1
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 September 30, 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 incorporation or organization) (I.R.S. Employer Identification No.)
3800 Gateway Boulevard, Suite 311, 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 October 31, 1999 there were 7,098,911 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 and Nine Months Ended September 30, 1999 And 1998
Condensed Balance Sheets - September 30, 1999 And December 31, 1998
Condensed Statements Of Cash Flows - Nine Months Ended September 30, 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)
Quarter Ended September 30, Nine Months Ended September 30,
----------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- ---------------- ---------------- ---------------
Net sales $ 2,169,539 $ 1,326,373 $ 8,932,615 $ 1,778,938
Cost of goods 949,535 1,089,648 4,676,790 1,380,200
--------------- ---------------- ---------------- ---------------
Gross profit 1,220,004 236,725 4,255,825 398,738
Operating expenses:
Marketing and sales 1,461,286 928,598 3,236,924 2,202,597
General and administrative 815,843 543,018 2,256,653 1,885,224
Research and development 682,237 785,869 2,274,987 3,196,711
--------------- ---------------- ---------------- ---------------
Total operating expenses 2,959,366 2,257,485 7,768,564 7,284,532
--------------- ---------------- ---------------- ---------------
Operating loss (1,739,362) (2,020,760) (3,512,739) (6,885,794)
Interest income, net 291,949 467,532 978,290 1,461,718
--------------- ---------------- ---------------- ---------------
Net loss $ (1,447,413) $ (1,553,228) $ (2,534,449) $ (5,424,076)
=============== ================ ================ ===============
Basic and diluted net loss
per share $ (0.21) $ (0.22) $ (0.36) $ (0.78)
=============== ================ ================ ===============
Weighted-average common
shares, basic and diluted 7,054,383 6,956,071 7,021,339 6,945,356
=============== ================ ================ ===============
See Notes to Condensed Financial Statements.
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C3, Inc.
Condensed Balance Sheets
September 30, 1999 December 31, 1998
------------------------ ----------------------
ASSETS (Unaudited)
Current Assets:
Cash and equivalents $ 21,973,656 $ 32,004,045
Accounts receivable, net 881,031 546,921
Interest receivable 123,024 121,276
Inventories 10,312,033 3,092,448
Prepaid expenses and other assets 596,585 294,797
------------------------ ----------------------
Total current assets 33,886,329 36,059,487
Equipment, net 6,418,795 3,832,019
Patent and license rights, net 536,021 276,817
======================== ======================
Total assets $ 40,841,145 $ 40,168,323
======================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Cree Research, Inc. $ 3,532,119 $ 1,679,600
Other 970,234 250,157
Accrued expenses 267,119 223,248
Deferred revenue 32,372 18,986
------------------------ ----------------------
Total current liabilities 4,801,844 2,171,991
Commitments
Shareholders' Equity:
Common stock 48,757,702 48,149,406
Additional paid-in capital - stock options 1,879,490 1,910,368
Accumulated deficit (14,597,891) (12,063,442)
------------------------ ----------------------
Total shareholders' equity 36,039,301 37,996,332
------------------------ ----------------------
Total liabilities and shareholders' equity $ 40,841,145 $ 40,168,323
======================== ======================
See Notes to Condensed Financial Statements
4
C3, Inc.
Condensed Statements Of Cash Flows
(Unaudited)
Nine Months Ended September 30,
----------------------------------------
1999 1998
------------------ ------------------
OPERATING ACTIVITIES:
Net loss $(2,534,449) $(5,424,076)
Adjustments:
Depreciation and amortization 474,811 106,345
Compensation expense related to stock options 210,496 276,648
Change in operating assets and liabilities:
Net change in assets (7,857,231) (2,263,796)
Net change in liabilities 2,629,853 754,901
------------------ ------------------
Net cash used in operating activities (7,076,520) (6,549,978)
------------------ ------------------
INVESTING ACTIVITIES:
Purchase of equipment (3,010,790) (2,980,066)
Patent costs (310,001) (72,534)
------------------ ------------------
Net cash used in investing activities (3,320,791) (3,052,600)
------------------ ------------------
FINANCING ACTIVITIES:
Stock options exercised 366,922 23,694
------------------ ------------------
Net cash provided by financing activities 366,922 23,694
------------------ ------------------
Net change in cash and equivalents (10,030,389) (9,578,884)
Cash and equivalents, beginning of period 32,004,045 43,980,385
================== ==================
Cash and equivalents, end of period $21,973,656 $34,401,501
================== ==================
See Notes to Condensed Financial Statements.
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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 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. As part of the
Company's transition from a technology-focused manufacturing company to a
consumer-focused marketing company, C3 began doing business as Charles & Colvard
in October 1999. The name reflects the heritage of the Company as well as the
long-term binding and marketing strategy.
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. Test instruments are shown net of a reserve for excess
inventory of $356,000 at September 30, 1999 and $132,000 at December 31, 1998.
September 30, December 31,
1999 1998
----------------- -----------------
Moissanite
Raw materials $ 397,516 $ 140,411
Work-in-process 3,937,308 819,953
Finished goods 5,435,612 1,113,619
----------------- -----------------
9,770,436 2,073,983
Test Instruments 541,597 1,018,465
----------------- -----------------
Total Inventory $10,312,033 $ 3,092,448
================= =================
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3. STOCK BASED COMPENSATION
During the quarter and nine months ended September 30, 1999, in accordance with
Accounting Principles Board Opinion No. 25, the Company recorded compensation
expense of $58,665 and $210,496, respectively, relating to stock options.
Compensation expense related to stock options for the quarter and nine months
ended September 30, 1998 was $129,870 and $276,648, respectively. 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, as amended by
FAS 137, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. The Company has not evaluated the impact of the adoption of
this Statement on the financial statements.
5. ADVERTISING COSTS
Advertising production costs are expensed as incurred. Media placement costs are
expensed over the period the advertising appears. Advertising expenses for the
quarter and nine months ended September 30, 1999 amounted to approximately
$383,000 and $905,000 respectively. Advertising expenses for the quarter and
nine months ended September 30, 1998 amounted to approximately $319,000 and
$440,000 respectively.
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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
The Company's principal business is to manufacture moissanite jewels and market
them on a worldwide basis. As the sole manufacturer of scientifically-made
moissanite jewels, the Company plans to create a unique brand image which
positions moissanite as a jewel in its own right, distinct from all other jewels
based on its fire, brilliance, luster and durability.
From its inception in June 1995 through June 30, 1998, the Company was a
development stage enterprise that devoted its resources to fund research and
development of colorless, scientifically-made moissanite jewels. At the same
time, the Company assembled a management team, conducted market research and
developed its strategic business plans.
The Company began shipping moissanite to authorized retail jewelers in Atlanta
and Miami/Ft. Lauderdale during the second quarter of 1998. Through the first
half of 1999, the Company's distribution of moissanite was inhibited by limited
product availability.
During the second quarter of 1999, Cree showed marked improvement in silicon
carbide crystal quality resulting in increased yield of salable jewels from
2-inch diameter crystals. The improvements in SiC crystal yield continued
through the third quarter of 1999. All of the new 3-inch diameter crystal growth
systems came on-line during the third quarter. Although the yields of the 3-inch
diameter crystals are much lower than the yields on the 2-inch diameter
crystals, the yield of the initial deliveries of 3-inch diameter crystals
exceeded the Company's expectations. The Company expects the yields of the
3-inch diameter crystals to vary over the next several quarters as a
manufacturing process evolves. Any significant increases or decreases in yields
would have a corresponding material impact on gross margins.
As the Company continues to expand its distribution channels, it is developing a
deeper understanding of the dynamics of the market, especially the impact of
seasonality on quarterly sales. The Company identified several issues in the
third quarter, including a slower than expected rate of adding retailers in the
U.S., lack of targeted retailer-driven marketing programs abroad, and third
quarter seasonality, particularly in international markets. The Company has
developed a global, strategic marketing program which it believes will address
these issues as well as increase consumer awareness of moissanite jewels.
8
This program is focused on creating consumer demand for the moissanite brand and
is based on new insight into the Company's target consumer. Its aim is to
inspire the target group to seek out moissanite. The Company believes that
seasonality will continue to have a meaningful impact on its results of
operations.
The global strategic marketing campaign opened November 1999. The first 100 days
is a consumer communications blitz greater than any in the Company's history. It
targets the Company's consumers on national cable television, in Harper's
Bazaar, local market special events and promotions. And, in a non-traditional
media purchase, advertising will appear in movie theaters in 10 of the leading
media markets. An estimated advertising and promotional budget of $6 million is
projected for 2000, with an additional expenditure of $2 million in the fourth
quarter of 1999. Furthermore, the Company's integrated marketing program, which
includes point-of-purchase materials, became available to the Company's
exclusive retailers in the second half of October. This global campaign will
target early adapter working women ages 25-54 with an annual household income in
excess of $50,000, will feature a new corporate logo, and will expand into
international markets next year. Additionally, as part of the Company's
transition from a technology-focused manufacturing company to a consumer-focused
marketing company, C3 has begun doing business as Charles & Colvard. This name
reflects the heritage of the Company as well as the long-term branding and
marketing strategy to be executed in the fourth quarter and beyond.
In concert with the advertising program, the Company's sales efforts are focused
on ten of the leading media markets in the U.S. to capitalize upon placement of
the product in influential, trend-setting cities. The Company will continue to
add qualified retailers domestically and expects carat shipments to increase in
the fourth quarter. However, the Company will not meet previously announced
estimates for the second half of the year. As the Company is expanding its
marketing and promotion activities, it expects to continue operating at a loss
through at least the end of 1999. Moreover, there can be no assurance that the
Company will ever achieve sales increases or profitability, or that if
profitability is achieved, that such profitability can be sustained.
The Company is in the process of refining its international distribution
methods, beginning with Western Europe. The Company is in discussions with
certain of its exclusive international distributors to expand their distribution
territories and provide the Company with more control over the positioning and
advertising of moissanite in their respective territories. The Company
anticipates that the distribution of moissanite in Western Europe will be
performed by two independent distributors.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED WITH QUARTER ENDED SEPTEMBER 30, 1998.
Net sales were $2,169,539 for the quarter ended September 30, 1999 compared to
$1,326,373 for the quarter ended September 30, 1998, an increase of 843,166 or
63.6%. The increase resulted primarily from expanded distribution of moissanite
jewels. The Company will continue to add qualified retailers domestically and
expects carat shipments to increase in the fourth quarter. However, the Company
will not meet previously announced estimates for the second half of the year.
The Company's gross profit margin was 56.2% for the quarter ended September 30,
1999 compared to 17.8% for the quarter ended September 30, 1998. The increase
resulted from higher yields of moissanite jewels from SiC crystals purchased
from Cree, thereby lowering the cost per carat. Throughout the remainder of
1999, particularly as the Company works with Cree to develop a manufacturing
process for the new 3-inch diameter crystal growth systems, yields may vary. Any
significant yield changes would have a material impact on gross profit.
9
Marketing and sales expenses were $1,461,286 for the quarter ended September 30,
1999 compared to $928,598 for the quarter ended September 30, 1998, an increase
of $532,688 or 57.4%. The increase was due primarily to the development of the
strategic global marketing program, including the creative and production
efforts supporting the specific advertising messages and materials to be
launched in the fourth quarter of 1999, as well as compensation and other
expenses related to additional staff.
General and administrative expenses were $815,843 for the quarter ended
September 30, 1999 compared to $543,018 for the quarter ended September 30,
1998, an increase of $272,825 or 50.2%. The increase resulted primarily from
compensation and other expenses related to additional staff and increased
insurance and taxes on the Company's increasing fixed assets.
Research and development expenses were $682,237 for the quarter ended September
30, 1999 compared to $785,869 for the quarter ended September 30, 1998, a
decrease of $103,632 or 13.2%. The decrease resulted primarily from the
reduction of development efforts effective September 1, 1999, as provided in the
May 1999 letter agreement between the Company and Cree.
Net interest income was $291,949 for the quarter ended September 30, 1999
compared to $467,532 for the quarter ended September 30, 1998, a decrease of
$175,583 or 37.6%. 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.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 1998.
Net sales were $8,932,615 for the nine months ended September 30, 1999 compared
to $1,778,938 for the nine months ended September 30, 1998, an increase of
$7,153,677 or 402%. The increase resulted primarily from expanded distribution
of moissanite jewels. During the first six months of 1998, prior to emerging
from the development stage, the Company generated net sales of approximately
$324,000 from moissanite jewels, which have been netted against research and
development expenses on the operating statement because many of the jewels sold
were associated with the Company's research and development program. Net sales
from the Company's proprietary test instrument decreased from approximately
$560,075 for the nine months ended September 30, 1998 to $436,472 for the nine
months ended September 30, 1999, primarily as a result of a market driven
decrease in the selling price. The Company will continue to add qualified
retailers domestically and expects carat shipments to increase in the fourth
quarter. However, the Company will not meet previously announced estimates for
the second half of the year.
Gross margin was 47.6% for the nine months ended September 30, 1999 compared to
22.4% for the nine months ended September 30, 1998. The increase resulted from
higher yields of moissanite jewels from SiC crystals purchased from Cree,
thereby lowering the cost per carat. Throughout the remainder of 1999,
particularly as the Company works with Cree to develop a manufacturing process
for the new 3-inch diameter crystal growth systems, yields may vary. Any
significant yield changes would have a material impact on gross profit.
Marketing and sales expenses were $3,236,924 for the nine months ended September
30, 1999 compared to $2,202,597 for the nine months ended September 30, 1998, an
increase of $1,034,327 or 47.0%. The increase was due primarily to the
development of the strategic global marketing program, including the creative
and production efforts supporting the specific advertising messages and
materials to be launched in the fourth quarter of 1999, as well as advertising
expenses in selected markets and compensation and other expenses related to
additional staff.
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General and administrative expenses were $2,256,653 for the nine months ended
September 30, 1999 compared to $1,885,224 for the nine months ended September
30, 1998, an increase of $371,429 or 19.7%. The increase resulted primarily from
compensation and other expenses related to additional staff and increased
insurance and taxes on the Company's increasing fixed assets.
Research and development expenses were $2,274,987 for the nine months ended
September 30, 1999 compared to $3,196,711 for the nine months ended September
30, 1998, a decrease of $921,724 or 28.8%. The decrease resulted primarily from
the more focused development effort under the Company's July 1998 Amended and
Restated Development Agreement with Cree. 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 was $978,290 for the nine months ended September 30, 1999
compared to $1,461,718 for the nine months ended September 30, 1998, a decrease
of $483,428 or 33.1%. This decrease resulted from lower interest income earned
on lower cash balances due primarily to the use of the invested proceeds from
the Company's initial public offering in November 1997. See Part II, Item 2.
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 third quarter of
1999, the Company used $3,019,313 to fund operations and $3,154,434 to fund
capital expenditures and patent expenses. At September 30, 1999, the Company had
$21,973,656 of cash and equivalents and $29,084,485 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 substantial inventory
levels and intends to significantly increase its advertising and marketing
expenditures as it implements the domestic launch of its global strategic
marketing program during the fourth quarter 1999. The Company expects its
advertising and promotional expenditures to exceed $2 million in the fourth
quarter of 1999 and $6 million in the year 2000. If the Company is unable to
significantly increase sales of moissanite jewels, inventories will increase
substantially. The Company intends to fund these increased inventories and
advertising and marketing expenditures from its existing cash and equivalents.
In May 1999, the Company entered into a letter agreement ("Letter Agreement")
with its exclusive supplier, Cree. Under the Letter Agreement the Company 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. All of the crystal growers were
built to grow 3-inch diameter crystals and came on-line during the third
quarter. Through September 30, 1999 the Company paid approximately one-half of
the cost of these growers. The balance will be paid during the fourth quarter
from the Company's existing cash and equivalents.
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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 selected and
implemented an enterprise-wide information technology system to support the
information 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 has substantially completed
the implementation of this system and the testing of the Year 2000 compliance of
the system and does not expect the Year 2000 issue to pose significant
operational problems for its computer systems. The Company has also
substantially completed reviewing its non-information technology systems for
Year 2000 compliance and 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 component services necessary for the manufacture of moissanite jewels.
Accordingly, if those suppliers are unable to process or fill the Company's
orders or otherwise interact with the Company because of Year 2000 problems, the
Company could experience material adverse effects to its business. Although the
Company cannot control whether and how third parties will address the Year 2000
issue, the Company has contacted critical vendors, including Cree, and have been
informed that they have the ability to ensure smooth delivery of products
without disruptions caused by Year 2000 problems. Based on the responses of
these vendors, the Company believes that all vendors are either substantially
Year 2000 compliant or that any noncompliance will not have a material effect on
the Company's operations.
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 10-Q for the quarter ended September 26, 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 could, in turn, delay deliveries of moissanite jewels to the
Company's customers. The Company has developed a significant inventory of
finished moissanite jewels and work-in-process that the Company believes could
fulfill its needs if there is a short-term delay in receipt of SiC crystals from
Cree. However, any significant delay in the Company's receipt of SiC crystals or
resulting delay in delivery of moissanite jewels to the Company's retailers
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.
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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 September 30,
1999 the Company has approximately $21.3 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.
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 September
30, 1999, the Company had approximately $10,500,000 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 $6,850,000 of the proceeds has been used in research
and development, of which $250,000 was paid to officers, directors or
shareholders owning more than 10 percent (10%) of the Common Stock outstanding.
The Company has also used approximately $9,375,000 to fund sales, marketing and
administrative expenses, of which $640,000 was paid to officers, directors or
shareholders owning more than ten percent (10%) of the Common Stock outstanding.
The Company also expended approximately $8,500,000 to fund working capital. In
addition, the Company acquired $5,525,000 of production equipment, including
$4,625,000 of crystal growth systems from Cree; certain computerized wafering
and preform development equipment, and other equipment. Other expenditures
include $325,000 for intangible assets.
ITEM 5: OTHER INFORMATION
The Company has entered into a number of agreements with specialty retail
jewelers with an aggregate of over 221 locations in 35 states. Additionally, the
Company has entered into 28 international agreements for distribution of
moissanite jewels in 46 countries and various areas in the Caribbean.
In October 1999, the Company entered into a fourth amendment to its agreement
with John M. Bachman, Inc. ("JMB"). The amendment provides for the Company to
advance JMB additional funds to expand the production facilities of its
affiliate which facets the Company's moissanite jewel preforms. These funds will
be repaid through reductions to future cutting charges. The amendment extends
the term of the Company's agreement with JMB to December 31, 2002. The Company
has the right to terminate the agreement at any time after January 1, 2002 upon
90 days written notice.
In October 1999, the Company entered into an employment agreement with David
Fudge, who will be employed in the capacity of Vice President of Sales effective
as of November 1, 1999. Mr. Fudge has 14 years experience in business, sales
management and sales training.
On November 4, 1999, the Company's board of directors elected Cecil D. Raynor as
a director. Mr. Raynor has more than 26 years of manufacturing and engineering
management experience primarily in the telecommunications industry, both
domestically and internationally. Mr. Raynor is currently Vice President of
Manufacturing at Nortel Networks, a telecommunications equipment manufacturer.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
10.37 Fourth Amendment to Agreement, dated October 5, 1999, between John
M. Bachman, Inc. and C3, Inc.*
10.38 Employment Agreement, dated November 1, 1999 between David Fudge
and C3, Inc.+*
27.1 Financial Data Schedule
+ Denotes a management contract or compensatory plan or arrangement.
* The Company has requested that certain portions of this exhibit be given
confidential treatment.
(b) Report on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended
September 30, 1999.
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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: November 15, 1999 /s/ Jeff N. Hunter
-------------------
Jeff N. Hunter
Chief Executive Officer and Chairman of the Board
and Director
(Principal Executive Officer)
Date: November 15, 1999 /s/ Mark W. Hahn
----------------
Mark W. Hahn
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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