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.
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(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:
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2) Aggregate number of securities to which transaction applies:
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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):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] 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:
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2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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[GRAPHIC]
3800 Gateway Boulevard
Suite 310
Morrisville, North Carolina 27560
(919) 468-0399
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 14, 2001
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 14, 2001
at 10:00 A.M., Eastern Daylight Savings Time, for the following purposes:
1. To set the number of Directors to be elected to the Board of Directors
at 5;
2. To elect 5 members to the Board of Directors with terms expiring at the
annual meeting in 2002;
3. To consider and vote upon a proposal to ratify the appointment of
Deloitte & Touche LLP as independent auditors for the year ending
December 31, 2001; and
4. 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 30,
2001 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,
/s/ Robert S. Thomas
Robert S. Thomas
President & CEO
March 30, 2001
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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.
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[GRAPHIC]
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 2000 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
14, 2001 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 6, 2001.
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 30, 2001 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
March 1, 2001, there were 13,447,714 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 the Bylaws of the Company, the proposal to fix the size of the
board at 5 for the Annual Meeting shall be passed if the number of votes cast
for the proposal exceeds the number of votes cast against it. 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, 2001 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, 2001 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 FIVE DIRECTORS
Under the Bylaws of the Company, the shareholders may fix the number of
directors to be elected at the 2001 Annual Meeting. The Board of Directors has
proposed to the shareholders that this number be set at 5.
THE BOARD OF DIRECTORS RECOMMENTS A VOTE "FOR" THIS PROPOSAL.
PROPOSAL 2
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
eight times during the year ended December 31, 2000. During 2000, 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 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 2002 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/she 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. (65) has been a director of the Company since
May 2000 and a consultant to the Company since September 1999. Since September
2000, Mr. O'Brien has been 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
2
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 (65) is a director nominee. 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 (57) has served as a director of the Company since
November 1996 and as Chairman of the Board since May 2000. 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, Inc. ("Cree")
from 1988 to 1992. He earned his Ph.D. in industrial administration at
Carnegie-Mellon University.
Robert S. Thomas (53) has served as the President and Chief Executive
Officer of the Company since July 2000. 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. Mr. Thomas earned his Bachelor of Science degree in Business
Administration from West Virginia University.
George A. Thornton, III (60) is a director nominee. 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 with Terms Expiring in 2001
Cecil D. Raynor, Ollin B. Sykes, Richard G. Hartigan, Jr., Kurt Nassau
and Dr. Russ are all serving as Directors of the Company with terms expiring in
May 2001. Mr. Raynor, Mr. Sykes, Mr. Hartigan and Dr. Nassau are not seeking
re-election.
Directors with Terms Expiring in 2002
Jeff N. Hunter resigned as Director in May 2000. Barbara Kotlikoff is
serving as a Director with a term expiring in 2002. However, Ms. Kotlikoff has
submitted her resignation as a director of the Company effective as of the
Annual Meeting. Accordingly, no directors are continuing in office.
Directors Emeritus
Howard Rubin (77) 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 (74) has served as a director of the Company since August
1996 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.
3
Committees of the Board of Directors
The Board of Directors has established an Audit Committee, a
Compensation Committee and a Corporate Governance 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 four meetings in 2000, is composed of
Mr. Sykes, Dr. Russ, and Mr. Raynor.
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 five meetings in 2000, is
composed of Mr. Hartigan, Dr. Russ and Mr. Sykes.
The Corporate Governance Committee, originally established as a
Nominating Committee in February 1999, is responsible, on an annual basis and
upon the request of the Board or its Chairman, for developing a list of
potential nominees for Director, including nominations from shareholders, if
any, and for investigating and evaluating the potential nominees' qualifications
to serve as a Director, the compliance of all nominations with the Bylaws of the
Company, and for making recommendations to the Board concerning such
nominations. Shareholders may submit nominations to the Company, provided that
written notice is provided to the Company not less than 30 nor more than 90 days
before the Annual Meeting in accordance with the Company's Bylaws. The Corporate
Governance Committee also has responsibility for reviewing issues of corporate
governance and making recommendations thereon to the Board. The Corporate
Governance Committee, which met four times in 2000, is composed of Mr. Hartigan,
Ms. Kotlikoff, Dr. Nassau and Mr. Raynor.
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:
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, which is attached as Appendix A to this
Proxy Statement. 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 2000, the Audit Committee:
- Reviewed and discussed the audited financial statements for the
year ended December 31, 2000 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. The Audit Committee 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
4
included in the Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 for filing with the Securities and Exchange Commission.
This Report is submitted by the Audit Committee.
Ollin B. Sykes, Chairman
Cecil D. Raynor
Frederick A. Russ
COMPENSATION OF DIRECTORS
Other than the non-executive Chairman, the Company does not presently
pay cash fees to its directors but does reimburse directors for expenses
incurred in their capacity as directors; however, the Company pays board members
$500 per day for special committee work. The non-executive Chairman of the Board
is paid $8,000 per quarter. Directors who are employees of the Company are not
separately compensated for their service on the Board of Directors. 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, 2000 and in
prior years.
The Company has 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 2000, each of the
non-employee directors received an annual grant of 5,000 options exercisable at
$5.38 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.
Robert S. Thomas (53) has served as the President and Chief Executive
Officer of the Company since June 2000. 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. Mr. Thomas earned his Bachelor of Science degree in Business
Administration from West Virginia University.
Earl R. Hines (64) has served as Vice President of Manufacturing,
Treasurer and Secretary 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.
5
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
$100,000 in 2000 (collectively, the "Named Officers")
Summary Compensation Table
Annual Compensation Long -Term Compensation
----------------------------------------------- -------------------------
Securities Underlying
Options/SARs
Name and Principal Position Year Salary ($) Bonus ($) (Number of Shares)
---------- --------- ------------------------
Robert S. Thomas (1) 2000 $ 125,000 $ --- ---
President & Chief Executive 1999 $ 125,000 $ 7,750 ---
Officer 1998 $ 67,708 $ --- 20,000
2000 $ 123,166 $ 20,000 8,000
Mark W. Hahn (2) 1999 $ 122,000 $ 7,750 ---
Chief Financial Officer 1998 $ 116,917 $ --- ---
Earl R. Hines
Vice President of 2000 $ 120,000 $ --- 8,000
Manufacturing, Secretary and 1999 $ 108,541 $ 10,000 ---
Treasurer 1998 $ 88,646 $ --- ---
Jeff N. Hunter (3) 2000 $ 135,000 $ --- 40,000
Former Chairman of the Board 1999 $ 133,958 $ 8,000 ---
and Chief Executive Officer 1998 $ 105,417 $ --- ---
(1) Mr. Thomas' compensation for 1998 reflects amounts earned from the
commencement of his employment with the Company in June 1998.
(2) Mr. Hahn resigned from the Company effective March 1, 2001.
(3) Mr. Hunter resigned as Chairman of the Board and Chief Executive Officer in
May 2000. Under the terms of his separation agreement, Mr. Hunter is to
continue receiving salary payments through May 15, 2001. The amount set
forth in the Salary column for 2000 includes actual payments through
December 31, 2000. Mr. Hunter will receive additional payments aggregating
approximately $50,000 in 2001.
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,
2000. The Named Officers did not exercise any of their stock options during the
year ended December 31, 2000.
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money
Options/SARs at Fiscal Year-end Options/SARs at Fiscal Year-end
------------------------------------ --------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------ --------------- ----------------- ---------------- ------------------
Robert S. Thomas 94,200 12,750 $ --- $ ---
Mark W. Hahn 132,700 50,500 $ --- $ 248
Earl R. Hines 30,788 16,500 $ --- $ 248
6
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
$125,000 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 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 Earl R.
Hines, the Company's Director 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 $120,000 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 2000 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
2000. See "Compensation Committee Report." Mr. Hartigan, Dr. Nassau, Mr. O'Brien
and Mr. Sykes each have a consulting agreement with the Company. See "Certain
Transactions -- Other Transactions." All members of the Board of Directors,
except Barbara Kotlikoff 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, 2000.
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
7
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.
Hartigan, Dr. Russ and Mr. Sykes.
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 generally 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.
Annual Incentive Plan. The Company did not have an annual incentive
plan for executive officers in 2000. The Company has not adopted such a plan
thus far in 2001 but intends to do so.
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 2000 the Committee recommended, and the Board of Directors
approved, grants to executive officers of options to purchase an aggregate of
16,000 shares of Common Stock.
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 no adjustment in Mr. Thomas'
salary in 1999 or 2000 and intends to review Mr. Thomas' compensation later in
2001.
This Report is submitted by the Compensation
Committee.
Richard G. Hartigan, Jr.
Frederick A. Russ
Ollin B. Sykes.
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, 2000 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.
Jewelery of Canada Ltd, Lazare Kaplan International Inc. and OroAmerica, Inc.
IWI Holdings Limited previously appeared in our peer group, however, they are no
longer listed and, therefore, have been excluded from this presentation. The
graph assumes an initial investment of $100 and the reinvestment of all
dividends.
{LINE CHART APPEARS HERE]
ASSUMES $100 INVESTED ON NOV. 14, 1997
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2000
- ------------------------------------- ------------------- --------------- ---------------- ------------- -------------
11/14/97 12/31/97 12/31/98 12/31/99 12/31/00
- ------------------------------------- ------------------- --------------- ---------------- ------------- -------------
Charles & Colvard, Ltd. 100.00 78.39 89.83 41.10 9.53
- ------------------------------------- ------------------- --------------- ---------------- ------------- -------------
Peer Group Index 100.00 89.45 83.06 70.56 55.95
- ------------------------------------- ------------------- --------------- ---------------- ------------- -------------
Nasdaq Market Index - U.S. and
Foreign 100.00 97.41 134.42 246.21 154.55
- ------------------------------------- ------------------- --------------- ---------------- ------------- -------------
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 March 1, 2001 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) 2,356,592 17.5%
Robert S. Thomas (3) 1,184,580 8.8%
General Electric Pension Trust (4) 505,737 3.8%
Ollin B. Sykes (5) 464,414 3.5%
Frederick A. Russ (6) 241,020 1.8%
Kurt Nassau (7) 78,120 *
Richard G. Hartigan, Jr. (8) 63,500 *
Earl. R. Hines (9) 58,411 *
George A. Thornton, III 46,420 *
Barbara Kotlikoff (10) 13,000 *
Walter J. O'Brien (11) 10,200 *
Cecil Raynor (12) 8,000 *
Directors, Director Nominees
and Executive Officers as a Group
(9 persons) (13) 4,524,257 33.6%
* 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) 1,856,400 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) 94,200 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 February 14, 2001 as filed
with the Securities Exchange Committee by General Electric Pension
Trust. The mailing address of General Electric Pension Trust is 3003
Summer Street, Stamford, Connecticut 06904.
(5) Includes (i) 180,310 shares of Common Stock held by the Sykes & Co.,
P.A. Profit Sharing Plan & Trust, (ii) 24,400 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' spouse, (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) 96,800 shares of Common
Stock issuable upon exercise of options granted under the 1996 Option
Plan and 1997 Omnibus Plan.
10
(6) Includes 11,500 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) 4000 shares of Common Stock held jointly by Dr. Nassau and
his spouse Julia Nassau over which Dr. Nassau has shared voting and
investment power and (ii) 74,120 shares of Common Stock issuable upon
exercise of options granted under the 1997 Omnibus Plan.
(8) Includes 27,500 shares of Common Stock issuable upon exercise of
options granted under the 1997 Omnibus Plan.
(9) 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) 30,788 shares of Common Stock
issuable to Mr. Hines upon exercise of options granted under the 1996
Option Plan and 1997 Omnibus Plan and (iii) 6,623 shares of Common
Stock issuable to Mrs. Hines upon exercise of options granted under the
1996 Option Plan and 1997 Omnibus Plan.
(10) Includes 13,000 shares of Common Stock issuable upon exercise of
options granted under the 1997 Omnibus Plan.
(11) Includes 10,000 shares of Common Stock issuable upon exercise of
options granted under the 1997 Omnibus Plan.
(12) Includes 5,000 shares of Common Stock issuable upon exercise of options
granted under the 1997 Omnibus Plan.
(13) Includes (i) 532,410 shares of Common Stock over which certain
directors and executive officers have shared voting and investment
power, (ii) 369,531 shares of Common Stock issuable upon exercise of
options granted under the 1996 Option Plan and 1997 Omnibus Plan and
(iii) 2,070,992 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.
CERTAIN TRANSACTIONS
Transactions with Cree
Jeff N. Hunter, one of the founders of the Company and the former
Chairman of the Board and Chief Executive Officer, is the brother of F. Neal
Hunter, the Chief Executive Officer of Cree. Based on the shareholdings reported
in Cree's proxy statement dated September 27, 2000, certain of Cree's officers
and directors own approximately 1.5% of the Common Stock outstanding. GEPT,
which is the beneficial owner of 3.8% of the Common Stock was, as of February
14, 2001, the beneficial owner of approximately 3.8 % 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 jewels 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 jewel use. The price for SiC
crystals under the Exclusive Supply Agreement 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. For calendar 2001, the Company and Cree
have agreed on an alternate framework for SiC crystal purchases. Under this
framework, the Company will be obligated to purchase SiC crystals only upon
issuance and Cree's acceptance of purchase orders at a set price per gram for
specified SiC crystals. The Company has issued a purchase order for deliveries
of SiC crystals during the second quarter of 2001 aggregating approximately
$400,000.
Under the Exclusive Supply Agreement, in the event that Cree cannot
supply the Company's requirements for SiC crystals, Cree may elect, in its sole
discretion, to have the Company purchase the additional growth systems
11
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.
In May 1998 and in May 1999, the Company ordered quantities of SiC
crystals exceeding the capacity of the existing crystal growth system. Cree
elected to have the Company purchase $3.4 million of additional crystal growers
in 1998 and $2.8 million of additional crystal growers in 1999. The Company paid
the entire initial $3.4 million purchase price to Cree during 1998 and the
entire $2.8 million purchase price to Cree during 1999.
In May 2000 the Company sold all of its crystal growth systems to Cree
for a purchase price of $5 million.
The Exclusive Supply Agreement has an initial term of ten years, which
may be extended for an additional ten years by either party.
Development Agreement
On July 1, 1998, the Company entered into an Amended and Restated
Development Agreement (the "Development Agreement") with Cree which is focused
on increasing the yield of usable material in each silicon carbide crystal
manufactured by Cree for use by the Company in the production of lab-created
moissanite jewels. The Development Agreement established performance milestones
for 1999 and contemplated that the Company and Cree would revise the performance
milestones annually to provide both parties with more flexibility to pursue
further color and yield improvements on both 2-inch and 3-inch diameter
crystals. The Development Agreement replaced the prior development agreements
between the parties and requires the Company to fund the program at $2.88
million annually. Either party may terminate the Agreement if Cree does not meet
the annual performance milestones or if the Company and Cree do not mutually
agree on the performance milestones for the ensuing year. During the year ended
December 31, 1998 the Company made aggregate payments of approximately $2.5
million to Cree under the Development Agreement, the 1997 Development Agreement
and the prior agreements.
In May 1999 the Development Agreement was amended to reduce the annual
funding level to $1.44 million annually effective in October 1999. During the
years ended December 31, 1999 and December 31, 2000 the Company made aggregate
payments of approximately $2.8 million and $1.2 million, respectively, to Cree
under the Development Agreement. Effective January 1, 2001, the Company and Cree
have agreed to suspend the work and payments required under the Development
Agreement through June 20, 2001.
Other Cree Transactions
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 jewel 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, 2000, the Company made
no payments to Cree under this letter agreement.
Other Transactions
In July 1997, the Company entered into a five year consulting agreement
with Ollin Sykes. Pursuant to the agreement, Mr. Sykes will provide finance and
business services to the Company, and the Company will pay Mr. Sykes
compensation as agreed upon from time to time. Mr. Sykes received no
compensation under this agreement in 2000.
The Company entered into a five year consulting agreement with Mr.
Hartigan in January 1998, pursuant to which Mr. Hartigan will provide business
development consulting services to the Company. Mr. Hartigan received no
compensation under this agreement in 2000.
12
In April 1998, the Company entered into a one year renewable consulting
agreement with Dr. Nassau through Nassau Consultants. In 2000, the Company paid
$6,250 to Mr. Nassau pursuant to this agreement.
In December 1999, the Company entered into a one-year renewable
consulting agreement with Mr. O'Brien, pursuant to which Mr. O'Brien will serve
as the Company's Brand Steward. The Company paid $157,306 to Mr. O'Brien under
this agreement in 2000.
In May 2000, in conjunction with his separation, the Company entered
into a three year consulting agreement with Mr. Hunter pursuant to which Mr.
Hunter provides consulting services related to the Company's relationship within
the jewelry industry. Mr. Hunter was granted options to purchase 40,000 shares
of Common Stock at an exercise price of $5.38, vesting in three equal annual
installments.
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 2000 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.
PROPOSAL 3
APPOINTMENT OF INDEPENDENT AUDITORS
Audit Fees
The aggregate fees billed the Company during 2000 by Deloitte & Touche,
LLP for services rendered are set forth in the following table:
Type of Service Amount of Fee
- --------------- --------------
Audit Fees $ 77,000
Financial Information Systems Design and Implementation Fees $ 0
All Other Fees $ 75,000
The Audit Committee considered the compatibility of the non-audit
services performed by and fees paid to Deloitte & Touche, LLP in 2000 and the
proposed non-audit services and proposed fees for 2001 and determined that such
services and fees were compatible with the independence of the auditors. During
2000, 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, 2001,
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 2002 Annual Meeting of the
Shareholders of the Company must be received by the Company no later than
December 7, 2001 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
13
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 or, 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 2002 Annual
Meeting of Shareholders must be mailed or delivered no earlier than February 18,
2002 and no later than March 18, 2002 to be considered timely.
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 2000 all such persons filed such reports on a timely basis
with the exception of Ollin Sykes, who failed to timely report a purchase of 200
shares on August 4, 2000.
ADDITIONAL INFORMATION
Copies of the Company's Annual Report on Form 10-K for the year ended December
31, 2000, 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 Robert D.
Dixson, 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,
/s/ Robert S. Thomas
Robert S. Thomas
President & CEO
March 30, 2001
14
EXHIBIT A
- ---------
AUDIT COMMITTEE CHARTER
Organization
There shall be a committee of the board of directors to be known as the audit
committee. The audit committee shall be composed of directors who are
independent of the management of the corporation and are free of any
relationship that, in the opinion of the board of directors, would interfere
with their exercise of independent judgment as a committee member.
Statement of Policy
The audit committee shall provide assistance to the corporate directors in
fulfilling their responsibility to the shareholders, potential shareholders, and
investment community relating to corporate accounting, reporting practices of
the corporation, and the quality and integrity of the financial reports of the
corporation. In so doing, it is the responsibility of the audit committee to
maintain free and open means of communication between the directors, the
independent auditors, the internal auditors, and the financial management of the
corporation.
Responsibilities
In carrying out its responsibilities, the audit committee believes its policies
and procedures should remain flexible, in order to best react to changing
conditions and to ensure to the directors and shareholders that the corporate
accounting and reporting practices of the corporation are in accordance with all
requirements and are of the highest quality.
In carrying out these responsibilities, the audit committee will:
o Provide an open avenue of communication between the internal auditors, the
independent auditors, and the board of directors.
o Review and recommend to the directors the independent auditors to be
selected to audit the financial statements of the corporation and its
divisions and subsidiaries.
o Meet with the independent auditors and financial management of the
corporation to review the scope of the proposed audit for the current year
and the audit procedures to be utilized, and at the conclusion thereof
review such audit, including any comments or recommendations of the
independent auditors.
o Review with management the need for an internal audit function.
o Review and concur in the appointment, replacement reassignment, or
dismissal of the director of internal auditing when appropriate.
o Review with the independent auditors, the company's internal auditor, and
financial and accounting personnel, the adequacy and effectiveness of the
accounting and financial controls of the corporation, and elicit any
recommendations for the improvement of such internal control procedures or
particular areas where new or more detailed controls or procedures are
desirable. Particular emphasis should be given to the adequacy of such
internal controls to expose any payments, transactions, or procedures that
might be deemed illegal or otherwise improper. Further, the committee
periodically should review company policy statements to determine their
adherence to the code of conduct.
o Review the internal audit function of the corporation including the
independence and authority of its reporting obligations, the proposed
audit plans for the coming year, and the coordination of such plans with
the independent auditors.
o Receive prior to each meeting, a summary of findings from completed
internal audits and a progress report on the proposed internal audit plan,
with explanations for any deviations from the original plan.
o Review the financial statements contained in the annual report to
shareholders with management and the independent auditors to determine
that the independent auditors are satisfied with the disclosure and
content of the financial statements to be presented to the shareholders.
Any changes in accounting principles should be reviewed.
o Meet with the internal and independent auditors without members of
management present. Among the items to be discussed in these meetings are
the independent auditors' evaluation of the corporation's financial,
accounting, and auditing personnel, the cooperation that the independent
auditors received during the course of the audit and any serious
difficulties or disputes with management encountered during the course of
the audit.
o Meet with management without the independent and internal auditors
present. Discuss any matters that the committee or management believe
should be discussed privately with the audit committee.
o Review accounting and financial human resources and succession planning
within the company.
o Review policies and procedures with respect to officers' and directors'
expense accounts and perquisites, including their use of corporate assets,
and consider the results of any review of these areas by the internal
auditor or the independent auditor.
o Submit the minutes of all meetings of the audit committee to, or discuss
the matters discussed at each committee meeting with, the board of
directors.
o Investigate any matter brought to its attention within the scope of its
duties, with the power to retain outside counsel for this purpose if, in
its judgment, that is appropriate.
2
P R O X Y Charles & Colvard, Ltd.
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 of the shares
of common stock, no par value, of the Company held of record by the undersigned
on March 30, 2001 at the Annual Meeting of the Shareholders of the Company to be
held on May 14, 2001 or any adjournment thereof.
1. PROPOSAL TO FIX THE NUMBER OF DIRECTORS ELECTED AT THE 2001 ANNUAL MEETING
AT FIVE.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. ELECTION OF DIRECTORS
[ ] FOR all nominees listed below (except as marked below)
[ ] WITHHOLD AUTHORITY for all nominees
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 [ ]
3. PROPOSAL TO RATIFY THE APPOINTMENT OF DELOITTE & TOUCHE LLP as independent
auditors for the year ending December 31, 2001.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. 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 TO FIX THE NUMBER OF DIRECTORS ELECTED AT THE 2001 ANNUAL
MEETING AT FIVE, 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, 2001.
(continued on other side)
3
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.
Signature:
---------------------------------------------------
Signature:
---------------------------------------------------
(if held jointly)
Dated:
------------------------------------------------------
Please mark, sign, date and return this proxy card promptly,
using the enclosed envelope.