 30, June 30,
1999 1998 1999
---------- ----------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (961,900) $(1,242,109) $(5,915,806)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 16,234 29,645 131,341
Amortization of deferred compensation 42,699 47,390 157,939
Non-cash compensation and other expenses 11,252 122,942 1,321,572
Loss realized on sale of short-term investment 48,545 -- 703,306
Changes in operating assets and liabilities:
Accounts receivable, net 116,805 (92,801) --
Prepaid expenses and other 16,805 (81,554) (52,670)
Accounts payable (47,571) 6,668 88,830
Accrued payroll and related (9,740) (36,794) 25,715
Accrued interest payable -- (12,500) --
Accrued royalty due to former stockholder -- (1,345) --
Other current liabilities (13,353) 5,401 15,523
---------- ----------- -----------
Net cash used for operating activities (780,224) (1,255,057) (3,524,250)
---------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment, net 12,259 (104,091) (177,812)
Purchase of short-term investment -- (4,000,000) (4,000,000)
Proceeds from sale of short-term investment 2,180,702 -- 3,296,694
Other assets -- -- (55,804)
---------- ----------- -----------
Net cash provided by (used for) investing activities 2,192,961 (4,104,091) (936,922)
---------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from initial public offering, net of deferred offering costs -- 5,932,313 5,672,407
Proceeds from issuance of common stock -- 2,083 262,083
Proceeds from issuance of Bridge Notes and warrants -- -- 600,000
Repayment of Bridge Notes payable -- (600,000) (600,000)
Repayment of capital lease obligations (2,957) (2,566) (8,976)
Deferred finance charges -- -- (26,820)
Advance from former stockholder -- -- 45,586
Repayment of advance from former stockholder -- -- (34,874)
Collection of capital subscriptions receivable stockholders -- -- 97,500
---------- ----------- -----------
Net cash provided by (used for) financing activities (2,957) 5,331,830 6,006,906
---------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,409,780 (27,318) 1,545,734
Cash and cash equivalents at beginning of period 135,954 298,823 --
---------- ----------- -----------
Cash and cash equivalents at end of the period $1,545,734 $ 271,505 $ 1,545,734
========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Non-Cash Financing Activities:
Capital subscriptions receivable from stockholders $ -- $ -- $ 197,500
Equipment acquired under capital lease obligations -- -- 18,276
Other Cash Flows Information:
Interest paid 812 22,566 24,573
Income taxes paid 4,785 1,824 9,009
</TABLE>
See accompanying notes.
6
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
1. Summary of Significant Accounting Policies
Description of Business
- -----------------------
C2i Solutions, Inc. (the "Company" or "C2i") was incorporated in the State of
Delaware on September 30, 1997. The Company was initially organized as a
California limited liability company under the name of Challenge 2000
International LLC (the "LLC") on September 17, 1996 ("Inception"). From
Inception through September 30, 1997, the Company operated under the name of the
LLC. On September 30, 1997, the Company reorganized as a Delaware corporation
and changed its name to C2i Solutions, Inc. On September 30, 1997, all LLC owner
units were converted into 2,391,338 shares of the Delaware Corporation's common
stock and all owner options were converted into options to acquire 547,500
shares of such common stock. Concurrent with the formation of the Delaware
corporation, the LLC was dissolved. The accompanying financial statements have
been adjusted to give retroactive effect to the reorganization and capital
structure of the Delaware corporation from Inception.
C2i provides information technology (IT) services and solutions to meet the
needs of business and government. C2i's primary business focus is on providing
e-business/e-commerce solutions that connect companies' new and existing IT
applications to customers and suppliers via the Internet.
Basis of Presentation
- ---------------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. Since Inception, the Company has been
primarily engaged in organizational activities, including raising capital,
recruiting personnel, and the marketing of its products and services. As of June
30, 1999, the Company has not realized significant revenues and therefore, is
considered to be in the development stage.
The Company's ability to transition from the development stage, and ultimately
to attain profitable operations is dependent upon its ability to raise
additional capital through debt or equity financing and the successful market
acceptance of its products and services. There can be no assurances that the
Company's products and services or its efforts to raise additional capital will
be successful. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
7
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Notes to Condensed Financial Statements
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. The
financial statements should be read in conjunction with the financial statements
and notes thereto, together with management's discussion and analysis of
financial condition and results of operations contained in the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1998. Operating results
for the six month period ended June 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.
Comprehensive Income
- --------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires that all components of comprehensive income, including net
income or loss, be reported in the financial statements in the period in which
they are recognized. SFAS No. 130 requires the change in net unrealized gains
(losses) on available-for-sale securities to be included in comprehensive income
(loss). As adjusted for this item, comprehensive net loss for the three and six
month periods ended June 30, 1999 and 1998 as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
Comprehensive net loss $(289,965) $(711,011) $(961,900) $(1,342,109)
2. Capital Transactions
Stock Option Plan
- -----------------
During the period from April 1, 1999 through June 30, 1999, the Company granted
incentive stock options to purchase an aggregate of 5,000 shares of the
Company's Common Stock, at exercise prices of $1.125 per share to a certain
employee of the Company. These options vest ratably over three years, are
exercisable at various dates, and expire ten years from date of grant, or
earlier in the event of termination of employment.
8
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
ITEM 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
This Form 10-QSB contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Such statements are only predictions and actual events or results may differ
materially. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this Item 2 as well as those discussed in
the Company's Annual Report on Form 10-KSB as filed with the Securities and
Exchange Commission on March 26,1999.
Overview
- --------
C2i Solutions, Inc. (the "Company" or "C2i") is a provider of
e-business/e-commerce solutions and specialized IT consulting services for
business and government.
During the majority of the first quarter of 1999, the Company continued to focus
its efforts on Y2K business development activities, expanding and strengthening
its workforce and regional presence, and improving its internal information
systems. Although the Company's efforts resulted in a significant increase in
revenues over the comparable prior year period, total revenues fell short of
management's expectations.
At the end of the first quarter of 1999, the Company reorganized to focus its
primary business on providing e-business/e-commerce solutions that connect
companies' new and existing IT applications to customers and suppliers via the
Internet. As a result of its strategic realignment and restructuring, C2i has
completed its existing contracts, but will not pursue new Y2K engagements.
Accordingly, C2i closed its four regional offices and eliminated approximately
14 positions.
During the second quarter of 1999, the Company's efforts were focused on
concluding its existing Y2K engagements and completing its strategic realignment
and restructing. A key part of its business restructuring includes establishing
additional business relationships and actively pursuing mergers and
acquisitions. On June 30, 1999 the Company signed a letter of intent to merge
with privately-held, Southern California based, American Digital Network (ADN) a
leading strategic Internet Services firm offering state-of-the-art, e-commerce,
connectivity, network, web site, intranet, extranet and hosting services. On
August 10, 1999, C2i and ADN executed a binding definitive merger agreement.
Under the terms of the binding definitive agreement, C2i will acquire 100
percent of the outstanding shares of ADN, with C2i remaining the surviving
public parent company. Outstanding shares of ADN common stock will be exchanged
for approximately 8 million newly issued shares of C2i common stock. C2i
anticipates accounting for the merger as a purchase.
Although C2i will only issue stock in the merger, C2i has agreed to provide ADN
with working capital in the form of a loan prior to the closing of the
transaction. The merger is expected to close in the fourth quarter of 1999, with
closing conditioned upon the effectiveness of a registration statement with the
SEC relating to the issuance of the C2i stock and other customary closing
conditions.
9
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
The following discussion should be read in conjunction with the attached
condensed financial statements and notes thereto.
Results of Operations for the three and six month periods ended June 30, 1999
- -----------------------------------------------------------------------------
and 1998
- ---------
Total revenues for the three months ended June 30, 1999 were $126,256 an
increase of 25% over the comparable quarter of the prior year, in which
revenues totaled $101,380. This increase in revenues resulted from completion of
additional work by the Company for its customers. For the three months ended
June 30, 1999, service revenues accounted for 100% of total revenues. For the
three months ended June 30, 1998, service revenues accounted for 86% of total
revenues, with product sales representing the remaining 14%.
Total revenues for the six months ended June 30, 1999 were $400,593, an increase
of 135% over the comparable period of the prior year, in which revenues totaled
$170,459. For the six months ended June 30, 1999 service revenues accounted for
100% of total revenues, compared with the comparable prior year period in which
service revenues accounted for 92% of total revenues, with product sales
representing 8%.
One customer accounted for 93% of the Company's total revenues for the six
months ended June 30, 1999. Two customers accounted for 100% of the Company's
total revenues (62% and 38%) for the six months ended June 30, 1998.
Cost of revenues were 94% ($118,050) of total revenues for the three months
ended June 30, 1999 and 64% ($255,074) of total revenues for the six months
ended June 30, 1999. These costs consisted primarily of personnel related costs
of providing consulting services. Cost of revenues were 51% ($51,407) of total
revenues and 48% ($81,799) of total revenues for the comparable periods in 1998,
which also represented primarily personnel related costs of providing consulting
services.
For the three months ended June 30, 1999 the gross margin percentage was 6%
compared to the prior year gross margin percentage of 49% which reflects more
profitable service revenue contract terms in 1998 relative to service revenue
contract terms in 1999. The significant decrease for the second quarter gross
margin percentage is the result of the terms of a contract modification done
during the second quarter of 1999.
The Company incurred selling, general and administrative expenses for the three
month period ended June 30, 1999 totaling $310,285 compared with $719,974 for
the comparable prior year period. This decrease in future selling, general and
administrative expenses is a result of recent restructuring efforts,
specifically the closure of four regional offices and the elimination of
approximately 14 positions. During the six months ended June 30, 1999, the
Company incurred selling, general and administrative expenses totaling
$1,093,537, a decrease of 14% over the comparable prior year period total of
$1,268,847.
Interest and dividend income was $17,296 and $46,846 for the three and six
months ended June 30, 1999, respectively, compared with $59,370 and $79,281 for
the three and six months ended June 30, 1998, respectively. This decrease in
1999 reflects a substantial decrease in interest-earning balances in 1999
compared to the 1998 balances. Interest expense totaled $359 and $812 for the
three and six months ended June 30, 1999, respectively, which consisted entirely
of interest on capital lease obligations, compared with total interest expense
of $575 and $18,367 for the three and six months ended June 30, 1998,
respectively.
The Company originally invested a portion of the net proceeds from its initial
public offering, in a mutual fund (the "Short-Term Investments"). During
the first quarter of 1999, the Company sold the entire balance of the Short-Term
Investment it held on December 31, 1998 and realized additional losses totaling
$48,545. The Company received net proceeds aggregating $2,180,702. The Company
has invested the proceeds from the short sale of this Short-Term Investment in
fully-insured, money market accounts and short-term U.S. government treasury
bills.
10
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Liquidity and Capital Resources
- -------------------------------
From Inception through February 1998, the Company financed its operations
primarily through the proceeds from the issuance of Common Stock and a bridge
financing, resulting in an aggregate of approximately $958,000 from the sale and
issuance of debt and equity securities, including warrants. In February 1998,
the Company completed an initial public offering of its Common Stock. This
offering provided the Company with net proceeds of $5,672,407, including
proceeds from the exercise of the underwriter's overallotment option received in
March 1998. Funds from these sources have been and are expected to continue to
be used as working capital to fund the Company's infrastructure and internal
operations, including purchases of capital equipment.
The Company's operating activities used net cash of $780,224 and $1,255,057
during the six-month periods ended June 30, 1999 and 1998, respectively. This
decrease in cash used for operating activities in 1999 compared to 1998 results
primarily from a smaller net loss for the 1999 period, which can be attributed
to recent restructuring efforts.
The Company's investing activities provided cash of $2,192,961 during the six
months ended June 30, 1999 and used cash of $4,104,091 during the six month
period ending June 30, 1998, respectively. The increase in cash provided by
investing activities in 1999 compared to cash used in 1998 relates to the
proceeds from the sale of the short-term investment totaling $2,180,702 and net
proceeds from the sale of property and equipment of $12,259 during 1999,
compared with $4,000,000 of cash used to purchase a short-term investment and
$104,091 used to purchase property and equipment during 1998.
The Company's financing activities used net cash of $2,957 and provided net cash
of $5,331,830 during the six months ended June 30, 1999 and 1998, respectively.
This increase in cash used in financing activities in 1999 represents cash used
to repay capital lease obligations of $2,957, compared to net proceeds from the
sale of common stock totaling $5,934,396 during 1998 (of which $5,932,313
related to the Company's initial public offering) which was partially offset by
cash used to repay the bridge notes ($600,000) and capital lease obligations
($2,566) in 1998.
As of June 30, 1999, the Company had cash and cash equivalents of $1,545,734 and
working capital of $1,489,023 compared with cash and the short-term investment
of $2,365,201 and working capital of $2,344,639 at December 31, 1998. Based on
management's current operating plan, the Company believes that its existing
resources will be sufficient to fund operations through March 2000. However, the
Company expects to continue to experience operating losses and to use cash in
operations through at least December 1999. C2i will be required to seek
additional capital to continue its operations beyond that time. If C2i is
unable to obtain the necessary capital, it will be required to significantly
curtail its activities or cease operations.
11
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
The Company's ability to achieve sustained profitability will be dependent upon
a number of factors, including its ability to generate future revenues. If the
Company cannot generate sufficient revenues from future contracts, which it may
be unable to do, the Company will be required to raise capital from the sale of
equity securities or the issuance of indebtedness. Such sales or issuances may
not be effected at favorable terms, if at all. If additional funds are raised by
issuing equity securities, substantial dilution to existing stockholders is
likely to result.
C2i is required to meet certain financial tests (including net tangible assets
of $2 million and a minimum bid price of the common stock of $1.00) to maintain
its listing on the Nasdaq SmallCap Market. Due to its continuing losses, as of
June 30, 1999 C2i failed to meet the net tangible asset continued listing
requirements. As a result, C2i's securities may be delisted from the Nasdaq
SmallCap Market, the liquidity of C2i's securities may be impaired and its
trading price may be reduced.
As previously discussed, the Company's recent restructuring is expected to
significantly reduce its ongoing operating expenses and operating losses. The
Company further plans to correct its noncompliance with the net tangible asset
continued listing requirements by raising additional funds through the sale of
equity securities through a private placement and by effecting a business
combination which results in the requisite increase in the Company's net
tangible assets. Such transactions may not be effected at favorable terms, if at
all.
Business Risks and Uncertainties
- --------------------------------
C2i has a Limited Operating History and Limited Experience in Information
Technology Solutions
C2i was founded in September 1996, has a limited operating history and is in the
development stage. As a result, C2i's operations to-date have not produced
significant revenues. C2i may not generate any future revenues from the sale of
its services or products.
C2i has limited experience in providing information technology solutions.
Although C2i has completed its initial assessment projects, C2i has not
completed a large scale IT project. There can be no assurance that C2i will be
successful in completing large scale IT projects, that C2i will not experience
delays or failures in providing its IT solutions or that the IT solutions will
be effective. The failure of C2i's IT solutions to function properly or the
existence of errors or bugs following completion of an IT project could
necessitate significant expenditures by C2i in order to attempt to remedy the
problems. The consequences of failures, errors and bugs could have a material
adverse effect on C2i's business, operating results and financial condition.
12
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
History of Operating Losses; Need for Additional Financing; Possible Delisting
from Nasdaq
C2i has experienced significant operating losses since its inception in
September 1996. As of June 30, 1999, C2i's accumulated deficit was
approximately $5,916,000, which includes a non-cash charge of approximately $1.2
million in 1997, as a result of sales of equity securities to key employees at
less than deemed value for financial statement purposes. Losses have been
principally the result of the various costs associated with C2i's selling,
general and administrative expenses as C2i commenced operations, and began
marketing activities and losses on investments. C2i expects that it will incur
operating losses through at least December 1999. C2i believes that its existing
capital resources will enable it to fund its operations until approximately
December 31, 1999. C2i will be required to seek additional capital to continue
its operations beyond that time. C2i has no commitments for any future funding,
and C2i may not be able to obtain additional capital in the future. If C2i is
unable to obtain the necessary capital, it will be required to significantly
curtail its activities or cease operations.
C2i is required to meet certain financial tests (including net tangible assets
of $2 million and a minimum bid price of the common stock of $1.00) to maintain
its listing on the Nasdaq SmallCap Market. If continued losses by C2i cause C2i
to fail to meet such continued listing requirements, C2i's securities may be
delisted from the Nasdaq SmallCap Market and the liquidity of C2i's securities
would be impaired.
Intense Industry Competition in the Information Technology Services Industry;
Competitive Disadvantages
The market for information technology service providers is highly competitive.
C2i's lack of resources and limited experience compared to other providers makes
it extremely vulnerable to competition from larger companies, all of which
benefit from greater recognition, larger lists of reference clients and
significantly greater financial, technical and marketing resources. Leading
competitors have proven products which can provide them with a significant
advantage over C2i because C2i's services have not been widely deployed and
therefore present potential customers with uncertainty not associated with
existing solutions from larger companies. In addition, many of C2i's potential
clients are reluctant to choose small companies as key suppliers or service
providers due to concerns about long term viability and, especially with respect
to high profile conversion projects, the consequences to the organization of a
failure of a proposed solution. There can be no assurance that C2i will
overcome these disadvantages.
Competitors may develop new products or services or improve their existing
products or services which, when combined with their existing market presence,
would make C2i's solutions obsolete or unmarketable. Any such development would
have a material adverse effect on C2i. C2i also expects that competition will
arise from new competitors and from new technological approaches adopted by new
and existing competitors. Competitive technologies may be developed which could
make C2i's services obsolete or of diminished utility, thereby materially
adversely affecting C2i. If C2i is unable to respond to the challenges of
competition, it would be unable to achieve or maintain profitability at a level
required to support its survival or growth.
13
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Resource and Time-Intensive Sales Process
Sales of C2i's services and solutions are characterized by a relatively complex
sales cycle due to such factors as the magnitude of the expenses associated with
implementation of a comprehensive solution at most organizations, the
substantial time required by potential customers to evaluate C2i's solutions and
those of competitors, and the potential consequences to the organization of a
wrong decision. These factors suggest that the decision will ultimately be made
at a level in an organization that is relatively higher than would otherwise be
involved in information system matters. As a result, C2i will likely continue
to be required to devote additional sales and marketing efforts to concluding
sales decisions.
Need to Develop New Products and Services Unrelated to Year 2000 Solutions
To date, C2i has generated substantially all of its revenues from its Year 2000
solutions. C2i plans to actively pursue business opportunities unrelated to the
Year 2000 problem in the information technology consulting services market, and
to develop products and services to take advantage of those opportunities. To
the extent product offerings and services provided by C2i are based upon
anticipated changes, sales of such products and services may be adversely
affected if other technologies become accepted in the industry. If C2i does not
successfully introduce new products or services in a timely manner, any
competitive position C2i may develop would be lost and C2i's sales would be
reduced. C2i may be unable to develop and introduce enhanced or new products or
services which satisfy customer needs and achieve market acceptance. The failure
of C2i to implement a successful new business development program would have a
material adverse effect upon its business and prospects.
14
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Dependence on Licenses and Third Party Technology
Substantially all of the tools that C2i uses to provide its IT solutions are
licensed from third parties. C2i's proprietary software, as well as licensed
software, is designed to work on or in conjunction with certain third party
hardware and/or software products. If any of these licensors or third party
vendors were to discontinue making their products available to C2i, or to
increase materially the cost to C2i to acquire, license or purchase the
products, or if a material problem were to arise in connection with the ability
of C2i to use and operate with third party hardware and/or software products,
C2i would be required to redesign its solutions to function with or on
alternative third party products or attempt to develop internally a replacement
for the third party products. In such an event, interruptions in the
availability or functioning in C2i's IT solutions and delays in the introduction
of new products and services may occur until replacement technology is obtained.
There can be no assurance that alternative sources of suitable technology would
be available or that C2i would be able to develop an alternative product in
sufficient time or at a reasonable cost. The failure of C2i to obtain or
develop alternative technologies or products on a timely basis and at a
reasonable cost could have a material adverse effect on C2i's business,
financial condition and results of operations.
Customer and Supplier Concentration; Uncertainty of Follow-On Business
A large portion of C2i's revenues have been dependent on a few customer
projects. C2i derived approximately 93% of its revenues for the six months ended
June 30, 1999 from one customer and 92% of its revenues for the year ended
December 31, 1998 from two customers. As of December 31, 1998, 100% of the
accounts receivable balance related to two customers. In addition, C2i has
experienced a supplier concentration, with 93% of its total cost of revenues for
the six months ended June 30, 1999 resulting from purchases from one supplier,
and 32% of its total cost of revenues for the year ended December 31, 1998
resulting from purchases from two suppliers. A loss of any significant customer
or supplier would have a material adverse effect on C2i's business, financial
condition and results of operations.
15
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Dependence on Proprietary Technology
C2i relies on trade secret and copyright protection for its products and
technology. C2i believes that its licensors use similar means of protecting
their technologies.
In the absence of significant proprietary protection, competitors may be able to
copy C2i's technology or design approaches, replicate its processes or gain
access to its trade secrets. Moreover, there can be no assurance that
competitors will not be able to develop technologies similar to or more advanced
than those used by C2i or design around any protected aspects of C2i's
technology rights. No assurance can be given that C2i's current or future
products or services will not infringe on the rights of others.
There has been substantial litigation regarding intellectual property rights in
computer software related industries. In the future, litigation may be necessary
to enforce technological rights of C2i, to protect trade secrets or know-how
owned or licensed by C2i or to defend C2i against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation would likely result in substantial cost
and diversion of effort by C2i, which by itself could have a material adverse
effect on C2i's business, financial condition and operating results. Further,
adverse determinations in such litigation could result in C2i's loss of
proprietary rights, subject C2i to significant liabilities to third parties,
require C2i to seek licenses from third parties or prevent C2i from providing
its services, any of which could have a material adverse effect on C2i's
business, financial condition and results of operations.
C2i also relies on trade secrets and proprietary technology that it seeks to
protect, in part, through confidentiality agreements with employees, consultants
and other parties. There can be no assurance that these agreements will not be
breached, that C2i will have adequate remedies for any breach, or that C2i's
trade secrets will not otherwise become known to or independently developed by
others.
Dependence on Key Personnel; Management of Restructuring of Information
Technology Operations
C2i's success will, to a large extent, depend upon the continued services of its
executive officers who have limited experience at managing a business like
C2i's. Although one of C2i's four executive officers has only been with C2i
since January 1999, the loss of services of any of these four executive officers
may materially and adversely affect C2i. C2i's employment agreements with its
key personnel may be terminated by either party, with or without cause, with the
exception of its agreement with Mr. Whalen. Mr. Whalen's employment agreement
has a term of five years, expiring in May 2002, and limits C2i's ability to
terminate him, except for cause, and provides for six months severance pay,
unless Mr. Whalen voluntarily resigns his position. C2i's Board of Directors has
approved the following changes to the employment agreements with its other three
executive officers, for which agreements were executed in the second quarter of
1999. Mr. Wooten's and Ms. Hessler's employment agreements are terminable at
will, but if either individual's employment with C2i is terminated prior to
March 2004 for any reason, other than cause, that individual will receive two
years severance pay unless that individual voluntarily resigns his or her
position. If Mr. Wooten or Ms. Hessler are terminated prior to March 2004 for
cause, they will receive six months severance. Mr. Hartman's employment
agreement is terminable at will, but if his employment with C2i is terminated
prior to March 2004 for any reason other than cause, Mr. Hartman will receive
six months severance pay unless he voluntarily resigns his position. C2i has
key man life insurance in the amount of $1,000,000 on Mr. Whalen.
C2i's plans to restructure its business are expected to place a significant
strain on C2i's management, operational and financial resources and systems. To
manage its restructured operations, C2i must, among other things, improve its
operational, financial and management information systems, including its
billing, accounts receivable and payable tracking, fixed assets and other
financial management systems.
16
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
C2i May Not Find Adequate Alternative Facilities
C2i currently leases its headquarters facility at 6138 Nancy Ridge Drive in San
Diego, California under a short-term sub-lease agreement, which expires August
31, 1999. The Company is currently negotiating a lease agreement for a new
headquarters facility, which it expects to finalize before August 31, 1999.
Although the Company believes it will successfully conclude these negotiations
in a timely manner, there can be no assurance of this. If C2i's tenancy
terminates before C2i finds an alternate facility, this may have a material
adverse impact on its business, operating results, and financial condition.
Risks Associated with Potential Unspecified Acquisitions
C2i plans to acquire assets or businesses complimentary to its operations,
although no specific acquisitions are currently in negotiation or planned. Any
such future acquisitions would be accompanied by the risks commonly encountered
in acquisitions of companies. Such risks include, among other things:
. The assumption of unforeseen liabilities;
. The difficulty of assimilating the operations and personnel of the
acquired companies;
. The potential disruption of C2i's business;
. The inability of C2i's management to maximize the financial and strategic
position of C2i by the incorporation of acquired technology or business
into C2i's service offerings;
. The difficulty of maintaining uniform standards, controls, procedures and
policies;
. The potential loss of key employees of the acquiring or acquired
companies; and
. The impairment of relationships with employees consultants, customers,
and suppliers as a result of changes in management.
No assurance can be given that C2i will undertake acquisition activities, will
complete any acquisitions, or that if an acquisition does occur it will not
materially and adversely affect C2i or will be successful in enhancing C2i's
business. If C2i proceeds with one or more significant acquisitions, a
substantial portion of C2i's available cash could be used to consummate those
transactions. Alternatively, C2i might issue equity securities as consideration
for an acquisition which might result in significant dilution of the
stockholders' ownership interest in C2i, or C2i could issue debt securities to
finance an acquisition, which might reduce the book value and earnings per share
of C2i common stock. The accounting for business acquisitions by C2i is likely
to involve the recognition of significant goodwill and intangible assets in
connection with the acquisition and, as a result, would typically result in
substantial charges against C2i's reported future operating results.
Risks Associated with International Expansion
A key component of C2i's long-term strategy is its expansion into international
markets. C2i has very limited previous experience in operating outside of the
United States and C2i may not be able to successfully market, sell and deliver
its products and services in the international marketplace. In addition to the
uncertainty as to C2i's ability to create an international presence, there are
risks inherent in doing business on an international level, including:
. More diverse, complex, unfamiliar and unexpectedly changing regulatory
requirements;
. Export restrictions, export controls, tariffs and other trade barriers
including cultural and structural impediments to trade;
. Difficulties in staffing and managing foreign operations;
17
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
. Longer payment cycles;
. Problems in collecting accounts receivable;
. Political instability;
. Fluctuations in currency exchange rates; and
. Potential adverse tax consequences that could adversely affect C2i's
international operations.
Any of these factors could have a material adverse effect on C2i's business,
financial conditions and results of operations.
Concentration of Share Ownership and Voting Power Among Directors and Officers
The directors and officers of C2i control approximately 50.3% of the voting
power and therefore have the votes required to elect all of C2i's directors and,
hence, will be able to control the affairs of C2i. In addition, the directors
and officers of C2i will have a substantial portion of all the votes required to
amend C2i's Certificate of Incorporation and By-laws and effect or preclude
fundamental corporate transactions involving C2i, including the acceptance or
rejection of any proposals relating to a merger of C2i or an acquisition of C2i
by another entity, in each case without the approval of any of C2i's other
stockholders.
Risk of Shares Being Characterized as Penny Stocks; Impaired Liquidity of the
Shares
The SEC has adopted regulations which define a "penny stock" to be any equity
security that has a market price (as therein defined) less than $5.00 per share
or with an exercise price of less than $5.00 per share, subject to certain
exceptions. For any transaction involving a penny stock, unless exempt, the
rules require delivery, prior to any transaction in a penny stock, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure is also required to be made about current quotations for the
securities and about commissions payable to both the broker-dealer and the
registered representative. Finally, broker-dealers must send monthly statements
to purchasers of penny stocks disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to the Shares if:
* They continue to be listed on the Nasdaq SmallCap Market;
* Certain price and volume information is publicly available on a current
and continuing basis; and,
* C2i meets certain minimum net tangible assets or average revenue
criteria.
There can be no assurance that C2i's securities will qualify for exemption from
the penny stock restrictions. If the Shares were subject to the rules on penny
stocks, the market liquidity for Shares could be severely adversely affected.
18
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
Year 2000 Compliance
- --------------------
Many currently installed computer systems and software products are not capable
of distinguishing 20th century dates from 21st century dates. As a result,
computer systems and/or software used by many companies in a very wide variety
of applications will experience operating difficulties unless they are modified
or upgraded to adequately process information involving, related to or dependent
upon the century change. Significant uncertainty exists in the software and
information services industries concerning the scope and magnitude of problems
associated with the century change. In light of the potentially broad effects of
the Year 2000 on a wide range of business systems, the Company's products and
services may be affected.
The Company utilizes and is dependent upon data processing computer hardware and
software to conduct its business. The Company has completed its assessment of
its own computer systems and based upon this assessment, the Company believes
its computer systems are "Year 2000 compliant", and therefore are capable of
adequately distinguishing 21st century dates from 20th century dates. However,
there can be no assurance that the Company has properly identified and
remediated all significant Year 2000 problems in its own computer systems, or
that such problems will not have a material adverse effect on the Company's
business, operating results and financial condition. If unforeseen internal
disruptions occur, the Company believes that its existing disaster recovery
program, which includes the manual processing of certain key transactions, would
significantly mitigate the impact.
The Company has made only limited efforts to determine the extent of and
minimize the risk that the computer systems of the Company's suppliers are not
Year 2000 compliant, or will not become compliant on a timely basis. The Company
expects that the process of making inquiries with these suppliers will be
ongoing through the end of 1999. If Year 2000 problems prevent any of the
Company's suppliers from timely delivery of products or services required by the
Company, the Company's operating results could be materially adversely affected.
However, the Company estimates that its costs to address the Year 2000 issues
relating to its suppliers will not be material. The Company has identified and
will continue to identify alternative suppliers in the event its preferred
suppliers become incapable of timely delivery of products or services required
by the Company. The Company's suppliers are generally locally or regionally
based, which tends to lessen the Company's exposure from the lack of readiness
of any single supplier. The Company's estimates of Year 2000 costs relating to
its suppliers are management's best estimates, which were derived from numerous
assumptions of future events, including the continued availability of certain
resources, third party remediation plans with regard to Year 2000 issues, and
other factors. There can be no assurance that these estimates are correct and
actual results could differ materially from these estimates.
19
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
PART II: OTHER INFORMATION
ITEM 2: Changes in Securities and Use of Proceeds
Pursuant to the Company's Registration Statement on Form SB-2 (No.333-39425),
declared effective by the Commission on February 13, 1998, the Company completed
its initial public offering in February 1998, and the overallotment in March
1998, resulting in aggregate net proceeds to the Company of $5,672,407, after
deducting underwriting discounts and commission and the offering expenses
payable by the Company.
Proceeds of the initial offering were used to repay the Bridge Notes and accrued
interest thereon, totaling $621,412, $17,920 of which was paid to a former
executive officer of the Company. The Company also used $132,868 to purchase
machinery, equipment and other capital additions, $10,284 to repay capital
leases and accrued interest, $1,880,028 to pay employees' and officers' salaries
and related payroll taxes, $374,622 for occupancy costs, $234,785 for
advertising and promotion, $149,400 for recruiting, $503,904 for other general
corporate purposes, and realized investment losses totaling $453,028 net of
related interest and dividend income. The remaining proceeds from the initial
public offering have been invested in fully insured, money market accounts and
short-term U.S. government treasury bills pending their use.
ITEM 6: Exhibits and Reports on Form 8-K:
(a) Exhibits:
See Exhibit Index.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended June 30,
1999.
Items 1, 3, 4 and 5 are not applicable and have been omitted.
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
10.16 Employment Agreement Dated April 30, 1999 By and Between C2i and
Thomas M. Hartman
10.17 Employment Agreement Dated April 30, 1999 By and Between C2i and
Diane E. Hessler
10.18 Employment Agreement Dated April 30, 1999 By and Between C2i and
Clyde Wooten
27.1 Financial Data Schedule
20
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C2i SOLUTIONS,INC.
Dated: August 12, 1999 By: /s/ JOHN ANTHONY WHALEN, JR.
--------------------------------
John Anthony Whalen, Jr., President
and Chief Executive Officer
Dated: August 12, 1999 By: /s/ DIANE E. HESSLER
---------------------------
Diane E. Hessler
Chief Financial Officer (Principal
Financial and Accounting Officer)
21
<PAGE>
EXHIBIT 10.16
EMPLOYMENT AGREEMENT DATED APRIL 30, 1999 BY AND BETWEEN C2I
AND THOMAS M. HARTMAN
[Letterhead of C2i Solutions, Inc.]
April 30, 1999
Thomas M. Hartman
7145-F Calabria Court
San Diego, CA 92122
Dear Thomas:
This letter is the "Amendment" to your employment letter dated January 19, 1999,
which set forth the basic terms and conditions of your employment with C2i
Solutions, Inc. ("C2i"). Effective as of March 23, 1999, your employment letter
is amended as follows:
17. TERMS OF EMPLOYMENT. The term of this Agreement is at will. C2i may
-------------------
terminate your employment with or without cause at any time. If you are
terminated for any reason, within a period of five years commencing on the
date that you sign this Agreement, other than cause you will receive six
month's salary continuation, payable in accordance with C2i's standard
payroll practices, in lieu of notice.
If you resign or are terminated for cause you shall not be entitled to
salary continuation. Upon any termination, or resignation, you shall be
entitled to payment for accrued vacation and for salary and bonuses accrued
for service actually rendered prior to the date of such termination.
For purposes of this Agreement "cause" shall mean (i) a willful failure by
you to substantially perform your duties, other than a failure resulting
from your complete or partial incapacity due to physical or mental illness
or impairment, or (ii) a willful act by you which constitutes gross
misconduct and which is materially injurious to C2i.
All stock option grants to you of Common Stock of C2i Solutions, Inc. will
continue to vest with your continued employment. If your employment is
terminated by C2i during this five year period for any reason other than
cause you will then have a minimum of 60 days from the termination date in
which to exercise your options, in accordance with the terms of the Option
Agreements.
This Amendment dated April 30, 1999, and the employment letter dated January 19,
1999 constitute the entire agreement between the parties. All prior agreements
or understandings, written or oral are superceded.
1
<PAGE>
In order to confirm your acceptance of this Amendment, please sign and return
this letter no later than Friday, May 7, 1999, at 5:00 P.M. PDT. If there is
any matter in this letter, which you wish to discuss further, please do not
hesitate to speak to me.
Very truly yours,
C2i Solutions, Inc.
By: /s/ JOHN ANTHONY WHALEN, JR.
----------------------------
John Anthony Whalen, Jr.
President/CEO
JAW/deh
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
I agree to the terms of employment set forth in this Amendment.
Dated: April 30, 1999
/s/ THOMAS M. HARTMAN
---------------------
Thomas M. Hartman
2
<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT DATED APRIL 30, 1999 BY AND BETWEEN C2I AND
DIANE E. HESSLER
[Letterhead of C2i Solutions, Inc.]
April 30, 1999
Diane E. Hessler
1717 Turnberry Drive
San Marcos, CA 92069
Dear Diane:
This letter is the "Second Amendment" to your employment letter dated September
18, 1997, as amended July 14, 1998, which set forth the basic terms and
conditions of your employment with Challenge 2000 International LLC, currently
known as C2i Solutions, Inc. as a result of a name change on September 30, 1997
("C2i"). Effective as of March 23, 1999, your employment letter is further
amended as follows:
17. TERMS OF EMPLOYMENT. If you are terminated for any reason,
-------------------
within a period of five years commencing on the date that you sign
this Agreement, other than cause you will receive two year's salary
continuation, payable with C2i's standard payroll practices, in lieu
of notice. If you are terminated with cause within two years of the
date that you sign this Agreement, you will receive six month's salary
continuation, payable in accordance with C2i's standard payroll
practices, in lieu of notice.
If you resign you shall not be entitled to salary continuation. Upon
any termination, or resignation, you shall be entitled to payment for
accrued vacation and for salary and bonuses accrued for service
actually rendered prior to the date of such termination.
For purposes of this Agreement "cause" shall mean (i) a willful
failure by you to substantially perform your duties, other than a
failure resulting from your complete or partial incapacity due to
physical or mental illness or impairment, or (ii) a willful act by you
which constitutes gross misconduct and which is materially injurious
to C2i.
This Second Amendment dated April 30, 1999, the employment letter dated
September 18, 1997, and the Amendment dated July 14, 1998 constitute the entire
agreement between the parties. All prior agreements or understandings, written
or oral are superceded.
1
<PAGE>
In order to confirm your acceptance of this Amendment, please sign and return
this letter no later than Friday, May 7, 1999, at 5:00 P.M. PDT. If there is
any matter in this letter, which you wish to discuss further, please do not
hesitate to speak to me.
Very truly yours,
C2i Solutions, Inc.
By: /s/ JOHN ANTHONY WHALEN, JR.
----------------------------
John Anthony Whalen, Jr.
President/CEO
JAW/deh
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
I agree to the terms of employment set forth in this Amendment.
Dated: April 30, 1999
/s/ DIANE E. HESSLER
--------------------
Diane E. Hessler
2
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT DATED APRIL 30, 1999 BY AND BETWEEN C2I AND CLYDE WOOTEN
[Letterhead of C2i Solutions, Inc.]
April 30, 1999
Clyde Wooten
1717 Tattenham Court
Encinitas, CA 92024
Dear Clyde:
This letter is the "Amendment" to your employment letter dated May 30, 1997,
which set forth the basic terms and conditions of your employment with Challenge
2000 International LLC, currently known as C2i Solutions, Inc. as a result of a
name change on September 30, 1997 ("C2i"). Effective as of March 23, 1999, your
employment letter is amended as follows:
17. TERMS OF EMPLOYMENT. If you are terminated for any reason,
-------------------
within a period of five years commencing on the date that you sign
this Agreement, other than cause you will receive two year's salary
continuation, payable in accordance with C2i's standard payroll
practices, in lieu of notice. If you are terminated with cause within
five years of the date that you sign this Agreement, you will receive
six month's salary continuation, payable in accordance with C2i's
standard payroll practices, in lieu of notice.
If you resign you shall not be entitled to salary continuation. Upon
any termination, or resignation, you shall be entitled to payment for
accrued vacation and for salary and bonuses accrued for service
actually rendered prior to the date of such termination.
For purposes of this Agreement "cause" shall mean (i) a willful
failure by you to substantially perform your duties, other than a
failure resulting from your complete or partial incapacity due to
physical or mental illness or impairment, or (ii) a willful act by you
which constitutes gross misconduct and which is materially injurious
to C2i.
All stock option grants to you of Common Stock of C2i Solutions, Inc.
will continue to vest with your continued employment. If your
employment is terminated by C2i during this five year period for any
reason other than cause you will then have a minimum of 60 days from
the termination date in which to exercise your options, in accordance
with the terms of the Option Agreements.
This Amendment dated April 30, 1999, and the employment letter dated May 30 1997
constitute the entire agreement between the parties. All prior agreements or
understandings, written or oral are superceded.
1
<PAGE>
In order to confirm your acceptance of this Amendment, please sign and return
this letter no later than Friday, May 7, 1999, at 5:00 P.M. PDT. If there is
any matter in this letter, which you wish to discuss further, please do not
hesitate to speak to me.
Very truly yours,
C2i Solutions, Inc.
By: /s/ JOHN ANTHONY WHALEN, JR.
----------------------------
John Anthony Whalen, Jr.
President/CEO
JAW/deh
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
I agree to the terms of employment set forth in this Amendment.
Dated: April 30, 1999
/s/ CLYDE WOOTEN
----------------
Clyde Wooten
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,545,734
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 24,600
<INVENTORY> 0
<CURRENT-ASSETS> 1,625,651
<PP&E> 170,408
<DEPRECIATION> 92,559
<TOTAL-ASSETS> 1,730,572
<CURRENT-LIABILITIES> 136,628
<BONDS> 2,739
0
0
<COMMON> 3,542
<OTHER-SE> 1,587,663
<TOTAL-LIABILITY-AND-EQUITY> 1,730,572
<SALES> 0
<TOTAL-REVENUES> 400,593
<CGS> 0
<TOTAL-COSTS> 255,074
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 812
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</TABLE>
