<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 March 31, 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 3,542,171 as of May 10, 1999.
Transitional Small Business Disclosure Format (check one):
YES [_] NO [X]
Page 1 of 13
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C2i SOLUTIONS, INC.
REPORT ON FORM 10-QSB
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Balance Sheets as of March 31, 1999
(Unaudited) and December 31, 1998 (Unaudited) 3
Condensed Statements of Operations for the three months
ended March 31, 1999 and 1998 (Unaudited) and for the period
from Inception through March 31, 1999 (Unaudited) 4
Condensed Statements of Stockholders' Equity (Deficit) for the
periods ended December 31, 1997 and 1998 (Unaudited) and
March 31, 1999 (Unaudited) 5
Condensed Statements of Cash Flows for the three months ended
March 31, 1999 and 1998 (Unaudited), and for the period
from Inception through March 31, 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 12
ITEM 5. Other Information 12
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
Page 2 of 13
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PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
C2i Solutions, Inc.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,684,991 $ 135,954
Short-term investment ---- 2,229,247
Accounts receivable, net 177,209 116,805
Prepaid expenses and other 77,169 69,475
----------- -----------
Total current assets 1,939,369 2,551,481
Property and equipment, net 92,405 117,534
Other assets, net 39,420 54,379
----------- -----------
Total assets $ 2,071,194 $ 2,723,394
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 124,819 $ 136,401
Accrued payroll and related 23,011 35,455
Current portion of capital lease obligations 6,336 6,110
Other current liabilities 52,415 28,876
----------- -----------
Total current liabilities 206,581 206,842
----------- -----------
Capital lease obligations, net of current portion 4,465 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
March 31, 1999 and December 31, 1998 3,542 3,542
Additional paid-in capital 7,466,970 7,466,970
Warrants to acquire common stock 223,100 223,100
Deficit accumulated during the development stage (5,625,841) (4,953,906)
Deferred compensation (207,623) (229,300)
----------- -----------
Total stockholders' equity 1,860,148 2,510,406
----------- -----------
Total liabilities and stockholders' equity $ 2,071,194 $ 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.
Page 3 of 13
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C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
(September 17,
Three Month Periods 1996) through
Ended March 31, March 31,
1999 1998 1999
---------- ---------- ------------
<S> <C> <C> <C>
Revenues:
Services $ 274,337 $ 69,079 $ 894,387
Products -- -- 118,848
---------- ---------- -----------
Total revenues 274,337 69,079 1,013,235
---------- ---------- -----------
Cost of revenues:
Services 137,024 30,392 404,399
Products:
Customers -- -- 64,852
Former stockholder -- -- 17,652
---------- ---------- -----------
Total cost of revenues 137,024 30,392 486,903
---------- ---------- -----------
Gross profit 137,313 38,687 526,332
Selling, general and administrative expenses 783,252 548,873 5,525,317
---------- ---------- -----------
Operating loss (645,939) (510,186) (4,998,985)
Interest and dividend income (29,550) (19,911) (250,278)
Interest expense 453 17,792 43,979
Interest expense to former employees -- 2,483 3,105
Other expense 6,548 120,548 126,744
Loss realized on sale of short-term investment 48,545 -- 703,306
---------- ---------- -----------
Net loss $ (671,935) $ (631,098) $(5,625,841)
========== ========== ===========
Loss per share (basic and diluted) $(0.19) $(0.22)
========== ==========
Shares used in computing loss per share 3,542,171 2,818,153
========== ==========
</TABLE>
See accompanying notes.
Page 4 of 13
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C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements of Stockholders' Equity (Deficit)
(Unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Warrants During the
--------------------- Additional to Acquire Development
Shares Amount Paid-In Capital Common Stock Stage
--------- ------ --------------- ------------ -----------
<S> <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 -- --
Net loss and comprehensive loss -- -- -- -- (44,338)
--------- ------ ---------- --------- ----------
Balance at January 1, 1997 1,050,000 1,050 156,450 (44,338)
Issuance of common stock for cash and
capital subscriptions receivable 1,333,332 1,333 1,398,666 -- --
Issuance of common stock for services
rendered 8,006 8 9,075 -- --
Deferred compensation -- -- 346,325 -- --
Issuance of warrants -- -- -- 108,000 --
Net loss and comprehensive loss -- -- -- -- (1,806,438)
--------- ------ ---------- --------- -----------
Balance at December 31, 1997 2,391,338 2,391 1,910,516 108,000 (1,850,776)
Issuance of common stock and warrants 1,150,000 1,150 5,556,157 115,100 --
Exercise of common stock options 833 1 2,082 -- --
Deferred compensation -- -- (1,785) -- --
Net loss and comprehensive loss -- -- -- -- (3,103,130)
--------- ------ ---------- --------- -----------
Balance at December 31, 1998 3,542,171 3,542 7,466,970 223,100 (4,953,906)
Deferred compensation -- -- -- -- --
Net loss and comprehensive loss -- -- -- -- (671,935)
--------- ------ ---------- --------- -----------
Balance at March 31, 1999 3,542,171 $3,542 $7,466,970 $223,100 $(5,625,841)
========= ====== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred Equity
Compensation (Deficit)
------------ -----------
<S> <C> <C>
Balance at Inception, September 17, 1996 $ -- $ --
Issuance of common stock for cash and
capital subscriptions receivable -- 157,500
Net loss and comprehensive loss -- (44,338)
--------- -----------
Balance at January 1, 1997 113,162
Issuance of common stock for cash and
capital subscriptions receivable -- 1,399,999
Issuance of common stock for services
rendered -- 9,083
Deferred compensation (322,812) 23,513
Issuance of warrants -- 108,000
Net loss and comprehensive loss -- (1,806,438)
--------- -----------
Balance at December 31, 1997 (322,812) (152,681)
Issuance of common stock and warrants -- 5,672,407
Exercise of common stock options -- 2,083
Deferred compensation 93,512 91,727
Net loss and comprehensive loss -- (3,103,130)
--------- -----------
Balance at December 31, 1998 (229,300) 2,510,406
Deferred compensation 21,677 21,677
Net loss and comprehensive loss -- (671,935)
--------- -----------
Balance at March 31, 1999 $(207,623) $ 1,860,148
========= ===========
</TABLE>
See accompanying notes.
Page 5 of 13
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C2i Solutions, Inc.
(A Development Stage Company)
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period from
inception
Three Month Periods (Sept. 17,
Ended March 31, 1996) through
1999 1998 March 31, 1999
---------- ----------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (671,935) $ (631,098) $(5,625,841)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 8,860 7,766 123,967
Amortization of deferred compensation 21,677 23,746 136,917
Non-cash compensation and other expenses 6,548 131,312 1,316,868
Loss realized on sale of short-term investment 48,545 -- 703,306
Changes in operating assets and liabilities:
Accounts receivable, net (60,404) (75,233) (177,209)
Prepaid expenses and other 7,235 (91,382) (62,240)
Accounts payable (11,582) 83,589 124,819
Accrued payroll and related (12,444) 8,017 23,011
Accrued interest payable -- (12,500) --
Accrued royalty due to former stockholder -- (1,345) --
Other current liabilities 23,539 (1,922) 52,415
---------- ----------- -----------
Net cash used for operating activities (639,961) (559,050) (3,383,987)
---------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment, net 9,751 (27,848) (180,320)
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 2,190,453 (4,027,848) (939,430)
---------- ----------- -----------
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 (1,455) (1,263) (7,474)
Deferred finance charges -- -- (26,820)
Advance from former stockholder -- -- 45,586
Repayment of advance from former stockholder -- -- (34,874)
Collection of capital subscriptions receivable from stockholders -- -- 97,500
---------- ----------- -----------
Net cash provided by (used for) financing activities (1,455) 5,333,133 6,008,408
---------- ----------- -----------
Net increase in cash and cash equivalents 1,549,037 746,235 1,684,991
Cash and cash equivalents at beginning of period 135,954 298,823 --
---------- ----------- -----------
Cash and cash equivalents at end of the period $1,684,991 $ 1,045,058 $ 1,684,991
---------- ----------- -----------
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 453 22,011 24,214
Income taxes paid 4,785 1,024 9,009
</TABLE>
See accompanying notes.
Page 6 of 13
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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 for information systems transformation and
conversion, and applications re-engineering. The Company's strategic focus
embraces information technology systems integration and re-engineering in its
entirety, including such tasks as complex software conversions, operating system
migrations, database migrations, programming language upgrades, application
development and maintenance outsourcing, data warehousing and the planning,
development and conversion of existing commercial to e-commerce applications.
The Company's suite of services also includes project assessment, feasibility
studies, planning, implementation, testing, and independent verification and
validation.
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
March 31, 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.
Page 7 of 13
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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 three month period ended March 31, 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
Comprehensive Income
- --------------------
Pursuant to SFAS No. 130, "Reporting Comprehensive Income," the Company has
reported comprehensive income for the three month periods ended March 31, 1999,
and 1998 in the Condensed Statement of Stockholders' Equity (Deficit). The
Company did not have any components of comprehensive income (loss) as defined in
SFAS No. 130 for the three month periods ended March 31, 1999 and 1998.
2. Capital Transactions
Stock Option Plan
- -----------------
During the period from January 1, 1999 through March 31, 1999, the Company
granted incentive stock options to purchase an aggregate of 160,200 shares of
the Company's Common Stock, at exercise prices ranging from $1.30625 to $1.75
per share to certain employees 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.
Page 8 of 13
<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 IT consulting
services. The Company's consulting solutions span a wide variety of platforms,
languages, and services, from client-server to mainframe, from assessment and
remediation to testing and re-implementation. The Company's approach utilizes a
mix of hands-on work by highly experienced technical staff, along with "best of
breed" tools, and focused project management. The desired result for the
Company's clients is reduced project cycle time, lower cost and improved
productivity.
During the majority of the first quarter of 1999, the Company continued to focus
its efforts on 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 plans
to complete its existing contracts, but does not intend to pursue new Y2K
engagements. Accordingly, C2i closed its four regional offices and eliminated
approximately 14 positions. Although this restructuring has no material impact
on results of operations for the first quarter of 1999, the Company believes
that its operating results for the first quarter of 1999 are not indicative of
future operating results.
As a key part of this business restructuring, C2i intends to establish
additional business relationships and is actively pursuing mergers and
acquisitions to strengthen its offerings or to otherwise enhance stockholder
value.
The following discussion should be read in conjunction with the attached
condensed financial statements and notes thereto.
Results of Operations for the three month periods ended March 31, 1999 and 1998
- --------------------------------------------------------------------------------
Total revenues for the three months ended March 31, 1999 were $274,337 an
increase of 297% over the comparable quarter of the prior year, in which
revenues totaled $69,079. This increase in revenues resulted from completion of
additional work by the Company for its customers. For the three months ended
March 31, 1999 and 1998, service revenues accounted for 100% of total revenues.
One customer accounted for 96% of the Company's revenues for the three months
ended March 31, 1999. One customer accounted for 100% of the Company's revenues
for the three months ended March 31, 1998.
Cost of revenues were 50% ($137,024) of total revenues for the three months
ended March 31, 1999. These costs consisted primarily of personnel related costs
of providing consulting services. Cost of revenues were 44% ($30,392) of total
revenues for the comparable prior year period in 1998, which also represented
personnel related costs of providing consulting services.
For the three months ended March 31, 1999 the gross margin percentage was 50%
compared to the prior year gross margin percentage of 56% which reflects more
profitable service revenue contract terms in 1998 relative to service revenue
contract terms in 1999. The Company expects a significant decrease in its second
quarter gross margin percentage as a result of the terms of a recent contract
modification.
Page 9 of 13
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C2i Solutions, Inc.
(A Development Stage Company)
The Company incurred selling, general and administrative expenses for the three
month period ended March 31, 1999 totaling $783,252 compared with $548,873 for
the comparable prior year period. This increase in 1999 resulted primarily from
increased personnel and related expenses due to a greater number of employees,
increased facilities expenses in connection with the establishment of regional
offices, expansion of operations, and increased travel and marketing expenses
incurred in connection with the overall scale-up of Company's operations and
business development efforts. The Company expects a decrease in future selling,
general and administrative expenses as a result of its recent restructuring.
Interest and dividend income was $29,550 for the three months ended March 31,
1999, compared with $19,911 for the three months ended March 31, 1998. This
increase in 1999 reflects interest and dividends earned from the short-term
investment of the net proceeds from the Company's initial public offering, which
closed on February 27, 1998. Interest expense totaled $453 for the three months
ended March 31, 1999 and consisted entirely of interest on capital lease
obligations, compared with total interest expense of $20,275 for the three
months ended March 31, 1998, related to capital lease obligations and the debt
financing completed in October 1997.
The Company originally invested a portion of the net proceeds from its initial
public offering, in a mutual fund (the "Short-Term Investment"). During January
and February 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 sale of this Short-Term Investment in fully-
insured, money market accounts and short-term U.S. government treasury bills.
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 the 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 $639,961 and $559,050 during
the three-month periods ended March 31, 1999 and 1998, respectively. This
increase in cash used for operating activities in 1999 compared to 1998 results
primarily from the larger net loss for the 1999 period as well as changes in net
working capital balances.
The Company's investing activities provided cash of $2,190,453 during the three
months ended March 31, 1999 and used cash of $4,027,848 during the three month
period ending March 31, 1998, respectively. This 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 $9,751 during 1999, compared
with $4,000,000 of cash used to purchase a short-term investment and $27,848 in
purchases of property and equipment during 1998.
Page 10 of 13
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
The Company's financing activities used net cash of $1,455 and provided net cash
of $5,333,133 during the three months ended March 31, 1999 and 1998,
respectively. This increase in cash used in financing activities in 1999
represents cash used to repay capital lease obligations of $1,455 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 ($1,263) in 1998.
As of March 31, 1999, the Company had cash and cash equivalents of $1,684,991
and working capital of $1,732,788 compared with cash and the net 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.
The Company's ability to achieve sustained profitability will be dependent upon
a number of factors, including its ability to generate future revenues. The
Company currently has one contract in process, which it expects to complete in
the second quarter of 1999. Although the Company is pursuing a limited number of
business development opportunities, which it hopes will produce future revenues,
the Company may not be able to successfully negotiate any additional contracts,
and any such current or future contracts may not provide the Company with
expected benefits.
If the Company cannot generate sufficient revenues from current and 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
March 31, 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 or 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.
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 indentified 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.
Page 11 of 13
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
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.
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, $8,072 to repay capital leases
and accrued interest, $1,699,078 to pay employees' and officers' salaries and
related payroll taxes, $333,074 for occupancy costs, $222,638 for advertising
and promotion, $149,400 for recruiting, $405,103 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 5: Other Information
Proposals of stockholders intended to be presented at the next Annual Meeting of
Stockholders of the Company must have been received by the Company at 6138 Nancy
Ridge Drive, San Diego, California 92121-3223, by January 27, 1999.
Page 12 of 13
<PAGE>
C2i Solutions, Inc.
(A Development Stage Company)
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 March 31,
1999.
Items 1, 3 and 4 are not applicable and have been omitted.
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
10.15 Employment agreement dated January 19, 1999 by and between C2i and
Thomas M. Hartman
27.1 Financial Data Schedule
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: May 14, 1999 By: /s/ JOHN ANTHONY WHALEN, JR.
----------------------------
John Anthony Whalen, Jr., President
and Chief Executive Officer
Dated: May 14, 1999 By: /s/ DIANE E. HESSLER
---------------------------
Diane E. Hessler
Chief Financial Officer (Principal
Financial and Accounting Officer)
Page 13 of 13
<PAGE>
EXHIBIT 10.15
EMPLOYMENT AGREEMENT DATED JANUARY 19, 1999
BY AND BETWEEN C2I AND THOMAS M. HARTMAN
[Letterhead of C2i Solutions, Inc.]
January 19, 1999
Thomas M. Hartman
7145-F Calabria Court
San Diego, CA 92122
Dear Thomas:
We are pleased to enclose this offer letter, which sets forth the basic terms
and conditions of your employment with C2i Solutions, Inc. ("C2i"). By signing
this letter, you will be agreeing to these terms. It is important that you
understand clearly both what your benefits are and what is expected of you by
C2i.
1. DUTIES. Your duties generally will include, but are not limited to,
------
those duties normally performed by a Senior Vice President of Sales and
Operations. You may be assigned other duties as needed and your duties may
change from time to time on reasonable notice, based on the needs of C2i and
your skills, as determined by C2i. You will report directly to the
President/CEO.
As an employee, you are required to exercise your specialized expertise,
independent judgment and discretion to provide high-quality services. You are
required to follow company policies and procedures adopted from time to time by
C2i and to take such general direction as you may be given from time to time by
your supervisor. C2i reserves the right to change these policies and procedures
at any time. You are required to devote your full energies, efforts and
abilities to your employment with C2i.
2. HOURS OF WORK. As an employee, you are expected to work the number of
-------------
hours required to get the job done. At a minimum, you are generally expected to
be present during the normal working hours of C2i, 8AM to 5PM local time. Your
primary office will be in San Diego, CA.
3. SALARY. Please see Exhibit A.
------
4. EXPENSES. As an employee, you will be reimbursed for all reasonable
--------
travel and office expenses incurred on behalf of C2i. Any expense over $100.00
must be approved in writing in advance.
5. EMPLOYEE BENEFITS. You will be eligible for the Blue Shield health
-----------------
plan, the Fortis dental plan, the Fortis life insurance, the 401K plan and other
employee benefits, which are generally applicable to full-time employees. These
benefits are subject to change.
6. PROPRIETARY RIGHTS; DUTY TO DISCLOSE. Employee hereby acknowledges and
------------------------------------
agrees to be bound by the provisions of the C2i's enclosed "Confidentiality
Agreement". Employee agrees during and after the term of this employment, not
to reveal confidential information, or trade secrets to any person, firm,
corporation, or other legal entity for a period of two (2) years. Should
employee reveal or threaten to reveal this information, the Company shall be
entitled to an injunction restraining the employee from disclosing same, or from
rendering any services to any entity to whom said information has been or is
threatened to be disclosed. The right to secure an injunction is not exclusive,
and the Company may pursue any other remedies it has against the employee for a
breach or threatened breach of this condition, including the recovery of damages
from the employee.
Page 1 of 4
<PAGE>
7. NONSOLICITATION OF EMPLOYEES. Employee specifically agrees that during
----------------------------
the term of this Agreement and for a period of two (2) years thereafter,
employee shall not, directly or indirectly, either for himself or for any other
person, firm, corporation or other legal entity, solicit any then employee of
C2i to leave the employment of C2i.
8. GOVERNING LAW. This Agreement shall be governed by and construed and
-------------
enforced in accordance with and subject to the laws of the State of California.
Any dispute or action between the employee and the Company resulting out of this
Agreement must be brought in the jurisdiction of the State of California or it
is void.
9. DISPUTE RESOLUTION PROCEDURE. The parties agree that any and all disputes
----------------------------
arising out of the employment relationship between them, will be resolved under
the following procedures.
A. The party claiming to be aggrieved shall furnish to the other
party a written statement of the grievance identifying any witnesses
or documents that support the grievance and the relief requested or
proposed.
B. If the other party does not agree to furnish the relief requested
or proposed, or otherwise does not satisfy the demand of the party
claiming to be aggrieved, C2i may submit the dispute to non-binding
mediation before a mediator to be jointly selected by the parties.
The parties will share the cost of the mediation.
C. If the mediation does not produce a resolution of the dispute, C2i
may submit the dispute for final and binding arbitration before an
arbitrator mutually selected by the parties or, if no agreement is
reached, then under the Expedited Labor Arbitration Rules of the
American Arbitration Association, except that the arbitrator shall be
selected by alternately striking names from the panel of five (5)
neutral labor or employment arbitrators designated by the American
Arbitration Association.
The arbitrator shall have the authority to grant any relief
authorized by law. The arbitrator shall not have the authority to
modify, change or refuse to enforce the terms of the employment
agreement. In addition, the arbitrator shall not have the authority
to require C2i to change any lawful policy or benefit plan. The
hearing shall be transcribed. Each party shall bear their respective
legal and arbitration fees.
D. Arbitration shall be the exclusive final remedy for any dispute
between the parties. Provided, however, that nothing in this
Paragraph 9 shall limit the right of C2i to go to court to obtain
injunctive relief for violation of C2i's Confidentiality Agreement.
E. Each party shall bear their respective legal fees.
10. NO ASSIGNMENT. This Agreement may not be assigned by the employee
-------------
without the written consent of C2i.
11. INTEGRATED AGREEMENT. This Agreement supersedes any prior agreements,
--------------------
representations or promises of any kind, whether written, oral, express or
implied between the parties hereto with respect to the subject matter herein.
It constitutes the full, complete and exclusive agreement between you and C2i
with respect to the subject matters herein. This Agreement may only be modified
by a writing signed by you and the President or Chief Financial Officer of C2i.
12. NOTICES. All notices or other communications provided for by this
-------
Agreement shall be made in writing and shall be deemed properly delivered when
(i) delivered personally or (ii) by the mailing of such notice by registered or
certified mail, postage prepaid, to the parties at the addresses set forth on
the signature page of this Agreement (or to such other address as one party
designates to the other in writing).
Page 2 of 4
<PAGE>
13. AMENDMENTS. No supplement, modification, or amendment of any term,
----------
provision or condition of this Agreement shall be binding or enforceable unless
evidenced in writing executed by the parties hereto.
14. COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15. SEVERABILITY. If any provision of this Agreement is declared invalid
------------
by any court or tribunal, that provision is deemed deleted from this Agreement
as though such provision had never been included herein. The remaining
provisions of the Agreement shall remain in effect.
16. PERFORMANCE EVALUATION. There will be a probationary period of 90
----------------------
days commencing on the first day of employment. At the end of the probationary
period an employee performance evaluation will be conducted. A satisfactory
evaluation will result in regular employee status. Failure to obtain a
satisfactory evaluation may result in the following:
1.) The extension of the probationary period.
2.) Termination of the employee.
17. TERMS OF EMPLOYMENT. The term of this Agreement is at will. You
-------------------
or C2i may terminate the employment relationship at any time, with or without
cause.
In order to confirm your agreement with and acceptance of these terms, please
sign and return via FAX to our office no later than close of business (5 PM)
Friday, January 22, 1999. You will be sent two original copies, one copy for
your records and the other should be signed and returned to C2i, along with the
enclosed forms upon completion. 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:ct
===================================================================
I agree to the terms of employment set forth in this Agreement.
Dated: January 22, 1999
/s/ THOMAS M. HARTMAN
----------------------
Thomas M. Hartman
Page 3 of 4
<PAGE>
EXHIBIT A
EMPLOYEE: Thomas M. Hartman
INITIAL POSITION: Senior Vice President of Sales and Operations
APPROXIMATE START DATE: January 25, 1999
REPORTS TO: President/CEO
SALES QUOTA: US Sales for the year ended 12/31/99 of approximately
$14,000,000.
Annual Salary: $120,000 payable semi-monthly on the 15th and the last
day of each month.
STOCK OPTIONS: A grant of Incentive Stock Options ("ISOs") for 60,000
shares of Common Stock upon commencement of work.
Options will vest monthly over 36 months with vesting
of first three months deferred until the 90 day
probation is completed and expire ten (10) years from
date of grant. In order to qualify for preferential tax
treatment, the exercise price of ISOs must be no less
than the fair market value of a share of Common Stock
on the date of the grant. All terms and conditions of
the stock option grants are in accordance with C2i's
standard stock option plan.
BONUS: A monthly bonus of 10% of earnings before taxes will be
paid for earnings before taxes in excess of budgeted
amounts, assuming earnings before taxes is positive.
All terms of such bonus are subject to approval by the
Compensation Committee of the Board of Directors.
BUSINESS EXPENSES: Reasonable travel and expense reimbursement, with
proper advance approval.
MEDICAL EXPENSES: C2i offers Blue Shield of California as our health plan
provider to our employees.
Page 4 of 4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,684,991
<SECURITIES> 0
<RECEIVABLES> 197,209
<ALLOWANCES> 20,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,939,369
<PP&E> 180,430
<DEPRECIATION> 88,025
<TOTAL-ASSETS> 2,071,194
<CURRENT-LIABILITIES> 206,581
<BONDS> 4,465
0
0
<COMMON> 3,542
<OTHER-SE> 1,856,606
<TOTAL-LIABILITY-AND-EQUITY> 2,071,194
<SALES> 0
<TOTAL-REVENUES> 274,337
<CGS> 0
<TOTAL-COSTS> 137,024
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 453
<INCOME-PRETAX> (671,935)
<INCOME-TAX> 0
<INCOME-CONTINUING> (671,935)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (671,935)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
