1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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C3, INC.
(Exact name of registrant as specified in its charter)
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NORTH CAROLINA 3915 56-0308470
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
3800 GATEWAY BOULEVARD, SUITE 310
MORRISVILLE, NC 27560
(919) 468-0399
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Office)
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JEFF N. HUNTER
PRESIDENT
C3, INC.
3800 GATEWAY BOULEVARD, SUITE 310
MORRISVILLE, NC 27560
(919) 468-0399
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
COPIES TO:
DEBORAH H. HARTZOG DEBRA K. WEINER
WOMBLE CARLYLE SANDRIDGE & RICE, PLLC GROVER T. WICKERSHAM, P.C.
2505 MERIDIAN PARKWAY 430 CAMBRIDGE AVENUE
SUITE 300 SUITE 100
RESEARCH TRIANGLE PARK, NC 27713 PALO ALTO, CA 94306
(919) 484-2311 (650) 323-6400
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. []
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. []
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BE REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
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Common Stock...................... 2,300,000 shares $15 $34,500,000 $10,455.00
Representative's Warrants(3)...... 200,000 shares .0001 20 0.01
Common Stock(4)................... 200,000 shares 18 3,600,000 1,091.00
Totals................... $38,100,020 $11,546.00
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(1) Includes 300,000 shares of Common Stock which the Underwriters have the
option to purchase from the Company solely to cover over-allotments, if any.
See "Underwriting."
(2) Estimated solely for purposes of calculation of the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(3) In connection with the sale of the shares of Common Stock, the Registrant is
granting to the Representative warrants to purchase 200,000 shares of Common
Stock (the "Representative's Warrants").
(4) Issuable upon exercise of the Representative's Warrants.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1997
2,000,000 SHARES
[LOGO]
C3, INC.
COMMON STOCK
All of the shares of Common Stock, no par value ("Common Stock"), of C3,
Inc. ("C3" or the "Company") offered hereby are being sold by the Company. Prior
to this offering, there has been no public market for the Common Stock of the
Company. It is currently estimated that the initial public offering price will
be between $12.00 and $15.00 per share. For information relating to the factors
considered in determining the initial offering price, see "Underwriting."
At the request of the Company, the Underwriters have reserved approximately
100,000 of the shares of Common Stock offered by the Company hereby for sale at
the initial public offering price to directors, officers, employees and certain
individuals associated with the Company, its directors, its officers or its
employees. See "Underwriting."
The Company has applied to have its Common Stock approved for quotation on
the Nasdaq National Market under the symbol "CTHR."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share.............................. $ $ $
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Total(3)............................... $ $ $
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(1) Excludes a non-accountable expense allowance payable to Paulson Investment
Company, Inc., the representative (the "Representative") of the several
underwriters named herein (the "Underwriters"), equal to 1% of the total
price to the public of the shares being offered hereby. The Company has
agreed to issue to the Representative warrants (the "Representative's
Warrants") to purchase up to 200,000 shares of Common Stock for $
per share (120% of the initial public offering price of the shares offered
hereby). The Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $900,000,
including the Representative's non-accountable expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
300,000 additional shares of Common Stock on the same terms as set forth
above solely to cover over-allotments, if any (the "Over-allotment Option").
If the Over-allotment Option is exercised in full, the Price to Public,
Underwriting Discount and the Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject
to receipt and acceptance by them, to prior sale and to their right to reject
orders in whole or in part. It is expected that delivery of certificates for the
shares will be made against payment therefor in New York City on or about
, 1997.
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PAULSON INVESTMENT COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
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DESCRIPTION OF FOLDOUT FACING FRONT COVER PAGE
The background of this graphic consists of a photograph of grayish brown
slate taken at close range. In the upper left hand corner, in three lines and
white lettering, are the words "THE HARDNESS, THE BRILLIANCE, THE FIRE YOU
EXPECT . . .", and in the bottom right hand corner are the words, in two lines
and white lettering, ". . . FROM AN UNEXPECTED NEW SOURCE." Scattered across the
mid-range of the graphic are eight loose lab-created moissanite gemstones, all
produced by the Company. Beneath this picture are the words "A sample of the
Company's promotional materials." Beneath this caption appears the Company's
name in its trademark stylized name logo, consisting of a large capital C,
similarly sized 3, with a geometric diamond shape to the right of, and
intersecting, the numeral "3". In the logo, the word "Inc." appears to the right
of the geometric diamond shape.
DESCRIPTION OF INSIDE FRONT COVER PAGE FOLDOUT
The inside front cover page foldout consists of a large single photograph.
The background of this graphic consists of a photograph of grayish brown slate
taken at close range. In the top middle of the graphic appears the Company's
trademark stylized moissanite gemstones logo. The logo consists of a black box
in which the word "MOISSANITE" appears in large silver capital letters,
traversed by an orange arc ending with a burst of light rays at the bottom right
corner of the box. The logo also includes the word "GEMSTONES" appearing
underneath the box in white capital letters approximately one-third of the size
of the letters used in "MOISSANITE." Underneath this logo are the words "CREATED
BY" in white capital letters approximately two-thirds of the size of the letters
used in "GEMSTONES" and the Company's stylized name logo, as described above.
Throughout the mid range of this page appear pictures of the Company's
lab-created gemstones. The photograph features a total of 13 loose lab-created
gemstones, one of which is held by jeweler's tweezers, and a total of 8
lab-created gemstones set in the following jewelry: two pairs of earrings, two
pendant necklaces, and one ring. In the bottom middle of this graphic appear the
following words in white lettering: "This jewelry features samples of the
Company's lab-created moissanite gemstones set in gold, silver or platinum. The
Company plans to distribute loose gemstones."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED
HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS
OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
C3(TM), the stylized C3, Inc. logo, the stylized logo for "MOISSANITE" and the
stylized logo for "MOISSANITE GEMSTONES" are trademarks of the Company. This
Prospectus may contain certain other trademarks and service marks of other
parties.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. Unless otherwise indicated, information in this Prospectus
(i) reflects the automatic conversion of all outstanding shares of 1996 Series A
Preferred Stock, no par value ("Series A Preferred Stock"), and 1997 Series B
Preferred Stock, no par value ("Series B Preferred Stock"), into an aggregate of
1,677,375 shares of Common Stock upon consummation of this offering; (ii)
reflects a 2.13-for-1 stock split effected in September 1997; and (iii) assumes
no exercise of the Over-allotment Option. See "Underwriting."
THE COMPANY
The Company is finalizing the development of, and intends to begin
marketing during the first half of 1998, colorless lab-created moissanite
gemstones which it will sell as a substitute for diamond in the jewelry market.
The physical properties of lab-created moissanite gemstones more closely match
those of diamond than any other known gemstone material. The Company believes
that its products are superior to other commercially available diamond
substitutes and intends to position its gemstone products as the ideal
substitute for diamond. The Company believes that its products will be
attractive to working women who desire an affordable alternative to diamond and
to middle and upper-income women who desire affordable "everyday" or "security"
jewelry.
Moissanite, also known by its chemical name, silicon carbide ("SiC"), is a
rare, naturally occurring mineral found primarily in meteorites. Moissanite and
diamond are both carbon-based minerals; moissanite is composed of silicon and
carbon while diamond is composed of carbon.
The Company's lab-created moissanite gemstones are made from crystals of
SiC grown by Cree Research, Inc. ("Cree") using patented and proprietary
technology. Cree has an exclusive license to the patent related to a process for
growing large single crystals of SiC. To the Company's knowledge, there are no
producers of SiC other than Cree that could supply lab-grown SiC crystals in
colors, sizes or volumes suitable for use as a diamond substitute. The Company
has undertaken a significant development program with Cree to develop a fully
repeatable process to grow SiC crystals in the desired diamond color grades and
sizes. The Company has certain exclusive licenses and supply rights with Cree
for SiC materials to be used for gemstone applications. In addition, the Company
has developed certain proprietary methods and processes for the production of
gemstones from lab-grown SiC crystals and has patent applications pending for
certain of these methods and processes. As a result, the Company believes that
its lab-created moissanite gemstones are proprietary products and that there are
technological barriers to prevent other competitors from developing or marketing
lab-created moissanite gemstones at affordable prices.
The Company currently intends to sell only loose lab-created gemstones,
rather than finished jewelry products, in round brilliant cuts of approximately
1/2 to 1 carat in colors and clarities comparable to those commonly used in
diamond jewelry. The Company plans to begin delivery of its products in the
first half of 1998 in selected cities in the United States and the Pacific Rim.
The Company believes that these market areas represent a significant portion of
the worldwide jewelry market and that consumers in these markets are relatively
accepting of diamond substitutes. The Company intends to grant exclusive
distribution rights to retail jewelry chains and high-volume independent retail
jewelry stores in certain U.S. cities and is exploring distribution arrangements
for the Pacific Rim.
The Company believes that neither visual inspection by jewelers who are not
trained gemologists nor commonly used test instruments reliably distinguish its
products from diamond. The Company recently began production of a
moissanite/diamond test instrument that distinguishes lab-created moissanite
gemstones from diamonds in the colors and clarities most commonly sold by retail
jewelers. The Company plans to introduce this new test instrument for sale to
jewelers, gemologists and pawnbrokers during the first half of 1998.
The Company was incorporated as a North Carolina corporation in June 1995.
The Company's principal executive offices are located at 3800 Gateway Boulevard,
Suite 310, Morrisville, North Carolina 27560, and its telephone number is (919)
468-0399.
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5
THE OFFERING
Common Stock offered.................. 2,000,000 shares
Common Stock outstanding after the
offering.............................. 5,938,476 shares(1)
Use of proceeds....................... For product development, acquisition
of manufacturing equipment, sales and
marketing, working capital and other
general corporate purposes. See "Use
of Proceeds."
Proposed Nasdaq National Market
symbol................................ CTHR
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(1) Excludes 1,009,066 shares of Common Stock issuable upon the exercise of
stock options outstanding at September 30, 1997. See "Dilution,"
"Management -- Stock Option Plans" and "Description of Capital Stock."
SUMMARY FINANCIAL DATA
PERIOD FROM
INCEPTION
(JUNE 28,
1995) SIX MONTHS ENDED
TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------
1995 1996 1996 1997
-------------- ----------------- -------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues:................................... -- -- -- --
Operating expenses:
Marketing and sales....................... $10,313 $ 47,019 $ 8,017 $ 46,611
General and administrative(1)............. 10,024 131,097 48,069 316,154
Research and development.................. 6,052 236,047 68,115 452,571
Depreciation and amortization............. 798 3,618 1,306 6,649
------- -------- -------- ---------
Operating loss.............................. 27,187 417,781 125,507 821,985
Interest income, net........................ -- (35,173) (1,231) (113,376)
------- -------- -------- ---------
Net loss.................................... $27,187 $382,608 $124,276 $ 708,609
======= ======== ======== =========
Pro forma net loss per share................ $ 0.01 $ 0.14 $ 0.05 $ 0.17
======= ======== ======== =========
Shares used in computing pro forma net loss
per share(2).............................. 2,204,062 2,652,250 2,381,562 4,199,978
JUNE 30, 1997
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ACTUAL AS ADJUSTED(3)
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BALANCE SHEET DATA:
Cash and equivalents........................................ $5,538,099 $29,938,099
Working capital............................................. 5,428,225 29,828,225
Total assets................................................ 5,661,920 30,061,920
Shareholders' equity........................................ 5,552,046 29,952,046
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(1) For the six months ended June 30, 1997, includes $66,000 of compensation
expense related to the issuance of Common Stock to Cree pursuant to a stock
option agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 10 of Notes to Financial
Statements.
(2) The calculation of shares for all periods reflects a 2.13-for-1 stock split
effected in September 1997 and the automatic conversion of the Series A
Preferred Stock and Series B Preferred Stock to be effected upon completion
of this Offering. See Notes 2 and 9 of Notes to Financial Statements.
(3) Adjusted to give effect to the sale by the Company of 2,000,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.50 per share, after deducting the underwriting discount and estimated
offering expenses and the application of net proceeds therefrom. See "Use of
Proceeds."
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6
RISK FACTORS
An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information set forth in this
Prospectus, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing any of the shares of
Common Stock offered hereby. This Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
related forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed in this
Prospectus. Factors that could cause or contribute to such differences include
those discussed below, as well as those discussed elsewhere in this Prospectus.
LACK OF OPERATING HISTORY; DEVELOPMENT STAGE COMPANY
The Company, which was incorporated in June 1995, is in the development
stage and has not yet engaged in any revenue-producing business activities.
Accordingly, the Company has no operating history upon which an evaluation of
the Company and its prospects can be based. To date, the Company's principal
activities have been to develop a process for the production of colorless
lab-created moissanite gemstones and the infrastructure to support the rapid
commercialization of those products. The Company's business is subject to the
risks inherent in the transition from pilot production to commercial production.
Likewise, the Company's products are in an early stage of development and are
subject to the risks inherent in the development and marketing of new products,
including unforeseen design, manufacturing or other problems or failure to
develop market acceptance. Failure by the Company to complete development of its
products or to develop the ability to produce such products in commercial
quantities would have a material adverse effect on the Company's business,
operating results and financial condition. Accordingly, the Company's prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development, particularly
technology-based companies operating with undeveloped and unproven products. To
address these risks, the Company must, among other things, respond to
competitive developments, attract and motivate qualified personnel, develop
market acceptance for its products, establish effective distribution channels,
effectively manage any growth that may occur and continue to upgrade its
technologies and successfully commercialize products incorporating such
technologies. See "Business" and "Management."
NEED FOR FURTHER PRODUCT DEVELOPMENT
Although the Company has produced small quantities of colorless lab-created
moissanite gemstones, the Company and its supplier of SiC crystals, Cree
Research Inc. ("Cree"), have not yet established a fully repeatable process for
producing lab-grown SiC crystals in the colors, sizes and volumes desired for
the Company's products. The Company intends to market lab-created gemstones in
the comparable diamond color grade range, according to the standards generally
accepted by the diamond industry for color using pregraded master color stones
("comparable diamond color grade"), of "G" through "J", but Cree has not yet
consistently achieved production of SiC crystals in this color range. The
Company's development agreement with Cree establishes milestones for developing
a fully repeatable process that will consistently grow SiC crystals in the
desired color grades, sizes and volumes. If Cree is unable to develop and
sustain a fully repeatable process for growing SiC crystals in the desired color
grades, sizes and volumes, the Company's business, operating results and
financial condition would be materially adversely affected. See "Business --
Dependence on Cree and Cree Technology" and "-- Products."
RELIANCE ON CREE RESEARCH, INC.
The Company is dependent on a single source, Cree, for development and
supply of SiC crystals. Cree has certain patents and other proprietary rights
relating to its process for growing large single crystals of SiC and its process
for growing colorless SiC crystals. The Company's effort to develop colorless
SiC crystals in colors, sizes and volumes suitable for use as lab-created
gemstones is concentrated entirely with Cree and is dependent on Cree's
expertise in SiC technology.
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7
Under the Company's Amended and Restated Exclusive Supply Agreement with
Cree dated June 6, 1997 (the "Exclusive Supply Agreement"), the Company is
obligated to buy from Cree and Cree is obligated to sell to the Company 50%, by
dollar volume, of the Company's requirements for SiC material for the production
of gemstones in each calendar quarter. Although the Company is only required to
purchase 50% of its SiC requirements from Cree, the Company believes that no
other SiC producer could supply crystals in the colors, sizes and volumes needed
for the Company's products. Therefore, the Company is, and expects for the
forseeable future to be, entirely dependent on Cree as its source for its
principal raw material.
Cree will have to build additional crystal growth capacity in order to grow
enough SiC crystals to meet the Company's requirements. Under the Exclusive
Supply Agreement, Cree may elect to have the Company purchase the additional
crystal growth systems that will be needed, and Cree would be obligated to
supply the Company 100% of the output from systems funded by the Company. If,
however, Cree elects to fund the cost of these additional growth systems on its
own, then there can be no assurance that Cree will supply the Company with all
of the output from these crystal growth systems or fill all of the Company's
orders for SiC crystals. Any delay or reduction in the availability of SiC
crystals could delay or limit the Company's ability to deliver and sell its
lab-created gemstones, which would have a material adverse effect on the
Company's business, operating results and financial condition.
The Company also obtains from Cree a component proprietary to Cree used in
the production of the Company's moissanite/diamond test instrument. The Company
believes that the test instrument may be important to building market acceptance
of the Company's lab-created gemstones. See "Business -- Manufacturing." If Cree
were unable to deliver this component in the quantities and at the times needed
by the Company, the Company's ability to provide the market with its test
instrument would be adversely affected.
Thus, the Company is dependent on Cree's ability to protect its patents and
other proprietary rights concerning the growth of SiC crystals, on Cree's
technological capabilities for the further development needed to deliver SiC
crystals acceptable to the Company, on Cree consistently producing and
delivering volumes of SiC crystals as and when needed by the Company and on
Cree's ability to supply the Company with components for its test instrument,
all of which are beyond the Company's control. Cree's failure to protect its
patents or other proprietary rights, to complete the desired development
objectives and to supply the Company with SiC crystals or components for its
moissanite/diamond test instrument would have a material adverse effect on the
Company's business, operating results and financial condition and could result
in a curtailment, suspension or cessation of the Company's business. See
"Business -- Dependence on Cree and Cree Technology."
UNDEVELOPED MARKETS; UNPROVEN ACCEPTANCE OF THE COMPANY'S PRODUCTS
There currently is no market among retail jewelers or consumers for
colorless lab-created moissanite gemstones, and the Company believes that retail
jewelers and consumers are generally unaware of the existence and attributes of
these lab-created gemstones. As is the case with any new or potential product,
market acceptance and demand are subject to a significant amount of uncertainty.
Although retail jewelers typically purchase finished jewelry rather than loose
gemstones, the Company plans to market loose lab-created gemstones to retailers.
The retailers will then select the jewelry into which the stones will be set and
will be responsible for completing the setting. The quality, design and
workmanship of the jewelry settings selected by retail jewelers, which will not
be within the Company's control, could impact the consumer's perception and
acceptance of the Company's lab-created gemstones. The Company's future
financial performance will depend upon consumer acceptance of the Company's
lab-created gemstones as a realistic and affordable substitute for diamond,
which may be impacted by (i) the jewelers' acceptance of lab-created gemstones
as a diamond substitute, (ii) the willingness of retail jewelers to purchase
loose stones and undertake setting of the loose stones, (iii) the ability of
retail jewelers to select jewelry settings that encourage consumer acceptance of
and demand for the Company's lab-created gemstones and (iv) the ability of
retail jewelers to set loose lab-created gemstones in jewelry with high quality
workmanship. The Company has not conducted extensive market tests to predict
retail jeweler or consumer reaction to its products.
6
8
Because no market now exists for lab-created moissanite gemstones, it is
difficult to predict the future growth rate, if any, and the size of the market
for the Company's products. In order to build inventory to meet anticipated
future demand, the Company expects to place orders with Cree for SiC crystals in
advance of actual demand for the Company's products. As a result, the Company
may spend significant amounts of its capital to acquire additional SiC crystal
growth systems or to purchase crystals at a time when there is not demand for
the Company's products at a level to fund those expenditures.
The market for the Company's lab-created gemstones may never develop or may
develop at a slower pace than expected as a result of lack of acceptance of
lab-created gemstones by retail jewelers or by consumers. If the market fails to
develop or develops more slowly than expected, or if the Company's products do
not achieve significant market acceptance, the Company's business, operating
results and financial condition would be materially adversely affected. See
"Business -- Dependence on Cree and Cree Technology" and "-- Marketing and
Sales."
UNDEVELOPED DISTRIBUTION CHANNELS
The Company currently plans to sell its products initially in selected
cities in the United States and the Pacific Rim. Although most loose gemstones
are sold to wholesalers or jewelry manufacturers, the Company initially intends
to sell its gemstones directly to retail jewelry chains and high-volume
independent retail jewelry stores in the United States under exclusive
distribution arrangements. In addition, the Company is exploring distribution
arrangements in the Pacific Rim. The Company must enter into distribution
agreements with and will be dependent upon a number of third parties for sales
of its lab-created moissanite gemstones to consumers. The Company has not yet
entered into distribution agreements with any retail jewelers or other
distributors. There can be no assurance that the Company will be able to enter
into distribution agreements with retail jewelers or other distributors, that
its strategy of eliminating dependence on gemstone wholesalers and jewelry
manufacturers will prove to be successful, or that jewelers or other
distributors will devote the efforts needed for successful distribution of the
Company's products. The inability of the Company to enter into favorable
arrangements with retail jewelers or other distributors or to achieve desired
distribution of its lab-created moissanite gemstones would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business -- Product Distribution."
DEPENDENCE ON INTELLECTUAL PROPERTY
The Company is heavily dependent upon Cree's technology for SiC crystals
and is dependent upon its own technology for the production of lab-created
gemstones from SiC crystals. Cree is exclusively licensed to use certain patents
concerning a process for growing large single crystals of SiC, has certain
patents of its own relating to growth of large single crystals of SiC and has a
patent pending for a process for growing colorless SiC. However, there can be no
assurance that any patents issued to or licensed by Cree will provide any
significant commercial protection to Cree or to the Company, that Cree will have
sufficient resources to prosecute its patents or that any patents will be upheld
by a court should the Company, Cree or Cree's licensor seek to enforce their
respective rights against an infringer. See "Business -- Dependence on Cree and
Cree Technology."
The Company has certain patent applications pending for lab-created
moissanite gemstones and also has an application pending on its
moissanite/diamond test instrument. Although one of the Company's pending patent
applications for lab-created moissanite gemstones has been rejected by the
United States Patent and Trademark Office (the "PTO") in its initial office
action, the Company intends to vigorously prosecute its patent applications.
There can be no assurance that any patent will be granted or that a patent, if
granted, will have any commercial or competitive value. See
"Business -- Intellectual Property of the Company."
The existence of valid patents does not prevent other companies from
independently developing competing technologies. Existing producers of SiC or
others may refine existing processes for growing SiC crystals or develop new
technologies for growing large single crystals of SiC or colorless SiC crystals
in a manner that does not infringe patents owned or licensed by Cree or the
Company. In addition, existing producers of SiC, existing producers of other
diamond simulants or other parties may develop new
7
9
technologies for producing lab-created moissanite gemstones in a manner that
does not infringe patents owned or licensed by Cree or the Company.
The Company regards certain of its technology as critical to its business
and attempts to protect such technology under copyright and trade secrets laws
and through the use of employee, customer and business partner confidentiality
agreements. Such measures, however, afford only limited protection, and the
Company may not be able to maintain the confidentiality of its technology.
As a result of the foregoing factors, existing and potential competitors
may be able to develop products that are competitive with or superior to the
Company's products, and such competition could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Business -- Competition."
DEPENDENCE ON THIRD PARTIES
In addition to its significant dependence on Cree and on third party
distribution channels, the Company's prospects depend upon its ability to
identify, reach agreements with and work successfully with other third parties.
In particular, the Company expects to rely on third parties to facet its
lab-created gemstones and manufacture components for and assemble its
moissanite/diamond test instrument. Faceting lab-created moissanite gemstones
requires different techniques than faceting diamond and other gemstones. There
can be no assurance that the Company can enter into contracts with faceting
vendors on terms satisfactory to the Company or that faceting vendors will be
able to provide faceting services in the quality and quantities required by the
Company. In addition, there can be no assurance that the Company will be
successful in identifying component manufacturers and assemblers for its
moissanite/diamond test instrument. Failure by the Company to achieve any of the
above would have a material adverse effect on the Company's business, operating
results and financial condition. See "Business -- Manufacturing."
COMPETITION
Competition in the market for gemstones is intense. The Company's planned
products face competition from established producers and sellers of diamonds,
synthetic gemstones and diamond simulants such as synthetic cubic zirconia. In
addition, other companies could seek to introduce synthetic diamonds or other
competing products or to develop competing processes for production of
lab-created moissanite gemstones. The Company believes that the more successful
it is in creating market acceptance for colorless lab-created moissanite
gemstones, the more competition can be expected to increase. Increased
competition could result in a decrease in the price charged by the Company for
its products or reduce demand for the Company's products, which would have a
material adverse effect on the Company's business, operating results and
financial condition. Further, the Company's current and potential competitors
have significantly greater financial, technical, manufacturing and marketing
resources and greater access to distribution channels than the Company. There
can be no assurance that the Company will be able to compete successfully with
its existing or potential competitors. See "Business -- Competition."
NEED FOR ADDITIONAL CAPITAL
The Company will require substantial additional capital to continue to
develop and improve the process for growing colorless SiC crystals in the
desired colors, sizes and volumes, to fund expansion of manufacturing capacity
to meet projected growth and to fund its expansion into new markets. The
Company's future capital requirements will depend on many factors, including the
speed at which the SiC crystal growth process can be refined and improved,
market acceptance of and demand for the Company's products and the timing of the
Company's expansion into new markets. The Company currently believes that its
existing capital resources, together with the proceeds of this offering and
interest earned thereon, will satisfy its capital requirements for at least the
12 months following this offering. However, there can be no assurance that
additional financing will not be required prior to such time. Moreover, there
can be no assurance that additional equity or debt financing, if required, will
be available on acceptable terms or at all. The inability of the Company to
obtain financing on acceptable terms when needed would have a material adverse
effect on the Company's business,
8
10
operating results and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
INTERNATIONAL OPERATIONS
The Company intends to target certain international markets for its
products. In addition, it expects to use certain companies based outside the
United States to facet its lab-created moissanite gemstone products. Due to the
Company's reliance on development of foreign markets and use of foreign vendors,
the Company is subject to the risks of conducting business outside of the United
States. These risks include unexpected changes in, or impositions of,
legislative or regulatory requirements, delays resulting from difficulty in
obtaining export licenses, tariffs and other trade barriers and restrictions and
the burdens of complying with a variety of foreign laws and other factors beyond
the Company's control. The Company is also subject to general geopolitical risks
in connection with its international operations, such as political, social and
economic instability, potential hostilities and changes in diplomatic and trade
or business relationships. There can be no assurance that such factors will not
adversely affect the Company's operations in the future or require the Company
to modify its anticipated business practices.
GOVERNMENTAL REGULATION
The Company is subject to governmental regulations in the manufacture and
sale of lab-created moissanite gemstones and the moissanite/diamond test
instrument. In particular, the Federal Trade Commission (the "FTC") has the
power to restrict the offer and sale of products that could deceive or have the
tendency or effect of misleading or deceiving purchasers or prospective
purchasers with regard to the type, kind, quality, character, origin or other
characteristics of a diamond. The Company may be under close scrutiny both by
governmental agencies and by competitors in the gemstone industry, any of which
may challenge the Company's promotion and marketing of its gemstone products. If
the Company's production or marketing of its lab-created gemstones is challenged
by governmental agencies or competitors, or if regulations are issued that
restrict the ability of the Company to produce and market its products as
diamond substitutes, the Company's business, operating results and financial
condition could be materially adversely affected. See "Business -- Government
Regulation."
IMITATION MOISSANITE
If the Company's products achieve market acceptance, it is possible that
low-quality gemstones or synthetics could be marketed as lab-created moissanite.
The sale of low-quality products as lab-created moissanite could damage the
perception of lab-created moissanite gemstones as a realistic substitute for
diamond, damage the Company's reputation among retail jewelers and consumers and
result in a loss of consumer confidence in the Company's products. The
introduction of low-quality imitation moissanite gemstones and the inability of
the Company to limit the adverse effects thereof could have a material adverse
effect on the Company's business, operating results and financial condition.
MANAGEMENT OF RAPID GROWTH
The Company currently is experiencing a period of rapid and significant
growth, which is expected to continue over the next several years. This rapid
growth has placed and will continue to place a significant strain on the
Company's resources. The Company's ability to manage its growth effectively will
require it to implement and improve operational and financial systems and to
expand, train and manage its employee base. The Company also will be required to
manage multiple relationships with various suppliers, customers and other third
parties. The Company's future operating results will also depend on its ability
to expand its sales and marketing, research and development and administrative
support organizations. The Company's executive officers have no significant
experience in managing rapidly growing businesses. If the Company is unable to
manage growth effectively, the Company's business, financial condition and
results of operations would be materially adversely affected.
9
11
DEPENDENCE UPON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's success depends in part upon retaining the services of
certain executive officers and other key employees. The Company has entered into
employment agreements with the Company's President, Chief Financial Officer,
Vice President of Marketing, Director of Technology, Director of Manufacturing
and Director of Sales. In addition, the Company intends to obtain "key man" life
insurance policies on its President and Chief Financial Officer, but each policy
is expected to provide coverage of only $1 million per individual. The loss of
the services of the Company's executive officers or other key employees could
have a material adverse effect on the Company's business, operating results and
financial condition. See "Management."
Because of the Company's early stage of development, the Company is also
dependent on its ability to recruit, retain and motivate personnel with
technical, manufacturing and gemological skills. There are a limited number of
personnel with these qualifications and competition for such personnel is
intense. The inability of the Company to attract and retain additional qualified
personnel would materially adversely affect the Company's business, operating
results and financial condition.
OPERATING LOSSES
The Company had net losses of $27,187 for the period from June 28, 1995
(inception) to December 31, 1995, $382,608 for the year ended December 31, 1996
and $708,609 for the six months ended June 30, 1997. As of June 30, 1997, the
Company had an accumulated deficit of $1,118,404. The Company expects to incur
substantial additional costs to complete the development of its products and to
market and distribute such products. The Company expects to incur losses through
at least some or all of 1998, and there can be no assurance that the Company
will ever achieve profitability or, if achieved, that such profitability will be
sustained. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
POTENTIAL FOR FLUCTUATIONS IN QUARTERLY RESULTS
Because the Company has no operating history, management has very little
data upon which to base estimated operating revenues and expenses. The Company's
revenues will be affected by many factors, including those discussed in "Risk
Factors." At the same time, the Company's expenses will be growing to support
anticipated rapid expansion. The Company will likely experience substantial
quarterly fluctuations in its operating results. As a result, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. Moreover, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Common Stock would likely be
materially adversely affected.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering. The initial public
offering price will be determined by negotiation between the Company and the
Representative of the Underwriters. See "Underwriting."
The trading price of the Common Stock could be subject to wide fluctuations
in response to quarterly variations in operating results, changes in financial
estimates by securities analysts, announcements of technological innovations or
new products by the Company or its competitors, or other events or factors. In
addition, the stock market has experienced extreme price and volume fluctuations
that have particularly affected the market prices for many technology and small
capitalization companies. These broad market fluctuations may materially and
adversely affect the market price of the Common Stock.
10
12
SUBSTANTIAL DILUTION
Purchasers of the Common Stock offered hereby will incur immediate and
substantial dilution of approximately $8.47 per share in the pro forma net
tangible book value per share of the Common Stock from the initial public
offering price. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of the Common Stock in the public market after this offering could
adversely affect the market price of the Common Stock. Following this offering,
there will be 5,938,476 shares of Common Stock outstanding, of which the
2,000,000 shares offered hereby (2,300,000 if the Over-allotment Option is
exercised in full) will be freely tradeable without restriction under the
Securities Act, except for shares acquired in this offering by "affiliates" of
the Company, as that term is defined in Rule 144 under the Securities Act. All
of the shares of Common Stock held by the officers, directors, director nominees
and beneficial owners of more than five percent of the Company's Common Stock,
aggregating 1,927,393 shares, are subject to lock-up agreements and may not be
sold or otherwise transferred until one year after the date of this Prospectus
unless sooner released by the Representative in its sole discretion. Upon
expiration of the lock-up agreements, all such shares of Common Stock will
become eligible for sale in the public market, subject to the provisions of Rule
144 or Rule 701. In addition, approximately 1,921,621 shares of Common Stock
outstanding prior to this offering and not subject to lock-up agreements will
become eligible for sale in the public markets under Rule 144, 90 days after the
effective date of this offering (the date on which these shares are assumed to
be eligible for resale is February 12, 1998). Moreover, the Company intends to
file registration statements under the Securities Act covering shares of Common
Stock reserved for issuance under stock option plans.
The Company has entered into an agreement under which holders of an
aggregate of 1,453,725 shares of Common Stock, which are to be issued at the
time of the offering upon the automatic conversion of the currently outstanding
Series B Preferred Stock, are entitled to cause the Company to register their
shares for sale and to participate in any future registration of securities
effected by the Company, subject to certain limitations and restrictions. See
"Shares Eligible For Future Sale" and "Description of Capital Stock --
Registration Rights."
BROAD DISCRETION OVER USE OF PROCEEDS
The principal purpose of this offering is to increase the Company's equity
capital to fund anticipated expenses for the development, production and
marketing and sale of the Company's lab-created gemstones. The Company currently
estimates that the net proceeds of this offering will be approximately $24.4
million and that $4.9 million (representing 20.0%) of such proceeds will be
allocated to working capital and other general corporate purposes. The Company's
management will have broad discretion to reallocate the use of the proceeds and
to direct the use of working capital without any action or approval of the
Company's shareholders. See "Use of Proceeds."
ANTI-TAKEOVER AND CERTAIN OTHER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company or limit the price that third parties might be willing to pay in the
future for shares of the Company's Common Stock. See "Description of Capital
Stock -- Certain Anti-Takeover Provisions."
Under the terms of the Exclusive Supply Agreement, the Company is
prohibited from entering into exclusive marketing or distribution agreements
with DeBeers or its affiliates or the Central Selling Organization (the
international cartel of diamond producers) or any party whose primary business
is the development, manufacture, marketing or sale of diamond gemstones or any
non-gemstone and non-jewelry industry competitor of Cree (collectively, the
"Prohibited Parties"). The agreement also prohibits the Company from entering
into certain merger, acquisition, sale of assets or similar transactions with a
Prohibited Party. These provisions of the Exclusive Supply Agreement could limit
the price that third parties might be willing to pay in the future for some or
all of the shares of the Company's Common Stock. In addition, this agreement
could prevent the Company from entering into certain potentially profitable
transactions with Prohibited Parties.
11
13
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby are estimated to be approximately $24.4 million
(approximately $28.2 million if the Over-allotment Option is exercised in full),
assuming an initial public offering price of $13.50 per share and after
deducting underwriting discounts and estimated offering expenses.
The Company intends to use approximately $5.5 million of the net proceeds
of this offering to fund research and development activities. Of this amount,
approximately $4.9 million will be paid to Cree under the Development Agreement
and $600,000 will be used to fund other aspects of the Company's development
efforts. The Company has reserved approximately $6.0 million of the net proceeds
of this offering to fund the acquisition of additional SiC crystal growth
systems from Cree, which the Company could be required to purchase for use by
Cree in supplying commercial production quantities of SiC crystals to the
Company. Under the Exclusive Supply Agreement, Cree has the option to require
the Company to purchase such systems from Cree at Cree's cost or to build such
systems itself and recoup its costs by incorporating the cost of the systems
into the cost of the SiC crystals purchased by the Company. See
"Business -- Dependence on Cree and Cree Technology." The Company has not
received any indication from Cree as to whether future capacity requirements
will be met at the Company's or Cree's expense. The Company also intends to use
approximately $1.9 million to purchase other equipment from unaffiliated third
parties. In addition, the Company plans to use approximately $6.1 million of the
net proceeds to fund its sales and marketing efforts.
The remaining net proceeds will be used for working capital and general
corporate purposes. Pending application of the net proceeds as set forth above,
the Company intends to invest the net proceeds in short-term, investment grade
debt securities. The Company reserves the right to reallocate the use of the net
proceeds of the offering to meet the business needs of the Company, which could
be required if Cree is unable to develop a fully repeatable process for growing
SiC crystals in desired colors, sizes and volumes, if market acceptance of
lab-created moissanite gemstones is slower than anticipated or if there are
unanticipated technological or other changes within the jewelry industry. The
Company currently believes that its existing capital resources, together with
the net proceeds of this offering and interest earned thereon, will satisfy the
Company's capital requirements at least through the 12 months following this
offering.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company intends to retain its future earnings, if any, to fund the
development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. Any future decision
concerning the payment of dividends on the Common Stock will depend upon the
results of operations, financial condition and capital expenditure plans of the
Company, as well as such other factors as the Board of Directors, in its sole
discretion, may consider relevant.
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14
DILUTION
As of June 30, 1997, the Company had a pro forma net tangible book value of
approximately $5.5 million or $1.39 per share of Common Stock. "Pro forma net
tangible book value" represents the amount of total tangible assets less total
liabilities divided by the number of shares of Common Stock outstanding, after
giving effect to the 2.13-for-1 stock split effected in September 1997, and the
automatic conversion of the outstanding shares of the Series A Preferred Stock
and Series B Preferred Stock into an aggregate of 1,677,375 shares of Common
Stock. After giving effect to the sale of 2,000,000 shares of Common Stock in
this offering at an assumed initial public offering price of $13.50 per share,
and the receipt of the net proceeds therefrom, the pro forma net tangible book
value of the Company as of June 30, 1997 is approximately $29.9 million or $5.03
per share of Common Stock. This represents an immediate dilution of $8.47 per
share to new investors purchasing shares of Common Stock offered hereby. The
following table illustrates the per share dilution:
Assumed public offering price per share..................... $13.50
Pro forma net tangible book value per share as of June 30,
1997................................................... $1.39
Increase in net tangible book value per share attributable
to this offering....................................... 3.64
Pro forma net tangible book value per share after this
offering.................................................. 5.03
------
Dilution per share to new investors......................... $ 8.47
======
The following table summarizes as of June 30, 1997, after giving effect to
the 2.13-for-1 stock split in September 1997, the automatic conversion of the
Series A Preferred Stock and Series B Preferred Stock and the sale of 2,000,000
shares of Common Stock in this offering, the number of shares of Common Stock
purchased from the Company, the total consideration paid therefor and the
average price per share paid by the existing shareholders and by the new
investors purchasing shares of Common Stock in this offering, at an assumed
initial public offering price of $13.50 per share, before deduction of the
estimated underwriting discount and offering expenses payable by the Company:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
Existing shareholders......... 3,938,476 66.3% $ 6,670,125 19.8% $ 1.96
New investors................. 2,000,000 33.7 27,000,000 80.2 13.50
--------- ---- ----------- ----
Total............... 5,938,476 100% $33,670,125 100%
========= ==== =========== ====
The foregoing tables assume no exercise of the Over-allotment Option and no
exercise of outstanding stock options to purchase Common Stock. There are (i)
661,791 shares of Common Stock issuable upon the exercise of options granted
under the 1996 Option Plan exercisable at a weighted average price of
approximately $3.95 per share and (ii) 37,275 shares of Common Stock issuable
upon the exercise of options granted to certain independent contractors
exercisable at a weighted average price of approximately $1.88 per share. To the
extent that any of these options are exercised in the future, there will be
further substantial dilution to new investors. See "Management -- Stock Option
Plans."
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15
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 on an actual and pro forma basis. The pro forma capitalization gives
effect to a 2.13-for-1 stock split effected in September 1997, the automatic
conversion of the Series A Preferred Stock and Series B Preferred Stock into an
aggregate of 1,677,375 shares of Common Stock, an amendment to the Company's
articles of incorporation to be effective prior to completion of the offering
and the sale of 2,000,000 shares of Common Stock in this offering at an assumed
initial public offering price of $13.50 and the application of the estimated net
proceeds therefrom. See "Use of Proceeds." This information should be read in
conjunction with the Company's Financial Statements and the Notes thereto
appearing in this Prospectus.
JUNE 30, 1997
--------------------------
ACTUAL PRO FORMA
----------- -----------
Shareholders' equity:
1996 Series A Preferred Stock, no par value; 105,000
shares authorized, 105,000 shares issued and
outstanding, actual; none authorized or issued and
outstanding, pro forma(1).............................. $ 593,271 $ --
1997 Series B Preferred Stock, no par value; 682,500
shares authorized, 682,500 shares issued and
outstanding, actual; none authorized or issued and
outstanding, pro forma(1).............................. 4,981,376 --
Preferred Stock, no par value; 4,212,500 shares
authorized, none issued and outstanding, actual;
10,000,000 authorized, none issued and outstanding, pro
forma.................................................. -- --
Common Stock, no par value; 10,000,000 shares authorized,
1,061,550 issued and outstanding, actual; 50,000,000
shares authorized, 5,938,476 issued and outstanding,
pro forma(1)(2)........................................ 1,095,803 31,070,450
Deficit accumulated during the development stage............ (1,118,404) (1,118,404)
----------- -----------
Total shareholders' equity(2)..................... 5,552,046 29,952,046
----------- -----------
Total capitalization......................... $ 5,552,046 $29,952,046
=========== ===========
- ---------------
(1) Net of related offering expenses. The Company intends to amend its articles
of incorporation prior to the completion of this offering to provide that
the shares will automatically convert into shares of Common Stock upon
consummation of this offering.
(2) Excludes (i) 37,275 shares of Common Stock issuable upon the exercise of
stock options granted to certain independent consultants with an exercise
price of approximately $1.88 per share, (ii) 661,791 shares of Common Stock
issuable upon the exercise of stock options granted under the 1996 Option
Plan with a weighted average exercise price of approximately $3.95 per share
and (iii) 310,000 shares of Common Stock issuable upon the exercise of stock
options granted under the 1997 Omnibus Plan with an exercise price equal to
the initial public offering price of the shares of Common Stock offered
hereby.
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16
SELECTED FINANCIAL DATA
The following selected statement of operations data for the period from
inception through December 31, 1995 and for the year ended December 31, 1996 and
the selected balance sheet data at December 31, 1995 and December 31, 1996 have
been derived from, and are qualified by reference to, the Company's financial
statements included elsewhere in this Prospectus, which have been audited by
Deloitte & Touche LLP, independent auditors. The selected statements of
operations data for the six month periods ended June 30, 1996 and June 30, 1997
and the selected balance sheet data at June 30, 1997 have been derived from the
Company's unaudited financial statements included elsewhere in this Prospectus.
In the opinion of management of the Company, such unaudited financial statements
have been prepared on a basis consistent with the audited financial information
and include all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the results of such periods. The results of
operations for the six month period ended June 30, 1997 are not necessarily
indicative of the results of operations for the year ending December 31, 1997.
The selected financial data set forth below should be read in conjunction with
the "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and Notes thereto included elsewhere in
this Prospectus.
PERIOD FROM
INCEPTION
(JUNE 28, 1995)
TO YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, --------------------------
1995 1996 1996 1997
--------------- ------------ ----------- ------------
STATEMENT OF OPERATIONS DATA:
Revenues.................................... -- -- -- --
Operating expenses:
Marketing and sales....................... $ 10,313 $ 47,019 $ 8,017 $ 46,611
General and administrative(1)............. 10,024 131,097 48,069 316,154
Research and development.................. 6,052 236,047 68,115 452,571
Depreciation and amortization............. 798 3,618 1,306 6,649
---------- ---------- ---------- -----------
Operating loss.............................. 27,187 417,781 125,507 821,985
Interest income, net........................ -- (35,173) (1,231) (113,376)
---------- ---------- ---------- -----------
Net loss.................................... $ 27,187 $ 382,608 $ 124,276 $ 708,609
========== ========== ========== ===========
Pro forma net loss per share................ $ 0.01 $ 0.14 $ 0.05 $ 0.17
========== ========== ========== ===========
Shares used in computing pro forma net loss
per share(2).............................. 2,204,062 2,652,250 2,381,562 4,199,978
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
------- ---------- ----------
BALANCE SHEET DATA:
Cash and equivalents........................................ $ 9,109 $1,167,458 $5,538,099
Working capital............................................. 8,355 1,161,603 5,428,225
Total assets................................................ 32,913 1,226,134 5,661,920
Shareholders' equity........................................ 22,813 1,213,279 5,552,046
- ---------------
(1) For the six months ended June 30, 1997, includes $66,000 of compensation
expense related to the January 2, 1997 issuance of Common Stock to Cree
pursuant to a stock option agreement. See Note 10 of Notes to Financial
Statements.
(2) The calculation of shares for all periods reflects a 2.13-for-1 stock split
effected in September 1997 and the automatic conversion of the Series A
Preferred Stock and Series B Preferred Stock to be effected upon completion
of this Offering. See Notes 2 and 9 of Notes to Financial Statements.
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17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since its organization in June 1995, the Company has devoted its resources
to funding research and development of colorless lab-created moissanite
gemstones, preliminary market research, qualifying potential retail jewelers and
other potential customers for distribution arrangements and assembling a
management team. As a development stage company, the Company is subject to all
the risks inherent in establishing a new business, including the risk that
full-scale operations may not occur.
The Company has not produced sales revenues to date and does not anticipate
having product sales until at least the first half of 1998. The Company has been
unprofitable since inception and anticipates that it will continue to incur
increasingly significant expenses as it transitions from the development stage
to full-scale production. Historic spending levels are not indicative of
anticipated future spending levels because the Company is entering a period in
which it will rapidly increase spending to refine its lab-created moissanite
gemstone products, exploit its technology, introduce its products into the
market, establish exclusive distribution channels, expand manufacturing
capacity, optimize SiC crystal yields and market its moissanite/ diamond test
instrument. For these reasons, the Company expects to continue operating at a
loss through at least some or all of 1998. Moreover, there can be no assurance
that the Company will ever achieve profitability or if profitability is
achieved, that such profitability can be sustained. See "Risk Factors -- Lack of
Operating History; Development Stage Company."
RESULTS OF OPERATIONS
Six Months ended June 30, 1997 compared with Six Months ended June 30,
1996. Research and development expenses for the six months ended June 30, 1997
increased by $384,456 over research and development expenses for the six months
ended June 30, 1996. The increase was attributable to expanded colorless SiC
crystal development efforts at Cree, internal development of prototype gemstone
pre-forming and faceting operations, qualifying of vendors for production and
development of production-quality prototypes of the moissanite/diamond test
instrument.
Marketing and sales expenses for the six months ended June 30, 1997
increased by $38,594 over expenses for the six months ended June 30, 1996. The
increase was due to the compensation expense of additional sales and marketing
staff hired since the prior period and the development of preliminary
advertising and marketing materials. Prior to May 1, 1996, the Company had no
paid employees.
General and administrative expenses for the six months ended June 30, 1997
increased by $268,085 over general and administrative expenses for the six
months ended June 30, 1996. The increase was primarily attributable to the
compensation expense of additional staff hired since the prior period and
occupancy expenses. The Company had no paid employees before May 1, 1996. Prior
to February 4, 1997, the Company conducted its operations from the home of two
of its founders and did not incur any lease or rent expenses during that time.
During this period in 1997, the Company also recognized $66,000 of compensation
expense related to the exercise of Cree's options to acquire 24,601 shares of
Common Stock on January 2, 1997.
Interest income for the six months ended June 30, 1997 increased by
$112,145 over interest income for the six months ended June 30, 1996. The
increase generally reflected interest earned on cash and cash equivalents,
consisting primarily of U.S. Treasury Bills and U.S. Treasury money market funds
acquired by investing the proceeds from the Company's Series A Preferred Stock
offering in August 1996 and its Series B Preferred Stock offering in January and
February 1997.
Year ended December 31, 1996 compared with Seven-Month Period ended
December 31, 1995. Research and development expenses for the year ended December
31, 1996 increased $229,995 over research and development expenses for the
seven-month period ended December 31, 1995. The increased expenses reflected the
commencement of the Company's external development of colorless SiC crystals
through Cree
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and increased activity in the development of prototype lab-created gemstones and
a prototype moissanite/ diamond test instrument.
Marketing and sales expenses for the year ended December 31, 1996 increased
by $36,706 over similar expenses for the seven-month period ended December 31,
1995. The increase was primarily due to the compensation expense of additional
sales and marketing staff hired since the prior period. The Company had no paid
employees before May 1, 1996.
General and administrative expenses for the year ended December 31, 1996
increased by $121,073 over general and administrative expenses for the
seven-month period ended December 31, 1995. The increases were primarily due to
the compensation expense of additional staff hired since the prior period and
occupancy expenses. The Company had no paid employees before May 1, 1996. Prior
to February 4, 1997, the Company's operations were conducted from the home of
two of its founders; consequently, the Company did not incur any lease or rent
expenses prior to that time.
Interest income was $35,173 for the year ended December 31, 1996. The
Company had no interest income in the seven-month period ended December 31,
1995. The interest was earned on cash and equivalents, consisting primarily of
U.S. Treasury Bills and U.S. Treasury money market funds acquired by investing
the proceeds from the Company's sale of Common Stock in May 1996 and the
Company's Series A Preferred Stock offering in August 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private equity sales totaling approximately $6.6 million. As of June 30, 1997,
the Company had approximately $5.5 million of cash and equivalents. The
Company's business strategy requires a significant expenditure of funds for an
accelerated commercialization of colorless lab-created moissanite gemstones.
These expenditures are presently projected to total approximately $13.9 million
through the end of 1998. In addition, the Company intends to spend approximately
$5.5 million on research and development activities during that period. Actual
expenditures for accelerated commercialization and additional research and
development efforts could vary materially from these estimates.
In connection with its planned commercial introduction of lab-created
moissanite gemstones, the Company has placed its first commercial quantity order
with Cree for a number of SiC crystals that the Company believes will require
the acquisition of additional crystal growth systems. This order is contingent
on Cree meeting certain development milestones for color range and the
successful completion of this offering. See "Business -- Manufacturing -- Growth
of SiC Crystals." Under the terms of the Exclusive Supply Agreement, Cree has
the option of building the growth systems at its own cost or requiring the
Company to purchase the growth systems from Cree. If the contingencies are
satisfied and Cree requires the Company to purchase the growth systems, the
Company will be obligated to spend approximately $1.0 million to fund the
purchase of such growth systems. In addition, if Cree's development efforts and
the Company's internal sales projections are met, the Company anticipates
placing orders for a number of crystals in 1998 and following years that it
believes will require additional capacity at Cree to meet the Company's SiC
crystal requirements. If Cree requires the Company to purchase additional growth
systems, the Company will be obligated to spend approximately $5.0 million to
fund the purchase of such growth systems in 1998. The Company also intends to
spend approximately $1.9 million to purchase other equipment, including certain
automated and computerized equipment to slice and dice SiC crystals into
preforms. See "Use of Proceeds" and "Business -- Manufacturing."
The Company plans to engage in substantial marketing activities to support
the introduction of lab-created moissanite gemstones. Such activities may
include advertising campaigns, cooperative advertising with retail jewelers and
distributors and individualized jeweler training. The Company also intends to
launch a direct mail campaign to support the introduction of its
moissanite/diamond test instrument. The Company estimates that it will spend
approximately $6.1 million for sales and marketing activities through 1998.
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The actual amount and timing of the Company's future capital requirements
will depend on many factors, including the extent of continued progress in its
development programs, the magnitude of these programs, the costs involved in
filing, prosecuting, enforcing and defending patent claims, the appearance of
competing technological and market developments and the success of the Company's
sales and marketing efforts. There can be no assurance that the Company's future
capital requirements will not exceed the amounts projected by its current
operating plan.
The Company has no committed external sources of capital. Based on its
current operating plan, the Company anticipates that its existing capital
resources, together with the proceeds of this offering and interest earned
thereon, will be adequate to satisfy its capital requirements for at least the
12 months following this offering. There may be circumstances, however,
particularly a delay in the introduction of the Company's proposed products or
lower than anticipated sales, that might accelerate the use of the net proceeds
of this offering and the Company's existing capital resources. The Company may
be required to raise substantial additional funds in the future, through public
or private sources or other relationships. No assurance can be given that
additional financing will be available, or if available, that it will be
available on terms acceptable to the Company. See "Risk Factors -- Need for
Additional Capital."
DEFERRED COMPENSATION
Subsequent to June 30, 1997, the Company recognized deferred compensation
expense of approximately $2.9 million related to stock options granted in July
and August 1997. Upon completion of this offering, the stock options granted to
certain officers and directors will vest on December 31, 1997. As a result,
approximately $2.1 million of this deferred compensation expense will be
recognized in the quarter ending December 31, 1997. The remaining deferred
compensation expense, approximately $800,000, will be recognized over the
three-year vesting period of the remaining options. See Note 10 of Notes to
Financial Statements.
NET OPERATING LOSS CARRYFORWARD
As of December 31, 1996 the Company had a net operating loss ("NOL")
carryforward of approximately $147,000, which expires in 2011. In accordance
with Section 382 of the Internal Revenue Code of 1986, as amended, a change in
equity ownership of greater than 50% of the Company within a three-year period
results in an annual limitation on the Company's ability to utilize its NOL
carryforwards that were created during tax periods prior to the change in
ownership. As a result of the Company's private equity offerings to date and
certain shareholder transactions, the utilization of the Company's NOL
carryforwards has become limited.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENT
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," was issued. This statement establishes standards for
computing and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This Statement simplifies
the current standards for computing earnings per share, and makes them
comparable to international EPS standards. This Statement is effective for
financial statements issued for periods ending after December 15, 1997; earlier
application is not permitted. This Statement requires restatement of all prior
period EPS data presented. The implementation of this Statement will not have a
material impact on the Company's financial statements.
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BUSINESS
INTRODUCTION
The Company is finalizing the development of, and intends to begin
marketing during the first half of 1998, colorless lab-created moissanite
gemstones which it will sell as a substitute for diamond in the jewelry market.
The physical properties of lab-created moissanite gemstones more closely match
those of diamond than any other known gemstone material. The Company believes
that its products are superior to other commercially available diamond
substitutes and intends to position its gemstone products as the ideal
substitute for diamond. The Company believes that its products will be
attractive to working women who desire an affordable alternative to diamond and
to middle and upper-income women who desire affordable "everyday" or "security"
jewelry.
Moissanite, also known by its chemical name, silicon carbide ("SiC"), is a
rare, naturally occurring mineral found primarily in meteorites. See
"-- Moissanite." Moissanite and diamond are both carbon-based minerals;
moissanite is composed of silicon and carbon while diamond is composed of
carbon.
The Company's lab-created moissanite gemstones are made from crystals of
SiC grown by Cree using patented and propriety technology. Cree has an exclusive
license to the patent related to a process for growing large single crystals of
SiC. To the Company's knowledge, there are no producers of SiC other than Cree
that could supply lab-grown SiC crystals in colors, sizes or volumes suitable
for use as a diamond substitute. The Company has certain exclusive licenses and
supply rights with Cree for SiC materials to be used for gemstone applications.
See "-- Dependence on Cree and Cree Technology." In addition, the Company has
developed certain proprietary methods and processes for the production of
gemstones from lab-grown SiC crystals and has patent applications pending for
certain of these methods and processes. See "-- Intellectual Property of the
Company." As a result, the Company believes that its lab-created moissanite
gemstones are proprietary products and that there are technological barriers to
prevent other competitors from developing or marketing lab-created moissanite
gemstones at affordable prices.
The Company and Cree are continuing their efforts to develop a fully
repeatable process to grow SiC crystals in colors, sizes and volumes desired for
the commercialization of lab-created gemstones. If the development objectives
are not fully accomplished, the Company believes it could market gemstones of
less than 1/2 carat in diamond color grades that have already been grown by
Cree, although at significantly lower average selling prices. Although the
Company has not yet begun to sell its products, the Company has begun qualifying
retail jewelry chains and high-volume independent retail jewelry stores in
selected U.S. cities to become exclusive distributors for sales anticipated to
begin in the first half of 1998. The Company is also evaluating alternatives for
distribution channels in the Pacific Rim and anticipates sales of its products
will also commence there in the first half of 1998.
There can be no assurance that the Company's development efforts will be
successful, that the Company will be able to enter into distribution agreements
with qualified retail jewelers on terms acceptable to the Company or that
consumers will accept the Company's lab-created gemstones as a diamond
substitute. See "Risk Factors," "-- Dependence on Cree and Cree Technology,"
"-- Product Distribution" and "-- Marketing and Sales."
INDUSTRY BACKGROUND
Overview. Gemstone materials can be grouped into three types: (i) natural
gemstone, which is found in nature; (ii) synthetic gemstone, which has the same
chemical composition and characteristics of natural gemstone but is created in a
lab and (iii) simulated or substitute material, which is similar in appearance
to the natural gemstone but does not have the same chemical composition. A
gemstone substitute should have physical properties similar to those of the
natural gemstone with which it compares and should be comparatively inexpensive.
The Company intends to market its products as the ideal substitute for diamond.
Diamond Jewelry Market. In 1996, worldwide retail diamond jewelry sales
were estimated to be in excess of $52 billion and diamond jewelry sales in the
United States were estimated to be $17.9 billion. In
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1996, approximately 29.5 million pieces of diamond jewelry were sold in the
United States, of which approximately 22.8 million pieces used settings other
than engagement rings.
The value of a diamond is determined by its carat size, cut, color and
clarity. Carat size refers to the weight of a diamond with one carat being
equivalent to 1/5 of a gram. The cut, or faceting of a rough diamond into a
gemstone, reveals the natural fire, brilliance and color of the stone. Color
refers to the amount of tint in a diamond. Clarity refers to the presence and
severity of inclusions (impurities trapped in the diamond during its formation)
and blemishes in a diamond.
The color grading scale, which is the standard generally accepted by the
diamond industry for color using pregraded master color stones, measures the
color of diamonds. The color grading scale consists of the letters "D" through
"Z". "D" is the designation given to a diamond that is completely colorless,
while a designation of "Z" is given to a colorless diamond that has a yellowish
tint visible to the naked eye. Colored diamonds, such as canary diamonds, use a
different grading scale. Retail jewelry stores most often sell diamonds within
the "G" to "M" range. In 1996, the median color grade of all diamonds sold was
within the range of "H" to "I".
The clarity grading scale, which is generally accepted by the diamond
industry, is used to identify the severity of defects. The clarity grading scale
is as follows: Flawless (a diamond that has no inclusions and only insignificant
blemishes that are invisible at 10x magnification); Very Very Slightly Included;
Very Slightly Included; Slightly Included; Imperfect-1; Imperfect-2; and
Imperfect-3 (large and/or numerous inclusions that are clearly visible to the
naked eye). Retail jewelry stores predominantly sell diamonds in the range of
Very Slightly Included to Imperfect-1. The clarity grade with the highest number
of diamonds sold in 1996 was Slightly Included.
The following table sets forth the matrix of wholesale prices for a one
carat round brilliant cut diamond of varying colors and clarities:
PER CARAT DIAMOND WHOLESALE PRICING(1)
COLOR
------------------------
CLARITY G/H I/J K/L
- ------- ------ ------ ------
Flawless.................................................... $7,450 $5,750 $4,750
Very, Very Slightly Included................................ 6,775 5,375 4,525
Very Slightly Included...................................... 6,125 4,925 4,125
Slightly Included........................................... 4,717 4,017 3,417
- ---------------
(1) Based on the September 5, 1997 Rapaport Diamond Report.
Diamond Synthetics and Substitutes. Although the technology to produce
synthetic diamonds has existed for over 40 years, synthetic diamonds have not
been used in significant quantities in jewelry. In 1955, The General Electric
Company ("GE") produced industrial-grade synthetic diamonds by subjecting
graphite to extreme pressure and heat. In 1970, GE announced that it had
produced colorless gemstone quality synthetic diamonds in carat weight. DeBeers,
Sumitomo Corporation and certain Russian producers have also produced gemstone
quality synthetic diamonds. However, the process for growing colorless gemstone
quality synthetic diamonds is far more expensive and time-consuming than growing
industrial-grade synthetic diamonds. The Company believes that it is not
commercially feasible to grow colorless gemstone quality synthetic diamonds at
the present time.
Treated diamonds, which are natural diamonds with imperfections or flaws
that have been altered in some manner to enhance their appearance, are also sold
in the jewelry industry. Diamonds with surface cracks may be filled with a
colorless substance to present a uniform appearance. The appearance of diamonds
containing inclusions, or foreign materials trapped in a diamond during its
formation, may be improved through the use of laser technology. Treated diamonds
are generally less expensive than diamonds of similar size, cut and color which
have not been treated.
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Industry experience has shown that certain diamond substitutes have
achieved market acceptance with consumers. Synthetic cubic zirconia, which is
often considered to be the first diamond substitute to possess physical
characteristics reasonably similar to diamond, gained rapid acceptance among
consumers after its introduction in 1976. The absence of any proprietary rights
in the process for producing synthetic cubic zirconia allowed a number of
producers to enter the market shortly after its introduction. As a result of
these factors, the wholesale price of synthetic cubic zirconia decreased by 90%
in the four years following its introduction.
Synthetic cubic zirconia initially was not well accepted by jewelers.
Industry publications suggest that jewelers historically believed that sales of
diamond simulants, such as synthetic cubic zirconia, might cause a decrease in
diamond sales. Reports of diamond sales following the introduction of synthetic
cubic zirconia fail to show, however, that synthetic cubic zirconia
significantly depressed diamond sales. The Gemological Institute of America has
stated that many jewelers have found that some purchasers of diamond simulants
return to upgrade their jewelry to diamond.
Based on consumer acceptance of other diamond simulants, the Company
believes that a market does exist for a realistic substitute for diamond in
jewelry. The Company believes that its products are superior to other
commercially available diamond simulants because the physical properties of
lab-created moissanite gemstones more closely match those of diamond than any
other known gemstone material. There can, however, be no assurance that
consumers will accept the Company's products as a substitute for diamond in
jewelry or that no other more realistic diamond substitutes will become
available. See "Risk Factors -- Undeveloped Markets" and "-- Unproven Acceptance
of the Company's Products."
BUSINESS STRATEGY
The Company has developed a business strategy for achieving commercial
production and widespread market acceptance for its lab-created gemstones. The
key components of this strategy include:
Exploit Proprietary Technology. The Company has undertaken a development
program with Cree under which Cree is refining its patented core SiC technology
in order to produce large lab-grown SiC crystals in the comparable diamond color
grades "G" through "J" by a fully repeatable process. See "-- Dependence on Cree
and Cree Technology."
Develop Market Recognition. The Company plans to position its gemstone
products as the ideal substitute for diamond. The Company believes that
lab-created gemstones will be attractive to working women who desire an
affordable alternative to diamond and to middle and upper-income women who
desire affordable "everyday" or "security" jewelry. See "-- Marketing and
Sales."
Establish Exclusive Distribution Channels. The Company plans to enter into
exclusive distribution agreements in 1998 with selected retail jewelry chains
and high-volume independent retail jewelry stores located in certain U.S. cities
and is exploring distribution options for the Pacific Rim. Exclusive
distribution rights are intended to enable retailers to distinguish themselves
from competitors in the highly competitive jewelry market, which the Company
believes will encourage the retailers to focus on and promote the sale of the
Company's gemstone products. See "-- Marketing and Sales."
Rapidly Expand Manufacturing Capacity. The Company is committed to rapidly
expand the capacity at Cree for producing colorless SiC crystals for gemstones.
Although the Company has certain rights under the Exclusive Supply Agreement
with Cree to cause Cree to expand capacity as needed to meet the Company's
orders for lab-grown SiC crystals, under certain circumstances, Cree's supply
obligation may be limited. See "-- Dependence on Cree and Cree Technology" and
"-- Manufacturing."
Optimize SiC Crystal Yield. After a fully repeatable process has been
developed for producing SiC crystals in comparable diamond color grades, sizes
and volumes desired for initial commercial production of the Company's colorless
lab-created moissanite gemstones, Cree will seek to expand SiC crystal size
while maintaining crystal color uniformity and volume. This development program
is intended to optimize the productivity of the crystal growth process and
minimize the per carat materials cost of the Company's colorless lab-created
moissanite gemstones. See "-- Dependence on Cree and Cree Technology."
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Provide Reliable Test Instruments. The Company believes that a practical,
readily available method of distinguishing colorless lab-created moissanite
gemstones from diamond will be needed by persons who are not trained gemologists
to prevent fraud, which may aid in establishing market acceptance of the
Company's gemstone products. Because the Company's tests indicate that neither
visual inspection nor commonly used testing devices reliably distinguish
colorless lab-created moissanite gemstones from diamond, the Company has begun
to produce a test instrument that distinguishes colorless lab-created moissanite
gemstones from diamonds in the colors and clarities most commonly sold by retail
jewelers. See "-- Products."
During the balance of 1997 and the first half of 1998, the Company will
continue to monitor closely Cree's program to develop a fully repeatable process
for producing SiC crystals with uniform color in the comparable diamond color
grades "G" through "J", with at least 50% in the comparable diamond color grades
"G" to "H". There can be no assurance that this portion of the development will
be accomplished during this time frame or at all. Once the targeted color grades
and uniformity are consistently achieved, the Company will continue to closely
monitor the on-going development program to increase crystal size while
maintaining color grade and uniformity. See "-- Dependence on Cree and Cree
Technology."
If Cree achieves the desired color grades, the Company anticipates placing
production orders for SiC crystals with Cree during the balance of 1997 and the
first half of 1998 that will require the expansion of Cree's manufacturing
capacity through the addition of numerous crystal growth systems. Under the
Exclusive Supply Agreement, Cree may elect to pay the cost of building the
growth systems itself and build this cost into the price of SiC crystals sold to
the Company or to require the Company to pay for the growth systems to be built
by Cree and maintained at Cree's facilities. See "-- Dependence on Cree and Cree
Technology" and "-- Manufacturing." Because Cree has not indicated which
alternative it will elect, the Company has budgeted a portion of the proceeds of
this offering to fund the acquisition of the crystal growth systems anticipated
to be needed. See "Use of Proceeds," "Risk Factors" and "-- Manufacturing." The
Company also anticipates making other equipment purchases of approximately $1.9
million for its own facility. See "Use of Proceeds." During this same time
period, the Company will continue to assess whether additional vendors of
faceting services are needed and to enter into contracts with vendors to provide
such services as needed to meet demand.
During the remainder of 1997 and the first half of 1998, the Company will
be developing its marketing program for introducing gemstone products for sale
in the first half of 1998. See "-- Marketing and Sales." Through the balance of
1997, the Company's sales force will continue to implement its strategy for
establishing product distribution channels. The Company currently anticipates
that it will begin to offer exclusive distribution arrangements in early 1998.
Assuming Cree has achieved production of SiC crystals in the comparable diamond
color grades, sizes and volumes desired by the Company, the Company will
continue to evaluate and select additional retailers or other distribution
channels for its products during the remainder of 1998.
MOISSANITE
Moissanite is a rare, naturally occurring mineral which is found primarily
in meteorites. The naturally occurring moissanite that has been found has
generally been very small in size and dark green or black in color and is not a
commercially viable gemstone material. Therefore, only lab-grown SiC crystals
are expected to provide a meaningful source of moissanite for gemstones.
The Company believes that lab-created moissanite gemstones have numerous
features that make them a superior substitute for diamond in jewelry and that
will result in market demand for the Company's products. It is generally
accepted that, in addition to carat size, the most important characteristics of
a gemstone are its beauty and durability. The beauty of a colorless diamond is
determined by the absence of color as well as the diamond's brilliance and
"fire." The brilliance of a gemstone is measured by its refractive index or the
extent to which it reflects light. The "fire" of a gemstone, or the breaking of
light rays into the spectrum of colors, is measured by its dispersion. The
gemstone's hardness also determines the extent to which brilliance and "fire"
can be highlighted by cutting with sharp, highly polished facets. The durability
of a gemstone is determined by the gem's hardness, or resistance to scratching,
and its toughness, or resistance to chipping or cleaving.
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Because of SiC's physical properties, lab-created moissanite gemstones
compare favorably to diamond for beauty and durability. The unique atomic
structure of SiC allows it to be grown in a wide variety of colors, including
colors within the commercially desirable portion of the diamond grading scale.
Colorless lab-created moissanite gemstones display a brilliance very similar to
that of diamond, with a refractive index that is greater than diamond and closer
to diamond than any other hard mineral. The dispersion of colorless lab-created
moissanite gemstones is also higher than diamond. The hardness of lab-created
moissanite gemstones is greater than all known gemstone materials except
diamond. As a result, lab-created moissanite gemstones, like diamond, can be cut
with sharp, highly polished facets that accentuate their brilliance and "fire."
An initial study indicates that the physical appearance of lab-created
moissanite gemstones is quite similar to diamond. In 1996, the Company
commissioned a market survey of 30 jewelry stores in the Midwest region of the
United States. In the survey, personnel at 28 out of 30 jewelry stores
mistakenly identified one of the Company's lab-created moissanite gemstones set
in a pendant as diamond. This study represents only one survey, and there can be
no assurance that other surveys would provide similar findings or that any
commercial market will develop for the Company's products.
The Company believes that other physical properties of lab-created
moissanite gemstones are similar to diamond and will aid in jewelers' acceptance
of its products as a diamond substitute. Because the specific gravity, or
density, of lab-created moissanite gemstones is very close to that of diamond,
the size of a 1 carat lab-created moissanite gemstone is virtually
indistinguishable from a 1 carat diamond by the naked eye. In addition,
lab-created moissanite gemstones, like diamond, can withstand high temperatures.
This property allows jewelers to make extensive repairs to the jewelry setting
without removing the stone and to use the same methods that are used to repair
diamond jewelry.
The Company believes that the physical properties of lab-created moissanite
gemstones make it a more attractive substitute for diamond than synthetic cubic
zirconia. Because it has a lower refractive index than diamond, synthetic cubic
zirconia is relatively easy to distinguish from diamond in most applications.
The difference is noticeable in larger size round brilliant cut gemstones and
particularly in gemstones cut with certain facet arrangements, such as emerald
or baguette cut gemstones. In addition, as a result of their relative softness,
synthetic cubic zirconia gemstones show signs of wear over time. Substantial
degradation of the facets, which does not occur to the same degree in diamond or
lab-created moissanite gemstones, results in a marked reduction in brilliance.
The following table compares the physical properties of lab-created
moissanite gemstones with other gemstone materials:
GEMSTONE MATERIAL COMPARISON(1)
HARDNESS REFRACTIVE SPECIFIC
GEMSTONE MATERIAL (MOHS SCALE)(2) TOUGHNESS INDEX DISPERSION GRAVITY
----------------- --------------- --------- ---------- ---------- ---------
Diamond....................... 10 Good* 2.42 .044 3.52
Lab-Created Moissanite(3)..... 9.25-9.50 Excellent 2.65-2.69 .090-.104 3.14-3.21
Sapphire & Ruby............... 9 Excellent 1.76-1.78 .018 3.90-4.00
Synthetic Cubic Zirconia...... 8.0-8.5 Good 2.09-2.18 .060 5.60-6.06
Emerald....................... 7.5 Poor to 1.56-1.60 .014 2.69-2.75
Good
- ---------------
* In cleavage direction, otherwise excellent.
(1) Sources: GEMOLOGICAL INSTITUTE OF AMERICA, GEM REFERENCE GUIDE FOR THE GIA
COLORED STONES, GEM IDENTIFICATION AND COLORED STONE GRADING COURSES 32-35,
65-82, 87-90 (1995); CORNELIUS S. HURLBURT, JR. & ROBERT C. KAMMERLING,
GEMOLOGY 320-324 (2d ed. 1991); KIRK-OTHMER ENCYCLOPEDIA OF CHEMICAL
TECHNOLOGY 891-906 (4th ed. 1994); INSTITUTION OF ELECTRICAL ENGINEERS,
PROPERTIES OF SILICON CARBIDE 3 (Gary L. Harris, ed., 1995); ROBERT WEBSTER,
GEMS: THEIR SOURCES, DESCRIPTIONS AND IDENTIFICATION 889-940 (5th ed. 1994);
W. VON MUENCH, "SILICON CARBIDE" IN LANDOLT-BOEMSTEIN NUMERICAL DATA AND
FUN-
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CTIONAL RELATIONSHIPS IN SCIENCE AND TECHNOLOGY, NEW SERIES, GROUP III, VOL.
17C, PP. 403-416 AND 585-592 (M. Schultz and H. Weiss, eds., 1984).
(2) The Mohs Scale is approximately logarithmic and quantitative comparisons of
different gemstone materials cannot be made directly using the Mohs Scale.
Lab-created moissanite gemstones are approximately one-third as hard as
diamond and synthetic cubic zirconia is approximately one-sixth as hard as
diamond. Lab-created moissanite gemstones are approximately twice as hard as
synthetic cubic zirconia.
(3) The physical properties of lab-created moissanite gemstones set forth in the
preceding table utilized materials from SiC crystals produced by parties
other than the Company or Cree. These crystals had various sizes, colors and
atomic structures that the Company believes made them unsuitable for use as
a diamond substitute. The Company has conducted tests on the hardness,
toughness and refractive index of samples of its lab-created gemstones, and
the results of these tests are consistent with the results reported in this
table. Because Cree and the Company have not yet developed a fully
repeatable process for producing gemstone quality SiC crystals in the
comparable diamond color grade range of "G" through "J", the specific
properties of the lab-created moissanite gemstones that will eventually be
commercialized are not now known. However, the Company believes that the
physical properties of its lab-created moissanite gemstones will fall within
the ranges of the lab-created moissanite shown in this table.
PRODUCTS
The Company expects to sell lab-created moissanite gemstones of 1/2 to 1
carat primarily in the comparable diamond color grade range of "G" through "J"
and in the comparable diamond clarity grade range of Flawless through Slightly
Included. Cree has grown pilot samples of SiC crystals in these colors and
clarities and has undertaken a significant development program, funded by the
Company, to develop a fully repeatable process to grow SiC crystals in the
desired color, size and volume. If Cree is not successful in its development
efforts, the Company intends to manufacture, from SiC crystals grown by Cree
using its existing processes, and sell lab-created moissanite gemstones
primarily in colors lower than its target color grade range and primarily in
sizes smaller than 1/2 carat but at significantly lower average selling prices.
The development efforts for such smaller, less expensive stones has been
completed, and no significant barriers exist to prevent the Company from
manufacturing and selling such stones, if necessary. There can be no assurance
that Cree will successfully complete its planned development efforts or that a
market will develop for lab-created gemstones of any color or size.
The Company currently intends to sell only loose lab-created gemstones
rather than finished jewelry products. See "-- Distribution, Marketing and
Sales." Initially, the Company plans to market round brilliant cut stones, which
are frequently used in rings, earrings, pendants and bracelets. Over time, the
Company may elect to expand its product lines by offering additional cuts or
colored lab-created gemstones. To date, Cree has produced pilot samples of
gemstone quality SiC crystals in green, blue and amber.
The Company has not yet determined the price at which it will market its
products. As the Company seeks to establish distribution channels, it is
conducting preliminary market research in its target markets. The Company
intends to determine the price of its lab-created gemstones after assessing the
response from its potential customers. There can be no assurance that the
Company will be able to sell its products at the prices ultimately established
by the Company or at any other prices that would be profitable to the Company.
Gemstone test instruments most commonly used by jewelry experts rely on
thermal properties to distinguish diamond from other gemstones or diamond
simulants such as synthetic cubic zirconia. Because the thermal properties of
lab-created moissanite gemstones are relatively close to those of diamond, such
instruments have not, to date, been able to reliably differentiate between
diamond and lab-created moissanite gemstones. Although gemologists trained in
the physical properties of lab-created moissanite gemstones may find a number of
ways to distinguish lab-created moissanite from diamond, the Company believes
there will be a need to introduce a readily available moissanite/diamond test
instrument concurrent with the introduction of lab-created moissanite gemstones
to help prevent fraud. The availability of this type of test instrument also may
aid market acceptance of its lab-created gemstones.
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The Company anticipates introducing its moissanite/diamond test instrument
for sale during the first half of 1998. This instrument, which distinguishes
moissanite gemstones from diamonds in the colors and clarities most commonly
sold by retail jewelers, would be used in conjunction with existing thermal test
instruments. A patent application by the Company is pending for this
moissanite/diamond test instrument. There can be no assurance that a market will
develop for the Company's test instrument or that other readily available means
will not be developed which can effectively distinguish lab-created moissanite
gemstones from diamond.
DEPENDENCE ON CREE AND CREE TECHNOLOGY
Cree, the Company's source for development and supply of lab-grown SiC
crystals, has developed or licensed numerous patented processes for the growth
of SiC crystals. The technology was initially developed for SiC uses in
semiconductors. The founders of the Company recognized the potential use of SiC
crystal for lab-grown gemstones, and the Company has obtained the exclusive
right to purchase SiC crystals from Cree for gemstones and gemological
instrumentation. The Company believes that Cree is the only producer of SiC
crystals in sizes suitable for commercial production of gemstones. In addition,
Cree is the only producer of SiC known by the Company to be developing colorless
SiC crystals suitable for use as a diamond substitute.
Cree has significant proprietary rights related to its processes for
growing SiC crystals. Cree has an exclusive license on the patent for a process
of growing large single crystals of SiC. This patent expires in years ranging
from 2006 to 2011, depending on the country in which issued. In addition, Cree
has other patents relating to aspects of its SiC crystal growth process. To
further protect its proprietary SiC crystal growth process, Cree internally
produces, with proprietary confidential technology, the crystal growth systems
used in its SiC crystal production. In addition, Cree has a pending patent
application for a process of growing colorless SiC crystals. The Company has a
royalty-free, perpetual license for the use in gemstone applications of the
technology covered by this pending patent application.
The Company's success and ability to compete is heavily dependent upon
Cree's proprietary technology. However, there can be no assurance that Cree will
be able to protect its proprietary technology from disclosure or that others
will not develop technologies that are similar or superior to its technology.
See "Risk Factors -- Dependence on Intellectual Property."
On June 6, 1997, the Company entered into the Exclusive Supply Agreement
and a Development Agreement (the "Development Agreement") with Cree. Under the
Development Agreement and the Exclusive Supply Agreement, the Company has
concentrated both its development expenditures and its source of supply for SiC
crystals with Cree. As a result, the business of the Company will be highly
dependent on Cree's performance under these agreements. The processes and other
technology developed by Cree under the Development Agreement are expected to
have application in Cree's development of SiC technology generally, will be
owned by Cree and will be available to Cree for all uses other than gemstone
applications. In addition, the payment terms under the Exclusive Supply
Agreement provide margins and certain financial incentives to Cree that the
Company believes provide appropriate business and economic incentives for Cree
to perform its obligations under the Development Agreement and the Exclusive
Supply Agreement.
Under the Development Agreement, Cree is developing a fully "repeatable
process" for producing SiC crystals in comparable diamond color grades "G"
through "J", with at least 50% in the "G" to "H" range. To date, Cree has
repeatedly produced crystals of consistent, uniform quality in the comparable
diamond color grades "L" through "N" and has produced samples in the comparable
diamond color grades "G" through "K". If Cree has not developed a fully
"repeatable process" by January 1, 1998, during the 10-day period ending on
January 10, 1998, the Company may elect to reduce its funding obligations under
the Development Agreement by 50% or terminate the Development Agreement. The
Development Agreement also establishes additional milestones for crystal
production in future years, and the Company has the right to terminate the
Agreement if those milestones are not met by Cree. The Development Agreement
also provides for a five-year focused development effort by Cree to increase
crystal size while maintaining color grade and uniformity. Provided the target
specifications for crystal size and color grade are met, over the five-year
period of the Development Agreement the Company could be obligated to fund
approximately $12 million of development work. See "Use of Proceeds."
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Under the Exclusive Supply Agreement, Cree has agreed not to sell
moissanite crystals for gemstone uses to anyone other than the Company. The
Company has agreed to purchase from Cree at least 50%, by dollar volume, of the
Company's requirements for SiC material for the production of gemstones in each
calendar quarter. Cree is obligated to supply this amount of material to the
Company. Although the Company is obligated to purchase only 50% of its
requirements from Cree, the Company does not believe there are any other
alternative sources of supply for SiC crystals suitable for gemstones.
Therefore, the Company expects to be dependent on Cree as its sole source of
supply of SiC crystals. The price for SiC crystals is set at Cree's loaded
manufacturing cost plus a margin, which margin may increase if the price of
crystals declines below a specified amount.
Cree will have to build additional crystal growth systems in order to meet
the Company's anticipated SiC crystal requirements. Under the Exclusive Supply
Agreement, Cree may elect to have the Company purchase the additional growth
systems that will be needed or to fund the costs on its own and recoup its costs
by incorporating the costs of the systems into the cost of the SiC crystals
purchased by the Company. If the Company funds the costs of the crystal growth
systems, Cree must supply the Company with 100% of the output from these
systems. If Cree elects to fund the cost of these additional growth systems on
its own, there can be no assurance that Cree will supply the Company with all of
the output from these crystal growth systems or fill all of the Company's
orders. Any delay or reduction in the availability of SiC crystals could delay
or limit the Company's ability to deliver and sell its lab-created gemstones,
which would have a material adverse effect on the Company.
The Exclusive Supply Agreement also restricts the Company from entering
into numerous types of arrangements with identified parties. See
"-- Distribution, Marketing and Sales" and "Description of Capital
Stock -- Certain Anti-Takeover Provisions." The Exclusive Supply Agreement has
an initial term of ten years, which may be extended for an additional ten years
by either party if the Company orders in any 36-month period SiC crystals with
an aggregate purchase price in excess of $1.0 million. The Company expects to
meet this order threshold and to extend the term of the Agreement.
Cree is also the sole supplier of a component of the Company's
moissanite/diamond test instrument that is proprietary to Cree. If Cree were to
fail to deliver this component, as required, the Company would not be able to
manufacture its test instrument. A lack or shortage of test instruments could
impact market acceptance of the Company's lab-created moissanite gemstones.
The President of the Company and one of the founders of the Company are the
brothers of the Chief Executive Officer of Cree. After this offering, Cree and
certain of its officers and directors will own approximately 3.9% of the
outstanding Common Stock. See "Certain Transactions."
INTELLECTUAL PROPERTY OF THE COMPANY
The Company has applied for a number of patents related to the production
of lab-created moissanite gemstones. The Company has pending patent applications
for lab-created moissanite gemstones and its moissanite/diamond test instrument.
Although the Company intends to vigorously prosecute all its patent
applications, there can be no assurance that such actions will be successful,
that any patents will be issued, that such patents, if issued, will not be
challenged, invalidated or circumvented or that such patents, if issued, will
have any competitive or commercial value.
The Company's success and ability to compete successfully is heavily
dependent upon its proprietary technology. In addition to its pending patents,
the Company relies on trade secret law and employee, consultant and customer
confidentiality agreements to protect certain aspects of its technology. There
can be no assurance that the Company will be able to protect its proprietary
technology from disclosure or that others will not develop technologies that are
similar or superior to its technology. See "Risk Factors -- Dependence on
Intellectual Property."
While the Company has not received any claims that its products or
processes infringe on the proprietary rights of third parties, there can be no
assurance that third parties will not assert such claims against the Company
with respect to its existing and future products. In the event of litigation to
determine the validity of
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any third party's claims, such litigation could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result of any such litigation, the Company could be
required to expend significant resources to develop non-infringing technology or
to obtain licenses to, and pay royalties on the use of, the technology which is
the subject of the litigation. There can be no assurance that the Company would
be successful in such development or that any such license would be available on
commercially reasonable terms.
MANUFACTURING
The production of lab-created moissanite gemstones includes (i) growing SiC
crystals, (ii) cutting crystals into preforms that will yield gemstones of an
approximate carat size, (iii) faceting preforms into gemstones and (iv)
inspecting, sorting and grading faceted gemstones. The processes for SiC crystal
growth are under continuing development by Cree, and the Company is engaged in
pilot production of lab-created moissanite gemstones at its own facilities as
part of its product development efforts.
Growth of SiC Crystals. The Company intends to source all of its SiC
crystals from Cree under the Exclusive Supply Agreement for the foreseeable
future. See "-- Dependence on Cree and Cree Technology."
In connection with the anticipated market introduction of its lab-created
gemstones in the first half of 1998, the Company has placed a contingent order
with Cree for a number of SiC crystals that the Company believes will exceed the
capacity of the crystal growth systems now in use. The order is contingent on
Cree meeting the milestones under the Development Agreement for color range and
on the Company's successful completion of this offering. Cree has not yet
informed the Company whether Cree will purchase some or all of the additional
crystal growth systems or require the Company to do so. If Cree's development
milestones are met, the Company would also place orders for a number of crystals
in the remainder of 1998 and following years that it believes would require the
use of a significant number of additional crystal growth systems. There can be
no assurance that Cree will meet its development milestones or that the Company
will be able to sell lab-created moissanite gemstones in accordance with its
objectives.
In an effort to have adequate quantities of its lab-created gemstones
available to meet anticipated market demand, the Company expects to place orders
with Cree for SiC crystals in advance of actual demand for the product. As a
result, the Company may spend significant amounts of its capital to acquire
additional crystal growth systems or purchase SiC crystals at a time when there
is no existing demand to justify such expenditures. If the Company
underestimates demand, the Company may be unable to rapidly increase its
production of lab-created moissanite gemstones to satisfy the demand as a result
of the several months that may elapse between the Company placing an order for
crystals and the time that additional growth systems needed could begin
producing crystals.
Preforms. The Company divides all SiC crystals through slicing and dicing
processes into preforms in carat sizes suitable for faceting into predetermined
calibrated-size gemstones. The Company plans to acquire readily available
automated and computerized equipment used in the semiconductor industry to slice
and dice crystals into preforms. The Company believes that this equipment will
enable it to maximize, with minimal additional investment or employee training,
the number of preforms obtained from each SiC crystal.
Faceting Gemstones. The faceting of preforms is a critical stage in
obtaining quality gemstones. The techniques and skills used in faceting
lab-created moissanite gemstones differ somewhat from those used in faceting
diamonds. The Company intends to outsource all faceting of gemstones for
commercial production and will continue internal faceting for research and
development. The Company has entered into an agreement with John M. Bachman,
Inc. ("JMB") under which an affiliate of JMB will facet lab-created moissanite
preforms. Pursuant to this agreement, the Company has advanced certain funds to
JMB to expand production capability at its affiliate. The Company has committed
to supply certain minimum quantities of preforms to JMB, and JMB has agreed to
have such quantities faceted to mutually agreed specifications at agreed upon
prices. The agreement renews annually unless sooner terminated by either party
upon no less than 60 days notice prior to the end of the then applicable term or
due to breaches of the agreement or the occurrence of certain other events.
Under this agreement, JMB has agreed to grant, and to cause its affiliates to
grant, to the
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Company a perpetual, non-exclusive, royalty-free license to use any inventions
or proprietary information developed by or for JMB or its affiliates that is
useful in the faceting of lab-created moissanite gemstones.
The Company has identified two additional suppliers of faceting services,
has qualified their faceting skills on a sample basis and intends to assess
these other vendors' production capabilities over the next year. There is,
however, no assurance that these vendors will be suitable for reliable supply
arrangements or that the Company will be able to enter into agreements with
these additional vendors or with other reliable, quality faceting providers on
terms acceptable to the Company. Even if these agreements can be reached, the
Company intends during the early stages of commercialization of its products to
source faceting services primarily from JMB and will be dependent on JMB's
ability to provide an adequate quantity of quality faceted lab-created
moissanite gemstones. The Company has not begun placing commercial production
orders with JMB, and therefore is unable to assess, with certainty, whether JMB
will be able to produce faceted lab-created moissanite gemstones to the
Company's quality specifications and within the Company's quantity and time
requirements.
Inspection, Sorting and Grading. Faceted lab-created moissanite gemstones
are returned to the Company for inspection, sorting and grading. During this
stage, specially trained personnel individually examine and grade each faceted
lab-created moissanite gemstone for color, cut and clarity to ensure that it
meets the Company's quality control standards. This phase of manufacturing is
relatively labor-intensive and requires skills not readily available in the
general work force. There can be no assurance that the Company will be able to
hire or retain sufficient numbers of appropriately skilled personnel for this
phase of manufacturing.
Test Instrument. The Company has contracted with an unaffiliated third
party for the assembly of the moissanite/diamond test instrument from components
produced by third parties. The Company believes that, other than with respect to
the chip described below, the components and assembly functions would be readily
available from a wide variety of other suppliers. The test instrument relies
upon a proprietary semiconductor chip that the Company obtains from Cree under a
letter agreement dated February 12, 1996 which expires in 2016 (the "Instrument
Agreement"). The Instrument Agreement obligates the Company to purchase all of
the chips used in the test instrument from Cree and gives the Company the
exclusive right to purchase those chips from Cree. The Company will pay Cree a
royalty of 2 1/2% of net sales of all test instruments incorporating the Cree
chip.
DISTRIBUTION, MARKETING AND SALES
The Company plans to introduce 1/2 to 1 carat round brilliant lab-created
moissanite gemstones for sale in certain large cities in the United States and
Pacific Rim in the first-half of 1998. The Company has targeted the United
States and the Pacific Rim because it believes that these markets represent a
significant portion of the worldwide jewelry market and are markets that are
relatively accepting of diamond substitutes. In connection with the planned
product introduction, the Company has begun pre-qualifying selected retail
jewelry chains and high-volume independent retail jewelry stores in targeted
U.S. cities as exclusive distributors and is exploring distribution options in
the Pacific Rim. The Company is currently evaluating the most appropriate
structure for the exclusive distribution agreements and may, in certain
circumstances, enter into other types of distribution agreements. The final
selection of retailers and the nature and scope of the exclusive arrangements
will be based on the responses received by the Company. The Company currently
anticipates that it will begin to offer exclusive distribution arrangements in
early 1998.
The Company believes that marketing loose stones will allow retail jewelers
to individually select the most appropriate jewelry settings for their
individual market areas. The sale of round brilliant cut stones also provides
the jeweler with a wide range of uses for the stones in rings, earrings,
pendants and bracelets. However, consumer perception and acceptance of the
Company's products will be directly impacted by the quality, design and
workmanship of the settings chosen by the retailers, and the Company will have
no control over these individual decisions.
The Company believes that exclusive distribution agreements will provide
retailers with an opportunity to earn a profit margin that compares favorably to
other jewelry products and will allow the retailer to distinguish its product
line from other jewelers in the highly competitive retail jewelry market. The
Company also believes
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that the profit margins associated with its products will create incentives for
these retailers to maximize their sales and promotions efforts resulting in
additional consumer demand for the Company's lab-created gemstones. As the
Company's supply of lab-created moissanite gemstones increases, the Company
plans to increase the number of markets in which its products are available and
the number of retailers handling its products. After the introduction of
lab-created moissanite gemstones in its target markets, the Company's sales
staff will divide its time between providing sales support to its existing
network of retailers and entering into new target markets and new distribution
arrangements.
The Company plans to market its moissanite/diamond test instrument directly
to jewelers, gemologists and pawnbrokers. Distribution of the test instrument
will be supported by direct mailings and advertisements in trade publications.
The Company may retain non-exclusive distributors to distribute the test
instrument in some markets or enter into other distribution agreements as it
deems appropriate.
The Exclusive Supply Agreement prohibits the Company, without Cree's
consent, from entering into exclusive marketing or distribution agreements with
DeBeers or any party that Cree reasonably believes is affiliated with DeBeers;
the Central Selling Organization (the international cartel of diamond
producers); any party whose primary business is the development, manufacture,
marketing or sale of diamond gemstones; or any non-gemstone and non-jewelry
industry competitor of Cree. These provisions may limit the avenues of
distribution potentially available to the Company and could prevent the Company
from entering into certain potentially profitable transactions.
The Company intends to develop a comprehensive marketing strategy to
support the introduction of its products in its target markets. The Company's
marketing efforts are expected to highlight the similarities of lab-created
moissanite gemstones and diamond and contrast their relative prices. The Company
expects to develop advertising campaigns for the jewelry trade and for the
consumer because the Company believes that a successful introduction of its
lab-created gemstones is dependent upon having a network of retailers committed
to aggressively market the Company's products. The Company's marketing strategy
is expected to include cooperative advertising with jewelers or other
distributors, point of purchase displays, jeweler or distributor training in
selling lab-created moissanite gemstones and providing other marketing support
services. In addition, the Company's corporate communications manager is
responsible for developing media interest in and generating positive media
reports on lab-created moissanite gemstones.
COMPETITION
Competition in the market for gemstones is intense. The Company's
lab-created moissanite gemstones compete with natural and treated diamonds and
existing synthetic gemstones such as synthetic cubic zirconia presently in
commercial distribution. The Company may also face competition from additional
gemstones such as synthetic diamonds, synthetic diamond films and other sources
of synthetic moissanite not presently available in colors, sizes and volumes
suitable for use as gemstones. Most of the suppliers of diamonds and existing
synthetic gemstones, as well as the potential suppliers of other synthetic
gemstones, have substantially greater financial, technical, manufacturing and
marketing resources and greater access to distribution channels than the
Company.
The worldwide market for uncut diamonds is significantly consolidated
through the Central Selling Organization, a cartel led by DeBeers. The cartel
has a major impact on the worldwide supply and pricing of diamonds at both the
wholesale and retail levels. Although the Company believes that its gemstones
will appeal primarily to the consumer who would not otherwise purchase
comparable diamond jewelry, diamond producers may undertake additional marketing
or other activities designed to protect the diamond jewelry market against sales
erosion from consumer acceptance of lab-created moissanite gemstones.
Synthetic diamond in gemstones or film form may also become available in
the marketplace as an alternative to the Company's gemstones. Synthetic diamonds
are regularly produced for industrial applications, and the primary producers of
these synthetic diamonds are DeBeers, Sumitomo and GE. There are also a number
of Russian producers of synthetic diamonds for industrial uses. The Company
believes that gemstone grade synthetic diamonds presently cannot be produced at
prices competitive with those expected to be offered for the Company's colorless
lab-created moissanite gemstones. There could, however, be
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technological advances that would enable competitively priced synthetic diamonds
of comparable grade to be offered.
Currently, synthetic diamond films can be grown at commercially viable
prices in thicknesses that can be applied to other surfaces. The films, however,
adhere well to only a few minerals such as diamond, silicon and SiC
(moissanite). If the technology to attach a synthetic diamond film to other
colorless minerals is improved, the resulting film-covered gemstone could
compete with moissanite as a substitute for diamond.
The Company's products will face competition from synthetic cubic zirconia,
the principal existing diamond simulant. Two of the largest producers of
synthetic cubic zirconia gemstones are D. Swarovski & Co. and Golay Buchel. In
addition, there are a significant number of other producers of synthetic cubic
zirconia jewelry. Three of the largest retailers of synthetic cubic zirconia
jewelry in the United States are QVC, Home Shopping Network and Wal-Mart. Some
of the major retailers of synthetic cubic zirconia, including QVC, have captive
manufacturing divisions that produce synthetic cubic zirconia jewelry. These
producers and sellers may see their markets being eroded by the introduction of
the Company's lab-created moissanite gemstones. The Company believes that price
is the primary basis upon which these products will compete with its lab-created
moissanite gemstones.
Although the Company believes that its products have a proprietary
position, it could face competition from other companies who develop competing
SiC technologies. Some of these technologies could be spawned by SiC used for
other industrial applications. Manufacturers of industrial SiC products include
The Carborundum Corporation (abrasive uses) and Cree, Siemens AG, ABB and
Northrup Grumman Corporation (semiconductor uses). The Company believes that
Cree is presently the only supplier of SiC crystals in colors, sizes and volumes
suitable for gemstone applications and believes that the patents owned or
pending by Cree or the Company provide substantial technological and cost
barriers to other companies' development of colorless lab-created moissanite
gemstones. It is possible, however, that these or other producers of SiC could
develop, by other processes, SiC crystals suitable for gemstone applications
and, if developed, these SiC crystals could be used by others to produce
lab-created moissanite gemstones.
The Company intends to compete primarily on the basis that the unique
qualities of its lab-created moissanite gemstones provide a substitute for
diamond that is superior to existing substitutes at a significant cost advantage
to diamond. Its ability to compete successfully is dependent on its ability to:
(i) achieve jeweler and consumer acceptance of its products; (ii) obtain
quantities of lab-grown SiC crystals in acceptable color and quality from Cree;
(iii) obtain reliable and high quality faceting services from third parties;
(iv) respond to market entries of other gemstone materials with technological or
cost improvements; and (v) meet consumer demand for its lab-created moissanite
gemstones. There can be no assurance that the Company will be able to obtain the
materials and services needed to deliver its products or to otherwise be able to
compete successfully in the marketplace.
GOVERNMENT REGULATION
The Company's products will be subject to regulation by the FTC. The FTC
has issued regulations and guidelines governing the marketing of diamond
simulants and substitutes that require diamond simulants and substitutes to be
clearly identified as such in any promotional or marketing materials. While the
Company intends to comply fully with all FTC regulations, there can be no
assurance that the FTC or a competitor will not challenge the Company's
promotional or marketing activities. Such a challenge could result in
significant expense to the Company and divert the efforts of the Company's
management and marketing personnel, whether or not such challenge is resolved in
favor of the Company. If the Company's actions were found to be in violation of
FTC regulations, the Company could be forced to suspend marketing and sales of
its products and could incur significant expenses in developing new marketing
strategies and materials that would not violate FTC regulations. There can be no
assurance that the Company would be successful in developing new marketing
strategies and materials that would comply with FTC regulations or that such
strategies, once developed, would allow the Company to market its products
profitably.
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FACILITIES
The Company leases approximately 12,700 square feet of mixed use space
(general office, light manufacturing and laboratory) in the Research Triangle
Park area of North Carolina from an unaffiliated third party. The Company
believes that comparable mixed use space could be obtained from other parties on
terms substantially the same as the Company's current lease. This space is
considered by management to be sufficient for the Company's foreseeable needs
over the next 12 to 24 months.
EMPLOYEES
At September 29, 1997, the Company had 24 full-time employees, two
part-time employees, three temporary employees and two independent contractors.
The Company believes that its future prospects will depend, in part, on its
ability to obtain additional management, scientific and technical personnel.
Competition for such personnel is intense, and the number of persons with
relevant experience is limited. None of the Company's employees is represented
by a labor union. The Company believes that its employee relations are good.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers, nominees for director and key employees
of the Company are as follows:
DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
- -------------------------------- --- --------
Jeff N. Hunter............................... 40 President and Chairman of the Board
Mark W. Hahn................................. 35 Chief Financial Officer, Treasurer
and Secretary
Martin J. DeRoy.............................. 50 Vice President of Marketing
Thomas G. Coleman............................ 37 Director of Technology
Kurt Nassau.................................. 70 Director
Howard Rubin................................. 72 Director
Frederick A. Russ............................ 53 Director
Kurt Leutzinger.............................. 46 Director Nominee
David B. Stewart............................. 34 Director Nominee
Ollin B. Sykes............................... 46 Director Nominee
KEY EMPLOYEES
- ---------------------------------------------
Renee McCullen............................... 38 Director of Sales
Earl R. Hines................................ 60 Director of Manufacturing
JEFF N. HUNTER, one of the founders of the Company, has served as the
Company's President and Chairman of the Board since June 1996 and as a director
since the Company's inception in June 1995. Mr. Hunter served as Treasurer and
Secretary of the Company from June 1995 to June 1996. From July 1980 to May
1996, he was employed in various capacities with North Carolina State
University, including as Director of Business, Finance and Research
Administration for the College of Engineering. Mr. Hunter received his Master of
Science degree in management science from North Carolina State University.
MARK W. HAHN has served as the Chief Financial Officer of the Company since
October 1996 and as Treasurer and Secretary since August 1997. From January 1984
to October 1996, Mr. Hahn was employed with Ernst & Young LLP, including as
Senior Manager in the Entrepreneurial Services Group. He earned his Bachelor of
Business Administration degree with concentrations in accounting and finance
from the University of Wisconsin in Milwaukee and is a Certified Public
Accountant.
MARTIN J. DEROY has served as Vice President of Marketing since September
1997. From October 1990 to September 1997, Mr. DeRoy was employed as Marketing
Director of Friedman's Inc., a retail jewelry chain with approximately 375
stores. He earned a Bachelor of Science degree in business administration, with
a major in advertising and public relations and a minor in marketing and
merchandise, at Youngstown State University.
THOMAS G. COLEMAN has served as Director of Technology of the Company since
March 1997. From August 1996 to March 1997, Mr. Coleman provided technical
consulting services to the Company. Mr. Coleman co-founded Cree and was employed
by Cree as a senior process development engineer from December 1987 to July
1995. He earned an electronic technology degree from Patterson Technical
College.
KURT NASSAU has served as a director of the Company since August 1996 and
has provided consulting services to the Company since April 1997. Since August
1990, Dr. Nassau has served as the President of Nassau Consultants where he
specializes in advising companies on gemology and color. Dr. Nassau is a former
Distinguished Research Scientist with AT&T Bell Labs and is the author of 16
patents and 4 books on gemology and the science of color. Dr. Nassau earned his
Ph.D. in physical chemistry at the University of Pittsburgh and is a former
20-year member of the Board of Governors of the Gemological Institute of
America.
HOWARD RUBIN became a director of the Company in November 1996 and a
consultant to the Company in February 1997. Since 1992, he has served as
President of GemDialogue Systems, Inc., a consulting
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company which provides jewelry appraisal and gemological training services to
jewelers and business process improvement services to jewelry manufacturers. Mr.
Rubin received a graduate gemology degree from the Gemological Society of
America in 1959.
FREDERICK A. RUSS has served as a director of the Company since November
1996. Dr. Russ has served as Dean of the College of Business Administration at
the University of Cincinnati since September 1994. From July 1989 to September
1994, he was Marketing Department Head and Professor of Marketing at the
University of Cincinnati. Dr. Russ served on the Board of Directors of Cree from
1988 to 1992. He earned his Ph.D. in industrial administration at
Carnegie-Mellon University.
KURT LEUTZINGER has been nominated and has consented to serve as a director
of the Company. It is anticipated that Mr. Leutzinger will be elected a director
of the Company at a special shareholders meeting in October 1997 (the "Special
Meeting"). Since July 1997, Mr. Leutzinger has been employed as Vice President
of Finance and Chief Financial Officer of Abgenix, Inc., a company engaged in
the business of antibody therapeutics. From June 1987 to July 1997, he was Vice
President and Portfolio Manager for GE Investment Corporation ("GEIC"), a wholly
owned investment management subsidiary of General Electric Company. Mr.
Leutzinger earned a Master of Business Administration degree in finance from New
York University.
DAVID B. STEWART has been nominated and has consented to serve as a
director of the Company. It is anticipated that Mr. Stewart will be elected a
director of the Company at the Special Meeting. Since November 1992, Mr. Stewart
has held various positions at GEIC and currently is an Investment Manager in its
Private Equity Group. He earned his Bachelor of Arts degree in economics from
the University of New Hampshire.
OLLIN B. SYKES has been nominated and has consented to serve as a director
of the Company. It is anticipated that Mr. Sykes will be elected a director of
the Company at the Special Meeting. Since December 1984, he has served as the
president of Sykes & Company, P.A., a regional accounting firm specializing in
accounting, tax and financial advisory services. Mr. Sykes earned his Bachelor
of Science degree in accounting at Mars Hill College and is a Certified Public
Accountant and a Certified Management Accountant.
RENEE MCCULLEN has served as Director of Sales of the Company since August
1997. From May 1983 to September 1996, she was employed in various capacities
with Art Carved Class Rings, a company engaged in the wholesale jewelry
business, most recently as Regional Vice President and Regional Sales Manager.
Ms. McCullen earned a Bachelor of Science degree in business administration,
with a concentration in marketing, at East Carolina University.
EARL R. HINES has served as Director of Manufacturing of the Company since
March 1997. From April 1996 to March 1997, Mr. Hines was a lapidary consultant
to the Company. From March 1990 to March 1997, Mr. Hines owned and operated
GemCrafters of Raleigh, a business that focused on cutting colored gemstones and
repairing and appraising jewelry. Mr. Hines retired from IBM in 1990 with more
than 30 years of service, including as Manufacturing Systems Manager.
The Company, C. Eric Hunter, a founder and beneficial owner of 17.8% of the
Common Stock outstanding after this offering, General Electric Pension Trust
("GEPT") and certain other shareholders of the Company are party to a
shareholders agreement (the "Shareholders Agreement"). Under the Shareholders
Agreement, as long as GEPT owns shares of Common Stock or Series B Preferred
Stock, Mr. Hunter and the other shareholders who are parties to the Shareholders
Agreement have agreed to vote all of their shares of Common Stock in favor of
the election of one individual designated by GEPT as a director. The
Shareholders Agreement further provides that, after the consummation of this
offering and so long as GEPT owns shares of Common Stock, the Company will (i)
nominate and recommend for election as a director one individual designated by
GEPT who shall be reasonably acceptable to the Company, (ii) if a GEPT nominee
is not a director, provide GEPT's designee with a copy of any information
distributed to the Board and allow that designee to attend and participate, but
not vote, in all meetings of the Board and (iii) not increase the size of the
Board without GEPT's consent, which will not be unreasonably withheld. GEPT has
consented to an
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increase in the size of the Board to seven directors. Mr. Stewart has been
nominated as a director pursuant to the Shareholders Agreement for election to
the Board at the Special Meeting. The Shareholders Agreement will terminate on
the earlier of (i) March 28, 2007 or (ii) the date on which GEPT no longer owns
any shares of Common Stock or Series B Preferred Stock.
Directors are elected annually to serve for one-year terms and until their
successors are duly elected and qualified. Executive officers of the Company are
appointed annually by the Board of Directors and serve until their successors
are elected and qualified. Mr. Sykes is a second cousin once removed of Jeff N.
Hunter. Otherwise, there are no family relationships among any of the directors
or officers of the Company.
BOARD COMMITTEES
The Board of Directors presently has a standing Executive Committee and
intends to appoint at a meeting in October 1997 two additional standing
committees: a Compensation Committee and a Finance and Audit Committee. The
Executive Committee is authorized to act on behalf of the Board during the
intervals between meetings of the full board subject to certain statutory
restrictions. Jeff N. Hunter and Kurt Nassau compose the Executive Committee.
The Compensation Committee will recommend to the Board the compensation of the
officers and salaried employees of the Company and, upon delegation of such
authority from the Board, will administer the Company's stock option plans. See
"-- Stock Option Plans." The Finance and Audit Committee will be responsible for
reviewing and evaluating the Company's financing plans, reviewing the scope and
results of audits and other services provided by the Company's independent
accountants and determining the adequacy of the Company's internal controls and
other financial reporting matters. Each committee has or will have at least two
non-employee directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
To date, the Board of Directors has made all determinations with respect to
executive officer compensation. No interlocking relationships exist between the
Company's Board of Directors and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past. Dr. Nassau and Mr. Rubin each have a consulting agreement
with the Company. See "-- Compensation of Directors." Dr. Nassau has purchased
and holds securities of the Company. See "Certain Transactions" and "Principal
Shareholders."
COMPENSATION OF DIRECTORS
The Company does not presently pay cash fees to its directors but does
reimburse all non-employee directors for expenses incurred in their capacity as
directors. The Company has granted to each non-employee director and director
nominee or, in the case of the GEPT nominee, to GEPT options to purchase an
aggregate of 30,560 shares of Common Stock. Options to purchase 25,560 shares
were granted under the 1996 Option Plan (the "1996 Directors Options") and
options to purchase 5,000 shares were granted under the 1997 Omnibus Plan,
subject to shareholder approval of the 1997 Omnibus Plan and the consummation of
this offering (the "1997 Directors Options").
The 1996 Directors Options become exercisable in three equal, annual
installments beginning on the first anniversary of the date of grant and
expiring on the tenth anniversary of the date of grant, although some of these
options will vest in full on December 31, 1997 if this offering is completed
prior to that date. The 1996 Directors Options were granted at the prices and on
the dates described below. In July 1996, Dr. Nassau was granted an option to
purchase 17,040 shares at an exercise price of approximately $1.88 per share. In
September 1996, Mr. Rubin was granted an option to purchase 17,040 shares at an
exercise price of approximately $2.70 per share. In October 1996, Dr. Russ was
granted an option to purchase 17,040 shares at an exercise price of
approximately $2.70 per share. In April 1997, GEPT was granted an option to
purchase 17,040 shares at an exercise price of approximately $3.45 per share. In
July 1997, GEPT, Dr. Nassau, Mr. Rubin and Dr. Russ were each granted an option
to purchase 8,520 shares at an exercise price of approximately $4.81 per share
and Messrs. Leutzinger and Sykes were each granted an option to purchase 25,560
shares at an exercise price of approximately $4.81 per share. The options
granted in July 1997 to GEPT
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and the non-employee directors will become exercisable in full on December 31,
1997 if this offering is completed prior to that date. See "-- Stock Option
Plans -- 1996 Option Plan."
The 1997 Directors Options were all granted in September 1997 at an
exercise price equal to the initial public offering price of the shares of
Common Stock offered hereby. Fifteen percent of each of the 1997 Directors
Options vest on the date of the consummation of this offering. The remaining 85%
of each of the 1997 Directors Options vests in the event the Company achieves
certain specified sales, earnings or margin criteria prior to December 31, 2001.
Each of the 1997 Directors Options expires on the tenth anniversary of the date
of grant. See "-- Stock Option Plans -- 1997 Omnibus Plan."
In February 1997, the Company entered into a letter agreement with
GemDialogue Systems, Inc., a corporation owned by Mr. Rubin ("GSI"), pursuant to
which Mr. Rubin provides consulting services to the Company on staff training in
gemological and jewelry trade skills, market research and other matters. Under
the letter agreement, the Company pays GSI a monthly retainer of $1,000 and Mr.
Rubin is obligated to provide two days of consulting per month. GSI is also
entitled to be reimbursed for any expenses incurred in connection with Mr.
Rubin's consulting activities. The Company will pay GSI $500 per day for any
consulting services in excess of two days per month. If the Company does not
require two days of consulting time in any given month, the excess time
accumulates, and the Company has the option of waiving the monthly retainer
until the accumulated time has been used or extending the term of the letter
agreement without charge until the accumulated time is used. The letter
agreement has an initial term of one year. At September 22, 1997, the Company
had paid GSI a total of $7,000 (excluding expense reimbursements) and there were
no accumulated days of unused consulting time. In September 1997, as additional
consideration for consulting services, the Company issued Mr. Rubin an option to
purchase 15,000 shares of Common Stock pursuant to the 1997 Omnibus Plan with
substantially the same terms as the 1997 Directors Options.
The Company entered into a letter agreement with Dr. Nassau effective April
1997 pursuant to which Dr. Nassau provides consulting services to the Company on
gemstone color, gemological science and other matters. The terms of the letter
agreement with Dr. Nassau are substantially the same as the terms of the letter
agreement with GSI. At September 22, 1997, the Company had paid Dr. Nassau a
total of $4,750 (excluding expense reimbursements) and there were no accumulated
days of unused consulting time. In September 1997, as additional consideration
for his consulting services, the Company issued Dr. Nassau an option to purchase
15,000 shares of Common Stock pursuant to the 1997 Omnibus Plan with
substantially the same terms as the 1997 Directors Options.
Dr. Nassau is also assisting the Company in the development of certain of
its intellectual property and inventions and, in May 1997, executed an agreement
with the Company whereby he agreed to assign to the Company all intellectual
property rights concerning the development, manufacture, production, design or
marketing of any consumer or industrial applications for SiC created by him. The
agreement also provides that, for a one year period beginning on the termination
of his service as a director of the Company, Dr. Nassau will not serve as an
officer, director, engineer, designer or manager of any entity that engages in
the business of developing, manufacturing, producing, designing or marketing SiC
material as gemstones or gemological testing instruments. The Company granted
Dr. Nassau an option to purchase 25,560 shares of Common Stock at an exercise
price of approximately $3.45 per share in consideration of this agreement. Dr.
Nassau's option becomes exercisable in three equal, annual installments
beginning on the first anniversary of the date of grant and expires on the tenth
anniversary of the date of grant.
In July 1997, the Company entered into a consulting agreement with Ollin B.
Sykes, a director nominee of the Company, pursuant to which Mr. Sykes may
provide finance and business development services to the Company at fees
mutually agreed upon by Mr. Sykes and the Company. Mr. Sykes is also entitled to
be reimbursed for any expenses incurred in connection with his consulting
services. The consulting agreement has an initial term of five years. Mr. Sykes
has performed certain consulting services for the Company without charge and,
consequently, the Company has paid no cash consulting fees to Mr. Sykes. In
connection with the execution of this consulting agreement, the Company granted
Mr. Sykes an option to purchase 17,040 shares of Common Stock at an exercise
price of approximately $4.81 per share. When issued, Mr. Sykes' option was
scheduled to vest in three equal, annual installments beginning on the first
anniversary of the date of grant. In
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September 1997 the Company made Mr. Sykes' option exercisable in full on
December 31, 1997 if this offering is completed prior to that date. Mr. Sykes'
option expires on the tenth anniversary of the date of grant. In September 1997,
as additional consideration for his consulting services, the Company granted Mr.
Sykes an option to purchase 23,000 shares of Common Stock pursuant to the 1997
Omnibus Plan with substantially the same terms as the 1997 Directors Options.
In September 1997, the Company issued Dr. Russ an option to purchase 5,000
shares of Common Stock pursuant to the 1997 Omnibus Plan with substantially the
same terms as the 1997 Directors Options. The option was issued in consideration
of the sales, marketing and strategic consulting services that Dr. Russ has
performed on behalf of the Company without compensation.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid during the Company's fiscal year ended December 31, 1996 to each individual
who served as chief executive officer of the Company during that fiscal year. No
executive officer of the Company received salary and bonus in excess of $100,000
in 1996.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
---------------------
ANNUAL SECURITIES UNDERLYING
FISCAL COMPENSATION OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY (NO. OF SHARES)
- --------------------------- ------ ------------ ---------------------
Jeff N. Hunter........................................... 1996 $26,833 51,120
President and Chairman of the Board
Paula K. Berardinelli(1)................................. 1996 $25,733 12,780
Former President and former Chairman of the Board
- ---------------
(1) Dr. Berardinelli began a one-year unpaid leave of absence on May 1, 1997.
Dr. Berardinelli served as President and Chairman of the Board of the
Company from June 1995 to May 1996 and as Vice President of Sales and
Marketing from June 1996 to April 1997. Dr. Berardinelli currently has a
consulting agreement with the Company and is entitled to return to a
position comparable to her prior position as Vice President of Sales and
Marketing at the conclusion of her leave of absence. Dr. Berardinelli is the
wife of Jeff N. Hunter, President and Chairman of the Board.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Jeff N. Hunter,
President and Chairman of the Board, Mark W. Hahn, Chief Financial Officer,
Treasurer and Secretary, Martin J. DeRoy, Vice President of Marketing, Thomas G.
Coleman, Director of Technology, Renee McCullen, Director of Sales, and Earl R.
Hines, Director of Manufacturing.
Under the agreement with Mr. Hunter, which expires May 31, 2000, Mr. Hunter
is entitled to receive a base salary of $110,000 per year and to participate in
the Company's incentive compensation plan. If the Company terminates Mr.
Hunter's employment without cause, Mr. Hunter is entitled to receive, for the
remaining term of his employment agreement, annual compensation equal to the
highest annual compensation (including all cash bonuses and other cash-based
benefits) received by him during the immediately preceding three calendar years
(the "Termination Consideration"), and the Company will take such action as may
be required to vest any unvested benefits under any employee stock-based or
benefit plan. If the Company experiences a change of control and Mr. Hunter
voluntarily terminates his employment following a reduction in his
responsibilities, pay or position, or if his employment is terminated following
such change in control, the Company is obligated to pay Mr. Hunter a lump sum
equal to approximately three times his Termination Consideration and to continue
his benefits for a period of two years, and any unvested benefits under any
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employee benefit plan will immediately vest and become exercisable. Upon the
termination of his employment with the Company, Mr. Hunter is prohibited from
competing with the Company or attempting to solicit the Company's customers or
employees for a period of one year.
Mr. Hahn's employment agreement, which expires July 29, 2002, entitles Mr.
Hahn to receive a base salary of $95,000 per year, which base salary shall
increase to $122,000 per year upon the consummation of this offering, and to
participate in the Company's incentive compensation plan. Mr. Hahn has rights
substantially the same as those granted to Mr. Hunter in the event his
employment is terminated without cause or in the event of a change in control.
Upon the termination of his employment with the Company, Mr. Hahn is prohibited
from competing with the Company or attempting to solicit the Company's customers
or employees for a period of one year.
By action of the Board of Directors, in the event of a change in control of
the Company, all stock options granted pursuant to the 1996 Option Plan will
immediately vest and become exercisable. As a result, the options granted to Mr.
Hunter and Mr. Hahn under the 1996 Option Plan pursuant to their respective
employment agreements or otherwise will vest and become immediately exercisable
upon any change in control of the Company.
The Company has adopted an annual incentive compensation plan (the "Annual
Plan") whereby eligible employees are entitled to receive a cash bonus based on
the Company's performance in 1998. Each eligible employee is assigned a target
bonus equal to 20% to 70% of such employee's base salary. If the Company's net
revenues and pre-tax income meet or exceed the Company's targeted performance
level, each eligible employee will receive 100% of his or her target bonus. The
Annual Plan provides for increasing cash bonuses if the Company's net revenues
and pre-tax income exceed specified amounts. If pre-tax income is positive, but
below the targeted level, the employee's target bonus shall be reduced on a
linear basis. No bonuses will be earned or paid if the Company does not achieve
positive pre-tax income.
OPTION GRANTS TO CERTAIN EXECUTIVE OFFICERS
The following table sets forth for each of the persons named in the Summary
Compensation Table certain information concerning stock options granted during
the year ended December 31, 1996.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
NAME GRANTED FISCAL 1996 SHARE DATE 5% 10%
- ---- ---------- ------------- --------- ---------- --------- ----------
Jeff N. Hunter.................. 51,120(1) 48% $1.88 5/31/06 $60,374 $152,999
Paula K. Berardinelli........... 12,780(2) 12% $1.88 5/31/06 $15,093 $ 38,250
- ---------------
(1) The option vests and becomes exercisable in three equal installments on each
of the first three anniversaries of the date of grant (June 1, 1996) and
expires to the extent not exercised on May 31, 2006.
(2) The option vested and became exercisable on April 30, 1997 and expires to
the extent not exercised on May 31, 2006.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and is calculated by assuming that the stock
price on the date of grant as determined by the Board of Directors
appreciates at the indicated annual rate compounded annually for the entire
term of the option and that the option is exercised and sold on the last day
of its term for the appreciated price. The 5% and 10% assumed rates of
appreciation are derived from the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future Common Stock price.
In July 1997, the Board of Directors granted the following options pursuant
to the 1996 Option Plan: Jeff N. Hunter -- 51,120 shares; and Paula K.
Berardinelli -- 12,780 shares each at an exercise price of approximately $4.81.
When issued, Mr. Hunter's option was scheduled to vest and become exercisable in
three equal, annual installments beginning on the first anniversary of the date
of grant, but in September 1997, the
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Company made Mr. Hunter's option exercisable in full on December 31, 1997 if
this offering is completed prior to that date. Dr. Berardinelli's option vests
and becomes exercisable upon the completion of this offering. These options
expire on the tenth anniversary of the date of grant. See "-- Stock Option
Plans -- 1996 Option Plan."
In September 1997, subject to shareholder approval of the 1997 Omnibus Plan
and the completion of this offering, the Board of Directors granted to Mr.
Hunter an option to purchase 70,000 shares of Common Stock pursuant to the 1997
Omnibus Plan at an exercise price equal to the initial public offering price of
the shares of Common Stock offered hereby. Fifteen percent of the option vests
and becomes exercisable on the completion of this offering. The remaining 85% of
the option vests in the event that the Company achieves certain specified sales,
earnings or profit margin goals prior to December 31, 2001. The option expires
on the tenth anniversary of the date of grant. See "-- Stock Option
Plans -- 1997 Omnibus Plan."
STOCK OPTION PLANS
1996 Option Plan
The 1996 Stock Option Plan of C3, Inc., as subsequently amended (the "1996
Option Plan"), was originally adopted by the Board of Directors and approved by
the shareholders of the Company effective as of June 1, 1996. The 1996 Option
Plan provides for the grant of options to purchase up to 777,450 shares of
Common Stock, subject to adjustment upon the occurrence of certain events
affecting the Company's capitalization, to the Company's key employees,
officers, directors and independent contractors. The Company currently has no
plans to award additional options under the 1996 Option Plan.
The 1996 Option Plan is administered by the Board of Directors, which
determines, subject to the provisions of the 1996 Option Plan, to whom and at
what time options may be granted, the per share exercise price, the duration of
each option, the number of shares subject to each option, the rate and manner of
exercise and the timing and form of payment. The Board of Directors has
determined that, in the event of a change in control of the Company, all stock
options granted pursuant to the 1996 Option Plan will immediately vest and
become exercisable.
Under the 1996 Option Plan, no option granted to an optionee who was an
employee of the Company at the time of grant may be exercised unless the
optionee (i) is, at the time of exercise, an employee of the Company and has
been an employee continuously since the date the option was granted or (ii) was,
within 90 days prior to the date of exercise, an employee of the Company and,
prior to the optionee's termination as an employee, had been an employee
continuously since the date the option was granted. The employment relationship
of an employee is treated as continuing intact for any period that the optionee
is on military or sick leave or other bona fide leave of absence, provided that
the period of such leave does not exceed 90 days, or, if longer, as long as the
optionee's right to reemployment is guaranteed either by statute or by contract.
The employment relationship of an optionee shall also be treated as continuing
intact while the optionee is not in active service because of "disability" as
defined in the 1996 Option Plan. If the employment of an optionee is terminated
because of a "disability" or death, the option may be exercised to the extent
exercisable on the date of the optionee's termination of employment (the
"Termination Date") for a period ending on the earlier of (i) the first
anniversary of the optionee's Termination Date or (ii) the expiration of the
option period. The Board of Directors may, in its discretion, accelerate the
date for exercising all or any part of an option which was not otherwise
exercisable on the Termination Date. In the event of the optionee's death, the
option will be exercisable by those person or persons who acquired the right to
exercise the option by will or by the laws of intestate succession.
Options granted to a non-employee director of the Company may be exercised
only if the optionee (i) is, at the time of exercise, a director of the Company
and has been a director continuously since the date the option was granted or
(ii) was, within 90 days prior to the date of exercise, a director of the
Company and, prior to the optionee's termination as a director, had been a
director continuously since the date the option was granted. If membership on
the Board of Directors is terminated because of death, the option may be
exercised to the extent exercisable on the date of the optionee's death for a
period ending on the earlier of (i) the first
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anniversary of the optionee's death or (ii) the expiration of the option period.
In the event of the optionee's death, the option will be exercisable by such
person or persons as shall have acquired the right to exercise the option by
will or by the laws of intestate succession.
At September 29, 1997, the Company had granted pursuant to the 1996 Option
Plan options to purchase 348,681 shares of Common Stock to employees (including
certain officers, see "-- Option Grants to Certain Executive Officers" and
"Principal Shareholders"), options to purchase 117,150 shares of Common Stock to
non-employee consultants and options to purchase 195,960 shares of Common Stock
to non-employee directors and director nominees (see "-- Compensation of
Directors" and "Principal Stockholders"). All of such options remain
outstanding. The exercise prices of options granted under the 1996 Option Plan
range from approximately $1.88 to approximately $7.63 per share, with a weighted
average of $3.95 per share. At September 29, 1997, none of these options has
been exercised. In addition, the Company has issued options (the "Consultant
Options") to purchase an additional 37,275 shares of Common Stock to certain
independent consultants in connection with the provision of services to the
Company. All of these options are currently exercisable at an exercise price of
approximately $1.88 and expire between May 25, 2001 and June 6, 2001.
1997 Omnibus Plan
In September 1997, the Board of Directors adopted the 1997 Omnibus Stock
Plan of C3, Inc. (the "1997 Omnibus Plan") and recommended its approval to the
Company's shareholders. The 1997 Omnibus Plan is subject to approval by the
shareholders of the Company, which approval must occur, if at all, within 12
months of the adoption of the plan by the Board of Directors. Awards granted
prior to shareholder approval are conditioned upon and shall be effective only
upon approval of the 1997 Omnibus Plan by the shareholders of the Company on or
before such date.
The 1997 Omnibus Plan authorizes the Company to grant stock options, stock
appreciation rights and restricted awards (collectively, "awards") to selected
employees, independent contractors and directors of the Company and related
corporations in order to promote a closer identification of their interests with
those of the Company and its shareholders. Initially, a maximum of 477,979
shares of Common Stock may be delivered pursuant to awards granted under the
1997 Omnibus Plan, and the Board of Directors has reserved that number of shares
for this purpose. The maximum number of shares of Common Stock for which awards
may be granted under the 1997 Omnibus Plan may be increased from time to time to
a number of shares equal to (i) 20% of the shares of Common Stock outstanding as
of that time less (ii) the number of shares of Common Stock subject to
outstanding options under the 1996 Option Plan. The number of shares reserved
for issuance under the 1997 Omnibus Plan may also be adjusted upon certain
events affecting the Company's capitalization.
The 1997 Omnibus Plan is presently administered by the Board of Directors,
but upon appointment of the Compensation Committee the Board of Directors
intends to authorize that committee to administer the 1997 Omnibus Plan. The
Compensation Committee will have authority to take any action with respect to
the plan and to determine all matters relating to awards, including selection of
individuals to be granted awards, the types of awards, the number of shares of
Common Stock subject to an award, and the terms, conditions, restrictions and
limitations of an award. The Compensation Committee may delegate to the
Company's chief executive officer the authority to grant awards. The 1997
Omnibus Plan may be amended or terminated at any time by the Board of Directors,
subject to the following: (i) no amendment or termination may adversely affect
the rights of an award recipient with respect to an outstanding award without
the recipient's consent; and (ii) shareholder approval is required of any
amendment that would increase the number of shares issuable under the 1997
Omnibus Plan (except to the extent of adjustments, as discussed above), or
materially change the requirements for eligibility, unless such approval is not
required under applicable law or rules.
Stock appreciation rights ("SARs") may be granted with respect to all or a
portion of the shares of Common Stock subject to a related option or may be
granted separately. Upon exercise of an SAR, a participant is entitled to
receive from the Company consideration equal to the excess of the fair market
value of a share of Common Stock on the date of exercise over the SAR price
(subject to certain plan limitations).
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The consideration may be paid in cash, shares of Common Stock (valued at fair
market value on the date of the SAR exercise), or a combination of cash and
shares of Common Stock.
Restricted awards may also be granted as the Compensation Committee may
determine. A restricted award may consist of a restricted stock award or a
restricted unit, or both. Restricted awards are payable in cash or whole shares
of Common Stock (including restricted stock), or partly in cash and partly in
whole shares of Common Stock, in the discretion of the Compensation Committee.
The 1997 Omnibus Plan also provides that, upon a change of control of the
Company (as defined in the 1997 Omnibus Plan), all options and SARs outstanding
as of the date of the change of control shall become fully exercisable, any
restrictions applicable to any restricted awards shall be deemed to have
expired, and restricted awards shall become fully vested and payable to the
fullest extent of the original award. In the event of a merger, share exchange,
or other business combination affecting the Company in which the Board of
Directors or the surviving or acquiring corporation takes actions which, in the
opinion of the Compensation Committee, are equitable or appropriate to protect
the rights and interest of participants under the plan, the Compensation
Committee may determine that any or all awards shall not vest or become
exercisable on an accelerated basis.
At September 29, 1997, the Board of Directors had granted, subject to
shareholder approval of the 1997 Omnibus Plan and the completion of this
offering, options to purchase 196,000 shares of Common Stock to employees
(including certain officers, see "-- Option Grants to Certain Executive
Officers"), options to purchase 26,000 shares of Common Stock to non-employee
consultants and options to purchase 88,000 shares of Common Stock to
non-employee directors (see "-- Compensation of Directors"). All these options
remain outstanding. The exercise price of these options will be equal to the
initial public offering price of the shares of Common Stock offered hereby.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of Common Stock as of September 29, 1997, and as adjusted to reflect
the sale of shares of Common Stock offered hereby, by (i) each person known by
the Company to own beneficially five percent or more of the Company's
outstanding shares of Common Stock; (ii) each director and director nominee of
the Company; (iii) the executive officers named in the Summary Compensation
Table; and (iv) all current directors, director nominees and executive officers
as a group. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission (the "Commission"). In computing the
number of shares beneficially owned by a person and the percentage ownership of
that person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or that are or may become exercisable
within 60 days of the date of this table are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the percentage
ownership of any other person. Except as indicated in the footnotes to this
table and pursuant to applicable community property laws, each shareholder named
in the table has sole voting and investment power with respect to the shares set
forth opposite such shareholder's name.
PERCENTAGE OF
COMMON STOCK CLASS PRIOR PERCENTAGE OF
BENEFICIALLY TO CLASS AFTER
NAME(1) OWNED OFFERING OFFERING
- ------- ------------ ------------- -------------
C. Eric Hunter(2)....................................... 1,054,627 26.8% 17.8%
General Electric Pension Trust(3)....................... 578,512 14.7% 9.7%
Jeff N. Hunter(4)....................................... 197,940 5.0% 3.3%
Paula K. Berardinelli(5)................................ 195,960 4.9% 3.3%
Ollin B. Sykes(6)....................................... 81,412 2.1% 1.4%
Kurt Nassau(7).......................................... 12,407 * *
Howard Rubin(8)......................................... 8,680 * *
Frederick A. Russ(9).................................... 7,180 * *
Kurt Leutzinger(10)..................................... 750 * *
Directors, Director Nominees and Executive Officers as a
Group (9 persons)(11)................................. 524,984 12.6% 8.5%
- ---------------
* Indicates less than one percent
(1) Unless otherwise indicated, the address of each person is 3800 Gateway
Boulevard, Suite 310 Morrisville, NC 27560.
(2) Includes 23,430 shares of Common Stock held jointly by Mr. Hunter and his
wife, Jocelyn Hunter. Mr. Hunter has shared voting and investment power
over such shares. Mr. Hunter, one of the founders of the Company, was one
of the founders of Cree and was formerly the President and Chief Executive
Officer of Cree. Mr. Hunter's mailing address is 3104 Hillsborough Street,
Box 189, Raleigh, North Carolina 27607.
(3) Includes 750 shares of Common Stock issuable upon exercise of options
granted under the 1997 Omnibus Plan. The address of General Electric
Pension Trust is 3003 Summer Street, Stamford, Connecticut 06904.
(4) Includes (i) 170,400 shares of Common Stock held jointly by Mr. Hunter and
his wife, Paula K. Berardinelli, over which Mr. Hunter has shared voting
and investment power and (ii) 27,540 shares of Common Stock issuable upon
exercise of options granted under the 1996 Option Plan and 1997 Omnibus
Plan. See "Management -- Stock Option Plans." Does not include 25,560
shares of Common Stock issuable to Dr. Berardinelli upon exercise of
options granted under the 1996 Option Plan. Mr. Hunter disclaims beneficial
ownership of such shares.
(5) Includes (i) 170,400 shares of Common Stock held jointly by Dr.
Berardinelli and her husband, Jeff N. Hunter, over which Dr. Berardinelli
has shared voting and investment power and (ii) 25,560 shares of Common
Stock issuable upon exercise of options granted under the 1996 Option Plan.
See "Management -- Stock Option Plans -- 1996 Option Plan." Does not
include 27,540 shares of Common Stock issuable upon exercise of options
granted to Mr. Hunter under the 1996 Option Plan and 1997 Omnibus Plan. Dr.
Berardinelli disclaims beneficial ownership of such shares.
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(6) Includes (i) 14,910 shares of Common Stock held by the Sykes & Co., P.A.
Profit Sharing Plan & Trust and (ii) 4,200 shares of Common Stock issuable
upon exercise of options granted under the 1997 Omnibus Plan. See
"Management -- Compensation of Directors" and "-- Stock Option
Plans -- 1997 Omnibus Plan."
(7) Includes (i) 3,727 shares of Common Stock held jointly by Dr. Nassau and
his wife, Julia Nassau, over which Dr. Nassau has shared voting and
investment power and (ii) 8,680 shares of Common Stock issuable upon
exercise of options granted under the 1996 Option Plan and 1997 Omnibus
Plan. See "Management -- Compensation of Directors" and "-- Stock Option
Plans."
(8) Includes 8,680 shares of Common Stock issuable upon exercise of options
granted under the 1996 Option Plan and 1997 Omnibus Plan. See
"Management -- Compensation of Directors" and "-- Stock Option Plans."
(9) Includes 7,180 shares of Common Stock issuable upon exercise of options
granted under the 1996 Option Plan and 1997 Omnibus Plan. See
"Management -- Compensation of Directors" and "-- Stock Option Plans."
(10) Includes 750 shares of Common Stock issuable upon exercise of options
granted under the 1997 Omnibus Plan. See "Management -- Compensation of
Directors" and "-- Stock Option Plans -- 1997 Omnibus Plan."
(11) Includes (i) 174,127 shares of Common Stock over which certain directors,
director nominees and executive officers have shared voting and investment
power and (ii) 229,980 shares of Common Stock issuable upon exercise of
options granted under the 1996 Option Plan and 1997 Omnibus Plan. See
"Management -- Compensation of Directors" and "-- Stock Option Plans."
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS
Since the incorporation of the Company in June 1995, the Company has
issued, in private placement transactions, shares of stock as follows (in each
case, before giving effect to the 2.13-for-1 stock split): 250,000 shares of
Common Stock at $4.00 per share in cash; 105,000 shares of Series A Preferred
Stock at $5.75 per share in cash; and 682,500 shares of Series B Preferred Stock
at $7.35 per share in cash. Each outstanding share of Common Stock will be split
into 2.13 shares of Common Stock immediately prior to the consummation of this
offering, and the outstanding shares of Series A Preferred Stock and Series B
Preferred Stock will automatically be converted into an aggregate of 1,677,375
shares of Common Stock upon the consummation of this offering. The holders of
shares of Series B Preferred Stock are entitled to certain registration rights
with respect to the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights." The following table sets
forth the number of shares of Common Stock, Series A Preferred Stock and Series
B Preferred Stock purchased by the Company's directors, executive officers and
five percent shareholders and their respective affiliates and the number of
shares of Common Stock issuable, giving effect to the stock split and the
conversion of the Series A Preferred Stock and Series B Preferred Stock:
COMMON
SERIES A SERIES B STOCK AFTER
COMMON PREFERRED PREFERRED SPLIT AND
INVESTOR STOCK(1) STOCK(1) STOCK(1) CONVERSION(1)
- -------- --------- --------- --------- -------------
General Electric Pension Trust(2)..... -- -- 271,250 577,762
Ollin B. Sykes(3)..................... 10,000 -- 26,250 77,212
F. Neal Hunter(4)..................... 26,000 7,000 -- 70,290
Thomas G. Coleman(5).................. 10,000 5,250 5,250 43,665
C. Eric Hunter(6)..................... 7,500 3,500 1,750 27,157
William J. Sykes, Jr.(7).............. -- 8,750 18,637
Mark Harrill(8)....................... 5,000 -- 1,750 14,377
Monica R. Hunter(9)................... 5,000 -- -- 10,650
Robert Angel(10)...................... 2,500 -- -- 5,325
Annabel C. Harrill(11)................ 2,500 -- -- 5,325
Kurt Nassau(12)....................... -- -- 1,750 3,727
See footnotes on following page.
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- ---------------
(1) Each share of outstanding Common Stock was split into 2.13 shares of Common
Stock in September 1997 and each share of outstanding Series A Preferred
Stock and Series B Preferred Stock will be automatically converted into
2.13 shares of Common Stock contemporaneously with the consummation of this
offering. Only the last column gives effect to these transactions.
(2) David B. Stewart, who is a director nominee of the Company, is an
investment manager at General Electric Investment Company which is the
investment advisor to GEPT.
(3) Includes 7,000 shares of Series B Preferred Stock owned by Sykes & Company,
P.A. Profit Sharing Plan and Trust of which Mr. Sykes is sole trustee.
(4) Mr. Hunter is the President, CEO and a director of Cree and the brother of
Jeff N. Hunter, who is President and Chairman of the Board of the Company,
and C. Eric Hunter, who is the beneficial owner of 17.8% of the Company's
Common Stock, giving effect to this offering.
(5) Mr. Coleman is the Director of Technology of the Company.
(6) Includes 7,500 shares of Common Stock and 3,500 shares of Series A
Preferred Stock owned jointly by Mr. Hunter and his wife, Jocelyn Hunter.
Mr. Hunter is the brother of Jeff N. Hunter.
(7) Includes 8,750 shares of Series B Preferred Stock owned jointly by Mr.
Sykes and his wife, Joyce M. Sykes. Mr. Sykes is the brother of Ollin B.
Sykes, a director nominee of the Company.
(8) Includes (i) 5,000 shares of Common Stock owned jointly by Mr. Harrill and
his wife, Melissa W. Harrill and (ii) 1,750 shares of Series B Preferred
Stock owned by Foscoe Realty and Development Corporation, Inc., of which
Mr. Harrill is the sole shareholder. Mr. Harrill is the step-brother of
Jeff N. Hunter and C. Eric Hunter.
(9) Dr. Hunter was, at the time of purchase, a sister-in-law of Jeff N. Hunter
and C. Eric Hunter.
(10) Mr. Angel is the brother-in-law of Jeff N. Hunter and C. Eric Hunter.
(11) Includes 2,500 shares of Common Stock owned jointly by Mrs. Harrill and her
husband, James Edward Harrill. Mrs. Harrill is the mother of Jeff N. Hunter
and C. Eric Hunter.
(12) Includes 1,750 shares of Series B Preferred Stock owned jointly by Dr.
Nassau, who is a director, and his wife, Julia Nassau.
TRANSACTIONS WITH CREE
The Company is heavily dependent on Cree and Cree's technology. See
"Business -- Dependence on Cree and Cree Technology." Jeff N. Hunter, one of the
founders of the Company, President and Chairman of the Board, and C. Eric
Hunter, one of the founders of the Company and the beneficial owner of 17.8% of
the Common Stock outstanding after this offering, are the brothers of F. Neal
Hunter, the Chief Executive Officer of Cree. C. Eric Hunter was one of the
founders of Cree and was the President and Chief Executive Officer of Cree prior
to the time of any transactions between the Company and Cree. In May 1995, Mr.
Hunter entered into a consulting and noncompetition agreement with Cree
effective from July 1995 through July 1998 under which Cree is entitled to
request Mr. Hunter to provide consulting services. Mr. Hunter has agreed that
during the term of the agreement, he will not, among other activities, provide
services to, or have certain interests or positions in, businesses engaged in
the production of SiC substrates, the distribution of SiC substrates not
produced or purchased from Cree, or research and development in SiC substrates.
Cree and certain of its officers and directors will own approximately 3.9% of
the Common Stock outstanding after this offering. GEPT, which is the beneficial
owner of 9.7% of the Common Stock after giving effect to the automatic
conversion of the 1997 Series B Preferred Stock and this offering, currently is
also the beneficial owner of approximately 10.4% of the outstanding common stock
of Cree.
Exclusive Supply Agreement
On June 6, 1997, the Company and Cree entered into the Exclusive Supply
Agreement. See "Business -- Dependence on Cree and Cree Technology" for a more
detailed description of the terms of the Exclusive Supply Agreement. Under the
provisions of the Exclusive Supply Agreement, the Company has agreed to purchase
from Cree at least 50%, by dollar volume, of the Company's requirements for SiC
crystals for the production of gemstones in each calendar quarter. Cree is
obligated to supply this amount of materials to the Company, and Cree has agreed
not to sell SiC crystals to anyone other than the Company for gemstone use.
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The price for SiC crystals is equal to Cree's loaded manufacturing cost plus a
margin, which margin may increase if the price of crystals falls below a
specified amount.
Under the Exclusive Supply Agreement, Cree may elect to have the Company
purchase the additional growth systems that will be required to meet the
Company's anticipated demand for SiC crystals or Cree may fund the costs of
these systems on its own and recoup its costs by incorporating the costs of the
systems into the cost of the SiC crystals purchased by the Company. If Cree
elects to have the Company purchase the additional crystal growth systems, such
systems must remain at Cree's facilities and ownership of such systems will
transfer to Cree when the Company has fully depreciated their cost.
The Exclusive Supply Agreement also prohibits the Company from entering
into certain types of arrangements with certain specified parties. See
"Description of Capital Stock -- Certain Anti-Takeover Provisions." The
Exclusive Supply Agreement has an initial term of ten years, which may be
extended for an additional ten years by either party if the Company orders in
any 36-month period SiC crystals with an aggregate purchase price in excess of
$1 million. The Company expects to meet this threshold and extend the term of
the Agreement.
Development Agreement
The Company is concentrating all of its development efforts with Cree under
the Development Agreement. For a full description of the Development Agreement,
see "Business -- Dependence on Cree and Cree Technology." If Cree is successful
in meeting the development milestones set forth in the Development Agreement,
the Company will be obligated to pay Cree approximately $12 million over the
five year term of the Development Agreement. In addition, if Cree meets certain
development milestones by January 1, 1998, the Company will pay Cree a $200,000
bonus.
Other Cree Transactions
In June 1995, the Company granted to Cree the right to purchase one percent
of the outstanding Common Stock of the Company for an aggregate consideration of
$500. The Company retained the right to waive the consideration and issue the
stock at any time during the option period. In January 1997, the Company issued
24,601 shares of Common Stock to Cree in satisfaction of these obligations. See
Note 5 of Notes to Financial Statements.
In January 1996, the Company and Cree entered into a letter agreement under
which the Company agreed to assist Cree in prosecuting its patent application
for a particular process of producing colorless SiC crystals, and Cree granted
the Company an irrevocable nonexclusive royalty-free license to use that process
in connection with the manufacture, use and sale of lab-created moissanite
gemstones. Under this agreement, the Company is obligated to reimburse Cree for
all legal expenses incurred by Cree in preparing, filing, prosecuting and
maintaining any patents issued in connection with that process for producing
colorless SiC crystals.
Under a February 1996 letter agreement, the Company has agreed to purchase
all of its requirements for the semiconductor chip component of its
moissanite/diamond test instrument from Cree, and Cree granted the Company the
exclusive right to purchase such chips for use in gemstone analysis and
verification equipment. The Company is obligated to purchase all of its
requirements for such chips from Cree at prices that may not exceed Cree's then
current list price for such chips and to pay Cree a royalty of 2 1/2% of net
sales of all test instruments incorporating the Cree chip. The letter agreement
has a term of twenty years.
In February 1997, the Company subleased approximately 3,000 square feet of
mixed use space from Real Color Displays, Inc., a wholly owned subsidiary of
Cree. The lease agreement had an initial term ending in January 1998 and
provided for annual lease payments of $24,000 and a one-time payment of $6,000
for leasehold improvements. The Company intends to terminate this arrangement in
October 1997.
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OTHER TRANSACTIONS
In connection with the formation of the Company on June 28, 1995, the
Company issued 1,465,440 shares of Common Stock to C. Eric Hunter, a founder of
the Company and brother of Jeff N. Hunter, for an aggregate consideration of
$50,000. On June 28, 1995, the Company also issued to Jeff N. Hunter, a founder
of the Company, President and Chairman of the Board and Paula K. Berardinelli, a
founder of the Company, former President and Chairman of the Board and wife of
Jeff N. Hunter, as joint tenants with rights of survivorship, 170,400 shares of
Common Stock in consideration of services to be performed by them as officers of
the Company. See Note 3 of Notes to Financial Statements.
In connection with the financing of the Company during its start-up phase,
the Company borrowed funds and issued promissory notes to certain founders to
evidence such borrowings. In November 1995, the Company issued a note in the
principal amount of $10,000 to C. Eric Hunter. In January 1996, the Company
issued a note in the principal amount of $3,000 to Jeff N. Hunter and Paula K.
Berardinelli. In February 1996, the Company issued a promissory note in the
principal amount of $50,000 to C. Eric Hunter. All of these notes, which were
unsecured and bore interest at the rate of seven percent per annum, have been
paid in full. See Note 8 of Notes to Financial Statements.
In August 1996, the Company entered into a consulting agreement with Thomas
G. Coleman, now the Director of Technology and an executive officer of the
Company, pursuant to which Mr. Coleman provided consulting services related to
the dicing of SiC crystals into lab-created moissanite gemstones for fees to be
mutually agreed upon plus expenses. The consulting agreement was terminated in
March 1997 when Mr. Coleman became an employee of the Company. During the term
of the agreement, the Company did not make any payments to Mr. Coleman. As
additional consideration for the consulting services to be performed by Mr.
Coleman, the Company granted Mr. Coleman an option to purchase 31,950 shares of
Common Stock at an exercise price of aproximately $2.70. Mr. Coleman's option
was originally scheduled to vest and become exercisable in three equal
installments on each of the first three anniversaries of the date of grant. The
Company subsequently made these options exercisable in full upon the
consummation of this offering. Mr. Coleman's options expire on the tenth
anniversary of the date of grant.
In May 1997, the Company entered into a consulting agreement with Paula K.
Berardinelli pursuant to which Dr. Berardinelli may provide marketing, sales,
management, organizational and other services to the Company for fees to be
mutually agreed upon plus expenses. From June 1996 to May 1997, Dr. Berardinelli
served as Vice President of Sales and Marketing of the Company, and the
consulting agreement was entered into in connection with Dr. Berardinelli
commencing a one-year unpaid leave of absence. If Dr. Berardinelli elects to
return to the Company, she will be entitled to a position comparable to her
prior position as Vice President of Sales and Marketing. To date, the Company
has not requested that Dr. Berardinelli perform consulting services under the
agreement and, consequently, has paid no fees to Dr. Berardinelli. Dr.
Berardinelli is the wife of Jeff N. Hunter, the President and Chairman of the
Board of the Company.
In September 1997, the Company entered into a consulting agreement with C.
Eric Hunter pursuant to which Mr. Hunter will assist the Company in filing,
prosecuting and maintaining certain patents relating to the Company's
technology. The Company is obligated to pay Mr. Hunter a monthly consulting fee
of $1,800, and the first such payment is due in November 1997. The consulting
agreement has an initial term of two years.
The Company has entered into employment agreements with certain of its
executive officers and consulting agreements with certain of its directors and
director nominees. The Company has also granted options to purchase Common Stock
under the 1996 Option Plan and 1997 Omnibus Plan to certain executive officers,
directors and director nominees. See "Management -- Employment Agreements,"
"-- Director Compensation" and "-- Stock Option Plans."
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DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, no par value, and
10,000,000 shares of Preferred Stock, no par value (the "Preferred Stock"), of
which 5,938,476 shares of Common Stock and no shares of Preferred Stock will be
issued and outstanding. All outstanding shares of Common Stock are, and the
shares of Common Stock offered hereby will be, when issued, duly authorized,
validly issued, fully paid and nonassessable shares of Common Stock of the
Company.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters on which the holders of Common Stock are entitled to vote and do not
have cumulative voting rights in the election of directors. Holders of Common
Stock are entitled to receive dividends when, as and if declared by the
Company's Board of Directors out of funds legally available therefor. In the
event of the liquidation, dissolution or winding up of the Company, holders of
Common Stock will be entitled to share ratably in the assets, if any, available
for distribution after payment of all creditors and the liquidation preferences
on any outstanding shares of Preferred Stock. Holders of Common Stock have no
preemptive rights to subscribe for any additional securities of any class which
the Company may issue, nor any conversion, redemption or sinking fund rights.
The rights and privileges of holders of Common Stock are subject to the
preferences of any shares of Preferred Stock that the Company may issue in the
future.
NEW PREFERRED STOCK
The Company may issue shares of Preferred Stock in one or more series as
may be determined by the Company's Board of Directors, who may establish, from
time to time, the number of shares to be included in each series, may fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof, and may increase or
decrease the number of shares of any such series without any further vote or
action by the shareholders. Any Preferred Stock so issued by the Board of
Directors may rank senior to the Common Stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up of the Company,
or both. In addition, any such shares of Preferred Stock may have class or
series voting rights. Moreover, under certain circumstances, the issuance of
Preferred Stock or the existence of the unissued Preferred Stock may tend to
discourage or render more difficult a merger or other change in control of the
Company. See "Risk Factors -- Anti-Takeover and Certain Other Provisions."
SERIES A PREFERRED STOCK AND SERIES B PREFERRED STOCK
At September 29, 1997, the Company has issued and outstanding 105,000
shares of Series A Preferred Stock and 682,500 shares of Series B Preferred
Stock. The Company intends to amend its articles of incorporation prior to the
completion of this offering to provide that contemporaneously with the effective
date of this offering, the outstanding shares of Series A Preferred Stock and
Series B Preferred Stock will be converted automatically into an aggregate of
1,677,375 shares of Common Stock pursuant to their terms, and thereafter no
shares of the Series A Preferred Stock or the Series B Preferred Stock will be
outstanding. No dividends have been or will be declared or paid on the Series A
Preferred Stock or Series B Preferred Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
Articles of Incorporation and Bylaws
A number of provisions of the Company's articles of incorporation and
bylaws deal with matters of corporate governance and the rights of shareholders.
Certain of these provisions may be deemed to have an anti-takeover effect and
may delay or prevent takeover attempts not first approved by the Board of
Directors (including takeovers that certain shareholders may deem to be in their
best interests). These provisions also could delay or frustrate the removal of
incumbent directors or the assumption of control by shareholders. The Company
believes that these provisions are appropriate to protect the interests of the
Company and all of its shareholders.
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Certain Business Combinations. The Company's articles of incorporation
require that any business combination, as defined in the articles, to be entered
into by the Company with a person or entity beneficially owning 10% or more of
the Company's outstanding voting shares (an "Interested Shareholder") be
approved by the affirmative vote of the holders of at least two-thirds of the
outstanding voting shares, including a majority of the outstanding voting shares
held by persons other than such Interested Shareholder and its affiliates, or,
alternatively, by two-thirds of certain members of the Board of Directors not
affiliated with such Interested Shareholder, unless all of the holders of the
Common Stock receive in the business combination an amount of consideration per
share equal to or greater than the highest price paid by the Interested
Shareholder in acquiring any of its holdings of Common Stock and the transaction
meets certain other minimum price requirements. The business combinations that
are subject to these provisions include a merger or share exchange with an
Interested Shareholder, sales to an Interested Shareholder of assets of the
Company having a value of $5.0 million or more and the issuances or transfers to
an Interested Shareholder by the Company or any of its subsidiaries of equity
securities of the Company or such subsidiary having a value of $5.0 million or
more. These provisions will make a takeover of the Company more difficult and
may have the effect of diminishing the possibility of certain types of
"front-end loaded" acquisitions of the Company or other unsolicited attempts to
acquire the Company.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Company's bylaws provide that a special meeting of
shareholders may be called only by the Board of Directors and certain designated
officers of the Company. Special meetings may not be called by the shareholders.
The Company's bylaws establish advance notice procedures for shareholder
proposals and the nomination, other than by or under the direction of the Board
of Directors or a committee thereof, of candidates for election as directors.
These procedures provide that the notice of shareholder proposals and
shareholder nominations for the election of directors be in writing, contain
certain specified information and be received by the Secretary of the Company
(i) in the case of an annual meeting that is called for a date that is within 30
days before or after the anniversary date of the immediately preceding annual
meeting of shareholders, not less than 60 days nor more than 90 days prior to
such anniversary date, and (ii) in the case of an annual meeting that is called
for a date that is not within 30 days before or after the anniversary date of
the immediately preceding annual meeting or, in the case of a special meeting of
shareholders, not later than the close of business on the tenth day following
the day on which notice of the date of the meeting was mailed or public
disclosure of the date of the meeting was made, whichever occurs first. These
provisions may preclude some shareholders from bringing matters before the
shareholders at any annual or special meeting, including making nominations for
directors.
Amendment of Articles and Bylaws. Subject to the North Carolina Business
Corporation Act, the Company's articles of incorporation may be amended by the
affirmative vote of a majority of the outstanding shares entitled to vote
thereon. Notwithstanding the foregoing, at a time that one or more Interested
Shareholders exist, the amendment or repeal of certain provisions of the
articles relating to the shares which the Company shall have authority to issue,
the approval of certain business combinations as described above and certain
other matters require the affirmative vote of the holders of two-thirds of the
Company's voting securities, unless approved by two-thirds of the certain
members of the Board of Directors not affiliated with the Interested
Shareholder, other than securities held by an Interested Shareholder. The
articles further provide that at a time that one or more Interested Shareholders
exist, certain provisions of the bylaws relating to the size and composition of
the Board of Directors and meetings of shareholders may be amended by the
shareholders, only by the affirmative vote of the holders of two-thirds of the
outstanding shares of voting securities, unless approved by two-thirds of the
certain members of the Board of Directors not affiliated with the Interested
Shareholder. Moreover, the articles provide that the Board of Directors may
repeal, amend or adopt any bylaw adopted, amended or repealed by the
shareholders. These provisions will make it more difficult for shareholders to
amend the articles or bylaws.
Exclusive Supply Agreement
The terms of the Exclusive Supply Agreement prohibit the Company from
entering into exclusive marketing or distribution agreements with DeBeers or its
affiliates or the Central Selling Organization, which is the international
diamond cartel, or any party whose primary business is the development,
manufacture,
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marketing or sale of diamond gemstones or any non-gemstone and non-jewelry
industry competitor of Cree (collectively, the "Prohibited Parties"). The
agreement also prohibits the Company from entering into certain merger,
acquisition, asset sale or similar transactions with a Prohibited Party. The
Exclusive Supply Agreement may prevent the Company from entering into certain
potentially profitable transactions with the Prohibited Parties and may limit
the price that third parties might be willing to pay for some or all of the
shares of the Company's Common Stock.
ANTI-TAKEOVER LEGISLATION
Pursuant to the Company's articles of incorporation, the Company has
elected not to be governed by the North Carolina Control Share Act, which
restricts the right of certain shareholders who acquire specified amounts of
Common Stock from voting those shares without certain approval by other
shareholders of the Company, and the North Carolina Shareholder Protection Act,
which imposes certain requirements for approval of transactions between the
Company and a shareholder beneficially owning in excess of 20% of the Common
Stock.
REGISTRATION RIGHTS
The Company has entered into an agreement under which the current holders
of Series B Preferred Stock (the "Investor Holders") are entitled to certain
rights as described below with respect to the registration under the Securities
Act of 1933, as amended (the "Securities Act"), of the sale of up to 1,453,725
shares of Common Stock which will be issued upon the conversion of the Series B
Preferred Stock (the "Registrable Securities"). Subject to certain exceptions,
if the Company proposes to register the sale of any Common Stock for its own
account or the account of others, the Investor Holders are entitled to notice of
such registration and to include the Registrable Securities therein at the
Company's expense. The Company has obtained waivers of the foregoing rights from
the Investor Holders in connection with this offering. After March 18, 1998,
Investor Holders owning at least 40% of the Registrable Securities may require
the Company to file a registration statement at the Company's expense with
respect to the Registrable Securities held by the Investor Holders, and the
Company must use its diligent best efforts to effect such registration. The
Investor Holders may not require the Company to file more than two registration
statements pursuant to their demand registration rights. The foregoing
registration rights are subject to certain conditions and limitations, including
(i) the right of the Company not to effect a requested registration during the
90 days following this offering, (ii) the right of the Company not to effect a
requested registration during the 180 days following a request for such
registration if the Board of Directors determines that such registration would
be seriously detrimental to the Company and (iii) the right of the underwriters
of an offering to limit the number of Registrable Securities in the offering,
unless other holders of the Company's securities are permitted to include their
securities in such offering. Certain of the Investor Holders are subject to
additional limitations with respect to the exercise of registration rights under
certain contractual provisions agreed to with the Representative in connection
with this offering. See "Underwriting."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is First
Union National Bank. Its address is 230 South Tryon Street, Charlotte, NC
28288-1179, and its telephone number at this location is 704-383-5406.
LISTING
The Company has applied for inclusion of the Common Stock on the Nasdaq
National Market under the symbol "CTHR."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock.
Future sales of substantial amounts of Common Stock in the public market could
adversely affect market prices prevailing from time to time. Furthermore,
because only a limited number of shares will be available for sale shortly after
this offering as a result of certain contractual and legal restrictions on
resale as described below, sales of substantial amounts of Common Stock in the
public market after the restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 5,938,476 shares of Common Stock, assuming no exercise of the
Over-allotment Option and no exercise of outstanding options to purchase Common
Stock. Of these shares, the 2,000,000 shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act (except for any shares purchased by "affiliates," as that term is
defined in Rule 144 under the Securities Act ("Affiliate")). Of the remaining
shares of Common Stock, the Company believes that 1,927,393 shares (the
"Affiliate Shares") will be held by Affiliates and 2,011,083 shares (the
"Nonaffiliate Shares") will be held by nonaffiliates of the Company. All of such
shares of Common Stock are "restricted securities" as that term is defined in
Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144 (including Rule 144(k)) or 701
promulgated under the Securities Act, which rules are summarized below or if
another exemption from registration is available. Pursuant to the provisions of
Rules 144 (including Rule 144(k)) and 701, the Company believes Restricted
Shares will be available for sale in the public market during 1997 as follows:
(i) no Restricted Shares will be eligible for immediate sale on the date of this
Prospectus; (ii) 1,921,621 Nonaffiliate Shares will be eligible for sale 90 days
after the effective date of this offering (the date on which these shares will
be eligible for resale is assumed to be February 12, 1998); (iii) 1,927,393
Affiliate Shares will be eligible for sale upon expiration of lock-up agreements
one year after the date of this Prospectus; and (iv) 89,462 Nonaffiliate Shares
will become eligible for sale upon the expiration of their one-year holding
periods between February 13, 1998 and March 7, 1998.
Beginning 90 days after the completion of this offering, the holders of
1,453,725 shares of Common Stock issued upon the automatic conversion of the
Series B Preferred Stock, or their transferees, will be entitled to cause the
Company to register their shares for sale and participate in any future
registration of securities effected by the Company. See "Description of Capital
Stock -- Registration Rights." Registration of such shares under the Securities
Act would result in such shares becoming freely tradeable without restriction
under the Securities Act (except for shares purchased by Affiliates) immediately
upon the effectiveness of such registration.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of: (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 59,384 shares immediately after this
offering); or (ii) the average weekly trading volume of the Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale. Sales under Rule 144 are also
subject to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144; therefore, unless otherwise restricted, "144(k)
shares" may be sold immediately upon the completion of this offering. In
general, under Rule 701 of the Securities Act as currently in effect, any
employee, consultant or advisor of the Company who purchased shares from the
Company in connection with a compensatory stock or option plan or other written
compensation agreement is eligible to resell such shares 90 days after the
effective date of this offering in
49
51
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
All of the Common Shares held by the Company's officers, directors,
director nominees and beneficial owners of more than five percent of the
Company's Common Stock, aggregating 1,927,393 shares, are subject to lock-up
agreements with the Underwriters and may not be sold or otherwise transferred
until one year after the date of this Prospectus without the consent of
Representative. The Representative may, in its sole discretion and at any time
without notice, release all or any portion of the securities subject to these
lock-up agreements.
The Company intends to file registration statements under the Securities
Act covering shares of Common Stock reserved for issuance under the 1996 Option
Plan and the 1997 Omnibus Plan. Based on the number of options outstanding under
the 1996 Omnibus Plan and the number of shares reserved for issuance under the
1997 Omnibus Plan, such registration statements would cover approximately
1,139,770 shares. See "Management -- Stock Option Plans." Such registration
statements are expected to be filed and become effective as soon as practicable
after the effective date of this offering. Accordingly, shares registered under
such registration statements will, subject to Rule 144 volume limitations
applicable to Affiliates, be available for sale in the open market, unless such
shares are subject to vesting restrictions with the Company or the lock-up
agreements described above. At September 29, 1997, options to purchase 971,791
shares of Common Stock were issued and outstanding under the 1996 Option Plan
and 1997 Omnibus Plan. See "Management -- Director Compensation" and "-- Stock
Option Plans."
50
52
UNDERWRITING
The Underwriters named below, acting through Paulson Investment Company,
Inc., the Representative, have agreed, severally and not jointly, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
Common Stock offered hereby in the amounts set forth below:
NUMBER OF
UNDERWRITER SHARES
----------- ---------
Paulson Investment Company, Inc.............................
---------
Total............................................. 2,000,000
=========
The Underwriting Agreement provides that the Underwriters are obligated to
purchase all of the shares of the Common Stock offered hereby if any shares are
purchased. The Company has been advised that the Underwriters propose to offer
the Common Stock to the public initially at the offering price shown on the
cover page of this Prospectus and to selected dealers, including Underwriters,
at that price less a concession to be determined by the Representative. After
the initial public offering of the Common Stock, the public offering price and
other offering terms may be changed.
The Company has granted the Underwriters the Over-allotment Option,
exercisable by the Representative during the 45-day period after the date of
this Prospectus, to purchase up to 300,000 additional shares on the same terms
as the Common Stock being purchased by the Underwriters from the Company. The
Representative may exercise this option only to cover over-allotments in the
sale of the Common Stock.
The Underwriters will purchase the Common Stock (including the shares
subject to the Over- allotment Option) offered hereby at a discount equal to
% of the public offering price, or $ per share. The
Representative will also receive at the Closing a non-accountable expense
allowance equal to 1% of the aggregate initial public offering price of the
Common Stock sold in this offering of which $35,000 has already been paid. In
the event the offering is not consummated, any non-accountable portion of the
advanced payment will be returned to the Company.
The Company has agreed to issue the Representative's Warrants to the
Representative. The Representative's Warrants will allow the Representative to
purchase up to 200,000 shares of Common Stock. The Representative's Warrants are
exercisable for a period of four years beginning one year from the date of this
Prospectus, at a price of $ per share (120% of the initial public
offering price of the shares) and are nontransferable for one year after the
date of this Prospectus except (i) to any of the Underwriters or to individuals
who are either an officer or a partner of an Underwriter or (ii) by will or the
laws of descent and distribution. The holders of the Representative's Warrants
will have, in that capacity, no voting, dividend or other shareholder rights.
Any profits realized on the sale of the Common Stock issuable on exercise of the
Representative's Warrants may be deemed to be additional underwriting
compensation.
The sale of the shares issuable upon exercise of the Representative's
Warrants could dilute the interests of the other holders of Common Stock, and
the existence of the Representative's Warrants may make the raising of
additional capital by the Company more difficult. At any time at which exercise
of the Representative's Warrants might be expected, it is likely that the
Company could raise additional capital on terms more favorable than the terms of
the Representative's Warrants.
All officers, directors, director nominees and five percent shareholders of
the Company, who own an aggregate of 1,927,393 shares of Common Stock, have
agreed not to sell any Common Stock of the Company owned by such person,
pursuant to Rule 144 under the Securities Act or otherwise, and the Company has
agreed not to sell any Common Stock (other than shares issuable upon the
exercise of options under the 1996
51
53
Option Plan or the 1997 Omnibus Plan), without the prior written consent of the
Representative, for a period of one year after the date of this Prospectus.
In addition, the Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute in certain events to any liabilities incurred by the Underwriters in
connection with the sale of the Common Stock.
At the request of the Company, the Underwriters have reserved approximately
100,000 of the shares of Common Stock offered by the Company hereby for sale at
the initial public offering price to directors, director nominees, officers,
employees and certain individuals associated with the Company, its directors,
its director nominees, its officers or its employees. The number of shares of
Common Stock available to the public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares that are not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares offered hereby.
The Representative has advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of Common Stock on behalf
of the Underwriters to reduce a short position incurred by the Underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
Representative to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Representative in a syndicate covering transaction and has therefore not
been effectively placed by such Underwriter or syndicate member. The
Representative has advised the Company that such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
Prior to the offering, there has been no public market for the Common
Stock. The price to the public for the Common Stock will be determined through
negotiations between the Company and the Representative and will be based on,
among other things, the Company's financial condition, the prospects of the
Company and its industry in general, the management of the Company and the
market prices of securities of companies engaged in business similar to those of
the Company.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Womble Carlyle Sandridge & Rice, PLLC, Research Triangle Park, North
Carolina. One of the members of Womble Carlyle Sandridge & Rice, PLLC holds
10,650 shares of Common Stock, which were purchased from the Company in May 1996
in a private placement transaction. Certain legal matters in connection with
this offering will be passed upon for the Underwriters by Grover T. Wickersham,
P.C., Palo Alto, California.
EXPERTS
The financial statements as of December 31, 1996 and 1995 and for the year
ended December 31, 1996, the seven-month period ended December 31, 1995, and the
period from June 28, 1995 (date of inception) to December 31, 1996 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
52
54
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") (which term shall encompass all amendments,
exhibits and schedules thereto) under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes part
of the Registration Statement, does not contain all the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission, and to which reference is
hereby made. For further information with respect to the Company and the Common
Stock, reference is hereby made to the Registration Statement. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Registration Statement can be inspected and
copied at the Public Reference Section of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of the Registration Statement can be obtained from the Public Reference
Section of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a World Wide
Web site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other documents filed electronically with the
Commission, including the Registration Statement.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by its independent public accountants
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
53
55
C3, INC.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Balance Sheets as of December 31, 1995 and 1996, and June
30, 1997.................................................. F-3
Statements of Operations for the seven-month period ended
December 31, 1995, the year ended December 31, 1996, the
period from June 28, 1995 (date of inception) to December
31, 1996, and for the six months ended June 30, 1996 and
1997...................................................... F-4
Statements of Shareholders' Equity for the seven-month
period ended December 31, 1995, the year ended December
31, 1996, and for the six months ended June 30, 1997...... F-5
Statements of Cash Flows for the seven-month period ended
December 31, 1995, the year ended December 31, 1996, the
period from June 28, 1995 (date of inception) to December
31, 1996, and for the six months ended June 30, 1996 and
1997...................................................... F-6
Notes to Financial Statements............................... F-7
F-1
56
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
C3, Inc.
Research Triangle Park, North Carolina
We have audited the accompanying balance sheets of C3, Inc. (a development stage
company) as of December 31, 1995 and 1996, and the related statements of
operations, shareholders' equity, and cash flows for the seven-month period
ended December 31, 1995, the year ended December 31, 1996, and the period from
June 28, 1995 (date of inception) to December 31, 1996.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1995 and 1996
and the results of its operations, and cash flows for the seven-month period
ended December 31, 1995, the year ended December 31, 1996, and the period from
June 28, 1995 (date of inception) to December 31, 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Raleigh, North Carolina
March 11, 1997, except for Note 9, as to which the date is September 25, 1997
F-2
57
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
PROFORMA
JUNE 30, JUNE 30,
1995 1996 1997 1997
-------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and equivalents...................... $ 9,109 $1,167,458 $ 5,538,099 $ 5,538,099
Prepaid and other assets.................. 9,346 7,000
-------- ---------- ----------- -----------
Total current assets.............. 18,455 1,174,458 5,538,099 5,538,099
EQUIPMENT, net of accumulated depreciation
of $542 and $2,352 at December 31, 1995
and 1996, respectively.................... 5,560 14,081 53,955 53,955
PATENT AND LICENSE RIGHTS, net of
accumulated amortization of $256 and
$2,064 at December 31, 1995 and 1996,
respectively.............................. 8,898 37,595 69,866 69,866
-------- ---------- ----------- -----------
TOTAL ASSETS...................... $ 32,913 $1,226,134 $ 5,661,920 $ 5,661,920
======== ========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable (Note 8).................... $ 10,100 $ $ $
Accounts payable.......................... 12,855 109,874 109,874
-------- ---------- ----------- -----------
Total current liabilities......... 10,100 12,855 109,874 109,874
-------- ---------- ----------- -----------
COMMITMENTS (Note 7)
SHAREHOLDERS' EQUITY
(Notes 3, 4, 5 and 9):
1996 Series A preferred stock, no par
value; 105,000 shares authorized,
issued and outstanding at December 31,
1996 and June 30, 1997 (unaudited);
none authorized or issued and
outstanding on a pro forma basis at
June 30, 1997 (unaudited).............. 593,271 593,271
1997 Series B preferred stock, no par
value; 682,500 shares authorized,
issued and outstanding at June 30, 1997
(unaudited); none authorized or issued
and outstanding on a pro forma basis at
June 30, 1997 (unaudited).............. 4,981,376
Common stock, no par value; 10 million
shares authorized; 1,704,000 shares,
2,236,500 shares, 2,261,101 shares and
3,938,476 shares issued and outstanding
at December 31, 1995 and 1996, June 30,
1997 (unaudited) and June 30, 1997 on a
pro forma basis (unaudited),
respectively........................... 50,000 1,029,803 1,095,803 6,670,450
Deficit accumulated during the development
stage.................................. (27,187) (409,795) (1,118,404) (1,118,404)
-------- ---------- ----------- -----------
Total shareholders' equity........ 22,813 1,213,279 5,552,046 5,552,046
-------- ---------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................... $ 32,913 $1,226,134 $ 5,661,920 $ 5,661,920
======== ========== =========== ===========
See notes to financial statements.
F-3
58
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS
CUMULATIVE
SEVEN-MONTH FOR THE PERIOD SIX MONTHS ENDED
PERIOD ENDED YEAR ENDED JUNE 28, 1995 TO JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------------
1995 1996 1996 1996 1997
------------ ------------ ---------------- ---------- ---------
(UNAUDITED) (UNAUDITED)
OPERATING EXPENSES:
Marketing and sales............. $ 10,313 $ 47,019 $ 57,332 $ 8,017 $ 46,611
General and administrative...... 10,024 131,097 141,121 48,069 316,154
Research and development........ 6,052 236,047 242,099 68,115 452,571
Depreciation and amortization... 798 3,618 4,416 1,306 6,649
---------- ---------- ---------- ---------- ---------
OPERATING LOSS.................... 27,187 417,781 444,968 125,507 821,985
INTEREST INCOME, net.............. (35,173) (35,173) (1,231) (113,376)
---------- ---------- ---------- ---------- ---------
NET LOSS.......................... $ 27,187 $ 382,608 $ 409,795 $ 124,276 $ 708,609
========== ========== ========== ========== =========
Pro forma net loss per share (Note
2).............................. $ 0.01 $ 0.14 $ 0.14 $ 0.05 $ 0.17
========== ========== ========== ========== =========
Pro forma weighted average common
shares and equivalent common
shares outstanding (Note 2)..... 2,204,062 2,652,250 2,898,212 2,381,562 4,199,978
========== ========== ========== ========== =========
See notes to financial statements.
F-4
59
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF SHAREHOLDERS' EQUITY
1996 1997
SERIES A SERIES A DEFICIT
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ACCUMULATED
-------------------- ---------------------- ---------------------- DURING THE TOTAL
NUMBER OF NUMBER OF NUMBER OF DEVELOPMENT SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE EQUITY
--------- -------- --------- ---------- --------- ---------- ----------- -------------
BALANCE, JUNE 28, 1995
(date of
inception) --
Issuance of common
stock to founders
for cash and
consideration of
services to be
provided.......... $ $ 1,704,000 $ 50,000 $ $ 50,000
Net loss..... (27,187) (27,187)
------- -------- ------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31,
1995................ 1,704,000 50,000 (27,187) 22,813
Issuance of common
stock, net of
offering costs of
$20,197........... 532,500 979,803 979,803
Issuance of 1996
Series A preferred
stock, net of
offering costs of
$10,479........... 105,000 593,271 593,271
Net loss..... (382,608) (382,608)
------- -------- ------- ---------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31,
1996................ 105,000 593,271 2,236,500 1,029,803 (409,795) 1,213,279
Exercise of stock
option and
recognition of
compensation
expense........... 24,601 66,000 66,000
Issuance of 1997
Series B preferred
stock, net of
offering costs of
$34,999........... 682,500 4,981,376 4,981,376
Net loss..... (708,609) (708,609)
------- -------- ------- ---------- --------- ---------- ----------- ----------
BALANCE, JUNE 30, 1997
(UNAUDITED)......... 105,000 $593,271 682,500 $4,981,376 2,261,101 $1,095,803 $(1,118,404) $5,552,046
======= ======== ======= ========== ========= ========== =========== ==========
See notes to financial statements.
F-5
60
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
CUMULATIVE
SEVEN-MONTH FOR THE PERIOD SIX MONTHS ENDED
PERIOD ENDED YEAR ENDED JUNE 28, 1995 TO JUNE 30,
DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------------
1995 1996 1996 1996 1997
------------ ------------ ---------------- --------- ----------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss..................... $(27,187) $ (382,608) $ (409,795) $(124,276) $ (708,609)
Adjustments:
Depreciation and
amortization............ 798 3,618 4,416 1,306 6,648
Compensation expense
related to stock option
exercise................ 66,000
Changes in assets and
liabilities:
Prepaid and other
assets............... (9,346) 2,346 (7,000) 9,446 7,000
Accounts payable........ 12,855 12,855 (100) 97,019
-------- ---------- ---------- --------- ----------
Net cash used in
operating
activities......... (35,735) (363,789) (399,524) (113,624) (531,942)
-------- ---------- ---------- --------- ----------
INVESTING ACTIVITIES:
Purchase of equipment........ (6,102) (10,331) (16,433) (1,286) (44,842)
Patent costs................. (9,154) (30,505) (39,659) (18,365) (33,951)
-------- ---------- ---------- --------- ----------
Net cash used in
investing
activities......... (15,256) (40,836) (56,092) (19,651) (78,793)
-------- ---------- ---------- --------- ----------
FINANCING ACTIVITIES:
Proceeds from notes
payable................... 10,100 53,000 63,100
Repayment of notes payable... (63,100) (63,100) (10,000)
Proceeds from common stock
offerings, net of costs... 50,000 979,803 1,029,803 1,000,002
Proceeds from preferred stock
offerings, net of costs... 593,271 593,271 4,981,376
-------- ---------- ---------- --------- ----------
Net cash provided by
financing
activities......... 60,100 1,562,974 1,623,074 990,002 4,981,376
-------- ---------- ---------- --------- ----------
INCREASE IN CASH AND
EQUIVALENTS.................. 9,109 1,158,349 1,167,458 856,727 4,370,641
CASH AND EQUIVALENTS, BEGINNING
OF PERIOD.................... 9,109 9,109 1,167,458
-------- ---------- ---------- --------- ----------
CASH AND EQUIVALENTS, END OF
PERIOD....................... $ 9,109 $1,167,458 $1,167,458 $ 865,836 $5,538,099
======== ========== ========== ========= ==========
See notes to financial statements.
F-6
61
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
SEVEN-MONTH PERIOD ENDED DECEMBER 31, 1995 AND YEAR ENDED DECEMBER 31, 1996
AND PERIOD FROM JUNE 28, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1996
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
C3, Inc. ("C3" or the "Company"), was incorporated in North Carolina on
June 28, 1995, and is engaged in the development and commercialization of
silicon carbide ("moissanite") as a gemstone material. In addition to the
development of synthetic moissanite gemstones (hereinafter referred to as
"moissanite" or "moissanite gemstones"), the Company is working to develop a
test instrument for manufacture and sale which will be able to distinguish
moissanite gemstones from diamond.
C3 is a development stage company which has devoted substantially all of
its efforts to research and product development and has not yet generated any
revenues, nor is there any assurance of future revenues. The ability of the
Company to successfully develop, manufacture and market its proprietary products
is dependent upon many factors. Further, during the period required to develop
these products, the Company may require additional funds which may not be
available to it. Accordingly, there can be no assurance of the Company's future
success.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Equivalents -- The Company considers all money market accounts,
debt instruments purchased with an original maturity of three months or less,
and other highly liquid investments to be cash equivalents. At December 31, 1996
and June 30, 1997, cash equivalents consisted of money market accounts and U.S.
Treasury bills.
Equipment -- Equipment consists primarily of computer hardware and research
and development equipment. Equipment is recorded at cost and depreciated on the
straight-line method based on estimated useful lives of five to six years.
Patents and License Rights -- The Company capitalizes costs associated with
obtaining patents issued or pending for inventions and license rights related to
the manufacture of moissanite gemstones and moissanite gemstone test
instruments. Such costs are amortized over seventeen years.
Income Taxes -- From the date of inception (June 28, 1995) to December 31,
1995, the Company was treated as a C Corporation for federal and state income
tax purposes. Effective January 1, 1996, the Company elected to change its tax
status from a C Corporation to an S Corporation. On September 4, 1996, in
connection with the closing of the 1996 Series A preferred stock offering, the
Company's number of shareholders exceeded the maximum 35 shareholder limitation
for S Corporations and, as a result, the Company's S Corporation status was
automatically terminated. Losses of the Company for the period January 1, 1996
through September 4, 1996 (totaling $259,533) are included in the personal
income tax returns of the common shareholders as of that date. The tax effect of
losses for the period September 5, 1996 to December 31, 1996 (totaling $123,075)
and the seven-month period ending December 31, 1995 are recorded under the
provisions of Statement of Financial Accounting Standards No. 109 ("FAS 109"),
Accounting for Income Taxes.
Research and Development -- All research and development costs are expensed
when incurred.
Stock Compensation -- The Company's stock option plan is accounted for in
accordance with Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees. In January 1996, the Company adopted
the disclosure requirements of Statement of Financial Accounting Standards No.
123 ("FAS 123"), Accounting for Stock Based Compensation.
F-7
62
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Pro Forma Net Loss Per Share -- Pro forma net loss per share applicable to
common shareholders is computed using the weighted average number of shares of
common stock outstanding which gives effect to a 2.13-for-1 stock split effected
in September 1997 (see Note 9 of Notes to Financial Statements) and the
conversion of all outstanding shares of the Company's 1996 Series A and 1997
Series B preferred stock into common stock. Common and common equivalent shares
from stock options issued by the Company at prices below the initial public
offering price during the twelve-month period prior to the initial public
offering have been included in the calculation as if they were outstanding for
all periods presented (using the treasury stock method) even if anti-dilutive.
Interim Financial Information -- Interim financial information as of June
30, 1997 and for the six months ended June 30, 1997 and 1996 is unaudited. In
the opinion of management, this interim financial data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such data. The operating results for any interim period are not
necessarily indicative of the results that may be expected for any future
periods.
Unaudited Pro Forma Balance Sheet at June 30, 1997 -- The Company's pro
forma balance sheet as of June 30, 1997 gives effect to a 2.13-for-1 stock split
effected in September 1997 and the automatic conversion of all outstanding 1996
Series A preferred stock and 1997 Series B preferred stock into an aggregate of
1,677,375 shares of common stock upon consummation of the Company's initial
public offering.
Newly Issued Accounting Pronouncement -- In February 1997, Statement of
Financial Accounting Standards No. 128, Earnings Per Share, was issued. This
Statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock or potential
common stock. This Statement simplifies the current standards for computing EPS,
and makes them comparable to international EPS standards. This Statement is
effective for financial statements issued for periods ending after December 15,
1997; earlier application is not permitted. This Statement requires restatement
of all prior period EPS data presented. The implementation of this Statement
will not have a material impact on the Company's financial statements.
3. COMMON STOCK
On June 28, 1995, the Company issued 1,465,440 shares of common stock, no
par value, to a founder for an initial capital contribution of $50,000 and
issued 238,560 shares to other founders for consideration of future services to
be provided to the Company. On April 2, 1996 the Company declared an
eight-for-one common stock split. The effect of this stock split is reflected as
if it had occurred at the beginning of the earliest period presented.
In May 1996, the Company issued 532,500 shares of common stock with net
proceeds of approximately $979,800 (net of offering costs of $20,197).
4. PREFERRED STOCK
The Company has authorized 5 million shares of preferred stock, no par
value. The preferred stock may be issued from time to time in one or more
series.
F-8
63
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1996 Series A Preferred Stock -- The Board has designated 105,000 shares of
its preferred stock as 1996 Series A preferred stock. In September 1996, the
Company issued 105,000 shares of Series A preferred stock with net proceeds of
approximately $593,000 (net of offering costs of $10,479).
1997 Series B Preferred Stock -- The Company has authorized 682,500 shares
of its preferred stock as 1997 Series B preferred stock. On January 3, 1997, the
Company offered a maximum of 195 units ("Units"), each consisting of 3,500
shares of its 1997 Series B preferred stock, no par value per share ("Preferred
Stock"), at a price of $25,725 per Unit or $7.35 per share. The preferred stock
may be purchased only by investors meeting the suitability standards prescribed
by the Company. Effective March 7, 1997, the Company completed the offering of
682,500 shares of its 1997 Series B preferred stock with net proceeds of
approximately $5 million.
Liquidation -- After payment of the Company's debts and obligations, any
remaining assets are distributed to shareholders as follow: (i) $4.00 per share
together with any accrued and unpaid dividends to holders of 1997 Series B
preferred stock, (ii) $3.00 per share together with any accrued dividends to
holders of 1996 Series A preferred stock, and (iii) any remaining assets are
then distributed to all shareholders equally based on their relative percentage
of total shares outstanding.
Voting -- Holders of 1996 Series A preferred stock and 1997 Series B
preferred stock are not entitled to vote, except as otherwise required by the
North Carolina Business Corporation Act (the "NCBCA"). The NCBCA generally
provides voting rights to any shares of stock, otherwise nonvoting, in
connection with amendments to the articles of incorporation affecting certain
rights of the shares.
Conversion/Redemption -- Holders of 1996 Series A preferred stock and 1997
Series B preferred stock have the right, at their option at any time after the
earlier of (i) July 31, 1998 (Series A) or January 1, 1997 (Series B) or (ii)
the closing of the sale of common stock in an offering registered under the
Securities Act of 1933 with net proceeds to the Company and/or any selling
shareholders of $8 million or more, to convert any or all of their shares of
preferred stock into shares of common stock at the conversion ratio of one share
of common stock for each share of preferred stock. The conversion ratio is
subject to adjustment upon the occurrence of certain events to protect against
dilution. Each share of 1996 Series A preferred stock and 1997 Series B
preferred stock will be automatically converted into common stock upon and at
the effective time of any merger of the Company with any other entity, any share
exchange of the common stock effected with any other entity or any sale of all
or substantially all the assets of the Company.
The Company is not bound by any mandatory redemption, sinking fund or other
similar provisions with respect to the 1996 Series A preferred stock or the 1997
Series B preferred stock. At any time at which the 1996 Series A preferred stock
or the 1997 Series B preferred stock is convertible into common stock, the
Company may redeem the 1996 Series A preferred stock or the 1997 Series B
preferred stock, at the Company's sole discretion, in whole but not in part,
upon not less than 30 days prior written notice at the cash price of $5.75 per
share (Series A) or $7.35 per share (Series B) plus any accrued and unpaid
dividends. After notice of redemption has been given but before the date stated
for redemption, holders of 1996 Series A preferred stock or the 1997 Series B
preferred stock would be able to convert the shares into common stock.
Dividends -- The Company does not anticipate the payment of dividends on
its common or preferred stock in the near future and intends to retain any
earnings indefinitely. If dividends are declared and paid on the common stock,
the Company's bylaws require that dividends are to be declared and paid to
holders of 1996 Series A and 1997 Series B preferred stock. Each share of 1996
Series A and 1997 Series B preferred stock shall be entitled to receive the same
dividends that would have been payable upon such share if that share of
preferred stock had been converted into common stock immediately prior to the
declaration of such dividend on the common stock.
F-9
64
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
5. STOCK OPTION PLAN
The Company has adopted the 1996 Incentive Stock Option Plan ("Stock Plan")
under which options to acquire 255,600 common shares, reduced by the number of
options granted outside the Stock Plan, may be granted to key employees,
directors and independent consultants. Under the Stock Plan, both incentive and
nonqualified options may be granted under terms and conditions established by
the board of directors. The exercise price for incentive options will be the
fair market value of the related common stock on the date the option is granted.
Options granted under the Stock Plan generally vest equally over a three-year
period and have terms of 10 years.
During 1996 options to acquire 200,220 shares of common stock were granted
under the Stock Plan with exercise prices ranging from $1.88-$2.70 per share
(weighted average exercise price of $2.37 per share). At December 31, 1996 all
of these options were outstanding and none were exercisable. Additionally,
during 1996 the Company granted options to acquire 37,275 shares of common stock
to certain consultants. These options are immediately exercisable, have a term
of 5 years and an exercise price of $1.88 per share.
During 1995, the Company issued Cree Research, Inc. ("Cree"), a related
company (see Note 7), an option to acquire 1% of the outstanding shares of
common stock on the date of exercise at an exercise price of $500 at any time
through July 1, 1997. However, the Company retained the right to waive the $500
option fee and issue the stock at any time during the option period. The Company
issued 24,601 shares of common stock to Cree pursuant to this right on January
2, 1997. The Company has recorded compensation expense of approximately $66,000
in 1997 related to this transaction.
All stock options are granted at fair market value of the common stock at
the grant date. Had compensation cost for the Stock Plan been determined
consistent with FAS 123, the Company's pro forma net loss for 1996 would have
been $404,375. The fair value of each option grant is estimated on the date of
grant using the minimum value method with the following assumptions: dividend
yield of 0.0%; risk-free interest rate of 6.0%; and a weighted average expected
option term of 1.8 years.
During the six months ended June 30, 1997, options to acquire 140,154
shares of common stock were granted under the Stock Plan with exercise prices
ranging from $3.45-$4.81 per share (weighted average exercise price of $3.82).
6. INCOME TAXES
At December 31, 1995 and 1996, the Company had deferred tax assets of
$10,700 and $57,600, respectively, relating to federal net operating and state
economic loss carryforwards. In accordance with FAS 109, a valuation allowance
has been provided against these assets.
A reconciliation between anticipated income taxes, computed at the
statutory federal income tax rate applied to pretax accounting income, and the
income taxes included in the statements of operations for the seven-month period
ended December 31, 1995 and the year ended December 31, 1996 follows:
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
Anticipated income tax benefit at the statutory federal
rate...................................................... $(9,250) $(40,600)
State income tax benefit, net of federal tax effect......... (1,450) (6,300)
Increase in valuation allowance............................. 10,700 46,900
------- --------
Income tax (benefit) expense................................ $ -- $ --
======= ========
F-10
65
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
At December 31, 1996, the Company has operating and economic loss
carryforwards of approximately $147,000, expiring through 2011, which can be
offset against future federal and state taxable income.
7. COMMITMENTS
Operating Lease -- On February 4, 1997, the Company entered into a lease
agreement for office space with Real Color Displays, Inc. ("RCD"), a related
party. The agreement specifies rent of $2,000 per month and a one-time payment
of $6,000 for leasehold improvements. The lease expires January 31, 1998 and may
be renewed at the Company's option for two additional one-year terms, with
annual rent increases of $750 per annum. Future minimum lease payments under
this agreement for 1997 and 1998 are $24,000 and $2,000, respectively.
Purchase Commitment -- In connection with an Exclusive Supply Agreement,
the Company has committed to purchase a minimum of 50% (by dollar volume) of its
requirements for SiC crystals from Cree, a related company. If the Company's
orders require Cree to expand beyond specified production levels, the Company
must commit to purchase certain minimum quantities. The Company is totally
dependent on Cree to supply SiC crystals for its production process. If the
Company is unable to obtain SiC crystals from Cree, its operations would be
adversely affected.
During 1995 and 1996, the Company made purchases from Cree of approximately
$13,500 and $189,600, respectively, for SiC materials and research and
development costs.
8. RELATED PARTIES
During 1995 and 1996, a significant shareholder of the Company loaned an
aggregate of $60,000 to the Company for working capital needs. In addition,
during 1996 an officer and director loaned the Company $3,000. Amounts
outstanding on these loans at December 31, 1995 totaled $10,100 and were paid in
full during 1996.
9. COMMON STOCK SPLIT
On September 25, 1997, the Company effected a 2.13-for-1 stock split of its
common stock. All shares of common stock, common stock options and per share
amounts included in the accompanying financial statements have been
retroactively adjusted to reflect the stock split.
10. SUBSEQUENT EVENTS (UNAUDITED)
On June 6, 1997, the Company entered into an Amended and Restated Exclusive
Supply Agreement ("Amended Agreement") and a Development Agreement with Cree.
The Amended Agreement has an initial term of ten years which may be extended for
an additional ten years by either party if the Company orders in any 36-month
period SiC crystals with an aggregate purchase price in excess of $1 million.
The Company expects to meet this order threshold and to extend the term of the
Amended Agreement. The Development Agreement provides for a five-year
development effort by Cree to produce a fully repeatable process for producing
SiC crystals meeting certain target specifications. If Cree is successful in
meeting the development milestones set forth in the Development Agreement, the
Company will be obligated to pay Cree approximately $12 million over the
five-year term of the Development Agreement. In addition, if Cree meets certain
development milestones by January 1, 1998, the Company will pay Cree a $200,000
bonus.
Subsequent to June 30, 1997, the Company recognized deferred compensation
expense of approximately $2.9 million related to stock options granted in July
and August 1997. Upon consummation of the Company's initial public offering, the
stock options granted to certain officers and directors will vest on December
31,
F-11
66
C3, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1997. As a result, approximately $2.1 million of this deferred compensation
expense will be recognized in the quarter ending December 31, 1997. The
remaining deferred compensation expense, approximately $800,000, will be
recognized over the three-year vesting period of the remaining options.
The Company has entered into agreements with certain directors pursuant to
which such directors provide consulting services to the Company. Consideration
paid for services provided to the Company through June 30, 1997 was
insignificant.
Subsequent to December 31, 1996, the Board of Directors authorized, subject
to shareholder approval, an increase in the number of shares for issuance under
the Stock Plan to 777,450. During the period July 1, 1997 through August 20,
1997, options to acquire 321,417 shares of Common Stock were granted under the
Stock Plan with exercise prices ranging from $4.81-$7.63 per share
(weighted-average exercise price of $5.00). The Company currently has no plans
to award additional options under the Stock Plan.
In September 1997, the Board of Directors adopted the 1997 Omnibus Stock
Plan of C3, Inc. (the "1997 Omnibus Plan") and recommended its approval to the
Company's shareholders. The 1997 Omnibus Plan is subject to approval by the
shareholders of the Company, which approval must occur, if at all, within 12
months of the adoption of the plan by the Board of Directors. Awards granted
prior to shareholder approval are conditioned upon and shall be effective only
upon approval of the 1997 Omnibus Plan by the shareholders of the Company on or
before such date. The Company has granted options to acquire 310,000 shares of
Common Stock under the 1997 Omnibus Plan at an exercise price equal to the
initial public offering price of Common Stock offered.
The 1997 Omnibus Plan authorizes the Company to grant stock options, stock
appreciation rights and restricted awards (collectively, "awards") to selected
employees, independent contractors and directors of the Company and related
corporations in order to promote a closer identification of their interests with
those of the Company and its shareholders. Initially, a maximum of 477,979
shares of common stock may be delivered pursuant to awards granted under the
1997 Omnibus Plan, and the Board of Directors has reserved that number of shares
for this purpose. The maximum number of shares of Common Stock for which awards
may be granted under the 1997 Omnibus Plan may be increased from time to time to
a number of shares equal to (i) 20% of the shares of common stock outstanding as
of that time less (ii) the number of shares of common stock subject to
outstanding options under the Stock Plan. The number of shares reserved for
issuance under the 1997 Omnibus Plan may also be adjusted upon certain events
affecting the Company's capitalization.
F-12
67
DESCRIPTION OF INSIDE BACK COVER
This graphic has a white background, and in the upper one-half has a
photograph of one of the Company's loose lab-created moissanite gemstones held
by jeweler's tweezers. In the middle of the graphic appears the Company's
trademark stylized moissanite gemstones logo. The logo consists of a black box
in which the word "MOISSANITE" appears in large silver capital letters,
traversed by an orange arc ending with a burst of light rays at the bottom
right corner of the box. The logo also includes the word "GEMSTONES" appearing
underneath the box in capital letters approximately one-third of the size of
the letters used in "MOISSANITE." At the bottom of the page appear the words
"CREATED BY" in capital letters approximately two-thirds of the size of the
letters used in"GEMSTONES" and the Company's stylized name logo. The name logo
consists of a large capital C, similarly sized 3, with a geometric shape of a
diamond to the right of, and intersecting, the numeral "3". In the logo, the
word "Inc." appears to the right of the geometric diamond shape.
68
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF, OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS
OF THE COMPANY SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.................... 3
Risk Factors.......................... 5
Use of Proceeds....................... 12
Dividend Policy....................... 12
Dilution.............................. 13
Capitalization........................ 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 19
Management............................ 32
Principal Shareholders................ 41
Certain Transactions.................. 42
Description of Capital Stock.......... 46
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 53
Index to Financial Statements......... F-1
---------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
2,000,000 SHARES
[LOGO]
C3, INC.
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
PAULSON INVESTMENT
COMPANY, INC.
, 1997
======================================================
69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses of issuance and distribution payable by the Registrant are
estimated as follows:
Securities and Exchange Commission registration fee......... $ 11,546
National Association of Securities Dealers, Inc. filing
fee....................................................... 4,311
Nasdaq National Market Quotation Fee........................ 50,000
Accounting fees and expenses................................ 30,000
Legal fees and expenses..................................... 250,000
Printing and engraving...................................... 100,000
Fees of Transfer Agent and Registrar........................ 5,000
State Blue Sky registration fees and expenses (including
counsel fees)............................................. 10,000
Representative's Non-Accountable Expense Allowance.......... 270,000
Directors and Officers Insurance Premium.................... 150,000
Miscellaneous expenses...................................... 19,143
--------
Total............................................. $900,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 55-8-50 through 55-8-58 of the North Carolina Business Corporation
Act contains specific provisions relating to indemnification of directors and
officers of North Carolina corporations. In general, such sections provide that
(i) a corporation must indemnify a director or officer who is wholly successful
in his defense of a proceeding to which he is a party because of his status as
such, unless limited by the articles of incorporation, and (ii) a corporation
may indemnify a director or officer if he is not wholly successful in such
defense and it is determined as provided by statute that the director or officer
meets a certain standard of conduct, but the corporation may not indemnify a
director or officer if he is liable to the corporation or is adjudged liable on
the basis that personal benefit was improperly received by him. A director or
officer of a corporation who is a party to a proceeding may also apply to the
courts for indemnification, and the court may order indemnification under
certain circumstances set forth in the statute. A corporation may, in its
articles of incorporation or bylaws or by contract or resolution, provide
indemnification in addition to that provided by statute, subject to certain
conditions.
The Registrant's bylaws provide for the indemnification of any director or
officer of the Registrant against liabilities and litigation expenses arising
out of his status as such, excluding (i) any liabilities or litigation expenses
relating to activities which were at the time taken known or believed by such
person to be clearly in conflict with the best interest of the Registrant and
(ii) that portion of any liabilities or litigation expenses with respect to
which such person is entitled to receive payment under any insurance policy.
The Registrant's articles of incorporation provide for the elimination of
the personal liability of each director of the Registrant to the fullest extent
permitted by law.
In connection with this offering, the Registrant intends to obtain
directors' and officers' liability insurance, under which any controlling
person, director or officer of the Registrant will be insured or indemnified
against certain liabilities which he may incur in his capacity as such.
Under the underwriting agreement to be entered into by the Registrant,
certain controlling persons, directors and officers of the Registrant may be
entitled to indemnification by underwriters who participate in the distribution
of securities covered by the Registration Statement against certain liabilities,
including liabilities under the Securities Act.
II-1
70
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) The Registrant was incorporated on June 28, 1995 under the laws of the
State of North Carolina. Except as set forth below, no securities of the
Registrant have been sold by the Registrant without registration under the
Securities Act. Amounts of Common Stock have been adjusted to reflect an 8-for-1
stock split, effected on April 2, 1996, and a 2.13-for-1 stock split effected on
September 25, 1997.
(b) On June 28, 1995, the Registrant issued 170,400 shares of Common Stock
to Jeff N. Hunter, a founder, President and Chairman of the Board of the
Company, and Paula K. Berardinelli, a founder of the Company, as joint tenants
with rights of survivorship, in consideration of services to be performed by
each of them on behalf of the Registrant in reliance on the exemption from
registration provided by Section 4(2) and Rule 701 under the Securities Act of
1933, as amended (the "Securities Act"). On June 28, 1995, the Registrant also
issued 1,465,440 shares of Common Stock to C. Eric Hunter, a founder of the
Company believed to qualify as an "accredited investor" as defined in Rule
501(a) under the Securities Act, for an aggregate consideration of $50,000 in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act. Also on June 28, 1995, the Registrant issued to Cree an option
covering a number of shares equal to one percent of the Common Stock outstanding
on the date of exercise in exchange for certain intellectual property rights.
Cree had the right to exercise the option upon payment of an aggregate exercise
price of $500 and the Registrant retained the right to waive the payment of the
exercise consideration and issue the stock at any time during the option period.
This option was issued in reliance on the exemption from registration provided
by Section 4(2) under the Securities Act.
(c) On June 30, 1995, the Registrant issued 68,160 shares of Common Stock
to two individuals who were consultants to the Registrant in consideration of
services to be performed by them on behalf of the Registrant. Such shares were
issued in reliance on the exemption from registration provided by Section 4(2)
and Rule 701 under the Securities Act.
(d) Between May 2 and May 24, 1996, the Registrant issued an aggregate of
532,500 shares of Common Stock to certain individual investors in exchange for
an aggregate consideration of $1 million in reliance on the exemption from
registration provided by Rule 505 under the Securities Act.
(e) Between May 25, 1996 and June 6, 1996, the Registrant issued options
covering an aggregate of 37,275 shares of Common Stock to four individuals who
were consultants to the Registrant for an aggregate consideration of $3 and in
consideration of services performed or to be performed by them on behalf of the
Registrant. Such options were issued in reliance on the exemption from
registration provided by Section 4(2) and Rule 701 under the Securities Act.
(f) Between June 1, 1996 and August 18, 1997, the Registrant issued options
covering an aggregate of 640,491 shares of Common Stock to certain employees,
directors and consultants of the Registrant pursuant to the 1996 Option Plan and
in consideration of services rendered and to be rendered to the Registrant. The
options have exercise prices between approximately $1.88 per share and
approximately $7.62 per share with a weighted average exercise price of $2.37
per share. The Registrant granted the options in reliance on the exemption from
registration provided by Section 4(2) and Rule 701 under the Securities Act.
(g) Between August 5, 1996 and September 3, 1996, the Registrant issued an
aggregate of 223,650 shares of 1996 Series A Preferred Stock to certain
individual investors in exchange for an aggregate consideration of $603,750 in
reliance on the exemption from registration provided by Rule 506 under the
Securities Act.
(h) On January 2, 1997, the Registrant issued 24,601 shares of Common Stock
to Cree in accordance with the terms of an option previously issued to Cree.
Such shares were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.
(i) Between January 9, 1997 and March 17, 1997, the Registrant issued an
aggregate of 1,453,725 shares of 1997 Series B Preferred Stock to certain
individual and institutional investors in exchange for an aggregate
consideration of $5,016,375 in reliance on the exemption from registration
provided by Rule 506 under the Securities Act.
II-2
71
(j) In September 1997, the Registrant issued options covering 310,000
shares of Common Stock to certain employees, directors and consultants of the
Registrant pursuant to the 1997 Omnibus Plan and in consideration of services
rendered and to be rendered to the Registrant. The options have an exercise
price equal to the initial public offering price of the shares of Common Stock
being offered in this offering. The Registrant granted the options in reliance
on the exemption from registration provided by Section 4(2) and Rule 701 under
the Securities Act.
(k) At or prior to the consummation of this offering, the Registrant will
issue, in reliance on the exemption from registration provided by Section
3(a)(9) of the Securities Act, 1,677,375 shares of Common Stock upon the
automatic conversion of outstanding shares of 1996 Series A Preferred Stock and
1997 Series B Preferred Stock.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits listed in accordance with the number assigned to
each in the exhibit table of Item 601 of Regulation S-K are included in Part II
of this Registration Statement.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1 -- Form of Underwriting Agreement
3.1 -- Amended and Restated Articles of Incorporation of C3, Inc.*
3.2 -- Amended and Restated Bylaws of C3, Inc.*
4.1 -- Specimen Certificate of Common Stock*
4.2 -- Form of Representative's Warrant
5 -- Opinion of Womble Carlyle Sandridge & Rice, PLLC*
10.1 -- Consulting Agreement, dated May 1, 1997, between Kurt Nassau
and C3, Inc.
10.2 -- Letter Agreement, dated May 17, 1997, between Kurt Nassau
and C3, Inc.
10.3 -- Letter Agreement, dated February 17, 1997, between Howard
Rubin and C3, Inc.
10.4 -- Independent Contractor Agreement, dated May 1, 1997, between
Paula K. Berardinelli and C3, Inc.
10.5 -- Independent Contractor Agreement, dated September 3, 1997,
between C. Eric Hunter and C3, Inc.
10.6 -- Independent Contractor Agreement dated July 10, 1997 between
Ollin B. Sykes and C3, Inc.
10.7 -- Employment Agreement, dated June 1, 1997, between Jeff N.
Hunter and C3, Inc.
10.8 -- Employment Agreement, dated July 30, 1997, between Mark W.
Hahn and C3, Inc.
10.9 -- Employment Agreement, dated September 15, 1997, between
Martin J. DeRoy and C3, Inc.
10.10 -- Employment Agreement, dated March 1, 1997, between Thomas G.
Coleman and C3, Inc.
10.11 -- Amended and Restated Exclusive Supply Agreement, dated June
6, 1997, between Cree Research, Inc. and C3, Inc.**
10.12 -- Development Agreement, dated as of June 6, 1997, between
Cree Research, Inc. and C3, Inc.**
10.13 -- Letter Agreement, dated July 14, 1997, between Cree
Research, Inc. and C3, Inc.**
10.14 -- Letter Agreement, dated January 31, 1996, between Cree
Research, Inc. and C3, Inc.**
10.15 -- 1996 Stock Option Plan of C3, Inc.
10.16 -- 1997 Omnibus Stock Plan of C3, Inc.
10.17 -- Restricted Stock Agreement, dated June 30, 1995, between
Jeff N. Hunter and Paula K. Berardinelli and C3, Inc.
II-3
72
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.18 -- Shareholders Agreement, dated March 18, 1997, between General Electric Pension Trust, C. Eric Hunter and
C3, Inc.
10.19 -- Registrations Rights Agreement, dated March 18, 1997, between General Electric Pension Trust and C3,
Inc.
10.20 -- Agreement, dated September 24, 1997, between John M. Bachman, Inc. and C3, Inc.**
10.21 -- Agreement, dated September 12, 1997, between QMD, Inc. and C3, Inc.**
23.1 -- Consent of Womble Carlyle Sandridge & Rice, PLLC (included in Exhibit 5)*
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Kurt Leutzinger
23.4 -- Consent of David B. Stewart
23.5 -- Consent of Ollin B. Sykes
24 -- Power of Attorney (included on the signature page of this Registration Statement)
27 -- Financial Data Schedule
- ---------------
* To be filed by amendment.
** The registrant has requested that certain portions of this exhibit be given
confidential treatment.
(b) Financial Statement Schedules
All schedules are omitted because they are not required, they are not
applicable or the information is already included in the financial statements or
notes thereto.
ITEM 17. UNDERTAKINGS.
1. The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
2. The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
3. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Charlotte, State of North
Carolina, on September 30, 1997.
C3, INC.
By: /s/ JEFF N. HUNTER
------------------------------------
Jeff N. Hunter
President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Jeff N. Hunter and Mark W. Hahn, and each of them, the true and lawful
attorneys-in-fact and agents of the undersigned, with full power of substitution
and resubstitution, for and in the name, place and stead of the undersigned, in
any and all capabilities, to sign any and all amendments (including
post-effective amendments, exhibits thereto and other documents in connection
therewith) to this Registration Statement and any subsequent registration
statement filed by the registrant pursuant to Rule 462(b) of the Securities Act
of 1933, as amended, which relates to this Registration Statement, and to file
the same, with all exhibits thereto and all documents in connection therewith,
with the Securities and Exchange Commission, and hereby grants to such
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as the undersigned might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitute, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons on September 30,
1997 in the capacities indicated.
/s/ JEFF N. HUNTER /s/ FREDERICK A. RUSS
- ----------------------------------------------------- -----------------------------------------------------
Jeff N. Hunter Frederick A. Russ
President and Director Director
(principal executive officer)
/s/ KURT NASSAU /s/ MARK W. HAHN
- ----------------------------------------------------- -----------------------------------------------------
Kurt Nassau Mark W. Hahn
Director Chief Financial Officer
(principal financial and accounting officer)
/s/ HOWARD RUBIN
- -----------------------------------------------------
Howard Rubin
Director
II-5
1
EXHIBIT 1
2,000,000 SHARES
OF COMMON STOCK
C3, INC.
UNDERWRITING AGREEMENT
________________, 1997
Paulson Investment Company, Inc.
As Representative of the
Several Underwriters
811 SW Front Avenue, Suite 200
Portland, Oregon 97204
Gentlemen:
C3, Inc., a North Carolina corporation (the "Company"), proposes to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as Representative (the "Representative") an aggregate of
2,000,000 shares (the "Firm Shares") of the Company's common stock, no par value
("Common Stock"). The respective amounts of the Firm Shares to be so purchased
by the several Underwriters are set forth opposite their names in Schedule I
hereto. The Company also proposes to grant to the Representative an option to
purchase an aggregate up to 300,000 additional Shares, identical to the Firm
Shares, (the "Option Shares") as set forth below. The offer and sale of the Firm
Shares and the Option Shares pursuant to this Agreement is referred to as the
"Offering."
As the Representative, you have advised the Company (a) that you are
authorized to enter into this Agreement for yourself as the Representative and
on behalf of the several Underwriters, and (b) that the several Underwriters are
willing, acting severally and not jointly, to purchase the number of Firm Shares
set forth opposite their respective names in Schedule I. The Firm Shares and the
Option Shares (to the extent the aforementioned option is exercised) are herein
collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
2
Paulson Investment Company, Inc.
________________, 1997
Page 2
1. Representations and Warranties of the Company.
The Company represents and warrants to each of the
Underwriters as follows:
(a) A registration statement on Form S-1 (File No.333-_____)
with respect to the Shares has been carefully prepared by the Company
in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the Rules and Regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder and has been filed with the Commission. Copies
of such registration statement, including any amendments thereto, the
preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements
and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you. Such registration statement, together
with any registration statement filed by the Company pursuant to Rule
462(b) of the Act, herein referred to as the "Registration Statement,"
which shall be deemed to include all information omitted therefrom in
reliance upon Rule 430A and contained in the Prospectus referred to
below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date
of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed
prior to the time it becomes effective or filed pursuant to Rule 424(a)
under the Act that is delivered by the Company to the Underwriters for
delivery to purchasers of the Shares, together with the term sheet or
abbreviated term sheet filed with the Commission pursuant to Rule
424(b)(7) under the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein
referred to as a "Preliminary Prospectus."
(b) (i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of North Carolina, with corporate power and authority to own or lease
its properties and conduct its business as described in the
Registration Statement. The Company is duly qualified to transact
business in all jurisdictions in which the conduct of its business
requires such qualification.
(ii) Each corporation all of the equity securities of
which are directly or indirectly beneficially owned by the
Company and the business of which is material to the Company's
business (a "Subsidiary") has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with corporate power and authority to
own or lease its properties and conduct its business as described in
the Registration Statement. Each Subsidiary is duly qualified to
transact business as a foreign corporation in good standing in all
other jurisdictions in which the conduct of its business requires such
qualification. Except with respect to Subsidiaries described in the
Prospectus, the Company does
3
Paulson Investment Company, Inc.
________________, 1997
Page 3
not own and never has owned a controlling interest in any
corporation or other business entity that has or ever has had
any material assets, liabilities or operations.
(c) The outstanding shares of Common Stock of the Company and
each Subsidiary have been duly authorized and validly issued and are
fully paid and nonassessable and have been issued and sold by the
Company in compliance in all material respects with applicable
securities laws; the Shares have been duly authorized and when issued
and paid for as contemplated herein will be validly issued, fully paid
and nonassessable; and no preemptive rights of stockholders exist with
respect to any security of the Company or any Subsidiary or the issue
and sale thereof. Neither the filing of the Registration Statement nor
the offering or sale of the Shares as contemplated by this Agreement
gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common
Stock or other securities of the Company or any Subsidiary.
(d) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. The Common
Stock conforms to the description thereof contained in the Registration
Statement. The form of certificate for the Common Stock conforms to the
corporate law of the jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering
of the Shares nor instituted proceedings for that purpose. The
Registration Statement contains, and the Prospectus and any amendments
or supplements thereto will contain, all statements which are required
to be stated therein by, and will conform, to the requirements of the
Act and the Rules and Regulations. The Registration Statement and any
amendment thereto do not contain, and will not contain, any untrue
statement of a material fact and do not omit, and will not omit, to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus and any
amendments and supplements thereto do not contain, and will not
contain, any untrue statement of material fact; and do not omit, and
will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or
the Prospectus, or any such amendment or supplement, in reliance upon,
and in conformity with, written information furnished to the Company by
or on behalf of any Underwriter through the Representative,
specifically for use in the preparation thereof.
(f) The financial statements of the Company, together with
related notes thereto as set forth in the Registration Statement,
present fairly the financial position and the results of operations and
cash flows of the Company and Subsidiaries, if any, at the indicated
dates
4
Paulson Investment Company, Inc.
________________, 1997
Page 4
and for the indicated periods. Such financial statements have been
prepared in accordance with generally accepted principles of
accounting, consistently applied throughout the periods involved,
except as disclosed herein, and all adjustments necessary for a fair
presentation of results for such periods have been made. The summary
financial and statistical data of the Company included in the
Registration Statement present fairly the information shown therein and
such data have been compiled on a basis consistent with the financial
statements presented therein and the books and records of the Company.
(g) Deloitte & Touch LLP, who have certified certain of the
financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required
by the Act and the Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or,
to the knowledge of the Company, threatened against the Company or any
Subsidiary, if any, before any court or administrative agency or
otherwise which if determined adversely to the Company might result in
any material adverse change in the earnings, business, management,
properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company or any Subsidiary, if any, or to
prevent the consummation of the transactions contemplated hereby,
except as set forth in the Registration Statement.
(i) The Company and each Subsidiary, if any, has good and
marketable title to all of the properties and assets reflected in the
financial statements (or as described in the Registration Statement)
hereinabove described, subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such financial
statements (or as described in the Registration Statement) or which are
not material in amount. The Company and each Subsidiary, if any, occupy
its leased properties under valid and binding leases conforming in all
material respects to the description thereof set forth in the
Registration Statement.
(j) The Company and each Subsidiary, if any, has filed all
Federal, State, local and foreign income tax returns which have been
required to be filed and have paid all taxes indicated by said returns
and all assessments received by it to the extent that such taxes have
become due and are not being contested in good faith. All tax
liabilities have been adequately provided for in the financial
statements of the Company.
(k) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or
supplemented, there has not been any material adverse change or any
development involving a prospective material adverse change in or
affecting the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise), or prospects of
the Company or any Subsidiary, if any, whether or not occurring in the
ordinary course of business, and there has not been any material
5
Paulson Investment Company, Inc.
________________, 1997
Page 5
transaction entered into or any material transaction that is probable
of being entered into by the Company or any Subsidiary, if any, other
than transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be
amended or supplemented. The Company and each Subsidiary, if any, has
no material contingent obligations which are not disclosed in the
Company's financial statements included in the Registration Statement
or elsewhere in the Prospectus.
(l) The Company and each Subsidiary, if any, are not, nor,
with the giving of notice or lapse of time or both, will it be, in
violation of or in default under its respective articles of
incorporation or by-laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or
by which it, or any of its properties, is bound and which default is of
material significance in respect of the condition, financial or
otherwise of the Company or Subsidiary, if any, as the case may be, or
the business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company or
Subsidiary, if any, as the case may be. The execution and delivery of
this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict
with or result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust or
other agreement or instrument to which the Company or its Subsidiary,
if any, is a party, or of the articles of incorporation or bylaws of
the Company or any Subsidiary, if any, or any order, rule or regulation
applicable to the Company or any Subsidiary, if any, of any court or of
any regulatory body or administrative agency or other governmental body
having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated (except such additional steps as may
be required by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD") or such additional steps as may be necessary
to qualify the Shares for public offering by the Underwriters under
state securities or Blue Sky laws) has been obtained or made and is in
full force and effect.
(n) The Company or its Subsidiaries, if any, holds all
material patents, patent rights trademarks, trade names, copyrights,
trade secrets and licenses of any of the foregoing (collectively,
"Intellectual Property Rights") that are necessary to the conduct of
its businesses; there is no claim pending or, to the best knowledge of
the Company or any Subsidiary, if any, threatened against the Company
or any Subsidiary, if any, alleging any infringement of Intellectual
Property Rights, or any violation of the terms of any license relating
to Intellectual Property Rights, nor does the Company or any
Subsidiary, if any, know of any basis for any such claim. The Company
and each Subsidiary, if any, knows of
6
Paulson Investment Company, Inc.
________________, 1997
Page 6
no material infringement by others of Intellectual Property Rights
owned by or licensed to the Company or any Subsidiary. The Company or
its Subsidiaries, if any, has obtained, is in compliance in all
material respects with and maintains in full force and effect all
material licenses, certificates, permits, orders or other, similar
authorizations granted or issued by any governmental agency
(collectively "Government Permits") required to conduct its business as
it is presently conducted. All applications for additional Government
Permits described in the Prospectus as having been made by the Company
or its Subsidiaries, if any, have been properly and effectively made in
accordance with the applicable laws and regulations with respect
thereto and such applications constitute, in the best judgment of the
Company's management, those reasonably required to have been made in
order to carry out the Company's business plan as described in the
Prospectus. No proceeding to revoke, limit or otherwise materially
change any Government Permit has been commenced or, to the Company's
best knowledge or that of its Subsidiaries, if any, is threatened
against the Company or any Subsidiary, if any, with respect to
materials supplied to the Company or its Subsidiaries, if any, and the
Company has no reason to anticipate that any such proceeding will be
commenced against the Company or any Subsidiary, if any. Except as
disclosed or contemplated in the Prospectus, the Company and each
Subsidiary, if any, has no reason to believe that any pending
application for a Government Permit will be denied or limited in a
manner inconsistent with the Company's business plan as described in
the Prospectus.
(o) The Company and each Subsidiary, if any, is in all
material respects in compliance with all applicable Environmental Laws.
The Company and each Subsidiary, if any, has no knowledge of any past,
present or, as anticipated by the Company or its Subsidiaries, if any,
future events, conditions, activities, investigation, studies, plans or
proposals that (i) would interfere with or prevent compliance with any
Environmental Law by the Company or any Subsidiary, if any or (ii)
could reasonably be expected to give rise to any common law or other
liability, or otherwise form the basis of a claim, action, suit,
proceeding, hearing or investigation, involving the Company or any
Subsidiary, if any, and related in any way to Hazardous Substances or
Environmental Laws. Except for the prudent and safe use and management
of Hazardous Substances in the ordinary course of the Company's
business, (i) no Hazardous Substance is or has been used, treated,
stored, generated, manufactured or otherwise handled on or at any
Facility and (ii) to the Company's best knowledge or that of its
Subsidiaries, if any, no Hazardous Substance has otherwise come to be
located in, on or under any Facility. No Hazardous Substances are
stored at any Facility except in quantities necessary to satisfy the
reasonably anticipated use or consumption by the Company and its
Subsidiaries, if any. No litigation, claim, proceeding or governmental
investigation is pending regarding any environmental matter for which
the Company or any Subsidiary, if any, has been served or otherwise
notified or, to the knowledge of the Company or any Subsidiary, if any,
threatened or asserted against the Company or any Subsidiary, if any,
or the officers or directors of the Company or of any Subsidiary, if
any, in their capacities as such, or any Facility or the Company's
business.
7
Paulson Investment Company, Inc.
________________, 1997
Page 7
There are no orders, judgments or decrees of any court or of any
governmental agency or instrumentality under any Environmental Law
which specifically apply to the Company or any Subsidiary, if any, any
Facility or any of the Company's operations. Neither the Company nor
any Subsidiary, if any, has received from a governmental authority or
other person (i) any notice that it is a potentially responsible person
for any Contaminated site or (ii) any request for information about a
site alleged to be Contaminated or regarding the disposal of Hazardous
Substances. There is no litigation or proceeding against any other
person by the Company or any Subsidiary, if any, regarding any
environmental matter. The Company has disclosed in the Prospectus or
made available to the Underwriters and their counsel true, complete and
correct copies of any reports, studies, investigations, audits,
analysis, tests or monitoring in the possession of or initiated by the
Company or any Subsidiary, if any, pertaining to any environmental
matter relating to the Company, any Subsidiary, if any, its past or
present operations or any Facility.
For the purposes of the foregoing paragraph, "Environmental
Laws" means any applicable federal, state or local statute, regulation, code,
rule, ordinance, order, judgment, decree, injunction or common law pertaining in
any way to the protection of human health or the environment, including without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Toxic Substances
Control Act, the Clean Air Act, the Federal Water Pollution Control Act and any
similar or comparable state or local law; "Hazardous Substance" means any
hazardous, toxic, radioactive or infectious substance, material or waste as
defined, listed or regulated under any Environmental Law; "Contaminated" means
the actual existence on or under any real property of Hazardous Substances, if
the existence of such Hazardous Substances triggers a requirement to perform any
investigatory, remedial, removal or other response action under any
Environmental Laws or if such response action legally could be required by any
governmental authority; "Facility" means any property currently owned, leased or
occupied by the Company.
(p) Neither the Company or any Subsidiary, if any, nor to the
Company's best knowledge or that of any Subsidiary, if any, any of its
affiliates, has taken or intends to take, directly or indirectly, any
action designed to cause or result in, or which has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate
the sale or resale of the Shares.
(q) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
(r) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary
8
Paulson Investment Company, Inc.
________________, 1997
Page 8
to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability
for assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(s) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is adequate for the conduct of their
respective businesses and the value of their respective properties and
as is customary for companies engaged in similar industries.
(t) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Section 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such
qualification.
(u) The Company and each Subsidiary, if any, is in material
compliance with all laws, rules, regulations, orders of any court or
administrative agency, operating licenses or other requirements imposed
by any governmental body applicable to it, including, without
limitation, all applicable laws, rules, regulations, licenses or other
governmental standards applicable to the industries in which the
Company and its Subsidiaries, if any, operates; and the conduct of the
business of the Company and each Subsidiary, if any, as described in
the Prospectus, will not cause the Company or any Subsidiary, if any,
to be in violation of any such requirements.
(v) The Representative's Warrants (as defined in Paragraph (d)
of Section 2 hereof) have been authorized for issuance to the
Representative and will, when issued, possess rights, privileges, and
characteristics as represented in the most recent form of
Representative's Warrants filed as an exhibit to the Registration
Statement; the securities to be issued upon exercise of the
Representative's Warrants, when issued and delivered against payment
therefor in accordance with the terms of the Representative's Warrants,
will be duly and validly issued, fully paid, nonassessable and free of
preemptive rights, and all corporate action required to be taken for
the authorization and issuance of the Representative's
9
Paulson Investment Company, Inc.
________________, 1997
Page 9
Warrants, and the securities to be issued upon their exercise, have
been validly and sufficiently taken.
(w) Except as disclosed in the Prospectus, neither the Company
or any Subsidiary, if any, nor any of its officers, directors or
affiliates have caused any person, other than the Underwriters, to be
entitled to reimbursement of any kind, including, without limitation,
any compensation that would be includable as underwriter compensation
under the NASD's Corporate Financing Rule with respect to the offering
of the Shares, as a result of the consummation of such offering based
on any activity of such person as a finder, agent, broker, investment
adviser or other financial service provider.
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set
forth, the Company agrees to sell to the Underwriters and each
Underwriter agrees, severally and not jointly, to purchase, at a price
of $__________ per Share (representing a 6.2% discount from the initial
public offering price of the Shares), the number of Firm Shares set
forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be
made in New York Clearing House funds and, at the option of the
Representative, by certified or bank cashier's checks drawn to the
order of the Company or bank wire to an account specified by the
Company against either uncertificated delivery of the securities
comprising the Firm Shares or of certificates therefor (which delivery,
if certificated, shall take place in such location in New York, New
York as may be specified by the Representative) to the Representative
for the several accounts of the Underwriters. Such payment is to be
made at the offices of the Representative, at the address set forth on
the first page of this agreement, at 7:00 a.m., Pacific time, on the
third business day after the date of this Agreement or at such other
time and date not later than five business days thereafter as you and
the Company shall agree upon, such time and date being herein referred
to as the "Closing Date." (As used herein, "business day" means a day
on which the New York Stock Exchange is open for trading and on which
banks in New York are open for business and not permitted by law or
executive order to be closed.) Except to the extent uncertificated
securities comprising the Firm Shares are delivered at closing, the
certificates for the securities comprising the Firm Shares will be
delivered in such denominations and in such registrations as the
Representative requests in writing not later than the second full
business day prior to the Closing Date, and will be made available for
inspection by the Representative at least one business day prior to the
Closing Date.
10
Paulson Investment Company, Inc.
________________, 1997
Page 10
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants an option to the
Representative to purchase the Option Shares at the price per Share as
set forth in the first paragraph of this Section 2. The option granted
hereby may be exercised in whole or in part by giving written notice
(i) at any time before the Closing Date and (ii) thereafter (on one or
more occasions) within 45 days after the date of this Agreement, by the
Representative to the Company setting forth the number of Option Shares
as to which the Representative is exercising the option, the names and
denominations in which the securities comprising the Option Shares are
to be registered and the time and date at which certificates
representing the securities comprising such Shares are to be delivered.
The time and date at which certificates for the securities comprising
the Option Shares are to be delivered shall be determined by the
Representative but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event
prior to the Closing Date (such time and date being herein referred to
as the "Option Closing Date"). If the date of exercise of the option is
three or more days before the Closing Date, the notice of exercise
shall set the Closing Date as the Option Closing Date. The option with
respect to the Option Shares granted hereunder may be exercised only to
cover over-allotments in the sale of the Firm Shares by the
Underwriters. The Representative may cancel such option at any time
prior to its expiration by giving written notice of such cancellation
to the Company. To the extent, if any, that the option is exercised,
payment for the Option Shares shall be made on the Option Closing Date
in New York Clearing House funds and, at the option of the
Representative, by certified or bank cashier's check drawn to the order
of the Company for the Option Shares to be sold by the Company or bank
wire to an account specified by the Company against delivery of
certificates therefor at the offices of the Representative set forth on
the first page of this Agreement.
(d) In addition to the sums payable to the Representative as
provided elsewhere herein, the Representative shall be entitled to
receive at the Closing, for itself alone and not as the Representative
of the Underwriters, as additional compensation for its services,
purchase warrants (the "Representative's Warrants") for the purchase of
up to 200,000 Shares at a price of $__________ per Unit (120% of the
initial public offering price of the Shares), upon the terms and
subject to adjustment and conversion as described in the form of
Representative's Warrants filed as an exhibit to the Registration
Statement.
3. Offering by the Underwriters.
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon as the Representative deems it
advisable to do so. The Firm Shares are to be initially offered to the public at
the initial public offering price set forth in the Prospectus. The
Representative may from time to time thereafter change the public offering price
and other selling
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Page 11
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Representative will offer them to the public on the
foregoing terms.
It is also understood that the Underwriters have reserved an
aggregate of Firm Shares for sale at the initial public offering price to
directors, director nominees, officers, employees and certain individuals
associated with the Company, its directors, director nominees, officers and
employees. Any reserved Shares that are not so purchased will be offered by the
Underwriters to the general public on the same basis as the balance of the Firm
Shares.
It is further understood that you will act as the
Representative for the Underwriters in the offering and sale of the Shares in
accordance with an Agreement Among Underwriters entered into by you and the
several other Underwriters.
4. Covenants of the Company.
The Company covenants and agrees with the several Underwriters
that:
(a) The Company will (i) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely
file with the Commission under Rule 424(b) of the Rules and Regulations
a Prospectus in a form approved by the Representative containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations, and (ii) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representative
shall not previously have been advised and furnished with a copy or to
which the Representative shall have reasonably objected in writing or
which is not in compliance with the Rules and Regulations.
(b) The Company will advise the Representative promptly (i)
when the Registration Statement or any post-effective amendment thereto
shall have become effective, (ii) of receipt of any comments from the
Commission, (iii) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending
the use of the Prospectus and to obtain as soon as possible the lifting
thereof, if issued.
(c) The Company will cooperate with the Representative in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representative may reasonably have designated
in writing and will make such applications, file such documents, and
furnish such information as may be reasonably required for that
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Page 12
purpose, provided the Company shall not be required to qualify as a
foreign corporation or to file a general consent to service of process
in any jurisdiction where it is not now so qualified or required to
file such a consent. The Company will, from time to time, prepare and
file such statements, reports, and other documents, as are or may be
required to continue such qualifications in effect for so long a period
as the Representative may reasonably request for distribution of the
Shares.
(d) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary
Prospectus as the Representative may reasonably request. The Company
will deliver to, or upon the order of, the Representative during the
period when delivery of a Prospectus is required under the Act, as many
copies of the Prospectus in final form, or as thereafter amended or
supplemented, as the Representative may reasonably request. The Company
will deliver to the Representative at or before the Closing Date, two
signed copies of the Registration Statement and all amendments thereto
including all exhibits filed therewith, and will deliver to the
Representative such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that
may reasonably be requested), and of all amendments thereto, as the
Representative may reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission
thereunder, so as to permit the completion of the distribution of the
Shares as contemplated in this Agreement and the Prospectus. If during
the period in which a prospectus is required by law to be delivered by
an Underwriter or dealer, any event shall occur as a result of which,
in the judgment of the Company or in the reasonable opinion of the
Underwriters, it becomes necessary to amend or supplement the
Prospectus in order to make the statements therein, in the light of the
circumstances existing at the time the Prospectus is delivered to a
purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company
promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus
so that the Prospectus as so amended or supplemented will not, in the
light of the circumstances when it is so delivered, be misleading, or
so that the Prospectus will comply with the law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration
Statement, an earnings statement (which need not be audited) in
reasonable detail, covering a period of at least 12 consecutive months
beginning after the effective date of the Registration Statement, which
earnings statement shall satisfy the requirements of Section 11(a) of
the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
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(g) The Company will, for a period of five years from the
Closing Date, deliver to the Representative copies of annual reports
and copies of all other documents, reports and information furnished by
the Company to its stockholders or filed with any securities exchange
pursuant to the requirements of such exchange or with the Commission
pursuant to the Act or the Exchange Act. The Company will deliver to
the Representative similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations,
which are not consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible
into or exchangeable or exercisable for shares of Common Stock or
derivative of Common Stock (or agreement for such) will be made for a
period of one year after the date of this Agreement, directly or
indirectly, by the Company otherwise than hereunder or with the prior
written consent of the Representative, other than pursuant to
outstanding convertible securities, stock option and warrants or
pursuant to employee benefit plans in effect as of the date hereof, in
each case as disclosed in the Prospectus.
(i) The Company will use its best efforts to list, subject to
notice of issuance, the Common Stock on The Nasdaq National Market.
(j) The Company has caused each officer and director and each
person who owns, beneficially or of record, 5% or more of the
outstanding shares of the Company's Common Stock (or securities
convertible into or exercisable for Common Stock) outstanding
immediately prior to this offering to furnish to you, on or prior to
the date of this Agreement, a letter or letters, in form and substance
satisfactory to the Underwriters ("Lockup Agreements"), pursuant to
which each such person shall agree (A) not to offer to sell, sell,
contract to sell, sell short or otherwise dispose of any shares of
Common Stock or other capital stock of the Company, or any other
securities convertible, exchangeable or exercisable for Common Stock or
derivatives of Common Stock owned by such person, or request the
registration for the offer or sale of any of the foregoing (or as to
which such person has the right to direct the disposition of) for a
period of one year after the date of this Agreement, directly or
indirectly, except with the prior written consent of the
Representative. The Lockup Agreements shall also provide that, after
the expiration of the lockup period, each person shall give you prior
notice with respect to any offers to sell, sales, contracts to sell,
short sales or other dispositions of Common Stock pursuant to Rule 144
under the Act or any similar provisions enacted subsequent to the date
of this Agreement for a period of two years from the date of this
Agreement.
(k) The Company shall apply the net proceeds of its sale of
the Shares as set forth in the Prospectus and shall file such reports
with the Commission with respect to the sale of
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Page 14
the Shares and the application of the proceeds therefrom as may be
required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a
manner as would require the Company or any of its Subsidiaries, if any,
to register as an investment company under the Investment Company Act
of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar for the Common Stock.
(n) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company.
5. Costs and Expenses.
(a) The Representative shall be entitled to receive from the
Company, for itself alone and not as the Representative of the
Underwriters, a nonaccountable expense allowance collectively equal to
1% of the aggregate public offering price of Shares sold to the
Underwriters in connection with the Offering. The Representative shall
be entitled to withhold this allowance on the Closing Date (less the
$35,000 advance against such amount that has been previously paid by
the Company) with respect to Shares delivered on the Closing Date and
to require the Company to make payment of this allowance on the Option
Closing Date with respect to Shares delivered on the Option Closing
Date.
(b) In addition to the payment described in Paragraph (a) of
this Section 5, the Company will pay all costs, expenses and fees
incident to the performance of the obligations of the Company under
this Agreement, including, without limiting the generality of the
foregoing, the following: accounting fees of the Company; the fees and
disbursements of counsel for the Company; the cost of electronic
filing, printing and delivering to, or as requested by, the
Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Underwriters' Selling
Memorandum, the Underwriters' Invitation Letter, the Listing
Application, the Blue Sky Survey and any supplements or amendments
thereto; the filing fees of the Commission; the filing fees incident to
securing any required review by the National Association of Securities
Dealers, Inc. (the "NASD") of the terms of the sale of the Shares; the
Listing Fee of The Nasdaq National Market; the reasonable costs of
conducting a due diligence investigation of the principals of the
Company by a firm acceptable to the Representative, and the expenses,
including the fees and disbursements of counsel for the Underwriters,
incurred in connection with the qualification of the Shares under state
securities or Blue Sky laws. Any transfer
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Page 15
taxes imposed on the sale of the Shares to the several Underwriters
will be paid by the Company. The Company agrees to pay all costs and
expenses of the Underwriters, including the fees and disbursements of
counsel for the Underwriters, incident to the offer and sale of
directed shares of the Common Stock by the Underwriters to employees
and persons having business relationships with the Company. The Company
shall not, however, be required to pay for any of the Underwriters'
expenses (other than those related to qualification under NASD
regulation and state securities or Blue Sky laws) except that, if this
Agreement shall not be consummated, then the Company shall reimburse
the several Underwriters for reasonable accountable out-of-pocket
expenses, including fees and disbursements of counsel, reasonably
incurred in connection with investigating, marketing and proposing to
market the Shares or in contemplation of performing their obligations
hereunder (less the $35,000 advance that has been paid by the Company);
but the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from
the sale by them of the Shares. In the event this Agreement is not
consummated, any nonaccountable portion of the $35,000 advance shall be
promptly returned to the Company.
6. Conditions of Obligations of the Underwriters.
The several obligations of the Underwriters to purchase the
Firm Shares on the Closing Date and the Option Shares, if any, on the Option
Closing Date are subject to the accuracy, as of the Closing Date or the Option
Closing Date, as the case may be, of the representations and warranties of the
Company contained herein, and to the performance by the Company of their
covenants and obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall
have been made, and any request of the Commission for additional
information (to be included in the Registration Statement or otherwise)
shall have been disclosed to the Representative and complied with to
their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to
time, shall have been issued and no proceedings for that purpose shall
have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission and no injunction, restraining order, or
order of any nature by a Federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares.
(b) The Representative shall have received on the Closing Date
or the Option Closing Date, as the case may be, the opinion of Womble
Carlyle Sandridge & Rice, PLLC, counsel for the Company, dated the
Closing Date or the Option Closing Date, as the case may be, addressed
to the Underwriters (and stating that it may be relied upon by counsel
to the Underwriters), substantially as follows:
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(i) The Company and the Subsidiaries, if any, each
has been duly organized and is validly existing as a
corporation in good standing under the laws of its respective
jurisdictions of incorporation, with corporate power and
authority to own or lease its properties and conduct its
business as described in the Registration Statement; each of
the Company and the Subsidiaries, if any, is duly qualified to
transact business in all jurisdictions in which the conduct of
its business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon
the business of the Company and its Subsidiaries, if any.
(ii) The Company has authorized and outstanding
capital stock as set forth under the caption "Capitalization"
in the Prospectus; the outstanding shares of the Company's
Common Stock have been duly authorized and validly issued and
are fully paid and nonassessable; all issued and outstanding
shares of the capital stock of the Company and the
Subsidiaries, if any, and all other securities issued and sold
or exchanged by the Company and its Subsidiaries, if any, have
been issued and sold or exchanged in compliance in all
material respects with applicable securities laws and
regulations; all of the securities of the Company conform to
the description thereof contained in the Prospectus; the
certificate for the Common Stock, assuming it is in the form
filed with the Commission, is in due and proper form; the
shares of Common Stock to be sold by the Company pursuant to
this Agreement, including shares of Common Stock to be sold as
a part of the Option Shares, have been duly authorized and,
upon issuance and delivery thereof as contemplated in this
Agreement and the Registration Statement, will be validly
issued, fully paid and nonassessable; no preemptive rights of
stockholders exist with respect to any of the Common Stock of
the Company or the issuance or sale thereof pursuant to any
applicable statute or the provisions of the Company's charter
documents or, to such counsel's best knowledge, pursuant to
any contractual obligation. The Representative's Warrants have
been authorized for issuance to the holders of the
Representative's Warrants, and will, when issued, possess
rights, privileges, and characteristics as represented in the
most recent form of Representative's Warrants filed as an
exhibit to the Registration Statement; the securities to be
issued upon exercise of the Representative's Warrants, when
issued and delivered against payment therefor in accordance
with the terms of the Representative's Warrants, will be duly
and validly issued, fully paid, nonassessable and free of
preemptive rights, and all corporate action required to be
taken for the authorization and issuance of the
Representative's Warrants, and the securities to be issued
upon their exercise, has been validly and sufficiently taken.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no
outstanding securities of the Company convertible or
exchangeable into or evidencing the right to purchase or
subscribe for
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Page 17
any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any
character obligating the Company to issue any shares of its
capital stock or any securities convertible or exchangeable
into or evidencing the right to purchase or subscribe for any
shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel, no holder of any
securities of the Company or any other person has the right,
contractual or otherwise, which has not been satisfied or
effectively waived, to cause the Company to sell or otherwise
issue to them, or to permit them to underwrite the sale of,
any of the Shares or the right to have any Common Stock or
other securities of the Company included in the Registration
Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act
of any shares of Common Stock or other securities of the
Company.
(iv) The Registration Statement has become
effective under the Act and, to the best of the knowledge of
such counsel, no stop order proceedings with respect thereto
have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and
each amendment or supplement thereto comply as to form in all
material respects with the requirements of the Act and the
applicable rules and regulations thereunder (except that such
counsel need express no opinion as to the financial statements
therein).
(vi) The statements under the captions "Business -
Dependence on Cree and Cree Technology," "Business -
Intellectual Property of the Company," "Description of
Securities" and "Shares Eligible for Future Sale" in the
Prospectus and in Item 14 of the Registration Statement,
insofar as such statements constitute a summary of documents
referred to therein or matters of law, fairly summarize in all
material respects the information called for with respect to
such documents and matters.
(vii) Such counsel does not know of any contracts or
documents required to be filed as exhibits to the Registration
Statement or described in the Registration Statement or the
Prospectus which are not so filed or described as required,
and such contracts and documents as are summarized in the
Registration Statement or the Prospectus are fairly summarized
in all material respects.
(viii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the
Company or any Subsidiary, if any, except as set forth in the
Registration Statement.
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Page 18
(ix) To the best knowledge of such counsel, except
as described in the Registration Statement or the Prospectus,
the Company is not party to any agreement giving rise to any
obligation by the Company to pay any third-party royalties or
fees of any kind whatsoever with respect to any technology
developed, employed, used or licensed by the Company.
(x) The execution and delivery of this Agreement
and the consummation of the transactions herein contemplated
do not and will not conflict with or result in a breach of any
of the terms or provisions of, or constitute a default under,
the articles of incorporation or bylaws of the Company or any
Subsidiary, if any, or any agreement or instrument known to
such counsel to which the Company or any Subsidiary, if any,
is a party or by which the Company or any Subsidiary, if any,
may be bound.
(xi) This Agreement has been duly authorized,
executed and delivered by the Company; and the
Representative's Warrants have been duly authorized, executed
and delivered by the Company.
(xii) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in
connection with the execution and delivery of this Agreement
and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by
state securities and Blue Sky laws as to which such counsel
need express no opinion) except such as have been obtained or
made, specifying the same.
(xiii) The Company is not, and will not become, as a
result of the consummation of the transactions contemplated by
this Agreement, and application of the net proceeds therefrom
as described in the Prospectus, required to register as an
investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters
governed by the laws of any state other than North Carolina or Federal laws on
local counsel in such jurisdictions, provided that in each case such counsel
shall state that they believe that they and the Underwriters are justified in
relying on such other counsel. In addition to the matters set forth above, the
opinion of Womble Carlyle Sandridge & Rice, PLLC, shall also include a statement
to the effect that nothing has come to the attention of such counsel that has
caused them to believe that (i) the Registration Statement, at the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) and as of the Closing
Date or the Option Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
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________________, 1997
Page 19
misleading, and (ii) the Prospectus, or any supplement thereto, on the date it
was filed pursuant to the Rules and Regulations and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made, not
misleading (except that such counsel need express no view as to financial
statements and statistical information therein).
(c) The Representative shall have received from counsel for
the Company, an opinion dated the Closing Date or the Option Closing
Date, as the case may be, (and stating that it may be relied upon by
counsel to the Underwriters), regarding intellectual property matters
in the form to be mutually agreed by the Company and the
Representative.
(d) The Representative shall have received from Grover T.
Wickersham, P.C., counsel for the Underwriters, an opinion dated the
Closing Date or the Option Closing Date, as the case may be,
substantially to the effect specified in subparagraphs (i), (iv) and
(v) of Paragraph (b) of this Section 6. In rendering such opinion,
Grover T. Wickersham, P.C. may rely as to all matters governed other
than by the laws of the State of California or Federal laws on the
opinion of counsel referred to in Paragraph (b) of this Section 6. In
addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the
attention of such counsel that has caused them to believe that (i) the
Registration Statement, or any amendment thereto, as of the time it
became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act)
as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as
the case may be,
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Page 20
contained an untrue statement of a material fact or omitted to state a
material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except
that such counsel need express no view as to financial statements,
schedules and statistical information therein). With respect to such
statement, Grover T. Wickersham, P.C. may state that their belief is
based upon the procedures set forth therein, but is without independent
check and verification.
(e) The Representative shall have received at or prior to the
Closing Date from Grover T. Wickersham, P.C. a memorandum or summary,
in form and substance satisfactory to the Representative, with respect
to the qualification for offering and sale by the Underwriters of the
Shares under the state securities or Blue Sky laws of such
jurisdictions as the Representative may reasonably have designated to
the Company.
(f) The Representative, on behalf of the several Underwriters,
shall have received, on each of the dates hereof, the Closing Date and
the Option Closing Date, as the case may be, a letter dated the date
hereof, the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to the Representative, of
Deloitte & Touche LLP, confirming that they are independent public
accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating that in their opinion the
financial statements examined by them and included in the Registration
Statement comply in form in all material respects with the applicable
accounting requirements of the Act and the related published Rules and
Regulations and containing such other statements and information as are
ordinarily included in accountants' "comfort letters" to Underwriters
with respect to the financial statements and certain financial and
statistical information contained in the Registration Statement and
Prospectus.
(g) The Representative shall have received on the Closing Date
or the Option Closing Date, as the case may be, a certificate or
certificates of the President and the Chief Financial Officer of the
Company to the effect that, as of the Closing Date or the Option
Closing Date, as the case may be, each of them severally represents as
follows:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness
of the Registration Statement has been issued, and no
proceedings for such purpose have been taken or are, to his or
her knowledge, contemplated by the Commission;
(ii) The representations and warranties of the
Company contained in Section 1 hereof are true and correct as
of the Closing Date or the Option Closing Date, as the case
may be;
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(iii) All filings required to have been made pursuant
to Rules 424 or 430A under the Act have been made;
(iv) He has carefully examined the Registration
Statement and the Prospectus and, in his opinion, as of the
effective date of the Registration Statement, the statements
contained in the Registration Statement were true and correct,
and such Registration Statement and Prospectus did not omit to
state a material fact required to be stated therein or
necessary in order to make the statements therein not
misleading, and since the effective date of the Registration
Statement, no event has occurred which should have been set
forth in a supplement to or an amendment of the Prospectus
which has not been so set forth in such supplement or
amendment; and
(v) Since the respective dates as of which
information is given in the Registration Statement and
Prospectus, there has not been any material adverse change or
any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise,
of the Company or the earnings, business, management,
properties, assets, rights, operations, condition (financial
or otherwise) or prospects of the Company, whether or not
arising in the ordinary course of business.
(h) The Company shall have furnished to the Representative
such further certificates and documents confirming the representations
and warranties, covenants and conditions contained herein and related
matters as the Representative may reasonably have requested.
(i) The Common Stock has been approved for quotation upon
notice of issuance on the Nasdaq National Market.
(j) The Lockup Agreements described in Section 4(j) are in
full force and effect.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if they are
in all material respects satisfactory to the Representative and to Grover T.
Wickersham, P.C., counsel for the Underwriters.
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this Agreement
to be fulfilled, the obligations of the Underwriters hereunder may be terminated
by the Representative by notifying the Company of such termination in writing or
by telegram at or prior to the Closing Date or the Option Closing Date, as the
case may be.
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In such event, the Company and the Underwriters shall not be
under any obligation to each other (except to the extent provided in Sections 5
and 8 hereof).
7. Conditions of the Obligations of the Company.
The obligations of the Company to sell and deliver the portion
of the Shares required to be delivered as and when specified in this Agreement
are subject to the conditions that at the Closing Date or the Option Closing
Date, as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act, against any losses, claims, damages or
liabilities to which such Underwriter or any such controlling person
may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; and will
reimburse each Underwriter and each such controlling person upon demand
for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or
proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter
or controlling person is a party to any action or proceeding; provided,
however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement, or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representative specifically
for use in the preparation thereof. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement and each person, if
any, who controls the Company within the meaning of the Act, against
any losses, claims, damages or liabilities to which the Company or any
such director, officer or controlling person may become subject under
the Act or otherwise, insofar as such
23
Paulson Investment Company, Inc.
________________, 1997
Page 23
losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, or (ii) the omission or the
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading in
the light of the circumstances under which they were made; and will
reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in
connection with investigating or defending any such loss, claim,
damage, liability, action or proceeding; provided, however, that each
Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or
omission or alleged omission has been made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or such amendment
or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative
specifically for use in the preparation thereof. This indemnity
agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to this Section 8, such person
(the "indemnified party") shall promptly notify the person against whom
such indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available
to any party who shall fail to give notice as provided in this Section
8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially
prejudiced by the failure to give such notice, but the failure to give
such notice shall not relieve the indemnifying party or parties from
any liability which it or they may have to the indemnified party for
contribution or otherwise than on account of the provisions of Section
8(a) or (b). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party and shall
pay as incurred the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any indemnified party shall
have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the indemnifying party shall pay as
incurred (or within 30 days of presentation) the fees and expenses of
the counsel retained by the indemnified party in the event (i) the
indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them or (iii) the indemnifying
party shall have failed to assume
24
Paulson Investment Company, Inc.
________________, 1997
Page 24
the defense and employ counsel acceptable to the indemnified party
within a reasonable period of time after notice of commencement of the
action. It is understood that the indemnifying party shall not, in
connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the reasonable fees and expenses of more
than one separate firm for all such indemnified parties. Such firm
shall be designated in writing by you in the case of parties
indemnified pursuant to Section 8(a) and by the Company in the case of
parties indemnified pursuant to Section 8(b). The indemnifying party
shall not be liable for any settlement of any proceeding effected
without its written consent but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any
judgment in any pending or threatened claim, action or proceeding of
which indemnification may be sought hereunder (whether or not any
indemnified party is an actual or potential party to such claim, action
or proceeding) unless such settlement, compromise or consent includes
an unconditional release of each indemnified party from all liability
arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party
under Section 8(a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
referred to therein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of
such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in
such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as
any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the
Company bears to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on
the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
the Company on the one hand or the Underwriters on the other
25
Paulson Investment Company, Inc.
________________, 1997
Page 25
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
8(d). The amount paid or payable by an indemnified party as a result of the
losses, claims, damages or liabilities (or actions or proceedings in respect
thereof) referred to above in this Section 8(d) shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter, and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or
amendment thereto, each party against whom contribution may be sought
under this Section 8 hereby consents to the jurisdiction of any court
having jurisdiction over any other contributing party, agrees that
process issuing from such court may be served upon him or it by any
other contributing party and consents to the service of such process
and agrees that any other contributing party may join him or it as an
additional defendant in any such proceeding in which such other
contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for
which an indemnified party is entitled to indemnification or
contribution under this Section 8 shall be paid by the indemnifying
party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred. The indemnity and contribution
agreements contained in this Section 8 and the representations and
warranties of the Company set forth in this Agreement shall remain
operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or
any persons controlling the Company, (ii) acceptance of any Shares and
payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be
entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 8.
26
Paulson Investment Company, Inc.
________________, 1997
Page 26
9. Default by Underwriters.
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion of the
Shares which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
the Representative of the Underwriters, shall use your reasonable efforts to
procure within 36 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the Firm Shares or Option Shares, as the case may
be, which the defaulting Underwriter or Underwriters failed to purchase. If
during such 36 hours you, as such Representative, shall not have procured such
other Underwriters, or any others, to purchase the Firm Shares or Option Shares,
as the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of Shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of Firm Shares or Option Shares, as the case may be, with
respect to which such default shall occur equals or exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representative of the Underwriters will have the right, by written notice
given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
the Representative, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. Notices.
All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Paulson
Investment Company, Inc., 811 SW Front Avenue, Portland, Oregon 97204,
Attention: Chester L.F. Paulson; with a copy to Grover T. Wickersham, P.C., 430
Cambridge Avenue, Suite 100, Palo Alto, California 94306, Attention: Debra K.
Weiner; if to the Company, to C3, Inc., 3800 Gateway Boulevard, Suite 310,
Morrisville, North Carolina 27560, Attention: Jeff N. Hunter; with a copy to
Womble Carlyle Sandridge & Rice, PLLC, 2505 Meridian Parkway, Suite 300, Durham,
North Carolina 27713, Attention: Deborah H. Hartzog.
27
Paulson Investment Company, Inc.
________________, 1997
Page 27
11. Termination.
This Agreement may be terminated by you by notice to the
Company as follows:
(a) at any time prior to the earlier of (i) the time the
Shares are released by you for sale by notice to the Underwriters, or
(ii) 11:30 a.m. on the first business day following the date of this
Agreement;
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
subsidiaries taken as a whole, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or
international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your reasonable judgment, make it impracticable
to market the Shares or to enforce contracts for the sale of the
Shares, (iii) the Dow Jones Industrial Average shall have fallen by 15
percent or more from its closing price on the day immediately preceding
the date that the Registration Statement is declared effective by the
Commission, (iv) suspension of trading in securities generally on the
New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading)
for securities on either such Exchange, (v) the enactment, publication,
decree or other promulgation of any statute, regulation, rule or order
of any court or other governmental authority which in your opinion
materially and adversely affects or may materially and adversely affect
the business or operations of the Company, (vi) declaration of a
banking moratorium by United States or New York State authorities,
(vii) any downgrading in the rating of the Company's debt securities by
any "nationally recognized statistical rating organization" (as defined
for purposes of Rule 436(g) under the Exchange Act); (viii) the
suspension of trading of the Common Stock by the Commission on the
Nasdaq National Market or (ix) the taking of any action by any
governmental body or agency in respect of its monetary or fiscal
affairs which in your reasonable opinion has a material adverse effect
on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
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Paulson Investment Company, Inc.
________________, 1997
Page 28
12. Successors.
This Agreement has been and is made solely for the benefit of
the Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. Information Provided by Underwriters.
The Company and the Underwriters acknowledge and agree that
the only information furnished or to be furnished by any Underwriter to the
Company for inclusion in any Prospectus or the Registration Statement consists
of the information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), legends required by
Item 502(d) of Regulation S-K under the Act and the information under the
caption "Underwriting" in the Prospectus.
14. Miscellaneous.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Oregon. All disputes relating to this
Underwriting Agreement shall be adjudicated before a court located in Multnomah
County, Oregon to the exclusion of all other courts that might have
jurisdiction.
29
Paulson Investment Company, Inc.
________________, 1997
Page 29
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
C3, INC.
By:
-------------------------
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
PAULSON INVESTMENT COMPANY, INC.,
as Representative of the Several Underwriters
listed on Schedule I
By:
------------------------------------
30
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
Paulson Investment Company, Inc.
---------------------
Total 2,000,000
=====================
1
EXHIBIT 4.2
THIS WARRANT HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
AND IS NOT TRANSFERABLE
EXCEPT AS PROVIDED HEREIN
C3, INC.
PURCHASE WARRANTS
Issued to:
PAULSON INVESTMENT COMPANY, INC.
Exercisable to Purchase
200,000 Shares of Common Stock
of
C3, INC.
Void after __________, 2002
2
This is to certify that, for value received and subject to the terms
and conditions set forth below, the Warrant holder (hereinafter defined) is
entitled to purchase, and the Company promises and agrees to sell and issue to
the Warrant holder, at any time on or after __________, 1998 and on or before
____________, 2002, up to 200,000 shares of Common Stock (hereinafter defined)
at the Exercise Price (hereinafter defined).
This Warrant Certificate is issued subject to the following terms and
conditions:
1. Definitions of Certain Terms. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
(c) "Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, no par value, of the
Company.
(e) "Company" means C3, Inc., a North Carolina corporation.
(f) "Company's Expenses" means any and all expenses payable by the
Company or the Warrantholder in connection with an offering described in Section
6 hereof, except Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration
Statement is declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one share of Common Stock (or Securities obtainable in lieu of one
Share) upon exercise of Warrants as determined from time to time pursuant to the
provisions hereof. The initial Exercise Price is $_____ per Share (120% of the
initial public offering price of a Share).
(i) "Offering" means the public offering of shares of Common Stock
made pursuant to the Registration Statement.
(j) "Participating Underwriter" means any underwriter participating
in the sale of the Securities pursuant to a registration under Section 6 of this
Warrant Certificate.
(k) "Registration Statement" means the Company's registration
statement (File No.333-_________), as amended on the Closing Date.
(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
2
3
(m) "Securities" means the securities obtained or obtainable upon
exercise of the Warrant or securities obtained or obtainable upon exercise,
exchange, or conversion of such securities.
(n) "Share" means, as the context requires, either (i) one share of
Common Stock which is one of the shares of Common Stock offered to the Public
pursuant to the Registration Statement or (ii) an identical share of Common
Stock for which the Warrant is initially exercisable.
(o) "Warrant Certificate" means a certificate evidencing the
Warrant.
(p) "Warrantholder" means a record holder of the Warrant or
Securities. The initial Warrantholder is Paulson Investment Company, Inc.
(q) "Warrantholder's Expenses" means the sum of (i) the aggregate
amount of cash payments made to an underwriter, underwriting syndicate, or agent
in connection with an offering described in Section 6 hereof multiplied by a
fraction the numerator of which is the aggregate sales price of the Securities
sold by such underwriter, underwriting syndicate, or agent in such offering on
behalf of the Warrantholder and the denominator of which is the aggregate sales
price of all of the securities sold by such underwriter, underwriting syndicate,
or agent in such offering and (ii) all out-of-pocket expenses of the
Warrantholder, except for the reasonable fees and disbursements of one firm
retained as legal counsel on behalf of all of the Warrantholders that will be
paid by the Company.
(r) "Warrant" means the warrant evidenced by this certificate, any
similar certificate issued in connection with the Offering, or any certificate
obtained upon transfer or partial exercise of the Warrant evidenced by any such
certificate.
2. Exercise of Warrants. All or any part of the Warrant may be
exercised commencing on the first anniversary of the Effective Date and ending
at 5 p.m. Pacific Time on the fifth anniversary of the Effective Date by
surrendering this Warrant Certificate, together with appropriate instructions,
duly executed by the Warrantholder or by its duly authorized attorney, at the
office of the Company, 3800 Gateway Boulevard, Suite 310, Morrisville, North
Carolina 27560, or at such other office or agency as the Company may designate.
Upon receipt of notice of exercise, the Company shall immediately instruct its
transfer agent to prepare certificates for the Securities to be received by the
Warrantholder upon completion of the Warrant exercise. When such certificates
are prepared, the Company shall notify the Warrantholder and deliver such
certificates to the Warrantholder or as per the Warrantholder's instructions
immediately upon payment in full by the Warrantholder, in lawful money of the
United States, of the Exercise Price payable with respect to the Securities
being purchased. If the Warrantholder shall represent and warrant that all
applicable registration and prospectus delivery requirements for their sale have
been complied with upon sale of the Securities received upon exercise of the
Warrant, such certificates shall not bear a legend with respect to the
Securities Act of 1933.
3
4
If fewer than all the Securities purchasable under the Warrant are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to this Warrant Certificate, evidencing that portion of the
Warrant not exercised. The Securities to be obtained on exercise of the Warrant
will be deemed to have been issued, and any person exercising the Warrants will
be deemed to have become a holder of record of those Securities, as of the date
of the payment of the Exercise Price.
3. Adjustments in Certain Events. The number, class, and price of
Securities for which this Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are
divided into a greater number of shares or a dividend in stock is paid on the
Common Stock, the number of shares of Common Stock for which the Warrant is then
exercisable will be proportionately increased and the Exercise Price will be
proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant is then exercisable will be
proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this subsection 3(a)
will be made with the intent and, as nearly as practicable, the effect that
neither the percentage of the total equity of the Company obtainable on exercise
of the Warrants nor the price payable for such percentage upon such exercise
will be affected by any event described in this subsection 3(a).
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a condition of such
change, lawful and adequate provision will be made so that the holder of this
Warrant Certificate will have the right thereafter to receive upon the exercise
of the Warrant the kind and amount of shares of stock or other securities or
property to which he would have been entitled if, immediately prior to such
event, he had held the number of shares of Common Stock obtainable upon the
exercise of the Warrant. In any such case, appropriate adjustment will be made
in the application of the provisions set forth herein with respect to the rights
and interest thereafter of the Warrantholder, to the end that the provisions set
forth herein will thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the exercise of the Warrant. The Company will not permit any change in its
capital structure to occur unless the issuer of the shares of stock or other
securities to be received by the holder of this Warrant Certificate, if not the
Company, agrees to be bound by and comply with the provisions of this Warrant
Certificate.
(c) When any adjustment is required to be made in the number of
shares of Common Stock, other securities, or the property purchasable upon
exercise of the Warrant, the Company will promptly determine the new number of
such shares or other securities or property purchasable upon exercise of the
Warrant and (i) prepare and retain on file a statement describing
4
5
in reasonable detail the method used in arriving at the new number of such
shares or other securities or property purchasable upon exercise of the Warrant
and (ii) cause a copy of such statement to be mailed to the Warrantholder within
thirty (30) days after the date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant, but the Company will pay,
in lieu of fractional shares, a cash payment therefor on the basis of the mean
between the bid and asked prices of the Common Stock in the over-the-counter
market or the last sale price on a national securities exchange or on The Nasdaq
National Market on the day immediately prior to exercise.
(e) If securities of the Company or securities of any subsidiary of
the Company are distributed pro rata to holders of Common Stock, such number of
securities will be distributed to the Warrantholder or his assignee upon
exercise of his rights hereunder as such Warrantholder or assignee would have
been entitled to if this Warrant Certificate had been exercised prior to the
record date for such distribution. The provisions with respect to adjustment of
the Common Stock provided in this Section 3 will also apply to the securities to
which the Warrantholder or his assignee is entitled under this subsection 3(e).
(f) Notwithstanding anything herein to the contrary, there will be
no adjustment made hereunder on account of the sale of the Common Stock or other
Securities purchasable upon exercise of the Warrant.
4. Reservation of Securities. The Company agrees that the number of
shares of Common Stock or other Securities sufficient to provide for the
exercise of the Warrant upon the basis set forth above will at all times during
the term of the Warrant be reserved for issuance upon exercise of the Warrant.
5. Validity of Securities. All Securities delivered upon the exercise
of the Warrant will be duly and validly issued in accordance with their terms,
and the Company will pay all documentary and transfer taxes, if any, in respect
of the original issuance thereof upon exercise of the Warrant.
6. Registration of Securities Issuable on Exercise of Warrant
Certificate.
(a) The Company will register the Securities with the Commission
pursuant to the Act so as to allow the unrestricted sale of the Securities to
the public from time to time commencing on the first anniversary of the
Effective Date and ending at 5:00 p.m. Pacific Time on the fifth anniversary of
the Effective Date (the "Registration Period"). The Company will also file such
applications and other documents necessary to permit the sale of the Securities
to the public during the Registration Period in those states in which the shares
of Common Stock were qualified for sale in the Offering or such other states as
the Company and the Warrantholder agree to. In order to comply with the
provisions of this Section 6(a), the Company is not required to file more than
one registration statement. The Company will initially register the Securities
5
6
on the registration statement to be used by the Company for the Offering. No
registration right of any kind, "piggyback" or otherwise, will last longer than
five years from the Closing Date.
(b) The Company will pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct
of the registration, including the contents of the registration, will be
entirely in the control and at the discretion of the Company. The Company will
file such post-effective amendments and supplements as may be necessary to
maintain the currency of the registration statement during the period of its
use. In addition, if the Warrantholder participating in the registration is
advised by counsel that the registration statement, in their opinion, is
deficient in any material respect, the Company will use its best efforts to
cause the registration statement to be amended to eliminate the concerns raised.
(d) The Company will furnish to the Warrantholder the number of
copies of a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Act, and such other documents as it may reasonably
request in order to facilitate the disposition of Securities owned by it.
(e) The Company will, at the request of Warrantholders holding at
least 50 percent of the then outstanding Warrants, (i) furnish an opinion of the
counsel representing the Company for the purposes of the registration pursuant
to this Section 6, addressed to the Warrantholders and any Participating
Underwriter, (ii) furnish an appropriate letter from the independent public
accountants of the Company, addressed to the Warrantholders and any
Participating Underwriter, and (iii) make representations and warranties to the
Warrantholders and any Participating Underwriter. A request pursuant to this
subsection (e) may be made on three occasions. The documents required to be
delivered pursuant to this subsection (e) will be dated within ten days of the
request and will be, in form and substance, equivalent to similar documents
furnished to the underwriters in connection with the Offering, with such changes
as may be appropriate in light of changed circumstances.
7. Indemnification in Connection with Registration.
(a) If any of the Securities are registered, the Company will
indemnify and hold harmless each selling Warrantholder, any person who controls
any selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which any Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it will reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in
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respect thereof), arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained, on the effective date thereof,
in any such registration statement or any preliminary prospectus or final
prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any case to the extent
that any loss, claim, damage, or liability arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in any registration statement, preliminary prospectus, final prospectus, or
any amendment or supplement thereto, in reliance upon and in conformity with
written information furnished by a Warrantholder for use in the preparation
thereof. The indemnity agreement contained in this subparagraph (a) will not
apply to amounts paid to any claimant in settlement of any suit or claim unless
such payment is first approved by the Company, such approval not to be
unreasonably withheld.
(b) Each selling Warrantholder, as a condition of the Company's
registration obligation, will indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in said registration statement, any preliminary or final
prospectus, or other filing, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, preliminary or final prospectus, or other filing, or
amendment or supplement, in reliance upon and in conformity with written
information furnished by such Warrantholder for use in the preparation thereof;
provided, however, that the indemnity agreement contained in this subparagraph
(b) will not apply to amounts paid to any claimant in settlement of any suit or
claim unless such payment is first approved by the Warrantholder, such approval
not to be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under
subparagraphs (a) or (b) above of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made against an
indemnifying party, notify the indemnifying party of the commencement thereof;
but the omission to notify the indemnifying party will not relieve it from any
liability that it may have to any indemnified party otherwise than under
subparagraphs (a) and (b).
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(d) If any such action is brought against any indemnified party and
it notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. Restrictions on Transfer. This Warrant Certificate and the Warrant
may not be sold, transferred, assigned or hypothecated for a one-year period
after the Effective Date except to underwriters of the Offering or to
individuals who are either a partner or an officer of such an underwriter or by
will or by operation of law. The Warrant may be divided or combined, upon
request to the Company by the Warrantholder, into a certificate or certificates
evidencing the same aggregate number of Warrants.
9. No Rights as a Stockholder. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant, be entitled to
any rights of a shareholder of the Company but will, upon written request to the
Company, be entitled to receive such quarterly or annual reports as the Company
distributes to its stockholders.
10. Notice. Any notices required or permitted to be given hereunder
will be in writing and may be served personally or by mail; and if served will
be addressed as follows:
If to the Company:
3800 Gateway Boulevard, Suite 310
Morrisville, North Carolina 27560
Attn: President
If to the Warrantholder:
at the address furnished by the
Warrantholder to the Company for the
purpose of notice.
Any notice so given by mail will be deemed effectively given 48 hours
after mailing when deposited in the United States mail, registered or certified
mail, return receipt requested, postage prepaid and addressed as specified
above. Any party may by written notice to the other specify a different address
for notice purposes.
11. Applicable Law. This Warrant Certificate will be governed by and
construed in accordance with the laws of the State of Oregon, without reference
to conflict of laws principles thereunder. All disputes relating to this Warrant
Certificate shall be tried before the courts of
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Oregon located in Multnomah County, Oregon to the exclusion of all other courts
that might have jurisdiction.
Dated as of ___________, 1997
C3, INC.
By:
-------------------------------------
Its:
-------------------------------------
Agreed and Accepted as of _______, 1997.
PAULSON INVESTMENT COMPANY, INC.
By:
-------------------------------------
Its:
-------------------------------------
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EXHIBIT 10.1
AGREEMENT
This Agreement ("Agreement") effective the 1st day of May, 1997, is
made by and between C3, INC., (the "Company"), and Dr. Kurt Nassau (hereinafter
called "Director").
W I T N E S S E T H:
The Company is currently in the business of developing, manufacturing,
producing, designing and marketing (i) silicon carbide materials as gemstones
and (ii) gemological testing instruments (collectively the "Business") and may
expand or improve its existing products and technology and may expand into new
applications for silicon carbide. The Company desires the Director to play an
integral part in the development of key intellectual property for the Company
during which endeavor he will have access to confidential and proprietary
information of the Company and develop additional intellectual property and
inventions which shall be confidential and proprietary to the Company. The
Company has, effective as of the date hereof, granted to Dr. Kurt Nassau
additional options for the Company's common stock as consideration for such
services.
NOW, therefore, in consideration of the premises hereto. the mutual
covenants and conditions herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto do
hereby agree as follows:
1. Noncompetition Covenants of Director. In recognition of Director's
acknowledgment that the services to be rendered to the Company are of a special
and unusual character which have a unique value to the Company, loss of which
cannot adequately be compensated by damages in any action at law, in view of the
unique value to the Company of the services which the Director shall render to
the company and the confidential information to be obtained by or disclosed to
Director; and as a material inducement to the Company to grant to the Director
certain options for such services to be rendered to the Company by the Director,
Director covenants and agrees as follows:
(a) Period of Covenant. The period of this noncompetition
covenant (the "Noncompetition Period") shall begin on the date of
termination of Dr. Nassau's service to the Company a director and shall
continue for one year.
(b) Nature and Area of Competition. Director agrees that for
the duration of the Noncompetition Period, Director shall not, in the
Territory (as defined below), directly or indirectly, serve as an
owner, officer, director, engineer, designer, salesperson or manager
for any business (i) which engages in the Business, or (ii) which
engages in any additional business in which the Company is engaged at
the time of the commencement of the Noncompetition Period for purposes
of this Agreement. "Territory" shall mean (i) throughout the world, but
if such area is determined by judicial action to be too broad, then
(ii) the United States of America.
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2. Discoveries are Property of the Company. Director agrees that all
discoveries, developments, designs, improvements, inventions, formula,
processes, techniques, program, know how, data, brand identifications or other
product identifiers (whether or not used by the Company as a trademark) or other
information of possible technical or commercial importance relating to the
development, manufacture, production, design or marketing of any consumer or
industrial applications for silicon carbide made by Director alone or with
others at any time, during Director's access to the Company's Proprietary
Information ("Developments") shall be the sole property of the Company and
deemed "work made for hire" (as defined in Section 101 of the U.S. Copyright Act
of 1976, as amended). If, for any reason, any such Development does not qualify
as a work made for hire, Director agrees to assign, and hereby assigns, to the
Company, all right, title and interest (including, but not limited to all patent
rights, common law and statutory trademark rights and copyrights) in and to such
Development, free and clear of any liens, claims or encumbrances (except as
otherwise contemplated herein). To the extent any of the Developments created by
Director hereunder incorporates or utilizes the proprietary rights of any third
party, Director represents and warrants that Director's use of such proprietary
rights is pursuant to an existing license from the owner thereof (with full
right to sublicense), and Director and the Company expressly acknowledge that
the assignment contemplated by this Agreement will instead be a royalty-free
sublicense with respect to any licensed components of the Developments. Director
also agrees that Director w ill neither (i) adopt nor use any such Developments
(or any material portion of such Developments) for Director's use, nor (ii)
present any such Developments (or any material portion of such Developments) to
any third party (including, but not limited to, any customer of the Company) for
such party's use; provided, however that nothing in this Agreement shall be
construed to restrict Director's continued use of (1) proprietary rights in
materials that are the subject of an existing license from the owner thereof
(with full right to sublicense), or (2) materials considered to be generic or in
the public domain. Director agrees to assist the Company in every necessary way
to obtain or enforce any patents, copyrights or any proprietary rights relating
to the Developments and to execute all documents and applications necessary to
vest in the Company full legal title in such developments, and Director agrees
to continue this assistance after the termination of this Agreement.
Furthermore, Director hereby designates and appoints the Company and its duly
authorized officers and agents as Director's agents and attorneys-in-fact to
execute and file any certificates, applications or documents and to do all other
lawful acts necessary to protect the company's rights in the Developments.
Director expressly acknowledges that the foregoing power of attorney is coupled
with an interest and is therefore irrevocable and shall survive Director's
termination, death or incompetency.
3. Reasonableness of Restrictions. Director has carefully read and
considered the provisions of this Agreement and, having done so, agrees that the
restrictions set forth in this Agreement (including, but not limited to, the
time period of restriction and the geographical areas of restriction set forth
in Section 2) are fair and reasonable and are reasonably required for the
protection of the interests of the Company. Notwithstanding the foregoing, in
the event any part of the covenants set forth in Sections 1 or 2 shall be held
to be invalid or unenforceable, the remaining parts thereof shall nevertheless
continue to be valid and enforceable as though the invalid or unenforceable
parts had not been included therein. In the event that any provision of
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Section 2 relating to time period and/or geographical areas of restriction shall
be declared by a court of competent jurisdiction to exceed the maximum time
period and/or geographical areas of restriction such court deems reasonable and
enforceable, said time period and/or geographical areas of restriction shall be
deemed to become and thereafter be the maximum time period and/or geographical
areas of restriction that such court deems reasonable and enforceable.
4. Accounting for Profits. Director covenants and agrees that if
Director violates any of the covenants or agreements under Sections 1 or 2, the
Company shall be entitled to an accounting and repayment of all profits,
compensation, commissions, remuneration or benefits that Director directly or
indirectly has realized and/or may realize as a result of, growing out of or in
connection with any such violation; such remedy shall be in addition to and not
in limitation of any injunctive relief or other rights or remedies that the
Company is or may be entitled at law, in equity or under this Agreement.
5. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the parties hereto with the respect
to the subject matter contained herein, and supersedes and cancels any
and all prior agreements between the parties hereto relating to the
subject matter. The parties hereto acknowledge that no promises,
statements or representations, other than those contained or referred
to in this Agreement, have been made to induce any party to enter into
this Agreement The parties hereto confirm that they have each read this
Agreement in its entirety, that they have had the opportunity to
consult with legal counsel, and that they understand the nature and
effect of this Agreement. The recitals set forth above are incorporated
herein by reference.
(b) Injunction. In the event of a breach or threatened breach
by Director of the provisions of this Agreement, the Company shall, in
addition to any other rights and remedies available to it, at law or
otherwise, be entitled to an injunction to be issued by any court of
competent jurisdiction enjoining and restraining Director from
committing any present violation or future violation of this Agreement.
(c) Assignment. The rights and obligations of the Company
hereunder shall inure to the benefit of and shall be binding upon its
successors and assigns. This Agreement is personal to Director.
Director may not assign or delegate any of Director's rights or
obligations hereunder, and any attempted assignment or delegation shall
be null and void.
(d) Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of North Carolina
without reference to the choice of law principles thereof. If any
dispute arises hereunder, the parties hereto agree that any suit
brought by either party shall be heard in the courts of North Carolina
or any federal court sitting in North Carolina, and the parties hereto
consent to the jurisdiction of such courts.
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(e) Waiver. Failure to insist upon strict compliance with any
provision hereof shall not be deemed a waiver of such provision or any
other provision hereof.
(f) Amendment. This Agreement may not be modified except by an
agreement in writing executed by both of the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
COMPANY DIRECTOR
C3, Inc.
By: /s/ Jeff N. Hunter /s/ Dr. Kurt Nassau (SEAL)
------------------------------- ------------------------
Jeff N. Hunter, President Dr. Kurt Nassau
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EXHIBIT 10.2
May 17, 1997
Dr. Kurt Nassau
_________________________
_________________________
Dear Kurt:
Because of the increasing time commitment C3 has for your gemological expertise,
I propose that we enter into a twelve month consulting relationship. These
services would be provided outside of the normal duties as a Director of C3.
It is my understanding that a retainer of $1,000 per month will secure two
consulting days per month. Upon approval by the Board of Directors, these
services would begin retroactive to April 1997 and end March 1998 (see attached
consulting rate terms for details).
The consulting services would include, but are not limited to, the following:
- - Training staff in the science of color and its application to
moissanite;
- - Consulting on key gemological characteristics;
- - Providing public relations support through seminars; and,
- - Others as may arise.
Thank you for your continued support of C3 and synthetic moissanite gemstones.
Sincerely,
/s/ Jeff N. Hunter
Jeff N. Hunter
The signatures below indicate agreement by C3 and Nassau Consultants to this
twelve month consulting relationship:
/s/ Jeff Hunter /s/ Kurt Nassau
- ------------------------------- ---------------------------------
Jeff Hunter (C3) Kurt Nassau (Nassau Consultants)
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CONSULTING RATE TERMS FOR NASSAU CONSULTANTS
A minimum of $1,000 per month (equal to two consulting days) plus expenses. C3
will receive a statement each month from Nassau Consultants showing the charges
and/or accumulated time. Payment will be made within 15 days after receipt of
your statement.
In addition to the statement of services, a calendar of open days for the
following two months will be included to facilitate scheduling of meetings.
At the end of six months:
- - Time spent in excess of two days per month will be paid by C3.
- - If more than two days of un-used consulting time accumulate then the
next month's fee may be waived or the contract may be extended without
a monthly fee until the accumulated time is used.
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EXHIBIT 10.3
February 17, 1997
W. Howard Rubin
GemDialogue Systems, Inc.
__________________________
__________________________
Dear Howard:
In response to your letter of January 1, 1997, C3 is delighted to enter into a
twelve month consulting relationship with your services through GemDialogue
Systems, Inc. (GemDialogue). These services are provided outside of the normal
duties as a Director of C3.
It is my understanding that a retainer of $ 1,000 per month will secure two
consulting days per month (see Attachment A: GemDialogue Consulting Rate Chart).
Payment will be made within 15 days after the end of each month. These services
would begin effective February 1997 and end January 1998.
The consulting services include, but are not limited to, the following:
- - Facilitating plans for arrangement of work areas as one would for a
diamond or gem company;
- - Training staff in the language and tools of the jewelry trade;
- - Explaining the demographics of the jewelry industry as it relates to
distribution chains; or providing public relations support through
seminars, and,
- - Others as may arise.
Thank you for your continued support of C3 and synthetic moissanite gemstones.
Sincerely,
/s/ Jeff Hunter
Jeff Hunter
Enclosure: Attachment A: GemDialogue Consulting Rate Chart
The signatures below indicate agreement by C3 and GemDialogue Systems to this
twelve month consulting relationship:
/s/ Jeff Hunter /s/ Howard Rubin
- --------------------------------- -------------------------------------
Jeff Hunter (C3) Howard Rubin for GemDialogue
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ATTACHMENT A
GEMDIALOGUE CONSULTING RATE CHART
DAILY RATE + EXPENSES PAYMENT TERMS COMMENTS
$1000.00 PER 8 MR DAY BILLING AFTER
UP TO THREE DAYS. ASSIGNMENT OR EVERY 30 TRAVEL EXPENSES MUST
DAYS. (Whichever is first) BE PAID, BUT BILLING IS
NOT ADDED FOR TRAVEL
TIME UNLESS RETURNING
THE SAME DAY.
$800.00 PER DAY IF DEPOSIT OF 25% OF SAME AS ABOVE
ASSIGNMENT IS LONGER PROPOSAL ESTIMATE IN
THAN THREE DAYS. ADVANCE AND BILLING AS
ABOVE.
$500.00 PER DAY IN RETAINER OF $1000.00 PER TRAVEL EXPENSES AS
ADDITION TO MONTH FOR LENGTH OF ABOVE. CONTRACT TIME
RETAINER* FEE, IF ON A CONTRACT WITH BECOMES CUMULATIVE IF
RETAINER BASIS AND ADJUSTMENTS MADE NOT USED DURING MONTH.
EXTRA SERVICES ARE BASED ON 2 DAYS OF IF MORE THAN TWO DAYS
NEEDED AS LISTED SERVICE PER MONTH. OF TIME IS ACCUMULATED
ABOVE. RETAINER CONTRACTS THE NEXT MONTH'S FEE
MAY BE MADE FOR MAY BE WAIVED OR THE
RETAINER BASED MINIMUMS OF 6 MONTHS. CONTRACT MAY BE
CHARGES ARE OUR EXTENDED WITHOUT
LOWEST CHARGE. MONTHLY FEE UNTIL
ACCUMULATED TIME IS
USED. NO WAIVER OF FEES
BEFORE THREE MONTHS.
*RETAINER BASED ACCOUNTS WILL RECEIVE STATEMENTS EACH MONTH SHOWING
CHARGES AND/OR ACCUMULATED TIME.
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EXHIBIT 10.4
INDEPENDENT CONTRACTOR AGREEMENT
THIS INDEPENDENT CONTRACTOR AGREEMENT, made effective as of the 1st day
of May, 1997 by and between C3, INC., a North Carolina corporation (the
"Company"), and Paula K. Berardinelli (the "Contractor").
RECITALS:
A. The Company is engaged in the business of designing, developing,
manufacturing and selling moissanite gemstones (the "Business").
B. The Contractor served as Vice President of Sales and Marketing for
the Company but has taken a leave of absence from such position.
C. The Company wishes the Contractor to continue to assist the Company
in providing marketing and sales, organization and management and other
consulting services for the Business.
D. The Contractor desires to provide such services to the Company on
the terms and for the compensation set for herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. ENGAGEMENT. The Company hereby engages the Contractor as a
nonexclusive contractor to perform the Services (as defined below) subject to
the terms and conditions of this Agreement, and the Contractor hereby accepts
such engagement for and in consideration of the compensation hereinafter
provided and agrees to use his best efforts performing the Services. The
Contractor shall perform her obligations hereunder in compliance with the terms
of this Agreement and any and all applicable laws and regulations. The
Contractor acknowledges that this is a nonexclusive engagement by the Company
and that the Company retains the right to appoint additional contractors as the
Company. in its sole and unrestricted judgment, may from time to time determine
to be in the best interests of the Company without liability or obligation to
the Contractor.
2. SERVICES.
(a) The Contractor agrees to provide marketing and sales,
organization and management and other consulting services for the
Company and perform other duties related thereto as the Company may
determine from time to time (the "Services"). The Contractor warrants
to the Company that the Services will be performed in a professional,
timely and workmanlike manner.
(b) The Contractor shall execute a Nondisclosure and Noncompetition
Agreement in substantially the form attached hereto as Exhibit A
concurrent with the execution of this Agreement.
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3. LICENSES; TOOLS AND MATERIALS. The Contractor shall be responsible
for obtaining, at the Contractor's own expense, all licenses, permits and bonds
as may be required by any federal, state or local law or regulation for the
performance of the Contractor's duties hereunder. The Company shall be
responsible for supplying at its cost all necessary tools and materials to be
used by the Contractor.
4. LIMITATIONS. Nothing in this Agreement shall be construed to give
the Contractor authority to represent the Company before any court or
governmental or regulatory agency without the express prior written
authorization of the Company. In addition, all files, books, accounts, records
and other information of any nature, however recorded or stored, and related to
the Company (the "Records") shall at all times belong to the Company and to the
extent possessed by the Contractor hereunder, such possession shall be for the
benefit of and as agent for the Company. The Contractor's possession of the
Records is at the will of the Company and is solely for the purpose of enabling
the Contractor to perform his obligations hereunder. The Records shall be
readily separable from the records of the Contractor.
5. TERM. The term of this Agreement shall commence on the date hereof
and shall continue thereafter through and including the close of business on
April 30, 1998. At the end of the term, the Contractor shall have the option, in
her sole discretion, to return to the Company in her prior position or a
position equivalent to her prior position as Vice President of Sales and
Marketing. Notwithstanding the foregoing, the Company may terminate this
Agreement for "cause," as defined herein, by giving written notice at least 30
days in advance of its desire to terminate this Agreement for cause. The Company
shall be deemed to have cause for terminating the Contractor's engagement in the
event the Contractor (i) demonstrates any dishonesty or engages in any act of
moral turpitude, (ii) improperly performs or fails to perform the Services
described herein, (iii) causes intentional damage to substantial property of the
Company, or (iv) is unable to perform the Services because of death or a
disability which renders her unable to perform the Services for 30 consecutive
calendar days.
6. FEES. As compensation for the performance of the Services, the
Company shall pay to the Contractor the amounts agreed to from time to time by
the Company and the Contractor. No amounts (including, without limitation,
social security, federal and state withholding taxes) shall be withheld or
otherwise subtracted from the compensation paid to the Contractor pursuant to
this Section 6 unless required by law. In addition, the Contractor shall be
reimbursed for all expenses incurred by the Contractor on behalf (and with the
prior written authorization) of the Company within 15 days from the date the
Contractor delivers an itemized report of such expenses, together with receipts
or other evidence of payment reasonably satisfactory to the Company and its
accountant.
7. INDEMNIFICATION. The Contractor shall defend, release, indemnify and
hold the Company and its directors, officers, shareholders, employees and agents
and the personal representatives and assigns of each, harmless from and against
any and all claims, suits, liability, costs and expenses, including, without
limitation, attorneys' fees and expenses, in connection with any act
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or omission of the Contractor, his employees and/or agents in connection with
the provision of the Services.
8. INSURANCE REPRESENTATIONS; WORKPLACE SAFETY. The Contractor agrees
to maintain liability, worker's compensation, errors and omission and/or other
insurance such amounts and with such carriers as the Company may reasonably
request, each of which policies shall, upon request of the Company, name the
Company as an additional insured. In addition, the Contractor shall be solely
responsible for workplace safety, shall maintain the workplace in accordance
with industry standards and shall comply with all governmental (including
federal, state and local) regulations.
9. NOTICES. All notices, demands, requests or other communications
which may be or are required to be given, served or sent by one party to the
other party pursuant to this Agreement shall be in writing and shall be hand
delivered or mailed by certified mail return receipt requested, postage prepaid,
or sent by telefax, addressed as follows:
If to the Company:
P.O. Box 13533
Research Triangle Park, NC 27709
Attention: Jeff Hunter, President
Telecopy: (919) 468-0486
If to the Contractor:
______________________________
______________________________
______________________________
Each party may designate by notice in writing a new address to which
any notice, demand, request or communication may thereafter be delivered, given
or sent. Documents delivered by hand shall be deemed to have been received upon
delivery; documents sent by telefax shall be deemed to have been received when
the answer back is received; and documents sent by mail shall be deemed to have
been received upon their receipt or at such time as delivery is refused by the
addressee upon presentation.
10. SECURITY. The Contractor agrees that she will at all times comply
with all security regulations in effect from time to time at the Company's
premises or applicable outside such premises to materials belonging to the
Company. The Contractor agrees not to use or disclose to any party any
information, systems, equipment, ideas, processor or methods of operation
observed in connection with the performance of his obligations hereunder.
11. INDEPENDENT CONTRACTOR.
(a) Acknowledgment by the Contractor. The Contractor acknowledges
and agrees that the Contractor will be treated, vis-a-vis the Company,
as an independent contractor and
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not as an employee, agent or authorized representative of the Company.
The Contractor shall have no authority to bind the Company to any
contract, agreement or obligation whatsoever. The acts of the
Contractor shall in no way constitute the acts of the Company, and the
Contractor shall not represent to any third party that the Contractor
has any express or implied authority to bind the Company to any such
contract, agreement or obligation.
(b) Tax Matters. Because the Contractor is an independent
contractor, the Company will not withhold from any compensation paid to
the Contractor any amounts for federal or state income taxes, or social
security (FICA) for the Contractor, nor will the Company pay any social
security or unemployment tax with respect to the Contractor. Such taxes
are the responsibility of the Contractor. The Contractor agrees to
indemnify and hold the Company (including its employees, officers,
directors, agents, subsidiaries or affiliates) harmless, and hereby
indemnifies and hold the Company harmless, from and against any damage,
claim, assessment, interest charge or penalty incurred by or charged to
the Company as a result of any claim, cause of action or assessment by
any federal or state government or agency for any nonpayment or late
payment by the Contractor of any tax or contribution based upon
compensation paid hereunder or because the Company did not withhold any
taxes from compensation paid hereunder.
(c) No insurance. Consistent with the Contractor's status as an
independent contractor, the Company will not provide the Contractor
with any company, individual or group insurance policy or any other
kind of insurance coverage whatsoever.
12. ASSIGNMENT. Neither this Agreement or any interest herein or any
rights hereunder shall be sold or assigned by the Contractor, nor shall any of
the duties of the Contractor hereunder be delegated to any person, firm or
corporation, without prior notice to and consent of the Company.
13. INTELLECTUAL PROPERTY. Any inventions, copyrights or other
intellectual property created or developed by the Contractor or the Contractor's
employees, or associates or subcontractors during the term of this Agreement
related to the work performed under the Agreement shall be assigned to the
Company.
14. STANDARD OF CARE. The Contractor warrants that she will exercise
due diligence to performance Services in a professional manner in compliance
with all applicable laws and regulations and the highest ethical standards. In
addition, the Contractor represents and warrants that any information which she
may supply the Company during the term of this Agreement (i) will have been
obtained by the Contractor lawfully and firm publicly available sources and (ii)
will not be confidential or proprietary to any third person. Nothing in this
Agreement shall be construed as authorizing or encouraging the Contractor to
obtain information for the Company in violation of any third party's rights to
copyright or trade secret protection.
15. MISCELLANEOUS.
(a) The provisions of this Agreement may be waived, altered,
amended or repealed, in whole or in part, only on the written consent
of the Company and the Contractor.
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5
(b) Section headings and numbers used in this Agreement are
included for convenience of reference only, and, if there is any
conflict between any such numbers and headings and the text of this
Agreement, the text shall control. Each of the statements set forth in
the premises of this Agreement is incorporated into the Agreement as a
valid and binding representation of the party or parties to whom it
relates.
(c) This Agreement shall be governed by and construed in accordance
with the laws of the State of North Carolina without reference to the
choice of law principles thereof. If any dispute arises hereunder, the
parties hereto agree that any suit brought by either party shall be
heard in the courts of North Carolina or any federal court sitting in
North Carolina, and the parties hereto consent to the jurisdiction of
such courts.
(d) This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
(e) This Agreement, together with the Confidential Disclosure
Agreement herein referenced represent the entire agreement of the
parties with respect to the subject matter hereof and supersede in
their entirety any and all prior written or oral agreements with
respect thereto.
(f) Neither party shall have the right under this Agreement to use
the name, trademark or trade names of the other, unless prior written
approval has been obtained. Any such approval or authorization shall
cease upon termination of this Agreement.
IN WITNESS WHEREOF, the duly authorized representations of the parties
have executed this Independent Contractor Agreement as of the date and year
first above written.
COMPANY
C3, Inc.
By: /s/ Jeff Hunter
-------------------------------------
Jeff Hunter, President
CONTRACTOR
/s/ Paula K. Berardinelli (SEAL)
-------------------------------------
Paula K. Berardinelli
5
1
EXHIBIT 10.5
INDEPENDENT CONTRACTOR AGREEMENT
THIS INDEPENDENT CONTRACTOR AGREEMENT, made effective as of the 3 day
of September, 1997 by and between C3, INC., a North Carolina corporation (the
"Company"), and C. Eric Hunter (the "Contractor").
RECITALS:
A. The Company is engaged in the business of designing, developing,
manufacturing and selling moissanite gemstones (the "Business") and desires to
engage the Contractor to assist the Company in providing consulting services
related to intellectual property of patents filed for the business (the
"Services").
B. The Contractor desires to provide such services to the Company on
the terms and for the compensation set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. ENGAGEMENT. The Company hereby engages the Contractor as a
nonexclusive contractor to perform the Services subject to the terms and
conditions of this Agreement, and the Contractor hereby accepts such engagement
for and in consideration of the compensation hereinafter provided and agrees to
use his best efforts in performing the Services. The Contractor shall perform
his obligations hereunder in compliance with the terms of this Agreement and any
and all applicable laws and regulations. The Contractor acknowledges that this
is a nonexclusive engagement by the Company and that the Company retains the
right to appoint additional contractors as the Company, in its sole and
unrestricted judgment, may from time to time determine to be in the best
interests of the Company without liability or obligation to the Contractor.
2. SERVICES.
(a) The Contractor agrees to provide the Services The Contractor
warrants to the Company that the Services will be performed in a
professional, timely and workmanlike manner.
(b) The Contractor shall execute a Nondisclosure and Noncompetition
Agreement in substantially the form attached hereto as Exhibit A
concurrent with the execution of this Agreement.
3. LICENSES; TOOLS AND MATERIALS. The Contractor shall be responsible
for obtaining, at the Contractor's own expense, all licenses, permits and bonds
as may be required by any federal, state or local law or regulation for the
performance of the Contractor's duties hereunder. The Company shall be
responsible for supplying at its cost all necessary tools and materials to be
used by the Contractor.
2
4. LIMITATIONS. Nothing in this Agreement shall be construed to give
the Contractor authority to represent the Company before any court or
governmental or regulatory agency without the express prior written
authorization of the Company. In addition, all files, books, accounts, records
and other information of any nature, however recorded or stored, and related to
the Company (the "Records") shall at all times belong to the Company and to the
extent possessed by the Contractor hereunder, such possession shall be for the
benefit of and as agent for the Company. The Contractor's possession of the
Records is at the will of the Company and is solely for the purpose of enabling
the Contractor to perform his obligations hereunder. The Records shall be
readily separable from the records of the Contractor.
5. TERM. The terms of this Agreement shall commence on the date hereof
and shall continue thereafter through and including the close of business on
September 3, 1999. Notwithstanding the foregoing, the Company may terminate this
Agreement for "cause," as defined herein, by giving written notice of at least
30 days in advance of its desire to terminate this Agreement for cause. The
Company shall be deemed to have cause for terminating the Contractor's
engagement in the event the Contractor (i) demonstrates any dishonesty or
engages in any act of moral turpitude, (ii) improperly performs or fails to
perform the Services described herein, (iii) causes intentional damage to
substantial property of the Company, or (iv) is unable to perform the Services
because of death or a disability which renders him unable to perform the
Services for 30 consecutive calendar days.
6. FEES. As compensation for the performance of the Services, the
Company shall pay to the Contractor $1,800 per month. No amounts (including,
without limitation, social security, federal and state withholding taxes) shall
be withheld or otherwise subtracted from the compensation paid to the Contractor
pursuant to this Section 6 unless required by law. In addition, the Contractor
shall be reimbursed for all expenses incurred by the Contractor on behalf (and
with the prior written authorization) of the Company within 15 days from the
date the Contractor delivers an itemized report of such expenses, together with
receipts or other evidence of payment reasonably satisfactory to the Company and
its accountant.
7. INDEMNIFICATION. The Company shall defend, release, indemnify and
hold the Consultant harmless from and against any and all claims, suits,
liability, costs and expenses, including, without limitation, attorneys' fees
and expenses, arising out of the provision of any Services or work by the
Consultant; provided the Company is given prompt written notice of such claims
and control of the defense and settlement negotiations.
8. INSURANCE REPRESENTATIONS; WORKPLACE SAFETY. The Contractor agrees
to maintain liability, worker's compensation, errors and omission and/or other
insurance in such amounts and with such carriers as the Company may reasonably
request, each of which policies shall, upon request of the Company, name the
Company as an additional insured. In addition, the Contractor shall be solely
responsible for workplace safety, shall maintain the workplace in accordance
with industry standards and shall comply with all governmental (including
federal, state and local) regulations.
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9. NOTICES. All notices, demands, requests or other communications
which may be or are required to be given, served or sent by one party to the
other party pursuant to this Agreement shall be in writing and shall be hand
delivered or mailed by certified mail, return receipt requested, postage
prepaid, or sent by telefax, addressed as follows:
If to the Company:
P.O. Box 13533
Research Triangle Park, North Carolina 27709-3533
Attention: Jeff Hunter, President
Telecopy: (919) 468-0486
If to the Contractor:
_________________________________
_________________________________
_________________________________
Each party may designate by notice in writing a new address to
which any notice, demand, request or communication may, thereafter be delivered,
given or sent. Documents delivered by hand shall be deemed to have been received
upon delivery; documents sent by telefax shall be deemed to have been received
when the answer back is received; and documents sent by mail shall be deemed to
have been received upon their receipt, or at such time ~ delivery is refused by
the addressee upon presentation.
10.SECURITY. The Contractor agrees that he will at all times comply
with all security regulations in effect from time to time at the Company's
premises or applicable outside such premises to materials belonging to the
Company. The Contractor agrees not to use or disclose to any party any
information, systems, equipment, ideas, processor or methods of operation
observed in connection with the performance of his obligations hereunder.
11.INDEPENDENT CONTRACTOR.
(a) Acknowledgment by the Contractor. The Contractor
acknowledges and agrees that the Contractor will be treated, vis-a-vis
the Company, as an independent contractor and not as an employee, agent
or authorized representative of the Company. The Contractor shall have
no authority to bind the Company to any contract, agreement or
obligation whatsoever. The acts of the Contractor shall in no way
constitute the acts of the Company, and the Contractor shall not
represent to any third party that the Contractor has any express or
implied authority to bind the Company to any such contract, agreement
or obligation.
3
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(b) Tax Matters. Because the Contractor is an independent
contractor, the Company will not withhold from any compensation paid to
the Contractor any amounts for federal or state income taxes, or social
security (FICA) for the Contractor, nor will the Company pay any social
security or unemployment tax with respect to the Contractor. Such taxes
are the responsibility of the Contractor. The Contractor agrees to
indemnify and hold the Company (including its employees, officers,
directors, agents, subsidiaries or affiliates) harmless, and hereby
indemnifies and holds the Company harmless, from and against any
damage, claim, assessment, interest charge or penalty incurred by or
charged to the Company as a result of any claim, cause of action or
assessment by any federal or state government or agency for any
nonpayment or late payment by the Contractor of any tax or contribution
based upon compensation paid hereunder or because the Company did not
withhold any taxes from compensation paid hereunder.
(c) No Insurance. Consistent with the Contractor's status as
an independent contractor, the Company will not provide the Contractor
with any company, individual or group insurance policy or any other
kind of insurance coverage whatsoever.
12. ASSIGNMENT. Neither this Agreement or any interest herein or
any rights hereunder shall be sold or assigned by the Contractor, nor shall any
of the duties of the Contractor hereunder be delegated to any person, firm or
corporation, without prior notice to and consent of the Company.
13. INTELLECTUAL PROPERTY. Any inventions, copyrights or other
intellectual property created or developed by the Contractor or the Contractor's
employees, or associates or pr subcontractors during the term of this Agreement
related to the work performed under the Agreement shall be assigned to the
Company.
14. STANDARD OF CARE. The Contractor warrants that he will
exercise due diligence to perform the Services in a professional manor in
compliance with all applicable laws and regulations and the highest ethical
standards. In addition, the Contractor represents and warrants that any
information which he may supply the Company during the term of this Agreement
(i) will have been obtained by the Contractor lawfully and from publicly
available sources and (ii) will not be confidential or proprietary to any third
person. Nothing in this Agreement shall be construed as authorizing or
encouraging the Contractor to obtain information for the Company in violation of
any third party's rights to copyright or trade secret protection.
15. MISCELLANEOUS.
(a) The provisions of this Agreement may be waived, altered,
amended or repealed, in whole or in part, only on the written consent
of the Company and the Contractor.
(b) Section headings and numbers used in this Agreement are
included for convenience of reference only, and if there is any
conflict between any such numbers and headings and the text of this
Agreement, the text shall control. Each of the statements set
4
5
forth in the premises of this Agreement is incorporated into the
Agreement as a valid and binding representation of the party or parties
to whom it relates.
(c) This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina without
reference to the choice of law principles thereof If any dispute arises
hereunder, the parties hereto agree that any suit brought by either
party shall be heard in the courts of North Carolina or any federal
court sitting in North Carolina, and the parties hereto consent to the
jurisdiction of such courts.
(d) This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) This Agreement, together with the Nondisclosure and
Noncompetition Agreement herein referenced represent the entire
agreement of the parties with respect to the subject matter hereof and
supersede in their entirety any and all prior written or oral
agreements with respect thereto.
(f) Neither party shall have the right under this Agreement to
use the name, trademark or trade names of the other unless prior
written approval has been obtained. Any such approval or authorization
shall cease upon termination of this Agreement.
IN WITNESS WHEREOF, the duly authorized representations of the parties
have executed this Independent Contractor Agreement as of the date and year
first above written
COMPANY
C3, Inc.
By: /s/ Jeff N. Hunter
------------------------------
Jeff N. Hunter, President
CONTRACTOR
/s/ C. Eric Hunter
---------------------------------
C. Eric Hunter
5
1
EXHIBIT 10.6
INDEPENDENT CONTRACTOR AGREEMENT
THIS INDEPENDENT CONTRACTOR AGREEMENT, made effective as of
the 10 day of July 1997 by and between C3, INC., a North Carolina corporation
(the "Company"), and OLLIN B. SYKES (the "Contractor").
RECITALS:
A. The Company is engaged in the business of designing,
developing, manufacturing and selling moissanite gemstones (the "Business") and
desires to engage the Contractor to assist the Company in providing finance and
business development services for the Business.
B. The Contractor desires to provide such services to the Company
on the terms and for the compensation set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. ENGAGEMENT. The Company hereby engages the Contractor as a
nonexclusive contractor to perform the Services (as defined herein) subject to
the terms and conditions of this Agreement, and the Contractor hereby accepts
such engagement for and in consideration of the compensation hereinafter
provided and agrees to use his best efforts in performing the Services. The
Contractor shall perform his obligations hereunder in compliance with the terms
of this Agreement and any and all applicable laws and regulations. The
Contractor acknowledges that this is a nonexclusive engagement by the Company
and that the Company retains the right to appoint additional contractors as the
Company, in it sole and unrestricted judgment, may from time to time determine
to be in the best interests of the Company without liability or obligation to
the Contractor.
2. SERVICES.
a. The Contractor agrees to provide finance and business
development services for the Company and perform other duties related thereto as
the Company may determine from time to time (the "Services"). Contractor
warrants to the Company that the Services will be performed in a professional,
timely and workmanlike manner.
b. The Contractor shall execute a Confidential
Disclosure Agreement in substantially the form attached hereto as Exhibit A
concurrent with the execution of this Agreement.
3. LICENSES; TOOLS AND MATERIALS. Contractor shall be responsible
for obtaining, at Contractor's own expense, all licenses, permits and bonds as
may be required by any federal, state or local law or regulation for the
performance of Contractor's duties hereunder. The Company shall be responsible
for supplying at its cost all necessary tools and materials to be used by
Contractor.
2
4. LIMITATIONS. Nothing in this Agreement shall construed to give
the Contractor authority to represent the Company before any court or
governmental or regulatory agency without the express prior written
authorization of the Company. In addition all files, books, accounts, records
and other information of any nature, however recorded or stored, and related to
the Company (the "Records") shall at all times belong to the Company and to the
extent possessed by the Contractor hereunder, such possession shall be for the
benefit of and as agent for the Company. The Contractor's possession of the
Records is at the will of the Company and is solely for the purpose of enabling
the Contractor to perform his obligations hereunder. The Records shall be
readily separable from the records of the Contractor.
5. TERM. The term of this Agreement shall commence on the date
hereof end shall continue thereafter through and including the close of business
on July 9, 2002. Notwithstanding the foregoing, the Company may terminate this
Agreement for "cause", as defined herein, by giving written notice of at least
30 days in advance of its desire to terminate this Agreement for cause. The
Company shall be deemed to have cause for terminating Contractor's engagement in
the event Contractor (i) demonstrates any dishonesty or engages in any act of
moral turpitude, (ii) improperly performs or fails to perform the Services
described herein, (iii) causes intentional damage to substantial property of the
Company, or (iv) is unable to perform the Services because of death or a
disability which renders him unable to perform the Services for 30 consecutive
calendar days.
6. FEES. As compensation for the performance of the Services, the
Company shall pay to the Contractor the amounts agreed to from time to time by
the Company and the Contractor. No amounts (including without limitation, social
security, federal and state withholding taxes) shall be withheld or otherwise
subtracted from the compensation paid to the Contractor pursuant to this Section
5 unless required by law. In addition, the Contractor shall be reimbursed for
all expenses incurred by the Contractor on behalf (and with the prior written
authorization) of the Company within 15 days from the date the Contractor
delivers an itemized report of such expenses, together with receipts or other
evidence of payment reasonably satisfactory to the Company and its accountant.
7. INDEMNIFICATION. The Contractor shall defend, release,
indemnify and hold the Company and its directors, officers, shareholders,
employees and agents and the personal representatives and assigns of each,
harmless from and against any and all claims, suits, liability, costs and
expenses, including, without limitation, attorneys' fees and expenses, in
connection with any knowing and intentional act or omission of the Contractor,
his employees and/or agents in connection with the provision of the Services.
8. INSURANCE REPRESENTATIONS; WORKPLACE SAFETY. The Contractor
agrees to maintain liability, worker's compensation, errors and omission and/or
other insurance in such amounts and with such carriers as the Company may
reasonably request, each of which policies shall, upon request of the Company,
name the Company as an additional insured. In addition, the Contractor shall be
solely responsible for workplace safety, shall maintain the workplace in
accordance with industry standards and shall comply with all governmental
(including federal, state and local) regulations.
3
9. NOTICES. All notices, demands, requests or other
communications which may be or are required to be given, served or sent by one
party to the other party pursuant to this Agreement shall be in writing and
shall be hand delivered or mailed by certified mail, return receipt requested,
postage prepaid, or sent by telefax, addressed as follows:
If to the Company:
P.O. Box 13533
Research Triangle Park, North Carolina 22709-3533
Attention: Jeff N. Hunter, President
Telecopy: (919) 468-0486
If to the Contractor:
Ollin B. Sykes
P.O. Box 1050
214 West Eden Street
Edenton, North Carolina 27932
Telecopy: (919) 482-2556
Each party may designate by notice in writing a new address to
which any notice, demand, request or communication may thereafter be delivered,
given or sent. Documents delivered by hand shall be deemed to have been received
upon delivery, documents sent by telefax shall be deemed to have been received
when the answer back is received; and documents sent by mail shall be deemed to
have been received upon their receipt, or at such time as delivery is refused by
the addressee upon presentation.
10. SECURITY. The Contractor agrees that he will at all times
comply with all security regulations in effect from time to time at the
Company's premises or applicable outside such premises' to materials belonging
to the Company. The Contractor agrees not to use or disclose to any party any
information, systems, equipment, ideas, processes or methods of operation
observed in connection with the performance of his obligations hereunder.
11. INDEPENDENT CONTRACTOR.
a. Acknowledgment by Contractor. Contractor acknowledges
and agrees that Contractor will be treated, vis-a-vis the
Company as an independent contractor and not as an employee,
agent or authorized representative of the Company. Contractor
shall have no authority to bind the Company to any contract,
agreement or obligation whatsoever. The acts of Contractor
shall in no way constitute the acts of the Company and
Contractor shall not represent to any third party that
Contractor has any express or implied authority to bind the
Company to any such contract, agreement or obligation.
b. Tax Matters. Because Contractor is an independent
contractor, the Company will not withhold from any
compensation paid to Contractor any amounts for federal
4
or state income taxes, or social security (FICA) for
Contractor, nor will the Company pay any social security or
unemployment tax with respect to Contractor. Such taxes are
the responsibility of Contractor. Contractor agrees to
indemnify and hold the Company (including its employees,
officers, directors, agents, subsidiaries or affiliates)
harmless, and hereby indemnifies and hold the Company
harmless, from and against any damage, claim, assessment,
interest charge or penalty incurred by or charged to the
Company as a result of any claim, cause of action or
assessment by any federal or state government or agency for
any nonpayment or late payment by Contractor of any tax or
contribution based upon compensation paid hereunder or because
the Company did not withhold any taxes from compensation paid
hereunder.
c. No Insurance. Consistent with Contractor's status as
an independent contractor, the Company will not provide
Contractor with any company, individual or group insurance
policy or any other kind of insurance coverage whatsoever.
12. ASSIGNMENT. Neither this Agreement or any interest herein or
any rights hereunder shall be sold or assigned by the Contractor, nor shall any
of the duties of the Contractor hereunder be delegated to any person, firm or
corporation, without prior notice to and consent of the Company.
13. INTELLECTUAL PROPERTY. Any inventions, copyrights, or other
intellectual property created or developed by Contractor or Contractor's
employees, or associates or sub-contractors during the term of this Agreement
related to the work performed under the Agreement shall be assigned to the
Company.
14. STANDARD OF CARE. The Contractor warrants that he will
exercise due diligence to perform the Services in a professional manner in
compliance with all applicable laws and regulations and the highest ethical
standards. In addition the Contractor represents and warrants that any
information which he may supply the Company during the term of this Agreement
(i) will have been obtained by the Contractor lawfully and from publicly
available sources' and (ii) will not be confidential or proprietary to any third
person. Nothing in this Agreement shall be construed as authorizing or
encouraging the Contractor to obtain information for the Company in violation of
any third party's rights to copyright or trade secret protection,
15. MISCELLANEOUS.
a. The provisions of this Agreement may be waived,
altered, amended or repealed, in whole or in part, only on the written consent
of the Company and the Contractor.
b. Section headings and numbers used in this Agreement
are included for convenience of reference only, and, if there is any conflict
between any such numbers and headings, and the text of this Agreement, the text
shall control. Each of the statements set forth in the premises of this
Agreement is incorporated into the Agreement as a valid and binding
representation of the party or parties to whom it relates.
c. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina without reference to the
choice of law principles thereof. If any
5
dispute arises hereunder, the parties hereto agree that any suit brought by
either party shall be heard in the courts of North Carolina or any federal court
sitting in North Carolina, and the parties hereto consent to the jurisdiction of
such courts.
d. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
e. This Agreement, together with the Nondisclosure and
Noncompetition Agreement herein referenced represent the entire agreement of the
parties with respect to the subject matter hereof and supersede in their
entirety any and all prior written or oral agreements with respect thereto.
f. Neither party shall have the right under this
Agreement to use the name, trademark or trade names of the other, unless prior
written approval has been obtained. Any such approval or authorization shall
cease upon termination of this Agreement.
IN WITNESS WHEREOF, the duly authorized representatives of the
parties have executed this Independent Contractor Agreement as of the date and
year first above written.
COMPANY
C3, INC.
By: /s/Jeff N. Hunter
-----------------------------------------
Jeff N. Hunter
CONTRACTOR
By: /s/Ollin Sykes (SEAL)
-----------------------------------
Ollin Sykes
1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
effective as of June 1, 1997 by and between C3, Inc., a North Carolina company
with its principal office at 3800 Gateway Boulevard, Suite 310, Morrisville,
North Carolina, 27560 (the "Company), and Jeff N. Hunter, an individual
currently residing at ___________________________________________ ("Employee").
Statement of Purpose
The Company wishes to obtain the services of Employee on the terms and
conditions and with the additional benefits as set forth in this Agreement.
Employee desires to be employed by the Company on such terms and conditions and
with such benefits.
Therefore, in consideration of the mutual covenants contained in this
Agreement and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Employee agree as
follows:
1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby accepts such employment, on the terms and conditions set forth
in this Agreement.
2. Term of Employment. The term of Employee's employment under this
Agreement shall commence as of the date of this Agreement and shall continue on
and through May 31, 1998; provided, however, that upon the successful completion
by the Company of an initial public offering raising a minimum of eight million
dollars ($8,000,000) (an "IPO"), the term of this Agreement shall be extended on
and through May 31, 2000. Termination of employment shall be governed by
Paragraph 7 of this Agreement, and unless terminated by either party as provided
in Paragraph 7, this Agreement shall automatically, at the expiration of each
then existing term, renew for successive one year terms.
3. Position and Duties. The Employee shall serve as President and Chief
Executive Officer of the Company. Employee will, under the direction of the
Board of Directors, faithfully and to the best of his ability perform the duties
as set out on Exhibit A hereto and such additional duties as may be reasonably
assigned by the Board of Directors. Employee agrees to devote his entire working
time, energy and skills to the Company while so employed.
4. Compensation and Benefits. Employee shall receive compensation and
benefits for the services performed for the Company under this Agreement as
follows:
(a) Base Salary. Employee shall receive a base salary of $110,000,
payable in regular and equal monthly installments ("Base Salary");
provided, however, that upon the successful completion by the Company
of an IPO, the Compensation Committee of
2
the Board of Directors may review the Employee's Base Salary and
determine if an increase is warranted.
(b) Employee Benefits. Employee shall receive such benefits as
are made available to the other employees of the Company, including,
but not limited to, life, medical and disability insurance, retirement
benefits and such vacation as is provided to the other employees of the
Company (the "Employee Benefits").
(c) Incentive Compensation. Employee shall participate in such
incentive plans as may be approved by the Board of Directors from
time-to-time. The specific incentive compensation plans for 1998 are as
set out on Exhibit B hereto.
5. Reimbursement of Expenses. The Company shall reimburse Employee for
all reasonable out-of-pocket expenses incurred by Employee specifically and
directly related to the performance by Employee of the services under this
Agreement.
6. Withholding. The Company may withhold from any payments or benefits
under this Agreement all federal, state or local taxes or other amounts as may
be required pursuant to applicable law, government regulation or ruling.
7. Termination of Employment.
(a) Death of Employee. If the Employee shall die during the Term,
this Agreement and the employment relationship hereunder will automatically
terminate on the date of death, which date shall be the last day of the Term.
(b) Termination for Just Cause. The Company shall have the right to
terminate the Employee's employment under this Agreement at any time for Just
Cause, which termination shall be effective immediately. Termination for "Just
Cause" shall include termination for the Employee's personal dishonesty, gross
incompetence, willful misconduct, breach of a fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses),
written Company policy or final cease-and-desist order, conviction of a felony
or of a misdemeanor involving moral turpitude, unethical business practices in
connection with the Company's business, misappropriation of the Company's assets
(determined on a reasonable basis), or material breach of any other provision of
this Agreement, provided that the Employee has received written notice from the
Company of such material breach and such breach remains uncured thirty days
after the delivery of such notice. In the event the Employee's employment under
this Agreement is terminated for Just Cause, the Employee shall have no right to
receive compensation or other benefits under this Agreement for any period after
such termination.
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(c) Termination Without Cause. The Company may terminate the
Employee's employment other than for "Just Cause," as described in Subsection
(b) above, at any time upon written notice to the Employee, which termination
shall be effective immediately. In the event the Company terminates Employee
pursuant to this Subsection (c), (i) the Employee will receive the highest
amount of the annual cash compensation (including cash bonuses and other
cash-based benefits, including for these purposes amounts earned or payable
whether or not deferred) received from the Company during any of the three
calendar years immediately preceding such termination ("Termination
Compensation") in each year until the end of the Term, so long as the Employee
complies with Sections 8, 9 and 10 of the Agreement and (ii) the Company shall
take such action as may be required to vest any unvested benefits of the
Employee under any employee stock-based or other benefit plan or arrangement.
Such amounts shall be payable at the times such amounts would have been paid in
accordance with Section 4. In addition, Employee shall continue to participate
in the same group hospitalization plan, health care plan, dental care plan, life
or other insurance or death benefit plan, and any other present or future
similar group employee benefit plan or program for which officers of the Company
generally are eligible, on the same terms as were in effect prior to Employee's
termination, either under the Company's plans or comparable coverage, for all
periods Employee receives Termination Compensation. Notwithstanding anything in
this Agreement to the contrary, if Employee breaches Sections 8, 9 or 10 of this
Agreement, the Employee will not be entitled to receive any further compensation
or benefits pursuant to this Section 7(c).
(d) Change of Control Situations. In the event of a Change of
Control of Company at any time after the date hereof, Employee may voluntarily
terminate employment with Company up until twelve (12) months after the Change
of Control for "Good Reason" and, subject to Section 7(f), (y) be entitled to
receive in a lump sum (i) any compensation due but not yet paid through the date
of termination and (ii) in lieu of any further salary payments from the date of
termination to the end of the then existing term, an amount equal to the
Termination Compensation times 2.99, and (z) shall continue to participate in
the same group hospitalization plan, health care plan, dental care plan, life or
other insurance or death benefit plan, and any other present or future similar
group employee benefit plan or program for which officers of the Company
generally are eligible, or comparable plans or coverage, for a period of two
years following termination of employment by the Employee, on the same terms as
were in effect either (A) at the date of such termination, or (B) if such plans
and programs in effect prior to the Change of Control of Company are, considered
together as a whole, materially more generous to the officers of Company, then
at the date of the Change of Control. Any equity based incentive compensation
(including but not limited to stock options, SARs, etc.) shall fully vest and be
immediately exercisable in full upon a Change in Control, not withstanding any
provision in any applicable plan. Any such benefits shall be paid by the Company
to the same extent as they were so paid prior to the termination or the Change
of Control of Company.
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"Good Reason" shall mean the occurrence of any of the following
events without the Employee's express written consent:
(i) the assignment to the Employee of duties inconsistent
with the position and status of the Employee with the Company
immediately prior to the Change of Control;
(ii) a reduction by the Company in the Employee's pay grade
or base salary as then in effect, or the exclusion of Employee from
participation in Company's benefit plans in which he previously
participated as in effect at the date hereof or as the same may be
increased from time to time during the Term, or Company's failure to
increase (within twelve (12) months of the Employee's last increase
in base salary) the Employee's base salary in an amount which at
least equals, on a percentage basis, the average percentage increase
in base salary for all executives entitled to participate in
Company's executive incentive plans for which Employee was eligible
in the preceding 12 months; or
(iii) an involuntary relocation of the Employee more than 50
miles from the location where the Employee worked immediately prior
to the Change in Control or the breach by the Company of any
material provision of this Agreement; or
(iv) any purported termination of the employment of Employee
by Company which is not effected in accordance with this Agreement.
A "Change of Control" shall be deemed to have occurred if (i)
any person or group of persons (as defined in Section 13(d) and 14(d)
of the Securities Exchange Act of 1934) together with its affiliates,
excluding employee benefit plans of Company, becomes, directly or
indirectly, the "beneficial owner" (as defined in Rule 13d-3
promulgated under the Securities Exchange Act of 1934) of securities of
Company representing 20% or more of the combined voting power of
Company's then outstanding securities; or (ii) during the then existing
term of the Agreement, as a result of a tender offer or exchange offer
for the purchase of securities of Company (other than such an offer by
the Company for its own securities), or as a result of a proxy contest,
merger, consolidation or sale of assets, or as a result of any
combination of the foregoing, individuals who at the beginning of any
year period during such term constitute the Company's Board of
Directors, plus new directors whose election by Company's shareholders
is approved by a vote of at least two-thirds of the outstanding voting
shares of the Company, cease for any reason during such year period to
constitute at least two-thirds of the members of such Board of
Directors; or (iii) the shareholders of the
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Company approve a merger or consolidation of the Company with any other
corporation or entity regardless of which entity is the survivor, other
than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or being
converted into voting securities of the surviving entity) at least 60%
of the combined voting power of the voting securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation; or (iv) the shareholders of the Company approve a plan
of complete liquidation or winding-up of the Company or an agreement
for the sale or disposition by the Company of all or substantially all
of the Company's assets; or (v) any event which the Company's Board of
Directors determines should constitute a Change of Control.
(e) Employee's Right to Payments. In receiving any payments
pursuant to this Section 7, Employee shall not be obligated to seek
other employment or take any other action by way of mitigation of the
amounts payable to the Employee hereunder, and such amounts shall not
be reduced or terminated whether or not the Employee obtains other
employment.
(f) Reduction in Agreement Payments. Notwithstanding anything in
this Agreement to the contrary, if any of the payments provided for
under this Agreement (the "Agreement Payments"), together with any
other payments that the Employee has the right to receive (such other
payments together with the Agreement Payments are referred to as the
"Total Payments"), would constitute a "parachute payment" as defined in
Section 280G(b)(2) of the Internal Revenue Code of 1986, as amended
(the "Code") (a "Parachute Payment"), the Agreement Payments shall be
reduced by the smallest amount necessary so that no portion of such
Total Payments would be Parachute Payments. In the event the Company
shall make an Agreement Payment to the Employee that would constitute a
Parachute Payment, the Employee shall return such payment to the
Company (together with interest at the rate set forth in Section
1274(b)(2)(B) of the Code). For purposes of determining whether and the
extent to which the Total Payments constitute Parachute Payments, no
portion of the Total Payments the receipt of which Employee has
effectively waived in writing shall be taken into account.
8. Covenant Not to Compete. Employee agrees that during his employment
with the Company and for a period of one (1) year following the termination of
his employment with the Company, for whatever reason:
(a) Employee shall not, directly or indirectly, own any interest in,
manage, operate, control, be employed by, render advisory services to,
or participate in the management or control of any business that
operates in the same business as the
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Company, which Employee and the Company specifically agree as the
business of fabricating (wafering, preforming and faceting), marketing
and distributing moissanite gemstones or other diamond simulants to the
gem and jewelry industry (the "Business"), unless Employee's duties,
responsibilities and activities for and on behalf of such other
business are not related in any way to such other business's products
which are in competition with the Company's products. For purposes of
this section, "competition with the Company" shall mean competition for
customers in the United States and in any country in which the Company
is selling the Company's products at the time of termination.
Employee's ownership of less than one percent of the issued and
outstanding stock of a corporation engaged in the Business shall not by
itself be deemed to be a violation of this Agreement. Employee
recognizes that the possible restriction on his activities which may
occur as a result of his performance of his obligations under Paragraph
8(a) are substantial, but that such restriction is required for the
reasonable protection of the Company.
(b) Employee shall not, directly or indirectly, influence or
attempt to influence any customer of the Company to discontinue its
purchase of any product of the Company which is manufactured or sold by
the Company at the time of termination of Employee's employment or to
divert such purchases to any other person, firm or employer.
(c) Employee shall not, directly or indirectly, interfere
with, disrupt or attempt to disrupt the relationship, contractual or
otherwise, between the Company and any of its suppliers.
(d) Employee shall not, directly or indirectly, solicit any
employee of the Company to work for any other person, firm or employer.
9. Confidentiality. In the course of his employment with the Company,
Employee will have access to confidential information, records, data, customer
lists, lists of product sources, specifications, trade secrets and other
information which is not generally available to the public and which the Company
and Employee hereby agree is proprietary information of the Company
("Confidential Information"). During and after his employment by the Company,
Employee shall not, directly or indirectly, disclose the Confidential
Information to any person or use any Confidential Information, except as is
required in the course of his employment under this Agreement. Employee agrees
to abide by the Company's policies and procedures for treatment of confidential
information as may be adopted from time to time. All Confidential Information as
well as records, files, memoranda, reports, plans, drawings, documents, models,
equipment and the like, including copies thereof, relating to the Company's
business, which Employee shall prepare or use or come into contact with during
the course of his employment, shall be and
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remain the Company's sole property, and upon termination of Employee's
employment with the Company, Employee shall return all such materials to the
Company.
10. Proprietary Information. Employee shall assign to the Company, its
successors or assigns, all of Employee's rights to copyrightable works and
inventions which, during the period of Employee's employment by the Company or
its successors in business, Employee makes or conceives, either solely or
jointly with others, relating to any subject matter with which Employee's work
for the Company is or may be concerned ("Proprietary Information"). Employee
shall promptly disclose in writing to the Company such copyrightable works and
inventions and, without charge to the Company, to execute, acknowledge and
deliver all such further papers, including applications for copyrights and
patents for such copyrightable works and inventions, if any, in all countries
and to vest title thereto in the Company, its successors, assigns or nominees.
Upon termination of Employee's employment hereunder, Employee shall return to
the Company or its successors or assigns, as the case may be, any Proprietary
Information. The obligation of Employee to assign the rights to such
copyrightable works and inventions shall survive the discontinuance or
termination of this Agreement for any reason.
11. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to Employee's employment by the Company and supersedes
any prior agreements between them, whether written or oral.
12. Waiver. The failure of either party to insist in any one or more
instance, upon performance of the terms and conditions of this Agreement, shall
not be construed as a waiver or a relinquishment of any right granted hereunder
or of the future performance of any such term or condition.
13. Notices. Any notice to be given under this Agreement shall be
deemed sufficient if addressed in writing and delivered personally, by telefax
with receipt acknowledged, or by registered or certified U.S. mail to the
address first above appearing, or to such other address as a party may designate
by notice from time to time.
14. Severability. In the event that any provision of any paragraph of
this Agreement shall be deemed to be invalid or unenforceable for any reason
whatsoever, it is agreed such invalidity or unenforceability shall not affect
any other provision of such paragraph or of this Agreement, and the remaining
terms, covenants, restrictions or provisions in such paragraph and in this
Agreement shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provision as to make it valid,
reasonable and enforceable.
15. Amendment. This Agreement may be amended only by an agreement in
writing signed by each of the parties hereto.
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16. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or breach thereof, shall be settled by arbitration in Raleigh,
North Carolina in accordance with the expedited procedures of the Rules of the
American Arbitration Association, and judgment upon the award may be rendered by
the arbitrator and may be entered in any court having jurisdiction thereof.
17. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of North Carolina. Each of the parties
hereto irrevocably submits to the exclusive jurisdiction of the courts located
in North Carolina for the purposes of any suit, action or other proceeding
contemplated hereby or any transaction contemplated hereby.
18. Benefit. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against the Company, its successors
and assigns, and Employee, his heirs, beneficiaries and legal representatives.
It is agreed that the rights and obligations of Employee may not be delegated or
assigned except as may be specifically agreed to by the parties hereto.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
C3, Inc.
By: /s/Martin J. DeRoy
-----------------------------------
Martin J. DeRoy, Vice-President
/s/Jeff N. Hunter
-----------------------------------
Jeff N. Hunter
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POSITION DESCRIPTION EXHIBIT A
JEFF N. HUNTER - CHIEF EXECUTIVE OFFICER AND PRESIDENT
Purpose
The Chief Executive Officer and President is responsible for directing the
Company according to business plan to achieve desired profit and return on
investment capital. In particular, this position develops the basic goals,
operating plans and policies for the Company and implements board-approved
plans. This position will report to the Board of Directors of the Company.
Responsibilities:
Works with the Board of Directors to develop and approve business objectives,
policies and plans that improve profit and growth objectives for the Company.
Coordinates the activities of the marketing, sales, manufacturing, research and
development, finance and administrative units of the Company. Directs
operations to achieve planned performance goals and develops management
systems to effectively control each unit.
Leads the development of the organization and personnel, products, facilities,
technology and appropriate financial resources to secure the position of
the Company and to facilitate its planned development.
Directs periodic review of the Company's strategic market position.
Performs such other responsibilities as may be assigned by the Board of
Directors from time to time.
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INCENTIVE COMPENSATION PLANS EXHIBIT B
JEFF N. HUNTER
Background
Each member of the management team can have a significant impact on the
Company's ability to meet and exceed its goals. The Company has established an
Annual Incentive Compensation Plan and a Long-term Incentive Compensation Plan
to provide management and key employees with incentives to not only achieve the
performance goals outlined in the business plan, but to exceed those goals.
New goals and targets will be established each year for the Annual Incentive
Compensation Plan and goals and targets for the Long-term Incentive Plan will be
established from time-to-time.
1998 Annual Incentive Compensation Plan
The 1998 Annual Incentive Compensation Plan (Annual Plan) provides for a "target
bonus" which is based on a percentage of base compensation. Your specific
"target bonus" is outlined below. Each person that participates in the Annual
Plan has the ability to earn far in excess of their "target bonus" if the
Company exceeds its performance goals.
1. Your "Target Bonus". Your 1998 "target bonus" is 50% of your base
compensation, or $55,000.
2. Performance Goals. The Annual Plan performance goals for 1998 have been
separated into several categories based on the Company's performance relative to
net revenue and pre-tax income. Based upon the Company achieving different
performance levels, as outlined in the chart below, the participating employee
can earn different percentages of their "target bonus".
NET REVENUE
TARGET TARGET + OPTIMUM OUTSTANDING
PRE-TAX INCOME >$31.7 M >$35.6 M >$42.2 M >$48.5 M
TARGET >$12.4 M 100% 110% 120% 130%
TARGET + >$16.3 M 150% 165% 180% 195%
OPTIMUM >$22.9 M 225% 245% 270% 290%
OUTSTANDING >$29.2 M 325% 360% 390% 425%
The actual net revenue and pre-tax income from the Company's 1998 audited
financial statements will be used to determine the appropriate percentage in the
table above. For example, net revenue of $34 million with pre-tax income of $14
million would lead to a bonus equal to 100%
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of the participant's "target bonus"; net revenue of $35.6 million with pre-tax
income of $16.3 million would lead to a bonus equal to 165% of the participants
"target bonus", etc. If the performance of the Company exceeds the criteria
above, the percentages will increase on a similar basis to those used above. If
however, the Company does not meet the criteria above, the bonus structure will
be modified as follows:
(a) As long as the $12.4 million pre-tax income target is met the bonuses will
be awarded at the 100% level.
(b) If pre-tax income is below $12.4 million, so long as the Company achieves a
positive pre-tax income, the percentage of the "target bonus" bonus would
be reduced on a linear basis. Therefore, the percentage will be calculated
by dividing the actual pre-tax net income by the $12.4 million target. No
bonuses will be earned or paid if the Company does not achieve positive
pre-tax net income.
Long-term Incentive Compensation Plan
The Long-term Incentive Compensation Plan (Long-term Plan) provides for the
award of equity based incentives (stock options, stock appreciation rights,
etc.); the specific grants and terms of which will be determined by the
Compensation Committee of the Board of Directors from time-to-time. Generally
the awards under the Long-term Plan will vest and become exercisable only upon
the attainment of specific operating goals for the target. These targets will be
based on factors that are deemed to have a direct impact on the performance of
the Company's stock, typically this will be earnings per share.
1. Your Award. Your current award under the Long-term Plan, to be granted only
upon completion of an IPO, is incentive stock options for the purchase of 70,000
shares of common stock at $13.50 per share.
2. Vesting Period. These options will vest and become exercisable based upon the
Company achieving the following results (note vesting will stop once 100%
vesting level has been achieved):
Completion of IPO 15%
98 Q1 sales > $800k & margin > 28% 5%
98 Q1 EPS > $.01 per share (stretch goal) 10%
98 Q2 sales > $2.2 M & margin > 36% 5%
98 Q2 EPS > $.01 per share (stretch goal) 10%
98 Q2 EPS > $.33 per share 10%
1998 TOTAL EPS > $1.13 per share 25%
99 Q1 EPS > $1.13 per share 5%
99 Q2 EPS > $1.31 per share 5%
99 Q3 EPS > $1.71 per share 5%
1999 TOTAL EPS > $8.00 per share 25%
2000 TOTAL EPS > $14.00 per share 25%
2001 TOTAL EPS > $19.00 per share 25%
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EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
effective as of July 30, 1997 by and between C3, Inc., a North Carolina company
with its principal office at 3800 Gateway Boulevard, Suite 310, Morrisville,
North Carolina, 27560 (the "Company), and Mark W. Hahn, an individual currently
residing at _____________________________________________________ ("Employee").
Statement of Purpose
The Company wishes to obtain the services of Employee on the terms and
conditions and with the benefits set forth in this Agreement. Employee desires
to be employed by the Company on such terms and conditions and to receive such
additional consideration as set out herein.
Therefore, in consideration of the mutual covenants contained in this
Agreement, the grant of certain options to purchase common stock of the Company
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Employee agree as follows:
1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby accepts such employment, on the terms and conditions set forth
in this Agreement.
2. Term of Employment. The term of Employee's employment under this
Agreement shall commence as of the date of this Agreement and shall continue on
and through July 29, 1999; provided, however, that upon the successful
completion by the Company of an initial public offering raising a minimum of
eight million dollars ($8,000,000) (an "IPO"), the term of this Agreement shall
be extended on and through July 29, 2002. Termination of employment shall be
governed by Paragraph 7 of this Agreement, and unless terminated by either party
as provided in Paragraph 7, this Agreement shall automatically, at the
expiration of each then existing term, renew for successive one year terms.
3. Position and Duties. The Employee shall serve as Chief Financial
Officer of the Company. Employee will, under the direction of the President and
CEO of the Company, faithfully and to the best of his ability perform the duties
as set out on Exhibit A hereto and such additional duties as may be reasonably
assigned by the President and Board of Directors. Employee agrees to devote his
entire working time, energy and skills to the Company while so employed.
4. Compensation and Benefits. Employee shall receive compensation and
benefits for the services performed for the Company under this Agreement as
follows:
(a) Base Salary. Employee shall receive a base salary of $95,000,
payable in regular and equal monthly installments ("Base Salary");
provided, however, that upon the
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successful completion by the Company of an IPO, Employee's Base Salary
shall be increased to $122,000 per year, payable in regular and equal
monthly installments.
(b) Employee Benefits. Employee shall receive such benefits as
are made available to the other employees of the Company, including,
but not limited to, life, medical and disability insurance, retirement
benefits and such vacation as is provided to the other employees of the
Company (the "Employee Benefits").
(c) Incentive Compensation. Employee shall participate in such
incentive plans as may be approved by the Board of Directors from
time-to-time. The specific incentive compensation plans for 1998 are as
set out on Exhibit B hereto.
5. Reimbursement of Expenses. The Company shall reimburse Employee for
all reasonable out-of-pocket expenses incurred by Employee specifically and
directly related to the performance by Employee of the services under this
Agreement.
6. Withholding. The Company may withhold from any payments or benefits
under this Agreement all federal, state or local taxes or other amounts as may
be required pursuant to applicable law, government regulation or ruling.
7. Termination of Employment.
(a) Death of Employee. If the Employee shall die during the Term,
this Agreement and the employment relationship hereunder will automatically
terminate on the date of death, which date shall be the last day of the Term.
(b) Termination for Just Cause. The Company shall have the right to
terminate the Employee's employment under this Agreement at any time for Just
Cause, which termination shall be effective immediately. Termination for "Just
Cause" shall include termination for the Employee's personal dishonesty, gross
incompetence, willful misconduct, breach of a fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses),
written Company policy or final cease-and-desist order, conviction of a felony
or of a misdemeanor involving moral turpitude, unethical business practices in
connection with the Company's business, misappropriation of the Company's assets
(determined on a reasonable basis), disability or material breach of any other
provision of this Agreement, provided that the Employee has received written
notice from the Company of such material breach and such breach remains uncured
thirty days after the delivery of such notice. For purposes of this subsection,
the term "disability" means the inability of Employee, due to the condition of
his physical, mental or emotional health, to satisfactorily perform the duties
of his employment hereunder for a
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continuous three month period; provided further that if the Company furnishes
long term disability insurance for the Employee, the term "disability" shall
mean that continuous period sufficient to allow for the long term disability
payments to commence pursuant to the Company's long term disability insurance
policy. In the event the Employee's employment under this Agreement is
terminated for Just Cause, the Employee shall have no right to receive
compensation or other benefits under this Agreement for any period after such
termination.
(c) Termination Without Cause. The Company may terminate the
Employee's employment other than for "Just Cause," as described in Subsection
(b) above, at any time upon written notice to the Employee, which termination
shall be effective immediately. In the event the Company terminates Employee
pursuant to this Subsection (c), (i) the Employee will receive the highest
amount of the annual cash compensation (including cash bonuses and other
cash-based benefits, including for these purposes amounts earned or payable
whether or not deferred) received from the Company during any of the five
calendar years immediately preceding such termination ("Termination
Compensation") in each year until the end of the Term, so long as the Employee
complies with Sections 8, 9 and 10 of the Agreement and (ii) the Company shall
take such action as may be required to vest any unvested benefits of the
Employee under any employee stock-based or other benefit plan or arrangement.
Such amounts shall be payable at the times such amounts would have been paid in
accordance with Section 4. In addition, Employee shall continue to participate
in the same group hospitalization plan, health care plan, dental care plan, life
or other insurance or death benefit plan, and any other present or future
similar group employee benefit plan or program for which officers of the Company
generally are eligible, on the same terms as were in effect prior to Employee's
termination, either under the Company's plans or comparable coverage, for all
periods Employee receives Termination Compensation. Notwithstanding anything in
this Agreement to the contrary, if Employee breaches Sections 8, 9 or 10 of this
Agreement, the Employee will not be entitled to receive any further compensation
or benefits pursuant to this Section 7(c).
(d) Change of Control Situations. In the event of a Change of
Control of Company at any time after the date hereof, Employee may voluntarily
terminate employment with Company up until twelve (12) months after the Change
of Control for "Good Reason" and, subject to Section 7(f), (y) be entitled to
receive in a lump sum (i) any compensation due but not yet paid through the date
of termination and (ii) in lieu of any further salary payments from the date of
termination to the end of the then existing term, an amount equal to the
Termination Compensation times 2.99, and (z) shall continue to participate in
the same group hospitalization plan, health care plan, dental care plan, life or
other insurance or death benefit plan, and any other present or future similar
group employee benefit plan or program for which officers of the Company
generally are eligible, or comparable plans or coverage, for a period of two
years following termination of employment by the Employee, on the same terms as
were in effect either (A) at the date of such termination, or (B) if such plans
and programs in effect prior to the
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Change of Control of Company are, considered together as a whole, materially
more generous to the officers of Company, then at the date of the Change of
Control. Any equity based incentive compensation (including but not limited to
stock options, SARs, etc.) shall fully vest and be immediately exercisable in
full upon a Change in Control, not withstanding any provision in any applicable
plan. Any such benefits shall be paid by the Company to the same extent as they
were so paid prior to the termination or the Change of Control of Company.
"Good Reason" shall mean the occurrence of any of the following
events without the Employee's express written consent:
(i) the assignment to the Employee of duties inconsistent
with the position and status of the Employee with the Company
immediately prior to the Change of Control;
(ii) a reduction by the Company in the Employee's pay grade
or base salary as then in effect, or the exclusion of Employee
from participation in Company's benefit plans in which he previously
participated as in effect at the date hereof or as the same may be
increased from time to time during the Term, or Company's failure to
increase (within twelve (12) months of the Employee's last increase
in base salary) the Employee's base salary in an amount which at
least equals, on a percentage basis, the average percentage increase
in base salary for all executives entitled to participate in
Company's executive incentive plans for which Employee was eligible
in the preceding 12 months; or
(iii) an involuntary relocation of the Employee more than 50
miles from the location where the Employee worked immediately prior
to the Change in Control or the breach by the Company of any
material provision of this Agreement; or
(iv) any purported termination of the employment of Employee
by Company which is not effected in accordance with this Agreement.
A "Change of Control" shall be deemed to have occurred if (i) any
person or group of persons (as defined in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934) together with its affiliates, excluding
employee benefit plans of Company, becomes, directly or indirectly, the
"beneficial owner" (as defined in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) of securities of Company representing 20% or more of the
combined voting power of Company's then outstanding securities; or (ii) during
the then existing term of the Agreement, as a result of a tender offer or
exchange offer for the purchase of securities of Company (other than such an
offer by the Company for its own securities), or as a result of a
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proxy contest, merger, consolidation or sale of assets, or as a result of any
combination of the foregoing, individuals who at the beginning of any year
period during such term constitute the Company's Board of Directors, plus new
directors whose election by Company's shareholders is approved by a vote of at
least two-thirds of the outstanding voting shares of the Company, cease for any
reason during such year period to constitute at least two-thirds of the members
of such Board of Directors; or (iii) the shareholders of the Company approve a
merger or consolidation of the Company with any other corporation or entity
regardless of which entity is the survivor, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or being converted into voting securities of the surviving entity)
at least 60% of the combined voting power of the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or (iv) the shareholders of the Company approve a plan of
complete liquidation or winding-up of the Company or an agreement for the sale
or disposition by the Company of all or substantially all of the Company's
assets; or (v) any event which the Company's Board of Directors determines
should constitute a Change of Control.
(e) Employee's Right to Payments. In receiving any payments pursuant
to this Section 7, Employee shall not be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Employee hereunder, and such amounts shall not be reduced or terminated whether
or not the Employee obtains other employment.
(f) Reduction in Agreement Payments. Notwithstanding anything in
this Agreement to the contrary, if any of the payments provided for under this
Agreement (the "Agreement Payments"), together with any other payments that the
Employee has the right to receive (such other payments together with the
Agreement Payments are referred to as the "Total Payments"), would constitute a
"parachute payment" as defined in Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended (the "Code") (a "Parachute Payment"), the Agreement
Payments shall be reduced by the smallest amount necessary so that no portion of
such Total Payments would be Parachute Payments. In the event the Company shall
make an Agreement Payment to the Employee that would constitute a Parachute
Payment, the Employee shall return such payment to the Company (together with
interest at the rate set forth in Section 1274(b)(2)(B) of the Code). For
purposes of determining whether and the extent to which the Total Payments
constitute Parachute Payments, no portion of the Total Payments the receipt of
which Employee has effectively waived in writing shall be taken into account.
8. Covenant Not to Compete. Employee agrees that during his employment
with the Company and for a period of one (1) year following the termination of
his employment with the Company, for whatever reason:
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(a) Employee shall not, directly or indirectly, own any interest in,
manage, operate, control, be employed by, render advisory services to, or
participate in the management or control of any business that operates in the
same business as the Company, which Employee and the Company specifically agree
as the business of fabricating (wafering, preforming and faceting), marketing
and distributing moissanite gemstones or other diamond simulants to the gem and
jewelry industry (the "Business"), unless Employee's duties, responsibilities
and activities for and on behalf of such other business are not related in any
way to such other business's products which are in competition with the
Company's products. For purposes of this section, "competition with the Company"
shall mean competition for customers in the United States and in any country in
which the Company is selling the Company's products at the time of termination.
Employee's ownership of less than one percent of the issued and outstanding
stock of a corporation engaged in the Business shall not by itself be deemed to
be a violation of this Agreement. Employee recognizes that the possible
restriction on his activities which may occur as a result of his performance of
his obligations under Paragraph 8(a) are substantial, but that such restriction
is required for the reasonable protection of the Company.
(b) Employee shall not, directly or indirectly, influence or attempt
to influence any customer of the Company to discontinue its purchase of any
product of the Company which is manufactured or sold by the Company at the time
of termination of Employee's employment or to divert such purchases to any other
person, firm or employer.
(c) Employee shall not, directly or indirectly, interfere with,
disrupt or attempt to disrupt the relationship, contractual or otherwise,
between the Company and any of its suppliers.
(d) Employee shall not, directly or indirectly, solicit any employee
of the Company to work for any other person, firm or employer.
9. Confidentiality. In the course of his employment with the Company,
Employee will have access to confidential information, records, data, customer
lists, lists of product sources, specifications, trade secrets and other
information which is not generally available to the public and which the Company
and Employee hereby agree is proprietary information of the Company
("Confidential Information"). During and after his employment by the Company,
Employee shall not, directly or indirectly, disclose the Confidential
Information to any person or use any Confidential Information, except as is
required in the course of his employment under this Agreement. All Confidential
Information as well as records, files, memoranda, reports, plans, drawings,
documents, models, equipment and the like, including copies thereof, relating to
the Company's business, which Employee shall prepare or use or come into contact
with during the
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course of his employment, shall be and remain the Company's sole property, and
upon termination of Employee's employment with the Company, Employee shall
return all such materials to the Company.
10. Proprietary Information. Employee shall assign to the Company, its
successors or assigns, all of Employee's rights to copyrightable works and
inventions which, during the period of Employee's employment by the Company or
its successors in business, Employee makes or conceives, either solely or
jointly with others, relating to any subject matter with which Employee's work
for the Company is or may be concerned ("Proprietary Information"). Employee
shall promptly disclose in writing to the Company such copyrightable works and
inventions and, without charge to the Company, to execute, acknowledge and
deliver all such further papers, including applications for copyrights and
patents for such copyrightable works and inventions, if any, in all countries
and to vest title thereto in the Company, its successors, assigns or nominees.
Upon termination of Employee's employment hereunder, Employee shall return to
the Company or its successors or assigns, as the case may be, any Proprietary
Information. The obligation of Employee to assign the rights to such
copyrightable works and inventions shall survive the discontinuance or
termination of this Agreement for any reason.
11. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to Employee's employment by the Company and supersedes
any prior agreements between them, whether written or oral.
12. Waiver. The failure of either party to insist in any one or more
instance, upon performance of the terms and conditions of this Agreement, shall
not be construed as a waiver or a relinquishment of any right granted hereunder
or of the future performance of any such term or condition.
13. Notices. Any notice to be given under this Agreement shall be
deemed sufficient if addressed in writing and delivered personally, by telefax
with receipt acknowledged, or by registered or certified U.S. mail to the
address first above appearing, or to such other address as a party may designate
by notice from time to time.
14. Severability. In the event that any provision of any paragraph of
this Agreement shall be deemed to be invalid or unenforceable for any reason
whatsoever, it is agreed such invalidity or unenforceability shall not affect
any other provision of such paragraph or of this Agreement, and the remaining
terms, covenants, restrictions or provisions in such paragraph and in this
Agreement shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provision as to make it valid,
reasonable and enforceable.
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15. Amendment. This Agreement may be amended only by an agreement in
writing signed by each of the parties hereto.
16. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or breach thereof, shall be settled by arbitration in Raleigh,
North Carolina in accordance with the expedited procedures of the Rules of the
American Arbitration Association, and judgment upon the award may be rendered by
the arbitrator and may be entered in any court having jurisdiction thereof.
17. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of North Carolina. Each of the parties
hereto irrevocably submits to the exclusive jurisdiction of the courts located
in North Carolina for the purposes of any suit, action or other proceeding
contemplated hereby or any transaction contemplated hereby.
18. Benefit. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against the Company, its successors
and assigns, and Employee, his heirs, beneficiaries and legal representatives.
It is agreed that the rights and obligations of Employee may not be delegated or
assigned except as may be specifically agreed to by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
C3, Inc.
By: /s/Jeff N. Hunter
----------------------------------
Jeff N. Hunter, President
/s/Mark W. Hahn
----------------------------------
Mark W. Hahn
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Position Description Exhibit A
Mark Hahn - Chief Financial Officer
Purpose:
The Chief Financial Officer is responsible for the management of all financial
and administrative operations of the company. This position will report to the
Chief Executive Officer.
Responsibilities:
Lead all aspects of business development and finance activities for the Company
including managing an initial public offering of the Company's stock,
financial reporting and investor relations.
Direct all aspects of the financial operations of the Company including
accounting, budgeting, investment management, cash management and
presentations of financial information at Board of Directors' meetings.
Manage the human resource activities and information systems for the Company.
Serve on company-wide project teams and perform such other responsibilities as
may be assigned by the Chief Executing Officer or Board of Directors from
time to time.
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Incentive Compensation Plans Exhibit B
Mark W. Hahn
Background
Each member of the management team can have a significant impact on the
Company's ability to meet and exceed its goals. The Company has established an
Annual Incentive Compensation Plan and a Long-term Incentive Compensation Plan
to provide management and key employees with incentives to not only achieve the
performance goals outlined in the business plan, but to exceed those goals.
New goals and targets will be established each year for the Annual Incentive
Compensation Plan and goals and targets for the Long-term Incentive Plan will be
established from time-to-time.
1998 Annual Incentive Compensation Plan
The 1998 Annual Incentive Compensation Plan (Annual Plan) provides for a "target
bonus" which is based on a percentage of base compensation. Your specific
"target bonus" is outlined below. Each person that participates in the Annual
Plan has the ability to earn far in excess of their "target bonus" if the
Company exceeds its performance goals.
1. Your "Target Bonus". Your 1998 "target bonus" is 40% of your base
compensation, or $48,800.
2. Performance Goals. The Annual Plan performance goals for 1998 have been
separated into several categories based on the Company's performance relative
to net revenue and pre-tax income. Based upon the Company achieving different
performance levels, as outlined in the chart below, the participating employee
can earn different percentages of their "target bonus".
NET REVENUE
TARGET TARGET + OPTIMUM OUTSTANDING
PRE-TAX INCOME >$31.7 M >$35.6 M >$42.2 M >$48.5 M
TARGET >$12.4 M 100% 110% 120% 130%
TARGET + >$16.3 M 150% 165% 180% 195%
OPTIMUM >$22.9 M 225% 245% 270% 290%
OUTSTANDING >$29.2 M 325% 360% 390% 425%
The actual net revenue and pre-tax income from the Company's 1998 audited
financial statements will be used to determine the appropriate percentage in the
table above. For example, net revenue of $34 million with pre-tax income of $14
million would lead to a bonus equal to 100%
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of the participant's "target bonus"; net revenue of $35.6 million with pre-tax
income of $16.3 million would lead to a bonus equal to 165% of the participants
"target bonus", etc. If the performance of the Company exceeds the criteria
above, the percentages will increase on a similar basis to those used above. If
however, the Company does not meet the criteria above, the bonus structure will
be modified as follows:
(a) As long as the $12.4 million pre-tax income target is met the bonuses will
be awarded at the 100% level.
(b) If pre-tax income is below $12.4 million, so long as the Company achieves a
positive pre-tax income, the percentage of the "target bonus" bonus would
be reduced on a linear basis. Therefore, the percentage will be calculated
by dividing the actual pre-tax net income by the $12.4 million target. No
bonuses will be earned or paid if the Company does not achieve positive
pre-tax net income.
Long-term Incentive Compensation Plan
The Long-term Incentive Compensation Plan (Long-term Plan) provides for the
award of equity based incentives (stock options, stock appreciation rights,
etc.); the specific grants and terms of which will be determined by the
Compensation Committee of the Board of Directors from time-to-time. Generally
the awards under the Long-term Plan will vest and become exercisable only upon
the attainment of specific operating goals for the target. These targets will be
based on factors that are deemed to have a direct impact on the performance of
the Company's stock, typically this will be earnings per share.
1. Your Award. Your current award under the Long-term Plan, to be granted only
upon completion of an IPO, is incentive stock options for the purchase of 50,000
shares of common stock at $13.50 per share.
2. Vesting Period. These options will vest and become exercisable based upon
the Company achieving the following results (note vesting will stop once 100%
vesting level has been achieved):
Completion of IPO 15%
98 Q1 sales > $800k & margin > 28% 5%
98 Q1 EPS > $.01 per share (stretch goal) 10%
98 Q2 sales > $2.2 M & margin > 36% 5%
98 Q2 EPS > $.01 per share (stretch goal) 10%
98 Q2 EPS > $.33 per share 10%
1998 total EPS > $1.13 per share 25%
99 Q1 EPS > $1.13 per share 5%
99 Q2 EPS > $1.31 per share 5%
99 Q3 EPS > $1.71 per share 5%
1999 total EPS > $8.00 per share 25%
2000 total EPS > $14.00 per share 25%
2001 total EPS > $19.00 per share 25%
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EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into effective
as of September 15, 1997 by and between C3, Inc., a North Carolina company with
its principal office at 3800 Gateway Boulevard, Suite 310, Morrisville, North
Carolina, 27560 (the "Company), and Martin J. DeRoy, an individual currently
residing at _____________________________________________________ ("Employee").
Statement of Purpose
The Company wishes to obtain the services of Employee on the terms and
conditions and with the benefits set forth in this Agreement. Employee desires
to be employed by the Company on such terms and conditions and to receive such
additional consideration as set out herein.
Therefore, in consideration of the mutual covenants contained in this
Agreement, the grant of certain options to purchase common stock of the Company
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Employee agree as follows:
1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby accepts such employment, on the terms and conditions set forth
in this Agreement.
2. Term of Employment. The term of Employee's employment under this
Agreement shall commence as of the date of this Agreement and shall continue on
and through September 14, 1998. Termination of employment shall be governed by
Paragraph 7 of this Agreement, and unless terminated by either party as provided
in Paragraph 7, this Agreement shall automatically, at the expiration of each
then existing term, renew for successive one year terms.
3. Position and Duties. The Employee shall serve as Vice President of
Marketing of the Company. Employee will, under the direction of the President
and CEO of the Company, faithfully and to the best of his ability perform the
duties as set out on Exhibit A hereto and such additional duties as may be
reasonably assigned by the President and Board of Directors. Employee agrees to
devote his entire working time, energy and skills to the Company while so
employed.
4. Compensation and Benefits. Employee shall receive compensation and
benefits for the services performed for the Company under this Agreement as
follows:
(a) Base Salary. Employee shall receive a base salary of $94,000 per
year, payable in regular and equal monthly installments ("Base
Salary").
(b) Employee Benefits. Employee shall receive such benefits as are
made available to the other employees of the Company, including, but
not limited to, life,
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medical and disability insurance, retirement benefits and such vacation
as is provided to the other employees of the Company (the "Employee
Benefits").
(c) Incentive Compensation. Employee shall participate in such
incentive plans as may be approved by the Board of Directors from
time-to-time. The specific incentive compensation plans for 1998 are as
set out on Exhibit B hereto.
5. Reimbursement of Expenses. The Company shall reimburse Employee for
all reasonable out-of-pocket expenses incurred by Employee specifically and
directly related to the performance by Employee of the services under this
Agreement.
6. Withholding. The Company may withhold from any payments or benefits
under this Agreement all federal, state or local taxes or other amounts as may
be required pursuant to applicable law, government regulation or ruling.
7. Termination of Employment.
(a) Death of Employee. If the Employee shall die during the Term,
this Agreement and the employment relationship hereunder will automatically
terminate on the date of death, which date shall be the last day of the Term.
(b) Termination for Just Cause. The Company shall have the right to
terminate the Employee's employment under this Agreement at any time for Just
Cause, which termination shall be effective immediately. Termination for "Just
Cause" shall include termination for the Employee's personal dishonesty, gross
incompetence, willful misconduct, breach of a fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses),
written Company policy or final cease-and-desist order, conviction of a felony
or of a misdemeanor involving moral turpitude, unethical business practices in
connection with the Company's business, misappropriation of the Company's assets
(determined on a reasonable basis), disability or material breach of any other
provision of this Agreement, provided that the Employee has received written
notice from the Company of such material breach and such breach remains uncured
thirty days after the delivery of such notice. For purposes of this subsection,
the term "disability" means the inability of Employee, due to the condition of
his physical, mental or emotional health, to satisfactorily perform the duties
of his employment hereunder for a continuous three month period; provided
further that if the Company furnishes long term disability insurance for the
Employee, the term "disability" shall mean that continuous period sufficient to
allow for the long term disability payments to commence pursuant to the
Company's long term disability insurance policy. In the event the Employee's
employment under this Agreement is terminated for Just Cause, the Employee shall
receive within ten (10) business days
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a severance payment equal to six (6) months Base Salary, but shall have no right
to receive compensation or other benefits under this Agreement for any period
after such termination.
(c) Termination Without Cause. The Company may terminate the
Employee's employment other than for "Just Cause," as described in Subsection
(b) above, at any time upon written notice to the Employee, which termination
shall be effective immediately. In the event the Company terminates Employee
pursuant to this Subsection (c), (i) the Employee will receive the Base Salary
for the remainder of the then existing term but no less than six (6) months of
Base Salary ("Termination Compensation"), so long as the Employee complies with
Sections 8, 9 and 10 of the Agreement and (ii) the Company shall take such
action as may be required to vest any unvested benefits of the Employee under
any employee stock-based or other benefit plan or arrangement. Such amounts
shall be payable at the times such amounts would have been paid in accordance
with Section 4. In addition, Employee shall continue to participate in the same
group hospitalization plan, health care plan, dental care plan, life or other
insurance or death benefit plan, and any other present or future similar group
employee benefit plan or program for which officers of the Company generally are
eligible, on the same terms as were in effect prior to Employee's termination,
either under the Company's plans or comparable coverage, for all periods
Employee receives Termination Compensation. Notwithstanding anything in this
Agreement to the contrary, if Employee breaches Sections 8, 9 or 10 of this
Agreement, the Employee will not be entitled to receive any further compensation
or benefits pursuant to this Section 7(c).
(d) Change of Control Situations. In the event of a Change of
Control of Company at any time after the date hereof, Employee may voluntarily
terminate employment with Company up until twelve (12) months after the Change
of Control for "Good Reason" and, subject to Section 7(f), (y) be entitled to
receive in a lump sum (i) any compensation due but not yet paid through the date
of termination and (ii) in lieu of any further salary payments from the date of
termination to the end of the then existing term, an amount equal to the base
salary plus prior years incentive compensation times 2.99, and (z) shall
continue to participate in the same group hospitalization plan, health care
plan, dental care plan, life or other insurance or death benefit plan, and any
other present or future similar group employee benefit plan or program for which
officers of the Company generally are eligible, or comparable plans or coverage,
for a period of two years following termination of employment by the Employee,
on the same terms as were in effect either (A) at the date of such termination,
or (B) if such plans and programs in effect prior to the Change of Control of
Company are, considered together as a whole, materially more generous to the
officers of Company, then at the date of the Change of Control. Any equity based
incentive compensation (including but not limited to stock options, SARs, etc.)
shall fully vest and be immediately exercisable in full upon a Change in
Control, not withstanding any provision in any applicable plan. Any such
benefits shall be paid by the Company to the same extent as they were so paid
prior to the termination or the Change of Control of Company.
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"Good Reason" shall mean the occurrence of any of the following
events without the Employee's express written consent:
(i) the assignment to the Employee of duties inconsistent
with the position and status of the Employee with the Company
immediately prior to the Change of Control;
(ii) a reduction by the Company in the Employee's pay grade
or base salary as then in effect, or the exclusion of Employee from
participation in Company's benefit plans in which he previously
participated as in effect at the date hereof or as the same may be
increased from time to time during the Term, or Company's failure
to increase (within twelve (12) months of the Employee's last
increase in base salary) the Employee's base salary in an amount
which at least equals, on a percentage basis, the average
percentage increase in base salary for all executives entitled to
participate in Company's executive incentive plans for which
Employee was eligible in the preceding 12 months; or
(iii) an involuntary relocation of the Employee more than 50
miles from the location where the Employee worked immediately prior
to the Change in Control or the breach by the Company of any
material provision of this Agreement; or
(iv) any purported termination of the employment of Employee
by Company which is not effected in accordance with this Agreement.
A "Change of Control" shall be deemed to have occurred if (i) any
person or group of persons (as defined in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934) together with its affiliates, excluding
employee benefit plans of Company, becomes, directly or indirectly, the
"beneficial owner" (as defined in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) of securities of Company representing 20% or more of the
combined voting power of Company's then outstanding securities; or (ii) during
the then existing term of the Agreement, as a result of a tender offer or
exchange offer for the purchase of securities of Company (other than such an
offer by the Company for its own securities), or as a result of a proxy contest,
merger, consolidation or sale of assets, or as a result of any combination of
the foregoing, individuals who at the beginning of any year period during such
term constitute the Company's Board of Directors, plus new directors whose
election by Company's shareholders is approved by a vote of at least two-thirds
of the outstanding voting shares of the Company, cease for any reason during
such year period to constitute at least two-thirds of the members of such Board
of Directors; or (iii) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation or entity regardless of
which entity is
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the survivor, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or being converted into
voting securities of the surviving entity) at least 60% of the combined voting
power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; or (iv) the
shareholders of the Company approve a plan of complete liquidation or winding-up
of the Company or an agreement for the sale or disposition by the Company of all
or substantially all of the Company's assets; or (v) any event which the
Company's Board of Directors determines should constitute a Change of Control.
(e) Employee's Right to Payments. In receiving any payments
pursuant to this Section 7, Employee shall not be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Employee hereunder, and such amounts shall not be reduced or terminated
whether or not the Employee obtains other employment.
(f) Reduction in Agreement Payments. Notwithstanding anything
in this Agreement to the contrary, if any of the payments provided for under
this Agreement (the "Agreement Payments"), together with any other payments that
the Employee has the right to receive (such other payments together with the
Agreement Payments are referred to as the "Total Payments"), would constitute a
"parachute payment" as defined in Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended (the "Code") (a "Parachute Payment"), the Agreement
Payments shall be reduced by the smallest amount necessary so that no portion of
such Total Payments would be Parachute Payments. In the event the Company shall
make an Agreement Payment to the Employee that would constitute a Parachute
Payment, the Employee shall return such payment to the Company (together with
interest at the rate set forth in Section 1274(b)(2)(B) of the Code). For
purposes of determining whether and the extent to which the Total Payments
constitute Parachute Payments, no portion of the Total Payments the receipt of
which Employee has effectively waived in writing shall be taken into account.
8. Covenant Not to Compete. Employee agrees that during his employment
with the Company and for a period of one (1) year following the termination of
his employment with the Company, for whatever reason:
(a) Employee shall not, directly or indirectly, own any interest
in, manage, operate, control, be employed by, render advisory
services to, or participate in the management or control of any
business that operates in the same business as the Company, which
Employee and the Company specifically agree as the business of
fabricating (wafering, preforming and faceting), marketing and
distributing moissanite gemstones or other diamond simulants to the
gem and jewelry industry (the "Business"), unless Employee's duties,
responsibilities and activities for and on behalf of such other
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business are not related in any way to such other business's products
which are in competition with the Company's products. For purposes of
this section, "competition with the Company" shall mean competition for
customers in the United States and in any country in which the Company
is selling the Company's products at the time of termination.
Employee's ownership of less than one percent of the issued and
outstanding stock of a corporation engaged in the Business shall not by
itself be deemed to be a violation of this Agreement. Employee
recognizes that the possible restriction on his activities which may
occur as a result of his performance of his obligations under Paragraph
8(a) are substantial, but that such restriction is required for the
reasonable protection of the Company.
(b) Employee shall not, directly or indirectly, influence or
attempt to influence any customer of the Company to discontinue its
purchase of any product of the Company which is manufactured or sold by
the Company at the time of termination of Employee's employment or to
divert such purchases to any other person, firm or employer.
(c) Employee shall not, directly or indirectly, interfere
with, disrupt or attempt to disrupt the relationship, contractual or
otherwise, between the Company and any of its suppliers.
(d) Employee shall not, directly or indirectly, solicit any
employee of the Company to work for any other person, firm or employer.
9. Confidentiality. In the course of his employment with the Company,
Employee will have access to confidential information, records, data, customer
lists, lists of product sources, specifications, trade secrets and other
information which is not generally available to the public and which the Company
and Employee hereby agree is proprietary information of the Company
("Confidential Information"). During and after his employment by the Company,
Employee shall not, directly or indirectly, disclose the Confidential
Information to any person or use any Confidential Information, except as is
required in the course of his employment under this Agreement. All Confidential
Information as well as records, files, memoranda, reports, plans, drawings,
documents, models, equipment and the like, including copies thereof, relating to
the Company's business, which Employee shall prepare or use or come into contact
with during the course of his employment, shall be and remain the Company's sole
property, and upon termination of Employee's employment with the Company,
Employee shall return all such materials to the Company.
10. Proprietary Information. Employee shall assign to the Company, its
successors or assigns, all of Employee's rights to copyrightable works and
inventions which, during the period of Employee's employment by the Company or
its successors in business, Employee makes or conceives, either solely or
jointly with others, relating to any subject matter with which Employee's work
for the Company is or may be concerned ("Proprietary Information"). Employee
shall promptly disclose in writing to the Company such copyrightable works and
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inventions and, without charge to the Company, to execute, acknowledge and
deliver all such further papers, including applications for copyrights and
patents for such copyrightable works and inventions, if any, in all countries
and to vest title thereto in the Company, its successors, assigns or nominees.
Upon termination of Employee's employment hereunder, Employee shall return to
the Company or its successors or assigns, as the case may be, any Proprietary
Information. The obligation of Employee to assign the rights to such
copyrightable works and inventions shall survive the discontinuance or
termination of this Agreement for any reason.
11. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to Employee's employment by the Company and supersedes
any prior agreements between them, whether written or oral.
12. Waiver. The failure of either party to insist in any one or more
instance, upon performance of the terms and conditions of this Agreement, shall
not be construed as a waiver or a relinquishment of any right granted hereunder
or of the future performance of any such term or condition.
13. Notices. Any notice to be given under this Agreement shall be
deemed sufficient if addressed in writing and delivered personally, by telefax
with receipt acknowledged, or by registered or certified U.S. mail to the
address first above appearing, or to such other address as a party may designate
by notice from time to time.
14. Severability. In the event that any provision of any paragraph of
this Agreement shall be deemed to be invalid or unenforceable for any reason
whatsoever, it is agreed such invalidity or unenforceability shall not affect
any other provision of such paragraph or of this Agreement, and the remaining
terms, covenants, restrictions or provisions in such paragraph and in this
Agreement shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provision as to make it valid,
reasonable and enforceable.
15. Amendment. This Agreement may be amended only by an agreement in
writing signed by each of the parties hereto.
16. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or breach thereof, shall be settled by arbitration in Raleigh,
North Carolina in accordance with the expedited procedures of the Rules of the
American Arbitration Association, and judgment upon the award may be rendered by
the arbitrator and may be entered in any court having jurisdiction thereof.
17. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of North Carolina. Each of the parties
hereto irrevocably submits to the exclusive jurisdiction of the courts located
in North Carolina for the purposes of any suit, action or other proceeding
contemplated hereby or any transaction contemplated hereby.
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18. Benefit. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against the Company, its successors
and assigns, and Employee, his heirs, beneficiaries and legal representatives.
It is agreed that the rights and obligations of Employee may not be delegated or
assigned except as may be specifically agreed to by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
C3, Inc.
By: /s/Jeff N. Hunter
-----------------------------------------
Jeff N. Hunter, President
/s/Martin J. DeRoy
--------------------------------------------
Martin J. DeRoy
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POSITION DESCRIPTION EXHIBIT A
MARTIN J. DEROY - VICE PRESIDENT OF MARKETING
Purpose:
To lead the marketing, promotion, advertising and public relations activities
for the Company. This position will report to the President and may serve as
Vice-President of the Company.
Responsibilities:
Lead all aspects of marketing moissanite gemstones, test instruments and other
products as developed, including planning, budgeting and policy setting.
Work closely with the Director of Sales to support the sales of moissanite
gemstones.
Manage all aspects of gemstone and test instrument branding such as product
image and recognition to trade and consumers, including collaboration with
the Director of Sales in maintaining brand images.
Direct all aspects of advertising and promotion of all products to the trade and
consumers. Interface with Advertising and Promotional (PR) Firms as
necessary to support product image.
Direct market research activities and continually develop plans to better meet
customer and consumer needs.
Keep current with consumer marketing and prevailing gemstone and jewelry
industry trends and issues.
Serve on company-wide project teams and perform such other responsibilities as
may be assigned by the President or Board of Directors from time to time.
10
INCENTIVE COMPENSATION PLANS EXHIBIT B
MARTIN DEROY
Background
Each member of the management team can have a significant impact on the
Company's ability to meet and exceed its goals. The Company has established an
Annual Incentive Compensation Plan and a Long-term Incentive Compensation Plan
to provide management and key employees with incentives to not only achieve the
performance goals outlined in the business plan, but to exceed those goals.
New goals and targets will be established each year for the Annual Incentive
Compensation Plan and goals and targets for the Long-term Incentive Plan will
be established from time-to-time.
1998 Annual Incentive Compensation Plan
The 1998 Annual Incentive Compensation Plan (Annual Plan) provides for a "target
bonus" which is based on a percentage of base compensation. Your specific
"target bonus" is outlined below. Each person that participates in the Annual
Plan has the ability to earn far in excess of their "target bonus" if the
Company exceeds its performance goals.
1. Your "Target Bonus". Your 1998 "target bonus" is 55% of your base
compensation, or $51,700.
2. Performance Goals. The Annual Plan performance goals for 1998 have been
separated into several categories based on the Company's performance relative
to net revenue and pre-tax income. Based upon the Company achieving different
performance levels, as outlined in the chart below, the participating employee
can earn different percentages of their "target bonus".
NET REVENUE
TARGET TARGET + OPTIMUM OUTSTANDING
PRE-TAX INCOME >$31.7 M >$35.6 M >$42.2 M >$48.5 M
TARGET >$12.4 M 100% 110% 120% 130%
TARGET + >$16.3 M 150% 165% 180% 195%
OPTIMUM >$22.9 M 225% 245% 270% 290%
OUTSTANDING >$29.2 M 325% 360% 390% 425%
The actual net revenue and pre-tax income from the Company's 1998 audited
financial statements will be used to determine the appropriate percentage in the
table above. For example, net revenue of $34 million with pre-tax income of $14
million would lead to a bonus equal to 100% of the participant's "target bonus";
net revenue of $35.6 million with pre-tax income of $16.3 million would lead to
a bonus equal to 165% of the participants "target bonus", etc. If the
performance of the Company exceeds the criteria above, the percentages will
increase on a similar
11
basis to those used above. If however, the Company does not meet the criteria
above, the bonus structure will be modified as follows:
(a) As long as the $12.4 million pre-tax income target is met the bonuses will
be awarded at the 100% level.
(b) If pre-tax income is below $12.4 million, so long as the Company achieves a
positive pre-tax income, the percentage of the "target bonus" bonus would
be reduced on a linear basis. Therefore, the percentage will be calculated
by dividing the actual pre-tax net income by the $12.4 million target. No
bonuses will be earned or paid if the Company does not achieve positive
pre-tax net income.
Long-term Incentive Compensation Plan
The Long-term Incentive Compensation Plan (Long-term Plan) provides for the
award of equity based incentives (stock options, stock appreciation rights,
etc.); the specific grants and terms of which will be determined by the
Compensation Committee of the Board of Directors from time-to-time. Generally
the awards under the Long-term Plan will vest and become exercisable only upon
the attainment of specific operating goals for the target. These targets will be
based on factors that are deemed to have a direct impact on the performance of
the Company's stock, typically this will be earnings per share.
1. Your Award. Your current award under the Long-term Plan, to be granted
only upon completion of an IPO, is incentive stock options for the purchase of
20,000 shares of common stock at $13.50 per share.
2. Vesting Period. These options will vest and become exercisable based upon
the Company achieving the following results (note vesting will stop once 100%
vesting level has been achieved):
Completion of IPO 15%
98 Q1 sales > $800k & margin > 28% 5%
98 Q1 EPS > $.01 per share (stretch goal) 10%
98 Q2 sales > $2.2 M & margin 36% 5%
98 Q2 EPS > $.01 per share (stretch goal) 10%
98 Q2 EPS > $.33 per share 10%
1998 TOTAL EPS > $1.13 per share 25%
99 Q1 EPS > $1.13 per share 5%
99 Q2 EPS > $1.31 per share 5%
99 Q3 EPS > $1.71 per share 5%
1999 TOTAL EPS > $8.00 per share 25%
2000 TOTAL EPS > $14.00 per share 25%
2001 TOTAL EPS > $19.00 per share 25%
1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
effective as of March 1, 1997 by and between C3, Inc., a North Carolina company
with its principal office at 3800 Gateway Boulevard, Suite 310, Morrisville,
North Carolina, 27560 (the "Company), and Thomas G. Coleman, an individual
currently residing at ___________________________________________ ("Employee").
Statement of Purpose
The Company wishes to obtain the services of Employee on the terms and
conditions and with the benefits set forth in this Agreement. Employee desires
to be employed by the Company on such terms and conditions and to receive such
additional consideration as set out herein.
Therefore, in consideration of the mutual covenants contained in this
Agreement, the grant of certain options to purchase common stock of the Company
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Company and Employee agree as follows:
1. Employment. The Company hereby agrees to employ Employee, and
Employee hereby accepts such employment, on the terms and conditions set forth
in this Agreement.
2. Term of Employment. The term of Employee's employment under this
Agreement shall commence as of the date of this Agreement and shall continue on
and through August 24, 1998; provided, however, that upon the successful
completion by the Company of an initial public offering raising a minimum of
eight million dollars ($8,000,000) (an "IPO"), the term of this Agreement shall
be extended on and through August 24, 2000. Termination of employment shall be
governed by Paragraph 7 of this Agreement, and unless terminated by either party
as provided in Paragraph 7, this Agreement shall automatically, at the
expiration of each then existing term, renew for successive one year terms.
3. Position and Duties. The Employee shall serve as Director of
Technology of the Company. Employee will, under the direction of the President
and CEO of the Company, faithfully and to the best of his ability perform the
duties as set out on Exhibit A hereto and such additional duties as may be
reasonably assigned by the President and Board of Directors. Employee agrees to
devote his entire working time, energy and skills to the Company while so
employed.
4. Compensation and Benefits. Employee shall receive compensation and
benefits for the services performed for the Company under this Agreement as
follows:
(a) Base Salary. Employee shall receive a base salary of $36,000
per year, payable in regular and equal monthly installments ("Base
Salary"); provided, however,
2
that upon the successful completion by the Company of an IPO,
Employee's Base Salary shall be increased to $87,000 per year, payable
in regular and equal monthly installments.
(b) Employee Benefits. Employee shall receive such benefits as are
made available to the other employees of the Company, including, but
not limited to, life, medical and disability insurance, retirement
benefits and such vacation as is provided to the other employees of the
Company (the "Employee Benefits").
(c) Incentive Compensation. Employee shall participate in such
incentive plans as may be approved by the Board of Directors from
time-to-time. The specific incentive compensation plans for 1998 are as
set out on Exhibit B hereto.
5. Reimbursement of Expenses. The Company shall reimburse Employee for
all reasonable out-of-pocket expenses incurred by Employee specifically and
directly related to the performance by Employee of the services under this
Agreement.
6. Withholding. The Company may withhold from any payments or benefits
under this Agreement all federal, state or local taxes or other amounts as may
be required pursuant to applicable law, government regulation or ruling.
7. Termination of Employment.
(a) Death of Employee. If the Employee shall die during the Term,
this Agreement and the employment relationship hereunder will automatically
terminate on the date of death, which date shall be the last day of the Term.
(b) Termination for Just Cause. The Company shall have the right to
terminate the Employee's employment under this Agreement at any time for Just
Cause, which termination shall be effective immediately. Termination for "Just
Cause" shall include termination for the Employee's personal dishonesty, gross
incompetence, willful misconduct, breach of a fiduciary duty involving personal
profit, intentional failure to perform stated duties, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses),
written Company policy or final cease-and-desist order, conviction of a felony
or of a misdemeanor involving moral turpitude, unethical business practices in
connection with the Company's business, misappropriation of the Company's assets
(determined on a reasonable basis), disability or material breach of any other
provision of this Agreement, provided that the Employee has received written
notice from the Company of such material breach and such breach remains uncured
thirty days after the delivery of such notice. For purposes of this subsection,
the term "disability" means the inability of Employee, due to the condition of
his physical, mental or emotional health, to satisfactorily perform the duties
of his employment hereunder for a
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continuous three month period; provided further that if the Company furnishes
long term disability insurance for the Employee, the term "disability" shall
mean that continuous period sufficient to allow for the long term disability
payments to commence pursuant to the Company's long term disability insurance
policy. In the event the Employee's employment under this Agreement is
terminated for Just Cause, the Employee shall have no right to receive
compensation or other benefits under this Agreement for any period after such
termination.
(c) Termination Without Cause. The Company may terminate the
Employee's employment other than for "Just Cause," as described in Subsection
(b) above, at any time upon written notice to the Employee, which termination
shall be effective immediately. In the event the Company terminates Employee
pursuant to this Subsection (c), (i) the Employee will receive the highest
amount of the annual cash compensation (including cash bonuses and other
cash-based benefits, including for these purposes amounts earned or payable
whether or not deferred) received from the Company during any of the five
calendar years immediately preceding such termination ("Termination
Compensation") in each year until the end of the Term, so long as the Employee
complies with Sections 8, 9 and 10 of the Agreement and (ii) the Company shall
take such action as may be required to vest any unvested benefits of the
Employee under any employee stock-based or other benefit plan or arrangement.
Such amounts shall be payable at the times such amounts would have been paid in
accordance with Section 4. In addition, Employee shall continue to participate
in the same group hospitalization plan, health care plan, dental care plan, life
or other insurance or death benefit plan, and any other present or future
similar group employee benefit plan or program for which officers of the Company
generally are eligible, on the same terms as were in effect prior to Employee's
termination, either under the Company's plans or comparable coverage, for all
periods Employee receives Termination Compensation. Notwithstanding anything in
this Agreement to the contrary, if Employee breaches Sections 8, 9 or 10 of this
Agreement, the Employee will not be entitled to receive any further compensation
or benefits pursuant to this Section 7(c).
(d) Change of Control Situations. In the event of a Change of
Control of Company at any time after the date hereof, Employee may voluntarily
terminate employment with Company up until twelve (12) months after the Change
of Control for "Good Reason" and, subject to Section 7(f), (y) be entitled to
receive in a lump sum (i) any compensation due but not yet paid through the
date of termination and (ii) in lieu of any further salary payments from the
date of termination to the end of the then existing term, an amount equal to
the Termination Compensation times 2.99, and (z) shall continue to participate
in the same group hospitalization plan, health care plan, dental care plan,
life or other insurance or death benefit plan, and any other present or future
similar group employee benefit plan or program for which officers of the
Company generally are eligible, or comparable plans or coverage, for a period
of two years following termination of employment by the Employee, on the same
terms as were in effect either (A) at the date of such termination, or (B) if
such plans and programs in effect prior to the
3
4
Change of Control of Company are, considered together as a whole, materially
more generous to the officers of Company, then at the date of the Change of
Control. Any equity based incentive compensation (including but not limited to
stock options, SARs, etc.) shall fully vest and be immediately exercisable in
full upon a Change in Control, not withstanding any provision in any applicable
plan. Any such benefits shall be paid by the Company to the same extent as they
were so paid prior to the termination or the Change of Control of Company.
"Good Reason" shall mean the occurrence of any of the following
events without the Employee's express written consent:
(i) the assignment to the Employee of duties inconsistent
with the position and status of the Employee with the Company
immediately prior to the Change of Control;
(ii) a reduction by the Company in the Employee's pay grade
or base salary as then in effect, or the exclusion of Employee from
participation in Company's benefit plans in which he previously
participated as in effect at the date hereof or as the same may be
increased from time to time during the Term, or Company's failure
to increase (within twelve (12) months of the Employee's last
increase in base salary) the Employee's base salary in an amount
which at least equals, on a percentage basis, the average
percentage increase in base salary for all executives entitled to
participate in Company's executive incentive plans for which
Employee was eligible in the preceding 12 months; or
(iii) an involuntary relocation of the Employee more than 50
miles from the location where the Employee worked immediately prior
to the Change in Control or the breach by the Company of any
material provision of this Agreement; or
(iv) any purported termination of the employment of Employee
by Company which is not effected in accordance with this Agreement.
A "Change of Control" shall be deemed to have occurred if (i) any
person or group of persons (as defined in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934) together with its affiliates, excluding
employee benefit plans of Company, becomes, directly or indirectly, the
"beneficial owner" (as defined in Rule 13d-3 promulgated under the Securities
Exchange Act of 1934) of securities of Company representing 20% or more of the
combined voting power of Company's then outstanding securities; or (ii) during
the then existing term of the Agreement, as a result of a tender offer or
exchange offer for the purchase of securities of Company (other than such an
offer by the Company for its own securities), or as a result of a
4
5
proxy contest, merger, consolidation or sale of assets, or as a result of any
combination of the foregoing, individuals who at the beginning of any year
period during such term constitute the Company's Board of Directors, plus new
directors whose election by Company's shareholders is approved by a vote of at
least two-thirds of the outstanding voting shares of the Company, cease for any
reason during such year period to constitute at least two-thirds of the members
of such Board of Directors; or (iii) the shareholders of the Company approve a
merger or consolidation of the Company with any other corporation or entity
regardless of which entity is the survivor, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or being converted into voting securities of the
surviving entity) at least 60% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately
after such merger or consolidation; or (iv) the shareholders of the Company
approve a plan of complete liquidation or winding-up of the Company or an
agreement for the sale or disposition by the Company of all or substantially
all of the Company's assets; or (v) any event which the Company's Board of
Directors determines should constitute a Change of Control.
(e) Employee's Right to Payments. In receiving any payments
pursuant to this Section 7, Employee shall not be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to the Employee hereunder, and such amounts shall not be reduced or terminated
whether or not the Employee obtains other employment.
(f) Reduction in Agreement Payments. Notwithstanding anything in
this Agreement to the contrary, if any of the payments provided for under this
Agreement (the "Agreement Payments"), together with any other payments that the
Employee has the right to receive (such other payments together with the
Agreement Payments are referred to as the "Total Payments"), would constitute a
"parachute payment" as defined in Section 280G(b)(2) of the Internal Revenue
Code of 1986, as amended (the "Code") (a "Parachute Payment"), the Agreement
Payments shall be reduced by the smallest amount necessary so that no portion of
such Total Payments would be Parachute Payments. In the event the Company shall
make an Agreement Payment to the Employee that would constitute a Parachute
Payment, the Employee shall return such payment to the Company (together with
interest at the rate set forth in Section 1274(b)(2)(B) of the Code). For
purposes of determining whether and the extent to which the Total Payments
constitute Parachute Payments, no portion of the Total Payments the receipt of
which Employee has effectively waived in writing shall be taken into account.
8. Covenant Not to Compete. Employee agrees that during his employment
with the Company and for a period of one (1) year following the termination of
his employment with the Company, for whatever reason:
5
6
(a) Employee shall not, directly or indirectly, own any interest
in, manage, operate, control, be employed by, render advisory services
to, or participate in the management or control of any business that
operates in the same business as the Company, which Employee and the
Company specifically agree as the business of fabricating (wafering,
preforming and faceting), marketing and distributing moissanite
gemstones or other diamond simulants to the gem and jewelry industry
(the "Business"), unless Employee's duties, responsibilities and
activities for and on behalf of such other business are not related in
any way to such other business's products which are in competition with
the Company's products. For purposes of this section, "competition with
the Company" shall mean competition for customers in the United States
and in any country in which the Company is selling the Company's
products at the time of termination. Employee's ownership of less than
one percent of the issued and outstanding stock of a corporation
engaged in the Business shall not by itself be deemed to be a violation
of this Agreement. Employee recognizes that the possible restriction on
his activities which may occur as a result of his performance of his
obligations under Paragraph 8(a) are substantial, but that such
restriction is required for the reasonable protection of the Company.
(b) Employee shall not, directly or indirectly, influence or
attempt to influence any customer of the Company to discontinue its
purchase of any product of the Company which is manufactured or sold by
the Company at the time of termination of Employee's employment or to
divert such purchases to any other person, firm or employer.
(c) Employee shall not, directly or indirectly, interfere with,
disrupt or attempt to disrupt the relationship, contractual or
otherwise, between the Company and any of its suppliers.
(d) Employee shall not, directly or indirectly, solicit any
employee of the Company to work for any other person, firm or employer.
9. Confidentiality. In the course of his employment with the Company,
Employee will have access to confidential information, records, data, customer
lists, lists of product sources, specifications, trade secrets and other
information which is not generally available to the public and which the Company
and Employee hereby agree is proprietary information of the Company
("Confidential Information"). During and after his employment by the Company,
Employee shall not, directly or indirectly, disclose the Confidential
Information to any person or use any Confidential Information, except as is
required in the course of his employment under this Agreement. Employee agrees
to abide by the Company's policies and procedures for treatment of confidential
information as may be adopted from time to time. All Confidential Information as
well as records, files, memoranda, reports, plans, drawings, documents, models,
equipment and
6
7
the like, including copies thereof, relating to the Company's business, which
Employee shall prepare or use or come into contact with during the course of
his employment, shall be and remain the Company's sole property, and upon
termination of Employee's employment with the Company, Employee shall return
all such materials to the Company.
10. Proprietary Information. Employee shall assign to the Company, its
successors or assigns, all of Employee's rights to copyrightable works and
inventions which, during the period of Employee's employment by the Company or
its successors in business, Employee makes or conceives, either solely or
jointly with others, relating to any subject matter with which Employee's work
for the Company is or may be concerned ("Proprietary Information"). Employee
shall promptly disclose in writing to the Company such copyrightable works and
inventions and, without charge to the Company, to execute, acknowledge and
deliver all such further papers, including applications for copyrights and
patents for such copyrightable works and inventions, if any, in all countries
and to vest title thereto in the Company, its successors, assigns or nominees.
Upon termination of Employee's employment hereunder, Employee shall return to
the Company or its successors or assigns, as the case may be, any Proprietary
Information. The obligation of Employee to assign the rights to such
copyrightable works and inventions shall survive the discontinuance or
termination of this Agreement for any reason.
11. Entire Agreement. This Agreement contains the entire agreement of
the parties with respect to Employee's employment by the Company and supersedes
any prior agreements between them, whether written or oral.
12. Waiver. The failure of either party to insist in any one or more
instance, upon performance of the terms and conditions of this Agreement, shall
not be construed as a waiver or a relinquishment of any right granted hereunder
or of the future performance of any such term or condition.
13. Notices. Any notice to be given under this Agreement shall be
deemed sufficient if addressed in writing and delivered personally, by telefax
with receipt acknowledged, or by registered or certified U.S. mail to the
address first above appearing, or to such other address as a party may
designate by notice from time to time.
14. Severability. In the event that any provision of any paragraph of
this Agreement shall be deemed to be invalid or unenforceable for any reason
whatsoever, it is agreed such invalidity or unenforceability shall not affect
any other provision of such paragraph or of this Agreement, and the remaining
terms, covenants, restrictions or provisions in such paragraph and in this
Agreement shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provision as to make it valid,
reasonable and enforceable.
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8
15. Amendment. This Agreement may be amended only by an agreement in
writing signed by each of the parties hereto.
16. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or breach thereof, shall be settled by arbitration in Raleigh,
North Carolina in accordance with the expedited procedures of the Rules of the
American Arbitration Association, and judgment upon the award may be rendered by
the arbitrator and may be entered in any court having jurisdiction thereof.
17. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of North Carolina. Each of the parties
hereto irrevocably submits to the exclusive jurisdiction of the courts located
in North Carolina for the purposes of any suit, action or other proceeding
contemplated hereby or any transaction contemplated hereby.
18. Benefit. This Agreement shall be binding upon and inure to the
benefit of and shall be enforceable by and against the Company, its successors
and assigns, and Employee, his heirs, beneficiaries and legal representatives.
It is agreed that the rights and obligations of Employee may not be delegated or
assigned except as may be specifically agreed to by the parties hereto.
8
9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
C3, Inc.
By: /s/Jeff N. Hunter
-----------------------------------------
Jeff N. Hunter, President
/s/Thomas G. Coleman
--------------------------------------------
Thomas G. Coleman
9
10
POSITION DESCRIPTION EXHIBIT A
THOMAS G. COLEMAN - DIRECTOR OF TECHNOLOGY
Purpose:
The Director of Technology is responsible for all research and development
activities at the Company including, but not limited to, interfacing with Cree
Research on development programs and developing methods to maximize gemstone
yields. This position reports to the President.
Responsibilities:
Lead the research and development activities for the Company, including
planning, budgeting and policy setting.
Interface with Cree Research on silicon carbide development programs working
closely with the Director of Manufacturing at the Company.
Identify and implement solutions, working closely with the Director of
Manufacturing, to maximize gemstone yields and improve the efficiency and
effectiveness of the manufacturing processes.
Handle all facilities needs for the Company, including upfit and technical
renovations.
Serve on company-wide project teams and perform such other responsibilities as
may be assigned by the President or Board of Directors from time to time.
11
INCENTIVE COMPENSATION PLANS EXHIBIT B
THOMAS G. COLEMAN
Background
Each member of the management team can have a significant impact on the
Company's ability to meet and exceed its goals. The Company has established an
Annual Incentive Compensation Plan and a Long-term Incentive Compensation Plan
to provide management and key employees with incentives to not only achieve the
performance goals outlined in the business plan, but to exceed those goals.
New goals and targets will be established each year for the Annual Incentive
Compensation Plan and goals and targets for the Long-term Incentive Plan will be
established from time-to-time.
1998 Annual Incentive Compensation Plan
The 1998 Annual Incentive Compensation Plan (Annual Plan) provides for a "target
bonus" which is based on a percentage of base compensation. Your specific
"target bonus" is outlined below. Each person that participates in the Annual
Plan has the ability to earn far in excess of their "target bonus" if the
Company exceeds its performance goals.
1. Your "Target Bonus". Your 1998 "target bonus" is 35% of your base
compensation, or $30,500.
2. Performance Goals. The Annual Plan performance goals for 1998 have been
separated into several categories based on the Company's performance relative to
net revenue and pre-tax income. Based upon the Company achieving different
performance levels, as outlined in the chart below, the participating employee
can earn different percentages of their "target bonus".
NET REVENUE
TARGET TARGET + OPTIMUM OUTSTANDING
PRE-TAX INCOME >$31.7 M >$35.6 M >$42.2 M >$48.5 M
TARGET >$12.4 M 100% 110% 120% 130%
TARGET + >$16.3 M 150% 165% 180% 195%
OPTIMUM >$22.9 M 225% 245% 270% 290%
OUTSTANDING >$29.2 M 325% 360% 390% 425%
The actual net revenue and pre-tax income from the Company's 1998 audited
financial statements will be used to determine the appropriate percentage in the
table above. For example, net revenue of $34 million with pre-tax income of $14
million would lead to a bonus equal to 100%
12
of the participant's "target bonus"; net revenue of $35.6 million with pre-tax
income of $16.3 million would lead to a bonus equal to 165% of the participants
"target bonus", etc. If the performance of the Company exceeds the criteria
above, the percentages will increase on a similar basis to those used above. If
however, the Company does not meet the criteria above, the bonus structure will
be modified as follows:
(a) As long as the $12.4 million pre-tax income target is met the bonuses will
be awarded at the 100% level.
(b) If pre-tax income is below $12.4 million, so long as the Company achieves a
positive pre-tax income, the percentage of the "target bonus" bonus would be
reduced on a linear basis. Therefore, the percentage will be calculated by
dividing the actual pre-tax net income by the $12.4 million target. No bonuses
will be earned or paid if the Company does not achieve positive pre-tax net
income.
Long-term Incentive Compensation Plan
The Long-term Incentive Compensation Plan (Long-term Plan) provides for the
award of equity based incentives (stock options, stock appreciation rights,
etc.); the specific grants and terms of which will be determined by the
Compensation Committee of the Board of Directors from time-to-time. Generally
the awards under the Long-term Plan will vest and become exercisable only upon
the attainment of specific operating goals for the target. These targets will
be based on factors that are deemed to have a direct impact on the performance
of the Company's stock, typically this will be earnings per share.
1. Your Award. Your current award under the Long-term Plan, to be granted only
upon completion of an IPO, is incentive stock options for the purchase of
10,000 shares of common stock at $13.50 per share.
2. Vesting Period. These options will vest and become exercisable based upon
the Company achieving the following results (note vesting will stop once 100%
vesting level has been achieved):
Completion of IPO 15%
98 Q1 sales > $800k & margin > 28% 5%
98 Q1 EPS > $.01 per share (stretch goal) 10%
98 Q2 sales > $2.2 M & margin > 36% 5%
98 Q2 EPS > $.01 per share (stretch goal) 10%
98 Q2 EPS > $.33 per share 10%
1998 TOTAL EPS > $1.13 per share 25%
99 Q1 EPS > $1.13 per share 5%
99 Q2 EPS > $1.31 per share 5%
99 Q3 EPS > $1.71 per share 5%
1999 TOTAL EPS > $8.00 per share 25%
2000 TOTAL EPS > $14.00 per share 25%
2001 TOTAL EPS > $19.00 per share 25%
1
EXHIBIT 10.11
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT
BE GIVEN CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.
AMENDED AND RESTATED EXCLUSIVE SUPPLY AGREEMENT,
DATED JUNE 6, 1997, BETWEEN
CREE RESEARCH, INC. AND C3, INC.
2
AMENDED AND RESTATED EXCLUSIVE SUPPLY AGREEMENT
THIS AMENDED AND RESTATED EXCLUSIVE SUPPLY AGREEMENT (this
"Agreement") is made and entered into effective as of the 6th day of June,
1997, by and between CREE RESEARCH, INC. ("Cree"), a North Carolina corporation
having its principal offices at 2810 Meridian Parkway, Suite 144, Durham, North
Carolina, 27713, and C3, INC. ("C3"), a North Carolina corporation formerly
known as C3 Diamante, Inc. and having its principal offices at P.O.
Box 13533, Research Triangle Park, North Carolina 27709-3533.
Recitals
WHEREAS, Cree is engaged in the business of developing, manufacturing
and selling silicon carbide (SiC) substrates and material for various
electronic applications; and
WHEREAS, C3 intends to develop, manufacture and market gemstones
fabricated from SiC material and desires to purchase such material from Cree;
and
WHEREAS, Cree and C3 entered into an Exclusive Supply Agreement dated
September 15, 1995 and a First Amendment to Exclusive Supply Agreement dated
July 10, 1996 wherein Cree and C3 agreed, inter alia, for Cree to supply C3 SiC
material and C3 agreed to purchase certain SiC material as provided therein;
and
WHEREAS, Cree and C3 desire to amend and restate the Exclusive Supply
Agreement, as amended as set out herein; and
WHEREAS, Cree and C3 shall simultaneously with the execution of this
Agreement enter into a Development Agreement (the "Development Agreement");
NOW, THEREFORE, the parties hereto, in consideration of the foregoing
premises and the covenants and undertakings herein contained, mutually agree as
follows:
1. Duties of C3
1.1 C3 agrees to purchase from Cree in each calendar quarter at least
50% (by dollar volume) of C3's requirements for SiC material for the production
of gemstones in each calendar quarter. A purchase shall be considered to be
made on the shipment date requested by C3 in any order submitted by it and
accepted by Cree, or as otherwise mutually agreed by C3 and Cree. C3 shall not
be in breach of this Section 1.1 if the dollar volume of purchases by C3 in a
given calendar quarter falls below such 50% due to Cree's failure to accept
orders requesting delivery in the quarter, provided that C3's orders do not
request delivery during the quarter for an aggregate number of boules in excess
of the number delivered during the preceding quarter, plus a commercially
reasonable increase (taking into consideration the time periods for capacity
increases specified in Sections 1.6 and 1.7 which are intended to address
capacity increases demanded for normal growth). C3 shall be obligated to
purchase from Cree under this Agreement, and Cree shall be obligated to sell to
C3, only SiC material in colors available from Cree. As used in this Agreement,
"colors available from Cree" means:
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(a) SiC material in colors that result from standard processes
Cree may from time to time employ for manufacturing SiC
semiconductor material; and
(b) Transparent or nearly transparent SiC material that results
from either the process claimed in U.S. Patent Application
Serial No. 08/596,526 entitled "Growth of Colorless Silicon
Carbide Crystals" or any other process using then standard
crystal growth equipment and processes of Cree capable of
producing transparent or nearly transparent SiC material,
which processes are currently under development by Cree or as
such processes may be developed by Cree from time to time.
References in this Agreement to "transparent" and "nearly
transparent" material are understood to mean colorless
material (and vice versa) and references in this Agreement to
"gemstones" are understood to mean "gems" (and vice versa).
As of June 6, 1997, the colors available from Cree are green, blue, amber, and
colorless, with processes for significantly improved colorless material under
development by Cree pursuant to the Development Agreement. Cree will give C3
written notice of the availability of other colors as they become available.
Without limiting the foregoing, when Cree notifies C3 that it has developed a
"Repeatable Process," as defined in the Development Agreement, for producing
SiC boules that meet specifications set forth in the Specifications and
Timetable Chart in Section 1.3 of the Development Agreement, boules meeting
such specifications shall be deemed standard products in colors available from
Cree under this Agreement.
1.2 Should C3 require SiC material in a color other than the colors
available from Cree, C3 will extend to Cree a right of first refusal with
respect to the development, manufacture and sale of such material as provided
in this paragraph. C3 agrees that it will not purchase such material from, or
otherwise enter into any agreement for the development, manufacture or sale of
such material with, any person or entity other than Cree except in compliance
with this paragraph. C3 will give Cree written notice referencing this Section
1.2 setting out the terms of the proposed transaction and extending an offer to
contract with Cree on such terms. If Cree does not accept such offer by written
notice given within thirty (30) days after receipt of C3's notice, C3 shall be
free at any time within the next six (6) months after expiration of the
thirty-day period to conclude the transaction with any third party, provided
the terms are no more favorable to the supplier than those described in C3's
notice to Cree. If Cree accepts any offer from C3 under this paragraph, then
notwithstanding anything to the contrary in such offer or herein, (i) all other
terms and provisions of this Agreement relating to the purchase of SiC material
for the production of gemstones not inconsistent with such offer shall apply to
the development, manufacture and sale of such material as provided in this
paragraph, and (ii) Cree shall have a perpetual, irrevocable, royalty-free,
exclusive (including exclusive of C3) license to use, manufacture, sell and
otherwise practice (including the right to sublicense) any process or other
work developed for C3 for all applications other than the manufacture of
gemstones. The foregoing shall not be construed as an assignment or other
transfer by Cree of any rights in any intellectual property. Development work
performed by Cree pursuant to the Development Agreement shall be governed by
the terms of such Development Agreement and not this Section 1.2.
1.3 C3 agrees to place orders that in the aggregate total a minimum
purchase price to C3 of $10,000 for SiC material to be shipped before December
31, 1995.
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REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
1.4 C3 agrees that it will not, without Cree's written consent, use
any SiC material supplied by Cree as a seed for bulk crystal growth or for any
purpose other than fabricating gemstones from such material. C3 further agrees
that it will not, without Cree's written consent, resell or otherwise transfer
bulk SiC material supplied by Cree to any third party and that it will not,
without Cree's written consent, sell or otherwise transfer SiC gemstones
fabricated from material supplied by Cree to any third party that C3 knows or
has reason to believe intends to use the material as a seed for the growth of
SiC.
1.5 C3 grants Cree a perpetual, irrevocable, royalty-free, exclusive
(including exclusive of C3) license to use, manufacture, sell and otherwise
practice (including the right to sublicense), for electronic applications only,
any inventions developed by employees of C3 or acquired by C3 during the term
of this Agreement which relate to SiC or gallium nitride (GaN) material,
including without limitation inventions relating to bulk crystal growth,
cutting or polishing of SiC or GaN material.
1.6. For so long as Cree has more than ***** but less than *****
crystal growth systems in use for the production of SiC material under this
Agreement, if the order and delivery requirements from C3 exceed the capacity
of the crystal growth systems then being used by Cree for the production of SiC
material under this Agreement, then Cree shall notify C3. C3 may elect to
either (i) reduce the order size or extend the delivery schedule so as not to
require additional crystal growth systems or (ii) upon submission to Cree of a
written request and the binding commitment of C3 to purchase a minimum of six
(6) months' output from such crystal growth system(s) (and subject to the
condition that specifications for any processes under development have been
established), require Cree to provide the additional crystal growth system(s),
up to a total of ***** systems, needed to meet the order and delivery
requirements of C3. Any such additional crystal growth systems provided under
this Section 1.6 (up to a total of ***** systems) shall be provided by Cree at
its expense within four months after receipt of such written request from C3.
1.7 If the order and delivery requirements from C3 exceed the capacity
of ***** crystal growth systems, then Cree may, but shall not be obligated to,
notify C3 of a request for additional capital equipment to supply such
capacity.
(a) Cree shall provide written notice to C3 identifying
the particular system or systems to be constructed
for which funding is required and an estimate of the
cost for all work as set out in this Section 1.7.
(b) C3 may elect to either (i) reduce the order size or
extend the delivery schedule so as not to require
additional crystal growth systems or (ii) purchase
the designated system or systems from Cree at Cree's
cost. Systems purchased by C3 are referred to below
as the "Purchased Equipment" and shall be provided
by Cree within four months after receipt of C3's
election. C3 will loan the Purchased Equipment back
to Cree.
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(c) Cree will use the Purchased Equipment exclusively
for the production of SiC material for C3, except
that from time to time Cree may give 7 days prior
written notice to C3 of available production time
for the Purchased Equipment, and if C3 does not by
the end of such 7-day period demonstrate an
immediate need for use of the Purchased Equipment,
then Cree will be free to use the Purchased
Equipment for other purposes until the Purchased
Equipment is next required to meet C3's orders under
this Agreement.
(d) The price to be paid by C3 for the Purchased
Equipment will include all labor and material costs
incurred by Cree in the construction of the systems
purchased, plus reasonable overhead, and will
specifically include, without limitation, all costs
of piping, electrical and mechanical systems
required for the operation of the Purchased
Equipment. Cree will be responsible solely for costs
of providing light industrial shell space (i.e.,
space upfit with only lay-in lighting, drop ceiling,
sprinklers, tile floor and walls).
(e) Cree will invoice C3 on a monthly basis for all
costs to be paid by C3 during construction of a
system designated to be purchased by C3. Any costs
not previously billed will be invoiced to C3 once
the Purchased Equipment is placed in service.
Amounts invoiced under this paragraph will be due
within thirty (30) days from the date of invoice.
(f) Upon payment of C3 of all costs incurred in the
construction of Purchased Equipment, Cree will
execute and deliver to C3 an assignment transferring
title to such system to C3, subject to reservation
of a security interest in favor of Cree as provided
below.
(g) Purchased Equipment will at all times remain at
Cree's facilities. C3 shall not sell or otherwise
transfer to any third party any rights in or to any
Purchased Equipment and shall at all times keep such
Purchased Equipment free and clear of any claim,
lien or other encumbrance, other than the security
interest in favor of Cree. C3 acknowledges that the
Purchased Equipment embodies confidential and
proprietary information of Cree and shall at all
times remain in Cree's possession and control,
notwithstanding any ownership interest of C3.
(h) Cree hereby reserves, and C3 hereby grants to Cree,
a security interest in and to all Purchase
Equipment, including all accessions thereto and
replacements thereof and all parts and supplies
associated therewith. This security interest secures
the performance by C3 of the obligations owed to
Cree, arising under this Agreement. If C3 attempts
to sell or otherwise transfer to any third party any
rights in or to any such property, or fails to keep
the same free and clear of any claim, lien or other
encumbrance in favor of any third party, C3 shall be
deemed in
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default under this Agreement, and Cree shall have
all of the rights and remedies afforded a secured
party upon default by Chapter 25 of the North
Carolina General Statutes. C3 agrees to execute and
deliver to Cree, from time to time upon Cree's
request, appropriate financing statements for filing
in the public records to evidence Cree's security
interest hereunder.
(i) Cree will, at its expense, maintain the Purchased
Equipment in good operating condition. The Purchased
Equipment shall be conspicuously marked as property
of C3. Cree shall not sell or otherwise transfer to
any third party any rights in or to any Purchased
Equipment and shall at all times keep such Purchased
Equipment free and clear of any claim, lien or other
encumbrance in favor of any third party. Cree agrees
to execute and deliver to C3, from time to time,
upon C3's request, appropriate financing statements
for filing in the public records to evidence C3's
ownership of the Purchased Equipment. Cree shall
not, however, be obligated to repair or replace any
Purchased Equipment damaged as a result of fire,
lightning, flood or other casualty of any kind
unless C3 or its insurer agrees to pay the cost of
such repair or replacement.
(j) C3 will be responsible for and shall timely pay all
property taxes due with respect to Purchased
Equipment during the period of C3's ownership
thereof.
(k) C3 will transfer ownership of the Purchased
Equipment to Cree, without charge, when such
equipment is fully-depreciated. If ownership has not
been transferred prior to the termination of this
Agreement, (i) in the event this Agreement is
terminated through no fault of Cree, upon such
termination C3 shall transfer ownership of the
Purchased Equipment to Cree without charge, or (ii)
in the event this Agreement is terminated due to the
breach of this Agreement by Cree, C3 shall transfer
the Purchased Equipment to Cree and Cree shall pay
to C3 the book value of the Purchased Equipment.
1.8 C3 shall not and shall cause its shareholders to not accept any
payment, or enter into any contract or other arrangement, for the purpose of
discontinuing or substantially curtailing its business of producing and selling
gemstones other than in connection with a sale of its business (whether by
stock sale, asset sale, merger or otherwise), subject to Section 6.5.
1.9 For the purpose of determining whether C3 has purchased at least
50% of its SiC material as provided in Section 1.1, the dollar value of SiC
material required by C3 and not purchased from Cree shall be equal to:
(a) If the material is purchased from a person other
than Cree, the purchase price of such material paid
by C3; or
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REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
(b) If such material is produced by C3, an amount
calculated using the price calculation as set forth
in the first sentence of Section 2.2, as then used
by Cree, using C3's loaded manufacturing cost.
1.10 Upon the request of Cree, which request shall occur no more than
twice per year, C3 shall, within two weeks of such request, provide non-binding
projections regarding SiC material to be ordered hereunder.
1.11 C3 will give Cree written notice upon the purchase from anyone
other than Cree, or producing for itself, any portion of its requirements of
SiC material for the production of gemstones. Thereafter Cree shall have the
right, at Cree's expense, to have an independent public accounting firm
reasonably acceptable to C3 audit C3's purchases of SiC material for the
production of gemstones and the calculation of dollar value under Section 1.9.
The audit shall be conducted during normal business hours and upon reasonable
prior notice. The accounting firm conducting the audit shall be required to
enter into a mutually acceptable nondisclosure agreement with C3 under which
such firm will be obligated not to disclose any information obtained during the
course of the audit, except that it may disclose to Cree its analysis of
whether C3 has complied with its obligations under Section 1.1. The audit right
under this paragraph may be exercised not more than once during any fiscal year
of C3 and only with respect to calendar quarters ended within one year
preceding the request for an audit. C3 shall provide reasonable assistance to
the public accounting firm including, but not limited to, providing a schedule
of purchases and the dollar value calculation under Section 1.9 (which shall
provide reasonable detail, but not divulge proprietary or confidential
information of C3, as to the calculation of loaded manufacturing costs),
supporting analyses and any supporting source documentation reasonably required
by the public accounting firm. Such accounting firm will audit and report to
Cree on the schedule of purchases and the dollar value calculation under
Section 1.9, but will not divulge to Cree any proprietary or confidential
information (including but not limited to supporting schedules and source
documentation) disclosed during the audit process.
2. Duties of Cree
2.1 Cree agrees to supply to C3, in accordance with C3's orders from
time to time submitted to and accepted by Cree in writing, such quantities of
SiC material ("material sales grade" and scrap) as C3 is obligated to purchase
from Cree under this Agreement for the purpose of developing and manufacturing
gemstones. Cree shall be obligated to supply SiC material from the production
capacity of ***** crystal growth systems and any growth systems purchased by
Cree or C3 pursuant to Section 1.6 or Section 1.7 of this Agreement. Without
limiting the foregoing, if Cree elects not to give notice under Section 1.7
above, Cree will obtain additional capacity to fill C3's orders under this
Agreement as promptly as commercially reasonable.
2.2 Cree agrees to provide "material sales grade" SiC material at its
"loaded manufacturing cost" plus ***** and to provide reject (scrap) material
at ***** per crystal. Cree also agrees to cut the SiC material for a price
equal to its loaded manufacturing cost plus *****, provided that the cutting
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utilizes Cree's standard equipment and processes. All "material sales grade"
material supplied by Cree under this Agreement shall be SiC crystals of the
quality and defect density that Cree supplies as standard products to its SiC
semiconductor wafer customers; provided, however, that transparent or nearly
transparent SiC material shall be considered "material sales grade" if it is of
the quality and defect density that results from either the process claimed in
U.S. Patent Application Serial No. 08/596,526 entitled 'Growth of Colorless
Silicon Carbide Crystals' as currently under development and as approved by C3
or by any other process using then standard Cree crystal growth equipment
capable of producing transparent SiC material, as those processes are developed
by Cree and as approved by C3. Cree will be obligated to supply SiC material
under this Agreement in cut form and in bulk crystal form, subject to
compliance by C3 with the terms of Section 1.4 and the other terms of this
Agreement.
2.3 For purposes of this Agreement,
(a) "Loaded manufacturing cost" shall be determined in accordance
with Cree's standard accounting practices using allocations,
conditions and calculations no less favorable than those
available to any other person or entity from Cree, and in all
events "loaded manufacturing cost" shall exclude any costs
and expenses related to capital equipment funding paid by C3
pursuant to Section 1.7 hereunder and costs related to the
production of crystals that do not meet "minimum
specifications," as provided herein, or elsewhere if mutually
agreed upon in writing by Cree and C3 in a document
referencing this Section 2.3. The "minimum specifications"
for colorless material shall be determined as set forth in
Section 2.4 below.
(b) The loaded manufacturing cost applicable to an order will be
Cree's average loaded manufacturing cost (as determined in
accordance with this Section 2.3) during the three (3)
calendar months preceding the month in which the order is
received by Cree.
(c) In manufacturing SiC material for sale to C3 under this
Agreement, Cree agrees to employ substantially the same
processes it employs in the manufacture of SiC material for
semiconductor applications for the purpose of maximizing
productivity and minimizing costs, except insofar as such
processes may be modified for the production of transparent
or nearly transparent SiC material or otherwise modified by
mutual agreement. Cree shall use its best commercially
reasonable efforts to incorporate into its production
processes those advances obtained from work pursuant to the
Development Agreement.
2.4 For the purposes of Section 2.3 above, "minimum
specifications" for colorless SiC material means:
(a) Prior to such date as Cree notifies C3 that it has
developed a "Repeatable Process," as defined in the
Development Agreement, for producing SiC boules that
meet the specifications for January 1, 1998 set
forth in the first row of the Specifications and
Timetable Chart in Section 1.3 of the Development
Agreement, no "minimum specifications" shall apply
unless otherwise mutually agreed by the parties as
provided in Section 2.3; and
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REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
(b) When Cree notifies C3 that it has developed a
"Repeatable Process," as defined in the Development
Agreement, for producing SiC boules that meet the
specifications for January 1, 1998 set forth in the
first row of the Specifications and Timetable Chart
in Section 1.3 of the Development Agreement,
"minimum specifications" shall mean a ***** or
larger diameter crystal with at least a ***** slice
comprised of material in the color grade range of
GHIJ, with no less than ***** in the GH range, or
better, according to the standards generally
accepted by the diamond industry for color using
pregraded master color stones (it being understood
that while the minimum specifications do not require
the absence of inclusions, blemishes or other
defects affecting clarity, Cree shall use its best
commercially reasonable efforts to minimize such
defects since such defects can have an impact on the
color grade); and
(c) On the first day of the calendar month immediately
following each anniversary of the date Cree notifies
C3 it has achieved the specification as stated in
Subsection (b) above, the "minimum specifications"
shall be revised to require that each boule contain
a contiguous volume of material (with a minimum
height of *****) in the GHIJ range, with no less
than ***** in the GH range, or better, according to
the standards generally accepted by the diamond
industry for color using pregraded master color
stones, with such volume equal to at least ***** of
the average volume of such material contained in all
boules that met the minimum specifications over the
previous twelve months (the "Minimum Specifications
Adjustment") (it being understood that while the
minimum specifications do not require the absence of
inclusions, blemishes or other defects affecting
clarity, Cree shall use its best commercially
reasonable efforts to minimize such defects since
such defects can have an impact on the color grade).
However, the minimum specifications shall never
decrease from the previous period. A Minimum
Specifications Adjustment shall occur each year for
so long as C3 continues funding SiC material
development at Cree in an amount not less than C3
funded during the previous twelve month period. No
Minimum Specifications Adjustment will occur if such
funding requirement is not fulfilled.
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REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
2.5 Should the price to C3 for production SiC boules calculated
pursuant to Section 2.2 become ***** per cubic millimeter for SiC boules having
a contiguous volume of material of at least ***** cubic millimeters of
colorless material with a minimum height of ***** in the comparable diamond
color grade range of GHIJ, with no less than ***** in the GH range, in each
case in accordance with the standards generally accepted by the diamond
industry for color using pregraded master color stones (it being understood
that while the minimum specifications do not require the absence of inclusions,
blemishes or other defects affecting clarity, Cree shall use its best
commercially reasonable efforts to minimize such defects since such defects can
have an impact on the color grade), notwithstanding the provisions of Section
2.2 hereof, the price to C3 for such boules shall not drop to less than *****
per cubic millimeter, except to the extent that such price yields to Cree an
amount in excess of Cree's loaded manufacturing cost plus *****.
2.6 Upon the request of C3, which request shall occur no more than
twice per year, Cree shall, within two weeks of such request, provide
non-binding updated projections regarding the cost of SiC material to be
supplied hereunder.
2.7 Cree is under no obligation to share any technical information
regarding crystal growth technology and/or crystal growth processes with any C3
personnel.
2.8 C3 shall have the right, at its expense, to have an independent
public accounting firm reasonably acceptable to Cree audit Cree's loaded
manufacturing cost determination and the price to be paid by C3 under Section
1.7 for the Purchased Equipment. The audit shall be conducted during normal
business hours and upon reasonable prior notice. The accounting firm conducting
the audit shall be required to enter into a mutually acceptable nondisclosure
agreement with Cree under which such firm will be obligated not to disclose any
information obtained during the course of the audit, except that it may
disclose to C3 its analysis of the correctness of the loaded manufacturing cost
as calculated by Cree. The audit right under this paragraph may be exercised
not more than once during any fiscal year of Cree and only with respect to
costs applicable to shipments made within one year preceding the request for an
audit. Cree shall provide reasonable assistance to the public accounting firm,
including but not limited to, providing a schedule of the loaded manufacturing
costs (which shall provide reasonable detail, but not divulge proprietary or
confidential information of Cree, as to the calculation of loaded manufacturing
costs), supporting analyses and any supporting source documentation reasonably
required by the public accounting firm. Such accounting firm will audit and
report to C3 on the schedule of loaded manufacturing costs, but will not
divulge to C3 any proprietary or confidential information (including but not
limited to supporting schedules and source documentation) disclosed during the
audit process.
2.9 During the term of this Agreement, Cree shall not sell SiC
material or crystals in any form to any customer other than C3 if Cree knows or
has reason to believe such customer intends to use such material for the
purpose of fabricating, distributing or selling gemstones.
2.10 Notwithstanding Section 2.9, if C3 has not placed orders to
purchase SiC material from Cree having a combined purchase price to C3 of at
least $100,000 by April 15, 1998, with shipment of
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such quantity to be made not later than July 15, 1998, this Agreement shall
become non-exclusive and Cree shall be free to sell SiC material to others for
use in the fabrication of gemstones.
3. Term and Termination
3.1 The term of this Agreement shall extend for ten (10) years
beginning July 15, 1995, unless sooner terminated in accordance with Section
3.3 or by written mutual consent of both parties.
3.2 If C3 submits and Cree accepts orders to purchase SiC material
having an aggregate purchase price in excess of $1,000,000 for delivery during
any thirty-six (36) consecutive months, then C3 and Cree shall each have an
option to extend this Agreement for one (1) additional term of ten (10) years.
Such option shall become exercisable at such time as the volume purchase
condition specified in the preceding sentence has been satisfied and may be
exercised by written notice given at any time thereafter prior to expiration of
the initial ten-year term.
3.3 In the event of a material breach by either party of any
obligation to the other party, whether arising under this Agreement or
otherwise, the other party may terminate this Agreement upon written notice if
the breach is not cured within thirty (30) days after giving written notice to
the party in breach setting out the nature of the breach in reasonable detail.
4. Terms and Conditions of Purchase
4.1 All orders under this Agreement shall be submitted to Cree in
writing. Cree will advise C3 in writing within ten (10 ) days after receipt of
each order whether Cree accepts the order. If not accepted within such 10-day
period the order will be deemed rejected.
4.2 C3 shall submit all orders at least thirty (30) days prior to the
requested shipping date. Subject to the foregoing, Cree shall use all
reasonable efforts to ship standard products on or before the date requested by
C3 in its order, but will not be obligated to make delivery under any order
earlier than forty-five (45) days after receipt of the order. Lead times for
non-standard products shall be subject to mutual agreement.
4.3 Cree shall invoice C3 upon shipment of each order. Payment of each
invoice is due within thirty (30) days after the invoice date. Any portion of
any invoice not paid when due will accrue interest until paid at the rate of
1.5% per month or, if less, the maximum rate permitted by law. Until receipt of
payment for each shipment Cree reserves a security interest in such shipment to
secure the purchase price and all taxes and shipping and other expenses
relating to such shipment. In the event of default in payment of any invoice,
C3 agrees to pay Cree's expenses, including reasonable attorney's fees and
expenses, incurred in enforcing payment thereof.
4.4 All applicable sales, use and other taxes with respect to
purchases under this Agreement (other than taxes on Cree's net income) will be
invoiced to and paid by C3.
4.5 All shipping expenses, including insurance against loss or damage
in transit, will be invoiced to and paid by C3.
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4.6 Material shall be shipped F.O.B. Cree's manufacturing facilities
to any U.S. location designated by C3. Subject to Cree's reserved security
interest, title and risk of loss shall pass to C3 upon delivery to the carrier
at the shipping point.
4.7 Cree shall not be liable for or be in default of this Agreement
for any delay in delivery or failure to perform due to strike, lockout, riot,
war, fire, act of God, accident, delays caused by any subcontractor or supplier
or by C3, technical difficulties, failure or breakdown of machinery or
components necessary to order completion, inability to obtain or substantial
rises in the price of labor or materials or manufacturing facilities,
curtailment of or failure to obtain sufficient electrical or other energy
supplies, or compliance with any law, regulation, order or direction, whether
valid or invalid, of any governmental authority or instrumentality thereof, or
due to any unforeseen circumstances or any causes beyond its control, whether
similar or dissimilar to the foregoing and whether or not foreseen. C3 agrees
that such delay in delivery or failure to deliver or perform any part of this
Agreement shall not be grounds to terminate or refuse to comply with any
provisions hereof and no penalty of any kind shall be effective against Cree
for delay or failure; provided, however, that if the delay or failure extends
beyond six (6) months from the originally scheduled date either party may, with
written notice to the other, terminate this Agreement without further
liability.
4.8 All standard "material sales grade" products supplied by Cree
under this Agreement shall conform to Cree's published specifications for such
products in effect at the time of shipment. Nonconforming products shall be
replaced by Cree upon return of the defective product, if such product is
returned within 90 days after shipment; such replacement shall be C3's sole
remedy for breach of the foregoing warranty. All scrap material and
non-standard products supplied under this Agreement will be supplied "AS IS."
EXCEPT AS PROVIDED ABOVE, CREE MAKES NO WARRANTY OF ANY KIND WITH RESPECT TO
ANY MATERIAL SUPPLIED HEREUNDER AND DISCLAIMS ANY IMPLIED WARRANTIES, INCLUDING
ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
NONINFRINGEMENT OF PATENT OR SIMILAR RIGHTS.
4.9 In no event shall either party be liable to the other for
incidental, consequential or special loss or damages of any kind, however
caused, or any punitive damages.
5. Confidential Information; Joint Inventions and Nonsolicitation
5.1 "Confidential Information" for purposes of this Agreement means
any information, not generally known in the relevant trade or industry, which
was obtained from the other party or which falls within any of the following
categories:
(a) information constituting trade secrets, including
but not limited to internal costs and margins;
(b) information relating to existing or contemplated
products, services, technology, designs, processes,
formula, computer systems, computer software,
algorithms, media and research or development.
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(c) information relating to the business of the party,
including but not limited to, business plans, sales
or marketing methods, methods of doing business,
customer lists, customer usages and/or requirements,
and supplier information; or
(d) information marked "Confidential" or "Proprietary."
5.2 Each party agrees that the other shall not be liable hereunder
for disclosure or use of any information which it establishes, by legally
sufficient evidence:
(a) was already known to the receiving party at the time
of receipt; or
(b) was rightfully obtained from a third party without
similar restriction and through no wrongful act of
the receiving party; or
(c) was at the time of receipt generally available to
the public or thereafter becomes so available
without breach hereof; or
(d) was used or disclosed with the prior written
authorization of the owner; or
(e) was disclosed pursuant to the requirement or request
of a governmental agency, which disclosure cannot be
made in confidence, or the disclosure of which was
required by law or judicial order; provided that, in
such instance, the disclosing party shall first give
the other notice of such requirement or request.
5.3 Each party agrees to keep the Confidential Information of the
other in the strictest confidence, in the manner set forth below:
(a) The receiving party shall not, directly or
indirectly, disclose, divulge, reveal, report or
transfer the Confidential Information to any third
party or to any individual employee other than an
employee having a need to know.
(b) The receiving party shall not use any Confidential
Information or the concepts therein for its own
benefit or for the benefit of a third party or for
any purpose other than the purposes authorized in
writing by the disclosing party.
(c) Any tangible materials which are or which contain
any Confidential Information shall be kept
confidential in accordance with the terms hereof,
and all such materials shall be returned or
destroyed upon satisfaction of the purpose for which
such material was originally provided or upon the
earlier request of the disclosing party.
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(d) The receiving party agrees to use at least the same
degree of care to protect the other party's
Confidential Information as it uses to protect its
own Confidential Information.
5.4 Each party shall appropriately notify each employee, agent or
consultant to whom any disclosure of received Confidential Information is made
and shall obtain their agreement that they will maintain Confidential
Information in confidence in accordance with the provisions set forth herein.
Each party represents and warrants to the others that its employees, agents and
consultants to whom any disclosure of received Confidential Information is made
shall be subject to a valid, binding and enforceable agreement to maintain such
Confidential Information in confidence in accordance with the provisions set
forth herein.
5.5 Except as expressly provided herein or in other written
agreements between the parties, neither party shall have any obligation of
confidentiality with respect to information received from the other. The
obligations of confidentiality set forth in this Section 5 shall continue for
so long as the Confidential Information continues to come within the definition
thereof set forth in Section 5.1 and shall survive the expiration or any
termination of this Agreement.
5.6 Nothing in this Agreement is or shall be construed to require
either party to disclose proprietary or confidential information to the other.
The parties agree that the terms of this Agreement shall be treated as
Confidential Information of each other subject to Section 5; provided, however,
that either party may, upon notice to the other, make such public disclosures
regarding this Agreement as in the opinion of counsel for such party are
required by applicable securities laws or regulations or other applicable law.
5.7 The parties will mutually agree on patenting procedures for
any inventions made jointly by employees of both parties during the term of
this Agreement. The parties do not presently anticipate that any such joint
inventions will be made under either this Agreement or the Development
Agreement.
5.8 Notwithstanding the ultimate determination of ownership, the
invention known by the parties as the "post faceting process" and any
improvements made thereon by either party during the term of this Agreement
shall be licensed to the nonowning party as follows:
(a) If to C3, a perpetual, irrevocable, royalty-free,
exclusive (including exclusive of Cree, except Cree
shall have the right to use and practice the
invention to manufacture or process material for C3)
license to use, manufacture, sell and otherwise
practice (including the right to sublicense) the
invention and any improvement exclusively for
gemstones and gemological instrumentation; or
(b) If to Cree, a perpetual, irrevocable, royalty-free,
exclusive (including exclusive of C3) license to
use, manufacture, sell and otherwise practice
(including the right to sublicense) the invention
and any improvement exclusively for electronic
applications.
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For all other uses and application, each party shall have full rights to use,
manufacture, sell and otherwise practice the invention and any improvement, but
neither party may sublicense any such use, manufacture, sale or practice.
5.9 Each party agrees that during the term of this Agreement,
without the prior written consent of the other party, it will not employ or
otherwise engage the services (as a consultant or in any other capacity) of any
individual who within one (1) year prior to being so engaged served as an
employee of the other party, or as a consultant to the other party providing
services, in the case of Cree, relating to bulk growth of SiC or GaN material
or the processing of such material (including without limitation, wafering and
polishing), or, in the case of C3, relating to gemstones or gemological
instrumentation.
6. General
6.1 This Agreement (which includes any Exhibits referenced
herein), constitutes the complete and exclusive statement of the understanding
and agreement of the parties with respect to the subject matter hereof and
supersedes all prior written or oral agreements between the parties concerning
such subject matter (including without limitation the Exclusive Distribution
Agreement dated June 6, 1995 between Cree and C. Eric Hunter, to which C3
succeeded by assignment). This Agreement shall not be amended, modified or
altered except pursuant to a document signed by both parties.
6.2 This Agreement is made in and shall be construed in
accordance with and governed by the laws of the State of North Carolina.
6.3 Neither party shall permit any "Affiliate" of such party (as
defined below) to act or fail to take action when such action or failure to
take action, if by the party, would be a breach of this Agreement. Pursuant to
but without limiting the foregoing, purchases of SiC material by Affiliates of
C3 will be considered purchases by C3 for purposes of Section 1 of this
Agreement and sale of SiC material by Affiliates of Cree shall be considered
sales by Cree for purposes of Section 2.9 of this Agreement. For purposes of
this Agreement, "Affiliate" of a designated party means any corporation,
partnership, limited liability company or other business entity which: (a)
controls, is controlled by, or is under common control with the designated
party, whether directly or through one or more intermediaries; and (b) is
sublicensed by either party under Section 5.8 of this Agreement, by Cree under
Section 1.5 of this Agreement, or by C3 under Section 4.2 of the Development
Agreement. For purposes of this definition "controlled" and "control" mean
ownership of more than fifty percent (50%) of the voting capital stock or other
interest having voting rights with respect to the election of the board of
directors or similar governing authority. This Agreement shall inure to the
benefit of and be binding upon the parties and their respective successors and
permitted assigns.
6.4 The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
6.5 Neither this Agreement nor any rights hereunder may be
assigned by either party without the other party's prior written consent, which
consent shall not be unreasonably withheld except that either party may, in its
sole discretion, withhold consent to assignment to any Prohibited Assignee (as
defined below). Any attempted assignment in violation of this Section 6.5 is
void and shall constitute a
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breach of this Agreement. "Prohibited Assignee" means (i) De Beers or any
corporation, partnership or other entity or individual which in the reasonable
belief of Cree is affiliated with the De Beers, and the Central Selling
Organization, (ii) any party whose primary business is the development,
manufacture, marketing or sale of diamond gemstones or (iii) any non-gemstone
and non-jewelry industry competitor of the non-assigning party. A grant by C3
to a Prohibited Assignee of exclusive rights to distribute or market moissanite
gemstones shall be an assignment for purposes of this Section 6.5.
The occurrence of any Change in Control (as defined below)
with respect to a transaction with a Prohibited Assignee involving a party
shall be deemed an "assignment" of this Agreement by such party, subject to the
provisions of this Section 6.5. A "Change in Control" shall be deemed to have
occurred with respect to a party if:
(a) any person or group (as that term is used in Section
13(d)(3) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended), together with all affiliates
of such person or group, becomes the beneficial
owner of more than 50% of the outstanding capital
stock of that party, and such person or group was
not, at June 15, 1996, the beneficial owner of more
than 50% of the outstanding capital stock of that
party and is not an employee benefit plan sponsored
or maintained by that party; or
(b) that party merges or consolidates with or into
another corporation, or sells or otherwise disposes
of all or substantially all of its assets, except as
part of a reorganization in which the shareholders
owning more than 50% of the outstanding capital
stock of that party immediately prior to the
effectiveness of the merger, consolidation or sale
own more than 50% of the outstanding capital stock
of the successor purchaser (as the case may be)
immediately after the effectiveness of such event.
6.6 Neither party shall issue any press release or otherwise make
any public announcement concerning this Agreement without the prior consent of
the other party, except as may be required by law. Neither party shall use the
name of the other party in any advertising, marketing or similar material
without the other party's prior written consent.
6.7 The parties acknowledge and agree that in the event of a
breach of the Agreement, in addition to any other rights and remedies available
to it at law or otherwise, the parties shall be entitled to seek equitable
relief in the form of a temporary restraining order ("TRO") from any court of
competent jurisdiction; provided however, that in the event a TRO is obtained,
the parties shall request that any hearing on the merits of the dispute shall
be stayed pending arbitration of the dispute as provided in this Section 6.7.
In the event a party seeks a TRO or in the event of any other controversy or
claim (including, without limitation, any claim based on negligence,
misrepresentation, strict liability or other basis) arising out of or relating
to this Agreement or its performance or breach, a party shall give the other
party notice of the dispute, setting out the circumstance in reasonable detail,
and requesting a meeting of the representatives of the parties to attempt to
resolve the dispute or to reduce the scope of the issues subject to dispute.
The chief executive officers of the parties, and such other representatives as
each may desire to have attend, shall meet at a mutually agreeable time within
five business days from the date the meeting request was received and shall
hold such meeting at the offices of the party not requesting the same, or
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17
at some mutually agreeable alternative location. In the event the parties do
not resolve the dispute at such meeting, or any mutually agreed upon
adjournment thereof, the dispute shall be settled exclusively by arbitration in
the City of Raleigh, North Carolina pursuant to the expedited procedures of the
Commercial Arbitration Rules of the American Arbitration Association (other
than notice requirements which shall be as provided in Section 6.8 below and
the expedited procedures for selection of arbitrators which shall be as
provided in Sections 14 and 15 of such Rules) . There shall be three
arbitrators, one selected by each of C3 and Cree and a third selected by the
arbitrators selected by the parties. The arbitrators shall in no event make any
damage award that contravenes Section 4.9 of this Agreement, but shall order
the losing party to pay all of the charges of the American Arbitration
Association for such arbitration and all of the prevailing party's costs of the
arbitration, including reasonable attorneys' fees. In the event of a breach of
this Agreement by a party, the arbitrators may award equitable relief against
such party to the extent the nonbreaching party is entitled to such relief
under applicable law. The decision in such arbitration shall be final and
binding and judgment on any award rendered therein may be entered in any court
having jurisdiction.
6.8 All notices under this Agreement shall be in writing and
addressed to the other party at the address shown below or to such other
address as the party may hereafter designate by notice under this Agreement.
All notices so addressed shall be deemed given five (5) days after mailing if
sent by certified mail, return receipt requested, postage prepaid, or when sent
via facsimile if receipt is acknowledged in writing or otherwise when actually
received.
IN WITNESS WHEREOF, the parties have executed this Agreement by and
through their duly authorized representatives.
CREE RESEARCH, INC. C3, INC.
By: /s/ Charles M. Swoboda By: /s/ Jeff N. Hunter
----------------------------------- --------------------------------
Charles M. Swoboda, Vice President Jeff N. Hunter, President
and Chief Operating Officer
Address for Notices: Address for Notices:
Cree Research, Inc. C3, Inc.
2810 Meridian Parkway, Suite 144 P.O. Box 13533
Durham, North Carolina 27713 Research Triangle Park, NC 27709-3533
Attention: President Attention: President
Fax No. (919) 361-5415 Fax No.: (919) 468-0486
16
1
EXHIBIT 10.12
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT
BE GIVEN CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.
DEVELOPMENT AGREEMENT, DATED JUNE 6, 1997, BETWEEN
CREE RESEARCH, INC. AND C3, INC.
2
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
DEVELOPMENT AGREEMENT
This DEVELOPMENT AGREEMENT (the "Agreement") is entered into effective
as of the 6th day of June, 1997 by and between Cree Research, Inc. ("Cree") and
C3, Inc. ("C3").
Recitals
WHEREAS, Cree and C3 are parties to an Exclusive Supply Agreement
dated September 15, 1995 as amended July 10, 1996 wherein Cree and C3 agree,
inter alia, for Cree to supply C3 certain silicon carbide ("SiC") material and
C3 agrees to purchase certain SiC material as provided therein; and
WHEREAS, Cree and C3 desire to enter into an agreement whereby Cree
shall perform certain research and development activities directed to improving
the colorless material available for purchase under the Exclusive Supply
Agreement; and
WHEREAS, Cree and C3 shall simultaneously with the execution of this
Agreement enter into an Amended and Restated Exclusive Supply Agreement (as
thus amended and restated, the "Supply Agreement"); and
WHEREAS, Cree and C3, in entering into this Agreement and the
amendment and restatement of the Supply Agreement, desire to improve and expand
upon their relationship and intend to work together cooperatively with the
objective of developing, as promptly as practicable, both the market for and
commercially viable means of manufacturing colorless silicon carbide material
suitable for gemstones; and
NOW, THEREFORE, the parties hereto, in consideration of the foregoing
premises and the covenants and undertakings herein contained, mutually agree as
follows:
1. Duties of Cree
1.1 Cree agrees to use its best commercially reasonable
efforts to develop a repeatable process, as defined in Section 1.2 (the
"Repeatable Process"), for producing SiC boules which meet the specifications
provided in Section 1.3 (the "Specifications") according to the proposal
attached hereto as Exhibit A.
1.2 The process for producing SiC boules shall be considered
a "Repeatable Process" when ***** crystal grower can produce, in a period of 30
days, at least ***** SiC boules that meet the Specifications.
1
3
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
1.3 As used in this Agreement, the term "Specifications"
shall mean the applicable specifications set out in the Specifications and
Timetable Chart below for SiC boules. The specifications require only that each
boule contain a certain volume of SiC material of which a specified percentage
(the "Percentage") is in the comparable diamond color grade range of GHIJ, with
no less than ***** in the GH range, or better, according to the standards
generally accepted by the diamond industry for color using pregraded master
color stones. While the specifications do not require the absence of
inclusions, blemishes or other defects affecting clarity, Cree shall use its
best commercially reasonable efforts to minimize such defects since such
defects can have an impact on the final color grade. The Percentage shall be
measured by observation on the a-axis through "windows" ground onto two sides
of the boule. The parties acknowledge that initially C3 shall promptly provide
feedback to Cree concerning the Percentage, but the parties shall cooperate to
develop a mutually acceptable testing procedure for Cree to determine the
Percentage prior to delivery of the SiC boules to C3. The volume specifications
are expressed in terms of the diameter and height of each boule, but any
equivalent volume is acceptable. The specifications change over time, as the
Date column indicates.
Specifications and Timetable Chart
Date Diameter Height %G-J Grade
---- -------- ------ ----------
1/1/1998 ***** ***** *****
7/1/1998 ***** ***** *****
7/1/1999 ***** ***** *****
7/1/2000 ***** ***** *****
7/1/2001 ***** ***** *****
For each of the specifications above, Cree will provide prompt notice to C3
when Cree has developed a Repeatable Process for producing boules meeting such
specifications.
1.4 Cree will use its best commercially reasonable efforts to
develop by October 31, 1997 a process that yields, an aggregate of at least
***** SiC boules per month each of which has a ***** height of material in the
comparable diamond color grade range of GHIJ, with no less than ***** in the GH
range, or better, according to the standards generally accepted by the diamond
industry for color using pregraded master color stones (it being understood
that while such specifications do not require the absence of inclusions,
blemishes or other defects affecting clarity, Cree shall use its best
commercially reasonable efforts to minimize such defects since such defects can
have an impact on the final color grade).
1.5 Cree agrees to report to C3 the progress of the
development services provided pursuant to this Agreement at monthly progress
meetings. Any "Confidential Information" provided by Cree to C3 at such
meetings or otherwise under this Agreement shall be subject to the terms of
Section 5 of the Supply Agreement.
2
4
1.6 In April of each year, Cree and C3 shall consult on
appropriate development goals for the following year. Before May 1 of each
year, Cree shall submit to C3 a development plan for the next twelve months
beginning July 1 which shall include a budget and a description of the scope of
development activities in a format and with a level of detail similar to the
proposal attached hereto as Exhibit A with the addition of specific tasks and
goals listed on a quarterly basis. Plans submitted under this paragraph shall
set forth Cree's then current expectations for carrying on development
activities under this Agreement for the period covered by the plan, in the
manner determined by Cree to maximize the development progress toward the
year's goals. Cree may substitute resources and personnel from those set out in
the development plans provided that Cree reasonably determines such
substitutions are in the best interest of maintaining or enhancing progress
toward the then current development goals. If Cree succeeds in reaching goals
more quickly than anticipated, Cree will consult with C3 to determine other
development goals important to high yields of gemstone quality SiC material.
1.7 All SiC boules produced pursuant to this Agreement,
including SiC boules that do not meet the Specifications, shall be the property
of C3; provided that the seeds from all SiC boules produced shall remain the
property of Cree and shall be removed and retained by Cree. Cree shall identify
each boule delivered to C3 both by the crystal growth system in which it was
grown and with the date it was produced. Crystal growth systems used in the
development activities shall not be considered as "in use for production" for
purposes of the Supply Agreement. All SiC boules delivered hereunder will be
supplied "AS IS." EXCEPT AS PROVIDED ABOVE IN THIS PARAGRAPH WITH RESPECT TO
IDENTIFICATION OF BOULES, CREE MAKES NO WARRANTY OF ANY KIND WITH RESPECT TO
ANY MATERIAL SUPPLIED HEREUNDER AND DISCLAIMS ANY IMPLIED WARRANTIES, INCLUDING
ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
NONINFRINGEMENT OF PATENT OR SIMILAR RIGHTS.
1.8 Cree will use all commercially reasonable efforts to
reduce costs of the development services performed under this Agreement.
1.9 Cree is not obligated to contribute resources to the
development services performed under this Agreement beyond those funded by C3,
as provided in Section 2.1.
1.10 Cree provides no assurances that the development
services performed under this Agreement will be successful.
2. Duties of C3
2.1 Subject to Sections 2.2 and 2.3, C3 shall pay to Cree
each month a development fee equal to the sum of:
(i) The costs of materials and equipment used in the
development activities undertaken pursuant to this Agreement
(including the costs of operating such equipment; with such costs
calculated in the same manner as "loaded manufacturing costs," but,
without reduction for boules that do not meet the "minimum
specifications," as provided in the Supply Agreement);
3
5
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
(ii) An amount equal to a ***** gross margin of the costs
described in Section 2.1(i); and
(iii) All research and development labor costs and
outside services costs directly incurred by Cree in providing
development services pursuant to this Agreement; provided, that these
costs shall be charged to C3 on the same basis as Cree charges similar
costs in providing research services pursuant to contracts between
Cree and the U.S. government, using allocations, conditions and
calculations no less favorable to C3 than those available under any
such contract of Cree (it being understood that reductions in costs
from cost-sharing shall not be applicable and that such costs include
certain overhead allocations).
2.2 Subject to Section 2.3 and notwithstanding Section 2.1,
C3 shall pay to Cree each month this Agreement continues in effect a
development fee equal to the lesser of:
(i) The fee calculated pursuant to Section 2.1; or
(ii) The total development budget for the
appropriate month set forth in the proposal attached hereto as Exhibit
A.
2.3 If, prior to January 1, 1998, Cree has not developed a
Repeatable Process for producing SiC boules that meet the Specifications for
January 1, 1998, C3 shall have the option to reduce its funding obligations
herein (that is, the amount applicable under clause (ii) of Section 2.2) by 50%
by giving notice to Cree; provided, that such option, if not sooner exercised
by C3, shall expire at 11:59 p.m. eastern time on January 10, 1998. If C3
exercises its option to reduce its funding obligations pursuant to this Section
2.3, such reduction shall be effective January 1, 1998.
2.4 If, prior to January 1, 1998, Cree produces from *****
crystal growers, in a 30- day period, an aggregate of at least ***** SiC boules
that meet the Specifications for January 1, 1998, C3 shall pay Cree the sum of
two hundred thousand dollars ($200,000) in addition to all other amounts due
under this Agreement.
2.5 Cree shall invoice amounts due from C3 under this
Agreement, and such invoices shall be due and payable within thirty days.
2.6 C3 shall have the right, at its expense, to have an
independent public accounting firm reasonably acceptable to Cree audit Cree's
costs described in Sections 2.1(i) and 2.1(iii) (the "Audited Costs"). The
audit shall be conducted during normal business hours and upon reasonable prior
notice. The accounting firm conducting the audit shall be required to enter
into a mutually acceptable nondisclosure agreement with Cree under which such
firm will be obligated not to disclose any information obtained during the
course of the audit, except that it may disclose to C3 its analysis of the
correctness of the Audited Costs as calculated by Cree. The audit right under
this paragraph may be exercised not more than once during any fiscal year of
Cree and only with respect to costs applicable to the year preceding the
request for an audit. Cree shall provide reasonable assistance to the public
4
6
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
accounting firm including, but not limited to, providing a schedule of the
Audited Costs (which shall provide reasonable detail as to the calculation of
the Audited Costs, including but not limited to hours charged by person at
billing rates applicable to each, total material costs, equipment charges and
overhead charges, however such schedule shall not divulge any proprietary or
confidential information of Cree), supporting analyses and any supporting
source documentation reasonably required by the public accounting firm. Such
accounting firm will audit and report to C3 on the schedule of Audited Costs,
but will not divulge to C3 any proprietary or confidential information
(including but not limited to supporting schedules and source documents)
disclosed during the audit process.
3. Term and Termination
3.1 Unless earlier terminated pursuant to Section 3.2 or
Section 5.6, or unless extended by the mutual consent of the parties hereto,
this Agreement shall terminate on June 30, 2002.
3.2 C3 shall have the option to terminate this Agreement
prior to June 30, 2002 under the following conditions:
(i) If, prior to January 1, 1998, Cree does not
produce from ***** crystal growers, in a 30-day period, an aggregate
of at least ***** SiC boules having an average volume of ***** height
and ***** diameter (or equivalent), with a minimum ***** height,
comprised of material in the comparable diamond color grade range of
GHIJ, with no less than ***** in the GH range, or better, according to
the standards generally accepted by the diamond industry for color
using pregraded master color stones (it being understood that while
such specifications do not require the absence of inclusions,
blemishes or other defects affecting clarity, Cree shall use its best
commercially reasonable efforts to minimize such defects since such
defects can have an impact on the final color grade), C3 shall have
the option of terminating this Agreement by giving notice to Cree;
provided, that such option to terminate, if not sooner exercised by
C3, shall expire at 11:59 p.m. eastern time on January 10, 1998.
(ii) During each year beginning July 1, 1998 through
the year beginning July 1, 2001 (the "Subject Years"), if Cree does
not develop by July 1 of each Subject Year a Repeatable Process for
producing SiC boules that meet the initial applicable Specifications
for such Subject Year, C3 shall have the option of terminating the
Agreement by giving notice to Cree; provided, that such termination
option, if not sooner exercised by C3, shall expire at 11:59 p.m.
eastern daylight savings time on the tenth day following the
termination of the applicable deadline for establishing the Repeatable
Process.
(iii) If the price charged to C3 for an SiC boule
ordered under the Supply Agreement as a standard product meeting the
Specifications noted below (as more specifically defined in Section
1.3) exceeds the amount shown for such Specifications below, C3 may
terminate this Agreement at any time by giving notice to Cree:
5
7
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
Diameter Height %G-J Grade Price
-------- ------ ---------- -----
***** ***** ***** *****
***** ***** ***** *****
***** ***** ***** *****
***** ***** ***** *****
***** ***** ***** *****
If C3 exercises its option to terminate this Agreement pursuant to Section
3.2(i) or 3.2(ii), Cree shall not be entitled to payment for any work done or
any expenses incurred during the period from the time C3's option to terminate
became exercisable to the time such option is exercised.
4. Intellectual property
4.1 All inventions developed by Cree personnel in performing
work under this Agreement shall be the sole property of Cree.
4.2 Except for inventions related to the bulk growth of
silicon carbide or gallium nitride, C3 shall have a perpetual, irrevocable,
royalty-free, exclusive (including exclusive of Cree) license to use,
manufacture, sell and otherwise practice (including the right to sublicense)
all inventions developed by Cree pursuant to this Agreement for all gemstone
applications and applications for gemological instrumentation; provided that
Cree shall have the right to use and practice the invention to manufacture or
process material for C3 for the licensed applications. References in this
Agreement to "gemstones" are understood to mean "gems" (and vice versa).
5. General.
5.1 This Agreement shall not be amended, modified or altered
except pursuant to a document signed by both parties.
5.2 This Agreement is made in and shall be construed in
accordance with and governed by the laws of the State of North Carolina.
5.3 This Agreement shall inure to the benefit of and be
binding upon the parties and their respective successors and permitted assigns.
5.4 The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
5.5 This Agreement may not be assigned by either party
without the other party's prior written consent, which consent shall not be
unreasonably withheld except that either party may, in its sole discretion,
withhold consent to assignment of this Agreement to anyone other than a
permitted
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8
assignee of all rights under the Supply Agreement. Any attempted assignment in
violation of this Section 5.5 is void and shall constitute a breach of this
Agreement.
5.6 In the event of a material breach by either party of any
obligation under this Agreement to the other party, the other party may
terminate this Agreement upon written notice if the breach is not cured within
thirty (30) days after giving written notice to the party in breach, setting
out the nature of the breach in reasonable detail; provided, however, that no
cure period shall apply to a termination pursuant to the terms of the Agreement
by C3 pursuant to Section 3.2 (it being understood that the grounds for
termination specified in Section 3.2 do not constitute a breach) or in the
event of a material breach by a party that has breached this Agreement and been
given notice of similar material breaches on two prior occasions. In addition,
this Agreement shall automatically terminate upon any termination of the Supply
Agreement under Section 3.3 thereof.
5.7 Neither party shall issue any press release nor otherwise
make any public announcement concerning this Agreement without the prior
consent of the other party, except as may be required by law. The parties
further agree that the terms of this Agreement shall be treated as Confidential
Information of each other subject to Section 5 of the Supply Agreement;
provided, however, that either party may, upon notice to the other, make such
public disclosures regarding this Agreement as in the opinion of counsel for
such party are required by applicable securities laws or regulations or other
applicable law. Neither party shall use the name of the other party in any
advertising, marketing or similar material without the other party's prior
written consent.
5.8 The parties acknowledge and agree that in the event of a
breach of the Agreement, in addition to any other rights and remedies available
to it at law or otherwise, the parties shall be entitled to seek equitable
relief in the form of a temporary restraining order ("TRO") from any court of
competent jurisdiction; provided however, that in the event a TRO is obtained,
the parties shall request that any hearing on the merits of the dispute shall
be stayed pending arbitration of the dispute as provided in this Section 5.8.
In the event a party seeks a TRO or in the event of any other controversy or
claim (including, without limitation, any claim based on negligence,
misrepresentation, strict liability or other basis) arising out of or relating
to this Agreement or its performance or breach, a party shall give the other
party notice of the dispute, setting out the circumstance in reasonable detail,
and requesting a meeting of the representatives of the parties to attempt to
resolve the dispute or to reduce the scope of the issues subject to dispute.
The chief executive officers of the parties, and such other representatives as
each may desire to have attend, shall meet at a mutually agreeable time within
five business days from the date the meeting request was received and shall
hold such meeting at the offices of the party not requesting the same, or at
some mutually agreeable alternative location. In the event the parties do not
resolve the dispute at such meeting, or any mutually agreed upon adjournment
thereof, the dispute shall be settled exclusively by arbitration in the City of
Raleigh, North Carolina pursuant to the expedited procedures of the Commercial
Arbitration Rules of the American Arbitration Association (other than notice
requirements which shall be as provided in Section 5.9 below and the expedited
procedures for selection of arbitrators which shall be as provided in Sections
14 and 15 of such Rules). There shall be three arbitrators, one selected by
each of C3 and Cree and a third selected by the arbitrators selected by the
parties. The arbitrators shall in no event make any damage award that
contravenes Section 5.10 of this Agreement, but shall order the losing party to
pay all of the charges of the American Arbitration Association for such
arbitration and all of the prevailing party's costs of the arbitration,
including reasonable attorneys' fees. The decision in such
7
9
arbitration shall be final and binding and judgment on any award rendered
therein may be entered in any court having jurisdiction.
5.9 All notices under this Agreement shall be in writing and
addressed to the other party at the address shown below or to such other
addresses as the party may hereafter designate by notice under this Agreement.
All notices so addressed shall be deemed given five (5) days after mailing if
sent by certified mail, return receipt requested, postage prepaid, or when sent
via facsimile if receipt is acknowledged in writing or otherwise when actually
received.
5.10 In no event shall either party be liable to the other
for incidental, consequential or special loss or damages of any kind, however
caused, or any punitive damages.
IN WITNESS WHEREOF, the parties have executed this Agreement by and
through their duly authorized representatives.
CREE RESEARCH, INC. C3, INC.
By:/s/ Charles M. Swoboda By:/s/ Jeff N. Hunter
---------------------------------- ------------------------------
Charles M. Swoboda, Vice President Jeff N. Hunter, President
and Chief Operating Officer
Address for Notices: Address for Notices:
Cree Research, Inc. C3, Inc.
2810 Meridian Parkway, Suite 144 P.O. Box 13533
Durham, North Carolina 27713 Research Triangle Park, NC 27709-3533
Attention: President Attention: President
Fax No. (919) 361-5415 Fax No.: (919) 468-0486
8
10
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
EXHIBIT A
A Proposal Submitted to:
C3, INC.
P.O. Box 13533
Research Triangle Park, NC 27009-3533
entitled:
DEVELOPMENT OF COLORLESS SILICON CARBIDE BOULE MANUFACTURING TECHNOLOGY
by:
CREE RESEARCH, INC.
2810 Meridian Parkway
Durham, NC 27713
Tel: (919) 361-5709
7 Month Proposed Cost: *****
12 Month Proposed Cost: *****
COMPANY PROPRIETARY
"The information contained in this document is
confidential and proprietary to Cree Research, Inc.
and shall not be duplicated, used or disclosed -- in
whole or in part without the prior written consent
of the Company."
11
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
Use or disclosure of proposal data is subject to the restriction on the Cover
Page of this proposal.
A. PERSONNEL
*****
12
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
Use or disclosure of proposal data is subject to the restriction on the Cover
Page of this proposal.
B. BUDGET
NOTE: CREE RESERVES THE RIGHT TO ADJUST THE SPENDING AS IT DEEMS APPROPRIATE IN
ORDER TO MEET TILE OBJECTIVES OF THE DEVELOPMENT PROGRAM AND WITHIN THE TOTAL
AMOUNT OF THE BUDGET.
MONTHLY
STARTING
JUN-97 JUL-97 AUG-97 SEP-97 OCT-97 NOV-97 DEC-97 JAN-98
EQUIPMENT
COSTS
***** ***** ***** ***** ***** ***** ***** ***** *****
***** ***** ***** ***** ***** ***** ***** ***** *****
***** ***** ***** ***** ***** ***** ***** ***** *****
PEOPLE COSTS
C3 ***** ***** ***** ***** ***** ***** ***** *****
Focused
Team
Cree ***** ***** ***** ***** ***** ***** ***** *****
Resources
OTHER PROCESSING
Analytical ***** ***** ***** ***** ***** ***** ***** *****
Wafering ***** ***** ***** ***** ***** ***** ***** *****
Polishing ***** ***** ***** ***** ***** ***** ***** *****
Total ***** ***** ***** ***** ***** ***** ***** *****
EQUIPMENT - The equipment is outlined above and the cost reflects a *****
margin. Please note that *****.
C3 FOCUSED TEAM - This team will be led by ***** and will include *****.
CREE RESOURCES - These resources will support the C3 development effort on a
part time basis. This team will work under the direction of ***** and include
*****. In addition, ***** will provide equipment design support.
13
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
Use or disclosure of proposal data is subject to the restriction on the Cover
Page of this proposal.
C. MILESTONES/GOALS
The goals and milestones for the proposed program are listed below in Table 1.
5 YEAR DEVELOPMENT PLAN (TABLE 1)
- ---------------------------------------------------------------------------------------------------------------------
DATE MILESTONE DEMONSTRATION
- ---------------------------------------------------------------------------------------------------------------------
January 1, 1998 ***** Diameter Crystal, ***** Height, *****crystals (per the milestone specification)
***** Yield, GHIJ grade material from ***** system in a single month
- ---------------------------------------------------------------------------------------------------------------------
July 1, 1998 ***** Diameter Crystal,***** Height, ***** crystals (per the milestone specification)
***** Yield, GHIJ grade material from ***** system in a single month
- ---------------------------------------------------------------------------------------------------------------------
July 1, 1999 ***** Diameter Crystal, ***** Height, ***** crystals (per the milestone specification)
***** Yield, GHIJ grade material from ***** system in a single month
- ---------------------------------------------------------------------------------------------------------------------
July 1, 2000 ***** Diameter Crystal, ***** Height, ***** crystals (per the milestone specification)
***** Yield, GHIJ grade material from ***** system in a single month
- ---------------------------------------------------------------------------------------------------------------------
July 1, 2001 ***** Diameter Crystal, ***** Height, ***** crystals (per the milestone specification)
***** Yield, GHIJ grade material from ***** system in a single month
- ---------------------------------------------------------------------------------------------------------------------
1
EXHIBIT 10.13
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT
BE GIVEN CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.
LETTER AGREEMENT, DATED JULY 14, 1997, BETWEEN
CREE RESEARCH, INC. AND C3, INC.
2
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
July 14, 1997
C3, Inc.
One Dominion Drive, Suite 106
Morrisville. NC 25670
Re: Development Agreement Dated as of June 6, 1997 (the
"Development Agreement"), and Amended and Restated Supply
Agreement Dated as of June 6, 1997 (the "Supply Agreement"),
between C3, Inc. and Cree Research, Inc.
Gentlemen:
This letter confirms the following representations made by, and
understandings reached between, C3, Inc. ("C3") and Cree Research, Inc.
("Cree") in connection with the execution of the Development Agreement and
Supply Agreement referenced above:
1. Notwithstanding any other provision of the Supply Agreement,
the price to C3 for ***** diameter production silicon carbide (SIC) boules
purchased under the Supply Agreement on an "as is" basis prior to July 1, 1998
shall not exceed ***** per boule, including the cost of removal of the seed.
2. C3 acknowledges that it has not given Cree any notice under
Section 1.2 of the Supply Agreement prior to the date of this letter.
3. C3 acknowledges and agrees that, except as provided otherwise
in the letter agreements between C3 and Cree dated January 31, 1996, and
February 12, 1996, the Assignment Agreement dated June 28, 1995 (as amended
September 15, 1995), and Section 5.8 of the Supply Agreement, nothing in any
agreement, purchase order or other arrangement between Cree and C3 gives C3
ownership rights in or any license with respect to any invention made or
conceived by Cree personnel prior to the date hereof, whether alone by Cree
personnel or jointly with Cree and C3 personnel.
4. Cree shall have ***** as the lead scientist (100% of his
effort) for the work to be performed for C3 pursuant to the Development
Agreement through June 30, 1998, provided that ***** remains an employee of
Cree and C3 does not reduce its funding obligations under Section 2.3 of the
Development Agreement.
5. C3 acknowledges that the license granted pursuant to the
letter agreement between C3 and Cree dated January 31, 1996 does not include a
license to any invention other than that claimed in U.S. Patent Application
Serial No. 08/596,526, entitled "Growth of Colorless Silicon Carbide Crystals,"
and, in particular, does not include a license to practice the methods claimed
in U.S. Patent No. Re34,861, entitled "Sublimation of Silicon Carbide to
Produce Large, Device Quality Single Crystals of Silicon Carbide."
3
6. The contents of this letter shall be considered "Confidential
Information" of each party subject to the provisions of Section 5 of the Supply
Agreement.
If you agree that the foregoing accurately states our understanding
regarding the subject matter addressed above, please indicate your agreement on
behalf of C3 by signing below.
Very truly yours,
CREE RESEARCH, INC.
By:/s/ Charles M. Swoboda
---------------------------------
Charles M. Swoboda, Vice President
and Chief Operating Officer
Agreed:
C3, INC.
By:/s/ Jeff N. Hunter
-----------------------------
Jeff N. Hunter, President
1
EXHIBIT 10.14
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT
BE GIVEN CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.
LETTER AGREEMENT, DATED JANUARY 31, 1996, BETWEEN
CREE RESEARCH, INC. AND C3, INC.
2
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE
COMMISSION AND IS DENOTED HEREIN BY *****
January 31, 1996
C3 Diamante, Inc.
3104 Hillsborough St., Suite 216
Raleigh, North Carolina 27607-5458
Attention: C. Eric Hunter, President
Re: Invention Relating to ***** for
Growth of Highly-Transparent Silicon Carbide Crystals
Gentlemen:
This letter will serve to evidence the agreement between C3 Diamante,
Inc. ("C3") and Cree Research, Inc. ("Cree") concerning the invention made by
Cree employees relating to ***** for growth of highly-transparent silicon
carbide crystals (the "Invention").
C3 and Cree have agreed as follows:
1. Cree and C3 will cooperate in the preparation, filing and
prosecution of a U.S. patent application or applications claiming the Invention
and applications in such foreign countries as may be mutually agreed. All
applications filed claiming the Invention (the "Applications"), and all filings
made in the prosecution of the Applications, will be subject to review and
approval by the parties and their respective counsel prior to filing. All
information disclosed by either party to the other party or its counsel in
connection with the Applications will be subject to the confidentiality
provisions of the Exclusive Supply Agreement dated September 15, 1995 between
C3 and Cree.
2. C3 will reimburse Cree for all fees and expenses of Cree's counsel
incurred in connection with the Applications and for all filing fees, issue
fees, maintenance fees, annuities and other out-of-pocket expenses paid by on
or behalf of Cree in connection with the preparation, filing and prosecution of
the Applications and the maintenance of any patents issued therein. C3 will be
solely responsible for all fees and expenses of its own counsel.
3. Cree will grant C3 an irrevocable, royalty-free nonexclusive
license, without the right to sublicense, to use the Invention to make, have
made, use and sell silicon carbide gemstones. The license will be evidenced by
a License Agreement reflecting the foregoing terms and such other provisions as
are customary or may be mutually agreed. If the parties do not execute a
License Agreement within 30 days from the date hereof, the license will be
considered granted on the terms and conditions contained in this letter
agreement.
3
If the foregoing accurately states our agreement, please have a copy
of this letter agreement signed on behalf of C3 below and returned to Cree.
Very truly yours,
CREE RESEARCH, INC.
/s/ F. Neal Hunter
-------------------------------
F. Neal Hunter, President
ACCEPTED AND AGREED TO:
C3 DIAMANTE, INC.
By: /s/Jeff Hunter
------------------------
Secretary/Treasurer
Date: 1/31/96
----------------------
1
EXHIBIT 10.15
1996 STOCK OPTION PLAN
OF
C3, INC.
2
1996 STOCK OPTION PLAN
OF
C3, INC.
1. PURPOSE
This plan (the "plan") is intended to encourage and enable selected
key employees, directors and independent contractors in the service of C3, Inc.
(the "Corporation") to acquire or to increase their holdings of common stock of
the Corporation (the "shares") in order to promote a closer identification of
their interests with those of the Corporation and its shareholders, thereby
further stimulating their efforts to enhance the efficiency, soundness,
profitability, growth and shareholder value of the Corporation. This purpose
will be carried out through the granting of incentive stock options ("incentive
options") and nonqualified stock options ("nonqualified options"). Incentive
options and nonqualified options shall be referred to herein collectively as
"options." To the extent that any option is designated as an incentive stock
option and such option does not qualify as an incentive stock option, it shall
constitute a nonqualified stock option.
2. ADMINISTRATION OF THE PLAN
(a) The plan shall be administered by the Board of Directors
of the Corporation (the "Board").
(b) Any action of the Board may be taken by a written
instrument signed by all of the members of the Board and any action so
taken by written consent shall be as fully effective as if it had been
taken by a majority of the members at a meeting duly held and called.
Subject to the provisions of the plan, the Board shall have full and
final authority, in its discretion, to take any action with respect to
the plan including, without limitation, the following: (i) to
determine the individuals to receive options, the nature of each
option as an incentive option or nonqualified option, the times when
options shall be granted, the number of shares to be subject to each
option, the option price (determined in accordance with Paragraph 6),
the option period, the time or times when each option shall be
exercisable and the other terms, conditions, restrictions and
limitations of an option; (ii) to prescribe the form or forms of the
agreements evi dencing any options granted under the plan; (iii) to
establish, amend and rescind rules and regulations for the
administration of the plan; and (iv) to construe and interpret the
plan, the rules and regulations, and the agreements evidencing options
granted under the plan, and to make all other determinations deemed
necessary or advisable for administering the plan.
3. EFFECTIVE DATE
The effective date of the plan shall be June 1, 1996. Options may be
granted under the plan on and after the effective date, but not after May 31,
2006.
4. SHARES OF STOCK SUBJECT TO THE PLAN
Both incentive options and nonqualified options, as designated by the
Board, may be granted under the plan. The shares of stock that may be issued
and sold pursuant to options shall not exceed in the aggregate 85,000 shares of
authorized but unissued shares of the Corporation. The Corporation
3
hereby reserves sufficient authorized shares to provide for the exercise of
options granted hereunder. Any shares subject to an option which, for any
reason, expires or is terminated unexercised as to such shares may again be
subject to an option granted under the plan.
5. ELIGIBILITY
An option may be granted only to an individual who satisfies the
following eligibility requirements on the date the option is granted:
(a) The individual is either (i) a key employee of the
Corporation or a related corporation, (ii) a member of the Board, or
(iii) an independent contractor providing services to the Corporation
or a related corporation. For this purpose, an individual shall be
considered to be an "employee" only if there exists between the
individual and the Corporation or a related corporation the legal and
bona fide relationship of employer and employee. In determining
whether such a relationship exists, the regulations of the United
States Treasury Department relating to the determination of the
employment relationship for the purpose of collection of income tax on
wages at the source shall be applied. Also, for this purpose, a "key
employee" is an employee of the Corporation whom the Board determines
is in a position to affect materially the profits of the Corporation
or a related corporation by reason of the nature and extent of such
employee's duties, responsibilities, personal capabilities,
performance and potential.
(b) With respect to the grant of an incentive option, the
individual as an employee does not own, immediately before the time
that the incentive option is granted, stock possessing more than ten
percent of the total combined voting power of all classes of stock of
the Corporation or a related corporation; provided, that an individual
owning more than ten percent of the total combined voting power of all
classes of stock of the Corporation or a related corporation may be
granted an incentive option if the price at which such option may be
exercised is greater than or equal to 110 percent (110%) of the fair
market value of the shares on the date the option is granted and the
period of the option does not exceed five years. For this purpose, an
individual will be deemed to own stock which is attributed to him
under Section 424(d) of the Internal Revenue Code of 1986, as amended
(the "Code").
(c) The individual, being otherwise eligible under this
Paragraph 5, is selected by the Board as an individual to whom an
option shall be granted (an "optionee").
6. OPTION PRICE
The price per share at which an option may be exercised (the "option
price") shall be established by the Board at the time the option is granted and
shall be set forth in the terms of the agreement evidencing the grant of the
option; provided that, in the case of an incentive option, the option price
shall be equal to or greater than the fair market value per share of the shares
on the date the option is granted. For this purpose, the following rules shall
apply:
-2-
4
(a) An option shall be considered to be granted on the date
that the Board acts to grant the option, or on any later date
specified by the Board as the effective date of the option.
(b) The fair market value of the shares shall be determined
in good faith by the Board in accordance with the applicable
provisions of Section 20.2031-2 of the Federal Estate Tax Regulations,
or in any other manner consistent with the Code and accompanying
regulations; provided, that if the shares are listed for trading on
the New York Stock Exchange or American Stock Exchange or included in
the NASDAQ National Market System, fair market value shall be the
closing sales price of the shares on the New York Stock Exchange or
the American Stock Exchange (as applicable) or as reported in the
NASDAQ National Market System on the date immediately preceding the
date the option is granted, or, if there is no transaction on such
date, then on the trading date nearest preceding the date the option
is granted for which closing price information is available; and,
provided further, if the shares are quoted on the NASDAQ System but
are not included in the NASDAQ National Market System, the fair market
value shall be the mean between the high bid and low asked quotations
in the NASDAQ System on the date immediately preceding the date the
option is granted for which such information is available.
(c) In no event shall there first become exercisable by an
optionee in any one calendar year incentive stock options granted by
the Corporation or any related corporation with respect to shares
having an aggregate fair market value (determined at the time an
option is granted) greater than $100,000.
7. OPTION PERIOD AND LIMITATIONS ON THE RIGHT TO EXERCISE OPTIONS
(a) The period during which an option may be exercised (the
"option period") shall be determined by the Board when the option is
granted and shall not extend more than ten years from the date on
which the option is granted. An option shall be exercisable on such
date or dates, during such period, for such number of shares, and
subject to such conditions as shall be determined by the Board and set
forth in the agreement evidencing such option, subject to the rights
granted herein to the Board to accelerate the time when options may be
exercised. Any option or portion thereof not exercised before the
expiration of the option period shall terminate.
(b) An option may be exercised by giving written notice of at
least ten days to the Secretary of the Corporation at the
Corporation's principal office. Such notice shall specify the number
of shares to be purchased pursuant to an option and the aggregate
purchase price to be paid therefor, and shall be accompanied by the
payment of such purchase price. Such payment shall be in the form of
(i) cash, (ii) certified check, (iii) shares owned by the optionee at
the time of exercise, (iv) shares of common stock withheld upon
exercise, or (iv) any combination of cash and shares. Shares tendered
or withheld in payment upon the exercise of an option shall be valued
at their fair market value on the date of exercise, as determined by
the Board by applying the provisions of Paragraph 6(b).
Notwithstanding the foregoing, the Board, in its sole discretion and
subject to such terms and conditions as it determines, may also permit
all or a portion of the purchase price of an option to be paid by the
optionee by delivery of a properly executed written
-3-
5
notice of exercise to the Corporation and delivery to a broker of written
notice of exercise and irrevocable instructions to promptly deliver to the
Corporation the amount of sale or loan proceeds to pay the option price.
(c) No option granted to an optionee who was an employee at the
time of grant shall be exercised unless the optionee is, at the time of
exercise, an employee as described in Paragraph 5(a), and has been an employee
continuously since the date the option was granted, subject to the following:
(i) An option shall not be affected by any change in the
terms, conditions or status of the optionee's employment, provided
that the optionee continues to be an employee of the Corporation or a
related corporation.
(ii) The employment relationship of an optionee shall be
treated as continuing intact for any period that the optionee is on
military or sick leave or other bona fide leave of absence, provided
that the period of such leave does not exceed ninety days, or, if
longer, as long as the optionee's right to reemployment is guaranteed
either by statute or by contract. The employment relationship of an
optionee shall also be treated as continuing intact while the optionee
is not in active service because of disability. For purposes of this
Paragraph 7(c)(ii), "disability" shall mean the inability of the
optionee to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can be
expected to result in death, or which has lasted or can be expected to
last for a continuous period of not less than twelve months. The Board
shall determine whether an optionee is disabled within the meaning of
this paragraph.
(iii) If the employment of an optionee is terminated because
of disability within the meaning of subparagraph (ii), or if the
optionee dies while he is an employee or dies after the termination of
his employment because of disability, the option may be exercised only
to the extent exercisable on the date of the optionee's termination of
employment or death while employed (the "termination date"), except
that the Board may in its discretion accelerate the date for
exercising all or any part of the option which was not otherwise
exercisable on the termination date. The option must be exercised, if
at all, prior to the first to occur of the following, whichever shall
be applicable: (A) the close of the period of twelve months next
succeeding the termination date; or (B) the close of the option
period. In the event of the optionee's death, such option shall be
exercisable by such person or persons as shall have acquired the right
to exercise the option by will or by the laws of intestate succession.
(iv) If the employment of the optionee is terminated for any
reason other than disability (as defined in subparagraph (ii)), his
option may be exercised to the extent exercisable on the date of such
termination of employment, except that the Board may in its discretion
accelerate the date for exercising all or any part of the option which
was
-4-
6
not otherwise exercisable on the date of such termination of
employment. The option must be exercised, if at all, prior to
the first to occur of the following, whichever shall be
applicable: (A) the close of the period of 90 days next
succeeding the termination date; or (B) the close of the
option period. If the optionee dies following such
termination of employment and prior to the earlier of the
dates specified in (A) or (B) of this subparagraph (iv), the
optionee shall be treated as having died while employed under
subparagraph (iii) immediately preceding (treating for this
purpose the optionee's date of termination of employment as
the termination date). In the event of the optionee's death,
such option shall be exercisable by such person or persons as
shall have acquired the right to exercise the option by will
or by the laws of intestate succession.
(d) No option granted to a member of the Board (a "director")
who is not an employee shall be exercised unless the director either
(i) is, at the time of exercise, a member of the Board and has been a
director continuously since the date the option was granted, or (B)
was, within ninety days prior to the time of exercise, a member of the
Board, and, prior to such termination from service as a director, had
been a director continuously since the date the option was granted;
provided, that if the director's membership on the Board is terminated
because of death, the option shall be exercisable by such person or
persons who shall have acquired the right to exercise the option by
will or the laws of intestate succession, and such option shall be
exercisable at any time prior to the earlier of: (A) the close of the
period ending twelve months after the death of the director, or (B)
the close of the option period.
(e) An optionee or his legal representative, legatees or
distributees shall not be deemed to be the holder of any shares
subject to an option unless and until certificates for such shares are
issued to him or them under the plan.
(f) Nothing in the plan shall confer upon the optionee any
right to continue in the employment or service of the Corporation or a
related corporation, or to interfere in any way with the right of the
Corporation or a related corporation to terminate the optionee's
employment or service at any time.
8. NONTRANSFERABILITY OF OPTIONS AND SHARES
Except to the extent, if any, as may be permitted by the Code or other
applicable law, an option shall not be transferable (including by pledge or
hypothecation) other than by will or the laws of intestate succession, and an
option shall be exercisable during the optionee's lifetime only by him.
9. DILUTION OR OTHER ADJUSTMENTS
If there is any change in the outstanding shares of common stock of
the Corporation as a result of a merger, consolidation, reorganization, stock
dividend, stock split to holders of shares that is distributable in shares, or
other change in the capital stock structure of the Corporation, the Board shall
-5-
7
make such adjustments to options, to the number of shares reserved for issuance
under the plan, and to any provisions of this plan or an agreement as the Board
deems equitable to prevent dilution or enlargement of options or otherwise
advisable to reflect such change.
10. WITHHOLDING
To the extent that an option is treated as a nonqualified stock
option, the Corporation shall require any recipient of shares pursuant to the
exercise of such an option to pay to the Corporation in cash the amount of any
tax or other amount required by any governmental authority to be withheld and
paid over by the Corporation to such authority for the account of such
optionee.
11. CERTAIN DEFINITIONS
For purposes of the plan, the following terms shall have the meaning
indicated:
(a) "Related corporation" means any parent, subsidiary or
predecessor of the Corporation.
(b) "Parent" or "parent corporation" shall mean any
corporation (other than the Corporation) in an unbroken chain of
corporations ending with the Corporation if, at the time that the
option is granted, each corporation other than the Corporation owns
stock possessing fifty percent or more of the total combined voting
power of all classes of stock in another corporation in the chain.
(c) "Subsidiary" or "subsidiary corporation" means any
corporation (other than the Corporation) in an unbroken chain of
corporations beginning with the Corporation if, at the time that the
option is granted, each corporation other than the last corporation in
the unbroken chain owns stock possessing fifty percent or more of the
total combined voting power of all classes of stock in another
corporation in the chain.
(d) "Predecessor" or "predecessor corporation" means a
corporation which was a party to a transaction described in Section
424(a) of the Code (or which would be so described if a substitution
or assumption under that section had occurred) with the Corporation,
or a corporation which is a parent or subsidiary of the Corporation,
or a predecessor of any such corporation.
(e) In general, terms used in the plan shall, where
appropriate, be given the meaning ascribed to them under the
provisions of the Code applicable to incentive stock options.
12. STOCK OPTION AGREEMENT
The grant of any option under the plan shall be evidenced by the
execution of an agreement (the "Agreement") between the Corporation and the
optionee. Such Agreement shall set forth the date of
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grant of the option, the option price, the option period, the designation of
the option as an incentive option or nonqualified option, and the time or times
when and the conditions upon the happening of which the option shall become
exercisable. Such Agreement shall also set forth the restrictions, if any, with
respect to which the shares to be purchased thereunder shall be subject and
such other terms and conditions as the Board shall determine which are
consistent with the provisions of the plan and applicable law and regulations.
13. RESTRICTIONS ON SHARES
The Corporation may impose such restrictions on any shares acquired
upon exercise of options granted under the plan as it may deem advisable,
including, without limitation, restrictions pursuant to any agreements between
the Corporation and the optionee and restrictions necessary to ensure
compliance with the Securities Act of 1933, as amended, and any blue sky or
securities laws applicable to such shares. The Corporation may cause a
restrictive legend to be placed on any certificate issued pursuant to the
exercise of an option in such form as may be prescribed from time to time by
applicable laws and regulations or as may be advised by legal counsel.
14. AMENDMENT OR TERMINATION
The plan may be amended or terminated by action of the Board;
provided, that:
(a) Any amendment that would (i) materially increase the
aggregate number of shares which may be issued under the plan (subject
to Paragraph 9 herein) or (ii) materially change the requirements for
eligibility to receive options under the plan shall be made only with
the approval of the shareholders of the Corporation.
(b) No option shall be adversely affected by a subsequent
amendment or termination of the plan.
(c) No option shall be amended (i) without the consent of the
optionee, and (ii) if the option is an incentive option, without the
opinion of legal counsel to the Corporation that such amendment will
not constitute a "modification" within the meaning of Section 424 of
the Code if the Board determines such an opinion is necessary.
15. SHAREHOLDER APPROVAL
The plan shall be submitted to the shareholders of the Corporation for
approval by a majority of the shares of common stock of the Corporation that
are entitled to vote thereon, which approval must occur, if at all, within
twelve months following the effective date of the plan. All options granted
prior to shareholder approval of the plan shall be conditional upon such
approval, and no option shall be exercisable prior to such approval.
16. APPLICABLE LAW
Except as otherwise provided herein, the plan shall be construed and
enforced according to the laws of the State of North Carolina.
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IN WITNESS WHEREOF, this 1996 Stock Option Plan of C3, Inc. has been
executed in behalf of the Corporation effective as of the 1st day of June,
1996.
C3, INC.
By /s/ Jeff Hunter
------------------------------------------
Jeff Hunter
President
Attest:
/s/ Paula Berardinelli
- ---------------------------------
Paula Berardinelli
Secretary
[Corporate Seal]
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1996 STOCK OPTION AGREEMENT
OF
C3, INC.
THIS AGREEMENT, made the ______ day of ____________, 19__, between C3,
INC., a North Carolina corporation (the "Corporation"), and
__________________________ (the "Optionee");
R E C I T A L S :
In furtherance of the purposes of the 1996 Stock Option Plan of C3,
Inc. (the "plan"), the Corporation and the Optionee hereby agree as follows:
1. The rights and duties of the Corporation and the Optionee under
this Agreement shall in all respects be subject to and governed by the
provisions of the plan, a copy of which is attached to this Agreement and the
terms of which are incorporated herein by reference.
2. The Corporation hereby grants to the Optionee pursuant to the plan,
as a matter of separate inducement and agreement in connection with his
employment with or service to the Corporation or related corporation, and not
in lieu of any salary or other compensation for his services, the right and
option (the "option") to purchase all or any part of an aggregate of
_______________ (_________) shares (the "shares") of the common stock of the
Corporation, at the purchase price of _____________________________ Dollars
($__________) per share. The option to purchase ________________ (________) of
the shares shall be designated as an incentive option. The option to purchase
______________________ (_______) of the shares shall be designated as a
nonqualified option. To the extent that any option is designated as an
incentive option and such option does not qualify as an incentive option, it
shall be treated as a nonqualified option. Except as otherwise provided in the
plan, the option will expire if not exercised in full before ______________,
______.
3. The option shall become exercisable on the date or dates set forth
on Schedule A attached hereto. To the extent that an option which is
exercisable is not exercised, such option shall accumulate and be exercisable
by the Optionee in whole or in part at any time prior to expiration of the
option. Upon the exercise of an option in whole or in part, the Optionee shall
pay the option price to the Corporation in accordance with the provisions of
Paragraph 7 of the plan, and the Corporation shall as soon thereafter as
practicable deliver to the Optionee a certificate or certificates for the
shares purchased.
4. Nothing contained in this Agreement or the plan shall require the
Corporation or a related corporation to continue the employment or service of
the Optionee for any particular period of time, nor shall it require the
Optionee to remain in the employment of or in service to the Corporation or
such related corporation for any particular period of time. Except as otherwise
expressly provided in the plan, all rights of the Optionee under the plan with
respect to the unexercised portion of his option shall
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terminate upon termination of the employment or service of the Optionee with
the Corporation or a related corporation.
5. This option shall not be transferable (including by pledge or
hypothecation) other than by will or the laws of intestate distribution, and
this option shall be exercisable during the Optionee's lifetime only by the
Optionee.
6. This Agreement shall be binding upon and shall inure to the benefit
of the parties hereto and their respective executors, administrators,
next-of-kin, successors and assigns. This paragraph shall not be construed to
authorize any transfer in violation of Paragraph 5.
7. This Agreement may be modified or amended only by the written
agreement of the parties hereto.
8. This Agreement shall be construed and enforced according to the
laws of the State of North Carolina.
IN WITNESS WHEREOF, this Agreement has been executed in behalf of the
Corporation and by the Optionee on the day and year first above written.
C3, INC.
By:
-------------------------
-------------------------
President
Attest:
- -------------------------
- -------------------------
Secretary
[Corporate Seal]
OPTIONEE
(SEAL)
-----------------------------
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1996 STOCK OPTION AGREEMENT
OF
C3, INC.
SCHEDULE A
Date option granted: __________________, 19__
Date option expires: __________________, 19__
Number of shares subject to option: _______ shares
Option price (per share): $________
Date Installment Number of Shares Incentive or
First Exercisable in Installment Nonqualified Option
1
EXHIBIT 10.16
1997 OMNIBUS STOCK PLAN
OF
C3, INC.
2
1997 OMNIBUS STOCK PLAN
OF
C3, INC.
1. PURPOSE
The purpose of the 1997 Omnibus Stock Plan of C3, Inc. (the "Plan") is to
encourage and enable selected employees, directors and independent contractors
of C3, Inc. (the "Corporation") and its related corporations to acquire or to
increase their holdings of common stock of the Corporation (the "Common Stock")
and other proprietary interests in the Corporation in order to promote a closer
identification of their interests with those of the Corporation and its
shareholders, thereby further stimulating their efforts to enhance the
efficiency, soundness, profitability, growth and shareholder value of the
Corporation. This purpose will be carried out through the granting of benefits
(collectively referred to herein as "Awards") to selected employees, independent
contractors and directors, including but not necessarily limited to the granting
of incentive stock options ("Incentive Options"), nonqualified stock options
("Nonqualified Options"), stock appreciation rights ("SARs"), restricted stock
awards ("Restricted Stock Awards"), and restricted units ("Restricted Units") to
such participants. Incentive Options and Nonqualified Options shall be referred
to herein collectively as "Options." Restricted Stock Awards and Restricted
Units shall be referred to herein collectively as "Restricted Awards."
2. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Board of Directors of the
Corporation, or upon its delegation to the Compensation Committee of the Board
of Directors, by the Committee (in either case hereinafter the "Committee"). The
Committee shall include no fewer than the minimum number of "non-employee
directors," as such term is defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and as may be
required by Rule 16b-3.
(b) Any action of the Committee with respect to the Plan may be taken by
a written instrument signed by all of the members of the Committee and any such
action so taken by written consent shall be as fully effective as if it had been
taken by a majority of the members at a meeting duly held and called. Subject to
the provisions of the Plan, and unless authority is granted to the Chief
Executive Officer as provided in Section 2(c), the Committee shall have full and
final authority in its discretion to take any action with respect to the Plan
including, without limitation, the authority (i) to determine all matters
relating to Awards, including selection of individuals to be granted Awards, the
types of Awards, the number of shares of the Common Stock, if any, subject to an
Award, and all terms, conditions, restrictions and limitations of an Award; (ii)
to prescribe the form or forms of the Agreements evidencing any Awards granted
under the Plan; (iii) to establish, amend and rescind rules and regulations for
the administration of the Plan; and (iv) to construe and interpret the Plan and
Agreements evidencing Awards granted under the Plan, to establish and interpret
rules and regulations for administering the Plan and to make all other
determinations deemed necessary or advisable for administering the Plan. In
addition, the Committee shall have authority, in its sole discretion, to
accelerate the date that any Award which was not otherwise exercisable or vested
shall become exercisable or vested in whole or in part without any obligation to
accelerate such date with respect to any other Awards granted to any recipient.
(c) Notwithstanding Section 2(b), the Committee may delegate to the
Chief Executive Officer of the Corporation the authority to grant Awards, and
to make any or all of the determinations reserved for the Committee in the
Plan and summarized in subsection (b) (i) with respect to such Awards,
3
to any individual who, at the time of said grant or other determination, (i) is
not deemed to be an officer or director of the Corporation within the meaning
of Section 16 of the Exchange Act; (ii) is not deemed to be a Covered Employee;
and (iii) is otherwise eligible under Section 5. To the extent that the
Committee has delegated authority to grant Awards pursuant to this Section 2(c)
to the Chief Executive Officer, references to the Committee shall include
references to the Chief Executive Officer, subject, however, to the
requirements of the Plan, Rule 16b-3 and other applicable law.
3. EFFECTIVE DATE
The effective date of the Plan shall be October 1, 1997 (the "Effective
Date"). Awards may be granted under the Plan on and after the effective date,
but no awards will be granted after September 30, 2007.
4. SHARES OF STOCK SUBJECT TO THE PLAN; AWARD LIMITATIONS
(a) The number of shares of Common Stock that may initially be issued
pursuant to Awards shall be 477,979 shares of authorized but unissued shares of
the Corporation, subject to adjustments and increases as provided in this
Section 4. The maximum number of shares authorized for issuance under the Plan
shall be increased at any time and from time to time by an amount (the
"Adjustment Amount") so that the maximum number of shares authorized for
issuance under the Plan shall be equal to (i) twenty percent (20%) of the
authorized and issued shares of Common Stock as of such date less (ii) the
number of shares of Common Stock subject to outstanding options granted under
the 1996 Stock Option Plan of C3, Inc. or any other prior stock option plan (the
"Prior Plans").
(b) The Corporation hereby reserves sufficient authorized shares of
Common Stock to meet the grant of Awards hereunder. Any shares subject to an
Award which is subsequently forfeited, expires or is terminated may again be the
subject of an Award granted under the Plan. To the extent that any shares of
Common Stock subject to an Award are not delivered to a Participant (or his
beneficiary) because the Award is forfeited or canceled or because the Award is
settled in cash, such shares shall not be deemed to have been issued for
purposes of determining the maximum number of shares of Common Stock available
for issuance under the Plan. If the option price of an Option granted under the
Plan (or any Prior Plan) is satisfied by tendering shares of Common Stock, only
the number of shares issued net of the shares of Common Stock tendered shall be
deemed issued for purposes of determining the maximum number of shares of Common
Stock available for issuance under the Plan.
(c) If there is any change in the shares of Common Stock because of a
merger, consolidation or reorganization involving the Corporation or a related
corporation, or if the Board of Directors of the Corporation declares a stock
dividend or stock split distributable in shares of Common Stock, or if there is
a change in the capital stock structure of the Corporation or a related
corporation affecting the Common Stock, the number of shares of Common Stock
reserved for issuance under the Plan shall be correspondingly adjusted, and the
Committee shall make such adjustments to Awards or to any provisions of this
Plan as the Committee deems equitable to prevent dilution or enlargement of
Awards.
(d) Subject to the terms of this Section 4, the following limitations
upon Awards shall apply:
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(i) The maximum number of shares of Common Stock that may be
issued pursuant to Incentive Options shall be 1,187,695 shares, which
number shall be equal to twenty percent (20%) of the number of outstanding
shares of Common Stock as of the effective date of the consummation of the
initial public offering of the Common Stock.
(ii) In no event shall an employee be granted Awards under the Plan
for more than 100,000 shares of Common Stock (or the equivalent value
thereof based on the fair market value of the Common Stock on the date of
grant of the Award) during any calendar year.
5. ELIGIBILITY
An Award may be granted only to an individual who satisfies the following
eligibility requirements on the date the Award is granted:
(a) The individual is either (i) an employee of the Corporation or a
related corporation, (ii) a director of the Corporation or a related
corporation, or (iii) an independent contractor, consultant or advisor
(collectively, "independent contractors") providing services to the Corporation
or a related corporation. For this purpose, an individual shall be considered to
be an "employee" only if there exists between the individual and the Corporation
or a related corporation the legal and bona fide relationship of employer and
employee.
(b) With respect to the grant of Incentive Options, the individual does
not own, immediately before the time that the Incentive Option is granted, stock
possessing more than ten percent of the total combined voting power of all
classes of stock of the Corporation. For this purpose, an individual will be
deemed to own stock which is attributable to him under Section 424(d) of the
Internal Revenue Code of 1986, as amended (the "Code").
(c) The individual, being otherwise eligible under this Section 5, is
selected by the Committee as an individual to whom an Award shall be granted (a
"Participant").
6. OPTIONS
(a) Grant of Options: Subject to the limitations of the Plan, the
Committee may in its sole and absolute discretion grant Options to such eligible
individuals in such numbers, upon such terms and at such times as the Committee
shall determine. Both Incentive Options and Nonqualified Options may be granted
under the Plan. To the extent necessary to comply with Section 422 of the Code
and related regulations, (i) if an Option is designated as an Incentive Option
but does not qualify as such under Section 422 of the Code, the Option (or
portion thereof) shall be treated as a Nonqualified Option; and (ii) the
provisions relating to the grant and terms of Incentive Options (including but
not limited to the provisions in Section 4(d)(i) herein regarding the maximum
number of shares available for issuance pursuant to such Incentive Options)
shall be deemed to be a separate plan.
(b) Option Price: The price per share at which an Option may be
exercised (the "Option Price") shall be established by the Committee at the time
the Option is granted and shall be set forth in the terms of the agreement
evidencing the grant of the Option; provided, that in the case of an Incentive
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Option, the Option Price shall be no less than the fair market value per share
of the Common Stock on the date the Option is granted. In addition, the
following rules shall apply:
(i) An Incentive Option shall be considered to be granted on the
date that the Committee acts to grant the Option, or on any later date
specified by the Committee as the effective date of the Option. A
Nonqualified Option shall be considered to be granted on the date the
Committee acts to grant the Option or any other date specified by the
Committee as the date of grant of the Option.
(ii) The fair market value of the shares shall be determined in
good faith by the Committee in accordance with the following provisions:
(i) if the shares of Common Stock are listed for trading on the New York
Stock Exchange or the American Stock Exchange or included in The Nasdaq
National Market, the fair market value shall be the closing sales price of
the shares on the New York Stock Exchange or the American Stock Exchange
or as reported in The Nasdaq National Market (as applicable) on the date
immediately preceding the date the Option is granted, or, if there is no
transaction on such date, then on the trading date nearest preceding the
date the Option is granted for which closing price information is
available and, provided further, if the shares are quoted on The Nasdaq
System but are not included in The Nasdaq National Market, the fair market
value shall be the mean between the high bid and low asked quotations in
The Nasdaq System on the date immediately preceding the date the Option is
granted for which such information is available; or (ii) if the shares of
Common Stock are not listed or reported in any of the foregoing, then fair
market value shall be determined by the Committee in accordance with the
applicable provisions of Section 20.2031-2 of the Federal Estate Tax
Regulations, or in any other manner consistent with the Code and
accompanying regulations.
(iii) In no event shall there first become exercisable by an
employee in any one calendar year Incentive Options granted by the
Corporation or any related corporation with respect to shares having an
aggregate fair market value (determined at the time an Incentive Option is
granted) greater than $100,000.
(c) Option Period and Limitations on the Right to Exercise Options
(i) The period during which an Option may be exercised (the
"Option Period") shall be determined by the Committee at the time the
Option is granted. With respect to Incentive Options, such period shall
not extend more than ten years from the date on which the Option is
granted. Any Option or portion thereof not exercised before expiration of
the Option Period shall terminate.
(ii) An Option may be exercised by giving written notice to the
Corporation at such place as the Corporation shall direct. Such notice
shall specify the number of shares to be purchased pursuant to an Option
and the aggregate purchase price to be paid therefor, and shall be
accompanied by the payment of such purchase price. Such payment shall be
in the form of (A) cash; (B) shares of Common Stock owned by the
Participant at the time of exercise; (C) shares of Common Stock withheld
upon exercise; (D) delivery of written notice of exercise to the
Corporation and delivery to a broker of written notice of exercise and
irrevocable instructions
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to promptly deliver to the Corporation the amount of sale or loan proceeds
to pay the Option Price; or (E) a combination of the foregoing methods, as
elected by the Participant. Shares tendered or withheld in payment on the
exercise of an Option shall be valued at their fair market value on the
date of exercise, as determined by the Committee by applying the
provisions of Section 6(b)(ii).
(iii) No Option granted to a Participant who was an employee at the
time of grant shall be exercised unless the Participant is, at the time of
exercise, an employee as described in Section 5(a), and has been an
employee continuously since the date the Option was granted, subject to
the following:
(A) An Option shall not be affected by any change in the
terms, conditions or status of the Participant's employment,
provided that the Participant continues to be an employee of the
Corporation or a related corporation.
(B) The employment relationship of a Participant shall be
treated as continuing intact for any period that the Participant is
on military or sick leave or other bona fide leave of absence,
provided that the period of such leave does not exceed ninety days,
or, if longer, as long as the Participant's right to reemployment is
guaranteed either by statute or by contract. The employment
relationship of a Participant shall also be treated as continuing
intact while the Participant is not in active service because of
disability. The Committee shall determine whether a Participant is
disabled within the meaning of this paragraph.
(C) If the employment of a Participant is terminated because
of disability within the meaning of subparagraph (B), or if the
Participant dies while he is an employee or dies after the
termination of his employment because of disability, the Option may
be exercised only to the extent exercisable on the date of the
Participant's termination of employment or death while employed (the
"termination date"), except that the Committee may in its discretion
accelerate the date for exercising all or any part of the Option
which was not otherwise exercisable on the termination date. The
Option must be exercised, if at all, prior to the first to occur of
the following, whichever shall be applicable: (X) the close of the
period of twelve months next succeeding the termination date; or (Y)
the close of the Option Period. In the event of the Participant's
death, such Option shall be exercisable by such person or persons as
shall have acquired the right to exercise the Option by will or by
the laws of intestate succession.
(D) If the employment of the Participant is terminated for
any reason other than disability (as defined in subparagraph (B)) or
death or for "cause," his Option may be exercised to the extent
exercisable on the date of such termination of employment, except
that the Committee may in its discretion accelerate the date for
exercising all or any part of the Option which was not otherwise
exercisable on the date of such termination of employment. The
Option must be exercised, if at all, prior to the first to occur of
the following,
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whichever shall be applicable: (X) the close of the period of 90
days next succeeding the termination date; or (Y) the close of the
Option Period. If the Participant dies following such termination of
employment and prior to the earlier of the dates specified in (X) or
(Y) of this subparagraph (D), the Participant shall be treated as
having died while employed under subparagraph (C) immediately
preceding (treating for this purpose the Participant's date of
termination of employment as the termination date). In the event of
the Participant's death, such Option shall be exercisable by such
person or persons as shall have acquired the right to exercise the
Option by will or by the laws of intestate succession.
(E) If the employment of the Participant is terminated for
"cause," his Option shall lapse and no longer be exercisable as of
the effective time of his termination of employment, as determined
by the Committee. For purposes of this subparagraph (E) and
subparagraph (D), the Participant's termination shall be for "cause"
if such termination results from the Participant's personal
dishonesty, gross incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to
perform stated duties, willful violation of any law, rule,
regulation (other than traffic violations or similar offences),
written Company policy or final cease-and-desist order, conviction
of a felony or of a misdemeanor involving moral turpitude, unethical
business practices in connection with the Company's business, or
misappropriation of the Company's assets. The determination of
"cause" shall be made by the Committee and its determination shall
be final and conclusive.
(F) Notwithstanding the foregoing, the Committee shall have
authority, in its discretion, to extend the period during which an
Option may be exercised; provided that, in the event that any such
extension shall cause an Incentive Option to be designated as a
Nonqualified Option, no such extension shall be made without the
prior written request and consent of the Participant.
(iv) An Option granted to a Participant who was an independent
contractor or director of the Corporation or a related corporation at the
time of grant (and who does not thereafter become an employee, in which
case he shall be subject to the provisions of Section 6(c)(iii) herein)
may be exercised only to the extent exercisable on the date of the
Participant's termination of service to the Corporation or a related
corporation (unless the termination was for cause), and must be exercised,
if at all, prior to the first to occur of the following, as applicable:
(X) the close of the period of 90 days next succeeding the termination
date; or (Y) the close of the Option Period. If the services of such a
Participant are terminated for cause (as defined in Section 6(c)(iii)(E)
herein), his Option shall lapse and no longer be exercisable as of the
effective time of his termination of services, as determined by the
Committee. Notwithstanding the foregoing, the Committee may in its
discretion accelerate the date for exercising all or any part of an Option
which was not otherwise exercisable on the termination date or extend the
period during which an Option may be exercised, or both.
-6-
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(v) A Participant or his legal representative, legatees or
distributees shall not be deemed to be the holder of any shares subject to
an Option unless and until certificates for such shares are delivered to
him or them under the Plan.
(vi) Nothing in the Plan shall confer upon the Participant any
right to continue in the service of the Corporation or a related
corporation as an employee, director, or independent contractor or to
interfere in any way with the right of the Corporation or a related
corporation to terminate the Participant's employment or service at any
time.
(vii) A certificate or certificates for shares of Common Stock
acquired upon exercise of an Option shall be issued in the name of the
Participant and distributed to the Participant (or his beneficiary) as
soon as practicable following receipt of notice of exercise and payment of
the purchase price.
(d) Nontransferability of Options
(i) Options shall not be transferable other than by will, the laws
of intestate succession or pursuant to a qualified domestic relations
order. The designation of a beneficiary does not constitute a transfer. An
Option shall be exercisable during the Participant's lifetime only by him
or by his guardian or legal representative.
(ii) If a Participant is subject to Section 16 of the Exchange Act,
shares of Common Stock acquired upon exercise of an Option may not,
without the consent of the Committee, be disposed of by the Participant
until the expiration of six months after the date the Option was granted.
7. STOCK APPRECIATION RIGHTS
(a) Grant of SARs: Subject to the limitations of the Plan, the Committee
may in its sole and absolute discretion grant SARs to such eligible individuals,
in such numbers, upon such terms and at such times as the Committee shall
determine. SARs may be granted to an optionee of an Option (hereinafter called a
"related Option") with respect to all or a portion of the shares of Common Stock
subject to the related Option (a "Tandem SAR") or may be granted separately to
an eligible key employee (a "Freestanding SAR"). Subject to the limitations of
the Plan, SARs shall be exercisable in whole or in part upon notice to the
Corporation upon such terms and conditions as are provided in the Agreement
relating to the grant of the SAR.
(b) Tandem SARs: A Tandem SAR may be granted either concurrently with
the grant of the related Option or (if the related Option is a Nonqualified
Option) at any time thereafter prior to the complete exercise, termination,
expiration or cancellation of such related Option. Tandem SARs shall be
exercisable only at the time and to the extent that the related Option is
exercisable (and may be subject to such additional limitations on exercisability
as the Committee may provide in the Agreement), and in no event after the
complete termination or full exercise of the related Option. For purposes of
determining the number of shares of Common Stock that remain subject to such
related Option and for purposes of determining the number of shares of Common
Stock in respect of which other Awards may be granted, upon the exercise of
Tandem SARs, the related Option shall be considered to have been
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surrendered to the extent of the number of shares of Common Stock with respect
to which such Tandem SARs are exercised. Upon the exercise or termination of the
related Option, the Tandem SARs with respect thereto shall be canceled
automatically to the extent of the number of shares of Common Stock with respect
to which the related Option was so exercised or terminated. Subject to the
limitations of the Plan, upon the exercise of a Tandem SAR, the Participant
shall be entitled to receive from the Corporation, for each share of Common
Stock with respect to which the Tandem SAR is being exercised, consideration
equal in value to the excess of the fair market value of a share of Common Stock
(as determined in accordance with Section 6(b)(ii) herein) on the date of
exercise over the related Option Price per share; provided, that the Committee
may, in any Agreement granting Tandem SARs, establish a maximum value payable
for such SARs.
(c) Freestanding SARs: The base price of a Freestanding SAR shall be not
less than 100% of the fair market value of the Common Stock (as determined in
accordance with Section 6(b)(ii) herein) on the date of grant of the
Freestanding SAR. Subject to the limitations of the Plan, upon the exercise of a
Freestanding SAR, the Participant shall be entitled to receive from the
Corporation, for each share of Common Stock with respect to which the
Freestanding SAR is being exercised, consideration equal in value to the excess
of the fair market value of a share of Common Stock on the date of exercise over
the base price per share of such Freestanding SAR; provided, that the Committee
may, in any Agreement granting Freestanding SARs, establish a maximum value
payable for such SARs.
(d) Exercise of SARs:
(i) Subject to the terms of the Plan, SARs shall be exercisable in
whole or in part upon such terms and conditions as are provided in the
Agreement relating to the grant of the SAR. The period during which an SAR
may be exercisable shall not exceed ten years from the date of grant or,
in the case of Tandem SARs, such shorter Option Period as may apply to the
related Option. Any SAR or portion thereof not exercised before expiration
of the period stated in the Agreement relating to the grant of the SAR
shall terminate.
(ii) SARs may be exercised by giving written notice to the
Corporation at such place as the Committee shall direct. The date of
exercise of the SAR shall mean the date on which the Corporation shall
have received notice from the Participant of the exercise of such SAR.
(iii) No SAR may be exercised unless the Participant is, at the time
of exercise, an eligible Participant, as described in Section 5, and has
been a Participant continuously since the date the SAR was granted,
subject to the provisions of Section 6(c)(iii) herein.
(e) Consideration; Election: The consideration to be received upon the
exercise of the SAR by the Participant shall be paid in cash, shares of Common
Stock (valued at fair market value on the date of exercise of such SAR in
accordance with Section 6(b)(ii) herein) or a combination of cash and shares of
Common Stock, as elected by the Participant, subject to the terms of the Plan
and the applicable Agreement. The Corporation's obligation arising upon the
exercise of the SAR may be paid currently or on a deferred basis with such
interest or earnings equivalent as the Committee may determine. A certificate or
certificates for shares of Common Stock acquired upon exercise of an SAR for
shares shall be issued in the name of the Participant (or his beneficiary) and
distributed to the Participant (or his beneficiary) as soon as practicable
following receipt of notice of exercise. No fractional shares of
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Common Stock will be issuable upon exercise of the SAR and, unless otherwise
provided in the applicable Agreement, the Participant will receive cash in lieu
of fractional shares.
(f) Limitations: The applicable Agreement shall contain such terms,
conditions and limitations consistent with the Plan as may be specified by the
Committee. Unless otherwise so provided in the applicable Agreement or the Plan,
any such terms, conditions or limitations relating to a Tandem SAR shall not
restrict the exercisability of the related Option.
(g) Nontransferability:
(i) SARs shall not be transferable other than by will, the laws of
intestate succession or pursuant to a qualified domestic relations order.
The designation of a beneficiary does not constitute a transfer. SARs may
be exercised during the Participant's lifetime only by him or by his
guardian or legal representative.
(ii) If the Participant is subject to Section 16 of the Exchange
Act, shares of Common Stock acquired upon exercise of an SAR may not,
without the consent of the Committee, be disposed of by the Participant
until the expiration of six months after the date the SAR was granted.
8. RESTRICTED AWARDS
(a) Grant of Restricted Awards: Subject to the limitations of the Plan,
the Committee may in its sole and absolute discretion grant Restricted Awards to
such eligible key employees in such numbers, upon such terms and at such times
as the Committee shall determine. A Restricted Award may consist of a Restricted
Stock Award or a Restricted Unit, or both. Restricted Awards shall be payable in
cash or whole shares of Common Stock (including Restricted Stock), or partly in
cash and partly in whole shares of Common Stock, in accordance with the terms of
the Plan and the sole and absolute discretion of the Committee. The Committee
may condition the grant or vesting, or both, of a Restricted Award upon the
continued service of the Participant for a certain period of time, attainment of
such performance objectives as the Committee may determine, or upon a
combination of continued service and performance objectives. The Committee shall
determine the nature, length and starting date of the period during which the
Restricted Award may be earned (the "Restriction Period") for each Restricted
Award, which shall be as stated in the Agreement to which the Award relates. In
the case of Restricted Awards based upon performance criteria, or a combination
of performance criteria and continued service, the Committee shall determine the
performance objectives to be used in valuing Restricted Awards and determine the
extent to which such Awards have been earned. Performance objectives may vary
from participant to participant and between groups of participants and shall be
based upon such Corporation, business unit and/or individual performance factors
and criteria as the Committee in its sole discretion may deem appropriate,
including, but not limited to, earnings per share, return on equity, return on
assets or total return to shareholders. The Committee shall determine the terms
and conditions of each Restricted Award, including the form and terms of payment
of Awards. The Committee shall have sole authority to determine whether and to
what degree Restricted Awards have been earned and are payable and to interpret
the terms and conditions of Restricted Awards and the provisions herein.
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(b) Earning of Restricted Awards: Unless the applicable Agreement
provides otherwise, a Restricted Award granted to a Participant shall be deemed
to be earned as of the first to occur of the completion of the Restriction
Period, retirement, displacement, death or disability of the Participant, or
acceleration of the Restricted Award, provided that, in the case of Restricted
Awards based upon performance criteria or a combination of performance criteria
and continued service, the Committee shall have sole discretion to determine if,
and to what degree, the Restricted Awards shall be deemed earned at the end of
the Restriction Period or upon the retirement, displacement, death or disability
of the Participant. In addition, the following rules shall also apply to the
earning of Restricted Awards:
(i) Completion of Restriction Period: For this purpose, a
Restricted Award shall be deemed to be earned upon completion of the
Restriction Period (except as otherwise provided herein for performance-
based Restricted Awards). In order for a Restricted Award to be deemed
earned, the Participant must have been continuously employed or in service
during the Restriction Period. Continuous employment or service shall mean
employment with or service to any combination of the Corporation and one
or more related corporations, and a temporary leave of absence with
consent of the Corporation shall not be deemed to be a break in continuous
employment or service.
(ii) Retirement of the Participant: For this purpose, the
Participant shall be deemed to have retired as of the earlier of (A) his
normal retirement date under the retirement plan established by the
Corporation for its employees which is applicable to the Participant, or
(B) his retirement date under a contract, if any, between the Participant
and the Corporation providing for his retirement from the employment of
the Corporation or a related corporation prior to such normal retirement
date, or (C) a mutually agreed upon early retirement date under such
retirement plan of the Corporation between the Participant and the
Corporation.
(iii) Displacement of the Participant: For this purpose, the
Participant shall be deemed to have been displaced in the event of the
termination of the Participant's employment or service due to the
elimination of the Participant's job or position without fault on the part
of the Participant.
(iv) Death or Disability of the Participant: Except as otherwise
provided herein for performance-based Restricted Awards, if the
Participant shall terminate continuous employment or service because of
death or disability before a Restricted Award is otherwise deemed to be
earned pursuant to this Section 8(b), the Participant shall be deemed to
have earned a percentage of the Award (rounded to the nearest whole share
in the case of Restricted Awards payable in shares) determined by dividing
the number of his full years of continuous employment or service then
completed during the Restriction Period with respect to the Award by the
number of years of such Restriction Period.
(v) Acceleration of Restricted Awards by the Committee:
Notwithstanding the provisions of this Section 8(b), in the event of the
termination of employment or service of a Participant for reasons other
than retirement, displacement, death or disability, the Committee, in its
sole and absolute discretion, may accelerate the date that any Restricted
Award granted to the Participant shall be deemed to be earned in whole or
in part, without any obligation to accelerate such date with respect to
other Restricted Awards granted to the Participant or to
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accelerate such date with respect to Restricted Awards granted to any
other Participant, or to treat all Participants similarly situated in the
same manner.
(c) Forfeiture of Restricted Awards: If the employment or service of a
Participant shall be terminated for any reason, and the Participant has not
earned all or part of a Restricted Award pursuant to the terms herein, such
Award to the extent not then earned shall be forfeited immediately upon such
termination and the Participant shall have no further rights with respect
thereto.
(d) Dividend and Voting Rights; Share Certificates: A Participant shall
have no dividend rights or voting rights with respect to shares reserved in his
name pursuant to a Restricted Award payable in shares but not yet earned
pursuant to Section 8(b). A certificate or certificates for shares of Common
Stock representing a Restricted Award payable in shares shall be issued in the
name of the Participant and distributed to the Participant (or his beneficiary)
as soon as practicable following the date that the shares subject to the Award
are earned as provided in Section 8(b). No certificate shall be issued hereunder
in the name of the Participant (or his beneficiary) except to the extent the
shares represented thereby have been earned.
(e) Nontransferability:
(i) The recipient of a Restricted Award shall not sell, transfer,
assign, pledge or otherwise encumber shares subject to the Award until the
Restriction Period has expired or until all conditions to vesting have
been met.
(ii) Restricted Awards shall not be transferable other than by
will, the laws of intestate succession or pursuant to a qualified domestic
relations order. The designation of a beneficiary does not constitute a
transfer.
(iii) If a Participant of a Restricted Award is subject to Section
16 of the Exchange Act, shares of Common Stock subject to such Award may
not, without the consent of the Committee, be sold or otherwise disposed
of within six months following the date of grant of such Award.
9. WITHHOLDING
The Corporation shall withhold all required local, state and federal taxes
from any amount payable in cash with respect to an Award. The Corporation shall
require any recipient of an Award payable in shares of the Common Stock to pay
to the Corporation in cash the amount of any tax or other amount required by any
governmental authority to be withheld and paid over by the Corporation to such
authority for the account of such recipient. Notwithstanding the foregoing, the
recipient may satisfy such obligation in whole or in part, and any other local,
state or federal income tax obligations relating to such an Award, by electing
(the "Election") to have the Corporation withhold shares of Common Stock from
the shares to which the recipient is entitled. The number of shares to be
withheld shall have a fair market value (determined in accordance with Section
6(b)(ii)) as of the date that the amount of tax to be withheld is determined
(the "Tax Date") as nearly equal as possible to (but not exceeding) the amount
of such obligations being satisfied. Each Election must be made in writing to
the Committee prior to the Tax Date.
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10. PERFORMANCE-BASED COMPENSATION
It is the general intent of the Corporation that Awards conferred under
the Plan to Covered Employees, as such term is defined in Section 14(b) herein,
shall comply with the qualified performance-based compensation exception to
employer compensation deductions set forth in Section 162(m) of the Code, and
the Plan generally shall be construed in favor of meeting the requirements of
Section 162(m) of the Code and the regulations thereunder to the extent
possible.
11. SECTION 16(B) COMPLIANCE
It is the intention of the Corporation that the Plan shall comply in all
respects with Rule 16b-3 under the Exchange Act, and, if any Plan provision is
later found not to be in compliance with Section 16 of the Exchange Act, the
provision shall be deemed null and void, and in all events the Plan shall be
construed in favor of it meeting the requirements of Rule 16b-3. Notwithstanding
anything in the Plan to the contrary, the Committee, in its sole and absolute
discretion, may bifurcate the Plan so as to restrict, limit or condition the use
of any provision of the Plan to participants who are officers or directors
subject to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other participants.
12. NO RIGHT OR OBLIGATION OF CONTINUED EMPLOYMENT
Nothing contained in the Plan shall require the Corporation or a related
corporation to continue the employment or service of a Participant, nor shall
any such individual be required to remain in the employment or service of the
Corporation or a related corporation. Except as otherwise provided in the Plan,
Awards granted under the Plan to employees of the Corporation shall not be
affected by any change in the duties or position of the participant, as long as
such individual remains an employee of, or in service to, the Corporation or a
related corporation.
13. RETIREMENT PLANS
In no event shall any amounts accrued, distributable or payable under the
Plan be treated as compensation for the purpose of determining the amount of
contributions or benefits to which any person shall be entitled under any
retirement plan sponsored by the Corporation or a related corporation that is
intended to be a qualified plan within the meaning of Section 401(a) of the
Code.
14. CERTAIN DEFINITIONS
For purposes of the Plan, the following terms shall have the meaning
indicated:
(a) "Agreement" means any written agreement or agreements between the
Corporation and the recipient of an Award pursuant to the Plan relating to the
terms, conditions and restrictions of Options, SARs, Restricted Awards and any
other Awards conferred herein.
(b) "Covered employee" shall have the meaning given the term in Section
162(m) of the Code or the regulations thereunder.
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(c) "Disability" shall mean the inability to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death, or which has lasted or can
be expected to last for a continuous period of not less than twelve months.
(d) "Parent" or "parent corporation" shall mean any corporation (other
than the Corporation) in an unbroken chain of corporations ending with the
Corporation if each corporation other than the Corporation owns stock possessing
50% or more of the total combined voting power of all classes of stock in
another corporation in the chain.
(e) "Predecessor" or "predecessor corporation" means a corporation which
was a party to a transaction described in Section 424(a) of the Code (or which
would be so described if a substitution or assumption under that Section had
occurred) with the Corporation, or a corporation which is a parent or subsidiary
of the Corporation, or a predecessor of any such corporation.
(f) "Related corporation" means any parent, subsidiary or predecessor of
the Corporation.
(g) "Restricted Stock" shall mean shares of Common Stock which are
subject to Restricted Awards payable in shares, the vesting of which is subject
to restrictions set forth in the Plan or the Agreement relating to such Award.
(h) "Subsidiary" or "subsidiary corporation" means any corporation
(other than the Corporation) in an unbroken chain of corporations beginning with
the Corporation if each corporation other than the last corporation in the
unbroken chain owns stock possessing 50% or more of the total combined voting
power of all classes of stock in another corporation in the chain.
15. AMENDMENT AND TERMINATION OF THE PLAN
The Plan may be amended or terminated at any time by the Board of
Directors of the Corporation; provided, that such amendment or termination shall
not, without the consent of the recipient of an Award, adversely affect the
rights of the recipient with respect to an outstanding Award; and provided
further, that approval by the shareholders of the Corporation shall be required
for any amendment which would (i) increase the number of shares of Common Stock
which may be issued under the Plan, except to the extent of adjustments pursuant
to Section 4; or (ii) materially change the requirements for eligibility to be a
recipient of an Award, unless shareholder approval of any such amendments is not
required by applicable law, rule or regulation.
16. RESTRICTIONS ON SHARES
The Committee may impose such restrictions on any shares representing
Awards hereunder as it may deem advisable, including without limitation
restrictions under the Securities Act, under the requirements of any stock
exchange or similar organization and under any blue sky or state securities laws
applicable to such shares. The Corporation may cause a restrictive legend to be
placed on any certificate issued pursuant to an Award hereunder in such form as
may be prescribed from time to time by applicable laws and regulations or as may
be advised by legal counsel.
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17. APPLICABLE LAW
The Plan shall be governed by and construed in accordance with the laws of
the State of North Carolina.
18. SHAREHOLDER APPROVAL
The Plan is subject to approval by the shareholders of the Corporation,
which approval must occur, if at all, within 12 months of the effective date of
the Plan. Awards granted prior to such shareholder approval shall be conditioned
upon and shall be effective only upon approval of the Plan by such shareholders
on or before such date.
19. CHANGE OF CONTROL
(a) Notwithstanding any other provision of the Plan to the contrary, in
the event of a Change of Control (as defined in Section 19(b) herein):
(i) All Options and SARs outstanding as of the date of such Change
of Control shall become fully exercisable, whether or not then otherwise
exercisable.
(ii) Any restrictions including but not limited to the Restriction
Period applicable to any Restricted Award shall be deemed to have expired,
and such Restricted Awards shall become fully vested and payable to the
fullest extent of the original grant of the applicable Award.
(iii) Notwithstanding the foregoing, in the event of a merger, share
exchange, reorganization or other business combination affecting the
Corporation or a related corporation, the Committee may, in its sole and
absolute discretion, determine that any or all Awards granted pursuant to
the Plan shall not vest or become exercisable on an accelerated basis, if
the Board of Directors of the surviving or acquiring corporation, as the
case may be, shall have taken such action, including but not limited to
the assumption of Awards granted under the Plan or the grant of substitute
awards (in either case, with substantially similar terms as Awards granted
under the Plan), as in the opinion of the Committee is equitable or
appropriate to protect the rights and interests of participants under the
Plan. For the purposes herein, the Committee authorized to make the
determinations provided for in this Section 19(a)(iii) shall be appointed
by the Board of Directors, two-thirds of the members of which shall have
been directors of the Corporation prior to the merger, share exchange,
reorganization or other business combinations affecting the Corporation or
a related corporation.
(b) For the purposes herein, a "Change of Control" shall be deemed to
have occurred on the earliest of the following dates:
(i) The date any person or group of persons (as defined in Section
13(d) and 14(d) of the Exchange Act) together with its affiliates,
excluding employee benefit plans of Corporation, becomes, directly or
indirectly, the "beneficial owner" (as defined in Rule 13d-3 promulgated
under the Exchange Act) of securities of the Corporation representing
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20% or more of the combined voting power of the Corporation's then
outstanding securities;
(ii) The date upon which, as a result of a tender offer or exchange
offer for the purchase of securities of Corporation (other than such an
offer by the Corporation for its own securities), or as a result of a
proxy contest, merger, consolidation or sale of assets, or as a result of
any combination of the foregoing, individuals who at the beginning of any
year period during such term constitute the Corporation's Board of
Directors, plus new directors whose election by the Corporation's
shareholders is approved by a vote of at least two-thirds of the
outstanding voting shares of the Corporation, cease for any reason during
such year period to constitute at least two-thirds of the members of such
Board of Directors;
(iii) The date the shareholders of the Corporation approve a merger
or consolidation of the Corporation with any other corporation or entity
regardless of which entity is the survivor, other than a merger or
consolidation which would result in the voting securities of the
Corporation outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or being converted into voting securities
of the surviving entity) at least 60% of the combined voting power of the
voting securities of the Corporation or such surviving entity outstanding
immediately after such merger or consolidation;
(iv) The date the shareholders of the Corporation approve a plan of
complete liquidation or winding-up of the Corporation or an agreement for
the sale or disposition by the Corporation of all or substantially all of
the Corporation's assets; or
(v) The occurrence of any other event which the Corporation's
Board of Directors determines should constitute a Change of Control.
IN WITNESS WHEREOF, this 1997 Omnibus Stock Plan of C3, Inc., is, by the
authority of the Board of Directors of the Corporation, executed in behalf of
the Corporation, the 25th day of September, 1997.
C3, INC.
By: /s/ Jeff N. Hunter
----------------------------
Jeff N. Hunter
President
ATTEST:
/s/ Mark W. Hahn
- -----------------------------
Mark W. Hahn, Secretary
[Corporate Seal]
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EXHIBIT 10.17
RESTRICTED STOCK AGREEMENT
OF
C3 DIAMANTE, INC.
THIS AGREEMENT, dated as of the 30th day of June, 1995, between C3
DIAMANTE, INC., a North Carolina corporation (the "Corporation"), and PAULA K.
BERARDINELLI ("Berardinelli") and JEFFREY NEAL HUNTER ("Hunter").
RECITALS:
In consideration for Berardinelli's and Hunter's service to the
Corporation as executive officers, the Corporation and Berardinelli and Hunter
hereby agree as follows:
1. Grant of Award. The Corporation hereby grants to Berardinelli and
Hunter, as joint tenants with right of survivorship, as a matter of separate
inducement and agreement in connection with their service to the Corporation as
executive officers 10,000 shares of the common stock (the "Common Stock") of the
Corporation (the "Award"). The grant of the Award is subject in all respects to
and governed in all respects by this Agreement.
2. No Right or Obligation of Continued Service. Nothing contained in
this Agreement shall require the Corporation or a related corporation to
continue the services of Berardinelli or Hunter.
3. Nonassignability of Award. This Award is not transferable (including
by pledge or hypothecation) other than by will or the laws of intestate
succession.
4. Restrictions on Shares. The Corporation may impose such restrictions
on any share(s) issued pursuant to the Award as it may deem advisable,
including, without limitation, restrictions on transfer pursuant to the
Securities Act of 1933, as amended, any blue sky or securities laws applicable
to such shares or any shareholder agreement to which Berardinelli or Hunter is a
party. The Corporation may cause a restrictive legend to be placed on any
certificate issued pursuant to the Award in such form as may be prescribed from
time to time by applicable laws and regulations or as it may be advised by legal
counsel.
5. Parties. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective executors, administrators,
next-of-kin, successors and assigns.
6. Amendment or Termination. This Agreement may be amended or
terminated only upon the written consent thereto by the parties to the
Agreement.
7. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of North Carolina.
2
IN WITNESS WHEREOF, this Agreement has been executed on behalf of the
Corporation and Berardinelli and Hunter as of the day and year first above
written.
C3 DIAMANTE, INC.
By: /s/ Paula K. Berardinelli
---------------------------
Paula K. Berardinelli
President
Attest:
/s/ Jeff N. Hunter
- ------------------------
Jeff N. Hunter
Secretary
[Corporate Seal]
/s/ Paula K. Berardinelli (SEAL)
-------------------------------
Paula K. Berardinelli
/s/ Jeffrey Neal Hunter (SEAL)
-------------------------------
Jeffrey Neal Hunter
2
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EXHIBIT 10.18
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT ("the Agreement") is entered into as of the
18th day of March, 1997 by and between C3, INC., a North Carolina corporation
(the "Company"), C. ERIC HUNTER ("Hunter") and GENERAL ELECTRIC PENSION TRUST
("GEPT").
WHEREAS, GEPT desires to purchase certain shares of 1997 Series B
Preferred Stock ("the Series B Preferred Stock") pursuant to the Summary of the
Offering of the Company dated January 3, 1997, which Series B Preferred Stock is
convertible into shares of common stock of the Company ("Common Stock") as set
out in the Company's Articles of Incorporation; and
WHEREAS, Hunter is the sole and direct owner of 592,680 shares of common
stock of the Company, which shares constitute a majority of the issued and
outstanding voting shares of the Company; and
WHEREAS, the Company, Hunter and GEPT believe that it would be in the best
interests of the Company if they agree, as provided in this Agreement, on
certain matters relating to the Company and its management.
NOW, THEREFORE, in consideration of the premises hereto and of the mutual
covenants and agreements contained herein, the parties agree as follows:
1. Election of Directors.
(a) At all times before (i) the Company effects its initial public
offering pursuant to the Securities Act of 1933, as amended (the "Act"), and,
(ii) for so long as GEPT shall be the beneficial owner of any Series B Preferred
Stock or Common Stock issued upon conversion of the Preferred Stock, Hunter
shall (i) vote all of his shares of Common Stock in person or by proxy to cause
the Company not to increase the size of the Board of Directors of the Company
without the consent of GEPT and (ii) vote all his shares of Common Stock in
person or by proxy for the election of one person designated by GEPT to serve as
director. IF GEPT fails to designate a person for election as director in any
specific election, Hunter agrees to vote all of his shares to re-elect the
person previously designated by GEPT. GEPT shall have the right, upon written
request to Hunter, to require Hunter to request that the Company call a special
meeting of shareholders at any time and from time to time, for the sole purpose
of removing from the Board of Directors of the Company, such director originally
designated by it, and in such event, Hunter shall vote all of his Common Stock
in person or by proxy to effect the removal from the Board of Directors of the
Company of the person designated for such removal from the Board of Directors by
GEPT and to elect as director of the Company the person designated by GEPT as
replacement thereof. Hunter agrees that for so long as the provisions of this
Section 1(a) are effective, he will not transfer his Common Stock without
requiring the transferee to be bound to the provisions of this Section 1(a). The
Company agrees that it will not issue after the date hereof, any new voting
securities without first obtaining
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the written consent of the purchaser or transferee of such voting securities to
be bound by the terms hereof, as if a party hereto, if as a result of such
issuances of voting securities, the aggregate shares of voting securities owned
by Hunter would represent less than a majority of the outstanding voting
securities of the Company.
(b) At any time after (i) the Company effects its initial
registered public offering pursuant to the Act, and, (ii) for so long as GEPT
shall be the beneficial owner of any Preferred Stock or Common Stock issued upon
the conversion of the Preferred Stock, the Company (a) will nominate and
recommend as candidate for election to the Board of Directors of the Company one
person designated by GEPT and reasonably acceptable to the Board of the Company
(the "Designee") and (b) will not increase the size of the Board of Directors of
the Company without the consent of GEPT, which consent shall not be unreasonably
withheld. If at any time such Designee is not a member of the Board of Directors
of the Company, (i) the Company will notify such Designee, concurrently with
notice given to members of the Board of Directors of the Company, of all
meetings of the Board of Directors, and, as soon as available, will provide to
such Designee all reports, financial statements or other information distributed
to the Board of Directors of the Company, (ii) the Company will permit such
Designee to attend all such meetings of the Board of Directors as an observer
and to participate as an elected member with all rights of an elected member,
voting excepted, and (iii) the Company will permit GEPT, or any person designed
by GEPT in writing to be acting on its behalf, to visit and inspect any of the
properties of the Company and to discuss the affairs, finances and accounts of
the Company with the principal officers and the auditors of the Company, all at
such reasonable time during business hours and as often as GEPT may reasonably
request.
2. Proposed Amendments to the Articles of Incorporation. The Company
shall submit the amendment to the Articles of Incorporation set out on Exhibit A
for approval by the shareholders as soon as possible after the date hereof.
Hunter shall vote all of his shares of Common Stock in favor of amending the
Articles of Incorporation of the Company as set out on Exhibit A attached
hereto.
3. Binding Effect and Benefit. This Agreement shall be binding upon,
and inure to the benefit of the Company, Hunter and GEPT and their respective
successor and assigns. The stock certificates representing the shares owned by
Hunter shall bear a legend acknowledging the existence of the voting provisions
set forth in this Agreement.
4. Waivers, Entire Agreement, Modifications. No party shall be deemed
to waive any rights hereunder, unless such waiver be in writing and signed by
him. A waiver in writing on one occasion shall not be construed as a consent to
or a waiver of any right or remedy on any future occasion. This writing contains
the full, final and exclusive statement of the agreement of the parties hereto
with respect to the matters contained herein, and no promises, agreements or
representations shall be binding upon any of the parties unless set forth
herein. This Agreement may be amended or modified in whole or in part only by an
instrument in writing signed by the Company, Hunter, and by GEPT.
2
3
5. Governing law, Construction. This Agreement shall be governed by and
construed and enforced in accordance with the law of North Carolina. Wherever
possible, each provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision thereof
shall be prohibited by or invalid under any such law, such provision shall be
ineffective to the extent of such prohibition or invalidity, without
invalidating or nullifying the remainder of such provision or any other
provisions of this Agreement.
6. Termination. This Agreement shall terminate upon the first to occur
of (a) the date upon which GEPT ceases to be the beneficial owner of any
Preferred Stock or Common Stock, or (b) the tenth anniversary of the date of
this Agreement.
IN WITNESS WHEREOF, the undersigned hereby execute this Shareholders
Agreement as of the 18th day of March, 1997.
C3, INC.
By: /s/ Jeff N. Hunter
-------------------------------
Jeff N. Hunter, President
THE TRUSTEES OF THE GENERAL
ELECTRIC PENSION TRUST
By: /s/ Alan M. Lewis
-------------------------------
Alan M. Lewis, Trustee
/s/ C. Eric Hunter
----------------------------------
C. Eric Hunter
3
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EXHIBIT 10.19
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, (the "Agreement") dated as of March
18th, 1997, is made by and among C3, INC., a North Carolina corporation (the
"Company"), and the General Electric Pension Trust ("GEPT").
WHEREAS, the Company intends to issue, in the aggregate, 682,500 shares of
the Company's 1997 Series B Convertible Preferred Stock (the "Preferred Stock")
to certain investors (the "Investors") pursuant to the Company's Summary of the
Offering dated January 3, 1997; and
WHEREAS, in order to induce General Electric Pension Trust to purchase
from the Company certain shares of the Preferred Stock, the Company desires to
grant registration rights to the Investors for shares of its Common Stock which
the Investors will have the right to acquire pursuant to conversion of the
Preferred Stock;
NOW, THEREFORE, in consideration of the premises hereto and of the mutual
covenants and agreements contained herein, the parties agree as follows:
1. Definitions.
As used herein the following defined terms shall have the following
respective meanings:
(a) The term "Holders" means any holder or holders of shares of
Registrable Securities.
(b) The terms "register", "registered" and "registration" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act (as defined below) and the declaration or
ordering of the effectiveness of such registration statement.
(c) The term "Registrable Securities" means all shares of Common
Stock issued or issuable upon the conversion of Preferred Stock.
(d) The term "Securities Act" means the Securities Act of 1933, as
amended.
2. Requested Registration.
(a) If at any time after one year from the date hereof, the
Company shall receive from the Holders of at least forty percent (40%) of the
Registrable Securities a written request that the Company effect a registration
under the Securities Act with respect to not less than twenty percent (20%) of
the Registrable Securities, and having an expected aggregate offering price to
the public of not less than $15,000,000, the Company will, as expeditiously as
possible, notify in writing all the Holders of such request and use its diligent
best efforts to effect all such registrations
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(including, without limitation, the execution of an undertaking to file
post-effective amendments and appropriate qualifications and approvals under the
laws and regulations applicable to the Company of any applicable governmental
agencies and authorities, including the applicable blue sky or other state
securities laws) as may be so requested and as would permit or facilitate the
sale and distribution of all or such portion of the Registrable Securities as
are specified in such request, together with any Registrable Securities held by
the other Holders who may desire to participate in such registrations; provided,
however, that before filing any such registration statement or any amendments or
supplements thereto, the Company will (x) furnish to the Holders of Registrable
Securities which are to be included in such registration, copies of all such
documents proposed to be filed, which documents will be subject to the review of
such Holders and their counsel, and (y) give the Holders of Registrable
Securities to be included in such registration statement and their
representatives the opportunity to conduct a reasonable investigation of the
records and business of the Company and to participate in the preparation of any
such registration statement or any amendments or supplements thereto; provided,
further, that the Company shall not be obligated to take any action to effect
such registration pursuant to this subparagraph 2(a), (i) after (A) the Company
has effected two such registrations pursuant to this subparagraph 2(a) at the
request of the Holders and (B) each of such registrations have been declared or
ordered effective; (ii) during the ninety (90) day period commencing with the
closing date of the Company's initial public offering, or (iii) if it delivers
notice to the Holders of the Registerable Securities within thirty (30) days of
any registration request of its intent to file a registration statement for such
initial public offering within ninety (90) days. With respect to any
registration requested pursuant to this subparagraph 2(a), the Company may
include in such registration any other shares of its capital stock, subject to
the restrictions set forth in subparagraph 2(c).
(b) Subject to subparagraph 2(a) above and the other terms and
conditions contained herein, the Company shall file a registration statement
covering the Registrable Securities so requested to be registered as soon as
practical, but in any event within ninety (90) days after (i) receipt of the
request or requests of the Holders or (ii) the date in which the Holders of
Registrable Securities to be included in such registration agree, pursuant to
subparagraph 2(c), on the terms and conditions of an underwriting, if
applicable, as evidenced by its letter of intent describing such terms and
conditions, whichever is later; provided, however, that if the Company shall
furnish to the Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to the Company and its stockholders for such registration
statement to be filed at the date filing would be required hereunder and it is
therefore essential to defer the filing of such registration statement, the
Company shall have an additional period of not more than ninety (90) days within
which to file such registration statement (which additional period may be
extended to one hundred eighty (180) days if such deferral will materially
reduce the expenses of such registration due to the elimination of the need for
any special audits to be performed in connection with such registration).
(c) If the Holders intend to distribute the Registrable Securities
covered by their request by means of an underwriting, they shall so advise the
Company as a part of their request made pursuant to subparagraph 2(a). In such
event, if so requested in writing by the Company, the Holders shall negotiate in
good faith with a nationally recognized underwriter or underwriters or
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major regional underwriter or underwriters acceptable to the Holders, selected
by the Company with regard to the underwriting of such requested registration;
provided, however, that if the Holders have not agreed with such underwriter(s),
in their discretion, as to the terms and conditions of such underwriting within
thirty (30) days following commencement of such negotiations, the Holders may
select an underwriter of their choice; and, provided further that any
underwriter selected hereunder, shall not be an underwriter in which the General
Electric Company has a direct or indirect interest of 5% or more, without the
consent of GEPT. The right of the Holders to registration pursuant to this
Paragraph 2 shall be conditioned upon the Holder's participation in such
underwriting to the extent provided herein. The Company shall (together with all
Holders proposing to distribute their Registrable Securities through such
underwriting) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected pursuant to this Paragraph 2.
Notwithstanding any other provision of this Paragraph 2, if the underwriter
advises the Company in writing with a copy to the Holders that marketing factors
require a limitation of the number of shares to be underwritten, the Company
shall so advise all Holders, and the Company will include in such registration
up to the maximum allowed by such underwriter (x) first, as many shares as
possible of Registrable Securities requested to be included by the applicable
Holders, which shall be allocated among all Holders thereof in proportion, as
nearly as practicable, to the respective amounts of Registrable Securities
requested by such Holders to be registered and (y) second, shares to be sold by
the Company or other holders of the Company's capital stock. If any Holder of
Registrable Securities disapproves of the terms of the underwriting, he or it
may elect to withdraw therefrom by written notice to the Company, the
underwriter and the other Holders. In the event of any such withdrawal, the
Company will include in any such registration in lieu thereof any additional
shares of Registrable Securities which were requested to be included by a Holder
and which were excluded pursuant to the above-described underwriter limitation
up to the maximum set by such underwriter.
(d) The Company will use its best efforts to do any and all other
acts which may be necessary or advisable to enable each selling Holder to
dispose of the Registrable Securities being sold including, without limitation,
(i) furnishing to each such Holder (x) the number of copies of the registration
statement and of the exhibits and the prospectus contained therein reasonably
requested by each such Holder, and (y) signed counterparts, addressed to each
such Holder, of an opinion of the Company's counsel and a "cold comfort" letter
of the Company's independent certified public accountants with respect to the
matters customarily covered in such documents delivered to underwriters in
underwritten public offerings, (ii) registering or qualifying the Registrable
Securities under the blue sky laws of any state in which the Registrable
Securities are to be sold or obtaining exemptions therefrom; provided, however,
that no blue sky filing shall be required in any state if to do so would require
the Company to qualify to do business or to file a general consent to service of
process in such state and (iii) listing the Registrable Securities to be sold on
a national securities exchange or equivalent.
3. Company Registration.
(a) In addition to the registration rights set forth in Paragraph
2, if at any time or from time to time, the Company shall determine to register
any of its securities, either for its own
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account or the account of a security holder or holders, in a registration
statement covering the sale of Common Stock to the general public pursuant to an
underwritten public offering (except with respect to any registration filed on
Form S-8, Form S-4 or any successor forms thereto), the Company will: (x) give
to each Holder written notice thereof at least ninety (90) days before the
initial filing of such registration (which shall include a list of the
jurisdictions in which the Company intends to attempt to qualify such securities
under the applicable blue sky or other state securities laws), or forty-five
(45) days before filing if such registration is a subsequent registration;
provided, however, in the case of a registration statement on Form S-3, the
Company shall give each Holder written notice of the proposed filing thereof
promptly after a decision to make such filings has been made and in no event
less than ten (10) business days prior to filing; and (y) use its best efforts
to include in such registration (and any related qualification under blue sky
laws) and in any underwriting involved therein, all the Registrable Securities
specified in a written request or requests, made within thirty (30) days after
receipt of such written notice from the Company, by any Holder or Holders,
except as set forth in subparagraph 3(b) below.
(b) The right of any Holder to registration pursuant to this
Paragraph 3 shall be conditioned upon such Holder's participation in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company)
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company, and may, at their
option, require that any or all the representations and warranties by, and the
covenants and other agreements on the part of, the Company to and for the
benefit of such underwriter shall also be made to and for the benefit of such
Holders; provided however, that any underwriter selected hereunder shall not be
an underwriter in which the General Electric Company has a direct or indirect
interest of 5% or more without the consent of GEPT. Such Holders shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriter other than those relating to such Holders and such
Holders' intended methods of distribution. Notwithstanding any other provision
of this Paragraph 3, if the underwriter determines that marketing factors
require a limitation of the number of Registrable Securities to be underwritten,
the underwriter may limit the number of Registrable Securities to be included in
the registration and underwriting; provided, however, that with respect to any
such registration of securities for the account of the Company, the underwriter
may not limit the amount of Registrable Securities included in such registration
and underwriting if other holders of the Company's securities are permitted to
include their securities in such registration and underwriting. The Company
shall so advise all Holders, and the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
among all Holders thereof in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities requested by such Holders to be
registered. If any Holder disapproves of the terms of any such underwriting, he
may elect to withdraw therefrom by written notice to the Company and the
underwriter. In the event of any such withdrawal, the Company will include, on a
proportionate basis (determined in accordance with the preceding sentence), in
any such registration in lieu thereof any additional Registrable Securities
which were requested to be included by a Holder and which were excluded pursuant
to the above-described underwriter limitation up to the maximum set by such
underwriter.
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4. Expenses of Registration.
All expenses incurred in connection with any registration or
qualification pursuant to this Agreement, including, without limitation, all
registration, filing and qualification fees, printing expenses, fees and
disbursements of counsel for the Company and counsel for the Holders, and
expenses and fees of any special audits incidental to or required by such
registration, shall be borne by the Company; provided, however, that (x) the
Company shall not be required to pay for expenses of any registration begun
pursuant to Paragraph 2, the request for which has been subsequently withdrawn
by the Holders and which the Company or any other stockholders do not wish to
continue, in which case, such expenses shall be borne by the Holders requesting
such withdrawal; provided, however, that the Company shall be required to pay
for such expenses if such registration was begun pursuant to Paragraph 2(a) and
the Holders deem such registration to satisfy the Company's obligation with
respect to registering such offering; and (y) the Company in any event shall not
be required to pay fees of legal counsel of the Holders (except for the fees of
one legal counsel of the Holders) or underwriters' discounts or commissions
relating to Registrable Securities (such underwriters' fees, discounts,
commissions or other fees or expenses to be borne by the Holders, on a pro rata
basis, based on the number of Registrable Securities sold by each of them),
except where a partner or employee of a Holder is a director of the Company and
incurs expenses on behalf of the Company with respect to any registration or
qualification in his or her capacity as a director of the Company. In the event
that expenses are to be paid by the Holders, such expenses shall not include (x)
costs of preparing any financial statements or other information normally
prepared by or for the Company in the ordinary course or (y) general overhead
expenses of the Company, including, without limitation, salaries.
5. Registration Procedures.
In the case of each registration effected by the Company pursuant to
this Agreement, the Company will keep each Holder participating therein advised
in writing as to the initiation of such registration (and any state
qualifications) and as to the completion thereof. The Company will: (x) keep
such registration or qualification pursuant to Paragraphs 2 or 3 effective for a
period of ninety (90) days or until all the Holders have completed the
distribution described in the registration statement relating thereto, whichever
last occurs, and (y) furnish such number of prospectuses and other documents
incident thereto as a Holder from time to time may reasonably request.
6. Indemnification.
(a) The Company will indemnify each Holder of Registrable
Securities, each of the Holder's officers, directors, partners and employees,
and each person controlling such Holder, with respect to such registration or
qualification effected pursuant to this Agreement and in which Registrable
Securities are included, against all claims, losses, damages, and liabilities
(or actions in respect thereto) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any prospectus,
registration statement or other document incident to any such registration or
qualification, or based on any omission (or alleged omission) to state therein a
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material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of any rule or
regulation promulgated pursuant to any Federal, state or common law rule or
regulation including, without limitation, the Securities Act, applicable to the
Company and relating to action or inaction required of the Company in connection
with any such registration, qualification or compliance and will reimburse each
such Holder, each of such Holder's officers, directors, partners and employees,
and each person controlling such Holder, for any legal and any other expenses
incurred in connection with investigating or defending any such claim, loss,
damage, liability or action, including reasonable attorneys' fees; provided,
however, that the Company will not be liable in any such case to the extent that
any such claim, loss, damage or liability arises out of or is based on any
untrue statement or omission based upon and in conformity with written
information furnished to the Company by such Holder, in a signed document
stating that such information is specifically for use therein. Such indemnity
shall be effective notwithstanding any investigation made by or on behalf of any
Holder, or any such officer, director, partner, employee or controlling person,
and shall survive any transfer by the same of any of the Registrable Securities.
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration or qualification is being effected, severally and not jointly,
indemnify the Company, each of its directors, officers and employees, against
all claims, losses, damages and liabilities (or actions in respect thereto)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any such registration statement, prospectus or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such Holders, such
directors, officers, partners, employees, persons or underwriters for any legal
or any other expenses incurred in connection with investigating or defending any
such claim, loss, damage, liability or action, including reasonable attorneys'
fees, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus or other document in reliance
upon and in conformity with written information furnished to the Company by such
Holder in a signed document stating that such information is specifically for
use therein. Notwithstanding the foregoing, the liability of any such Holder
shall not exceed an amount equal to the proceeds realized by each such Holder of
Registrable Securities sold as contemplated herein. Such indemnity shall be
effective notwithstanding any investigation made by or on behalf of the Company,
any such director, officer, partner, employee, or controlling person and shall
survive the transfer of such securities by such seller.
(c) Each party entitled to indemnification under this Paragraph 7
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought. Unless in
the reasonable judgment of the Indemnified Party a conflict of interest may
exist between the Indemnifying Party and the Indemnified Party, the Indemnifying
Party shall be permitted to assume the defense of any such claim or any
litigation resulting therefrom; provided, however, that in any event counsel for
the Indemnifying Party or Indemnified Party who shall conduct the defense of
such claim or litigation as provided above shall
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be approved by the other Party (whose approval shall not be unreasonably
withheld), and such other Party may participate in such defense at such Party's
expense; provided, further, that the failure of any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Paragraph 6.
(d) The Indemnified Party shall make no settlement of any claim or
litigation which would give rise to liability on the part of the Indemnifying
Party under an indemnity contained in this Paragraph 6 without the written
consent of the Indemnifying Party, which consent shall not be unreasonably
withheld or delayed, and no Indemnifying Party shall make any settlement of any
such claim or litigation without the consent of the Indemnified Party. If a firm
offer is made to settle a claim or litigation defended by the Indemnified Party
and the Indemnified Party notifies the Indemnifying Party in writing that the
Indemnified Party desires to accept and agree to such offer, but the
Indemnifying Party elects not to accept or agree to such offer within ten (10)
days after receipt of written notice from the Indemnified Party of the terms of
such offer, then, in such event, the Indemnified Party shall continue to contest
or defend such claim or litigation and, if such claim or litigation is within
the scope of the Indemnifying Party's indemnity contained in this Paragraph 6,
the Indemnified Party shall be indemnified pursuant to the terms hereof. If a
firm offer is made to settle a claim or litigation defended by the Indemnifying
Party and the Indemnifying Party notifies the Indemnified Party in writing that
the Indemnifying Party desires to accept and agree to such offer, but the
Indemnified Party elects not to accept or agree to such offer within 10 days
after receipt of written notice from the Indemnifying Party of the terms of such
offer, then, in such event, the Indemnified Party may continue to contest or
defend such claim or litigation and, in such event, the total maximum liability
of the Indemnifying Party to indemnify or otherwise reimburse the Indemnified
Party in accordance with this Agreement with respect to such claim or litigation
shall be limited to and shall not exceed the amount of such settlement offer,
plus reasonable out-of-pocket costs and expenses (including reasonable fees and
disbursements of counsel) to the date of notice that the Indemnifying Party
desired to accept such settlement offer.
(e) The indemnification payments required pursuant to this
Paragraph 6 for expenses of the investigation or defense of a claim or lawsuit
shall be made from time to time during the course of the investigation or
defense, as the case may be, upon submission of reasonably sufficient
documentation that any such expenses have been incurred.
7. Information by Holder.
The Holder or Holders of Registrable Securities included in any
registration shall furnish to the Company such written information regarding
such Holder or Holders and the distribution proposed by such Holder or Holders
as the Company may reasonably request in writing and as shall be required in
connection with any registration or qualification referred to in this Agreement.
The Company agrees to include in any such registration statement all information
concerning the Holders and their distribution which the Holders shall reasonably
request.
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8. Securities Act Registration Statements.
The Company shall not file any registration statement under the
Securities Act covering any securities unless it shall first have given the
Holders written notice thereof. The Company further covenants that the Holders
shall have the right, at any time when they may be deemed to be a controlling
person of the Company, to participate in the preparation of such registration
statement and to request the insertion therein of material furnished to the
Company in writing which in the Holders' judgment should be included. In
connection with any registration statement referred to in this subsection, the
Company will indemnify, to the extent permitted by law, the Holders, their
officers, directors, partners and employees and each person, if any, who
controls the Holders within the meaning of Section 15 of the Securities Act,
against all losses, claims, damages, liabilities and expenses caused by any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus or any preliminary prospectus or any
amendment thereof or supplement thereto or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages, liabilities or expenses are caused by any untrue
statement or alleged untrue statement or omission or alleged omission contained
in written information furnished to the Company by the Holders expressly for use
in such registration statement. If, in connection with any such registration
statement, the Holders shall furnish written information to the Company
expressly for use in the registration statement, the Holders, severally and not
jointly, will indemnify, to the extent permitted by law, the Company, its
directors, each of its officers who sign such registration statement and each
person if any, who controls the Company within the meaning of the Securities Act
against all losses, claims, damages, liabilities and expenses caused by any
untrue statement or alleged untrue statement of a material fact or any omission
or alleged omission of a material fact required to be stated in the registration
statement or prospectus or any preliminary prospectus or any amendment thereof
or supplement thereto or necessary to make the statements therein not
misleading, but only to the extent that such untrue statement or alleged untrue
statement or such omission or alleged omission is contained in information so
furnished in writing by the Holders for use therein.
9. Filing of Reports Under The Exchange Act.
The Company shall give prompt notice to the Holders of (a) the
filing of any registration statement (an "Exchange Act Registration Statement")
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), relating to any class of equity securities of the Company, and (b) the
effectiveness of such Exchange Act Registration Statement and the number of
shares of such class of equity securities outstanding as reported in such
Exchange Act Registration Statement, in order to enable the Holders to comply
with any reporting requirements under the Exchange Act or the Securities Act.
The Company shall, at any time after the Company shall register any shares of
Common Stock under the Securities Act and upon the written request of the
Holders, file an Exchange Act Registration Statement relating to any class of
equity securities of the Company then held by the Holders or issuable upon
conversion or exercise of any class of debt or equity securities or warrants or
options of the Company then held by the Holders, whether or not the class of
equity securities with respect to which such request is made shall be held by at
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9
least the number of persons which would require the filing of a registration
statement under Section 12(g) of the Exchange Act.
10. Rule 144 Reporting.
With a view to making available to the Holders benefits of certain
rules and regulations of the Securities and Exchange Commission (the "SEC")
which may permit the sale of the Registrable Securities to the public without
registration, the Company agrees that if it becomes subject to the reporting
requirements of either Section 13 of Section 15(d) of the Exchange Act, it will:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, or any successor provision thereto, at
all times;
(b) use its best efforts to file with the SEC in a timely manner
all reports and other documents required of the Company under the Securities Act
and the Exchange Act;
(c) so long as a Holder owns any Registrable Securities (or other
securities of the Company), to furnish to such Holder forthwith upon its request
a written statement by the Company as to the Company's compliance with the
reporting requirements of Rule 144 and of the Securities Act and the Exchange
Act, a copy of the most recent annual or quarterly report of the Company, and
such other reports and documents so filed by the Company as such Holder may
reasonably request in availing itself of any rule or regulation of the SEC
allowing such Holder to sell any such securities without registration; and take
any further action reasonably requested by a Holder to enable such Holder to
sell its Registrable Securities without registration under Rule 144, under any
successor provision, or any similar rule or regulation promulgated by the SEC
from time to time.
11. Consent; Changes.
For purposes of this Agreement, unless otherwise specifically
provided for hereby, all approvals and consents of the Holders required or
permitted under this Agreement shall be deemed granted by the affirmative vote
of the Holders of greater than sixty percent (60%) of the Registrable Securities
which have not already been registered. The terms and provisions of this
Agreement may not be waived, modified or amended, except that they may be
waived, modified or amended with the written consent of (a) the Company and (b)
the Holders of greater than sixty percent (60%) of the Registrable Securities
which have not already been registered; provided, however, that this Paragraph
11 may not be waived, modified or amended without the written consent of (a) the
Company and (b) all of the Holders.
12. Granting of Registration Rights.
The Company shall not, without the prior written consent of holders
of sixty percent (60%) of the Registrable Securities with respect to the Holders
of the Preferred Stock which have not already been registered, grant any rights
to any persons to register any shares of capital stock
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or other securities of the Company if such rights could reasonably be expected
to conflict with, or be on parity with, the rights of the Holders provided
hereunder.
13. "Lock-Up" Agreement.
If required by the Company and an underwriter of Common Stock or
other securities of the Company, each Holder shall agree not to sell or
otherwise transfer or dispose of any Registrable Securities held by such Holder
for a specified period of time (not to exceed one hundred eighty (180) days)
following the effective date of a primary offering by the Company; provided that
all officers and directors of the Company and all other Holders of 1% of the
shares, enter into similar agreements. Such agreement shall be in writing in a
form satisfactory to the Company and such underwriter. The Company may impose
stop-transfer instructions with respect to the Registrable Securities or other
securities subject to the foregoing restriction until the end of the stand-off
period.
14. Governing Law.
This Agreement shall be governed by and construed in accordance with
the internal laws of the State of North Carolina without reference to the
principles of conflicts of law thereof.
15. Notice.
All notices and other communications required or permitted to be
given in respect of this Agreement shall be deemed to have been given or made if
delivered personally or if mailed by registered or certified mail, return
receipt requested, to the parties at the addresses listed on Schedule 1 hereto,
or, in each case, at such other address or addresses as any party shall
hereafter specify by written notice to the others. All such notices and
communications, if mailed, shall be deemed to have been given on the third
business day after the mailing thereof.
16. Termination.
This Agreement shall terminate with respect to any Holder 90 days
after the effective date of a Registration Statement registering all of such
Holder's Shares under Section 12 of the Securities Act; provided, however, that
the indemnification provisions in Paragraph 6 shall survive the termination of
this Agreement.
17. Third Party Beneficiaries.
It is the intent of the parties hereto that the Investors are third
party beneficiaries of the rights provided to Investors by this Agreement.
18. Counterparts.
This Agreement may be executed in counterparts, each of which shall
be deemed an original and which together shall constitute a single agreement.
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19. Headings.
The headings of the Paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute a part hereof.
20. Severability.
If any provision or any portion of any provision of this Agreement
shall be held to be void or unenforceable, the remaining portions of this
Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed by their authorized officers as of the day and year first above
written.
COMPANY:
C3, INC.
By: /s/ Jeff N. Hunter
----------------------------------
Jeff N. Hunter, President
THE TRUSTEES OF THE GENERAL
ELECTRIC PENSION TRUST
By: /s/ Alan M. Lewis
----------------------------------
Alan M. Lewis, Trustee
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EXHIBIT 10.20
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT
BE GIVEN CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.
AGREEMENT, DATED SEPTEMBER 24, 1997, BETWEEN
JOHN M. BACHMAN, INC. AND C3, INC.
2
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
AGREEMENT
THIS AGREEMENT (this "Agreement") is entered into as of September 24, 1997
by and among C3, INC., a North Carolina corporation ("C3"), JOHN M. BACHMAN,
INC. ("JMB").
Statement of Purpose
C3 is engaged in the business of designing, manufacturing, marketing and
selling gemstones made of silicon carbide ("Moissanite Gemstones"). JMB, through
an affiliate provides stone cutting services. The parties desire to enter into
this Agreement to formalize the terms upon which JMB will cut Moissanite
Gemstones for C3 in consideration of the payments set forth below.
Therefore, in consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledge, the
parties hereby agree as follows:
1. Expansion Funds. Within 10 business days after the date of this
Agreement first set forth above, C3 will advance to JMB by certified check
delivered to the address set forth in Section 7 funds in the amount of *****
(the "Expansion Funds"), which funds will be utilized by JMB solely to expand
its affiliate's production facility and procure additional equipment and labor
as needed to enable JMB and its affiliate to satisfy the production volumes
contemplated by this Agreement. The entire amount of the Expansion Funds will be
an advance against production charges payable by C3 pursuant to Section 2,
below, and C3 will be credited against production charges for the entire amount
of the Expansion Funds pursuant to Section 2, below.
2. Cutting Charges. C3 will pay JMB for Moissanite Gemstone cutting
services provided hereunder at the specifications set forth as Exhibit A hereto
and at a rate of ***** per stone for round stones less than or equal to ***** in
diameter and ***** per carat for stone for round stones greater than ***** in
diameter and at the rates as set forth on Exhibit B hereto for other shapes.
Together with each shipment of cut stones delivered to C3, JMB will deliver to
C3 a detailed invoice itemizing the number and sizes of Moissanite Gemstones cut
by its affiliate and included in each such shipment and the amount payable by C3
to JMB for such services. In the event C3 disputes any portion of an invoice, C3
will deliver to JMB a detailed written description of such dispute together with
payment of any undisputed portion of the invoice and 75% of the disputed
portion, and the parties will cooperate in good faith to resolve any such
dispute. If they are unable to do so within 60 days after the date of the
invoice giving rise to the dispute, the matter will be submitted to arbitration
pursuant to Section 14 of this Agreement. C3 will pay in full all undisputed
charges on each invoice within 5 business days after receipt of each invoice by
wire transfer to an account specified by JMB. Beginning with the invoice
reflecting cutting services provided by JMB from and after May 1, 1998, the
amount payable to JMB by C3 reflected on each invoice will be reduced by 25%
until the aggregate amount of such reductions equals ***** and C3 has received
full credit against production charges for the amount of the Expansion Funds.
3
REDACTED--OMITTED MATERIAL HAS BEEN FILED WITH COMMISSION AND IS DENOTED
HEREIN BY *****
3. Term; Termination.
(a) The initial term of this Agreement will begin as of the date
first set forth above and will continue until December 31, 1998; provided
that the Agreement will continue automatically thereafter for calendar
year terms until the earlier to occur of (i) the delivery by either party
to the other of written notice delivered not less than 60 calendar days
before the end of the then current term of the notifying party's desire to
terminate this Agreement as of December 31 of such year; or (ii) the
termination of this Agreement pursuant to subsection b., below.
(a) Either C3 or JMB may terminate this Agreement upon (i) the
breach by the other party of any of its agreements or covenants set forth
herein, provided that the terminating party first provides written notice
describing such breach and demanding its cure to the other party and
permits such party a sixty-day period to cure such breach; (ii) changes in
any laws or regulations affecting C3, JMB or its affiliate that render any
material aspect of their performance contemplated by this Agreement
illegal; (iii) any actions by the other party that materially harm the
image or reputation of the terminating party as regarded by its customers,
suppliers or the public; or (iv) in accordance with Section 17.
4. Production Procedures; Standards.
(a) C3 will deliver all Moissanite Gemstones C3 desires to have
cut together with specifications for the cut of each stone to such
location as directed by JMB. It shall be C3's responsibility to ensure
that all Moissanite Gemstones it delivers for production are suitable for
the specifications provided by C3 and JMB shall not be liable to C3 for
the inability to cut to specifications any Moissanite Gemstones not
suitable for such specifications.
(b) JMB covenants that the services to be provided hereunder will
be performed in accordance with specifications provided by C3. C3 will
have the right to return without payment any Moissanite Gemstones received
by C3 from JMB that do not satisfy such specifications and JMB will at its
own expense re-cut at its expense any such Moissanite Gemstones to the
original specifications provided by C3.
(c) For orders placed by C3 under this Agreement JMB will pay all
import, export and freight costs C3 for which C3 will pay JMB ***** or
more. For orders placed by C3 under this Agreement for which C3 will pay
JMB less than *****, C3 will reimburse JMB ***** for any import, export
and freight costs. C3 will provide all shipping insurance and JMB or its
affiliates shall provide insurance for the Moissanite Gemstones while in
their possession. JMB shall cause C3 to be named as an additional insured
party on such insurance.
(d) The parties estimate that the volume of Moissanite Gemstones
to be cut by JMB from the date of this Agreement through December 1998
will be as set forth on Exhibit C hereto. JMB covenants that it will be
able to meet such production volumes
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without delay or additional cost to C3 and in accordance with the
standards set forth in subsection b., above. JMB will have the right to
reject any order by C3 to the extent the volume of any such order exceeds
the volume estimates set forth on Exhibit C hereto by providing written
notice of such rejection to C3 within 10 business days after receipt by
JMB of such an order from C3. Failure to timely reject any excess portion
of an order will constitute acceptance of the entire order by JMB. The
parties will agree in writing on quarterly volume estimates for any
Moissanite Gemstones to be cut pursuant to this Agreement after December
31, 1998.
5. Compliance with Laws. Subject to Section 4.c., above, each party
will perform its duties and obligations hereunder in compliance in all material
respects with all laws and regulations applicable to such party, including
without limitation, those related to the import and export of raw and processed
materials, taxes, tariffs and employment.
6. Noncompetition. JMB nor its affiliates shall cut any Moissanite
Gemstones for any third parties without the prior written consent of C3.
7. Nonexclusive License. JMB grants, and shall cause its affiliates to
grant C3, a perpetual, nonexclusive and royalty-free license to use and
otherwise practice (including the right to sublicense) any inventions developed
by or for JMB, its affiliates or by their employees, all trade secrets or other
proprietary or confidential information, which is applicable or useful in the
cutting of Moissanite Gemstones.
8. Indemnification.
(a) By JMB. JMB shall indemnify, defend and hold harmless C3 and
its officers, directors, agents, shareholders and representatives from,
against, and with respect to any and all loss, damage, claim, obligation,
liability, cost and expense (including without limitation reasonable
attorneys' fees and costs and expenses incurred in investigating,
preparing, defending against or prosecuting any litigation, claim,
proceeding or demand), of any kind or character (a "Loss") arising out of
or in connection with any failure by JMB to perform or observe, or to have
performed or observed, in full, any covenant, agreement or condition to be
performed or observed by each pursuant to this Agreement and the
operations of the businesses of JMB.
(b) By C3. C3 will indemnify, defend and hold harmless JMB and its
officers, directors, agents, shareholders and representatives from,
against, and with respect to any Loss arising out of or in connection with
any failure by C3 to perform or observe, or to have performed or observed,
in full, any covenant, agreement or condition to be performed or observed
by it pursuant to this Agreement and the operations of the business of C3.
9. Notices. Any notices required or permitted to be given by the
parties hereunder shall be in writing and delivered personally or sent by
registered or certified mail, return-receipt requested, or by express courier
service, addressed as follows:
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If to C3:
C3, Inc.
Post Office Box 13533
Research Triangle Park, NC 27709-3533
Attention: Mr. Jeff N. Hunter, President
Tel: (919) 468-0399
Fax: (919) 468-0486
With a copy (which shall not constitute notice) to:
Womble Carlyle Sandridge & Rice, PLLC
3300 One First Union Center
301 South College Street
Charlotte, North Carolina 28202
Attention: Cyrus M. Johnson, Jr., Esq.
Tel: (704) 331-4900
Fax: (704) 331-4955
If to JMB:
John M. Bachman, Inc.
______________________________
______________________________
Tel:__________________________
Fax:__________________________
With a copy (which shall not constitute notice) to:
______________________________
______________________________
______________________________
Tel:__________________________
Fax:__________________________
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together shall constitute one and the same instrument.
11. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties to this Agreement and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by any of the parties to this Agreement
without the prior written consent of all other parties to this Agreement, and
any purported assignment without such consent shall be void.
5
6
12. Third Party Beneficiaries. JMB shall contract with its affiliate to
provide the services required under this Agreement and shall specify in such
Agreement that C3 is a third-party beneficiary of such Agreement. Other than as
set out herein, none of the provisions of this Agreement or any document
contemplated by this Agreement is intended to grant any right or benefit to any
other person or entity.
13. Amendment. Any waiver, amendment, modification or supplement of or
to any term or condition of this Agreement shall be effective only if in writing
and signed by all parties hereto, and the parties to this Agreement waive the
right to amend the provisions of this Section orally.
14. Governing Law. This Agreement shall be governed by the laws of the
State of North Carolina without regard to conflicts of laws principles.
15. Jurisdiction: Service of Process. Each of the parties to this
Agreement submits to the jurisdiction of any state or federal court sitting in
North Carolina any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of such action or proceeding may
be heard and determined in any such court. Each of the parties to this Agreement
waives any defense of inconvenient forum to the maintenance of any action or
proceeding so brought and waives any bond, surety or other security that may be
required of any party with respect thereto. Any party may make service on any
other party by sending or delivering a copy of the process to the party to be
served at the address and in a manner provided in Section 7 above; provided,
however, that nothing in this Section 13 will affect the right of any party to
serve legal process in any other manner permitted by law or at equity. Each
party agrees that a final judgment in any action or proceeding so brought shall
be conclusive and may be enforced by suit on the judgment or in any other manner
provided by law or at equity.
16. Resolution of Disputes.
(a) No party to this Agreement shall institute a proceeding in any
court or administrative agency to resolve a dispute between the parties
arising out of or related to this Agreement before that party has sought
to resolve the dispute through direct negotiation with the other party. If
the dispute is not resolved within three weeks after a demand for direct
negotiation, the parties shall seek relief through arbitration in North
Carolina administered by the American Arbitration Association under its
commercial arbitration rules and procedures then in effect. The
arbitrator(s) shall base its/their award on applicable laws and judicial
precedent and include in such award a statement of the reasons upon which
the award is based. Judgment on the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof. The arbitrator(s)
shall in no event make any damage award that contravenes subsection d. of
this Section 14, but shall order the losing party to pay all of the
charges of the American Arbitration Association for such arbitration and
all of the prevailing party's costs of the arbitration, including
reasonable attorneys' fees.
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(b) All applicable statutes of limitation and defenses based upon
the passage of time shall be tolled while the procedures specified in this
Section 14 are pending. The parties will take such action, if any,
required to effectuate such tolling.
(c) Each party is required to continue to perform its obligations
under this Agreement pending final resolution of any dispute arising out
of or relating to this Agreement.
(d) In no event shall any party hereunder be liable to any other
party for incidental, consequential or special loss or damages of any
kind, however caused, or any punitive damages.
17. Severability. In the event that any provision in this Agreement is
determined to be invalid, illegal or unenforceable in any respect, the remaining
provisions of this Agreement will not be in any way impaired, and the illegal,
invalid or unenforceable provision will be fully severed from this Agreement and
there will be automatically added a replacement provision as similar in terms
and intent to such severed provision as may be legal, valid and enforceable.
18. Entire Agreement. This Agreement and the Exhibits hereto constitute
the entire contract between the parties to this Agreement pertaining to the
subject matter of this Agreement, and supersede all prior and contemporaneous
agreements and understandings between the parties with respect to such subject
matter. Notwithstanding the foregoing, the parties agree and acknowledge that
they continue to be bound by all terms and provisions of that certain
Confidential Disclosure Agreement, dated as of October 10, 1996, and by its
execution and delivery of this Agreement JMB hereby becomes a party to and
agrees to be bound by the terms of such agreement as a "Promisor" thereunder.
19. Force Majeure.
(a) Neither party shall be liable for delay or failure of
performance of this Agreement if the delay or failure is caused by acts of
God, war, fire, embargo, strikes or other labor trouble, governmental
regulations or actions or any cause beyond the control of the parties.
(b) If a delay or failure of performance caused by force majeure
shall continue for a period of more than three (3) months, each of C3 and
JMB shall have the right to terminate this Agreement immediately upon
written notice to the other.
7
8
IN WITNESS WHEREOF, each of the parties has executed and delivered this
Agreement, or has caused this Agreement to be executed and delivered by its duly
authorized officer, as of the date first above written.
C3, INC.
By: /s/ Jeff N. Hunter
-----------------------------
Name: Jeff N. Hunter
-----------------------------
Title: President
-----------------------------
JOHN M. BACHMAN, INC.
By: /s/ John M. Bachman
-----------------------------
Name: John M. Bachman
-----------------------------
Title: President
-----------------------------
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REDACTED--OMITTED MATERIAL HAS BEEN FILED WITH COMMISSION AND IS DENOTED
HEREIN BY *****
EXHIBIT A
SPECIFICATIONS
Stones must be cut according to the engineered cutting diagram supplied by C3.
The diagram specifies all angles and indexes. These angles and indexes will
produce a stone that has the following:
ROUND BRILLIANT DESIGN CUTTING SPECIFICATION:
- Table width ***** of stone width
- Pavilion depth measured from girdle to cutlet is ***** of stone
width
- Crown depth measured from girdle to table is *****
- Girdle thickness is thin to medium per diamond standards
- Girdle should be round and polished
- The P2 facets should be cut to cause the P1 facets to meet point
***** from girdle to culet.
Other shapes are required to be cut from time to time. For each shape, the
cutting requirement will be communicated to JMB by C3 either by engineered
diagram or specified angles and indexes.
FINISH SPECIFICATION:
All stones must meet the standards of *****. The finish will show no
evidence of polish lines when viewed in a microscope using ***** power. This
specification will apply to all shapes cut.
GENERAL:
- - Meet points must not show any undercutting or over cutting *****.
- - Crown depth, Pavilion depth should be within plus or minus *****.
- - This specification will apply to all shapes cut.
- - All shape engineered diagrams may change from time to time.
10
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
EXHIBIT B
1st. Sept. 1997
Cutting Charges *****
(Using *****)
Small Sizes Size in mm. US $ per piece
- ----------- ----------- --------------
Round ***** *****
***** *****
Oval ***** *****
***** *****
***** *****
Pear ***** *****
***** *****
***** *****
Marquise ***** *****
***** *****
***** *****
***** *****
Trilliant ***** *****
Heart ***** *****
Princess ***** *****
Square ***** *****
***** *****
Large Sizes Size in mm. US $ per Carat
- ----------- ----------- --------------
Round ***** *****
Oval ***** *****
Marquise ***** *****
Heart ***** *****
Trillion ***** *****
For small orders we charge ***** for our import and re-export expenses. For
cutting-orders of over ***** we absorb these expenses. Note: small stones we
charge per piece, larger stones per carat.
11
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION
AND IS DENOTED HEREIN BY *****
EXHIBIT C
PRODUCTION VOLUMES
For the Month of: Volume of:*
---------------- -----------
November 1997 *****
December 1997 *****
January 1998 *****
February 1998 *****
March 1998 *****
April 1998 *****
May 1998 *****
June 1998 *****
July 1998 *****
August 1998 *****
September 1998 *****
October 1998 *****
November 1998 *****
December 1998 *****
*Volumes are finished pieces per month.
1
EXHIBIT 10.21
THE REGISTRANT HAS REQUESTED THAT CERTAIN PORTIONS OF THIS EXHIBIT
BE GIVEN CONFIDENTIAL TREATMENT. AN UNREDACTED VERSION OF THIS
EXHIBIT HAS BEEN FILED WITH THE COMMISSION.
SUPPLY AGREEMENT, DATED SEPTEMBER 12, 1997, BETWEEN
QMD, A DIVISION OF R&M ELECTRONICS, INC., AND C3, INC.
2
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
SUPPLY AGREEMENT
This Supply Agreement (this "Agreement") is dated this 12th day of
September, 1997, between QMD, A DIVISION OF R&M ELECTRONICS, INC. ("QMD") and
C3, Inc. ("Customer").
Statement of Purpose
Customer is engaged in the manufacture, marketing, distribution and sale
of the gemological testing instrumentation known as the Model 590 (the
"Product"). The parties desire to enter into this Agreement to formalize the
terms upon which QMD will manufacture the Product and supply it to Customer and
upon which Customer will purchase the Product from QMD.
Therefore, in consideration of the foregoing and other good and valuable
consideration the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows.
1. Supply of the Product. During the term of this Agreement, QMD agrees
to manufacture and supply, and Customer agrees to purchase, the Product pursuant
to the terms of this Agreement.
2. Term of Agreement. The initial term of the Agreement (the "Initial
Term") shall be one year; provided that the Agreement will continue
automatically thereafter for calendar year terms until either party delivers to
the other written notice at least 90 days prior to the end of the then current
term of the notifying party's desire to terminate the Agreement as of the end of
the then current term. At the end of the Initial Term, the parties may agree in
writing to new quantity and/or price terms; provided, however, that if no new
quantity and/or price terms are agreed upon by the parties, the quantity and/or
price terms in effect during the Initial Term pursuant to Paragraph 3 and
Paragraph 4 of this Agreement shall remain in effect until the parties agree in
writing to new terms.
3. Quantity. QMD agrees that for the Initial Term it will manufacture
and supply to Customer a minimum of ***** Products per year, and Customer agrees
to purchase the same. QMD further agrees to use its best efforts to manufacture
additional Products upon the submission by Customer of a purchase order or
purchase orders for such additional Products.
4. Price. Customer agrees to pay QMD ***** for each Product. This price
shall remain firm for the Initial Term; provided, however, that if the price of
any of the components provided by QMD pursuant to Paragraph 5 changes (increases
or decreases), the price paid by Customer for the Product may be adjusted to
reflect such changes.
5. Supply of Component Parts. All component parts used in the
manufacture of the Model 590 shall be supplied by QMD; except that Customer
shall provide to QMD, in amounts sufficient to comply with Paragraph 3 of the
attached Terms and Conditions, (i) the chip manufactured by Cree, Inc. and used
in the Product and (ii) the casing for the Product.
1
3
6. Terms and Conditions. The purchase of the Products by Customer shall
be governed by the terms and conditions attached to this Agreement. These terms
and conditions may be superseded only by written agreement signed by both C3 and
QMD.
7. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed an original, but all of which
together shall constitute one and the same instrument.
8. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties to this Agreement and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights, interest or
obligations hereunder shall be assigned by any of the parties to this Agreement
without the prior written consent of all other parties to this Agreement, and
any purported assignment without such consent shall be void.
9. Third Party Beneficiaries. None of the provisions of this Agreement
or any document contemplated by this Agreement is intended to grant any right or
benefit to any person or entity which is not a party to this Agreement.
10. Amendment. Any waiver, amendment, modification or supplement of or
to any term or condition of this Agreement shall be effective only if in writing
and signed by all parties hereto, and the parties to this Agreement waive the
right to amend the provisions of this Agreement orally.
11. Governing Law. This Agreement shall be governed by the laws of the
State of North Carolina without regard to conflicts of laws principles.
12. Severability. In the event that any provision in this Agreement is
determined to be invalid, illegal or unenforceable in any respect, the remaining
provisions of this Agreement will not be in any way impaired, and the illegal,
invalid or unenforceable provision will be fully severed from this Agreement and
there will be automatically added a replacement provision as similar in terms
and intent to such severed provision as may be legal, valid and enforceable.
13. Entire Agreement. This Agreement and the attached Terms and
Conditions constitute the entire contract between the parties to this Agreement
pertaining to the subject matter of this Agreement, and supersede all prior and
contemporaneous agreements and understandings between the parties with respect
to such subject matter.
2
4
IN WITNESS WHEREOF, each of the parties has executed and delivered this
Agreement, or has caused this Agreement to be executed and delivered by its duly
authorized officer, as of the date first above written.
C3, INC.
By: /s/Jeff N. Hunter
-------------------------------------
Name: Jeff N. Hunter
Title: President
QMD, A DIVISION OF
R&M ELECTRONICS, INC.
By: /s/Richard A. O'Bey
-------------------------------------
Name: Richard A. O'Bey
Title: President
3
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QMD - TERMS AND CONDITIONS
The following Terms and Conditions apply to all Purchase Orders received
by QMD, A DIVISION OF R&M ELECTRONICS, INC. (hereinafter "QMD") from C3, Inc.
(hereinafter "Customer") for the gemological testing instrument known as the
Model 590 (the "Product"). These Terms and Conditions may be superseded only by
written agreements signed by both C3 and QMD.
Terms and Conditions.
1. Customer will issue a purchase order for delivery of the Product
covering a minimum of 90 days deliveries. Products purchased are
non-cancelable and non-reschedulable other than as provided in paragraph
5.
2. Turnkey Warranty: QMD will repair or replace, at its option, any
Product found defective in materials (other than materials supplied by
Customer) or workmanship (IPC-610B Class 2) within ninety (90) days after
delivery to Customer. Customer will return any Product found defective
under this warranty to QMD freight prepaid.
QMD MAKES NO OTHER WARRANTIES OR REPRESENTATIONS OF ANY KIND, WHETHER
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO MERCHANTABILITY, FITNESS
FOR A PARTICULAR PURPOSE, OR ANY OTHER WARRANTY WITH RESPECT TO THE GOODS
OR SERVICES PROVIDED HEREUNDER, WHETHER USED ALONE OR IN CONNECTION WITH
ANY OTHER EQUIPMENT OR PRODUCT. CUSTOMER'S SOLE AND EXCLUSIVE REMEDY, AND
THE LIMIT OF QMD'S LIABILITY FROM LOSS FROM ANY CAUSE WHATSOEVER SHALL IN
NO EVENT EXCEED THE PURCHASE PRICE OF THE GOODS OR SERVICES AS TO WHICH A
CLAIM IS MADE. IN NO EVENT SHALL QMD BE LIABLE FOR ANY DAMAGES RESULTING
FROM CUSTOMER'S INABILITY OR FAILURE TO PERFORM WORK, OR FOR ANY LOST
PROFITS OR OTHER CONSEQUENTIAL EXEMPLARY OR SPECIAL DAMAGES RELATING IN
WHOLE OR IN PART TO CUSTOMER'S RIGHTS UNDER THIS AGREEMENT (EVEN IF QMD
HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), OR FOR ANY OTHER
INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER CUSTOMER'S CLAIMS ARE BASED
UPON CONTRACT, NEGLIGENCE OR OTHERWISE.
3. All material supplied by the Customer will be of acceptable quality
and will be provided prior to the beginning of the month in which the
material is required for assembly of products. Customer will provide a
reasonable oversupply (up to 3%) of these parts to cover manufacturing
fallout. All unused components will be returned (or retained for future
production) at your request including any damaged parts.
4. Completed Products will be delivered FOB Raleigh, NC.
5. QMD will cancel or reschedule Products to be delivered under the
following conditions:
a. The Product orders to be canceled or rescheduled are not due
to be delivered within 90 days of receipt of written notice.
6
REDACTED--OMITTED MATERIAL HAS BEEN FILED SEPARATELY WITH THE COMMISSION AND IS
DENOTED HEREIN BY *****
b. Customer agrees to pay to QMD all reasonable costs of
cancellation and rescheduling including:
1. All restocking charges required by vendors.
2. All return freight and repackaging costs.
3. The cost of all material that cannot be returned to the
vendor for credit. Upon receipt of Customer's payment for this
material, QMD will make available all material that cannot be
returned for disposition by Customer.
4. Material Management fees of 12% of the purchase price
for all material canceled or returned to the vendor.
5. All expedited freight costs if required by rescheduling.
c. The material for rescheduled Products can be procured and the
products can be manufactured by the rescheduled delivery date.
6. The terms of payment for the Products shipped are 1% 10 net 30 days.
Amounts due beyond 35 days will be assessed interest at the highest rate
allowed by law as a deterrent to late payment. Customer further agrees to pay
all reasonable expenses, including court costs, legal and administrative
expenses, and attorney fees paid or incurred by QMD in endeavoring to collect
delinquent amounts due and payable from Customer.
7. Neither party shall institute a proceeding in any court or
administrative agency to resolve a dispute between the parties arising out of
or related to their agreements before that party has sought to resolve the
dispute through direct negotiation with the other party. If the dispute is not
resolved within three weeks after a demand for direct negotiation, the parties
shall seek relief through arbitration in Raleigh, North Carolina administered
by the American Arbitration Association under its commercial arbitration rules
and procedures then in effect. Judgment on the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof.
8. Lead-time on follow on orders based on QMD's fax to K. Flynn,
C3 9/09/97.
1. Eight weeks lead-time based on a ***** minimum per tester to
purchase power packs from a distributor, rather than the
manufacturer's 12 week lead time.
2. Order power packs from manufacturers and stock a safety
reserve to cover the difference in lead time.
3. The lead time will be 8 weeks with action taken on item 1 or
2 above.
2
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Our agreement to these Terms and Conditions is evidenced by the signature
of a duly authorized officer below:
C3, INC. QMD, A DIVISION OF
R&M ELECTRONICS, INC.
Name: Jeff N. Hunter Name: Richard A. O'Bey
------------------------------ -------------------------------
Title: President Title: President
------------------------------ -------------------------------
Date: 9/12/97 Date: 9/15/97
------------------------------ -------------------------------
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of C3, Inc. on Form S-1 of
our report dated March 11, 1997, except for Note 9, as to which the date is
September 25, 1997, appearing in the Prospectus, which is part of this
Registration Statement, and to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Raleigh, North Carolina
September 30, 1997
1
EXHIBIT 23.3
September 25, 1997
C3, Inc.
3800 Gateway Boulevard
Suite 310
Morrisville, North Carolina 27560
Attention: President
Dear Sir:
It is my understanding that I will be nominated for election as a
director of C3, Inc., a North Carolina corporation (the "Company"), at the next
meeting of the shareholders of the Company. I hereby consent to my nomination
as a director of the Company and agree to serve and act as a director if
elected. Further, I expressly consent to be named as a director nominee in any
registration statement or other document filed in accordance with the
Securities Act of 1933, as amended, Securities Exchange Act of 1934, as
amended, and any applicable state securities law.
Sincerely,
/s/ Kurt Leutzinger
Kurt Leutzinger
1
EXHIBIT 23.4
September 25, 1997
C3, Inc.
3800 Gateway Boulevard
Suite 310
Morrisville, North Carolina 27560
Attention: President
Dear Sir:
It is my understanding that pursuant to an agreement between the
Company and General Electric Pension Trust, I will be nominated for election as
a director of C3, Inc., a North Carolina corporation (the "Company"), at the
next meeting of the shareholders of the Company. I hereby consent to my
nomination as a director of the Company and agree to serve and act as a
director if elected. Further, I expressly consent to be named as a director
nominee in any registration statement or other document filed in accordance
with the Securities Act of 1933, as amended, Securities Exchange Act of 1934,
as amended, and any applicable state securities law.
Sincerely,
/s/ David B. Stewart
David B. Stewart
1
EXHIBIT 23.5
September 25, 1997
C3, Inc.
3800 Gateway Boulevard
Suite 310
Morrisville, North Carolina 27560
Attention: President
Dear Sir:
It is my understanding that I will be nominated for election as a director
of C3, Inc., a North Carolina corporation (the "Company"), at the next meeting
of the shareholders of the Company. I hereby consent to my nomination as a
director of the Company and agree to serve and act as a director if elected.
Further, I expressly consent to be named as a director nominee in any
registration statement or other document filed in accordance with the Securities
Act of 1933, as amended, Securities Exchange Act of 1934, as amended, and any
applicable state securities law.
Sincerely,
/s/ Ollin B. Sykes
Ollin B. Sykes
5
YEAR 6-MOS
DEC-31-1996 DEC-31-1997
JAN-01-1996 JAN-01-1997
DEC-31-1996 JUN-30-1997
1,167,458 5,538,099
0 0
0 0
0 0
0 0
1,174,458 5,538,099
14,081 53,955
2,352 0
1,226,134 5,661,920
12,855 109,874
0 0
0 0
593,271 5,574,647
1,029,803 1,095,803
(409,795) (1,118,404)
1,226,134 5,661,920
0 0
0 0
0 0
0 0
286,684 505,831
0 0
0 0
(382,608) (708,609)
0 0
(382,608) (708,609)
0 0
0 0
0 0
(382,608) (708,609)
0 0
(0.14) (0.17)
