Exhibit 10.63

 

EMPLOYMENT AGREEMENT

 

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into effective
as of August 1, 2004 by and between Charles & Colvard, Ltd., a North Carolina
company with its principal office at 3800 Gateway Boulevard, Suite 310,
Morrisville, North Carolina, 27560 (the “Company), and Dennis Reed, an
individual currently residing at 101 Kalvesta Drive, Morrisville, North
Carolina, 27560 (“Employee”).

 

Statement of Purpose

 

The Company wishes to obtain the services of Employee on the terms and
conditions and with the benefits set forth in this Agreement. Employee desires
to be employed by the Company on such terms and conditions and to receive such
additional consideration as set out herein.

 

Therefore, in consideration of the mutual covenants contained in this Agreement,
the grant of certain options to purchase common stock of the Company and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Company and Employee agree as follows:

 

1. Employment. The Company hereby agrees to employ Employee, and Employee hereby
accepts such employment, on the terms and conditions set forth in this
Agreement.

 

2. Term of Employment. The term of Employee’s employment under this Agreement
shall commence as of the date of this Agreement and shall continue for one year.
Termination of employment shall be governed by Paragraph 7 of this Agreement,
and unless terminated by either party as provided in Paragraph 7, this Agreement
shall automatically, at the expiration of each then existing term, renew for
successive additional one year terms (such annual period being hereinafter
referred to as the “Term”).

 

3. Position and Duties. The Employee shall serve as Vice President of Sales of
the Company. Employee will, under the direction of the President and CEO of the
Company, faithfully and to the best of his ability perform the duties as set out
on Exhibit A hereto and such additional duties as may be reasonably assigned by
the President and Board of Directors. Employee agrees to devote his entire
working time, energy and skills to the Company while so employed.

 

4. Compensation and Benefits. Employee shall receive compensation and benefits
for the services performed for the Company under this Agreement as follows:

 

(a) Base Salary. Employee shall receive a base salary of $165,000.00, payable in
regular and equal semi-monthly installments (“Base Salary”).

 

(b) Employee Benefits. Employee shall receive such benefits as are made
available to the other employees of the Company, including, but not limited to,
life,

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medical and disability insurance, retirement benefits and such vacation as is
provided to the other employees of the Company (the “Employee Benefits”).
Employer reserves the right to reduce, eliminate or change such Employee
Benefits, in its sole discretion, subject to any applicable legal and regulatory
requirements.

 

(c) Incentive Compensation. Employee may participate in such incentive plans as
may be approved by the Board of Directors from time-to-time. The specific
incentive compensation plans for 2004 are as set out on Exhibit B hereto.

 

5. Reimbursement of Expenses. The Company shall reimburse Employee for all
reasonable out-of-pocket expenses incurred by Employee specifically and directly
related to the performance by Employee of the services under this Agreement

 

6. Withholding. The Company may withhold from any payments or benefits under
this Agreement all federal, state or local taxes or other amounts as may be
required pursuant to applicable law, government regulation or ruling.

 

7. Termination of Employment.

 

(a) Death of Employee. If the Employee shall die during the Term, this Agreement
and the employment relationship hereunder will automatically terminate on the
date of death.

 

(b) Termination for Just Cause. The Company shall have the right to terminate
the Employee’s employment under this Agreement at any time for Just Cause, which
termination shall be effective immediately. Termination for “Just Cause” shall
include termination for the Employee’s personal dishonesty, gross incompetence,
willful misconduct, breach of a fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, regulation (other than traffic violations or similar offenses), written
Company policy or final cease-and-desist order, conviction of a felony or of a
misdemeanor involving moral turpitude, unethical business practices in
connection with the Company’s business, misappropriation of the Company’s assets
(determined on a reasonable basis), disability or material breach of any other
provision of this Agreement. The determination of whether “Just Cause” exists
for termination shall be made by the Board of Directors of the Company in its
sole discretion. For purposes of this subsection, the term “disability” means
the inability of Employee, due to the condition of his physical, mental or
emotional health, to satisfactorily perform the duties of his employment
hereunder for a continuous three month period; provided further that if the
Company furnishes long term disability insurance for the Employee, the term
“disability” shall mean that continuous period sufficient to allow for the long
term disability payments to commence pursuant to the Company’s long term
disability insurance policy. In the event the Employee’s employment under this
Agreement is terminated for Just Cause, the Employee shall have no right to
receive compensation or other benefits under this Agreement for any period after
such termination.

 

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(c) Termination Without Cause. The Company may terminate the Employee’s
employment other than for “Just Cause,” as described in Subsection (b) above, at
any time upon written notice to the Employee, which termination shall be
effective immediately. In the event the Company terminates Employee pursuant to
this Subsection (c), the Employee will continue to receive the compensation due
him hereunder (“Termination Compensation”) until the end of the Term, so long as
the Employee complies with Sections 8, 9 and 10 of the Agreement. Such amounts
shall be payable at the times such amounts would have been paid in accordance
with Section 4. In addition, Employee shall continue to participate in the same
group hospitalization plan, health care plan, dental care plan, life or other
insurance or death benefit plan, and any other present or future similar group
employee benefit plan or program for which officers of the Company generally are
eligible, on the same terms as were in effect prior to Employee’s termination,
either under the Company’s plans or comparable coverage, for all periods
Employee receives Termination Compensation. Notwithstanding anything in this
Agreement to the contrary, if Employee breaches Sections 8, 9 or 10 of this
Agreement, the Employee will not be entitled to receive any further compensation
or benefits pursuant to this Section 7(c).

 

(d) Change of Control Situations. In the event of a Change of Control of the
Company at any time after the date hereof, Employee may voluntarily terminate
employment with Company up until six (6) weeks after the Change of Control for
“Good Reason” and, subject to Section 7(f), (y) be entitled to receive in a lump
sum (i) any compensation due but not yet paid through the date of termination
and (ii) in lieu of any further salary payments from the date of termination to
the end of the then existing term, an amount equal to the Termination
Compensation times 2.99, and (z) shall continue to participate in the same group
hospitalization plan, health care plan, dental care plan, life or other
insurance or death benefit plan, and any other present or future similar group
employee benefit plan or program for which officers of the Company generally are
eligible, or comparable plans or coverage, for a period of two years following
termination of employment by the Employee, on the same terms as were in effect
either (A) at the date of such termination, or (B) if such plans and programs in
effect prior to the Change of Control of Company are, considered together as a
whole, materially more generous to the officers of Company, then at the date of
the Change of Control. Any equity based incentive compensation (including but
not limited to stock options, SARs, etc.) shall fully vest and be immediately
exercisable in full upon a Change in Control, not withstanding any provision in
any applicable plan. Any such benefits shall be paid by the Company to the same
extent as they were so paid prior to the termination or the Change of Control of
Company.

 

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“Good Reason” shall mean the occurrence of any of the following events without
the Employee’s express written consent:

 

(i) the assignment to the Employee of duties inconsistent with the position and
status of the Employee with the Company immediately prior to the Change of
Control;

 

(ii) a reduction by the Company in the Employee’s pay grade or base salary as
then in effect, or the exclusion of Employee from participation in Company’s
benefit plans in which he previously participated as in effect at the date
hereof or as the same may be increased from time to time during the Term;

 

(iii) an involuntary relocation of the Employee more than 50 miles from the
location where the Employee worked immediately prior to the Change in Control or
the breach by the Company of any material provision of this Agreement; or

 

(iv) any purported termination of the employment of Employee by Company which is
not effected in accordance with this Agreement.

 

A “Change of Control” shall be deemed to have occurred if (i) any person or
group of persons (as defined in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934) together with its affiliates, excluding employee benefit
plans of Company, becomes, directly or indirectly, the “beneficial owner” (as
defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of
securities of Company representing 20% or more of the combined voting power of
Company’s then outstanding securities; or (ii) during the then existing term of
the Agreement, as a result of a tender offer or exchange offer for the purchase
of securities of Company (other than such an offer by the Company for its own
securities), or as a result of a proxy contest, merger, consolidation or sale of
assets, or as a result of any combination of the foregoing, individuals who at
the beginning of any year period during such term constitute the Company’s Board
of Directors, plus new directors whose election by Company’s shareholders is
approved by a vote of at least two-thirds of the outstanding voting shares of
the Company, cease for any reason during such year period to constitute at least
two-thirds of the members of such Board of Directors; or (iii) the shareholders
of the Company approve a merger or consolidation of the Company with any other
corporation or entity regardless of which entity is the survivor, other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or being converted into voting securities of the surviving
entity) at least 60% of the combined voting power of the voting securities of
the Company or such surviving entity outstanding immediately after such merger
or consolidation; or (iv) the shareholders of the Company approve a plan of
complete liquidation or winding-up of the Company or an agreement for the sale
or disposition by the Company of all or substantially all of the Company’s
assets; or (v) any event which the Company’s Board of Directors determines
should constitute a Change of Control.

 

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(e) Employee’s Right to Payments. In receiving any payments pursuant to this
Section 7, Employee shall not be obligated to seek other employment or take any
other action by way of mitigation of the amounts payable to the Employee
hereunder, and such amounts shall not be reduced or terminated whether or not
the Employee obtains other employment.

 

(f) Reduction in Agreement Payments. Notwithstanding anything in this Agreement
to the contrary, if any of the payments provided for under this Agreement (the
“Agreement Payments”), together with any other payments that the Employee has
the right to receive (such other payments together with the Agreement Payments
are referred to as the “Total Payments”), would constitute a “parachute payment”
as defined in Section 280G(b)(2) of the Internal Revenue Code of 1986, as
amended (the “Code”) (a “Parachute Payment”), the Agreement Payments shall be
reduced by the smallest amount necessary so that no portion of such Total
Payments would be Parachute Payments. In the event the Company shall make an
Agreement Payment to the Employee that would constitute a Parachute Payment, the
Employee shall return such payment to the Company (together with interest at the
rate set forth in Section 1274(b)(2)(B) of the Code). For purposes of
determining whether and the extent to which the Total Payments constitute
Parachute Payments, no portion of the Total Payments the receipt of which
Employee has effectively waived in writing shall be taken into account.

 

8. Covenant Not to Compete. Employee agrees that during his employment with the
Company and for a period of one (1) year following the termination of his
employment with the Company, for whatever reason:

 

(a) Employee shall not, directly or indirectly, own any interest in, manage,
operate, control, be employed by, render advisory services to, or participate in
the management or control of any business that operates in the same business as
the Company, which Employee and the Company specifically agree as the business
of fabricating (wafering, preforming and faceting), marketing and distributing
moissanite gemstones or other diamond simulants to the gem and jewelry industry
(the “Business”), unless Employee’s duties, responsibilities and activities for
and on behalf of such other business are not related in any way to such other
business’s products which are in competition with the Company’s products. For
purposes of this section, “competition with the Company” shall mean competition
for customers in the United States and in any country in which the Company is
selling the Company’s products at the time of termination. Employee’s ownership
of less than one percent of the issued and outstanding stock of a corporation
engaged in the Business shall not by itself be deemed to be a violation of this
Agreement. Employee recognizes that the possible restriction on his activities
which may occur as a result of his performance of his obligations under
Paragraph 8(a) are substantial, but that such restriction is required for the
reasonable protection of the Company.

 

(b) Employee shall not, directly or indirectly, influence or attempt to
influence any customer of the Company to discontinue its purchase of any product
of the Company

 

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which is manufactured or sold by the Company at the time of termination of
Employee’s employment or to divert such purchases to any other person, firm or
employer.

 

(c) Employee shall not, directly or indirectly, interfere with, disrupt or
attempt to disrupt the relationship, contractual or otherwise, between the
Company and any of its suppliers.

 

(d) Employee shall not, directly or indirectly, solicit any employee of the
Company to work for any other person, firm or employer.

 

9. Confidentiality. In the course of his employment with the Company, Employee
will have access to confidential information, records, data, customer lists,
lists of product sources, specifications, trade secrets and other information
which is not generally available to the public and which the Company and
Employee hereby agree is proprietary information of the Company (“Confidential
Information”). During and after his employment by the Company, Employee shall
not, directly or indirectly, disclose the Confidential Information to any person
or use any Confidential Information, except as is required in the course of his
employment under this Agreement. All Confidential Information as well as
records, files, memoranda, reports, plans, drawings, documents, models,
equipment and the like, including copies thereof, relating to the Company’s
business, which Employee shall prepare or use or come into contact with during
the course of his employment, shall be and remain the Company’s sole property,
and upon termination of Employee’s employment with the Company, Employee shall
return all such materials to the Company.

 

10. Proprietary Information. Employee shall assign to the Company, its
successors or assigns, all of Employee’s rights to copyrightable works and
inventions which, during the period of Employee’s employment by the Company or
its successors in business, Employee makes or conceives, either solely or
jointly with others, relating to any subject matter with which Employee’s work
for the Company is or may be concerned (“Proprietary Information”). Employee
shall promptly disclose in writing to the Company such copyrightable works and
inventions and, without charge to the Company, to execute, acknowledge and
deliver all such further papers, including applications for copyrights and
patents for such copyrightable works and inventions, if any, in all countries
and to vest title thereto in the Company, its successors, assigns or nominees.
Upon termination of Employee’s employment hereunder, Employee shall return to
the Company or its successors or assigns, as the case may be, any Proprietary
Information. The obligation of Employee to assign the rights to such
copyrightable works and inventions shall survive the discontinuance or
termination of this Agreement for any reason.

 

11. Entire Agreement. This Agreement contains the entire agreement of the
parties with respect to Employee’s employment by the Company and supersedes any
prior agreements between them, whether written or oral.

 

12. Waiver. The failure of either party to insist in any one or more instance,
upon performance of the terms and conditions of this Agreement, shall not be
construed as a waiver or a relinquishment of any right granted hereunder or of
the future performance of any such term or condition.

 

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13. Notices. Any notice to be given under this Agreement shall be deemed
sufficient if addressed in writing and delivered personally, by telefax with
receipt acknowledged, or by registered or certified U.S. mail to the address
first above appearing, or to such other address as a party may designate by
notice from time to time.

 

14. Severability. In the event that any provision of any paragraph of this
Agreement shall be deemed to be invalid or unenforceable for any reason
whatsoever, it is agreed such invalidity or unenforceability shall not affect
any other provision of such paragraph or of this Agreement, and the remaining
terms, covenants, restrictions or provisions in such paragraph and in this
Agreement shall remain in full force and effect and any court of competent
jurisdiction may so modify the objectionable provision as to make it valid,
reasonable and enforceable.

 

15. Amendment. This Agreement may be amended only by an agreement in writing
signed by each of the parties hereto.

 

16. Arbitration. Any controversy or claim arising out of or relating to this
Agreement, or breach thereof, shall be settled by arbitration in Raleigh, North
Carolina in accordance with the expedited procedures of the Rules of the
American Arbitration Association, and judgment upon the award may be rendered by
the arbitrator and may be entered in any court having jurisdiction thereof.

 

17. Governing Law. This Agreement shall be governed and construed in accordance
with the laws of the State of North Carolina. Each of the parties hereto
irrevocably submits to the exclusive jurisdiction of the courts located in North
Carolina for the purposes of any suit, action or other proceeding contemplated
hereby or any transaction contemplated hereby.

 

18. Benefit. This Agreement shall be binding upon and inure to the benefit of
and shall be enforceable by and against the Company, its successors and assigns,
and Employee, his heirs, beneficiaries and legal representatives. It is agreed
that the rights and obligations of Employee may not be delegated or assigned
except as may be specifically agreed to by the parties hereto.

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.

 

Charles & Colvard, Ltd.

By:

 

/s/ Robert S. Thomas

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Robert S. Thomas, President

EMPLOYEE

/s/ Dennis Reed

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Dennis Reed

 

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Exhibit A

 

Position Description

Vice President Sales

 

Summary

 

Develops the policies, procedures, and objectives for sales of the Company’s
products. Leads and directs the activities of the sales personnel. Continually
evaluates the Company’s sales efforts and develops and implements programs to
strengthen the Company’s sales efforts. Provides sales expertise to other
members of the Company’s management team and coordinates the Company’s sales
efforts with other Company activities including, but not limited to, marketing
and manufacturing.

 

Primary Responsibilities

  1. Directs activities of the sales function of the Company to achieve Company
objectives for sales volume and market penetration. Responsible for advancing
the Company’s performance management system, especially in sales.

 

  2. Directs activities of the sales function. This includes competitive
analysis, product and consumer research, establishing sales budgets and quotas,
product pricing and distribution.

 

  3. Leads and directs activities of the Company’s sales force and any
representatives and/or distributors of the Company’s products. Provides
leadership, training (including coaching), management, and sales support.
Coordinates field sales efforts to enhance ability of sales personnel to work
effectively and achieve goals.

 

  4. Directs product and customer service activities. Responsible for
maintaining satisfactory customer perception of Company services and products by
working with the marketing staff to insure that the Company’s branding and
positioning strategy is consistent with the Company’s sales activities.

 

  5. Works closely with members of the management team, especially
manufacturing, to ensure that the product mix and availability is synchronized
with customer demand.

 

  6. Analyzes actual sales and marketing performance against budgeted sales
volume and market penetration levels.

 

  7. Manages all sales promotion activities, including planning and executing
the Company’s participation in industry trade shows. Responsible for the
coordination of all sales efforts with the marketing department and public
relations and advertising agencies of record.

 

  8. Establishes and maintains contact with potential customers and actively
participates in the selling effort to support key accounts and with a high level
of sales.

 

  9. Responsible for submitting annual projected sales forecast, including the
necessary product mix, and budget for inclusion in the Company’s annual business
plan for approval by the Company’s Board of Directors. Is accountable for the
execution of the sales plan as presented in the annual business plan, which
includes the management of the sales budgets for both planned sales income and
planned sales expenses.

 

  10. Presents updates to the Board of Directors during quarterly meetings and
management briefings.

 

  11. Performs such activities consistent with the position of Vice President of
Sales as may be reasonably delegated by the CEO, COO, President, or the Board of
Directors of the Company.

 

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Exhibit B

 

2004 Officer & Director Compensation Plan

 

Eligible Employees

 

  • CEO

 

  • CFO

 

  • Vice President of Sales

 

  • Vice President of Manufacturing

 

  • Vice President Brand Development and Industry Relations

 

  • Director of Domestic Sales

 

  • Director of International Sales

 

  • Director of Information Technology

 

Bonus Pool

 

A bonus pool is to be established which will consist of stock options and cash.
The pools will be funded upon the Company achieving its annual operating goals.
These goals will be consistent with the Company’s business plan as approved by
the Board of Directors.

 

Cash Pool: The Sales Directors receive cash compensation based on specific
goals, and will be excluded from the cash portion of this proposed plan. The
Director of Information Technology participates in the quarterly bonus pool for
non-officer employees.

 

The cash portion of the bonus pool will be based on:

 

  • Operating income—if the pre-bonus, operating income goal is met, 5% of the
operating income will be added to the pool

 

  • Sales (shipments)—if the goal above is met and the shipments goal is met, an
additional 5% of operating income will be added to the pool

 

  • If both goals are met, 15% of all pre-bonus, operating income exceeding the
goal will be added to the pool

 

If the operating income goal is not met, the bonus will be entirely
discretionary, and be determined by the Compensation Committee of the Board of
Directors, based upon the recommendations of the CEO.

 

The maximum amount any one person can earn under the bonus plan shall be limited
to $500,000 annually during their first three years of employment, $1,000,000
annually during the next three years of employment and $2,500,000 annually
thereafter.

 

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2004 Officer & Director Compensation Plan (cont’d)

 

Option Pool

 

The option pool shall be 143,000 options annually and be awarded based solely on
achieving the operating income goal.

 

Pool Sharing

 

The cash and options in the pool shall be distributed, as soon as practical
after the results of the annual audit by the outside auditors of the Company.
The proposed distribution of the pool is as follows:

 

     Cash Portion

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    Options

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· CEO

   35.00 %   40,000

· CFO

   16.25 %   20,000

· Vice President of Manufacturing

   16.25 %   20,000

· Vice President of Sales

   16.25 %   20,000

· Vice President Brand Development and Industry Relations

   16.25 %   20,000

· Director of Domestic Sales

         7,000

· Director of International Sales

         7,000

· Director of Information Technology

         9,000

 

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