Development Agreement/6-6-97/cree Research

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.


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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.


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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.


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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);


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(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:
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