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 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 ss. 240.14a-11(c) or ss. 240.14a-12
CHARLES & COLVARD, LTD.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy statement if other than the 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 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:
-----------------------------------------------------------------------------
CHARLES & COLVARD(TM)
-------Created-------
M O I S S A N I T E
3800 Gateway Boulevard
Suite 310
Morrisville, North Carolina 27560
(919) 468-0399
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 20, 2002
To The Shareholders Of Charles & Colvard, Ltd.:
Notice is Hereby Given that the Annual Meeting of the Shareholders of
Charles & Colvard, Ltd. (the "Company") will be held at the Sheraton Imperial
Hotel, 4700 Emperor Boulevard, Durham, North Carolina, on Monday, May 20, 2002
at 10:00 A.M., Eastern Daylight Savings Time, for the following purposes:
1. To elect 5 members to the Board of Directors whose terms expire at the
annual meeting on May 20, 2002;
2. To consider and vote upon a proposal to ratify the appointment of
Deloitte & Touche LLP as independent auditors for the year ending
December 31, 2002; and
3. 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 March 28,
2002 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.
By order of the Board of Directors,
Robert S. Thomas
President & CEO
March 22, 2002
--------------------------------------------------------------------------------
A PROXY CARD IS ENCLOSED FOR THE CONVENIENCE OF THOSE SHAREHOLDERS WHO DO NOT
PLAN TO ATTEND THE ANNUAL MEETING IN PERSON BUT DESIRE TO HAVE THEIR SHARES
VOTED. IF YOU DO NOT PLAN TO ATTEND THE ANNUAL MEETING, PLEASE COMPLETE AND
RETURN THE PROXY CARD IN THE ENVELOPE PROVIDED FOR THAT PURPOSE. IF YOU RETURN
YOUR CARD AND LATER DECIDE TO ATTEND THE ANNUAL MEETING IN PERSON OR FOR ANY
OTHER REASON DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE YOUR
PROXY IS VOTED.
--------------------------------------------------------------------------------
M O I S S A N I T E
-----Created By-----
C H A R L E S & C O L V A R D
3800 Gateway Boulevard
Suite 310
Morrisville, North Carolina 27560
(919) 468-0399
PROXY STATEMENT
This Proxy Statement is furnished to the Shareholders of Charles &
Colvard, Ltd. (the "Company") in connection with the solicitation of proxies, by
the Board of Directors of the Company, for use at the 2002 Annual Meeting of the
Shareholders of the Company (the "Annual Meeting") to be held at the Sheraton
Imperial Hotel, 4700 Emperor Boulevard, Durham, North Carolina, on Monday, May
20, 2002 at 10:00 A.M., Eastern Daylight Savings Time, and all adjournments
thereof. This Proxy Statement and the accompanying proxy card are being mailed
on or about April 16, 2002.
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 March 28, 2002 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
February 28, 2002, there were 13,371,714 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, 2002 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 a broker,
as nominee, that are not voted on such proposal will not affect 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, 2002 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.
PROPOSAL 1
ELECTION 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.
The Board of Directors meets on a regularly scheduled basis and met 4
times during the year ended December 31, 2001. During 2001, each director
attended 100% of the aggregate of all meetings of the Board of Directors and of
the committees of the Board of Directors on which that director served.
The Bylaws of the Company provide that the Board of Directors shall
consist of one or more members and at any time that it consists of nine or more
members the terms shall be staggered. Under North Carolina law, the Company
cannot have staggered director terms unless it has at least nine Directors.
Accordingly, newly elected Directors will serve one year terms.
The five persons named below have been nominated to serve on the Board
of Directors until the 2003 Annual Meeting of the Shareholders or until their
successors are elected and qualified. The age and a brief biographical
description of each director nominee are set forth below. The information
appearing below and certain information regarding beneficial ownership of
securities by such nominees contained in this proxy statement has been furnished
to the Company by the nominees. 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.
Nominees for Election as Directors
Walter J. O'Brien, Jr. (66) has been a director of the Company since
May 2000 and a consultant to the Company since September 1999. From June 2001 to
present Mr. O'Brien has been the Director General of the International
Advertising Association. From September 2000 to June 2001, he was the Executive
Director of the Privacy Leadership Initiative, Inc. From May 1999 to September
2000, he was a consultant for The O'Brien Association, a brand consulting firm.
From November 1995 to April 1999, Mr. O'Brien was the President of the National
Advertising Review Council, an advertising self-regulatory organization. He
graduated from Marquette University, completed the Advanced Advertising Planning
Program at Harvard University and attended the Executive Program at Stanford
Graduate School of Business.
Chester L.F. Paulson (66) has been a director of the Company since May
2001. Since 1970, Mr. Paulson has served as President and Chairman of Paulson
Capital Corporation and as Director of Corporate Finance and Director of its
wholly-owned subsidiary, Paulson Investment Company, Inc. which provides full
service brokerage services and is engaged in investment banking services. Mr.
Paulson earned his Masters of Business Administration from the University of
Portland.
Frederick A. Russ (58) has served as a director of the Company since
November 1996 and as Chairman of the Board from May 2000 to May 2001. 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
2
Directors of Cree, Inc. ("Cree") from 1988 to 1992. He earned his Ph.D. in
industrial administration at Carnegie-Mellon University.
Robert S. Thomas (54) has served as the President and Chief Executive
Officer of the Company since July 2000 and as Chairman of the Board since May
2001. From June 1998 to July 2000, Mr. Thomas served as the President and Chief
Operating Officer of the Company. From November 1996 to June 1998, Mr. Thomas
served as a consultant to the Company on various financing and sales related
matters. From October 1977 to November 1996, Mr. Thomas was employed with Morven
Partners, one of the nations largest processors and distributors of both raw and
processed edible nuts, and its predecessor companies in various capacities
including President and Chief Executive Officer. Since November 2000, Mr. Thomas
has served as a member of the Board of Directors of The University of North
Carolina Health Care System. Mr. Thomas earned his Bachelor of Science degree in
Business Administration from West Virginia University.
George A. Thornton, III (61) has served as a director of the Company
since May 2001. Since June 1984, Mr. Thornton has been a real estate developer.
Additionally, from 1997 to 1998, Mr. Thornton served in various capacities
including as Chief Executive Officer of Rhodes Furniture, Inc. From 1984 to
1997, Mr. Thornton was a marketing consultant to Kincaid Furniture. Mr. Thornton
earned his Associate of Arts degree from Louisburg College.
Directors Emeritus
Howard Rubin (78) served as a director of the Company from November
1996 to May 2000 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.
Kurt Nassau (75) served as a director of the Company from August 1996
to May 2001 and has provided consulting services to the Company since April
1997. Since 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 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.
Mr. Rubin was appointed as Director Emeritus in May 2000, and Dr.
Nassau was appointed as Director Emeritus effective May 2001. Directors Emeritus
serve for three year periods whereby they may attend board meetings at the
invitation of the Board, but have no voting rights.
Committees of the Board of Directors
The Board of Directors has established an Audit Committee and a
Compensation 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 2001, is composed of Mr.
O'Brien, Mr. Paulson, Mr. Russ and Mr. Thornton.
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 2001, is composed
of Mr. O'Brien, Mr. Paulson, Mr. Russ and Mr. Thornton.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, which consists entirely
of directors who meet the independence and experience requirements of the
Nasdaq, has furnished the following report:
3
The Audit Committee assists the Board in overseeing and monitoring the
integrity of the Corporation's financial reporting process, its compliance with
legal and regulatory requirements and the quality of its external audit
processes. The role and responsibilities of the Audit Committee are set forth in
a written Charter adopted by the Board. The Audit Committee reviews and
reassesses the Charter annually and recommends any changes to the Board for
approval.
The Audit Committee is responsible for overseeing the Corporation's
overall financial reporting process. In fulfilling its responsibilities for the
financial statements for fiscal year 2001, the Audit Committee:
- Reviewed and discussed the audited financial statements for
the year ended December 31, 2001 with management and Deloitte
& Touche LLP ("D&T"), the Corporation's independent auditors;
- Discussed with D&T the matters required to be discussed by
Statement on Auditing Standards No. 61 relating to the conduct
of the audit; and
- Received written disclosures and the letter from D&T regarding
its independence as required by Independence Standards Board
Standard No. 1 and discussed with D&T their independence.
The Audit Committee also considered the status of pending litigation,
taxation matters and other areas of oversight relating to the financial
reporting and audit process that the Committee determined appropriate.
Based on the Audit Committee's review of the audited financial
statements and discussions with management and D&T, the Audit Committee
recommended to the Board that the audited financial statements be included in
the Corporation's Annual Report on Form 10-K for the fiscal year ended December
31, 2001 for filing with the Securities and Exchange Commission.
This Report is submitted by the Audit Committee.
Chester L. F. Paulson, Chairman
Mr. Walter J. O'Brien
Mr. Frederick A. Russ
Mr. George A. Thornton
COMPENSATION OF DIRECTORS
Other than the non-executive Chairman, the Company did not pay cash to
its directors during 2001 but did reimburse directors for expenses incurred in
their capacity as directors. At the February 23, 2002 meeting the Board of
Directors approved a proposal to compensate each non-employee Director elected
at the Annual Shareholders Meeting for 2002 at the rate of $12,000 per annum and
8,000 options with one year vesting. Non-employee directors have been granted
options to purchase Common Stock of the Company as compensation for their
services during the year ended December 31, 2001 and in prior years. Until May
2001, the non-executive Chairman of the Board was paid $8,000 per quarter. This
was eliminated on May 14, 2001 when Mr. Thomas became Chairman of the Board.
Directors who are employees of the Company are not separately compensated for
their service on the Board of Directors.
Prior to 2002, the Company had a practice of granting non-employee
directors options to purchase 5,000 shares of Common Stock, which vest
immediately before the next scheduled annual meeting, as compensation for the
ensuing year's service (the "annual grant") and an initial grant of options to
purchase 7,500 shares of Common Stock, which vest ratably over a three-year
period, upon their first election to the Board of Directors (the "initial
grant"). In 2001, each of the non-employee directors received an annual grant of
5,000 options exercisable at $1.33 per share with new directors receiving an
initial grant of 7,500 shares at $1.33 per share.
INFORMATION CONCERNING EXECUTIVE OFFICERS
Certain information as to executive officers of the Company is set
forth below. Executive officers are appointed by and serve at the pleasure of
the Board. The information appearing below and certain information regarding
beneficial ownership of securities by such executive officers contained in this
proxy statement has been furnished to the Company by the executive officers.
4
Robert S. Thomas (54) has served as the President and Chief Executive
Officer of the Company since June 2000 and Chairman of the Board of Directors of
the Company since May 2001. From June 1998 to June 2000, Mr. Thomas served as
the President and Chief Operating Officer of the Company. From November 1996 to
June 1998 Mr. Thomas served as a consultant to the Company on various financing
and sales related matters. From October 1977 to November 1996 Mr. Thomas was
employed with Morven Partners, one of the nations largest processors and
distributors of both raw and processed edible nuts, and its predecessor
companies in various capacities including President and Chief Executive Officer.
Since November 2000, Mr. Thomas has served as a member of the Board of Directors
of The University of North Carolina Health Care System. Mr. Thomas earned his
Bachelor of Science degree in Business Administration from West Virginia
University.
James R. Braun (47) has served as the Chief Financial Officer of the
Company since June 2001, and Treasurer and Secretary since September, 2001. From
November 1997 to prior to joining the Company he served as Executive Vice
President and Chief Financial Officer of Webcraft Inc., a manufacturing company
specializing in the printing of direct marketing materials. From June 1997 to
November 1997, he was Vice President of Smith Technology, an environmental
engineering company. From February 1988 to June 1997, he was Executive Vice
President and Chief Financial Officer of Safeguard Business Systems, Inc., a
business forms manufacturer. Mr. Braun earned his Bachelor of Science degree in
Accounting from Villanova University.
Earl R. Hines (65) has served as Vice President of Manufacturing since
February 2001. Mr. Hines has served as Director of Manufacturing for the Company
from March 1997 to February 2001. 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.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation paid by the Company to the Company's Chief Executive
Officer and its other executive officers whose total salary plus bonus exceeded
$100,000 in 2001 (collectively, the "Named Officers")
Summary Compensation Table
Annual Compensation Long -Term Compensation
---------------------------------------- -----------------------
Securities Underlying
Options/SARs
Name and Principal Position Year Salary ($) Bonus ($) (Number of Shares)
---------- --------- ------------------
Robert S. Thomas 2001 $ 145,314 $ 23,671 89,000
President & Chief Executive 2000 $ 125,000 $ --- ---
Officer 1999 $ 125,000 $ 7,750 ---
James R. Braun (1) 2001 $ 80,770 $ 8,672 41,666
Chief Financial Officer, 2000 $ --- $ --- ---
Secretary and Treasurer 1999 $ --- $ --- ---
Earl R. Hines 2001 $ 123,750 $ 11,836 55,000
Vice President of 2000 $ 120,000 $ --- 8,000
Manufacturing 1999 $ 108,541 $ 10,000 ---
(1) Mr. Braun's compensation for 2001 reflects amounts earned from the
commencement of his employment with the Company in June 2001.
5
Option Grants in Last Fiscal Year
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Option Term (2)
Number of % of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Per Expiration
Name Granted (1) Fiscal Year Share Date 5% 10%
---- ---------------------------------------------------------------------------------------
Robert S. Thomas 50,000 16.2 $ 1.16 5/13/2011 $36,500 $ 92,435
39,000 12.7 $ 2.59 2/26/2012 $63,525 $160,980
James R. Braun 30,000 9.8 $ 1.49 6/3/2011 $28,112 $ 71,238
11,666 3.8 $ 2.59 2/16/2012 $19,002 $ 48,154
Earl R. Hines 35,000 11.4 $ 1.08 10/17/2011 $23,772 $ 60,242
20,000 6.5 $ 2.59 2/26/2012 $32,577 $ 82,554
(1) These options have a term of 10 years, are incentive stock options and
have an exercise price equal to the fair market value of the Common
Stock on the date of grant. Options generally vest over a three year
period except for those issued pursuant to the Company's Executive
Compensation Plan which vest immediately.
(2) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission (the "Commission") and do not represent the Company's
estimate or projection of future Common Stock prices.
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 the Named Officers at December 31,
2001. The Named Officers did not exercise any of their stock options during the
year ended December 31, 2001.
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
---- --------------- ----------------- ---------------- ------------------
Robert S. Thomas 144,200 12,750 $ 20,000 $ ---
James R. Braun --- 30,000 $ --- $ 2,100
Earl R. Hines 36,125 43,500 $ 1,480 $ 16,800
Employment Agreements and Other Arrangements
The Company has entered into an employment agreement with Robert S.
Thomas, the Company's President and Chief Executive Officer. Mr. Thomas'
employment agreement, which expires annually on February 28, automatically
renews on an annual basis and entitles Mr. Thomas to receive a salary of
$160,000 and to participate in the Company's incentive compensation plans. If
the Company terminates Mr. Thomas's employment without cause, Mr. Thomas 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. Thomas voluntarily terminates his employment
following a reduction in his responsibilities, pay or position, or if his
employment is terminated
6
following such change in control, the Company is obligated to pay Mr. Thomas 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. Thomas is prohibited from
competing with the Company or attempting to solicit the Company's customers or
employees for a period of one year. Mr. Thomas will also participate in the
Company's annual incentive plan, if one is implemented.
The Company has also entered into an employment agreement with James R.
Braun, the Company's Vice President-Finance, Chief Financial Officer, Secretary
and Treasurer. Mr. Braun's employment agreement which expires annually on June
3, and automatically renews on an annual basis and entitles Mr. Braun to receive
a salary of $150,000 and to participate in the Company's incentive compensation
plans. Mr. Braun has rights substantially the same as those granted to Mr.
Thomas 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. Braun is prohibited from competing with the Company or attempting to solicit
the Company's customers or employees for a period of one year.
The Company has also entered into an employment agreement with Earl R.
Hines, the Company's Vice President of Manufacturing. Mr. Hines' employment
agreement, which expires annually on August 31, and automatically renews on an
annual basis, entitles Mr. Hines to receive a base salary of $150,000 and to
participate in the Company's incentive compensation plan. Mr. Hines has rights
substantially the same as those granted to Mr. Thomas 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. Hines is prohibited
from competing with the Company or attempting to solicit the Company's customers
or employees for a period of one year.
The 1996 Option Plan provides 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. 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
None of the members of the Compensation Committee during 2001 has
ever served as an officer or employee of the Company. 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. Robert
S. Thomas, the Company's President and Chief Operating Officer, participated in
the process of determining the compensation to be paid to certain executive
officers during 2001. See "Compensation Committee Report." Dr. Nassau and Mr.
O'Brien each have a consulting agreement with the Company. See "Certain
Transactions -- Other Transactions." All members of the Board of Directors have
purchased and hold securities of the Company. See "Security Ownership of
Management and Certain Beneficial Owners."
COMPENSATION COMMITTEE REPORT
This report has been prepared to describe the Company's executive
compensation policies and the basis for the compensation earned by the Named
Officers, during the year ended December 31, 2001.
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.
O'Brien, Mr. Paulson, Dr. Russ and Mr. Thornton.
7
Objectives and Philosophies. The Compensation Committee employs
compensation practices designed to (i) attract and retain qualified executives,
(ii) align the interests of executives with the long-term interests of the
Company's shareholders and (iii) motivate executives to achieve targeted
objectives. In furtherance of these goals, base salaries are generally evaluated
annually to ensure that executives are compensated at levels that take into
account both competitive and performance factors. The Company also relies to a
substantial degree on stock options to attract and motivate its executives.
Generally, compensation arrangements for executive officers consist of base
salary, annual incentive plan, stock option grants and other benefits available
to other employees of the Company.
Cash Compensation. The Committee determines the base salary of the
chief executive officer and reviews and approves base salaries for the Company's
other executive officers annually. In adjusting salaries, the Committee examines
both qualitative and quantitative factors relating to corporate and individual
performance. The qualitative factors in general involve a subjective assessment
by the Committee. The Committee does not base its considerations on any single
performance factor, nor does it apply any formulaic relationship between the
Company's performance and salary levels. Instead it considers a variety of
factors and evaluates individual performance against those factors both in
absolute terms and in relation to the competitive market for executives in
similar positions. The Committee also relies on the evaluations and
recommendations of Mr. Thomas, who has served as President of the Company since
1998, in approving salary adjustments for other executive officers.
Equity Incentives. The Company utilizes stock options granted under the
Company's 1996 Stock Option Plan and 1997 Omnibus Plan, which are administered
by the Compensation Committee, to align shareholder and management interests by
giving executive officers a substantial economic stake in long-term appreciation
of the Company's stock. Since the Company's initial public offering in 1997, all
options granted under the plan have been awarded with exercise prices set not
less than the market value of the underlying stock on the grant date. Generally,
option grants are awarded with a ten-year term and are subject to vesting over
three years.
The Compensation Committee takes into account all factors it deems
appropriate in reviewing proposed option grants to executive officers, including
the officer's position and level of responsibility, the officer's existing
unvested option holdings, the potential reward to the officer if the stock price
appreciates and the competitiveness of the officer's overall compensation
arrangements, including stock options. Outstanding performance by an individual
may also be taken into consideration. Option grants are often made to new
executives upon commencement of employment and, on occasion, to executives in
connection with a significant change in job responsibility. The Compensation
Committee relies on Mr. Thomas's evaluations and recommendations in approving
option grants to other executive officers. Based on the factors described above,
during fiscal 2001 the Committee recommended, and the Board of Directors
approved, grants to executive officers of options to purchase an aggregate of
115,000 shares of Common Stock.
Annual Incentive Plan. In May 2001 the Board of Directors adopted the
2001 Executive Compensation Plan. This plan offers key employees of the Company
incentive awards in the form of cash payments, and/or stock option grants based
upon the Company's attainment of certain performance goals. In 2002, the Company
made $42,000 in cash payments and granted 91,000 stock options based on the 2001
Plan.
Chief Executive Officer Compensation. Mr. Thomas's cash compensation
level was established in 1998 in connection with the negotiation of the terms of
his employment with the Company. The Committee made an adjustment in Mr.
Thomas's salary in May 2001 increasing it from $125,000 to $160,000 to more
closely match market conditions. In 2001, the Company adopted the 2001 Executive
Compensation Plan. This plan offers key employees of the Company incentive
awards in the form of cash payments, and/or stock option grants based upon the
Company's attainment of certain performance goals.
This Report is submitted by the Compensation Committee.
Frederick A. Russ, Chairperson
Walter J. O'Brien
Chester L. F. Paulson
George A. Thornton
8
STOCK 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, 2001 and the cumulative total return over the same period of (i)
the Nasdaq Market Index - US and (ii) a peer group composed of D.G. Jewelery of
Canada Ltd, and Lazare Kaplan International Inc. OroAmerica, Inc. and IWI
Holdings Limited previously appeared in our peer group, however, they are no
longer publicly traded companies and, therefore, have been excluded from this
presentation. The graph assumes an initial investment of $100 and the
reinvestment of all dividends.
COMPARE CUMULATIVE TOTAL RETURN
AMONG CHARLES & COLVARD, LTD.,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
[GRAPH]
ASSUMES $100 INVESTED ON NOV.14, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC.31, 2001
--------------------------------------------------------------------------------------------
11/14/97 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
--------------------------------------------------------------------------------------------
Charles & Colvard, Ltd. 100.00 78.37 89.83 41.08 9.56 10.58
--------------------------------------------------------------------------------------------
Peer Group Index 100.00 97.08 187.02 123.83 43.95 58.55
--------------------------------------------------------------------------------------------
Nasdaq Market Index - 100.00 99.17 138.47 256.98 156.02 123.17
U.S.
--------------------------------------------------------------------------------------------
The Company's peer group primarily consists of gemstone or jewelry
manufacturers that sell their products directly to retail jewelers. 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 jewel 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.
9
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 February 28, 2002 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) each executive officer of the Company; 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.
Common Stock
Name (1) Beneficially Owned Percent of Class
-------- ------------------ ----------------
Chester L. F. Paulson (2) 2,280,592 16.8%
Robert S. Thomas (3) 1,273,580 9.4%
Rodney D. Baber (4) 768,450 5.7%
General Electric Pension Trust (5) 505,737 3.8%
Frederick A. Russ (6) 246,020 1.8%
Earl. R. Hines (7) 82,086 *
George A. Thornton, III 46,420 *
Walter J. O'Brien (8) 37,600 *
James R. Braun (9) 18,266 *
Directors, Director Nominees
and Executive Officers as a Group
(7 persons) (10) 3,984,564 28.7%
* 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) 260,400 shares of Common Stock held jointly by Mr. Paulson
and his spouse, Jacqueline, over which Mr. Paulson has shared voting
and investment power, (ii) 25,200 shares of Common Stock issuable upon
exercise of stock purchase warrants held jointly by Mr. & Mrs.
Paulson, (iii) 1,780,400 shares of Common Stock held by Paulson
investment Company, Inc. (PIC) and (iv) 214,592 shares of Common Stock
issuable upon exercise of stock purchase warrants held by PIC. Mr. &
Mrs. Paulson are the controlling shareholders of the parent company of
PIC. The mailing address of Mr. Paulson and PIC is 811 S.W. Naito
Parkway, Suite 200, Portland, OR 97204.
(3) Includes (i) 34,000 shares of Common Stock held jointly by Mr. Thomas
and his spouse, Mary Ann Thomas, over which Mr. Thomas has shared
voting and investment power and (ii) 183,200 shares of Common Stock
issuable to Mr. Thomas upon exercise of options granted under the 1996
Option Plan and 1997 Omnibus Plan.
(4) Information obtained from Schedule 13G dated January 16, 2002 as filed
with the Securities Exchange Commission. The mailing address of Mr.
Baber is Morgan Keegan and Co., Inc., 50 N. Front Street, 15th Floor,
Memphis, TN 38117.
(5) Information obtained from Schedule 13G dated December 31, 2001 as filed
with the Securities Exchange Commission by General Electric Pension
Trust. The mailing address of General Electric Pension Trust is 3003
Summer Street, Stamford, Connecticut 06904.
(6) Includes 16,500 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 (i) 21,000 shares of Common Stock held jointly by Mr. Hines
and his spouse, Jacqueline Hines, over which Mr. Hines has shared
voting and investment power, (ii) 56,125 shares of Common Stock
issuable to Mr. Hines upon exercise of options granted under the 1996
Option Plan and 1997 Omnibus Plan and (iii) 4,961 shares of Common
Stock issuable to Mrs. Hines upon exercise of options granted under the
1996 Option Plan and 1997 Omnibus Plan.
10
(8) Includes 37,500 shares of Common Stock issuable upon exercise of
options granted under the 1997 Omnibus Plan.
(9) Includes (i) 5,000 shares of Common Stock held jointly by Mr. Braun and
his spouse Cherie Braun, over which Mr. Braun has shared voting and
investment power and (ii) 11,666 shares of Common Stock issuable to Mr.
Braun upon exercise of options granted under the 1996 Option Plan and
1997 Omnibus Plan.
(10) Includes (i) 345,600 shares of Common Stock over which certain
directors and executive officers have shared voting and investment
power, (ii) 309,952 shares of Common Stock issuable upon exercise of
options granted under the 1996 Option Plan and 1997 Omnibus Plan and
(iii) 214,592 shares of Common Stock issuable upon exercise of stock
purchase warrants held by Mr. Paulson and Paulson Investment Company.
Does not include 505,737 shares of Common Stock beneficially owned by
GEPT and 768,450 shares owned by Rodney D. Baber.
CERTAIN TRANSACTIONS
In September 2001, the Board of Directors authorized the repurchase of
up to 1,300,000 shares of the Company's common stock . At the discretion of
management, the repurchase program can be implemented through open market or
privately negotiated transactions at prevailing prices. The Company will
determine the time and extent of repurchases based on its evaluation of market
conditions and other factors.
In November 2001, the Company repurchased 76,000 shares of common stock
at $1.00 per share from Paulson Investment Company, Inc. (PIC) a company which
Chester L. F. Paulson, a member of Charles & Colvard's Board of Directors, is a
controlling Shareholder. This was the Company's only share repurchase in 2001.
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. All agreements entered into between the Company, and
its officers and directors and the agreements entered into between the Company
and Cree during 2001 were approved by a majority of the Board. 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.
11
PROPOSAL 2
APPOINTMENT OF INDEPENDENT AUDITORS
Audit Fees
The aggregate fees billed the Company during 2001 by Deloitte & Touche,
LLP for services rendered are set forth in the following table:
Type of Service Amount of Fee
--------------- -------------
Audit Fees $ 91,000
Financial Information Systems Design and Implementation Fees $ 0
All Other Fees $ 32,000
The Audit Committee considered the compatibility of the non-audit
services performed by and fees paid to Deloitte & Touche, LLP in 2001 and the
proposed non-audit services and proposed fees for 2002 and determined that such
services and fees were compatible with the independence of the auditors. During
2001, Deloitte & Touche, LLP did not utilize any leased personnel in connection
with the audit.
The Board of Directors has appointed Deloitte & Touche LLP as
independent auditors of the Company for the year ending December 31, 2002,
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.
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 materials of the Company for such meeting. All
shareholder proposals intended to be presented at the 2003 Annual Meeting of the
Shareholders of the Company must be received by the Company no later than
December 7, 2002 for inclusion in the Proxy Statement and proxy card relating to
such meeting. In addition, if a shareholder desires to make a proposal from the
floor during the meeting, even if such proposal is not to be included in the
Company's proxy statement, the Company's Bylaws provide that the shareholder
must give timely written notice of the proposal to the chief executive officer
of the Company. Notice will be considered timely if it is mailed or delivered
(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, not less than 60 days and not more than 90 days prior to the
anniversary date of the immediately preceding annual meeting, or (ii) in the
case of a special meeting or 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, not later than the close of business on the tenth day
following the day on which notice of meeting was mailed or public disclosure of
the date of the meeting was made, whichever occurs first. If written notice is
not timely given, the shareholder proposal will be considered untimely and the
Company may exclude the proposal from consideration at the meeting. If the
proposal is permitted to be considered at the meeting, the proxies appointed
pursuant to the proxy cards will have discretionary authority to vote for or
against the proposal even if the proposal was not discussed in the proxy
statement. Accordingly, notice of proposals to be brought before the 2003 Annual
Meeting of Shareholders must be mailed or delivered no earlier than February 18,
2003 and no later than March 18, 2003 to be considered timely.
12
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. 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 2001 all such persons filed such reports on a timely basis.
ADDITIONAL INFORMATION
Copies of the Company's Annual Report on Form 10-K for the year ended
December 31, 2001, including financial statements and schedules, will be
provided upon written request, without charge, 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 James R. Braun, Chief Financial Officer, at Charles & Colvard, Ltd., 3800
Gateway Boulevard, Suite 310, Morrisville, North Carolina 27560.
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.
By Order of the Board of Directors,
Robert S. Thomas
President & CEO
March 22, 2002
13
Charles & Colvard, Ltd. Proxy
3800 Gateway Boulevard
Suite 310
Morrisville, North Carolina 27560
-------------------------------------------
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned shareholder of Charles & Colvard, Ltd., a North Carolina
corporation (the "Company"), hereby appoints Robert S. Thomas and Earl R. Hines
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 March
28, 2002 at the Annual Meeting of the Shareholders of the Company to be held on
May 20, 2002 or any adjournment thereof.
1. ELECTION OF DIRECTORS
[_] FOR all nominees listed below [_] WITHHOLD AUTHORITY for all nominees
(except as marked below)
(INSTRUCTION: To withhold authority to vote for any individual nominee,
mark the box next to that nominee's name.)
Nominees:
Walter J. O'Brien [_] Chester L. F. Paulson [_] Frederick A. Russ [_]
Robert S. Thomas [_] George A. Thornton, III [_]
2. PROPOSAL TO RATIFY THE APPOINTMENT OF DELOITTE & TOUCHE LLP as independent
auditors for the year ending December 31, 2002.
[_] 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 PROPOSAL 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, 2002.
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 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)