SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2001
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from_____________________to______________________
Commission File Number: 000-23329
Charles & Colvard, Ltd.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
North Carolina 56-1928817
- -------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3800 Gateway Boulevard, Suite 310, Morrisville, N.C. 27560
- --------------------------------------------------------------------------------
(Address of principal executive offices)
919-468-0399
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _
---
As of August 6, 2001 there were 13,447,714 shares of the Registrant's Common
Stock, no par value per share, outstanding.
Charles & Colvard, Ltd.
Index
Part I. Financial Information
- --------------------------------------------------------------------------------
Item 1. Financial Statements
Condensed Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 200l and 2000
Condensed Consolidated Balance Sheets - June 30, 2001 and December
31, 2000
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2001 and 2000
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
- --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
Part I. Financial Information
Item 1. Financial Statements
Charles & Colvard, Ltd.
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------- -------------- ----------------------------------
2001 2000 2001 2000
------------- -------------- -------------- --------------
Net sales $ 2,462,732 $ 3,647,621 $ 5,362,716 $ 6,658,871
Cost of goods sold 1,084,089 1,656,431 2,346,788 3,033,179
------------- -------------- -------------- --------------
Gross profit 1,378,643 1,991,190 3,015,928 3,625,692
Operating expenses:
Marketing and sales 592,556 1,559,753 1,306,138 4,015,930
General and administrative 478,307 1,126,993 1,177,553 2,116,322
Research and development 2,775 416,159 3,808 855,791
Other expense 44,224 252,577 90,295 253,201
------------- -------------- -------------- --------------
Total operating expenses 1,117,862 3,355,482 2,577,794 7,241,244
------------- -------------- -------------- --------------
Operating income (loss) 260,781 (1,364,292) 438,134 (3,615,552)
Interest income, net 98,263 113,782 168,084 254,880
------------- -------------- -------------- --------------
Net income (loss) $ 359,044 $ (1,250,510) $ 606,218 $ (3,360,672)
============= ============== ============== ==============
Basic and diluted net income
(loss) per share: $ 0.03 $ (0.17) $ 0.05 $ (0.47)
============= ============== ============== ==============
Weighted-average common shares:
Basic 13,447,714 7,157,671 11,662,933 7,133,487
============= ============== ============== ==============
Diluted 13,465,408 7,157,671 11,669,081 7,133,487
============= ============== ============== ==============
See Notes to Condensed Consolidated Financial Statements.
3
Charles & Colvard, Ltd.
Condensed Consolidated Balance Sheets
June 30, 2001 December 31, 2000
------------------ -------------------
Assets (Unaudited)
Current Assets
Cash and equivalents $ 10,018,282 $ 3,826,402
Accounts receivable 1,133,619 1,468,041
Interest receivable 29,489 18,890
Inventory, net 22,440,201 23,071,416
Prepaid expenses 183,384 301,267
------------------ -------------------
Total current assets 33,804,975 28,686,016
Equipment, net 386,471 552,272
Patent and license rights, net 314,525 369,706
------------------ -------------------
Total assets $ 34,505,971 $ 29,607,994
================== ===================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable:
Cree, Inc. $ 230,698 $ 1,147,718
Other 261,513 847,428
Accrued expenses 398,639 640,068
Deferred revenue 91,857 112,996
------------------ -------------------
Total current liabilities 982,707 2,748,210
Commitments
Shareholders' Equity
Common stock 55,258,692 49,226,697
Additional paid-in capital - stock options 1,952,011 1,926,744
Accumulated deficit (23,687,439) (24,293,657)
------------------ -------------------
Total shareholders' equity 33,523,264 26,859,784
------------------ -------------------
Total liabilities and shareholders' equity $ 34,505,971 $ 29,607,994
================== ===================
See Notes to Condensed Consolidated Financial Statements
4
Charles & Colvard, Ltd.
Condensed Consolidated Statements Of Cash Flows
(Unaudited)
Six Months Ended June 30,
--------------------------------------
2001 2000
--------------- ---------------
Operating Activities:
Net income (loss) $ 606,218 $ (3,360,672)
Adjustments:
Depreciation and amortization 84,377 462,005
Stock option compensation 25,267 111,211
Loss on disposal of long-term assets 90,295 266,963
Change in provision for uncollectible accounts (20,000) 260,000
Change in operating assets and liabilities:
Net change in assets 1,092,921 (3,307,839)
Net change in liabilities (1,765,503) (2,246,578)
--------------- ---------------
Net cash provided (used) in operating activities 113,575 (7,814,910)
--------------- ---------------
Investing Activities:
Purchase of equipment (21,351) (14,971)
Patent and license rights costs (2,339) (40,444)
Proceeds from sale of long term assets 70,000 ---
--------------- ---------------
Net cash provided (used) in investing activities 46,310 (55,415)
--------------- ---------------
Financing Activities:
Stock options exercised --- 281,819
Proceeds from stock rights offering, net 6,031,995 ---
--------------- ---------------
Net cash provided by financing activities 6,031,995 281,819
--------------- ---------------
Net change in cash and equivalents 6,191,880 (7,588,506)
Cash and equivalents, beginning of period 3,826,402 13,161,665
--------------- ---------------
Cash and equivalents, end of period $ 10,018,282 $ 5,573,159
=============== ===============
Supplemental non-cash investing activity:
In May 2000, the Company sold its crystal growth equipment to Cree, Inc.
(Cree) for $5,000,000. The $5 million receivable from this transaction was
eliminated by purchases from Cree, completed in November, 2000.
Supplemental non-cash operating activity:
During the six months ended June 30, 2000, there was $1,726,718 of
inventory purchases financed by the receivable from Cree.
See Notes to Condensed Consolidated Financial Statements.
5
Charles & Colvard, Ltd.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. Basis Of Presentation
The accompanying unaudited financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
for interim financial information. However, certain information or footnote
disclosures normally included in complete financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed, or omitted, pursuant to the rules and regulations
of the Securities and Exchange Commission. In the opinion of management, the
financial statements include all normal recurring adjustments which are
necessary for the fair presentation of the results of the interim periods
presented. Interim results are not necessarily indicative of results for the
year. Certain reclassifications have been made to prior year's financial
statements to conform to the classifications used in fiscal 2001. These
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 2000, as set forth in the
Company's Form 10-K, filed with the Securities and Exchange Commission on March
29, 2001.
In preparing financial statements that conform with accounting principles
generally accepted in the United States of America, management must make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and amounts of revenues and expenses reflected during the
reporting period. Actual results could differ from those estimates.
In October 2000, the Company established a wholly-owned subsidiary in Hong Kong,
Charles & Colvard HK Ltd., for the purpose of gaining better access to the
important Far Eastern markets. All inter-company accounts have been eliminated.
The Company does not anticipate establishing additional subsidiaries in the near
future.
All the Company's activities are within a single business segment. During the
three and six months ended June 30, 2001, export sales aggregated approximately
$500,000 and $1,200,000, respectively. Export sales aggregated approximately
$1,200,000 and $2,500,000 for the three and six months ended June 30, 2000,
respectively.
2. Inventories
Inventories are stated at the lower of cost or market determined on a first in,
first out basis. Finished goods are shown net of a reserve for excess jewelry
inventory of $265,000 at June 30, 2001and $270,000 at December 31, 2000. Test
instruments are shown net of a reserve for excess inventory of $465,000 and
$500,000 respectively.
June 30, December 31,
------------------------------------------------
2001 2000
------------------ ----------------
Moissanite
Raw materials $ 743,714 $ 1,482,969
Work-in-process 1,201,705 3,105,096
Finished goods 20,457,435 18,411,563
------------------ ----------------
22,402,854 22,999,628
Test instruments 37,347 71,788
------------------ ----------------
Total Inventory $ 22,440,201 $ 23,071,416
================== ================
3. Common Stock
On February 21, 2001, the Company completed a Rights Offering to its
shareholders. The Company issued an aggregate of 6,246,735 shares of common
stock at $1 per share. Net proceeds from the offering, after expenses, were
$6,031,995.
6
4. Stock Based Compensation
During the three and six months ended June 30, 2001, in accordance with
Accounting Principles Board Opinion No. 25 and Statement of Financial Accounting
Standards (FAS) No. 123, the Company recorded compensation expense of $21,050
and $25,267, respectively, relating to stock options. Compensation expense
related to stock options for the three and six months ended June 30, 2000 were
$58,545 and $111,211, respectively. This compensation expense is recorded in
general and administrative expense in the statements of operations.
5. Newly Adopted Accounting Pronouncements
In June 1998, FAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This statement establishes standards for valuing and
reporting at fair value all derivative instruments as either assets or
liabilities. FAS 133, as amended by FAS 137, was effective January 1, 2001. The
adoption of FAS 133 did not have a material effect on the Company's consolidated
financial statements.
6. Newly Issued Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards No. 141 ("FAS 141"),
Business Combinations, was issued. This statement prospectively prohibits the
pooling-of-interest method of accounting for business combinations initiated
after June 30, 2001. Management believes the adoption of FAS 141 will not have a
material effect on its financial statements.
In July 2001, Statement of Financial Accounting Standards No. 142 ("FAS 142"),
Goodwill and Other Intangible Assets, was issued. This statement requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually. Management
believes the adoption of FAS 142 will not have a material effect on its
financial statements.
7
Item 2: Management's Discussion And Analysis Of Financial Condition And Results
of Operations
This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent our
judgment on future events. Our business is subject to business and economic
risks and uncertainties that could cause our actual performance and results to
differ materially from those expressed or implied by any of the forward-looking
statements included herein. These risks and uncertainties are described under
the heading "Business Risks" in our Form 10-K for the year ended December 31,
2000, which was filed with the Securities and Exchange Commission on March 29,
2001.
Overview
We manufacture, market and distribute Charles & Colvard created moissanite
jewels (also called moissanite or moissanite jewels) for sale in the worldwide
jewelry market. Moissanite, also known by its chemical name, silicon carbide
(SiC), is a rare, naturally occurring mineral found primarily in meteorites. As
the sole manufacturer of scientifically-made moissanite jewels, our strategy is
to create a unique brand image which positions moissanite as a jewel in its own
right, distinct from all other jewels based on its fire, brilliance, luster,
durability and rarity.
From our inception in June 1995 through June 30, 1998, we were a development
stage enterprise, devoting our resources to fund research and development of
colorless, scientifically made moissanite jewels. At the same time, we assembled
a management team, conducted market research and developed our strategic
business plans. We began shipping moissanite to authorized retail jewelers
during the second quarter of 1998. At that time, we launched limited
consumer-focused advertising and promotion activities in the targeted areas.
Through the first half of 1999, we limited our efforts to expand the
distribution of moissanite jewels as a result of limited product availability
and our lack of confidence in the quality of the SiC crystals we were receiving.
Late in the second quarter of 1999, we began to receive indications that the
quality of the SiC crystals was improving rapidly. The rate of improvement in
the quality of the SiC crystals continued to accelerate through the end of 1999,
far exceeding our expectations. At the same time, we experienced a decline in
shipments of moissanite jewels during the third quarter of 1999 as a result of
the following:
. a slow growth in the addition of domestic retailers;
. lack of targeted retailer-driven marketing programs abroad; and
. poor overall jewelry market performance in certain international markets.
The improved supply of SiC crystals along with the decrease in sales led to a
significant increase in inventories of moissanite jewels.
With the improvements in the supply of saleable moissanite jewels, we launched
our strategic global marketing program in the fourth quarter of 1999 to spur
consumer awareness of moissanite jewels. During 2001, this program is being
refocused to emphasize use of public relations activities to increase consumer
brand awareness while reducing higher cost print and media advertising.
In March 2000, we entered into distribution agreements with Stuller Settings,
Inc. and Rio Grande, two of the largest suppliers of jewelry-related products to
the jewelry industry, for the North American distribution of moissanite. We have
also entered into several agreements with domestic jewelry manufacturers.
Through these agreements with Stuller, Rio Grande and jewelry manufacturers and
the brand awareness created by our marketing program, our goal is to rapidly
increase the introduction of moissanite into the domestic jewelry market while
maintaining average selling prices. However, because of the early stage of
development of these strategic efforts, we have no assurance that these efforts
will be successful.
We made significant investments in our branding program and in developing our
manufacturing and operational infrastructures during the fourth quarter of 1999
and through 2000, all in anticipation of future significant and rapid growth.
During the third and fourth quarters of 2000, we restructured our operations to
reduce our overall general and administrative expense levels in order to
conserve cash and attempt to position the Company to achieve profitability in
the future. Additionally, research and development expenses under the
Development Agreement
8
with Cree were suspended effective as of January 2001 through June 30, 2001.
Our strategy for 2001 is to remain profitable and conserve cash by achieving
modest growth in sales while maintaining our lower marketing and advertising
costs, maintaining our lower general and administrative expense levels,
continuing to curtail research and development expenses and reducing
inventories. We believe that our sales can increase as the distribution of
moissanite jewels expands domestically and internationally and that our
current infrastructure and stage of product development can support a
significant increases in sales. We attained our goal to achieve
profitability in both the first and second quarters of 2001, however, we did not
achieve sales increases in the second quarter of 2001, and we cannot be sure
that we will ever be able to achieve increased sales or sustain profitability.
In addition, although we have had additional discussion with Cree regarding
extending the suspension of research and development expenses under our
Development Agreement beyond June 30, 2001, there can be no assurance that such
a definitive agreement will be reached nor that profitability will not be
adversely impacted by any significant resumption of research and development
spending.
As discussed below, the shift in our domestic distribution strategy may affect
our historical relationships between revenues and expenses as well as our
liquidity and capital requirements.
Results Of Operations
Three Months ended June 30, 2001 compared with Three Months ended June 30, 2000.
Net sales were $2,462,732 for the three months ended June 30, 2001 compared to
$3,647,621 for the three months ended June 30, 2000, a decrease of $1,184,889 or
32.5%. Shipments of moissanite jewels decreased in the three months ended June
30, 2001 to approximately 12,500 carats from 19,000 carats in the same period of
2000. Average selling prices were slightly higher in the three months ended June
30, 2001 when compared to the three months ended June 30, 2000. North American
sales amounted to approximately $2,000,000 in the three months ended June 30,
2001 compared to $2,500,000 in the three months ended June 30, 2000.
International sales amounted to approximately $500,000 and $1,200,000 for the
three months ended June 30, 2001 and 2000, respectively.
In April of 2000, we implemented a price increase to our jewelry store customers
in North America. Subsequently, during the three months ended June 30, 2000, we
changed our method of distribution from selling directly to jewelry stores to
selling via distributors. Therefore, in addition to the economy's negative
effects on the jewelry industry, lower sales in the three months ended June 30,
2001, when compared to the same quarter of 2000, can be attributed to the fact
that in 2000 new distributors purchased their initial inventory from the company
and a number of jewelry store customers purchased jewels prior to a price
increase. The decrease in international sales can be attributed to the strong
dollar and the lack of substantial advertising and public relations activities.
Our gross profit margin was 56.0% for the three months ended June 30, 2001
compared to 54.6% for the three months ended June 30, 2000. The increased gross
margin rate results from better efficiencies in the manufacturing process.
Marketing and sales expenses were $592,556 for the three months ended June 30,
2001 compared to $1,559,753 for the three months ended June 30, 2000, a decrease
of $967,197 or 62.0%. The decrease resulted primarily from a $600,000 reduction
in marketing and advertising expenses consistent with our new strategy to
increase consumer impressions through lower cost approaches such as public
relations activities and media editorial coverage, as well as decreased
compensation costs (including severance costs recorded in 2000).
General and administrative expenses were $478,307 for the three months ended
June 30, 2001 compared to $1,126,993 for the three months ended June 30, 2000, a
decrease of $648,686 or 57.6%. The decrease was primarily a result of decreased
bad debt expense, compensation costs (including severance costs recorded in
2000), and other general overhead expenses consistent with our efforts to cut
costs.
Research and development expenses were $2,775 for the three months ended June
30, 2001 compared to $416,159 for the three months ended June 30, 2000, a
decrease of $413,384 or 99.3%. The decrease resulted from the suspension of
development efforts with Cree effective January 1, 2001.
Other expenses for the three months ended June 30, 2001 amounted to $44,224,
resulting from the write-off of certain patent costs. Other expenses for the
three months ended June 30, 2001 amounted to $252,577, resulting from
9
a loss on the sale of crystal growth equipment to Cree and the disposition of
certain other assets.
Net interest income was $98,263 for the three months ended June 30, 2001
compared to $113,782 for the three months ended June 30, 2000, a decrease of
$15,519 or 13.6%. This decrease is due to approximately $28,000 of interest
earned during the three months ended June 30, 2000 on a receivable due from Cree
that was completely paid during 2000.
Six Months ended June 30, 2001 compared with Six Months ended June 30, 2000.
Net sales were $5,362,716 for the six months ended June 30, 2001 compared to
$6,658,871 for the six months ended June 30, 2000, a decrease of $1,296,155 or
19.5%. Shipments of moissanite jewels decreased during the six months ended June
30, 2001 to approximately 28,000 carats from 34,500 carats for the six months
ended June 30, 2000. Average selling prices were slightly lower for the six
months ended June 30, 2001 compared to the six months ended June 30, 2000. North
American sales amounted to approximately $4,100,000 for the six months ended
June 30, 2001 compared to $4,200,000 for the six months ended June 30, 2000.
International sales amounted to approximately $1,200,000 and $2,500,000 for the
six months ended June 30, 2001 and 2000, respectively.
During the six months ended June 30, 2001, increased carat shipments in North
America were offset by a reduction in the average selling price due to volume
purchase discounts offered to our new customers. In addition, carat shipments in
North America were hampered by the negative effect the economy is having on
retail jewelry sales. The decrease in international sales can be attributed to
the strong dollar and the lack of substantial advertising and public relations
activities.
The Company's gross profit margin was 56.2% for the six months ended June 30,
2001 compared to 54.4% for the six months ended June 30, 2000. The increased
gross margin rate results from better efficiencies in the manufacturing process
Marketing and sales expenses were $1,306,138 for the six months ended June 30,
2001 compared to $4,015,930 for the six months ended June 30, 2000, a decrease
of $2,709,792 or 67.5%. The decrease resulted primarily from a $2,100,000
reduction in marketing and advertising expenses consistent with our new strategy
to increase consumer impressions through lower cost approaches such as public
relations activities and media editorial coverage, as well as decreased
compensation costs.
General and administrative expenses were $1,177,553 for the six months ended
June 30, 2001 compared to $2,116,322 for the six months ended June 30, 2000, a
decrease of $938,769 or 44.4%. The decrease resulted primarily from decreased
compensation costs (including severance costs recorded in 2000), bad debt
expense, and other general overhead expenses consistent with our efforts to cut
costs.
Research and development expenses were $3,808 for the six months ended June 30,
2001 compared to $855,791 for the six months ended June 30, 2000, a decrease of
$851,983 or 99.6%. The decrease resulted from the suspension of development
efforts with Cree effective January 1, 2001.
Other expenses for the six months ended June 30, 2001 amounted to $90,295,
resulting from the write-off of certain patent costs and a loss on the
disposition of certain other assets. Other expenses for the six months ended
June 30, 2000 amounted to $253,201, resulting from a loss on the sale of crystal
growth equipment to Cree and the disposition of certain other assets.
Net interest income was $168,084 for the six months ended June 30, 2001 compared
to $254,880 for the six months ended June 30, 2000, a decrease of $86,796 or
34.1%. This decrease resulted from a lower interest rate earned on our cash
balances, as well as approximately $28,000 of interest earned during the second
quarter of 2000 on a receivable from Cree that was completely paid in 2000.
Liquidity And Capital Resources
- -------------------------------
At June 30, 2001, we had $10.0 million of cash and cash equivalents and $32.8
million of working capital. During the three months ended June 30, 2001, we
generated $890,317 from operations. In addition, $57,677 was provided
10
from investing activities, resulting from the sale of certain fixed assets.
During the six months ended June 30, 2001, we generated $113,575 from operations
and $46,310 from investing activities. In addition, we completed a Rights
Offering to our shareholders on February 21, 2001, raising $6 million of net
proceeds. We believe our existing capital resources are adequate to satisfy our
capital requirements for at least the next 12 months.
In December 2000, we agreed with Cree on a framework for purchase of SiC
crystals during 2001. Under the terms of the Agreement, we are obligated to
purchase SiC crystals only upon issuance and Cree's acceptance of purchase
orders. We purchased approximately $400,000 of SiC crystals during the three
months ended June 30, 2001. We have committed to purchase approximately $400,000
of SiC crystals during the three months ending September 30, 2001.
The 4-year Development Agreement with Cree, as amended, requires us to fund a
development program at Cree for $1.44 million annually through December 31,
2002. Either party may terminate the agreement if Cree does not meet the annual
performance milestone or if the parties do not mutually agree on the performance
milestones for the ensuing year. Research and development expenses under the
Development Agreement with Cree were suspended effective as of January 2001
through June 30, 2001.
Our strategy for 2001 is to remain profitable and conserve cash by achieving
modest growth in sales while maintaining our lower marketing and advertising
costs, maintaining our lower general and administrative expense levels,
continuing to curtail research and development expenses and reducing
inventories. We believe that our sales can increase as the distribution of
moissanite jewels expands domestically and internationally and that our
current infrastructure and stage of product development can support a
significant growth in sales. We attained our goal to achieve
profitability in both the first and second quarters of 2001, however we did not
achieve sales increases in the second quarter of 2001, and we cannot be sure
that we will ever be able to achieve increased sales or sustain profitability.
In addition, although we have had additional discussions with Cree regarding
extending the suspension of research and development expenses under our
Development Agreement beyond June 30, 2001, there can be no assurance that such
a definitive agreement will be reached nor that profitability will not be
adversely impacted by any significant resumption of research and development
spending.
Newly Adopted Accounting Pronouncements
In June 1998, Statement of Financial Accounting Standards (FAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, was issued. This
statement establishes standards for valuing and reporting at fair value all
derivative instruments as either assets or liabilities. FAS 133, as amended by
FAS 137, was effective January 1, 2001. The adoption of FAS 133 did not have a
material effect on our consolidated financial statements
Newly Issued Accounting Pronouncements
In July 2001, Statement of Financial Accounting Standards No. 141 ("FAS 141"),
Business Combinations, was issued. This statement prospectively prohibits the
pooling-of-interest method of accounting for business combinations initiated
after June 30, 2001. We believe the adoption of FAS 141 will not have a material
effect on our financial statements.
In July 2001, Statement of Financial Accounting Standards No. 142 ("FAS 142"),
Goodwill and Other Intangible Assets, was issued. This statement requires that
goodwill and other intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually. We believe the
adoption of FAS 142 will not have a material effect on our financial statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
We believe that our exposure to market risk for changes in interest rates is not
significant because our investments are limited to highly liquid instruments
with maturities of three months or less. At June 30, 2001, we had approximately
$9.7 million of short-term investments classified as cash and equivalents. All
of our transactions with international customers and suppliers are denominated
in U.S. dollars.
11
Part II - Other Information
Item 4. Submission Of Matters To A Vote Of Security Holders
The Annual Meeting of Shareholders of Charles & Colvard Ltd. was held on May 14,
2001. At the meeting, the shareholders voted on the number of directors of the
Company to be elected to the Board of Directors, the election of directors, and
the ratification of the selection of independent auditors. The number of
directors of the Company to be elected to the Board of Directors was set at 5.
The following five nominees were each elected to the Board for a one-year term:
Walter J. O'Brien, Jr., Chester L. F. Paulson, Frederick A. Russ, Robert S.
Thomas, and George A. Thornton III. Additionally, the appointment of Deloitte &
Touche LLP as independent auditors for the Company for the fiscal year ending
December 31, 2001 was ratified. The number of votes cast for, against or
withheld, as well as the number of abstentions, for each proposal are as
follows:
A. Proposal to set the number of directors of the Company to be elected to the
Board of Directors at five.
Votes For Votes Against Abstentions
- -------------------------------------------------------------------------------------------------------------------
Set Number of Directors at 5 12,175,655 26,220 31,197
B. Election of Directors
- ----------------------------------------------------------------------------------------------------------
Director Nominee Votes For Votes Withheld
- ----------------------------------------------------------------------------------------------------------
Walter J. O'Brien, Jr. 11,769,149 463,923
Chester L. F. Paulson 12,148,963 84,109
Frederick A. Russ 11,779,229 453,843
Robert S. Thomas 12,141,613 91,459
George A. Thornton III 12,144,013 89,059
C. Ratification of Appointment of Deloitte & Touche LLP as auditors for fiscal
year ending December 31, 2001.
Votes For Votes Against Abstentions
- -------------------------------------------------------------------------------------------------------------------
Ratification of Appointment of
Deloitte & Touche LLP 12,208,916 20,000 4,156
Item 5: Other Information
On June 4, 2001, James R. Braun joined the Company as its Chief Financial
Officer. From November 1997, to prior to joining the Company, he served as
executive vice president and chief financial officer of Webcraft, Inc., a
manufacturing and database company specializing in direct marketing. From June
1997 to November 1997, Mr. Braun was vice president of Smith Technology. From
February 1988 to June 1997, Mr. Braun was executive vice president and chief
financial officer/treasurer of Safeguard Business Systems, Inc.
Item 6: Exhibits And Reports On Form 8-K
(a) Exhibits
Exhibit No. Description
- ----------- -----------
10.47 2001 Executive Bonus Plan
10.48 Employment Agreement, dated June 4, 2001, between James R.
Braun and Charles & Colvard, Ltd.+
+ Denotes a management contract or compensatory plan or arrangement.
12
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Charles & Colvard, Ltd.
Date: August 10, 2001 /s/ Robert S. Thomas
--------------------
Robert S. Thomas
President & Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 2001 /s/ James R. Braun
------------------
James R. Braun
Chief Financial Officer
(Principal Accounting Officer)
13