C3 INC /NC/, DEF 14A, 1998-04-27

C3 INC /NC/
DEF 14A, 1998-04-27
JEWELRY, SILVERWARE & PLATED WARE

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant (X)
Filed by a Party other than the Registrant ( )

Check the appropriate box:

( ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

C3, Inc.
(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other than Registrant)

Payment of Filing Fee (Check the appropriate box):

(X) No fee required

( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

1) Title of each class of securities to which transaction applies:

2) Aggregate number of securities to which transaction applies:

3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

4) Proposed maximum aggregate value of transaction:

5) Total fee paid:

( ) Fee paid previously with preliminary materials.

( ) Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

1) Amount Previously Paid:

2) Form, Schedule, or Registration Statement No.:

3) Filing Party:

4) Date Filed:

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C3, INC.
3800 GATEWAY BOULEVARD
SUITE 310
MORRISVILLE, NORTH CAROLINA 27560
(919) 468-0399

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

JUNE 23, 1998
----------------------------------

To the Shareholders of C3, Inc.:

The Annual Meeting of the Shareholders of C3, Inc. (the "Company")
will be held at the Durham Hilton Hotel, 3800 Hillsborough Road, Durham,
North Carolina, on Tuesday, June 23, 1998 at 10:00 A.M., Eastern Daylight
Savings Time, for the following purposes:

o To elect eight members to the Board of Directors;

o To consider and vote upon a proposal to ratify the
appointment of Deloitte & Touche LLP as independent
auditors for the year ending December 31, 1998; and

o To transact such other business as may properly come
before the meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on May 7, 1998
as the record date for the determination of shareholders entitled to vote at the
meeting. Accordingly, only shareholders who are holders of record at the close
of business on that date are entitled to notice of and to vote at the meeting.

EVEN IF YOU EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED
ENVELOPE SO THAT YOUR SHARES WILL BE REPRESENTED AT THE MEETING IN THE EVENT
THAT YOU ARE UNABLE TO ATTEND IN PERSON. IF YOU ATTEND THE MEETING IN PERSON,
YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON.

By order of the Board of Directors,

Jeff N. Hunter
President
May 22, 1998

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C3, INC.
3800 GATEWAY BOULEVARD
SUITE 310
MORRISVILLE, NORTH CAROLINA 27560
(919) 468-0399

PROXY STATEMENT
----------------------------------

This Proxy Statement is furnished to the Shareholders of C3, Inc.
(the "Company") in connection with the solicitation by the Board of Directors of
the Company of proxies to be used at the 1998 Annual Meeting of the Shareholders
of the Company (the "Annual Meeting") to be held at the Durham Hilton Hotel,
3800 Hillsborough Road, Durham, North Carolina, on Tuesday, June 23, 1998, at
10:00 A.M., Eastern Daylight Saving Time, and all adjournments thereof. This
Proxy Statement and the accompanying proxy card are being mailed on or about May
22, 1998.

VOTING SECURITIES

The Company's common stock, no par value per share (the "Common
Stock"), is the only outstanding voting security of the Company. The Board of
Directors has fixed the close of business on May 7, 1998 as the record date (the
"Record Date") for the determination of shareholders entitled to vote at the
Annual Meeting. Accordingly, each holder of record of Common Stock as of the
Record Date is entitled to one vote for each share of Common Stock held. As of
April 15, 1998, there were 6,938,476 shares of Common Stock outstanding.

VOTING PROCEDURES

The holders of a majority of the shares of Common Stock entitled to
vote at the Annual Meeting, present in person or represented by proxy,
constitute a quorum for the transaction of business at the Annual Meeting. If a
quorum is present at the beginning of the Annual Meeting, the shareholders may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough shareholders to leave less than a quorum. Abstentions, shares that are
withheld as to voting with respect to one or more of the director nominees and
shares held by a broker, as nominee, that are voted at the discretion of the
broker on any matter will be considered to be present for purposes of
determining whether a quorum exists.

Under North Carolina law, directors are elected by a plurality of the
votes cast by the shares of Common Stock present in person or by proxy and
entitled to vote in the election of directors. Shares that are withheld as to
voting with respect to a director nominee and shares held of record by a broker,
as nominee, that are not voted will not be counted for purposes of electing
directors. Under the Company's Bylaws, the proposal to ratify the appointment of
independent auditors for the year ending December 31, 1998 will be approved if
the number of shares voted in favor of the proposal exceeds the number of shares
voted against the proposal. Abstentions and shares held of record by

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a broker, as nominee, that are not voted on such proposal will not effect the
outcome of such proposal.

VOTING OF PROXIES

The shares represented by the accompanying proxy card and entitled to
vote will be voted if the proxy card is properly signed and received by the
Secretary of the Company prior to the Annual Meeting. Where a choice is
specified on any proxy card as to the vote on any matter to come before the
Annual Meeting, the proxy will be voted in accordance with such specification.
Where no choice is specified, the proxy will be voted for the election of the
persons nominated to serve as the directors of the Company and named in this
Proxy Statement, for the proposal to ratify the appointment of Deloitte & Touche
LLP as independent auditors for the year ending December 31, 1998 and in such
manner as the persons named on the enclosed proxy card in their discretion
determine upon such other business as may properly come before the Annual
Meeting or any adjournment thereof. Any shareholder giving a proxy has the right
to revoke it at any time before it is voted by giving written notice to the
Secretary of the Company, by attending the Annual Meeting and giving notice of
his or her intention to vote in person or by executing and delivering to the
Company a proxy bearing a later date.

EXPENSES OF SOLICITATION

The Company will bear the entire cost of the solicitation of proxies
from its shareholders. Following the mailing of this Proxy Statement and the
accompanying proxy card, the directors, officers and employees of the Company
may solicit proxies on behalf of the Company in person, by telephone or by other
electronic means. The Company may reimburse persons holding shares for others in
their names or in those of their nominees for their reasonable expenses in
sending proxy material to their principals and obtaining their proxies. The
Company will use the services of Corporate Investor Communications, Inc. to aid
in the solicitation of proxies at an anticipated fee of $750 plus reasonable
expenses.

SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS

The following table sets forth information with respect to the
beneficial ownership of Common Stock as of April 15, 1998 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 Company's chief executive officer; and (iv) all current
directors, director nominees and executive officers as a group. 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.

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COMMON STOCK
BENEFICIALLY
NAME (1) OWNED PERCENTAGE OF CLASS
- -------- ----- -------------------
<S> <C> <C>
C. Eric Hunter (2) 1,056,627 15.2%

General Electric Pension Trust (3) 592,712 8.5%

Jeff N. Hunter (4) 291,860 4.1%

Ollin B. Sykes (5) 146,312 2.1%

Kurt Nassau (6) 29,447 *

Kurt Leutzinger (7) 26,310 *

Howard Rubin (8) 17,200 *

Frederick A. Russ (9) 15,700 *

David B. Stewart -- *

Joel Levy (10) 44,820 *

Richard Hartigan 3,100 *

Directors, Director Nominees and Executive Officers as a Group
(10 persons) (11) 796,883 10.8%
</TABLE>

* 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 (i) 23,430 shares of Common Stock held jointly by Mr. Hunter and
his wife, Jocelyn Hunter, and (ii) 2,000 shares of Common Stock owned by Jack
Hunter, Mr. Hunter's minor son, over which Mr. Hunter has shared voting and
investment power. Mr. Hunter's mailing address is 3104 Hillsborough Street, Box
189, Raleigh, North Carolina 27607.

(3) Includes 14,950 shares of Common Stock issuable upon exercise of options.
See "Board of Directors -- Compensation of Directors." 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, (ii) 95,700 shares of Common Stock issuable to Mr. Hunter upon
exercise of options granted under the 1996 Option Plan of C3, Inc. (the "1996
Option Plan") and 1997 Omnibus Stock Plan of C3, Inc. (the "1997 Omnibus

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Plan"), (iii) 200 shares of Common Stock held in trust for the benefit of
Zachary Hunter, Mr. Hunter's minor son, over which Dr. Berardinelli has sole
voting and investment power, and (iv) 25,560 shares of Common Stock issuable to
Dr. Berardinelli upon exercise of options granted under the 1996 Option Plan.
See "Executive Compensation -- Aggregated Option/SAR Exercises in the Last
Fiscal Year and Fiscal Year-End Option/SAR Values." Mr. Hunter disclaims
beneficial ownership of the shares of Common Stock issuable to Dr. Berardinelli
upon exercise of the options granted under the 1996 Option Plan and the shares
of Common Stock held in trust for the benefit of his son.

(5) Includes (i) 22,910 shares of Common Stock held by the Sykes & Co., P.A.
Profit Sharing Plan & Trust, (ii) 1,200 shares of Common Stock held in Mr.
Sykes' individual retirement account, (iii) 1,000 shares of Common Stock held
by Lou S. Sykes, Mr. Sykes' wife, (iv) 2,100 shares of Common Stock held by Mr.
Sykes' minor sons, over which Mr. Sykes has shared voting and investment power,
and (v) 46,800 shares of Common Stock issuable upon exercise of options granted
under the 1996 Option Plan and 1997 Omnibus Plan. See "Board of Directors --
Compensation of Directors."

(6) 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) 25,720 shares of Common Stock issuable upon exercise of options granted
under the 1996 Option Plan and 1997 Omnibus Plan. See "Board of Directors --
Compensation of Directors."

(7) Includes 26,310 shares of Common Stock issuable upon exercise of options
granted under the 1996 Option Plan and 1997 Omnibus Plan. See "Board of
Directors -- Compensation of Directors."

(8) Includes 17,200 shares of Common Stock issuable upon exercise of options
granted under the 1996 Option Plan and 1997 Omnibus Plan. See "Board of
Directors -- Compensation of Directors."

(9) Includes 15,700 shares of Common Stock issuable upon exercise of options
granted under the 1996 Option Plan and 1997 Omnibus Plan. See "Board of
Directors -- Compensation of Directors."

(10) Includes (i) 29,910 shares of Common Stock held by Mr. Levy's wife, Rona
Pellet Levy, (ii) 7,455 shares of Common Stock held by Mr. Levy's daughter, R.
Marcy Levy, and (iii) 7,455 shares of Common Stock held by Mr. Levy's son,
Jeremy Levy, over which Mr. Levy has shared voting and investment power. Mr.
Levy disclaims beneficial ownership of the shares of Common Stock held by his
wife and daughter.

(11) Includes (i) 247,677 shares of Common Stock over which certain directors
and executive officers have shared voting and investment power and (ii) 446,410
shares of Common Stock issuable upon exercise of options granted under the 1996
Option Plan and 1997 Omnibus Plan. See "Board of Directors -- Compensation of
Directors" and "Executive Compensation -- Aggregated Option/SAR Exercises in the
Last Fiscal Year and Fiscal Year-End Option/SAR Values." Does not include
592,712 shares of Common Stock beneficially owned by GEPT which has the right to
require the Company to nominate and recommend for election as a director one
individual designated by GEPT. See "Board of Directors -- Shareholders
Agreement."

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BOARD OF DIRECTORS

The business and affairs of the Company are managed under the
direction of the Board of Directors, as provided by North Carolina law and the
Company's Bylaws. The Board of Directors establishes corporate policies and
strategies and supervises the implementation and execution of those policies and
strategies by the Company's officers and employees. The directors are kept
informed of the Company's operations at meetings of the Board, through reports
and analyses prepared by, and discussions with, the Company's management.

MEETINGS OF THE BOARD OF DIRECTORS

The Board of Directors meets on a regularly scheduled basis and met
ten times during the year ended December 31, 1997. During 1997, each director
attended at least 75% of the aggregate of all meetings of the Board of Directors
and of the committees of the Board of Directors on which he served during the
period that he served as a director or committee member.

NOMINEES FOR DIRECTOR

The Bylaws of the Company provide that the Board of Directors shall
consist of one or more members. The eight persons named below have been
nominated to serve on the Board of Directors until the 1999 Annual Meeting of
the Shareholders or until their successors are elected and qualified. Each of
the director nominees other than Messrs. Hartigan and Levy is currently a member
of the Board of Directors. The age and a brief biographical description of each
director nominee are set forth below.

JEFF N. HUNTER (41), 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.

KURT LEUTZINGER (47) has served as a director of the Company since
October 1997. 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.

KURT NASSAU (71) 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

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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 5 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 (73) has served as a director of the Company since
November 1996 and has been a consultant to the Company since February 1997.
Since 1992, he has served as President of GemDialogue Systems, Inc., a
consulting 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 Institute of America in 1959.

FREDERICK A. RUSS (53) 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 Research, Inc. ("Cree") from 1988 to 1992. He earned his Ph.D.
in industrial administration at Carnegie-Mellon University.

OLLIN B. SYKES (47) has served as a director of the Company since
October 1997 and has been a consultant to the Company since July 1997. 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. Mr. Sykes is a second cousin once removed of Jeff N. Hunter.

RICHARD G. HARTIGAN JR. (61) is a director nominee. Since 1995 Mr.
Hartigan has served as President of the Hartigan Consulting Group, which
provides sales, marketing, and sales promotion consulting services primarily to
companies in the cosmetics industry. From 1969 to 1990, he was employed by Estee
Lauder Companies Inc., a national cosmetics concern, in various positions,
including as Executive Vice President. From 1990 to 1994, Mr. Hartigan served as
President and Chief Executive Officer of Lancaster Group North America, a
cosmetics company Mr. Hartigan helped establish in 1990. He earned his Bachelor
of Business Administration degree from Boston College in Chestnut Hill,
Massachusetts.

JOEL N. LEVY (56) is a director nominee. Since 1997, Mr. Levy has
been a member of the general partner of CM Equity Partners, LP, an acquisiton
and buy-out partnership, and a managing member of CMLS Management, LLC which
manages CM Equity Partners, LP. From 1992 to 1997, he was the managing member of
Joel N. Levy/Peter M. Schulte, LLC, an acquisition and buy-out firm. Mr. Levy is
also a director of Tep Fund, a municipal bond fund. Mr. Levy earned his Bachelor
of Arts degree from American University.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has established an Audit Committee and a
Compensation Committee. The Board of Directors has not established a Nominating
Committee.

The Audit Committee, established in October 1997, has the authority
to nominate an independent public accounting firm to serve as the Company's
external auditor, to direct, monitor and discuss with such auditors the scope,
timing and results of their audit, to implement internal accounting controls and
to review the Company's annual financial statements and the auditors' report
thereon. The Audit Committee, which had two meetings in 1997, is composed of
Messrs. Leutzinger, Stewart and Sykes. Mr. Stewart has advised the Company that
he will not seek re-election as a member of the Board of Directors at the Annual
Meeting.

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The Compensation Committee, established in October 1997, has the
authority to determine the cash and non-cash compensation of each officer,
salaried employee and consultant of the Company, other than members of the Board
of Directors, to establish and administer the Company's insurance and benefits
plans and to administer the Company's stock option plans. The Compensation
Committee also recommends to the full Board of Directors the cash and non-cash
compensation (including stock options and awards) to be paid to each member of
the Board of Directors who serves as an officer, employee or consultant of the
Company. The Compensation Committee, which had one meeting in 1997, is composed
of Mr. Rubin, Dr. Russ and Mr. Sykes.

SHAREHOLDERS AGREEMENT

The Company, C. Eric Hunter, a founder and beneficial owner of 15.2%
of the Common Stock, General Electric Pension Trust ("GEPT"), a beneficial owner
of 8.5% of the Common Stock, and certain other shareholders of the Company are
party to a shareholders agreement (the "Shareholders Agreement"). The
Shareholders Agreement provides that 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. 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.

David B. Stewart, who was elected as a director in accordance with
the terms of the Shareholders Agreement, has advised the Company that he will
not seek re-election as a member of the Board of Directors at the Annual
Meeting. GEPT has waived its right to nominate a director for election at the
Annual Meeting and has elected to have Mr. Stewart attend meetings of the Board
of Directors as a non-voting participant. Effective as of the Annual Meeting,
GEPT has consented to an increase in the number of directors from seven to
eight.

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,
other than Mr. Stewart, 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 and options to purchase 5,000 shares were granted under the 1997
Omnibus Plan.

When issued, the options granted under the 1996 Option Plan (the
"1996 Directors Options") were scheduled to vest in three equal, annual
installments beginning on the first anniversary of the date of grant. 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

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granted an option to purchase 17,040 shares at an exercise price of
approximately $2.70 per share. In July 1997, 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. In September 1997 the Company made the options granted in July 1997
to the non-employee directors exercisable in full on December 31, 1997 if the
Company's initial public offering was completed prior to that date. These
options are therefore fully vested and exercisable. Each of the 1996 Directors
Options expires on the tenth anniversary of the date of grant.

The options granted under the 1997 Omnibus Plan (the "1997 Directors
Options") were all granted in September 1997 at an exercise price equal to
$15.00 per share. Fifteen percent of each of the 1997 Directors Options vested
on the consummation of the Company's initial public offering. The remaining 85%
of each of the 1997 Directors Options will vest in the event the Company
achieves certain specified sales, earnings or margin criteria in 1998, 1999,
2000 and 2001. Any portion of the 1997 Directors Options that has not vested
prior to the ninth anniversary of the date of grant will vest on that date. Each
of the 1997 Directors Options expires on the tenth anniversary of the date of
grant.

In connection with Mr. Stewart's service on the Board of Directors,
the Company has granted to GEPT options to purchase an aggregate of 30,560
shares of Common Stock. In April 1997, GEPT was granted an option to purchase
17,040 shares at an exercise price of approximately $3.45. In July 1997, GEPT
was granted an option to purchase 8,520 shares at an exercise price of
approximately $4.81 per share. Each of these options had substantially the same
terms as the 1996 Directors Options. In September 1997, the Company made the
options granted in July 1997 exercisable in full on December 31, 1997 if the
Company's initial public offering was completed prior to that date. The options
issued in July 1997 are therefore fully vested and exercisable. In September
1997, the Company granted GEPT an option to purchase 5,000 shares at an exercise
price equal to $15.00 per share. These options have substantially the same terms
as the 1997 Directors Options. While the options granted to GEPT were not issued
pursuant to the 1996 Option Plan or 1997 Omnibus Plan, the GEPT options do
reduce the total number of options that may be granted under the 1996 Option
Plan and 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 had an initial term of one year and was renewed in

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February 1998 for an additional one year term. During the year ended December 31
1997, the Company paid GSI a total of $10,000 (excluding expense reimbursements)
and there were no accumulated days of unused consulting time as of December 31,
1997. In September 1997, as additional consideration for his 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. During the year ended December 31, 1997, the
Company paid Dr. Nassau a total of $10,125 (excluding expense reimbursements)
and there were no accumulated days of unused consulting time as of December 31,
1997. 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
Mr. Sykes 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. During the year ended December 31, 1997, Mr.
Sykes performed certain consulting services for the Company without charge and,
consequently, the Company paid no cash consulting fees to Mr. Sykes during that
time. 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 September 1997 the Company made Mr. Sykes'
option exercisable in full on December 31, 1997 if the Company's initial public
offering was completed prior to that date. Mr. Sykes' option is therefore
exercisable in full. The option expires on the tenth anniversary of the date of
grant. In September

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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 December 1997, as additional consideration for his consulting
services, the Company granted Mr. Sykes an option to purchase 40,000 shares of
Common Stock at an exercise price of $13.87 per share. This 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 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.

In August 1997, the Company entered into an informal arrangement with
Mr. Levy pursuant to which Mr. Levy provides advice on capital funding matters
from time to time as requested by the Company. In consideration of these
services, the Company issued Mr. Levy an option to purchase 21,300 shares of
Common Stock at an exercise price of approximately $4.81 per share. This 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. The Company does not pay Mr. Levy any cash compensation but does
reimburse Mr. Levy for certain expenses incurred in connection with this
arrangement.

In February 1998, the Company entered a letter agreement with Mr.
Hartigan pursuant to which Mr. Hartigan may provide business development
services to the Company. Under the letter agreement, Mr. Hartigan is entitled to
receive a consulting fee of $1,000 per day for the first ten days of consulting
services provided to the Company and a consulting fee of $1,500 per day for any
additional days of consulting services. Mr. Hartigan is also entitled to be
reimbursed for any expenses incurred in connection with his consulting services.
In March 1998, as additional consideration for his consulting services, the
Company granted Mr. Hartigan an option to purchase 10,000 shares of Common Stock
at an exercise price of $9.81 per share. This 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.

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth information concerning the annual and
long-term compensation earned by Jeff N. Hunter, the Company's President and
Chairman of the Board, for services rendered to the Company in all capacities
for the years ended December 31, 1997 and 1996. Effective June 1, 1997, Mr.
Hunter's base salary was increased from $58,000 to $110,000. See "Report on
Executive Compensation -- Compensation of the Chief Executive Officer." No
executive officer of the Company received salary and bonus compensation in
excess of $100,000 in the year ended December 31, 1997.

LONG TERM
COMPENSATION
------------

ANNUAL COMPENSATION AWARDS
--------------------------- ------
SECURITIES UNDERLYING
OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR SALARY (NO. OF SHARES)
- --------------------------- ---- ------ ---------------
<S> <C> <C> <C>
Jeff N. Hunter (1) ..................................... 1997 $92,667 168,120
President and Chairman of the
Board

1996 $26,833 51,120
- ----------
</TABLE>

(1) Mr. Hunter has served as President and Chairman of the Board since June
1996. Prior to that time, Mr. Hunter served as Treasurer and Secretary of the
Company.

10
<PAGE>

OPTION/SAR GRANTS IN THE LAST FISCAL YEAR

The following table sets forth certain information with respect to
stock options granted to Mr. Hunter during the year ended December 31, 1997.

POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM(4)
----------------- -------------------------------

FAIR VALUE
NUMBER OF % OF TOTAL OF
SECURITIES OPTIONS/SARS EXERCISE UNDERLYING
UNDERLYING GRANTED TO PRICE SECURITY ON
OPTIONS/SARS EMPLOYEES IN PER DATE OF EXPIRATION
NAME GRANTED FISCAL YEAR SHARE GRANT DATE 0% 5% 10%
- ---- ------- ----------- ----- ----- ---- -- -- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Jeff N. Hunter 51,120(1) 10.7% $4.81 $10.80 07/06/2007 $306,209 $653,419 $1,186,107

70,000(2) 14.7% $15.00 $15.00 09/25/2007 $ 0 $660,340 $1,673,429

47,000(3) 9.9% $13.87 $13.87 12/09/2007 $ 0 $410,118 $1,039,319
- ----------
</TABLE>

(1) When issued, this option was scheduled to vest and become exercisable in
three equal, annual installments beginning on the first anniversary of the
date of grant. In September 1997, the Board of Directors made this option
exercisable in full on December 31, 1997 if the Company completed its
initial public offering prior to that date. Consequently, this option
vested and became exercisable in full on December 31, 1997. This option
expires to the extent not exercised on July 6, 2007.

(2) Fifteen percent of this option vested and became exercisable on the
consummation of the Company's initial public offering. The remaining
eighty-five percent of this option will vest in the event the Company
achieves certain specified sales, earnings or margin criteria in 1998,
1999, 2000 and 2001. Any portion of this option that has not vested prior
to September 26, 2006, the ninth anniversary of the date of grant, will
vest on that date. This option expires to the extent not exercised on
September 25, 2007.

(3) This option vests and becomes exercisable in three equal, annual
installments beginning on the first anniversary of the date of grant and
expires to the extent not exercised by December 9, 2007.

(4) The potential realizable value of an option is calculated based on the
term of the option at its time of grant (10 years) and is calculated by
assuming that the fair value of the underlying

11
<PAGE>

stock on the date of grant 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 0%, 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. The
actual value realized from these options may be greater than or less than
the potential realizable values set forth in the table.

AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

The following table sets forth the number of shares of Common Stock
covered by outstanding stock options held by Mr. Hunter at December 31, 1997.
Mr. Hunter did not exercise any of his stock options during the year ended
December 31, 1997.

NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT FISCAL YEAR-END OPTIONS/SARS AT FISCAL YEAR-END
------------------------------- -------------------------------

NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------

<S> <C> <C> <C> <C>
Jeff N. Hunter 78,660 / 140,580 $510,178 / $329,980
</TABLE>

EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS

Under an employment agreement effective as of June 1, 1997 which
expires on 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 other 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 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. Hunter also participates in the Company's annual
incentive plan. See "Report on Executive Compensation -- Compensation of the
Chief Executive Officer."

12
<PAGE>

The Company has also entered into an employment agreement with Mark
W. Hahn, the Company's Chief Financial Officer, Treasurer and Secretary. Mr.
Hahn's employment agreement, which expires on July 29, 2002, entitles Mr. Hahn
to receive a base salary of $122,000 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 under the 1996 Option Plan will vest and become
immediately exercisable upon any change in control of the Company. The 1997
Omnibus Plan 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
interests 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.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Prior to the creation of the Compensation Committee in October 1997,
the Board of Directors made all determinations with respect to executive officer
compensation. No interlocking relationships exist between the Company's Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past. Jeff N. Hunter, the Company's President and Chairman of the
Board of Directors, participated in the process of determining the compensation
to be paid to certain executive officers during 1997. See "Report on Executive
Compensation." Dr. Nassau, Mr. Rubin and Mr. Sykes each have a consulting
agreement with the Company. See "Compensation of Directors." Dr. Nassau and Mr.
Sykes have purchased and hold securities of the Company. See "Certain
Transactions -- Private Placement Transactions."

REPORT ON EXECUTIVE COMPENSATION

This report has been prepared to describe the Company's executive
compensation policies and the basis for the compensation earned by Jeff N.
Hunter, the Company's President and Chairman of the Board of Directors, during
the year ended December 31, 1997.

13
<PAGE>

GENERAL

The Compensation Committee of the Board of Directors was established
in October 1997. The Compensation Committee is authorized to determine the cash
and non-cash compensation of each officer, salaried employee and consultant of
the Company, other than members of the Board of Directors, to establish and
administer the Company's insurance and benefits plans and to administer the
Company's stock option plans. The Compensation Committee also recommends for
review and approval by the full Board of Directors the cash and non-cash
compensation (including stock options and awards) to be paid to each member of
the Board of Directors who serves as an officer, employee or consultant of the
Company. The Compensation Committee is composed of Mr. Rubin, Dr. Russ and Mr.
Sykes. Prior to October 1997, compensation and benefit decisions were made by
the Board of Directors.

OBJECTIVES AND PHILOSOPHY

The Company's executive compensation policy has been designed to (i)
attract and retain qualified executives to fill key management positions, (ii)
provide executives with appropriate incentives to achieve a targeted level of
performance and (iii) align the interests of the executives with those of the
Company's shareholders. The Company seeks to achieve its objectives by providing
its executive officers with a comprehensive and competitive salary and benefits
package which currently consists of a base salary, annual incentive plan and
stock options.

The Compensation Committee intends to evaluate its executive
compensation programs from time to time to ensure that the compensation paid to
its executive officers is sufficient to attract and retain qualified executives
and is fair and reasonable to the Company and its shareholders. The Compensation
Committee also intends to review and compare the compensation practices of
companies that have a similar market capitalization as the Company or that are
engaged in similar businesses as the Company to ensure that the Company is
offering a competitive compensation package. The Compensation Committee may also
retain an independent compensation and benefit consulting firm to assist it in
reviewing its current compensation programs and designing and implementing new
programs.

COMPONENTS OF COMPENSATION

Executive compensation currently consists of base salaries,
participation in an annual incentive plan and stock options awarded under the
Company's stock plans. The Compensation Committee may alter the existing
components of executive compensation or design and implement new components if
it determines that such alterations or additions would further the objectives of
the Company's executive compensation policy.

BASE SALARIES

Prior to September 1997, each executive officer, other than Jeff
Hunter, was paid a base salary which was determined primarily based on
negotiations between the Company and that executive officer at the time the
officer was offered employment with the Company. Mr. Hunter,

14
<PAGE>

the Company's President and Chairman of the Board, played an active role in
these negotiations and determined, after discussions with the Board of
Directors, the amount of base salary to offer those officers. Those amounts were
based primarily on the amount of compensation earned by those officers with
their previous employers and the Company's ability to pay such amounts. Mr.
Hunter's salary was determined by the Board of Directors.

In September 1997, the Board of Directors reviewed the existing base
salary of each executive officer and determined it to be in the best interests
of the Company to increase the base salary of each executive officer and to
enter into an employment agreement with each executive officer. The revised base
salary of each executive officer was based on an assessment of prevailing market
rates and the level of additional responsibility assumed by such officer in
connection with the Company's expansion and growth. There is presently no
established relationship between the base salaries of the executive officers and
the performance of the Company. Each executive officer has executed an
employment agreement with the Company which provides for a minimum employment
term of one year from the officer's original date of employment, a fixed base
salary, the right to participate in the Company's annual incentive plan and the
right to certain payments upon any termination of such officer's employment
other than for cause. See "Executive Compensation -- Employment Agreements and
Other Arrangements."

ANNUAL INCENTIVE PLAN

The 1998 Annual Incentive Plan of the Company (the "Annual Plan") was
adopted to provide the Company's employees, including its executive officers,
with an incentive to achieve certain performance targets in 1998. The Annual
Plan entitles eligible employees to receive a cash bonus based on the Company's
performance in 1998. Each eligible employee is assigned a target bonus equal to
a percentage 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, each employee's bonus will be reduced on a linear basis. No
bonuses will be earned or paid if the Company does not achieve positive pre-tax
income.

STOCK OPTIONS

In June 1996, the Company adopted the 1996 Option Plan, pursuant to
which the Company granted options to purchase shares of Common Stock to certain
employees, directors and consultants, including the Company's executive
officers. Options granted under the 1996 Option Plan are exercisable at prices
ranging from approximately $1.88 per share to $7.35 per share and typically vest
over a period of 3 years. In September 1997, the Board of Directors modified
certain options issued under the 1996 Option Plan, including options granted to
certain executive officers, by accelerating the vesting date of such options to
December 31, 1997 if the Company completed its initial public offering prior to
that date. Consequently, the modified options are now fully vested and
exercisable. In October 1997, the Company adopted the 1997 Omnibus Plan which
authorized

15
<PAGE>

the Company to grant stock options, stock appreciation rights and restricted
stock awards. In accordance with the terms of the 1997 Omnibus Plan, the Company
has granted options to certain employees, directors and consultants, including
its executive officers, at an exercise price of $15 per share. Fifteen percent
of each of these options vested upon the completion of the Company's initial
public offering and the remaining eighty-five percent of each of these options
will vest in the event the Company meets certain performance targets for
earnings per share, sales or margins during 1998, 1999, 2000 and 2001. Any
portion of these options that has not vested prior to the ninth anniversary of
the date of grant will vest upon that date. In December 1997, the Company
granted options to certain of its directors, consultants and executive officers
at an exercise price of $13.87 per share. These options vest in three equal,
annual installments beginning on the first anniversary of the date of grant and
expire on the tenth anniversary of the date of grant. Prior to October 1997, the
Company's stock plans were administered by the Board of Directors. The
Compensation Committee now administers each of the Company's stock option plans.

The number and terms of options granted by the Compensation Committee
to executive officers, other than to Mr. Hunter, during 1997 were based
principally on either a recommendation made by Mr. Hunter in connection with the
negotiation of the terms of such officer's employment with the Company or a
review by the Board of Directors of the officer's duties and responsibilities
and potential contributions to the success of the Company. The number and terms
of options granted to Mr. Hunter were determined by the Board of Directors after
a review of Mr. Hunter's duties and responsibilities, past contributions to the
Company and potential future contributions to the Company. The Compensation
Committee has not adopted any objective criteria that establishes a relationship
between the number of options granted to executive officers and the Company's
performance. The Company believes that stock option awards more closely align
the interests of its executives officers with those of the Company's
shareholders and provide such officers with appropriate incentives to achieve
the Company's performance targets.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

During 1997, the base salary of Jeff N. Hunter, the President and
Chairman of the Board, increased from $58,000 to $110,000. See "Executive
Compensation -- Summary Compensation Table." The increase in Mr. Hunter's base
salary was effective as of June 1, 1997, the anniversary date of his employment
with the Company, and primarily reflects the increase in Mr. Hunter's
responsibilities caused by the Company's rapid growth during the year. Mr.
Hunter also participates in the Annual Plan. See "-- Components of Compensation
- -- Annual Incentive Plan."

In July 1997, the Board of Directors granted Mr. Hunter an option to
acquire 51,120 shares of Common Stock at an exercise price of approximately
$4.81 per share. When issued, this option was scheduled to vest and become
exercisable in three equal, annual installments beginning on the first
anniversary of the date of grant. In September 1997, the Board of Directors
modified this option to become exercisable in full on December 31, 1997 if the
Company's initial public offering was completed prior to that date.
Consequently, this option vested on December 31, 1997 and is now fully
exercisable. In September 1997, the Board of Directors granted Mr. Hunter an
option to

16
<PAGE>

acquire 70,000 shares of Common Stock at an exercise price of $15.00 per share.
Fifteen percent of this option vested upon the completion of the Company's
initial public offering and the remaining eighty-five percent of this option
will vest in the event the Company meets certain performance targets for
earnings per share, sales or margins during 1998, 1999, 2000 and 2001. Any
portion of this option that has not vested prior to the ninth anniversary of the
date of grant will vest upon that date. In December 1997, the Compensation
Committee granted Mr. Hunter an option to purchase 47,000 shares of Common Stock
at an exercise price of $13.87 per share. This option vests and becomes
exercisable in three equal, annual installments beginning on the first
anniversary of the date of grant. Each of the options granted to Mr. Hunter will
expire on the tenth anniversary of its date of grant. See "Executive
Compensation -- Option/SAR Grants in Last Fiscal Year" and "Executive
Compensation -- Aggregated Option/SAR Exercises in the Last Fiscal Year and
Fiscal Year-End Option/SAR Values."

This report is submitted by the Board of Directors of the Company.

Jeff N. Hunter Kurt Leutzinger Kurt Nassau
Howard Rubin Frederick A. Russ David B. Stewart
Ollin B. Sykes

17
<PAGE>

PERFORMANCE GRAPH

The following line graph and table illustrate the cumulative total
shareholder return on the Company's Common Stock over the period beginning on
the date of the Company's initial public offering, November 14, 1997, and ending
on December 31, 1997 and the cumulative total return over the same period of (i)
the Nasdaq Market Index - US and Foreign and (ii) a peer group composed of D.G.
Jewellery of Canada Ltd., IWI Holding Limited, Lazare Kaplan International Inc.
and OroAmerica, Inc. The graph assumes an initial investment of $100 and the
reinvestment of all dividends.

(The Performance Graphic appears here. The plot points are listed in the table
below.)

11/14/97 11/30/97 12/31/97
C3, Inc. 100 88.89 79.06
Peer Group Index 100 97.09 90.49
Nasdaq Market Index - US and Foreign 100 99.08 97.41

The Company's peer group primarily consists of gemstone or jewelry
manufacturers that sell their products directly to retailer jewelers as the
Company intends to do. While these companies have been selected on the basis of
the similarities between their businesses and the business of the Company, the
Company, unlike the members of the peer group, manufactures and sells a patented
lab-created gemstone that is not currently available from other sources. The
Company therefore believes that comparisons between the Company and the peer
group may not accurately and reliably reflect the relative performance of the
Company.

18
<PAGE>

CERTAIN TRANSACTIONS

PRIVATE PLACEMENT TRANSACTIONS

Between January 9, 1997 and March 17, 1997, the Company issued in
private placement transactions 682,500 shares of its Series B Preferred Stock at
a purchase price of $7.35 per share. Pursuant to the Company's Amended and
Restated Certificate of Incorporation, each share of Series B Preferred Stock
automatically converted into 2.13 shares of Common Stock on the closing of the
Company's initial public offering. The following table sets forth the number of
shares of Series B Preferred Stock purchased by the Company's directors,
executive officers and their affiliates.

SHARES OF SHARES OF
SERIES B COMMON STOCK
INVESTOR PREFERRED STOCK AFTER CONVERSION
-------- --------------- ----------------
<S> <C> <C>
General Electric Pension Trust (1) 271,250 577,762

Ollin B. Sykes (2) 26,250 55,912

William J. Sykes, Jr. (3) 8,750 18,637

Thomas G. Coleman (4) 5,250 11,182

C. Eric Hunter (5) 1,750 3,727

Mark Harrill (6) 1,750 3,727

Kurt Nassau (7) 1,750 3,727
</TABLE>

(1) David B. Stewart, who is a director of the Company, is an investment manager
at General Electric Investment Company which is the investment advisor to GEPT.

(2) Includes 14,910 shares of Common Stock owned by Sykes & Company, P.A. Profit
Sharing Plan and Trust of which Mr. Sykes is sole trustee.

(3) Includes 18,637 shares of Common Stock owned jointly by Mr. Sykes and his
wife, Joyce M. Sykes. Mr. Sykes is the brother of Ollin B. Sykes, a director of
the Company.

(4) Mr. Coleman is the Director of Technology of the Company.

(5) Mr. Hunter is the brother of Jeff N. Hunter.

19
<PAGE>

(6) Includes 3,727 shares of Common 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.

(7) Includes 3,727 shares of Common Stock owned jointly by Dr. Nassau, who is a
director of the Company, and his wife, Julia Nassau.

TRANSACTIONS WITH CREE

Jeff N. Hunter, one of the founders of the Company and President and
Chairman of the Board, and C. Eric Hunter, one of the founders of the Company
and the beneficial owner of 15.2% of the Common Stock outstanding, 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 own 231,744
shares of Common Stock, or approximately 3.3% of the Common Stock outstanding.
GEPT, which is the beneficial owner of 8.5% of the Common Stock was, as of
October 2, 1997, the beneficial owner of approximately 10.1% of the outstanding
common stock of Cree.

EXCLUSIVE SUPPLY AGREEMENT

On June 6, 1997, the Company and Cree entered into an Exclusive
Supply Agreement (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. 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.

Cree will have to build additional crystal growth systems in order to
meet the Company's anticipated requirements for SiC crystals. 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.

20
<PAGE>

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. During the year ended December 31, 1997, the Company made
aggregate payments of approximately $365,000 to Cree under the Exclusive Supply
Agreement.

DEVELOPMENT AGREEMENTS

Under a June 6, 1997 Development Agreement (the "Development
Agreement") with Cree, the Company is funding Cree's efforts to develop a fully
repeatable process for producing SiC crystals in the comparable diamond color
grades "G" through "J," with at least 50% in the "G" to "H" range. The
Development Agreement also provides for a five-year focused development effort
by Cree to increase crystal size while maintaining color grade and uniformity
and establishes milestones to be met by July 1 of each year. The Company has the
right to terminate the Development Agreement if Cree does not meet any
milestone. During the year ended December 31, 1997, the Company made aggregate
payments of approximately $1 million to Cree under the Development Agreement.

In January 1998, the Company elected to continue funding the
Development Agreement with Cree even though Cree had not developed a fully
repeatable process in the target color range by January 1, 1998. On January 8,
1998, the Company and Cree entered into a Supplemental Development Agreement
(the "Supplemental Agreement") under which Cree is obligated to accelerate its
efforts to develop a fully repeatable process for producing larger diameter SiC
crystals in the target color range that had originally been scheduled to be
developed by July 1, 1999. If the diameter and color objectives are achieved by
Cree in the earliest time frames under the Supplemental Agreement, the Company
could pay Cree up to an additional $2.3 million. The Supplemental Agreement,
which expires on December 31, 1998, provides that if Cree is unable to develop a
fully repeatable process in the target color range by a specified date the
Company has the right, for a period of ten days after that date, to terminate
the Supplemental Agreement.

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.

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

21
<PAGE>

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. Cree was issued a patent for a process for growing
colorless SiC on February 17, 1998. During the year ended December 31, 1997, the
Company made aggregate payments of approximately $3,000 to Cree in connection
with this letter agreement.

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 2.5% of net sales
of all test instruments incorporating the Cree chip. The letter agreement has a
term of twenty years. During the year ended December 31, 1997, the Company made
aggregate payments of approximately $59,000 to Cree under this letter agreement.

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 vacated these premises in October
1997. During the year ended December 31, 1997, the Company made aggregate
payments of approximately $24,000 to Real Color Displays, Inc.

OTHER TRANSACTIONS

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 approximately $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 the Company's initial public 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. While Dr. Berardinelli was
entitled to return to the Company at the end of her leave of absence in a
position comparable to her prior position as Vice President of Sales and
Marketing, Dr. Berardinelli has informed the Company that she will not be
rejoining the Company. While the term of the consulting agreement ends on April
30, 1998, the Company and Dr. Berardinelli have agreed to extend the term of the
agreement for an additional one year period. During the year ended December 31,
1997, the Company did not request that Dr. Berardinelli perform consulting
services under the agreement and, consequently, 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 agreed to assist the Company in
filing, prosecuting and maintaining certain patents relating to the Company's
technology. The consulting agreement had an initial term of two years and
entitled Mr. Hunter to receive a monthly consulting fee of $1,800. Upon the
completion of Mr. Hunter's consulting obligations to the Company, the consulting
agreement was terminated effective as of March 31, 1998 and the Company paid Mr.
Hunter accrued consulting fees of $12,600. Mr. Hunter is the beneficial owner of
15.2% of the Common Stock outstanding and the brother of Jeff N. Hunter.

The Company has entered into employment agreements with certain of
its executive officers and consulting agreements with certain of its directors.
The Company has also granted options to purchase Common Stock under the 1996
Option Plan and 1997 Omnibus Plan to certain executive officers and directors.
See "Board of Directors -- Compensation of Directors," "Executive Compensation
- --Employment Agreements and Other Arrangements" and "Report on Executive
Compensation -- Components of Compensation -- Stock Options."

FAIRNESS OF TRANSACTIONS

The Company believes that all of the transactions listed under the
caption "Certain Transactions" were made on terms no less favorable to the
Company than could have been obtained in substantially similar transactions with
unaffiliated third parties. Future transactions between the Company and any
officer, director, five percent shareholder or affiliate of the Company will be
approved by a majority of the Board of Directors and will be on terms no less
favorable to the Company than could be obtained in substantially similar
transactions with unaffiliated third parties.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires directors and certain officers of the Company, and persons who own more
than 10% of the outstanding shares of the Company's Common Stock, to file with
the Securities and Exchange Commission (the "SEC") initial reports of ownership
and reports of changes in ownership of Common Stock. Such persons are required
by SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.

22
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Based solely on a review of the copies of such reports furnished to
the Company by such persons and their written representations that such reports
accurately reflect all reportable transactions and holdings, the Company
believes that during 1997 all such persons filed such reports on a timely basis
except C. Eric Hunter, a beneficial owner of more than 10% of the outstanding
Common Stock, who filed a late report on Form 4 in connection with the purchase
of 2,000 shares of Common Stock by a member of Mr. Hunter's immediate family. In
addition, Thomas G. Coleman and Mark W. Hahn, executive officers of the Company,
and Kurt Leutzinger, Kurt Nassau, Howard Rubin, Frederick A. Russ and Ollin B.
Sykes, directors of the Company, each filed an amended Form 3 in April 1998 to
more accurately reflect the vesting provisions of certain stock options held by
them.

PROPOSALS TO BE VOTED UPON

ELECTION OF DIRECTORS

The eight individuals set forth under the caption "Board of Directors
- -- Nominees for Director" have been nominated by the Board of Directors for
election at the Annual Meeting. Each nominee for director has indicated that he
is willing and able to serve as a director if elected. However, if any nominee
should become unable to serve or for good cause will not serve, the persons
named on the enclosed proxy card will vote for such other nominees and
substituted nominees as designated by the Board of Directors.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ELECTION OF EACH OF THE DIRECTOR NOMINEES.

APPOINTMENT OF INDEPENDENT AUDITORS

The Board of Directors has appointed Deloitte & Touche LLP as
independent auditors of the Company for the year ending December 31, 1998,
subject to ratification by the Company's shareholders. Deloitte & Touche LLP has
acted as independent auditors of the Company since February 1997.
Representatives of Deloitte & Touche LLP are expected to be present at the
Annual Meeting, will be given the opportunity to make a statement if they desire
to do so and will also be available to respond to appropriate questions.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THIS PROPOSAL

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SHAREHOLDER PROPOSALS

Under certain conditions, shareholders may request the Company to
include a proposal for action at a forthcoming meeting of the shareholders of
the Company in the proxy material of the Company for such meeting. All
shareholder proposals intended to be presented at the 1999 Annual Meeting of the
Shareholders of the Company must be received by the Company no later than
January 22, 1999 for inclusion in the Proxy Statement and proxy card relating to
such meeting.

OTHER MATTERS

The Board of Directors is not aware of any other matters to come
before the Annual Meeting. However, if any other matters properly come before
the Annual Meeting, it is the intention of the persons named on the enclosed
proxy card to vote said proxy in accordance with their judgment in such matters.

COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997, INCLUDING FINANCIAL STATEMENTS AND SCHEDULES, WILL BE
PROVIDED UPON WRITTEN REQUEST, WITHOUT CHANGE, TO ANY PERSON WHOSE PROXY IS
BEING SOLICITED. ANY EXHIBIT TO FORM 10-K IS ALSO AVAILABLE UPON WRITTEN REQUEST
AT A REASONABLE CHARGE FOR COPYING AND MAILING. WRITTEN REQUESTS SHOULD BE MADE
TO MARK W. HAHN, CHIEF FINANCIAL OFFICER, AT C3, INC., 3800 GATEWAY BOULEVARD,
SUITE 310, MORRISVILLE, NORTH CAROLINA 27560.

By order of the Board of Directors,

Jeff N. Hunter
President
May 22, 1998

24
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**********************************APPENDIX**************************************

C3, Inc.
3800 Gateway Boulevard
Suite 310
Morrisville, North Carolina 27560

PROXY

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.

The undersigned shareholder of C3, Inc., a North Carolina corporation (the
"Company"), hereby appoints Jeff N. Hunter and Mark W. Hahn as Proxies, each
with the power to appoint his substitute, and hereby authorizes them to
represent and to vote, as designated below, all the shares of common stock, no
par value, of the Company held of record by the undersigned on May 7, 1998 at
the Annual Meeting of the Shareholders of the Company to be held on June 23,
1998 or any adjournment thereof.

1. Election of Directors

[ ] For all nominees listed below [ ] Withhold authority for all
(except as marked below) nominees

Nominees: Richard G. Hartigan Jr. [ ] Jeff N. Hunter [ ]
Kurt Leutzinger [ ] Joel N. Levy [ ] Kurt Nassau [ ]
Howard Rubin [ ] Frederick A. Russ [ ] Ollin B. Sykes [ ]

INSTRUCTION: To withhold authority to vote for any individual nominee, mark the
box next to that nominee's name.

2. Proposal to ratify the appointment of Deloitte & Touche LLP as
independent auditors for the year ending December 31, 1998.

[ ] For [ ] Against [ ] Abstain

3. In their discretion, the Proxies are authorized to vote upon such other
matters as may properly come before the Annual Meeting of the
Shareholders.

This proxy, when properly executed, will be voted in the manner specified herein
by the undersigned shareholder. If no specification is made, this proxy will be
voted for the election of the persons named above and for the proposal to ratify
the appointment of Deloitte & Touche LLP as independent auditors for the year
ending December 31, 1998.

Please sign this proxy exactly as your name appears below. When shares are held
by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give your full title as such. If
shares are held by a corporation, please sign the full name of the

<PAGE>

corporation by an authorized officer. If shares are held by a partnership,
please sign the full name of the partnership by an authorized person.

Dated: ______________________________ ______________________________
PLEASE MARK, SIGN, DATE AND RETURN Signature
THIS PROXY CARD PROMPTLY USING
THE ENCLOSED ENVELOPE ______________________________
Signature (if held jointly)