<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2000
Commission File Number 0-28081
CONSTELLATION 3D, INC.
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(Exact name of registrant as specified in its charter)
Florida 13-4064492
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 Park Avenue, Suite 453, New York, NY 10169
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(Address of principal executive offices) (Zip Code)
(212) 983-1107
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2000, 51,501,609 shares of the registrant's common stock, $.001
par value per share, (the "Common Stock") were issued and outstanding, including
the 10,500,000 shares of Common Stock issued to Constellation 3D Trust LLC, a
Delaware limited liability company wholly owned by the registrant. EXCEPT WHERE
AND AS OTHERWISE STATED TO THE CONTRARY IN THIS QUARTERLY REPORT, ALL SHARE,
WARRANT AND OPTION AMOUNTS, PRICES PER SHARE AND EXERCISE PRICES HAVE BEEN
ADJUSTED TO GIVE RETROACTIVE EFFECT TO THE CHANGE IN THE PRICE PER SHARE OF THE
COMMON STOCK RESULTING FROM THE THREE-FOR-ONE FORWARD SPLIT OF THE COMMON STOCK
THAT TOOK EFFECT ON JANUARY 18, 2000.
<PAGE>
Table of Contents
Part I-Financial Information................................................. 4
Item 1. Financial Statements (Unaudited)..................................... 4
Consolidated Condensed Balance Sheets ....................................... 4
Consolidated Condensed Statements of Operations ............................. 5
Consolidated Condensed Statement of Stockholders' Deficit ................... 6
Consolidated Condensed Statements of Cashflows .............................. 7
Notes to Consolidated Condensed Financial Statements ........................ 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk........... 19
Risk Factors ................................................................ 20
Part II-Other Information.................................................... 28
Item 1. Legal Proceedings.................................................... 28
Item 2. Changes in Securities and Use of Proceeds............................ 28
Item 3. Defaults upon Senior Securities...................................... 28
Item 6. Exhibits and Reports on Form 8-K..................................... 29
Signatures .................................................................. 30
Index to Exhibits ........................................................... 31
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Except where the context indicates otherwise, references in this document to
"we," "us" and "our" refer to the registrant, Constellation 3D, Inc.
(individually referred to in this Quarterly Report as "C3D" and together with
all of its directly and indirectly owned subsidiaries, collectively referred to
in this Quarterly Report on Form 10-Q (this "Quarterly Report") as the
"Company")).
FORWARD LOOKING STATEMENTS
Some of the information in this Quarterly Report and the documents
incorporated by reference in this Quarterly Report may contain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. You can identify these
statements by the appearance of words and phrases such as "will likely result,"
"may," "believes," "are expected to," "is anticipated to," "is forecasted to,"
"is designed to," "plans to," "predict," "seek," "estimate," "projected,"
"intends to" or other similar words and phrases. Important factors that could
cause actual results to differ materially from expectations include:
o failure to raise sufficient capital to fund business operating
plans;
o market conditions and demand for new data storage technology;
o our competitors' ability to successfully develop new technologies to
satisfy demand for data storage;
o difficulties in achieving sales, gross margin and operating expense
targets based on competitive market factors;
o difficulties in competing successfully in the markets for new
products with established and emerging competitors;
o difficulties with single source supplies, product defects or product
delays;
o our status as a going concern;
o difficulties in forming and maintaining successful joint venture
relationships;
o difficulties in negotiating and receiving licensing royalties;
o difficulties in obtaining, maintaining and using intellectual
property protections;
o changes in data storage technological protocols and standards;
o volatility in interest rates and currency exchange rates;
o difficulties in state, federal, foreign and international regulation
and licensing requirements;
o economic and political instability in the foreign countries where we
conduct operations;
o litigation actions by directors, employees, investors and others;
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o limited operation and management history;
o dependence on key personnel;
o other factors discussed in the Quarterly Report.
All of the above factors could cause our actual results to differ
materially from historical results and those presently anticipated. When
considering forward-looking statements, you should keep these factors in mind as
well as the other cautionary statements in this Quarterly Report, including
without limitation, the Risk Factors beginning on page 20 of this Quarterly
Report. This document should be read in conjunction with the Company's amended
Form 10-K filed with the Securities and Exchange Commission on March 31, 2000.
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 (Unaudited) 1999
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<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,768,455 $ 2,030,139
Prepaid and other 197,269 150,989
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Total Current Assets 1,965,724 2,181,128
Property, Plant and Equipment, net 288,842 241,100
Deferred Interest, net of accumulated amortization of $641,168 3,358,832 -
-----------------------------------------------------------------------------------------------------------------------
Total Assets $ 5,613,398 $ 2,422,228
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Note payable $ 674,481 $ 650,577
Accounts payable and accrued expenses 1,511,857 1,268,404
Due to related parties 560,508 360,711
Due to shareholder 1,381,534 1,316,712
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Total Current Liabilities 4,128,380 3,596,404
Convertible Notes Payable 6,301,710 2,105,480
Other Long Term Liabilities 57,457 39,969
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Total Liabilities 10,487,547 5,741,853
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Stockholders' Deficit
Preferred stock, no par value; 10,000,000 shares authorized, 0 issued and
outstanding - -
Common stock, $.001 par value; 100,000,000 shares authorized, 41,001,609
issued and outstanding 41,001 41,001
Additional paid in capital 19,603,708 7,310,708
Deficit accumulated during the development stage (24,518,858) (10,671,334)
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Total Stockholders' Deficit (4,874,149) (3,319,625)
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Total Liabilities and Stockholders' Deficit $ 5,613,398 $ 2,422,228
=======================================================================================================================
</TABLE>
The accompanying notes are an integral part
of these consolidated condensed financial statements.
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CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Cumulative Amounts
From Inception Three Months Ended June 30, Six Months Ended June 30,
(September 25, 1997) ----------------------------- --------------------------------
Through June 30, 2000 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING EXPENSES
Research and development $ 7,357,932 $ 1,138,305 $ 739,099 $ 1,918,038 $ 1,062,305
General and administrative 6,791,986 859,223 260,604 1,980,295 554,863
Marketing 225,846 79,881 - 225,846 -
Noncash stock-based compensation 4,293,000 4,293,000 - 4,293,000 -
------------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 18,668,764 6,370,409 999,703 8,417,179 1,617,168
------------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Interest expense, net 5,771,523 775,612 4,836 5,418,824 29,290
Taxes 78,571 3,000 4,000 11,521 11,000
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Net loss $(24,518,858) $(7,149,021) $(1,008,539) $(13,847,524) $(1,657,458)
====================================================================================================================================
Net loss per share - basic and diluted $ (0.17) $ (0.03) $ (0.34) $ (0.06)
====================================================================================================================================
Weighted average number of shares of
common stock outstanding - basic and
diluted 41,001,609 29,214,000 41,001,609 29,214,000
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the
Shares Amount Paid-in Capital Development Stage Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Constellation 3D, Inc. Activities
(Formerly Constellation 3D Holdings):
Issuance of common stock for cash 600 $ 3 $ - $ - $ 3
Net Loss - - - (2,612,745) (2,612,745)
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Balance, December 31, 1997 600 3 - (2,612,745) (2,612,742)
Issuance of common stock for cancellation
of shareholders advances, December 27,
1998 3,749,400 39,906 4,848,631 - 4,888,537
Recapitalization, December 27, 1998 25,464,000 (10,695) 10,695 - -
Net Loss - - - (3,191,902) (3,191,902)
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Balance, December 31, 1998 29,214,000 29,214 4,859,326 (5,804,647) (916,107)
Debt settlement through the issuance ofs
common stock - April 1, 1999 36,000 36 241,454 - 241,490
Common stock issued in connection with
reverse acquisition - October 1, 1999 11,109,765 11,109 942,096 - 953,205
Conversion of notes payable ($1.67/share)
- October 22, 1999 608,835 609 1,014,116 - 1,014,725
Sale of common stock for cash, net
($4.90/share) November 1, 1999 25,509 25 99,974 - 99,999
Issuance of common stock for services
($3.83/share) November 8, 1999 7,500 8 28,742 - 28,750
Beneficial conversion discount of
convertible debt - November 11, 1999 - - 125,000 - 125,000
Net Loss - - - (4,866,687) (4,866,687)
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Balance, December 31, 1999 41,001,609 41,001 7,310,708 (10,671,334) (3,319,625)
Deferred interest related to issuance of
detachable warrants - March 24, 2000 - - 4,000,000 - 4,000,000
Beneficial conversion discount of
convertible debt - March 24, 2000 - - 4,000,000 - 4,000,000
Noncash stock-based compensation related
to issuance of stock options to
consultant - May 11, 2000 - - 4,293,000 - 4,293,000
Net Loss - - - (13,847,524) (13,847,524)
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 2000 (unaudited) 41,001,609 $ 41,001 $19,603,708 $(24,518,858) $ (4,874,149)
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statements.
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<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOWS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Cumulative Amounts
From Inception
(September 25, 1997) Three Months Ended June 30,
Through June 30, ------------------------------
2000 2000 1999
=================================================================================================================
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $(24,518,858) $(7,149,021) $(1,008,539)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash stock-based compensation 4,321,750 4,293,000 -
Discount amortization on convertible debt 4,125,000 - -
Discount amortization on deferred interest 641,168 590,166 -
Depreciation 109,386 18,386 21,176
Write down of furniture and equipment 49,750 - 49,750
Change in assets and liabilities:
Prepaid and other (212,203) 13,675 67,184
Accounts payable 2,112,683 (209,873) 371,498
Accrued interest on convertible notes payable 233,147 149,611 -
Accrued interest on notes payable 23,904 11,952 -
Accrued interest on shareholder loans 64,822 32,411 -
-----------------------------------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (13,049,451) (2,249,693) (498,931)
-----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of furniture and equipment (529,907) (34,290) (95,796)
Sale of furniture and equipment 80,405 - -
Business acquisition, net of cash acquired 1,019,413 - -
-----------------------------------------------------------------------------------------------------------------
Net Cash Provided (Used in) Investing Activities 569,911 (34,290) (95,796)
-----------------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock 4,988,540 - -
Proceeds from issuance of convertible debt 7,100,000 - -
Proceeds from (repayments to) shareholders loan 1,541,490 - (239,144)
Net changes in other long-term debt 57,457 17,038 (9,906)
Advances from (repayments to) related party 560,508 205,437 (415,123)
Advances from parent company - - 1,234,837
-----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 14,247,995 222,475 570,664
-----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents 1,768,455 (2,061,508) (24,063)
Cash and Cash Equivalents, beginning of period - 3,829,963 136,863
-----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 1,768,455 $ 1,768,455 $ 112,800
=================================================================================================================
Non-cash Financing Activity
Deferred interest related to
detachable warrants $ 4,000,000 $ - $ -
=================================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------
2000 1999
========================================================================================
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(13,847,524) $(1,657,458)
Adjustments to reconcile net loss to net
cash used in operating activities:
Noncash stock-based compensation 4,293,000 -
Discount amortization on convertible debt 4,000,000 -
Discount amortization on deferred interest 641,168 -
Depreciation 30,023 33,993
Write down of furniture and equipment - 49,750
Change in assets and liabilities:
Prepaid and other (46,280) 16,013
Accounts payable 243,453 424,591
Accrued interest on convertible notes payable 196,230 -
Accrued interest on notes payable 23,904 -
Accrued interest on shareholder loans 64,822 -
----------------------------------------------------------------------------------------
Net Cash Used in Operating Activities (4,401,204) (1,133,111)
----------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Purchase of furniture and equipment (77,765) (108,585)
Sale of furniture and equipment - -
Business acquisition, net of cash acquired - -
----------------------------------------------------------------------------------------
Net Cash Provided (Used in) Investing Activities (77,765) (108,585)
----------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Proceeds from issuance of common stock - -
Proceeds from issuance of convertible debt 4,000,000 -
Proceeds from (repayments to) shareholders loan - 241,490
Net changes in other long-term debt 17,488 3,678
Advances from (repayments to) related party 199,797 (248,606)
Advances from parent company - 1,234,837
----------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 4,217,285 1,231,399
----------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash
Equivalents (261,684) (10,297)
Cash and Cash Equivalents, beginning of period 2,030,139 123,097
----------------------------------------------------------------------------------------
Cash and Cash Equivalents, end of period $ 1,768,455 $ 112,800
========================================================================================
Non-cash Financing Activity
Deferred interest related to
detachable warrants $ 4,000,000 $ -
========================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated condensed financial statement
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<PAGE>
CONSTELLATION 3D, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. BUSINESS DESCRIPTION
Constellation 3D, Inc., a Florida corporation ("C3D"; together with all of its
subsidiaries, the "Company"), was incorporated on December 27, 1995, under the
name Latin Venture Partners, Inc. The name of the company was changed to C3D
Inc. on March 24, 1999 in anticipation of a transaction with Constellation 3D
Technology Limited, a British Virgin Islands company ("Constellation Tech").
On October 1, 1999, C3D completed the acquisition of Constellation Tech which
was treated as a reverse acquisition whereby C3D was acquired by Constellation
Tech, with the balance sheets being combined using each company's historical
cost bases. The results of operations include those of both companies from the
date of acquisition. The financial statements for the period prior to the date
of acquisition are those of Constellation Tech. As the transaction was a reverse
acquisition with a public shell, no pro forma information related to this
transaction is provided. The equity section of the balance sheet and the
earnings per share of the Company are retroactively restated to reflect the
effect of the exchange ratio established in the asset purchase agreement.
The consolidated condensed financial statements of the Company include the
accounts of its subsidiaries after elimination of intercompany balances and
transactions.
On December 27, 1999, as approved by the requisite number of shares at the
Annual Meeting of Shareholders, C3D Inc. changed its name to Constellation 3D,
Inc. effective December 29, 1999, and amended its Articles of Incorporation to
allow for an increase in the number of shares authorized from 50,000,000 shares
to 100,000,000 shares of Common Stock ($.001 par value). In addition, the
Company is authorized to issue 10,000,000 shares of preferred stock (no par
value). On January 18, 2000, a three-for-one forward split of C3D's Common Stock
took effect for shareholders of record as December 16, 1999, and all per share
information for all prior periods have been adjusted accordingly.
The Company has developed what it believes to be a state-of-the-art optical,
data storage product that surpasses the physical limits of two-dimensional
memory technology. Research and development work on the Company's technology has
been conducted and is being conducted in the United States, Israel, Russia and
Ukraine.
NOTE 2. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements of the Company are
unaudited and include, in the opinion of management, all normal recurring
adjustments necessary to present fairly the consolidated condensed balance
sheets as of June 30, 2000, and the related consolidated condensed statements of
operations, stockholders' deficit and cash flows for the periods presented.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These consolidated condensed financial
statements should be read in conjunction with the Company's audited consolidated
condensed financial statements and the related notes thereto included in C3D's
amended Form 10-K filed with the Securities and Exchange Commission on March 31,
2000.
The results of operations presented for the three months ended June 30, 2000 and
1999 and the results of operations for the six months ended June 30, 2000 and
1999, are not necessarily indicative of the results to be expected for any other
interim period or any future fiscal year.
The Company has been in the development stage since its inception. It has had no
operating revenue to date, has accumulated losses of $24,518,858 and will
require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses. Thus, there is no assurance that the Company will be able
to continue as a going concern. As a result of these factors, the Company's
independent certified public accountants modified their opinion on the amended
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Form 10-K filed with the Securities and Exchange Commission on March 31, 2000,
with an explanatory paragraph addressing the Company's ability to continue as a
going concern.
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including some
types of derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, assess the effectiveness of
transactions that receive hedge accounting. SFAS 133, as amended by SFAS No. 137
defining SFAS No. 133's effective date, is effective for fiscal years beginning
after June 15, 2000, and must be applied to instruments issued, acquired, or
substantively modified after December 31, 1997.
Also, Statement Of Position 98-5, "Reporting the Costs of Start-up Activities"
is effective for the year ended January 1, 2000.
The Company does not expect the adoption of either of the above accounting
pronouncements to have a material effect on its financial position or results of
operations.
NOTE 4. INCOME TAXES
The Company records its provision for income taxes using the liability method.
Under this method, deferred tax assets and liabilities are recognized based on
the anticipated future tax effects arising from the differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. A 100% valuation allowance has been recorded against the
deferred tax asset as management has yet to establish that recovery of this
asset is more likely than not.
NOTE 5. NET LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted average
number of shares of Common Stock outstanding. Per share information for all
prior periods have been adjusted to reflect the three-for-one forward stock
split effective January 18, 2000. Diluted loss per share reflects the effect of
the issuance of shares of the Company's Common Stock upon the exercise of stock
options and warrants based on the treasury method of computing such effects. As
of June 30, 2000, the Company had issued 3,450,000 warrants and 4,846,550
options to purchase shares of Common Stock which were not included in the
calculation of diluted loss per share as their effect was anti-dilutive.
NOTE 6. STOCKHOLDERS' DEFICIT
Convertible subordinated debt
On March 24, 2000, C3D issued a 10% subordinated convertible debenture for the
principal amount of $4,000,000 to Sands Brothers Venture Capital Associates LLC,
a limited liability company organized under the laws of New York ("Sands
Brothers VC"). The subordinate convertible debenture can be converted at any
time into shares of Common Stock of the Company at a conversion price of $17.65
and expires on September 24, 2001. The quoted price for the Company's stock on
March 24, 2000 was $46.50, resulting in a deemed beneficial conversion feature
and discount of approximately $4,000,000, which was recorded as interest expense
and an increase to additional paid-in capital in the first quarter of this year.
Sands Brothers VC has the right to demand repayment of all or any portion of the
principal amount of the convertible debenture and interest outstanding before
the maturity date in the event that C3D receives no less than $25,000,000 in
gross financings through the sale of debt and/or equity securities or a change
of control of the company occurs. C3D granted the subordinate convertible
debenture holder certain registration rights with respect to the underlying
Common Stock.
Warrants to purchase Common Stock
Upon closing of the $4,000,000 subordinate convertible debenture to Sands
Brothers VC on March 24, 2000, and pursuant to the terms of the agency agreement
originally signed on December 1, 1999 (the "Agency Agreement"), by and between
the Company and Sands Brothers & Co. Ltd., a Delaware corporation ("Sands
Brothers"), the Company issued to Sands Brothers detachable warrants to purchase
1,050,000 shares of Common Stock at an exercise price of $3.67 per share and
warrants to purchase 2,400,000 shares of Common Stock at an exercise price of
$15.13 per share until December 1, 2004. C3D granted the warrant holder certain
registration rights with respect to the underlying Common Stock and the option
to exercise the stock warrants in lieu of any cash payment in exchange for the
number of shares of Common Stock that amount to the difference between the
market price and the exercise price of the stock warrants.
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Proceeds from the subordinate convertible debenture issued with the detachable
stock purchase warrants are allocated between the debenture and the warrants
based on their relative fair values as required by Accounting Principles Board
Opinion No. 14. The value ascribed to the detachable warrants for accounting
purposes was $4,000,000 based on the proceeds of the subordinate convertible
debenture to the Company. The $4,000,000 value was recorded as a debt discount
and will be amortized as a component of interest expense over the term of the
related debt. This amount is presented as an addition to paid-in capital of
stockholders' deficit.
Stock options
The shareholders approved the 1999 stock option plan (the "Plan") on December
27, 1999. The Plan allows the Company to grant stock options to officers, other
key employees, directors and other important consultants at prices not less than
fair market value at date of grant. A maximum of 4,617,540 shares were approved
to be issued under the Plan. As at June 30, 2000 there were 3,871,550 options
under this Plan outstanding and 975,000 options outside of the plan outstanding.
The following table summarizes the options currently outstanding:
Weighted average
remaining Options
Exercise price Number of options contractual life exercisable
-------------- ----------------- ------------------ -----------
$ 1.33 525,000 3.62 525,000
$ 5.00 450,000 2.80 450,000
$10.69 3,871,550 4.79 3,871,550
--------- ---------
4,846,550 4,846,550
--------- ---------
Noncash stock-based compensation
On May 11, 2000 the Company granted options to a non-employee consultant to
purchase 450,000 shares of the Company's common stock at an exercise price of
$5.00 per share. The option to purchase the shares vested on June 30, 2000 and
will expire 3 years from the date of grant. In connection with the issuance, the
Company recorded a non-cash compensation charge to operations of $4,293,000,
representing the fair value of the issuance, calculated using the Black-Scholes
option pricing model.
Common stock issued to Constellation 3D Trust LLC
During the six months ended June 30, 2000, the Company has issued a total of
10,500,000 (Ten Million Five Hundred Thousand) shares of Common Stock to
Constellation 3D Trust LLC, a wholly owned subsidiary of the Company.
Constellation 3D Trust LLC intends to use the shares to raise debt or equity
capital and contribute the proceeds thereof to the Company. For the purposes of
the Company's consolidated condensed financial statements, the issuance of the
10,500,000 shares of Common Stock are not considered to be issued or outstanding
because the Common Stock has remained under the control of the Company and will
be cancelled if no financing transaction is completed.
NOTE 7. LEGAL PROCEEDINGS
On June 9, 2000, Challis International Limited ("Challis") commenced a lawsuit
in the Supreme Court of the State of New York, County of New York, against
Constellation Tech and C3D. The Complaint alleges that Challis entered into
several contracts with Constellation Tech or its predecessor-in-interest
pursuant to which Constellation Tech agreed to provide Challis with 11.946% of
the shares it would receive in C3D. Although none of the contracts upon which
Challis bases its claims were with C3D, Challis seeks to hold C3D liable based
on an allegation that C3D is the alter-ego of Constellation Tech. Challis
alleges that it is entitled to 3,494,205 shares of C3D. The complaint seeks an
order directing the defendants to issue proper certificates to Challis for
3,494,205 shares of C3D or, if specific performance is not granted, the fair
market value of the shares, plus any incidental damages. The Company believes
that the outcome will not have a material adverse effect on the Company's
financial statements.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed in these forward-looking statements as a result
of various factors, including risk factors set forth in this Quarterly Report
and in the C3D's amended Form 10-K filed with the Securities and Exchange
Commission on March 31, 2000. The following discussion should be read in
conjunction with the financial statements and notes thereto included elsewhere
in this Quarterly Report.
Overview
Constellation 3D, Inc. ("C3D"), formerly known as C3D Inc., is an
international enterprise headquartered in New York, New York. With operations in
the United States, Israel and Russia and a subcontractor who performs services
for the Company in Ukraine, the Company researches and develops optical data
storage technology products with flexibility in commercial applications. The
Company has developed what it believes to be a state-of-the-art optical, data
storage product that surpasses the physical limits of two-dimensional memory
technology. Research and development work on the Company's technology has been
conducted and is being conducted in the United States, Israel, Russia and
Ukraine.
The Company plans to continue its focus on research and development of
its data storage technology and to develop strategic alliances, joint ventures
and licensing arrangements with established companies in the data storage
industry. The Company expects that its operating expenses will increase
significantly during the foreseeable future as the result of its plans to:
o increase expenditures on marketing and business development by
hosting demonstrations of the Company's technology to potential
strategic partners, continually obtaining information about the
market size and growth parameters to update the market analysis,
updating industry pricing and cost trends, enlarging the team
responsible for establishing partnerships, and monitoring new
technological developments in the industry. The Company expects to
increase expenditures from the current levels of approximately
$40,000 per month to $450,000 per month for the above activities;
o enhance existing capabilities of products by increasing the levels
of research and development expenditures and capital assets from the
current levels of $350,000 per month to $600,000;
o increase expenditures on administration to provide the overall
management of the parent company as well as the subsidiaries from
the current levels of $330,000 per month to $450,000 per month;
o increase monthly expenditures on professional fees for patent
registration, licensing and joint venture agreements from $40,000
per month to $150,000 per month; and
o establish research and development facilities with initial
manufacturing capabilities in the United States by hiring additional
staff and transferring equipment and personnel. The Company expects
such expenses to be approximately $1,000,000 over the next twelve
months.
On February 8, 2000, C3D formed Constellation 3D Trust LLC, a Delaware
limited liability company. C3D then issued 2,500,000 (Two Million Five Hundred
Thousand) shares of Common Stock to Constellation 3D Trust LLC as a capital
contribution. On March 21, 2000, C3D issued an additional 3,000,000 (Three
Million) shares of Common Stock and on June 27, 2000, C3D issued an additional
5,000,000 (Five Million) shares of Common Stock to Constellation 3D Trust LLC as
capital contributions. Constellation 3D Trust LLC intends to use the shares to
raise debt or equity capital and contribute the proceeds thereof to C3D, which
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proceeds shall be used for general corporate purposes. There is no assurance
that the issuance of the shares will result in the raising of any debt or equity
capital. For the purposes of the Company's consolidated condensed financial
statements, the issuance of the 10,500,000 (Ten Million Five Hundred Thousand)
shares of Common Stock are not considered to be issued or outstanding because
the Common Stock has remained under the control of C3D and will be cancelled if
no financing transaction is completed.
On February 15, 2000, the Company entered into a letter of intent to
acquire Reflekt Technology, Inc., a Massachusetts corporation. There is no
assurance that the transaction will be consummated. It is possible that the
parties to the letter of intent will agree to modify or waive one or more terms
and/or conditions of the letter of intent or that the Company instead will
acquire certain assets of Reflekt Technology, Inc. If the acquisition is
consummated, it is also possible that, by agreement of the parties, one or more
terms and/or conditions of any legally binding definitive acquisition agreements
will differ materially from the terms and conditions of the letter of intent.
On April 7, 2000, the Company formed FMD&E, Inc., ("FMD&E") a
Commonwealth of Massachusetts corporation, for the purpose of researching and
developing replication hardware for mass production of the Company's proposed
products.
The Company must raise additional funds as a result of the planned
significant increase in its operating expenditures and anticipates that it will
require approximately $25 million in order to fund its operations over the next
twelve months. The Company has sufficient working capital to support its
operations through September 2000 and is in the process of negotiating for
additional capital. The Company does not expect to receive revenues until the
first quarter of the fiscal year 2001 and expects to continue to incur operating
losses until late in the first quarter of fiscal year 2002. The Company is
currently exploring additional financing alternatives, including the possibility
of private equity or debt offerings.
On March 23, 2000, the Company entered into another agreement to amend
the Placement Agency Agreement and Warrant Agreement dated December 1, 1999,
with Sands Brothers & Co., Ltd. (the "Agency Agreement" and "Warrant Agreement"
respectively) pursuant to which Sands Brothers & Co., Ltd. ("Sands Brothers") is
to raise, on a best efforts basis, a minimum of $4.0 million (the "Minimum
Amount") and a maximum of $120.0 million of financing for the Company.
Furthermore, the Company shall issue to Sands Brothers warrants to purchase
1,050,000 shares at an exercise price of $3.67 for the Minimum Amount of
securities sold, and 600,000 stock warrants for each $1.0 million of all
securities sold up to $25.0 million (the "Additional Placement Agent Warrants")
at an exercise price equal to a 40% discount to the average of the bid price of
the Common Stock for the 120 day period prior to any closing, but in no event
less than $5.00 per share. On March 24, 2000, Sands Brothers raised the Minimum
Amount by way of a subordinated convertible debenture and was issued warrants to
purchase 1,050,000 and 2,400,00 shares of Common Stock at a price of $3.67 and
$15.13 respectively.
On May 16, 2000, the Company entered into another agreement to amend
the Agency Agreement and Warrant Agreement pursuant to which the exercise price
for the Additional Placement Agent Warrants shall be at a price equal to a 40%
discount to the lower of (a) the average closing bid price of the Common Stock
for the 120 day period prior to the date of closing or (b) the average for the 7
day period prior to the date of closing.
On May 31, 2000, the Company entered into another agreement to amend
the Agency Agreement, Warrant Agreement and Warrant Certificate No. SB-2
pursuant to which the exercise price for the Additional Placement Agent Warrants
shall be at a price equal to the lower (a) the average closing bid price of the
Common Stock for the 120 day period prior to the date of closing, (b) the
average for the 7 day period prior to the date of closing, or (c) a 40% discount
of the purchase price paid by any investor introduced directly or indirectly by
Sands Brothers. Furthermore, Sands Brothers shall have the right to exercise the
stock warrants at any time from the date of issuance to the end of the five-year
term.
On June 28, 2000, the Company entered into another agreement to amend
the Agency Agreement and Warrant Agreement pursuant to which, effective July 10,
2000, the retention of Sands Brothers under the Agency Agreement shall be one of
a non-exclusive basis and Sands Brothers shall not be entitled to any fees or
stock warrants with respect to financing sources not brought by Sands Brothers.
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On August 3, 2000, the Company entered into another agreement to amend
the Agency Agreement, the Warrant Agreement and Warrant Certificate No. SB-2,
pursuant to which Sands Brothers would receive, in connection with financing by
any party introduced directly or indirectly by Sands Brothers and which is
consummated by no later than November 1, 2000 (but with respect to one
particular investor only, by August 11, 2000), 300,000 warrants for each $1
million of financing on the first $25 million of financing and 150,000 warrants
for each $1 million of financing on a further $50 million of financing, at an
exercise price of $10.34 per share. The exercise price is reduced to $8.25 per
share in the event that at least $75 million of financing is available from
financing sources having good and immediately available funds for the Company.
The first 2.4 million of any warrants issued would contain cashless exercise
provisions and any additional warrants issued would not contain such provisions.
Warrant Certificate No. SB-2 would be cancelled after the issuance of 12.6
million warrants and on a pro-rata basis up to an aggregate 15 million warrants.
Furthermore, the warrants issued pursuant to Warrant Certificate No. SB-2 were
amended to not have "cashless" exercise provisions on a pro-rata basis upon
issuance of the first 2.4 million warrants issued.
Although the Company's existing debt securities contain no such
restrictions, the signing of future convertible debt or preferred share
agreements could result in restrictions being placed on dividends, interest and
principal payments, or any other covenant restrictions that could make payments
of such debts difficult, create difficulties in obtaining further financings,
limit the flexibility of changes in the business, and cause substantial
liquidity problems. There can be no assurance, however, that such financing will
be available to the Company or, if it is, that it will be available on terms
acceptable to the Company. If the Company is unable to obtain the financing
necessary to support its operations, it may be unable to continue as a going
concern.
The Company has a limited operating history upon which to base an
evaluation of its business. The Company's business and prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of development, particularly
companies in new and rapidly evolving markets such as data storage. These risks
include, but are not limited to, rapid technological change, inability to manage
growth, competition from more established companies, dependence on suppliers,
internal system problems, and the inability to obtain sufficient financing and
an unproven business record.
Results of Operations for the Six Months Ended June 30, 2000 Compared to Six
Months Ended June 30, 1999
Our reported financial condition and earnings for the six months ended
June 30, 2000, includes all amounts for the parent company, C3D, and our three
wholly owned operating subsidiary companies, C-TriD Israel, an Israeli company
("C-TriD"), TriD Store Vostok, a Russian company ("Vostok"), and FMD&E, Inc., a
Massachusetts company ("FMD&E"). Our reported financial condition and earnings
for the comparative six months ended June 30, 1999, include the consolidated
amounts of the predecessor company, Constellation Tech.
Revenue. The Company generated no revenue for the six months ended June
30, 2000 and 1999.
Research and Development Expenses. The Company incurred research and
development expenses of $1,918,038 for the six months ended June 30, 2000,
compared with $1,062,305 for six months ended June 30, 1999. Research and
development expenses consist primarily of expenses incurred for the development
of the data storage technology, including compensation of technical staff and
contractors, materials consumed in the development process, and professional
fees for patent registration of intellectual property. The significant costs
were payroll for staff and contractors which amounted to $1,146,560 for the six
months ended June 30, 2000, compared with $520,000 for the six months ended June
30, 1999. Professional fees were $149,277 for patent registration for the six
months ended June 30, 2000, compared with $383,252 for the six months ended June
30, 1999. The decrease in patent registration was due to the Company's
proprietary technology ("Fluorescent Memory" or "Fluorescent Memory Technology")
becoming more proven and patentable during the same period last year. Materials
consumed amounted to $182,781 for the six months ended June 30, 2000, compared
with $17,881 for the six months ended June 30, 1999. The increase in material
was due to purchase of lasers required at the current stage of development of
the Company's products. Travel expenses amounted to $141,090 for the six months
ended June 30, 2000, compared with no travel expenses for the six months ended
June 30, 1999. The increase in travel costs is due to the travel of research and
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development staff between the Company's geographical locations. General and
administrative costs associated with research and development facilities were
$160,195 for the six months ended June 30, 2000, compared with $117,136 for the
six months ended June 30, 1999. Depreciation expenses were $12,138 for the six
months ended June 30, 2000, compared with $24,036 for the six months ended June
30, 1999.
General and Administrative Expenses. General and administrative
expenses consist of management compensation, rent, professional fees, telephone,
travel and other general corporate expenses. General and administrative expenses
were $1,980,295 for the six months ended June 30, 2000, compared with $554,863
for the six months ended June 30, 1999. The Company paid substantially more for
management and facilities for the six months ended June 30, 2000, than it did
for the six months ended June 30, 1999. Payroll expenses and management fees
relating to general and administrative activities were $423,758 for the six
months ended June 30, 2000, compared with $170,335 for the six months ended June
30, 1999. The rise in compensation expenses was due to the increase in the size
and compensation of the management team compared to the six months ended June
30, 1999. Office and maintenance charges were $288,005 for the six months ended
June 30, 2000, compared with $205,962 for the six months ended June 30 1999. The
increase in office and maintenance charges relates to the increased activity of
the New York office for the six months ended June 30, 2000, compared to the six
months ended June 30, 1999, when there was no corporate office in New York.
Travel and accommodation expenses were $288,725 in the six months ended June 30,
2000, compared with $92,777 for the six months ended June 30, 1999. The increase
in travel and accommodation expenditures was due to the increased fund-raising
activities of the Company for the six months ended June 30, 2000, over the six
months ended June 30, 1999. Professional fees were $740,695 for the six months
ended June 30, 2000, compared with $26,392 for the six months ended June 30,
1999. The increase was for legal support for the Company's financing
transactions and the legal and auditing work required for the preparation of the
previously filed quarterly and annual reports. Consulting fees amounted to
$130,516 for the six months ended June 30, 2000, compared with $49,440 for the
six months ended June 30, 1999. Shareholder relations expenses and filing fees
were $90,711 for the six months ended June 30, 2000, compared with no expenses
or fees for the six months ended June 30, 1999. Depreciation expenses were
$9,038 for the six months ended June 30, 2000, compared with $9,957 for the six
months ended June 30, 1999.
Marketing and Business Development: Marketing and business development
expenses consisted of compensation to consultants and travel expenditures for
demonstrations of the Company's technology to potential strategic partners.
Marketing and business development expenses were $225,846 for the six months
ended June 30, 2000, compared to no expenses for the six months ended June 30,
1999, when the company had yet to demonstrate its technology. Consulting fees
relating to marketing and business development were $165,000 for the six months
ended June 30, 2000, compared with no expenses for six months ended June 30,
1999. Travel and accommodation expenses for product demonstrations and exhibits
were $56,143 for the six months ended June 30, 2000, compared with no expenses
for the six months ended June 30, 1999. The Company incurred $4,703 in expenses
relating to media exposure for the six months ended June 30, 2000, compared to
no expenses for the six months ended June 30, 1999.
Noncash Stock-Based Compensation. Noncash stock-based compensation
costs were $4,293,000 for the six months ended June 30, 2000, compared with no
noncash stock-based compensation costs for the six months ended June 30, 1999.
The cost is due to the grant of 450,000 options to a non-employee consultant of
the Company during the six months ended June 30, 2000. The charge represents the
relative fair value ascribed to the options measured using the Black-Scholes
option pricing model. This amount is presented as an addition to paid-in capital
in the statement of stockholders' deficit.
Interest and Other Charges. The Company has recorded net interest
expense of $5,418,824 for the six months ended June 30, 2000, compared with
$29,290 for the six months ended June 30, 1999. The interest expense included
$4,000,000 for the beneficial conversion feature on the subordinated convertible
debt issued during the six months ended June 30, 2000, compared to no such
expense for the six months ended June 30, 1999. The Company recorded interest
expense of $641,168 for the amortization of the financing cost associated with
the detachable warrants during the six months ended June 30, 2000, compared to
no such expense for the six months ended June 30, 1999. The Company also
recorded an interest expense of $500,000 related to the commission charged on
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the subordinated convertible debt issued during the six months ended June 30,
2000, compared with no such expense for the six months ended June 30, 1999.
Interest expenses relating to bank overdrafts, shareholder loans and
subordinated convertible debt amounted to $296,885 for the six months ended June
30, 2000, compared to $29,290 for the six months ended June 30, 1999. Interest
revenue was generated through short-term deposits and amounted to $19,229 during
the six months ended June 30, 2000, compared with no interest revenue for the
six months ended June 30, 1999.
Income Taxes. The Company has generated minimal inter-company taxable
income to date and therefore has paid $11,521 for the six months ended June 30,
2000, compared with $11,000 for the six months ended June 30, 1999. The taxes
were incurred in the Russian and Israeli subsidiaries due to their treatment of
inter-company advances as taxable revenue.
Results of Operations for the Three Months Ended June 30, 2000 Compared to the
Three Months Ended June 30, 1999
Our reported financial condition and earnings for the three months
ended June 30, 2000, includes all amounts for the parent company, C3D, and our
three wholly owned operating subsidiary companies, C-TriD, Vostok and FMD&E. Our
reported financial condition and earnings for the comparative three months ended
June 30, 1999, include the consolidated amounts of the predecessor company,
Constellation Tech.
Revenue. The Company generated no revenue in the three months ended
June 30, 2000 and 1999.
Research and Development Expenses. Research and development expenses
consist primarily of expenses incurred for the development of the data storage
technology, including compensation of technical staff and contractors,
professional fees for intellectual property, general and administrative expenses
related to development offices, and travel expenses. The Company incurred
research and development expenses of $1,138,305 for the three months ended June
30, 2000, compared with $739,099 for the three months ended June 30, 1999. The
significant costs were payroll for staff and contractors which amounted to
$639,735 for the three months ended June 30, 2000, compared with $305,505 for
the three months ended June 30, 1999. Professional fees were $81,467 for patent
preparation and filing for the three months ended June 30, 2000, compared with
$356,042 for the three months ended June 30, 1999. The decrease in patent
registration was due to the Company's Fluorescent Memory Technology becoming
more proven and patentable during the same period last year. General office
expenses relating to research and development amounted to $60,264 for the three
months ended June 30, 2000, compared with $43,952 for the three months ended
June 30, 1999. The Company incurred $163,060 for expenses relating to the
acquisition of materials for the three months ended June 30, 2000, compared with
$17,881 for the three months ended June 30, 1999. The increase in material was
due to purchase of lasers required at the current stage of development of the
Company's products. Travel expenses amounted to $60,641 for the three months
ended June 30, 2000, compared with no travel expenses for the three months ended
June 30, 1999. The increase in travel costs is due to the travel of research and
development staff between the Company's geographical locations. Depreciation
expenses were $12,138 for the three months ended June 30, 2000, compared with
$15,719 for the three months ended June 30, 1999.
General and Administrative Expenses. General and administrative
expenses consist of management compensation, rent, professional services,
telephone expense, travel and other general corporate expenses. General and
administrative expenses were $859,223 for the three months ended June 30, 2000,
compared with $260,604 for the three months ended June 30, 1999. This increase
reflected the hiring of additional management, increased facilities charges and
expansion of operations in the United States. Payroll expenses and management
fees relating to general and administrative expenses were $216,044 for the three
months ended June 30, 2000, compared with $20,236 for the three months ended
June 30, 1999. The increase was due to the management team receiving
compensation directly from C3D during the second quarter of last year rather
than the predecessor company. Office and maintenance charges consisting of
expenditures on rent, general maintenance, and communications were $181,932 for
the three months ended June 30, 2000, compared with $114,701 for the three
months ended June 30, 1999. Travel and accommodation expenses were $136,286 for
the three months ended June 30, 2000, compared with $53,978 for the three months
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ended June 30, 1999. Professional fees were $222,978 for the three months ended
June 30, 2000, compared with $16,792 for the three months ended June 30, 1999,
the majority of which were related to legal support for the Company's financing
transactions and the preparation of the previously filed quarterly and annual
reports. Consulting fees amounted to $44,516 for the three months ended June 30,
2000, compared with $49,440 for the three months ended June 30, 1999.
Shareholder relations expenses and filing fees were $51,218 for the three months
ended June 30, 2000, compared with no expenses or fees for the three months
ended June 30, 1999. Depreciation expenses were $6,248 for the three months
ended June 30, 2000, compared with $5,457 for the three months ended June 30,
1999.
Marketing and Business Development: Marketing and business development
expenses consisted of compensation to consultants and travel expenditures for
demonstrations of the Company's technology to potential strategic partners.
Marketing and business development expenses were $79,881 for the three months
ended June 30, 2000, compared to no expenses for the three months ended June 30,
1999, when the company had yet to demonstrate its technology. Consulting fees
relating to marketing and business development were $60,000 for the three months
ended June 30, 2000, compared with no expenses for three months ended June 30,
1999. Travel and accommodation expenses were $19,881 for the three months ended
June 30, 2000, compared with no expenses for the three months ended June 30,
1999
Noncash Stock-Based Compensation. Noncash stock-based compensation
costs were $4,293,000 for the three months ended June 30, 2000, compared with no
noncash stock-based compensation costs for the three months ended June 30, 1999.
The cost is due to the grant of 450,000 options to a non-employee consultant of
the Company during the second quarter of 2000. The charge represents the
relative fair value ascribed to the options measured using the Black-Scholes
option pricing model. This amount is presented as an addition to paid-in capital
in the statement of stockholders' deficit.
Interest and Other Charges. The Company has recorded net interest
expense of $775,612 for the three months ended June 30, 2000, compared with
$4,836 for the three months ended June 30, 1999. The Company recorded interest
expense of $590,166 for the amortization of the financing cost associated with
the detachable warrants during the three months ended June 30, 2000, compared to
no expense for the three months ended June 30, 1999. Interest expense relating
to shareholder loans, notes payable and the subordinated convertible debts
amounted to $193,974 for the three months ended June 30, 2000, compared to
$4,836 for the three months ended June 30, 1999. Interest revenue was generated
through short-term deposits and amounted to $7,185 during the three months ended
June 30, 2000, compared with no interest revenue for the three months ended June
30, 1999.
Income Taxes. The Company has generated inter-company taxable income to
date and therefore has paid $3,000 for the three months ended June 30, 2000,
compared with $4,000 for the three months ended June 30, 1999. The taxes were
incurred in the Israeli and Russian subsidiaries, C-TriD and Vostok, due to
their treatment of inter-company advances as taxable revenue. The Company has
not generated any taxable income to date and therefore has not paid any federal
income taxes since its inception. Deferred tax assets created primarily from net
operating loss carry-forwards have been fully reserved as management is unable
to conclude that future realization is more likely than not.
Liquidity and Capital Resources
As of June 30, 2000, the Company's cash position was $1,768,455 and its
working capital deficit was $2,162,656, compared to a cash position of $112,800
and a working capital deficit of $2,815,135 as at June 30, 1999.
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Since inception, the Company has financed its operations from capital
contributions, shareholder loans and subordinated convertible debt. During the
six months ended June 30, 2000, the Company received net proceeds of $3,345,000
from the issuance of subordinate convertible debt and advances from related
parties of $199,797. This compares with net proceeds from shareholder loans and
advances from related parties of $1,227,721 for the six months ended June 30,
1999. As at May 19, 2000 and July 31, 2000, shareholder's loans in the principal
amounts of $300,0000 and $1,000,000 respectively, became due and payable
immediately. The Company is currently negotiating an extension with the
shareholder but there are no assurances an extension will be granted. There are
no financial penalties associated with the non-payment of the loans.
Net cash used in operating activities was $4,401,204 for the six months
ended June 30, 2000, including a net loss of $13,847,524 and an increase in
payables of $243,453. This compares with net cash used in operating activities
of $1,133,111 for the six months ended June 30, 1999, including a net loss of
$1,657,458 and an increase in payables of $424,591. For the six months ended
June 30, 2000, the Company recorded non-cash transactions of $4,293,000 relating
to the issuance of a stock option to a non-employee consultant, a charge of
$4,000,000 for the beneficial conversion feature on the subordinated convertible
note issued during the period, and $641,168 of amortization of the deferred
interest asset resulting from the issuance of detachable warrants issued during
the period. This compares with no such non-cash transactions for the six months
ended June 30, 1999. The Company's current operating expenditures are
approximately $750,000 per month and the Company plans to increase its operating
expenditures to $1,100,000 a month in order to expand its operations. The
Company has not generated any revenues to date and does not anticipate cash flow
from operations to be sufficient to fund its cash requirements until early in
the year 2002.
The Company incurred net capital expenditures of $77,765 for the six
months ended June 30, 2000, compared with $108,585 for the six months ended June
30, 1999. These expenditures were primarily for laboratory equipment associated
with the Company's continued research and development.
The Company currently has no commitments for any credit facilities such
as revolving credit agreements or lines of credit that could provide additional
working capital. Based on its existing capital resources, the Company believes
that it will be able to fund operations through September 2000. The Company's
capital requirements depend on several factors, including the success and
progress of research development programs, the resources devoted to developing
products, the extent to which products achieve market acceptance and other
factors. The Company anticipates that it will require substantial additional
financing to fund its working capital requirements. There can be no assurance,
however, that additional funding will be available or, if available, that it
will be available on terms acceptable to the Company. If adequate funds are not
available, it may not be able to continue. There can be no assurance that the
Company will be able to raise additional cash if its cash resources are
exhausted. The Company's ability to arrange such financing in the future will
depend in part upon the prevailing capital market conditions as well as the
Company's business performance.
The Company has been in the development stage since its inception. It
has had no operating revenue to date, has accumulated losses of $24,518,858 and
will require additional working capital to complete its business development
activities and generate revenue adequate to cover operating and further
development expenses. Thus, there is no assurance that the Company will be able
to continue as a going concern. As a result of these factors, the Company's
independent certified public accountants modified their opinion on the Company's
amended Form 10-K filed with the Securities and Exchange Commission on March 31,
2000 with an explanatory paragraph addressing the Company's ability to continue
as a going concern.
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Recent Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Statement establishes
accounting and reporting standards requiring that every derivative instrument
(including some types of derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The Statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. SFAS 133, as
amended by SFAS No. 137 defining SFAS No. 133's effective date, is effective for
fiscal years beginning after June 15, 2000, and must be applied to instruments
issued, acquired, or substantively modified after December 31, 1997. Also,
Statement of Position 98-5, "Reporting the Costs of Start-up Activities" is
effective for the year ended January 1, 2000. The Company does not expect the
adoption of either of the above accounting pronouncements to have a material
effect on its financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company expects that, like many companies, it may be exposed to
some degree of market risk particularly, for its Ukrainian, Israeli and Russian
operations. The Company cannot provide any assurance that future developments in
each respective country will not generally have an adverse effect on the
financial condition of the Company. The Company does not anticipate that it will
enter into derivative transactions (e.g., foreign currency forward or option
contracts) to hedge against known or forecasted market changes.
The Company believes that it does face political risk based on having
operations in the Ukraine, Israel and Russia. These countries do face political
instability that could have a material adverse effect on the Company's
operations. However, the Company believes that this is unlikely to occur. The
Company does not possess "political risk" or other similar insurance to protect
it against business interruption losses caused by political acts.
The Company believes that it does not have any material exposure to
interest or commodity risks. The Company does not own any derivative
instruments, does not engage in any hedging transactions and does not have any
outstanding long-term debt. The Company is exposed to economic and political
changes in international markets where the Company competes, such as inflation
rates, recession, foreign ownership restrictions, domestic and foreign
government spending, budgetary and trade policies and other external factors
over which the Company has no control.
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RISK FACTORS
No History of Revenue
As a research and development enterprise, the Company has no revenue
history and therefore has not achieved profitability. The Company expects to
continue to incur operating losses until early in the first quarter of 2002. The
Company incurred a net loss of $13,847,524 for the six months ended June 30,
2000, $4,866,687 for the year ended December 31, 1999 and $3,191,902 for the
year ended December 31, 1998. The Company has never been profitable, and there
can be no assurance that, in the future, the Company will be profitable on a
quarterly or annual basis. In addition, over the next twelve months, the Company
plans to increase its operating expenses from approximately $750,000 per month
to $1,100,000 per month in order to fund research and development and increase
its administration resources. The Company expects to receive revenues by the
first quarter of 2001 at the earliest. Nevertheless, it is possible that the
revenue of the Company may never be sufficient to recognize a profit.
Limited Operating History
The operations of the Company began in January of 1997, when it
continued the performance of research and development of three-dimensional
technology for the storage of digital information on disc that had begun in
1995.
The Company's proposed operations will be subject to the problems,
expenses, difficulties, complications, and delays frequently encountered in
connection with the development, production and marketing of a start-up
operation. Primarily, there is the risk that the Company may not be able to
transform the technology into commercially profitable products. Also, there is
the risk that once introduced into the market place, the Company's products will
not be embraced by the market.
The Company as a Going Concern
Due to its lack of operating revenues, accumulated operating losses of
$24,518,858 and the need for additional working capital, there is no assurance
that the Company will be able to continue as a going concern. The Company's
independent certified public accountants modified their opinion on the Company's
consolidated financial statements in the Company's amended Form 10-K filed with
the Securities and Exchange Commission on March 31, 2000, to express their
substantial doubt about the Company's ability to continue as a going concern.
Need for Additional Capital
The Company believes that it has sufficient working capital to sustain
its operations through September 2000. However, as a research and development
company in the optical data storage technology field, the Company continually
expends large amounts of capital over short periods of time. The Company is
currently generating no revenues and does not expect to do so until early in
2001 at the earliest. There is no assurance that revenues generated in future
operations, if any, will be sufficient to finance the complete cost of the
Company's research and development. Additional funds will be required before the
Company achieves positive cash flow from operations. Future capital requirements
and profitability depend on many factors, including, but not limited to, the
timely success of product development projects and the timeliness and success of
joint venture and corporate alliance strategies and marketing. The Company is
actively in the process of raising additional capital, including the issuance of
convertible debt securities and the potential issuance of preferred shares. The
Company's outstanding convertible debt contains no restrictions on the further
incurrence of indebtedness nor does such debt adversely affect the Company's
liquidity. However, future debt or preferred share offerings could result in
restrictions that could make payments of such debts difficult, create
difficulties in obtaining further financings, limit the flexibility of changes
in the business, and cause substantial liquidity problems. However, there can be
no assurances that financing or additional funds needed will be available when
needed or, if available, on terms acceptable to the Company. Additional equity
or convertible debt financing, if obtained, could result in substantial dilution
to shareholders. The Company is not currently considering acquiring a bank
credit facility.
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Sales of Restricted Securities
Sales of a substantial number of shares of our Common Stock after the
filing of this Quarterly Report could adversely affect the market price of our
Common Stock by introducing a large number of sellers to the market. Given the
potential volatility in the price of our shares, these sales could cause the
market price of our Common Stock to decline.
The majority of our outstanding shares of Common Stock have been issued
in private placements and are restricted securities under Rule 144 of the U.S.
Securities Act of 1933, as amended (the "Securities Act"). These restricted
securities will be subject to restrictions on the timing, manner and volume of
sales of restricted shares.
Under Rule 144, certain holders of restricted shares of the Common
Stock of C3D might be able to sell at least some of their shares of such Common
Stock beginning one year after C3D offered or sold those shares of Common Stock
to them. Such sales, if legally permissible, might be subject to certain
restrictions and limitations under Rule 144. Nothing in this paragraph should be
deemed an opinion, legal or otherwise, regarding the salability of any shares of
Common Stock of C3D referred to in this paragraph or elsewhere.
We cannot predict if future sales of our Common Stock or the
availability of our Common Stock for sale will adversely affect the market price
for our Common Stock or our ability to raise capital by offering equity
securities.
Foreign Operations
In addition to its activities in the United States, the Company
conducts business operations in Israel and Russia, and it has hired a
subcontractor to perform various activities for the Company in Ukraine. In
recent history, these three nations have experienced significant economic and
political instability. It is possible that present or future economic or
political instability in those nations will have a material adverse impact on
the Company's ability to conduct its business and/or its financial condition.
The rate of inflation in Israel, Russia and Ukraine has not materially adversely
affected the Company's financial condition.
Economic Instability
Economic instability may encompass unstable price level (i.e.
inflation), unstable interest levels or rates (i.e. fluctuation of capital) and
social unrest.
The rate of inflation in Israel, Russia and Ukraine has not materially
adversely affected the Company's financial condition. It is not possible for the
Company to predict whether the rate of inflation in Israel, Russia or Ukraine
will materially adversely affect the Company's financial condition in the
future. However, the Company believes that it is possible that such adverse
effects might result in the future. High rates of inflation have occurred in the
above-mentioned countries on numerous occasions in the past, and they may
reoccur in the future. High rates of inflation may cause insecurity and
uneasiness in the local populace in general, including the Company's employees.
In such situations, there is often concern about the increasing cost of living
(as measured in local currency) and attempts to keep pace with it. This
situation by itself might adversely affect the performance of the Company.
Whenever inflation is not matched proportionately by the currency exchange rate
(as has happened as a matter of governmental policy in countries such as Israel,
Argentina, and Russia), generally there is an increase in the costs to the
Company in U.S. dollars. Such increases in costs might materially adversely
affect the Company's financial condition.
The Company does not have, at the moment, a hedging policy for
protecting against changes in the dollar costs of the activities.
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Changes and fluctuations of interest rates might, in principle, affect
the operations of the Company in each of the aforementioned countries. The
changes in the interest rates might create flows of capital that might affect
the economy of an entire country, and thus also the Company's employees. Since
most of the financing of the non-U.S. operations is provided by the Company, and
since such financing is expected to continue in the future, the Company believes
that local interest rate fluctuations will not have a material adverse impact on
the Company's financial condition.
The economic situation in each of the above-mentioned countries might
eventually develop into extended social unrest. Such social unrest might
materially adversely affect the financial performance of the Company's local
activities and of the Company as a whole.
Political Instability
The Company does not possess "political risk" or other insurance to
protect it against business interruption losses caused by political acts.
Israel's physical security and integrity have been at risk since
Israel's inception as a modern nation. Recently, Israel and Syria have stopped
their peace negotiations. There is no formal peace between Israel and Syria or
Lebanon, and there are conflicts also between Israel and Iraq and between Israel
and Iran. Furthermore, Israel and the Palestinian Authority have been conducting
negotiations with respect to the legal status of the West Bank, Gaza Strip and
Jerusalem, the current Israeli capitol. In connection with those negotiations
and their results, violent activity has occurred, and may reoccur. Therefore, to
the extent that the Company has operations in Israel, there is risk that the
political instability will have an adverse impact on the Company's ability to
conduct its business. It is highly unlikely, but possible, that Israel's
compulsory military service obligation for its citizens, which lasts until an
individual is 50 years of age, could disrupt the scheduled work of the Company's
Israeli research and development facility, which in turn could delay the
commercial launch of the Company's planned volumetric storage product line and
materially adversely affect the Company's results of operations and financial
condition.
Russia's significant political and economic instability could have a
material adverse effect on the results of our operations and the market price of
our stock. Russia has incurred significant debt, which it may fail to adequately
service. Russian currency, the ruble, has encountered foreign exchange
volatility. The Russian government has experienced frequent political
instability and change, including wars inside Russia, acts of terrorism, power
struggles among government officials and among big commercial enterprises, which
included allegations of high levels of corruption, and allegations of organized
or other crime. In the recent years, prime ministers have been replaced
frequently, and parties with radical positions regarding intervention of the
government in the economy, like the Communist Party, have gained influence.
Although we do not believe that the Company has been materially adversely
affected by these activities to date, in the future, such factors may have a
material adverse effect on our operations. Our ability to conduct operations in
Russia could be adversely affected by difficulties in protecting and enforcing
our rights and by future changes to local laws and regulations.
Other Adversities
Additional strains on our local operations might result from other
factors, such as the delay of Moscow banks in acknowledging wire transfers of
funds into Russia. These delays can be anywhere from a day to a week. Also,
Moscow banks often charge very expensive and somewhat arbitrary fees with
respect to wire transfers.
The Company's activities in Ukraine are limited to the operations of a
single subcontractor. Economic or political instability in Ukraine might have a
material adverse impact on the Company's ability to conduct its business and/or
its financial condition. It should be noted that, as in Russia, Ukraine has
experienced significant political and economic change. The Ukrainian economy is
less developed than that of Russia. Ukraine is susceptible to most of the same
economic risks as Russia, including sovereign debt defaults and/or
restructurings, foreign exchange volatility and political instability.
Deterioration in the Ukrainian economic or political situation could materially
adversely impact our results of operations.
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Need for Additional Technology
The Company believes that it has developed a substantial amount of
technology for developing its products. Nevertheless the Company foresees the
need to recruit more employees with relevant technological knowledge and
capabilities and/or to purchase the right for specific technologies from others.
However, there can be no assurances that the Company will succeed in performing
these acquisitions.
Proprietary Rights Protection
Although the Company intends to rely on trade secret, trademark,
copyright and other intellectual property laws to protect its Fluorescent Memory
Technology, currently the Company relies and expects to rely almost entirely on
patent laws for such protection. While the Company currently intends to
vigorously enforce its intellectual property rights, there can be no assurance
that the steps taken by the Company to protect its Fluorescent Memory Technology
and to enforce its rights will be successful. The Company, through its wholly
owned subsidiary TriDStore IP, L.L.C., individually holds seven U.S. patents
relating to its Fluorescent Memory Technology. Through its wholly owned
subsidiary TriDStore IP, L.L.C., the Company holds more than forty U.S. and
foreign regular patent applications relating to its Fluorescent Memory
Technology. However, there can be no assurance that patents will be issued for
those patent applications. As of July 26, 2000, through its wholly owned
subsidiary TriDStore IP, L.L.C., the Company holds nine pending provisional
patent applications. There is also no assurance that the Company will timely
exercise its right to convert provisional patent applications into regular or
international patent applications or that patents will be issued for any regular
or international patent applications into which the Company does convert such
provisional patent applications.
The Company expects that it will develop trade secrets. The Company may
seek patent or copyright protection for such trade secrets. There is no
assurance that the Company will develop trade secrets or seek patent or
copyright protection for any or all of them. The Company intends to enter into
confidentiality and non-disclosure agreements to protect one or more trade
secrets which it or its employees or independent contractors may develop, but
there is no assurance that the Company will do so or that the confidentiality
necessary to protect a Company trade secret will be maintained. Such failure to
maintain one or more trade secrets could have a material adverse financial
impact on the Company.
The Company may offer products in the U.S. and in foreign countries
based on its patented Fluorescent Memory Technology. Certain foreign countries
in the Pacific Rim and elsewhere may not offer the same degree of intellectual
property protection that is afforded in the U.S., European Community and Japan,
and the Company may be unable to enforce its patent rights in such
jurisdictions, even if it were able to obtain such rights.
Pending Intellectual Property Applications
The Company has filed intent to use trademark applications with the
U.S. Patent and Trademark Office for the trademarks "CLEARCARD" and
"CONSTELLATION 3D". There is no assurance that these applications will mature
into registrations or that the Company will even use these marks. Furthermore,
the Company has acquired the internet domain names "C-3D.NET," "C-TRID.COM,"
"C-TRID.NET", "CONSTELLATION3D.COM", and "CONSTELLATION3D.NET". Currently, the
Company maintains a web site at http://www.c-3d.net.
There can be no assurance that any patents, copyrights, trade secrets,
trademarks or domain names developed or obtained by the Company will provide
substantial or sufficient value or protection to the Company. Furthermore, there
is no assurance that their validity will not be challenged or that affirmative
defenses to infringement will not be asserted. With respect to trademarks,
affirmative defenses to both infringement and dilution may be asserted. If
another party were to succeed in developing data storage technology comparable
to the Company's Fluorescent Memory Technology without infringing, diluting,
misusing, misappropriating or otherwise violating the Company's intellectual
property rights, the Company's financial condition might suffer a material
adverse effect.
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Possible Intellectual Property Litigation
The company has received one notice alleging infringement on the
patents of others. The company believes these claims are without merit. The
company has requested more information from the claimant in writing about the
alleged infringement, but has received no response. The Company believes it has
not infringed any patents or intellectual property of others. Nevertheless, as
is typical in the data storage industry, from time to time, the Company may in
the future be notified of claims that it may be infringing, diluting, misusing,
misappropriating or otherwise violating patents, copyrights, trademarks, trade
secrets and/or other intellectual property rights of third parties. It is not
possible to predict the outcome of such claims, and there can be no assurance
that such claims will be resolved in the Company's favor. If one or more of such
claims is resolved unfavorably, there can be no assurance that such outcomes
will not have a material adverse effect on the Company's business or financial
results. In particular, the data storage industry has been characterized by
significant litigation relating to infringement of patents and other
intellectual property rights. There can be no assurance that future intellectual
property claims will not result in litigation. If infringement, dilution,
misuse, misappropriation or another intellectual property rights violation were
established, the Company and/or its joint ventures (to the extent that it has
any) could be required to pay substantial damages or be enjoined from
developing, marketing, manufacturing and selling the infringing product(s) in
one or more countries. In addition, the costs of engaging in intellectual
property litigation may be substantial regardless of outcome. If the Company
seeks licensure for intellectual property that it cannot otherwise lawfully use,
there can be no assurance that the Company will be able to obtain such licensure
on satisfactory terms.
Intellectual Property Ownership
In the future, a Company employee or contractor, and not the Company,
might be deemed the legal and/or record owner of one or more patents, patent
applications or other intellectual property, which is material to protecting the
Company's data storage technology. The Company typically requires that its
employees and contractors assign to the Company all right, title and interest in
and to the intellectual property they develop for the Company. However, there
can be no assurance that the Company will obtain legal or record ownership of,
or one or more licenses to use, such intellectual property on satisfactory
terms. It is possible that failure to obtain such legal or record ownership, or
one or more licenses to use, such intellectual property will have a material
adverse effect on the Company's business or financial results.
Product Liability Considerations
The Company may face inherent business risk of exposure to product
liability claims in the event that the use or misuse of its future products is
alleged to have resulted in the death or injury of a customer, consumer or user
or to have had some other adverse effect. The Company does not presently have
product liability insurance. Currently, the Company's technology is not mass
manufactured and it is not expected to be mass manufactured in the near future.
Although the Company might obtain product liability insurance and the Company
might protect itself against product liability claims by contractually requiring
its joint ventures (to the extent that it has any): (a) to have continuous
quality control inspections, detailed training and instructions in the
manufacture of its products; (b) to indemnify the Company for damages caused by
the joint venture's own tortuous acts or omissions; and/or (c) to obtain and
maintain adequate product liability insurance, product liability lawsuits may
affect the reputation of the Company's future products and services (to the
extent that it has any) or otherwise diminish the financial resources of the
Company. If product liability suits are brought, there is no assurance that any
existing product liability insurance of the Company or a joint venture or any
existing indemnification by the Company's joint ventures will be adequate to
cover the liability claims. However, there is no assurance that product
liability insurance will continue to be available to the Company or the
Company's joint ventures in sufficient amounts at acceptable costs.
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Supply of Components and Raw Materials
It is not uncommon in the data storage technology manufacturing and
assembly industry that certain components are available only from a few or
sole-source suppliers. However, the Company anticipates that the key components
for its future products (to the extent that it has any) will be available from a
number of source suppliers and that the Company and its joint ventures will not
experience difficulty in obtaining a sufficient supply of key components on a
timely basis. As discussed below, the Company intends to develop relationships
with qualified manufacturers with the goal of securing high-volume manufacturing
capabilities and controlling the cost of current and future models of the
Company's future products (to the extent that it has any).
However, there can be no assurance that the Company will be able to
obtain a sufficient supply of components on a timely basis or on commercially
reasonable terms or realize any future cost savings. Sales may be adversely
affected for these or similar reasons. The inability to obtain sufficient
components and equipment, to obtain or develop alternative sources of supply at
competitive prices and quality or to avoid manufacturing delays could prevent
the Company's joint ventures (to the extent that it has any) from producing
sufficient quantities of the Company's products to satisfy market demand. In
addition, in the case of a component purchased exclusively from one supplier,
the Company's joint ventures (to the extent that it has any) could be prevented
from producing any quantity of the affected product(s) until such component
becomes available from an alternative source. Such adverse events could cause
delays to product shipments, thereby increasing the joint venture's material or
manufacturing costs or causing an imbalance in the inventory levels of certain
components. Moreover, difficulties in obtaining sufficient components may cause
the Company's joint venture(s) to modify the design of the Company's products to
use a more readily available component, and such design modifications may result
in product performance problems. Any or all of these problems could result in
the loss of customers, provide an opportunity for competing products to achieve
market acceptance and otherwise adversely affect the Company's business and
financial results. The Company does not believe that there are any raw materials
on which its products depend whose unavailability is a material risk to the
financial condition of the Company.
Customers
As solely a research and development company, the Company has not yet
had any customers for its products. As discussed above, the Company intends to
establish joint ventures with strategic partners to market and sell the
Company's Fluorescent Memory Technology. In the future, it is possible that the
Company or its joint ventures will have sales to one or more customers which may
equal ten percent (10%) or more of the Company's consolidated revenues. However,
the Company does not intend to become financially dependent on a small number
of, or any single, customer.
Directors' and Officers' Involvement in Other Projects
Some of the officers and directors of C3D, notably Leonardo Berezowsky,
Stuart Garawitz, Val Mandel, Joseph Shefet, and Michael Goldberg, serve and are
expected to serve as directors, officers and/or employees of companies other
than C3D. See "Directors, Executive Officers and Certain Significant Employees."
While the Company believes that such officers and directors will be devoting
adequate time to effectively manage C3D, there can be no assurance that such
other positions will not negatively impact an officer's or a director's duties
for C3D and that such impact will not have a material adverse effect on the
Company's financial condition. The Company believes that such other company
positions do not raise actual or potential conflicts of interest that could
interfere with the carrying out of the respective duties of Messrs. Berezowsky,
Garawitz, Mandel, Shefet, and Goldberg at C3D.
Legal and Regulatory Controls
The Company is not aware of any particular electrical,
telecommunication, environmental, health or safety laws and standards that will
apply to the Company's products. While the Company does not anticipate
regulation of its products, there can be no assurances that the Company will not
have to comply with laws and regulations of domestic, international or foreign
governmental or legal authorities, compliance with which could have a material
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adverse affect on the Company. The U.S. Federal Communications Commission (the
"FCC") regulates computer hardware that contains or utilizes magnetic forces to
store information. To the extent the FCC may regulate in the future
fluorescent-based computer storage devices, such as our products, compliance
with those regulations could have a material adverse effect on our financial
condition.
Market Risk
The Company expects that, like many companies, it may be exposed to
some degree of market risk, particularly for its Ukrainian, Israeli and Russian
operations. The Company cannot provide any assurance that future developments in
each respective country will not generally have an adverse effect on the
financial condition of the Company. Therefore, the Company does not anticipate
that it will enter into derivative transactions (e.g., foreign currency forward
or option contracts) to hedge against known or forecasted market changes.
No Dividends
The Company does not intend to pay dividends to the holders of any of
the Company's outstanding stock for the foreseeable future. Therefore, investors
who anticipate the need for immediate or future income by way of dividends from
their investment should refrain from the purchase of the Company's shares.
Year 2000
As of July 26, 2000, the Company's management does not have any actual
knowledge of any Year 2000 computer problem that has had, is having or will have
a material adverse effect on the Company's financial condition.
The Year 2000 issue arises with the change in century and the potential
inability of information systems to correctly "rollover" dates to the new
century. To save on computer storage space, many systems were programmed with a
two-digit century (e.g., December 31, 1999 would appears as 12/31/99) assuming
that all years would be part of the 20th century. On January 1, 2000, systems
with this programming would have defaulted to 01/01/1900 instead of 01/01/2000
and calculations using or reporting the date would not be correct and errors
would arise. To prevent this from occurring, information systems need to be
updated to ensure that they recognize the Year 2000. The Company does not
anticipate any material exposure to the Year 2000 issue. As of the date of this
Annual Report, the Company has not experienced any material adverse effects
resulting from the arrival of January 1, 2000.
The Company has completed its assessment of its information technology
systems, as well as its non-information technology systems. The Company
reasonably believes that it was not materially adversely affected by the Year
2000.
The Company's research records are primarily handwritten. The Company's
computer hardware and software is relatively new and all have been purchased
with Year 2000 computer risks in mind. The Company does not reasonably
anticipate that any of its computer hardware or software will malfunction as a
result of the Year 2000.
The Company expects that its research prototypes will accurately and
unambiguously display, reconfigure, interrupt and process all date codes
designating the Year 2000 and beyond, including leap years. However, the
Company's research prototypes may encounter a Year 2000 problem because of the
interaction of a third party's product with the Company's prototypes.
The Company is primarily relying on Year 2000 Readiness Disclosures in
its assessment of its principal suppliers. After reviewing these Year 2000
Readiness Disclosures, the Company does not foresee that any of its principle
suppliers will suffer Year 2000 issues. The Company has one supplier from which
it purchases the raw materials needed for its research operations. The Company
believes that this supplier will not face Year 2000 problems that would affect
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the supplier's ability to provide the materials the Company needs to continue
its research operations. However, in the event the supplier is unable to fill
orders to the Company as a result of a Year 2000 computer failure, the Company
is prepared to utilize other suppliers to fill its orders for raw materials.
Finally, the Company has determined that its operations in Russia,
which account for a material portion of the Company's business, were not
materially adversely affected by the Year 2000 problem. The Company's concerns
stem from the state of readiness of third parties, including the Russian
government, and not from its own level of preparation. The Company reasonably
believes that the Russian government was able to handle the possible problems
that may have arisen from the Year 2000 problem and which could put at material
risk the financial condition of the Company. However, it is possible that some
unexpected problem may arise as a result of a Year 2000 problem and cause a
material adverse impact on the Company's financial condition. The Company has
put contingency plans in place to deal with a possible Year 2000 failure in
Russia. These contingency plans include a complete back-up of all computer
files, as well as the creation of paper copies of all computer files.
Dependence on Key Personnel
The Company's success depends, to a great extent, upon its ability to
attract and retain highly qualified technical and management personnel,
including experts in the field of optical data storage technology and the
sciences underlying such technology. Such individuals are in high demand and are
often subject to competing offers. The Company faces competition for such
personnel from other companies, research and academic institutions, government
entities and other organizations. There can be no assurances that the Company
will be able to attract and retain other qualified personnel needed for its
business. Furthermore, the Company does not currently maintain "key man"
insurance for any personnel.
Competitors in the Data Storage Technology Industry
The Company estimates that there are approximately 14 enterprises
researching, developing and/or producing data storage technology, which the
Company believes to be the Company's material competitors. The data storage
technology industry is fiercely competitive, and a number of the Company's
competitors have already established their names, brands, products and
technologies in the marketplace. Some competitors are expected to have
significant market shares. Mergers, acquisitions and research and development by
the Company's competitors might further increase their market shares.
While the Company believes that its Fluorescent Memory products and
joint venture strategies will result in competitive advantages, there is no
assurance that any such advantages will be obtained or, if obtained, can be
maintained over time, that a competitor will not invent a superior technology,
or that the Company's products and services will be able to penetrate the data
storage market. Many of the Company's current and potential competitors have or
may have advantages over the Company such as greater financial, personnel,
marketing, sales and public relations resources. Existing or future competitors
may develop or offer products that provide significant performance, price,
creativeness or other advantages over those offered by the Company.
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings
On June 9, 2000, Challis International Limited ("Challis") commenced a lawsuit
in the Supreme Court of the State of New York, County of New York, against
Constellation Tech and C3D. The complaint alleges that Challis entered into
several contracts with Constellation Tech or its predecessor-in-interest
pursuant to which Constellation Tech agreed to provide Challis with 11.946% of
the shares it would receive in C3D. Although none of the contracts upon which
Challis bases its claims were with C3D, Challis seeks to hold C3D liable based
on an allegation that C3D is the alter-ego of Constellation Tech. Challis
alleges that it is entitled to 3,494,205 shares of C3D. The complaint seeks an
order directing the defendants to issue proper certificates to Challis for
3,494,205 shares of C3D or, if specific performance is not granted, the fair
market value of the shares, plus any incidental damages. The Company believes
that the outcome will not have a material adverse effect on the Company's
financial statements.
Item 2. Changes in Securities and Use of Proceeds
On June 27, 2000, C3D issued 5,000,000 (Five Million) shares of Common Stock to
Constellation 3D Trust LLC as a capital contribution. Constellation 3D Trust LLC
intends to use the 5,000,000 (Five Million) shares to raise debt or equity
capital and contribute the proceeds thereof to C3D, which proceeds shall be used
for general corporate purposes. There is no assurance that the issuance of the
shares will result in the raising of any debt or equity capital. The issuance of
the 5,000,000 (Five Million) shares of Common Stock was made as an exempt
offering under Section 4(2) of the Securities Act.
Item 3. Defaults Upon Senior Securities
On May 11, 2000, and pursuant to a Registration Rights Agreement made on
November 11, 1999 (the "Rights Agreement"), Wilbro Nominees Limited ("Wilbro")
requested the conversion, into registered Common Stock, of 40% of the $500,000
aggregate principal amount of that certain 8.0% Series "B" Convertible Note (the
"Note") dated November 11, 1999. According to the Rights Agreement, until
November 11, 2000, Wilbro has the right to demand conversion of an additional
10% of the aggregate principal amount of the Note into registered Common Stock
on the eleventh day of each month following May 2000. As of August 7, 2000, and
in the near future, C3D cannot deliver the registered securities under the
Securities Act. According to the Rights Agreement, C3D is required to pay to
Wilbro cash penalties until C3D has fully complied with the provision requiring
the delivery of registered securities. The Rights Agreement requires that for
the first month of conversion, C3D must pay the value, in cash, of 2% of the
registered securities to which Wilbro is entitled under the said Rights
Agreement, and 3% of the value, in cash, of registered securities to which
Wilbro is entitled for each thirty days thereafter until (i) the Company has
provided to Wilbro all of the registered shares of Common Stock to which Wilbro
is entitled under the Rights Agreement and (ii) the Company has fully complied
with the terms and conditions of that certain Purchase Agreement dated as of
November 11, 1999 between the Company and Wilbro. As of July 26, 2000, C3D has
paid the cash penalties to Wilbro. The amount of registered securities that
Wilbro is entitled to receive as of July 26, 2000, is 21,154 registered
securities, consisting of 13,580 as of May 11, 2000, 3,675 as of June 11, 2000,
and 3,899 as of July 11, 2000. The conversion price varies according to the
market price of C3D's Common Stock.
On October 29, 1999 and November 18, 1999, Epicenter Venture Finance Ltd.
("Epicenter") made a loan to C3D in the principal amounts of $300,000 and
$1,000,000 respectively. The $300,000 loan, along with accrued interest would
have become due and payable on March 24, 2000, but Epicenter agreed, in writing,
to extend the due date until May 19, 2000. The loan for $1,000,000 along with
accrued interest, became due and payable on July 31, 2000. As of August 3, 2000,
C3D has defaulted on payment of both loans and is negotiating with the
shareholder for a further extension. There are no financial penalties associated
with the non-payment of the loans.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are included herein:
10.1 Amendment No. 4 to Placement Agency Agreement, dated May 16, 2000, by
and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.;
Amendment No. 2 to Warrant Agreement dated May 16, 2000, between
Constellation 3D, Inc. and Sands Brothers & Co., Ltd.
10.2 Amendment No. 5 to Placement Agency Agreement, dated May 31, 2000, by
and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.;
Amendment No. 3 to Warrant Agreement, dated May 31, 2000, between
Constellation 3D, Inc. and Sands Brothers & Co., Ltd.; Amendment No. 1
to Warrant Certificate No. SB-2, dated May 31, 2000, between
Constellation 3D, Inc. and Sands Brothers & Co., Ltd.
10.3 Amendment No. 6 to Placement Agency Agreement, dated June 28, 2000, by
and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.
10.4 Amendment No. 7 to Placement Agency Agreement, dated August 3, 2000, by
and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.,
Amendment No. 4 to Warrant Agreement, dated August 3, 2000, by and
between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.,
Amendment No. 2 to Warrant Certificate No. SB-2, dated August 3, 2000,
between Constellation 3D, Inc. and Sands Brothers & Co., Ltd.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed with the Securities and Exchange
Commission during the three months ended June 30, 2000
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSTELLATION 3D, INC.
----------------------
(Registrant)
Date: August 14, 2000 By: /s/ Eugene Levich
-----------------------
EUGENE LEVICH
President and
Chief Executive Officer
(Principal Executive Officer
and Director)
Date: August 14, 2000 By: /s/ Leonardo Berezowsky
-----------------------
LEONARDO BEREZOWSKY
Chief Financial Officer and Senior
Vice President of Finance
(Principal Financial and
Accounting Officer)
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<PAGE>
CONSTELLATION 3D, INC.
INDEX TO EXHIBITS
Exhibit
Number
------
10.1 Amendment No. 4 to Placement Agency Agreement, dated May 16, 2000, by
and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.;
Amendment No. 2 to Warrant Agreement dated May 16, 2000, between
Constellation 3D, Inc. and Sands Brothers & Co., Ltd.
10.2 Amendment No. 5 to Placement Agency Agreement, dated May 31, 2000, by
and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.;
Amendment No. 3 to Warrant Agreement, dated May 31, 2000, between
Constellation 3D, Inc. and Sands Brothers & Co., Ltd.; Amendment No. 1
to Warrant Certificate No. SB-2, dated May 31, 2000, between
Constellation 3D, Inc. and Sands Brothers & Co., Ltd.
10.3 Amendment No. 6 to Placement Agency Agreement, dated June 28, 2000, by
and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.
10.4 Amendment No. 7 to Placement Agency Agreement, dated August 3, 2000, by
and between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.,
Amendment No. 4 to Warrant Agreement, dated August 3, 2000, by and
between Sands Brothers & Co., Ltd. and Constellation 3D, Inc.,
Amendment No. 2 to Warrant Certificate No. SB-2, dated August 3, 2000,
between Constellation 3D, Inc. and Sands Brothers & Co., Ltd.
27.1 Financial Data Schedule
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