CHARLES & COLVARD LTD - 10-Q Quarterly Report

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 ¨

	Three Months Ended June 30,				Six Months Ended June 30,
	2002		2001		2002		2001
Net sales	$	4,075,602	$	2,462,732	$	8,225,748	$	5,362,716
Cost of goods sold		1,632,901		1,084,089		3,671,855		2,346,788

Gross profit		2,442,701		1,378,643		4,553,893		3,015,928
Operating expenses:
Marketing and sales		1,125,730		592,556		2,179,376		1,306,138
General and administrative		732,063		478,307		1,339,275		1,177,553
Other expense		—		46,999		—		94,103

Total operating expenses		1,857,793		1,117,862		3,518,651		2,577,794

Operating income		584,908		260,781		1,035,242		438,134
Interest income, net		52,879		98,263		102,755		168,084

Net income	$	637,787	$	359,044	$	1,137,997	$	606,218

Net income per share:
Basic	$	0.05	$	0.03	$	0.09	$	0.05

Diluted	$	0.05	$	0.03	$	0.08	$	0.05

Weighted-average common shares:
Basic		13,377,484		13,447,714		13,375,626		11,662,933

Diluted		13,707,458		13,465,408		13,641,479		11,669,081

	June 30, 2002			December 31, 2001
	(Unaudited)
ASSETS
Current Assets:
Cash and equivalents	$	12,542,770		$	10,236,319
Accounts receivable		2,814,005			2,803,117
Interest receivable		14,952			13,824
Inventory, net		20,370,726			21,341,071
Prepaid expenses		209,682			214,749

Total current assets		35,952,135			34,609,080
Equipment, net		405,450			342,281
Patent and license rights, net		292,656			290,569

Total assets	$	36,650,241		$	35,241,930

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable:
Cree, Inc.	$	421,244		$	405,020
Other		224,845			154,831
Accrued payroll		323,294			202,012
Accrued expenses and other liabilities		306,264			272,490
Deferred revenue		90,303			129,801

Total current liabilities		1,365,950			1,164,154
Commitments
Shareholders’ Equity:
Common stock		55,190,702			55,182,692
Additional paid-in capital—stock options		2,024,514			1,964,006
Accumulated deficit		(21,930,925	)		(23,068,922	)

Total shareholders’ equity		35,284,291			34,077,776

Total liabilities and shareholders’ equity	$	36,650,241		$	35,241,930

	Six Months Ended June 30,
	2002			2001
Operating Activities:
Net income	$	1,137,997		$	606,218
Adjustments:
Depreciation and amortization		63,537			84,377
Stock option compensation		62,358			25,267
Loss on disposal of long-term assets		—			90,295
Change in operating assets and liabilities:
Net change in assets		963,396			1,072,921
Net change in liabilities		201,796			(1,765,503	)

Net cash provided by operating activities		2,429,084			113,575

Investing Activities:
Purchase of equipment		(116,319	)		(21,351	)
Patent and license rights costs		(12,474	)		(2,339	)
Proceeds from sale of long term assets		—			70,000

Net cash provided(used) by investing activities		(128,793	)		46,310

Financing Activities:
Stock options exercised		6,160			—
Proceeds from stock rights offering, net		—			6,031,995

Net cash provided by financing activities		6,160			6,031,995

Net change in cash and equivalents		2,306,451			6,191,880
Cash and equivalents, beginning of period		10,236,319			3,826,402

Cash and equivalents, end of period	$	12,542,770		$	10,018,282

The accompanying unaudited condensed consolidated 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 2002. These financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2001, as set forth in the Company’s Form 10-K, filed with the Securities and Exchange Commission on March 25, 2002.

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.

All the Company’s activities are within a single business segment. During the three and six months ended June 30, 2002, export sales aggregated approximately $600,000 and $1,400,000 respectively. Export sales aggregated approximately $500,000 and $1,200,000 for the three and six months ended June 30, 2001, respectively.

Inventories are stated at the lower of cost or market determined on a first in, first out basis. Based on current estimates and assumptions, the Company believes that a substantial amount of inventories will be sold or consumed during its operating cycle. However, to be prepared to react to possible customer demand for large purchases and for a variety of jewel styles, a significant amount of inventory must be maintained at all times.

The Company currently sells one grade of jewel. The grade is classified as “very good” and consists of near colorless jewels that meet certain standards. Only “very good” jewels are valued in inventory. There is a substantial amount of jewels, including colored jewels, that have not met the quality standards and are not valued in inventory. In the future, management might determine that there is a market for a portion of this unvalued inventory.

Finished goods are shown net of a reserve for excess jewelry inventory of $235,000 and $170,000 at June 30, 2002 and December 31, 2001, respectively. Test instruments are shown net of a reserve for excess inventory of $450,000 and $465,000 respectively.

	June 30, 2002		December 31, 2001
Moissanite:
Raw materials	$	40,748	$	131,525
Work-in-process		2,190,559		1,604,699
Finished goods		18,122,483		19,588,295

		20,353,790		21,324,519
Test instruments		16,936		16,552

Total Inventory	$	20,370,726	$	21,341,071

In September 2001, the Board of Directors authorized the repurchase of up to 1,300,000 shares of the Company’s common stock. At the discretion of management, the repurchase program can be implemented through open market or privately negotiated transactions at prevailing prices. The Company will determine the time and extent of repurchases based on its evaluation of market conditions and other factors. There were no shares repurchased during the six months ended June 30, 2002. During 2001, the Company repurchased 76,000 shares at a cost of $1 per share.

In accordance with Accounting Principles Board Opinion No. 25 and Statement of Financial Accounting Standards (FAS) No. 123, the Company recorded compensation expense due to stock options of $29,939 and $62,358 during the three and six months ended June 30, 2002, respectively. Compensation expense related to stock options for the three and six months ended June 30, 2001 was $21,050 and $25,267. This compensation expense is recorded in general and administrative expense in the Statements Of Operations.

In July 2001, FAS No. 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. This statement was effective for the Company on January 1, 2002. The Company does not have goodwill or other intangible assets with indefinite useful lives and the adoption of this statement did not have an effect on its consolidated financial statements.

In August 2001, FAS No. 143, Accounting For Asset Retirement Obligations, was issued. This statement requires recording the fair value of a liability for an asset retirement obligation in the period in which it is incurred, and a corresponding increase in the carrying value of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, it is either settled for its recorded amount or a gain or loss upon settlement is recorded. FAS 143 is effective for the Company’s year ended December 31, 2003. The Company does not have any asset retirement obligations and does not expect the adoption of FAS 143 to have an effect on its consolidated financial statements.

In August 2001, FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets was issued. This statement addresses financial accounting and reporting for the impairment of disposal of long-lived assets. FAS 144 is effective for the Company’s year ended December 31, 2003. The Company does not expect the adoption of FAS 144 to have an effect on its consolidated financial statements.

From July 1, 2002 through August 7, 2002, we repurchased 43,600 shares of our common stock through our repurchase program at an average cost of $3.86 per share. Therefore, since inception of this program in September 2001, we have repurchased 119,600 shares at an average cost of $2.04 per share.

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, 2001, which was filed with the Securities and Exchange Commission on March 25, 2002.

North Carolina		56-1928817
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


Part I.	Financial Information

Item 1.	Financial Statements	3

	Condensed Consolidated Statements of Operations—Three Months and Six Months Ended June 30, 2002 and 2001	3

	Condensed Consolidated Balance Sheets—June 30, 2002 and December 31, 2001	4

	Condensed Consolidated Statements Of Cash Flows—Six Months Ended June 30, 2002 and 2001	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative And Qualitative Disclosures About Market Risk	11

Part II.	Other Information

Item 4.	Submission of Matters to a Vote of Security Holders	12

Item 5.	Other Information	12

Item 6.	Exhibits And Reports On Form 8-K	12

Signatures		13

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