SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________________to______________________
COMMISSION FILE NUMBER: 000-23329
C3, Inc.
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(Exact name of Registrant as specified in its charter)
North Carolina 56-1928817
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3800 Gateway Boulevard, Suite 310, Morrisville, N.C. 27560
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(Address of principal executive offices)
919-468-0399
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of May 9, 1999 there were 7,004,669 shares of the Registrant's Common Stock,
no par value per share, outstanding.
C3, Inc.
INDEX
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Condensed Statements of Operations - Three Months Ended March 31,
1999 And 1998
Condensed Balance Sheets - March 31, 1999 And December 31, 1998
Condensed Statements Of Cash Flows - Three Months Ended March 31,
1999 And 1998
Notes To Condensed Financial Statements
Item 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
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Item 2. Changes In Securities And Use Of Proceeds
Item 5. Other Information
Item 6. Exhibits And Reports On Form 8-K
Signatures
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
C3, Inc.
Condensed Statements Of Operations
(Unaudited)
Three Months Ended March 31,
---------------------------------
1999 1998
------------ ------------
Net sales $ 3,229,464 $ 250,555
Cost of goods 2,095,578 155,076
----------- -----------
Gross profit 1,133,886 95,479
Operating expenses:
Marketing and sales 603,304 761,136
General and administrative 798,934 627,330
Research and development 803,056 1,322,512
----------- -----------
Total operating expenses 2,205,294 2,710,978
----------- -----------
Operating loss (1,071,408) (2,615,499)
Interest income, net 364,977 520,495
----------- -----------
Net loss $ (706,431) $(2,095,004)
=========== ===========
Basic and diluted net loss
per share $ (0.10) $ (0.30)
=========== ===========
Weighted-average common
shares, basic and diluted 6,997,726 6,938,476
=========== ===========
See notes to Condensed Financial Statements.
3
C3, Inc.
Condensed Balance Sheets
March 31, December 31,
1999 1998
--------------- --------------
ASSETS (Unaudited)
Current Assets:
Cash and equivalents $ 30,304,859 $ 32,004,045
Accounts receivable, net 440,965 546,921
Interest receivable 106,264 121,276
Inventories 4,224,844 3,092,448
Prepaid expenses and other assets 306,875 294,797
------------ ------------
Total current assets 35,383,807 36,059,487
Equipment, net 3,783,747 3,832,019
Patent and license rights, net 285,781 276,817
------------ ------------
Total assets $ 39,453,335 $ 40,168,323
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Cree Research, Inc. $ 1,483,764 $ 1,679,600
Other 343,319 250,157
Accrued expenses 236,226 223,248
Deferred revenue 1,110 18,986
------------ ------------
Total current liabilities 2,064,419 2,171,991
Commitments
Shareholders' Equity:
Common stock 48,179,964 48,149,406
Additional paid-in capital - stock options 1,978,825 1,910,368
Accumulated deficit (12,769,873) (12,063,442)
------------ ------------
Total shareholders' equity 37,388,916 37,996,332
------------ ------------
Total liabilities and shareholders' equity $ 39,453,335 $ 40,168,323
============ ============
See notes to Condensed Financial Statements
4
C3, Inc.
Condensed Statements Of Cash Flows
(Unaudited)
Three Months Ended March 31,
---------------------------------------------
1999 1998
---------------- ---------------
OPERATING ACTIVITIES:
Net loss $ (706,431) $ (2,095,004)
Adjustments:
Depreciation and amortization 130,467 15,499
Compensation expense related to stock options 68,457 50,879
Change in operating assets and liabilities:
Net change in assets (1,023,506) (512,308)
Net change in liabilities (107,572) 420,152
---------------- ---------------
Net cash used by operating activities (1,638,585) (2,120,782)
---------------- ---------------
INVESTING ACTIVITIES:
Purchase of equipment (77,744) (114,181)
Patent costs (13,415) (22,479)
---------------- ---------------
Net cash used by investing activities (91,159) (136,660)
---------------- ---------------
FINANCING ACTIVITIES:
Stock options exercised 30,558 ----
---------------- ---------------
Net cash provided by financing activities 30,558 ----
---------------- ---------------
Net change in cash and equivalents (1,699,186) (2,257,442)
Cash and equivalents, beginning of period 32,004,045 43,980,385
---------------- ---------------
Cash and equivalents, end of period $ 30,304,859 $ 41,722,943
================ ===============
See notes to Condensed Financial Statements.
5
C3, Inc.
Notes To Condensed Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the financial statements include all
normal recurring adjustments which are necessary for the fair presentation of
the results of the interim periods presented. Interim results are not
necessarily indicative of results for the fiscal year. Certain reclassifications
have been made to prior year's financial statements to conform to the
classifications used in fiscal 1999. These financial statements should be read
in conjunction with the Company's audited financial statements for the year
ended December 31, 1998, as set forth in the Company's Form 10-K, filed with the
Securities and Exchange Commission on March 18, 1999.
Prior to July 1, 1998 C3, Inc. was a development stage company which devoted
substantially all of its efforts to research and product development and
development of its initial markets and did not, through June 30, 1998, generate
significant revenues from its planned principal operations.
In preparing financial statements that conform with generally accepted
accounting principles, management must make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and amounts of
revenues and expenses reflected during the reporting period. Actual results
could differ from those estimates.
2. INVENTORIES
Inventories are stated at the lower of cost or market determined on a first in,
first out basis. At March 31, 1999 finished goods includes $850,398 of test
instruments, net of a $244,000 reserve for excess inventory. At December 31,
1998 finished goods includes $1,018,465 of test instruments, net of a $132,000
reserve for excess inventory. Inventories consisted of the following:
March 31, December 31,
1999 1998
----------------- -----------------
Raw materials $ 855,347 $ 140,411
Work in process 1,299,836 819,953
Finished goods 2,069,661 2,132,084
----------------- -----------------
Total inventory $ 4,224,844 $ 3,092,448
================= =================
6
3. NON-CASH OPERATING EXPENSES
During the quarter ended March 31, 1999, in accordance with Accounting
Principles Board Opinion No. 25, the Company recorded compensation expense of
approximately $68,457 relating to stock options. Compensation expense related to
stock options for the quarter ended March 31, 1998 was approximately $51,000.
This compensation expense is recorded in general and administrative expense in
the statements of operations.
4. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133 ("FAS 133"),
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133 is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999. The
Company has not evaluated the impact of the adoption of this Statement on the
financial statements.
5. SUBSEQUENT EVENT
In May 1999 the Company entered into a letter agreement ("Letter Agreement")
with its exclusive supplier, Cree Research, Inc. ("Cree"). Under the Letter
Agreement the Company has agreed to purchase $2.8 million of crystal growth
equipment from Cree and to purchase all crystals produced by existing crystal
growers and the new crystal growers through June 30, 2000 at a price based upon
a sliding scale depending on the quality of each crystal received. Additionally
the two companies agreed to reduce the Company's monthly funding commitment
under the Amended and Restated Development Agreement from $240,000 to $120,000.
A portion of the crystal growers will be built to grow 3-inch diameter crystals
and the rest will grow 2-inch diameter crystals.
The Company will pay the purchase price of the systems on a monthly basis as the
systems are manufactured. Once completed the systems will remain at Cree where
Cree will use them to produce silicon carbide ("SiC") crystals for the Company.
When the systems are fully depreciated, the Company is obligated to transfer
title to Cree. The first of these systems will come on-line in September 1999
with the balance coming on-line through the remainder of 1999. The Company
intends to fund the purchase of these systems from its existing cash and
equivalents.
7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 that relate to the Company's future plans, objectives, estimates and
goals. These statements are subject to numerous risks and uncertainties,
including macro and micro economic factors that affect businesses operating in
the international economy, the Company's reliance on Cree Research, Inc.
("Cree") as a developer and supplier of SiC crystals, the level of growth in
domestic and international gemstone jewelry markets, the level of market
acceptance of and demand for the Company's products, and the actions of existing
and potential competitors. These and other risks and uncertainties are described
under the heading "Business Risks" in the Company's Form 10-K for the year ended
December 31, 1998, which was filed with the Securities and Exchange Commission
on March 18, 1999. These risks and uncertainties could cause actual results and
developments to be materially different from those expressed or implied by any
of the forward-looking statements included herein.
OVERVIEW
From its inception in June 1995 through June 30, 1998, the Company was a
development stage enterprise that devoted its resources to funding research and
development of colorless lab-created moissanite gemstones, market research,
developing initial consumer marketing themes and assembling a management team.
The Company's principal business is the manufacture, marketing and distribution
of lab-created moissanite gemstones (hereinafter referred to as moissanite or
moissanite gemstones). Moissanite is being marketed as an exclusive new gemstone
with properties, including brilliance, fire and hardness, that rival other fine
gemstones like diamond, sapphire, ruby and emerald.
The Company began shipping moissanite to authorized retail jewelers in Atlanta
and Miami/Ft. Lauderdale during the second quarter of 1998, and, in July 1998,
launched consumer-focused advertising and promotion activities in those areas.
Since mid-1998 the Company has expanded the number of authorized retail jewelers
primarily located in the southeastern states of North Carolina, South Carolina,
Georgia and Florida and increased the number of exclusive international
distributors. To date marketing and promotion activities have been focused
primarily in these southeastern states. Domestically, during 1999, the Company
will focus on the market introduction of moissanite in other areas of the United
States and as a result of these efforts expects moissanite may be available in
as many as 500 retail locations by the end of 1999, although there can be no
assurance that the Company will be successful in its efforts to expand its
domestic distribution. As the Company develops a sufficient network of
authorized retail jewelers, it expects to begin a national advertising campaign,
which could begin as early as the second half of 1999. The Company will seek to
expand the international distribution of moissanite and believes international
sales could represent 2/3 of total sales for 1999.
The Company believes that its sales volumes will increase as the yield of
salable gemstones from each crystal provided by Cree increases, additional
crystal growth capacity is added, and as the market introduction of moissanite
gemstones expands geographically. As distribution of moissanite expands, the
Company will incur increasing spending levels as it continues to make
investments in development efforts with Cree to increase production volumes and
yields, as it makes investments in receivables, inventory and manufacturing
equipment, and as it increases advertising, marketing and personnel
expenditures. The Company expects to continue operating at a loss through at
least part of 1999. Moreover, there can be no assurance that the Company will
ever achieve the expected sales increases or profitability or that if
profitability is achieved, that such profitability can be sustained.
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
Net sales increased by $2,978,909 from $250,555 for the three months ended March
31, 1998 to $3,229,464 for the three months ended March 31, 1999. The Company
generated net sales of approximately $2,952,000 from moissanite for the three
months ended March 31, 1999. During the first three months of 1998, prior to
emerging from the development stage, the Company generated net sales of
approximately $81,000 from gemstones, which have been netted against research
and development expenses on the operating statement because many of the
gemstones sold were associated with the Company's research and development
program. Net sales from the Company's proprietary test instrument decreased from
approximately $250,555 for the three months ended March 31, 1998 to $162,000 for
the three months ended March 31, 1999.
Gross profit increased by $1,038,407 from $95,479 or 38% of sales for the three
months ended March 31, 1998 to $1,133,886 or 35% of sales for the three months
ended March 31, 1999. Gross profit for the three months ended March 31, 1998
related entirely to sales of the Company's proprietary test instrument. The
Company will seek to increase gross margins for moissanite gemstones as the
Company realizes improved yields from each SiC crystal produced by Cree. Gross
margins for test instruments will likely decrease over time as the Company
enters into additional volume distribution agreements and if it experiences
pricing pressures on its testers from competitive test instruments.
Marketing and sales expenses decreased by $157,832 from $761,136 for the three
months ended March 31, 1998 to $603,304 for the three months ended March 31,
1999. The decrease was primarily due to non-recurring expenditures for market
research and initial development of advertising and marketing materials in the
first quarter of 1998.
General and administrative expenses increased by $171,604 from $627,330 for the
three months ended March 31, 1998 to $798,934 for the three months ended March
31, 1999. The increase resulted primarily from compensation and other expenses
related to additional staff, occupancy expenses and investor relations expenses
associated with business expansion and SEC compliance obligations incurred as a
public company.
Research and development expenses decreased by $519,456 from $1,322,512 for the
three months ended March 31, 1998 to $803,056 for the three months ended March
31, 1999. The decrease resulted primarily from the more focused development
effort under the Company's July 1998 Amended and Restated Development Agreement
with Cree Research, Inc. The July 1998 agreement replaced the June 1997
Development Agreement and the January 1998 Supplemental Development Agreement
between C3 and Cree and provides both parties increased flexibility to pursue
further color and yield improvements on both 2-inch and 3-inch diameter
crystals.
Net interest income decreased by $155,518 from $520,495 for the three months
ended March 31, 1998 to $364,977 for the three months ended March 31, 1999. This
decrease resulted from lower interest income earned on lower cash balances due
primarily to the use of the invested proceeds from the Company's initial public
offering in November 1997. See Part II, Item 2.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the
net proceeds of its initial public offering of Common Stock in November 1997
and, prior to such offering, through private equity sales. Net proceeds from the
Company's initial public offering were $41,072,982. During the first quarter of
1999, the Company used $1,638,585 to fund operations and $91,159 to fund capital
expenditures and patent expenses. At March 31, 1999, the Company had $30,304,859
of cash and cash equivalents and $33,319,388 of working capital. The Company
anticipates that its existing capital resources will be adequate to satisfy its
capital requirements for at least the next 12 months.
The Company has entered into a number of agreements with specialty retail
jewelry stores in the United States and with international distributors. See
Item 5 of Part II of this Quarterly Report. To support this expansion of its
distribution network, the Company has begun to build inventory levels and
intends to significantly increase its advertising and marketing expenditures as
it develops and implements a national advertising campaign. The advertising
campaign could aggregate $1-1.5 million in the second half of 1999. The Company
intends to fund these inventories and advertising and marketing expenditures
from its existing cash and equivalents.
Additionally, in May 1999 the Company entered into a letter agreement ("Letter
Agreement") with its exclusive supplier, Cree Research, Inc. ("Cree"). Under the
Letter Agreement the Company has agreed to purchase $2.8 million of crystal
growth equipment from Cree and to purchase all crystals produced by existing
crystal growers and the new crystal growers through June 30, 2000 at a price
based upon a sliding scale depending on the quality of each crystal received.
Additionally the two companies agreed to reduce the Company's monthly funding
commitment under the Amended and Restated Development Agreement from $240,000 to
$120,000. A portion of the crystal growers will be built to grow 3-inch diameter
crystals and the rest will grow 2-inch diameter crystals.
The Company will pay the purchase price of the systems on a monthly basis as the
systems are manufactured. Once completed the systems will remain at Cree where
Cree will use them to produce SiC crystals for the Company. When the systems are
fully depreciated, the Company is obligated to transfer title to Cree. The first
of these systems will come on-line in September 1999 with the balance coming
on-line through the remainder of 1999. The Company intends to fund the purchase
of these systems from its existing cash and equivalents.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept entries to distinguish 21st century dates from 20th century
dates. The inability to recognize or properly treat dates subsequent to December
31, 1999 may cause a company's systems and applications to process critical
financial and operational information incorrectly. The Company has undertaken a
program to address the Year 2000 issue with respect to the following: (i) the
Company's information technology and operating systems; and (ii) certain systems
of the Company's major suppliers, including Cree (insofar as such systems relate
to the Company's business activities with such parties).
As part of its evolution to an operating company, the Company has selected and
is in the process of implementing an enterprise-wide information technology
system to support the long-term information
10
needs of the Company. The Company has received written confirmation from the
software vendor that the information technology system selected by the Company
is fully Year 2000 compliant. The Company anticipates that the implementation of
this system and testing of the Year 2000 compliance of the system will be
completed by mid 1999 and that the Year 2000 issue will not pose significant
operational problems for its computer systems. The Company is in the process of
reviewing its non-information technology systems for Year 2000 compliance and
expects this review to be complete by mid 1999. The Company believes the Year
2000 exposure with respect to those systems is not material.
The Company believes that its greatest risk with respect to the Year 2000 issue
stems from the potential non-compliance of our suppliers. The Company depends on
one supplier of SiC crystals, Cree, and on a limited number of suppliers of
other components services necessary for the manufacture of moissanite gemstones.
Accordingly, if those suppliers are unable to process or fill the Company's
orders or otherwise interact with us because of Year 2000 problems, the Company
could experience material adverse effects to its business. The Company has
initiated communications with its significant suppliers and vendors, including
Cree. The Company is coordinating efforts with these parties to minimize the
extent to which the Company's business will be vulnerable to their failure to
remediate their own Year 2000 issues. The Company has received confirmation from
its significant suppliers and vendors that they have developed plans to address
the Year 2000 compliance issues of their systems prior to December 31, 1999.
The crystal growth systems, which Cree uses to produce SiC crystals for the
Company, are dependent upon microprocessors. The Company has received written
confirmation from Cree that it has evaluated the crystal growth systems and
determined that they are fully Year 2000 compliant. Cree has also evaluated and
remediated its other business systems that rely on microprocessors. According to
Cree's Form 10Q for the quarter ended March 28, 1999, Cree has completed all
Year 2000 compliance efforts with respect to its business systems. Any
unexpected Year 2000 issues at Cree could cause delays in the receipt of SiC
crystals which would, in turn, delay deliveries of moissanite gemstones to the
Company's customers. Any significant delay in the Company's receipt of SiC
crystals or resulting delay in delivery of moissanite gemstones would have a
material adverse effect on the Company's business, operating results and
financial condition.
There can be no assurance that the systems of third parties on which the
Company's business relies will be modified on a timely basis. Additionally, to
the extent that the general economy slows down as a result of Year 2000
compliance issues, the Company's operations could be affected. The Company's
business, financial condition and results of operations could be materially
adversely affected by the failure of its systems or those operated by other
parties to operate properly beyond December 31, 1999. Although there is
currently no alternative source for SiC crystals, to the extent possible, the
Company will develop and execute contingency plans designed to allow continued
operation in the event of failure of the Company's or third parties' systems.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company believes that its exposure to market risk for changes in interest
rates is not significant because the Company's investments are limited to highly
liquid instruments with maturities of three months or less. At March 31, 1999
the Company has approximately $29.6 million of short-term investments classified
as cash and equivalents. All of the Company's transactions with international
customers and suppliers are denominated in US dollars.
11
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On November 14, 1997, the Securities and Exchange Commission declared the
Company's Registration Statement on Form S-1 (File No. 333-36809) to be
effective. The net proceeds of this offering were $41,072,982. As of March 31,
1999, the Company had approximately $22,530,600 of the remaining net proceeds of
the offering invested in money market accounts, debt instruments having an
original maturity of three months or less and other highly liquid investments.
Approximately $5,594,800 of the proceeds has been used in research and
development, of which $173,225 was paid to officers, directors or shareholders
owning more than ten percent (10%) of the Common Stock outstanding. The Company
has also used approximately $5,475,100 to fund sales, marketing and
administrative expenses, of which $383,000 was paid to officers, directors or
shareholders owning more than ten percent (10%) of the Common Stock outstanding.
The Company also expended approximately $3,517,500 to build inventory of its
products. In addition, the Company acquired $3,955,000 of production equipment,
including $3,375,000 of crystal growth systems from Cree, certain computerized
wafering and preform development equipment, and other equipment.
ITEM 5: OTHER INFORMATION
The Company has entered into a number of agreements with specialty retail
jewelers with an aggregate of over 150 locations in 31 states. Additionally, the
Company has entered into 21 international agreements for distribution of
moissanite gemstones in 27 countries and various areas in the Caribbean. The
international agreements require aggregate annual moissanite purchases of
approximately $16 million during calendar 1999 and approximately $18 million
during calendar 2000.
In May 1999, the Company announced the addition of Mary Katherine Rafferty as
Director of Marketing and Public Relations. Ms. Rafferty has 20 years of
marketing and public relations experience primarily in the jewelry and cosmetics
industries.
Additionally, in May 1999 the Company entered into a letter agreement ("Letter
Agreement") with its exclusive supplier, Cree Research, Inc. ("Cree"). Under the
Letter Agreement the Company has agreed to purchase $2.8 million of crystal
growth equipment from Cree and to purchase all crystals produced by existing
crystal growers and the new crystal growers through June 30, 2000 at a price
based upon a sliding scale depending on the quality of each crystal received.
Additionally the two companies agreed to reduce the Company's monthly funding
commitment under the Amended and Restated Development Agreement from $240,000 to
$120,000. A portion of the crystal growers will be built to grow 3-inch diameter
crystals and the rest will grow 2-inch diameter crystals.
The Company will pay the purchase price of the systems on a monthly basis as the
systems are manufactured. Once completed the systems will remain at Cree where
Cree will use them to produce SiC crystals for the Company. When the systems are
fully depreciated, the Company is fully obligated to transfer title to Cree; the
first of these systems will come on-line in September 1999 with the balance
coming on-line through the remainder of 1999. The Company intends to fund the
purchase of these systems from its existing cash and equivalents.
12
Consistent with the Company's efforts to improve and secure its products, the
Company has obtained certain rights for manufacturing gemstone products and
gemological instrumentation which may arise from inventions made by C. Eric
Hunter related to wide-band gap compound semiconductor materials. Mr. Hunter is
the lead author on U.S. patents owned by the Company for synthetic SiC
gemstones. Under a Licensing Agreement effective as of October 10, 1998, C. Eric
Hunter granted the Company an irrevocable, exclusive and perpetual license to
utilize certain new patent applications for compound semiconductor materials
that potentially have use in the manufacture of synthetic gemstones and
gemological instrumentation. Under the Licensing Agreement, the Company agreed
to pay for the cost of filing, prosecuting and maintaining those patent
applications in the United States and to indemnify C. Eric Hunter from any
claims made against Mr. Hunter relating to any patent infringement for gemstone
and gemological instrumentation or relating to his involvement with C3 through
December 31, 2003.
Mr. Hunter has filed a number of patent applications on technology covered under
the Licensing Agreement, one of which has been issued (US Patent Number
5858086), and the Company has paid or reimbursed legal expenses relating to the
patent and patent applications of approximately $58,000 to date. The Company
also has the right to license other technology developed by Mr. Hunter through
December 31, 2003 under the same terms and conditions.
The Company entered into the License Agreement in order to assure itself of
rights to future gemstone technology developed by C. Eric Hunter. The
technologies are covered by existing patent applications and are in the very
early stages of development. Based on the development to date, the Company is
unable to assess the extent to which these technologies may enable the Company
to pursue new gemstone products or improve existing products. Should the Company
ever use any of these technologies in its products, the Company has agreed to
pay Mr. Hunter a royalty based on net sales of those products. If Mr. Hunter
manufactures gemstone materials or gemological instrumentation using the
inventions, he has agreed to sell those materials or instruments exclusively to
C3 at his cost plus an agreed upon margin. The Company believes the terms of the
royalty and product purchases to be no less favorable than they could obtain
from a third party. The Company has no obligation to fund any development
expenses other than legal fees, including filing, prosecuting and maintaining
said patents and patent applications.
C. Eric Hunter is the brother of Jeff N. Hunter, the Chairman and Chief
Executive Officer of the Company, and according to information obtained from his
Schedule 13G dated January 18, 1999 was also the beneficial owner of
approximately 9.4% of the Company's common stock.
13
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.33 Employment Agreement, dated May 1, 1999, between Mary
Katherine Rafferty and C3, Inc.+
10.34 Letter Agreement, dated May 3, 1999 between Cree
Research, Inc. and C3, Inc.*
10.35 Licensing Agreement, dated October 10, 1998, between
C. Eric Hunter and C3, Inc.*
27.1 Financial Data Schedule
* The Company has requested that certain portions of this exhibit be
given confidential treatment. An unredacted version of this Exhibit
has been filed with the Commission.
+ Denotes a management contract or compensatory plan or arrangement.
(b) Report on Form 8-K
The Company filed a current Report on Form 8-K on March 11, 1999 to
report the Company's adoption of a Shareholder Rights Agreement.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C3, Inc.
Date: May 17, 1999 /s/ Jeff N. Hunter
-------------------
Jeff N. Hunter
Chief Executive Officer and Chairman of the Board
and Director
(Principal Executive Officer)
Date: May 17, 1999 /s/ Mark W. Hahn
----------------
Mark W. Hahn
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15