<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 0-28178
CARBO CERAMICS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 72-1100013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
600 E. LAS COLINAS BOULEVARD
SUITE 1520
IRVING, TEXAS 75039
(Address of principal executive offices)
(972) 401-0090
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
6, 1998, as reported on the Nasdaq National Market, was approximately
$105,937,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 6, 1998, Registrant had outstanding 14,602,000 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held April 14, 1998 are incorporated by reference in Part
III.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
CARBO Ceramics Inc. is the world's largest producer and supplier of ceramic
proppants for use in the hydraulic fracturing of natural gas and oil wells.
Demand for ceramic proppants depends generally upon the demand for natural gas
and oil and on the number of natural gas and oil wells drilled, completed or
recompleted worldwide. More specifically, the demand for ceramic proppants is
dependent on the number of oil and gas wells that are hydraulically fractured to
stimulate production.
The hydraulic fracturing process consists of pumping fluids down a natural
gas or oil well at pressures and flow rates sufficient to split the hydrocarbon
bearing formation and create fractures in the formation. A granular material,
such as ceramic proppant or sand-based proppant, is suspended in the fluid and
packs the newly created fracture, keeping the fracture open once high-pressure
pumping stops. The proppant-filled fracture creates a permeable channel through
which the hydrocarbons can flow more freely from the formation to the well and
then to the surface.
CARBO Ceramics was formed in 1987 for the purpose of purchasing the assets
of Standard Oil Proppants Company Ltd. (SOPCO). SOPCO was a joint venture formed
to operate the combined proppant businesses of the Carborundum Company and
Dresser Industries. These proppants businesses were started in 1978 and 1984
respectively. While the Carborundum Company and Dresser Industries had primarily
manufactured high strength, premium priced proppants for use in very deep wells,
CARBO Ceramics has pursued a strategy of introducing new, lower-priced,
lightweight, intermediate strength ceramic proppants to capture a greater
portion of the large market for sand-based proppants.
The Company estimates that it supplies 60% of the ceramic proppants and 5%
of all proppants used worldwide.
PRODUCTS
The Company's four product lines cover the entire spectrum of commercially
available ceramic proppants. CARBOHSP(TM) and CARBOPROP(R) are premium priced,
high strength proppants designed primarily for use in deep gas wells.
CARBOHSP(TM), which was introduced in 1979, is the original ceramic proppant,
formerly marketed as "Sintered Bauxite". CARBOHSP(TM) offers the highest level
of strength and conductivity for use primarily in deep gas wells. CARBOPROP(R),
which was introduced by the Company in 1982, is slightly lower in weight and
strength than CARBOHSP(TM) and was developed for use in deep gas wells that do
not require the strength of CARBOHSP(TM).
The CARBOLITE(R) and CARBOECONOPROP(R) products are lightweight,
intermediate strength proppants designed for use in gas wells of moderate depth
and shallower oil wells. The products are manufactured and sold to compete
directly with sand-based proppants. CARBOLITE(R), introduced in 1984, is used in
medium depth oil and gas wells, where the additional strength of ceramic
proppants may not be essential, but where higher production rates can be
achieved due to the products' roundness and uniform grain size.
CARBOECONOPROP(R), introduced in 1992 to compete directly with sand-based
proppants, is the Company's lowest priced and fastest growing product. The
introduction of CARBOECONOPROP(R) has resulted in ceramics being used in many
new markets by end users that had not previously used ceramic proppants. The
Company believes that many of the users of CARBOECONOPROP(R) had previously used
sand or resin-coated sand. The Company further believes that its ability to
continue to penetrate the market for sand-based proppants in 1997 was limited by
its production capacity for lightweight ceramic proppants.
CUSTOMERS AND MARKETING
The Company's largest customers are, in alphabetical order, BJ Services
Company, Dowell and Halliburton Company, the three largest participants in the
worldwide petroleum pressure pumping industry.
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These companies collectively accounted for approximately 84% of the Company's
1997 revenues. The Company's other customers include primarily foreign pumping
service companies, that compete in the worldwide fracturing business. The end
users of the Company's products, however, are the operators of natural gas and
oil wells that engage pumping service companies to hydraulically fracture wells
to improve the recovery of natural gas or oil wells, thereby enhancing the rate
of return on the investment made in such wells. The Company works with the
pressure pumping service companies to present the advantages of using ceramic
proppants to the operators of natural gas and oil wells. The Company generally
supplies its customers with products on a just-in-time basis, with transactions
governed by individual purchase orders. Continuing sales of product depend on
the Company's direct customers and the well operators being satisfied with both
product and delivery performance.
The Company recognizes the importance of aggressive marketing when
introducing a technically advanced and performance enhancing, but intrinsically
more costly, product. The Company must market its products both to its direct
customers and to owners and operators of the natural gas and oil wells. The
Company's sales and marketing staff regularly calls on and keeps close contact
with the people who are influential in the proppant purchasing decision:
production companies, regional offices of well service companies that offer
pressure pumping services, and various completion engineering consultants. The
Company provides a variety of technical support services and has developed
computer software that models the return on investment achievable by using the
Company's ceramic proppants versus that of other proppants in the hydraulic
fracturing of a natural gas or oil well.
The Company's Vice President of Marketing and Technology coordinates
worldwide sales and marketing activities. The Company's export marketing efforts
are conducted through its sales office in Aberdeen, Scotland and through two
commissioned sales agents located in South America and Australia.
The Company's ceramic proppants are used worldwide by U.S. customers
operating abroad and by foreign customers. Sales outside the United States
accounted for 37%, 31% and 37% of the Company's sales for 1995, 1996 and 1997,
respectively.
The distribution of the Company's export and domestic revenues is shown
below, based upon the region in which proppants were used by the customer:
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- -----
($ IN MILLIONS)
<S> <C> <C> <C>
LOCATION
United States........................................... $36.8 $45.3 $53.3
International........................................... 21.2 19.9 31.8
----- ----- -----
Total........................................... $58.0 $65.2 $85.1
===== ===== =====
</TABLE>
COMPETITION AND MARKET SHARE
The Company's chief worldwide competitor is Norton-Alcoa Proppants
("Norton-Alcoa"). Norton-Alcoa is a joint venture of Compagnie de Saint-Gobain,
a French glass and materials company, and Aluminum Company of America.
Norton-Alcoa manufactures ceramic proppants that directly compete with each of
the Company's products. In addition, Mineraco Curimbaba ("Curimbaba"), based in
Brazil, manufactures a sintered bauxite product similar to the Company's
CARBOHSP(TM), which is marketed in the United States under the name
"Sinterball". The Company believes that Curimbaba has not expanded its U.S.
product line to include a full range of ceramic proppants and is unlikely to do
so in light of patents held by the Company and Norton-Alcoa. The Company
believes that it supplies approximately 60% of the ceramic proppants and
approximately 5% of all proppants used by the oilfield services companies that
perform fracturing services worldwide.
Competition for CARBOHSP(TM) and CARBOPROP(R) includes ceramic proppants
manufactured by Norton-Alcoa and Curimbaba. The Company's CARBOLITE(R) and
CARBOECONOPROP(R) products compete with ceramic proppants produced by
Norton-Alcoa and with sand-based proppants for use in the hydraulic fracturing
of medium depth natural gas and oil wells. The leading suppliers of mined sand
are
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<PAGE> 4
Unimin Corp., Badger Mining Corp., Wedron Silica Co., Ogelbay-Norton Company and
Colorado Silica Sand, Inc. The leading suppliers of resin-coated sand are Borden
Proppants Corp. and Santrol, a subsidiary of Fairmont Minerals Limited, Inc.
The Company believes that the most significant factors that influence a
customer's decision to purchase the Company's products are: (i)
price/performance ratio, (ii) on-time delivery performance, (iii) technical
support and (iv) proppant availability. The Company believes that its products
are competitively priced and that its delivery performance is excellent. The
Company also believes that its superior technical support has enabled it to
persuade customers to use ceramic proppants in an increasingly broad range of
applications and thus increased the overall market for the Company's products.
Prior to 1997, the Company had generally maintained sufficient inventory to
satisfy demand for its products. However, in 1997, it became obvious to the
management of the Company that previous capacity additions were insufficient to
satisfy demand in an improving market. The Company has addressed this issue
through the construction of a new manufacturing facility in McIntyre, Georgia
which is scheduled for completion in the fourth quarter of 1998.
The Company continually conducts testing and development activities with
respect to alternative raw materials to be used in the Company's existing
production methods and alternative production methods. The Company is not aware
of the development of alternative products for use as proppants in the hydraulic
fracturing process. The Company believes that the main barriers to entry for
additional competitors are the patent rights held by the Company and certain of
its current competitors and the capital costs involved in building production
facilities of sufficient size to be operated efficiently.
DISTRIBUTION
The Company maintains finished goods inventories at its plants in New
Iberia, Louisiana, and Eufaula, Alabama, and at six remote stocking facilities
located in: Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas;
Fairbanks, Alaska; Edmonton, Alberta, Canada; and Rotterdam, The Netherlands.
The remote stocking facilities consist of bulk storage silos with truck trailer
loading facilities. The Company owns the facilities in San Antonio, Rock Springs
and Edmonton and subcontracts the operation of the facilities and transportation
to a local trucking company. The remaining stocking facilities are owned and
operated by local trucking companies under contract with the Company. The North
American sites are supplied by rail, and the site in the Netherlands is supplied
by container ship. In total, the Company leases 79 rails cars, and owns or
leases 62 dedicated trailers. The price of the Company's products sold for
delivery in the lower 48 United States and Canada includes just-in-time delivery
of proppants to the operator's well site, which eliminates the need for
customers to maintain an inventory of ceramic proppants.
The Company increased storage capacity at its remote storage facilities in
San Antonio, Rock Springs and Edmonton in 1997 at a cost of approximately $4.1
million.
RAW MATERIALS
Ceramic proppants are made from alumina-bearing ores (commonly referred to
as bauxite, bauxitic clay or kaolin, depending on the alumina content), which
are readily available on the world market. Bauxite is largely used in the
production of aluminum metal, refractory material and abrasives. The main
deposits of alumina-bearing ores in the United States are in Arkansas, Alabama
and Georgia; other economically mineable deposits are located in Australia,
China, Jamaica, Russia and Surinam.
The Company's New Iberia facility currently uses bauxite imported from
Australia and bauxitic clay mined in Arkansas. The Company has decreased its
dependence on imported bauxite and bauxitic clay as it has entered into a
long-term contract for the processing and supply of Arkansas bauxite and
bauxitic clay for use at the New Iberia facility. The Company believes that this
agreement, which stipulates a fixed price, subject to annual upward adjustments
in accordance with a producer price index, will provide a sufficient supply of
bauxite and bauxitic clay to meet the requirements of the New Iberia facility
through 1999.
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<PAGE> 5
The Company's Eufaula facility exclusively employs locally mined uncalcined
kaolin, and the Company has entered into a contract requiring the supplier to
sell to the Company up to 200,000 net tons of kaolin per year and the Company to
purchase from the supplier 80% of the Eufaula facility's annual kaolin
requirements, each through 2003. This agreement stipulates a fixed price,
subject to annual adjustment in accordance with fluctuations (within an 8%
annual limit) in the producer price index. Raw material costs for the Eufaula
facility are substantially below those for the New Iberia plant, due to the
Eufaula facility's proximity to raw material reserves and use of uncalcined raw
materials.
The new production facility in McIntyre, Georgia will also utilize
primarily locally mined uncalcined kaolin. The Company has entered into a
long-term supply agreement for these raw materials which stipulates a fixed
price subject to annual adjustments for changes in the producer price index and
fuel costs. The supply contract provides for a twenty-year supply of raw
materials.
PRODUCTION PROCESS
Ceramic proppants are made by grinding or dispersing ore to a fine powder,
combining the powder into small, green (i.e., unfired) pellets and sintering the
pellets at 2,500F to 3,000F in a rotary kiln.
The Company uses two different methods to produce ceramic proppants. The
Company's plant in New Iberia, Louisiana, uses a dry process (the "Dry Process")
which starts with bauxite or bauxitic clay which has been dried to remove both
free water and water which was chemically bound within the ore. This drying
process is referred to as calcining. The calcined ores are received at the plant
and ground into a dry powder. Pellets are formed by combining the powder with
water and binders and introducing the mixture into a high-shear mixer. The
process is completed once the green pellets are sintered in a rotary kiln. The
Company's competitors also use the Dry Process to produce ceramic proppants.
The Company's plant in Eufaula, Alabama, uses a wet process (the "Wet
Process"), which starts with moist, uncalcined kaolin from local mines. The
kaolin is dispersed with chemicals in a water slurry. With an atomizer, the
slurry is sprayed like a mist into a dryer which causes the slurry to harden
into green pellets. Finally, these green pellets are sintered in rotary kilns.
The Company believes that the Wet Process is unique to its plant in Eufaula,
Alabama.
The Company's plant in McIntrye, Georgia will use the Dry Process. However,
the Company expects to maintain lower production costs at this facility by
purchasing locally mined ore and performing the calcining process itself.
PATENT PROTECTION
The Company's ceramic proppants are made by processes and techniques that
involve a high degree of proprietary technology, some of which is protected by
patents.
The Company owns outright six issued U.S. patents and seven issued foreign
patents; three of these U.S. patents and four of these foreign patents relate to
the CARBOPROP(R) product produced by the Dry Process.
The Company jointly owns with A/S NIRO Atomizer ("NIRO"), the Danish
designer and manufacturer of the spray atomizer device used in the Wet Process,
three issued U.S. patents and 17 issued foreign patents. The patents owned
jointly with NIRO generally relate to the Wet Process, and the products produced
thereby (CARBOLITE(R) and CARBOECONOPROP(R)).
The current versions of the Company's six most important U.S. patents
expire at various times in the years 2002 through 2009 with its two key product
patents expiring in 2006 and 2009. The Company believes that these patents have
been and will continue to be important in enabling the Company to compete in the
market to supply proppants to the natural gas and oil industry. The Company
intends to enforce and has in the past vigorously enforced its patents. The
Company may be involved from time to time in the future, as it has been in the
past, in litigation to determine the enforceability, scope and validity of its
patent rights. Past disputes with its main competitor have been resolved in ways
that permit the Company to continue to benefit fully from its patent rights. The
Company and this competitor have cross-licensed certain of their respective
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patents relating to intermediate and low density proppants on both a
royalty-free and royalty-bearing basis. (Royalties under these licenses are not
material to the Company's financial results.) The Company and NIRO have not
granted any licenses to third parties relating to the use of the Wet Process. As
a result of these cross licensing arrangements, both the Company and its main
competitor are able to produce a broad range of ceramic proppants, while third
parties are unlikely to be able to enter the ceramic proppants market without
infringing on the patent rights held by the Company, its main competitor or
both.
PRODUCTION CAPACITY
The Company believes that constructing adequate capacity ahead of demand
while incorporating new technology to reduce manufacturing costs are important
competitive strategies to increase its overall share of the market for
proppants. Prior to 1993, the Company's production capacity was substantially in
excess of its sales requirements. Since that time, however, the Company has been
expanding its capacity in order to meet the generally increasing demand for its
products. In October 1993, the Company increased the capacity of the Eufaula
facility from 90 million pounds per year to 170 million pounds per year, in
response to the increasing demand for the Company's CARBOLITE(R) and
CARBOECONOPROP(R) products. In May 1995, the Company completed a 40 million
pound per year capacity expansion at the New Iberia facility, intended to meet
increasing demand for CARBOHSP(TM) and CARBOPROP(R). Most recently, in February
1996, the Company commenced operations of its second 80 million pound per year
expansion of the Eufaula plant. Total annual capacity is currently 100 million
pounds at the New Iberia facility and is 250 million pounds at the Eufaula
facility.
In July 1997, the Company began construction of a new $40 million
manufacturing facility in McIntyre, Georgia. The plant is expected to be
completed in the fourth quarter of 1998 and is expected to have initial capacity
of 200 million pounds per year. The plant will be capable of producing all of
the Company's product lines and has been designed to be expandable to a capacity
of 400 million pounds per year.
The following table sets forth the date of construction of and recent
expansion of the Company's manufacturing facilities:
<TABLE>
<CAPTION>
YEAR OF ANNUAL
LOCATION COMPLETION CAPACITY PRODUCTS
-------- ------------ --------- --------
(MILLIONS
OF
POUNDS)
<S> <C> <C> <C>
New Iberia, Louisiana
Unit 1............. 1979 20 CARBOHSP(TM) and CARBOPROP(R)
Unit 2............. 1981 40 CARBOHSP(TM) and CARBOPROP(R)
1995
Expansion..... 1995 40 CARBOHSP(TM) and CARBOPROP(R)
---
Total...... 100
===
Eufaula, Alabama
Unit 3............. 1983 90 CARBOLITE(R) and CARBOECONOPROP(R)
1993
Expansion..... 1993 80 CARBOLITE(R) and CARBOECONOPROP(R)
1996
Expansion..... 1996 80 CARBOLITE(R) and CARBOECONOPROP(R)
---
Total...... 250
===
McIntyre, Georgia(1)
Units 1 and 2...... 1998 200 CARBOLITE(R), CARBOECONOPROP(R)
CARBOHSP(TM) and CARBOPROP(R)
</TABLE>
- ---------------
(1) The McIntyre, Georgia plant is expected to be completed in the fourth
quarter of 1998, and is expected to have an initial installed capacity of
200 million pounds per year.
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ORDER BACKLOG
The Company generally operates without any material backlog.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
The Company believes that its operations are in substantial compliance with
applicable federal, state and local environmental and safety laws and
regulations. The Company does not anticipate any significant expenditures in
order to continue to comply with such laws and regulations.
EMPLOYEES
At December 31, 1997, the Company had 117 full-time employees. In addition
to the services of its employees, the Company employs the services of
consultants as required. The Company's employees are not represented by labor
unions. There have been no work stoppages or strikes during the last three years
that have resulted in the loss of production or production delays. The Company
believes its relations with its employees are satisfactory.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K, the Company's Annual
Report to Shareholders, any Form 10-Q or any Form 8-K of the Company or any
other written or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from such statements. This document contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning, among other things, the Company's
prospects, developments and business strategies for its operations, all of which
are subject to certain risks, uncertainties and assumptions. These risks and
uncertainties include but are not limited to, changes in the demand for oil and
natural gas, the development of alternative stimulation techniques and the
development of alternative proppants for use in hydraulic fracturing. The words
"believe", "expect", "anticipate", "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters (approximately 2,700
square feet of leased office space) in Irving, Texas, and owns its manufacturing
facilities, land and substantially all of the related production equipment in
New Iberia, Louisiana, and Eufaula, Alabama.
The facility in New Iberia, Louisiana, located on 24 acres of land owned by
the Company, consists of two production units (approximately 85,000 square
feet), a laboratory (approximately 4,000 square feet) and an office building
(approximately 3,000 square feet). The Company also owns an 80,000 square foot
warehouse on the plant grounds in New Iberia, Louisiana.
The facility in Eufaula, Alabama, located on 14 acres of land owned by the
Company, consists of one production unit (approximately 111,000 square feet), a
laboratory (approximately 2,000 square feet) and an office (approximately 1,700
square feet).
The Company's customer service and distribution operations are located at
the New Iberia facility, while its quality control, testing and development
functions operate out of both the New Iberia and Eufaula facilities. The Company
owns distribution facilities in San Antonio, Texas, Rock Springs, Wyoming and
Edmonton, Alberta, Canada.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not currently engaged in any material pending legal
proceedings and is not currently aware of any claims that are likely to give
rise to such proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Jesse P. Orsini (age, 57): Mr. Orsini, President and Chief Executive
Officer, has served as President, Chief Executive Officer and a Director of the
Company since its organization in 1987.
Paul G. Vitek (age, 39): Mr. Vitek has been the Vice President of Finance
since February 1996 and has served as Treasurer and Secretary of the Company
since 1988.
Terry P. Keefe (age, 49): Mr. Keefe has been Vice President of
Manufacturing since July 1997. Prior to being elected Vice President of
Manufacturing, Mr. Keefe was Plant Manager of the Company's Eufaula, Alabama
plant since the organization of the Company in 1987.
Dr. C. Mark Pearson (age, 41): Dr. Pearson joined the Company as Vice
President of Marketing and Technology in March 1997. Prior to joining the
Company, Dr. Pearson served as Associate Professor of Petroleum Engineering at
the Colorado School of Mines from December 1995 and held various engineering and
management positions with Arco Petroleum Company from 1984 through December
1995.
All officers are elected at the Annual Meeting of the Board of Directors
for one-year terms or until their successors are duly elected. There are no
arrangements between any officer and any other person pursuant to which he was
selected as an officer. There is no family relationship between any of the named
executive officers or between any of them and the Company's directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Market Information
The Company's Common Stock began trading on the NASDAQ National Market
under the symbol CRBO upon completion of the Company's initial public offering
on April 23, 1996. Per share stock prices for the quarterly periods during 1997
and 1996 as reported by NASDAQ were as follows:
<TABLE>
<CAPTION>
LOW HIGH
------- -------
<S> <C> <C> <C> <C>
1997
First quarter............................................. 18 3/8 21 3/4
Second quarter............................................ 18 1/2 28 1/2
Third quarter............................................. 26 33 1/2
Fourth quarter............................................ 32 38 1/2
1996
Second quarter............................................ 18 1/4 24 1/4
Third quarter............................................. 18 1/2 22 3/4
Fourth quarter............................................ 18 7/8 21
</TABLE>
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<PAGE> 9
(b) Holders
The approximate number of shareholders of record of Common Stock on March
6, 1998 was 18. However, from available information, the Company believes that
the total number of shareholders of Common Stock is approximately 1,100.
(c) Dividends
The Company paid quarterly cash dividends of $0.075 per share on its Common
Stock in 1997 and in the third and fourth quarters of 1996. The Company's
current intention, subject to its financial condition, the amount of funds
generated from operations and the level of capital expenditures, is to continue
to pay quarterly dividends to shareholders of its Common Stock at the rate of
$0.075 per share.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from financial statements
of the Company. The data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements and notes thereto included elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues..................................... $85,122 $65,151 $58,001 $53,310 $41,894
Cost of goods sold........................... 42,186 34,517 29,297 26,630 20,613
------- ------- ------- ------- -------
Gross profit................................. 42,936 30,634 28,704 26,680 21,281
Selling, general and administrative
expenses(1)................................ 8,915 8,126 7,148 6,194 5,940
------- ------- ------- ------- -------
Operating profit............................. 34,021 22,508 21,556 20,486 15,341
Other income, net............................ 1,004 175 157 291 198
------- ------- ------- ------- -------
Income before income taxes................... 35,025 22,683 21,713 20,777 15,539
Income taxes................................. 12,936 5,883 -- -- --
------- ------- ------- ------- -------
Net income................................... $22,089 $16,800 $21,713 $20,777 $15,539
======= ======= ======= ======= =======
Earnings per share
Basic...................................... $ 1.51
=======
Diluted.................................... $ 1.50
=======
PRO FORMA DATA(2):
Income before income taxes................... $22,683
Pro forma income taxes....................... 8,393
-------
Pro forma net income......................... $14,290
=======
Pro forma earnings per share(3)
Basic...................................... $ 0.98
=======
Diluted.................................... $ 0.97
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets............................... $46,861 $38,158 $17,085 $18,301 $13,353
Current liabilities excluding bank
borrowings................................. 7,616 5,204 4,928 3,788 3,211
Bank borrowings-current...................... -- -- 2,780 -- --
Property, plant and equipment, net........... 34,093 22,247 22,004 10,854 9,175
Total assets................................. 80,954 60,405 39,089 29,154 22,527
Total shareholders' equity................... 70,942 53,234 31,381 25,366 19,316
Cash dividends per share(4).................. $ 0.30 $ 0.15
</TABLE>
8
<PAGE> 10
- ---------------
(1) Selling, general and administrative expenses for the year ended December
31, 1996 include an incremental charge of $877,225 relating to the
accelerated recognition of compensation expense for the vesting of
restricted stock in connection with the Company's initial public offering.
(2) Pro forma data reflects the effects on historical income statement data for
the year ended December 31, 1996 as if the Company had been treated as a C
Corporation for the entire year for income tax purposes, with an estimated
effective income tax rate of 37%. The Company terminated its S Corporation
election on April 23, 1996 prior to its initial public offering.
(3) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of earnings per share and the
impact of Statement No. 128, see the notes to the consolidated financial
statements beginning on page F-6.
(4) Cash dividends per share for 1996 is based on cash dividends declared
subsequent to the Company's initial public offering and does not include S
Corporation distributions paid prior to and in conjunction with the initial
public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL BUSINESS CONDITIONS
CARBO Ceramics Inc. manufactures and sells ceramic proppants for use in the
hydraulic fracturing of oil and natural gas wells. Hydraulic fracturing is the
most common technique used to stimulate production from hydrocarbon bearing
formations. The process involves pumping fluids into an oil or gas well at very
high pressure in order to fracture the rock formation that contains the
hydrocarbons. As the fracture is created, the fluids are blended with granular
materials, or proppants, which fill the fracture and prop it open after the
pressure pumping ceases. The proppant filled fracture creates a highly permeable
channel that enables the oil or gas to flow more freely from the formation,
thereby increasing production from the well.
Ceramic proppants are premium products that are sold at higher prices than
sand or resin-coated sand, the two primary alternative proppants. The principal
advantage of ceramic proppants is that they are stronger than sand-based
proppants. The higher strength of ceramic proppants results in higher production
rates in deep wells where sand or resin-coated sand may crush under high closure
stress. Consequently, the Company's business is influenced by the level of deep
drilling activity (generally defined as wells deeper than 7,500 feet). Ceramic
proppants are also more uniform in size and shape than sand-based proppants.
This uniformity can result in higher production rates than sand-based proppants
when used in wells that do not otherwise need ceramics for their higher
strength.
As deep drilling, particularly in North America, is typically focused on
the production of natural gas, the Company's business is significantly impacted
by the number of natural gas wells drilled in North America. In markets outside
North America, sales of the Company's products are less dependent on natural gas
markets but are influenced by the overall level of drilling activity.
Furthermore, because the decision to use ceramic proppants is based on the
present value economics of comparing the higher cost of ceramic proppants to the
future value derived from increased production rates, the Company's business is
secondarily influenced by the price of natural gas and oil.
From 1987 through 1996, the Company's revenues grew at a compound annual
rate of 21% despite relatively modest growth in the total number of gas wells
drilled. In 1997, the most active year for drilling activity in the last decade,
the Company's revenues increased by over 30% from 1996.
From 1986 through 1996, the ceramic proppant industry has had productive
capacity in excess of demand. The competitive pressure brought on by this excess
capacity made it difficult for the Company to raise prices on its products.
However, the Company continued to grow its revenues through the introduction of
CARBOECONOPROP(R), a new product introduced in 1992, aimed at increasing the use
of ceramic proppants in the fracturing of medium depth wells, which had
previously been fractured with sand-based proppants. CARBOECONOPROP(R) has been
widely accepted in the industry and has been the Company's fastest
9
<PAGE> 11
growing product line over the past five years. The Company expects that
CARBOECONOPROP(R) will continue to be the fastest growing product line in the
future and, as a result, gross profit margins will decline slightly.
In the latter half of 1996, the industry began to operate near full
capacity and product availability on certain product lines was limited. In 1997,
demand for ceramic proppants continued to increase and availability of all
products was limited. In light of this fact, the Company raised prices on its
products by an average of 5% effective in the first quarter 1997. This price
increase was the first across-the-board price increase that the Company had
realized since 1991.
Future growth in the Company's revenues and net income are dependent on the
future demand for natural gas in North America and the demand for hydrocarbons
worldwide. Management believes that the demand for natural gas will continue to
increase due to the abundance, relatively low cost and environmental benefits of
natural gas as a source of energy. With this in mind, the Company initiated
construction of a new manufacturing facility in McIntyre, Georgia in July 1997.
The plant will cost approximately $40 million to construct and is expected to be
completed in the fourth quarter of 1998. Initial capacity of the plant is
expected to be 200 million pounds per year, an increase of 57% over current
manufacturing capacity.
IMPACT OF YEAR 2000
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999, to cost less than $100,000 and have no significant effect on
operations.
REVENUES
<TABLE>
<CAPTION>
PERCENT PERCENT
1997 CHANGE 1996 CHANGE 1995
------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $85,122 31% $65,151 12% $58,001
</TABLE>
CARBO Ceramics Inc.'s 1997 revenues of $85.1 million established a new
annual record for the Company and were 31% higher than revenues in 1996. While
sales volume increased 24% from 1996, revenues grew at a faster pace due to an
increase in the average selling price that was the result of a price increase of
approximately 5% which became effective in January 1997. Domestic volumes
increased 13% from 1996 as strong demand for natural gas resulted in a 30%
increase in drilling activity. Export volumes increased 51% as the Company's
products became more widely accepted in the international oil markets. The
fastest growing product during 1997 was CARBOLITE(R), which increased 47% from
1996. The largest part of this increase was in export sales, to Russia,
Australia and the North Sea.
Revenues were $65.2 million for the year ended December 31, 1996, an
increase of 12% over 1995 revenues of $58.0 million. While sales volume
increased 15% from 1995, revenues grew at a slower pace because of a shift in
the product mix toward CARBOECONOPROP(R), the Company's lowest price product,
targeted at penetrating the market for sand and resin-coated sand. For the year
ended 1996, CARBOECONOPROP(R) accounted for 43% of the Company's total sales
volume, up from 40% in 1995. In addition, revenue growth lagged volume growth
due to lower pricing in Europe and South Texas, as the Company protected its
market share by matching lower prices established by its competitors.
GROSS PROFIT
<TABLE>
<CAPTION>
PERCENT PERCENT
1997 CHANGE 1996 CHANGE 1995
------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross Profit................................... $42,936 40% $30,634 7% $28,704
Gross Profit %................................. 50% 47% 49%
</TABLE>
The Company's cost of goods sold consists of manufacturing costs and
packaging and transportation expenses associated with the delivery of the
Company's products to its customers. Variable manufacturing
10
<PAGE> 12
expenses include raw materials, labor, utilities and repair and maintenance
supplies. Fixed manufacturing expenses include depreciation, property taxes on
production facilities, insurance and factory overhead.
Gross profit for 1997 increased $12.3 million or 40% from 1996. Gross
profit as a percentage of revenues increased from 47% to 50% due to the higher
average selling price resulting from the 5% price increase which became
effective in January 1997 and lower manufacturing costs in the New Iberia
manufacturing facility. The lower costs achieved in New Iberia were primarily
the result of improved efficiency due to increased production at the plant
versus the previous year. Production volumes also increased at the Eufaula
manufacturing facility due to a mid-year capacity expansion project but this was
offset by higher raw material prices resulting from a consolidation of suppliers
in the Eufaula area.
Gross profit for 1996 increased by $1.9 million or 7% from 1995. Gross
profit as a percentage of revenues decreased from 49% to 47% due to lower
average selling prices for the Company's products and increases in raw materials
and labor. Raw material costs at the New Iberia facility increased due to an
increase in demand for CARBOHSP(TM) which requires a higher grade and higher
cost raw material to produce than CARBOPROP(R). Raw material costs at the
Eufaula facility increased due to the negotiation of a new supply contract that
was necessitated by a consolidation of suppliers in the Eufaula area.
Depreciation included in cost of goods sold increased by $788,000 from 1995 due
to the effect of the full year's depreciation on plant expansions completed
during 1995.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
PERCENT PERCENT
1997 CHANGE 1996 CHANGE 1995
------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SG&A............................................... $ 8,915 10% $ 8,126 14% $ 7,148
SG&A as a % of Revenues............................ 10.5% 12.5% 12.3%
</TABLE>
Selling, general and administrative expenses increased by $789,000 in 1997
over 1996. While SG&A expenses decreased as a percentage of revenues, there was
a substantial change in the composition of these expenses from 1996 to 1997. In
connection with the initial public offering of the Company's Common Stock in
1996, the vesting of restricted stock previously granted to the Company's
President and Chief Executive Officer was accelerated. This resulted in non-cash
compensation expense of $1,316,000 in 1996, where none was present in 1997.
These reductions in 1997 were partially offset by new costs incurred in
connection with regulatory filing costs, listing expenses and shareholder
communication costs associated with being a publicly traded company. Other SG&A
components that increased were those that vary with sales volume or
profitability including warehouse and shipping expenses, commissions expense and
incentive compensation.
Selling, general and administrative expenses increased by $978,000 in 1996
over 1995. While SG&A expenses increased only slightly as a percentage of
revenues, there was a substantial change in the composition of these expenses in
1996. Prior to the initial public offering of the Company's Common Stock, a
consulting agreement with the Company's Chairman was terminated in April 1996.
As a result, expenses recognized in connection with the consulting agreement
decreased by $717,000 in 1996 as compared to 1995. In connection with the
initial public offering, the vesting of restricted stock previously granted to
the Company's President and Chief Executive Officer was accelerated. This
acceleration resulted in an incremental non-cash compensation expense of
$877,000 over 1995. Other increases in SG&A expenses in 1996 were variable
expenses that increased due to higher sales volume. These variable expenses
include warehouse charges, incentive compensation and franchise taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of December 31, 1997 were $8.9 million
compared to $17.4 million at the beginning of the year. The Company generated
cash from operations of $23.6 million. Cash used in investing and financing
activities totaled $32.1 million. As of December 31, 1997 the Company held $13.9
million in investments expected to be held to maturity. These investments
consisted solely of U.S. Government Securities.
11
<PAGE> 13
Total capital expenditures for property, plant and equipment during 1997
were $13.8 million. Spending on the new Georgia manufacturing facility scheduled
to be completed by the 4th quarter of 1998 was $7.8 million, expansion of the
San Antonio storage facility -- $1.8 million, acquisition of Rock Springs
Terminal -- $1.3 million, Canadian remote storage expansion -- $1.1 million,
Eufaula capacity expansion and kiln shell replacement -- $1.3 million. The
balance of $.5 million was spent on the normal replacement of capital equipment.
Other investing activities during the year involved the purchase of $13.9
million of held-to-maturity investments (U.S. Government Securities).
The Company paid $4.4 million in dividends during 1997.
The Company plans to spend approximately $32 million for the completion of
its new manufacturing facility in McIntyre, Georgia during 1998, with funding
expected to be provided entirely by cash generated from operations. The
Company's current intention, subject to its financial condition, the amount of
funds generated from operations and the level of capital expenditures, is to
continue to pay quarterly dividends to shareholders of its Common Stock at the
rate of $0.075 per share.
In 1997, the Company maintained an unsecured line of credit in the amount
of $9.0 million. As of December 31, 1997, there were no borrowings outstanding
under this credit agreement. An amended and restated credit agreement under
which the Company may borrow up to $10.0 million through December 31, 2000 was
executed on February 12, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in pages F-1 through
F-14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement. Information
concerning executive officers is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
12
<PAGE> 14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements:
The consolidated financial statements of CARBO Ceramics Inc. listed
below are contained in pages F-1 through F-14 of this Report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for each of the three years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997, 1996 and 1995
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the fourth quarter of
1997.
(c) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as
part of, or incorporated by reference into, this Report.
(d) Financial Statement Schedules:
All schedules have been omitted since they are either not required or
not applicable.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CARBO CERAMICS INC.
By: /s/ JESSE P. ORSINI
----------------------------------
Jesse P. Orsini
President and Chief Executive
Officer
By: /s/ PAUL G. VITEK
----------------------------------
Paul G. Vitek
Vice President, Finance
Dated: March 16, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jesse P. Orsini and Paul G. Vitek,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM C. MORRIS Chairman of the Board March 16, 1998
- -----------------------------------------------------
William C. Morris
/s/ JESSE P. ORSINI President, Chief Executive March 16, 1998
- ----------------------------------------------------- Officer and Director
Jesse P. Orsini (Principal Executive Officer)
/s/ PAUL G. VITEK Chief Financial Officer March 16, 1998
- ----------------------------------------------------- (Principal Financial and
Paul G. Vitek Accounting Officer)
/s/ CLAUDE E. COOKE, JR. Director March 16, 1998
- -----------------------------------------------------
Claude E. Cooke, Jr.
/s/ WILLIAM A. GRIFFIN, JR. Director March 16, 1998
- -----------------------------------------------------
William A. Griffin, Jr.
/s/ JOHN J. MURPHY Director March 16, 1998
- -----------------------------------------------------
John J. Murphy
/s/ ROBERT S. RUBIN Director March 16, 1998
- -----------------------------------------------------
Robert S. Rubin
</TABLE>
14
<PAGE> 16
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CARBO Ceramics Inc.
We have audited the accompanying consolidated balance sheets of CARBO
Ceramics Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CARBO Ceramics
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New Orleans, Louisiana
January 23, 1998
F-1
<PAGE> 17
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
($ IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 8,899 $17,414
Investment securities..................................... 13,905 --
Trade accounts receivable................................. 14,243 10,902
Inventories:
Finished goods......................................... 4,347 4,478
Raw materials and supplies............................. 4,034 3,907
------- -------
Total inventories................................. 8,381 8,385
Prepaid expenses and other current assets................. 661 608
Deferred income taxes..................................... 772 849
------- -------
Total current assets.............................. 46,861 38,158
Property, plant and equipment:
Land and land improvements................................ 214 57
Buildings................................................. 4,536 4,536
Machinery and equipment................................... 27,773 25,112
Construction in progress.................................. 11,382 401
------- -------
Total............................................. 43,905 30,106
Less accumulated depreciation............................. 9,812 7,859
------- -------
Net property, plant and equipment................. 34,093 22,247
------- -------
Total assets...................................... $80,954 $60,405
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,131 $ 1,423
Accrued payroll and benefits.............................. 2,448 1,837
Accrued freight........................................... 851 659
Accrued utilities......................................... 422 326
Accrued income taxes...................................... 1,018 609
Other accrued expenses.................................... 746 350
------- -------
Total current liabilities......................... 7,616 5,204
Deferred income taxes....................................... 2,396 1,967
Shareholders' equity:
Preferred stock, par value $0.01 per share, 5,000 shares
authorized: none outstanding........................... -- --
Common stock, par value $0.01 per share, 40,000,000 shares
authorized: 14,602,000 shares issued and outstanding... 146 146
Additional paid-in capital................................ 42,919 42,919
Retained earnings......................................... 27,877 10,169
------- -------
Total shareholders' equity........................ 70,942 53,234
------- -------
Total liabilities and shareholders' equity........ $80,954 $60,405
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 18
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................................... $85,122 $65,151 $58,001
Cost of goods sold.......................................... 42,186 34,517 29,297
------- ------- -------
Gross profit................................................ 42,936 30,634 28,704
Selling, general and administrative expenses................ 8,915 8,126 7,148
------- ------- -------
Operating profit............................................ 34,021 22,508 21,556
Other income (expense):
Interest income, net...................................... 969 240 160
Other income, net......................................... 35 (65) (3)
------- ------- -------
1,004 175 157
------- ------- -------
Income before income taxes.................................. 35,025 22,683 21,713
Income taxes................................................ 12,936 5,883 --
------- ------- -------
Net income.................................................. $22,089 $16,800 $21,713
======= ======= =======
Pro forma data:
Income before income taxes................................ $22,683 $21,713
Income taxes.............................................. 8,393 8,034
------- -------
Net income................................................ $14,290 $13,679
======= =======
Earnings per share (pro forma for 1996 and 1995):
Basic..................................................... $ 1.51 $ 0.98 $ 0.94
======= ======= =======
Diluted................................................... $ 1.50 $ 0.97 $ 0.94
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 19
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CLASS B ADDITIONAL
COMMON COMMON PAID-IN UNEARNED RETAINED
STOCK STOCK CAPITAL COMPENSATION EARNINGS TOTAL
------ ------- ---------- ------------ -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995............. $120 $ 3 $ 6,626 $(1,754) $ 20,372 $ 25,367
Net income............................ -- -- -- -- 21,713 21,713
Amortization of unearned
compensation....................... -- -- -- 438 -- 438
Cash distributions.................... -- -- -- -- (16,137) (16,137)
---- ---- ------- ------- -------- --------
BALANCES AT DECEMBER 31, 1995........... 120 3 6,626 (1,316) 25,948 31,381
Net income............................ -- -- -- -- 16,800 16,800
Amortization of unearned
compensation....................... -- -- -- 1,316 -- 1,316
Distributions to shareholders paid
prior to and in connection with
initial public offering ($2.67 per
share)............................. -- -- (2,455) -- (30,389) (32,844)
Conversion of Class B Common Stock to
Common Stock....................... 3 (3) -- -- -- --
Deferred tax asset related to vesting
of restricted stock................ -- -- 3,486 -- -- 3,486
Net proceeds from initial public
offering........................... 23 -- 35,262 -- -- 35,285
Cash dividends ($0.15 per share)...... -- -- -- -- (2,190) (2,190)
---- ---- ------- ------- -------- --------
BALANCES AT DECEMBER 31, 1996........... 146 -- 42,919 -- 10,169 53,234
Net income............................ -- -- -- -- 22,089 22,089
Cash dividends ($0.30 per share)...... -- -- -- -- (4,381) (4,381)
---- ---- ------- ------- -------- --------
BALANCES AT DECEMBER 31, 1997........... $146 $ -- $42,919 $ -- $ 27,877 $ 70,942
==== ==== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 20
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 22,089 $ 16,800 $ 21,713
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 1,953 1,901 1,117
Amortization.............................................. -- 1,316 438
Deferred income taxes..................................... 506 4,604 --
Changes in operating assets and liabilities:
Trade accounts receivable.............................. (3,341) (2,119) 36
Inventories............................................ 4 (554) (3,046)
Prepaid expenses and other current assets.............. (53) (338) 13
Accounts payable....................................... 708 205 269
Accrued payroll and benefits........................... 611 271 358
Accrued freight........................................ 192 53 (118)
Accrued utilities...................................... 96 44 (4)
Accrued income taxes................................... 409 609 --
Other accrued expenses................................. 396 (40) 156
-------- -------- --------
Net cash provided by operating activities................... 23,570 22,752 20,932
INVESTING ACTIVITIES
Purchases of investment securities.......................... (13,905) -- --
Purchases of property, plant and equipment.................. (13,799) (3,010) (11,788)
-------- -------- --------
Net cash used in investing activities....................... (27,704) (3,010) (11,788)
FINANCING ACTIVITIES
Proceeds from bank borrowings............................... -- 7,180 2,780
Repayments on bank borrowings............................... -- (9,960) --
Net proceeds from initial public offering................... -- 35,285 --
Distributions paid to shareholders.......................... -- (32,844) (16,137)
Dividends paid.............................................. (4,381) (2,190) --
-------- -------- --------
Net cash used in financing activities....................... (4,381) (2,529) (13,357)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (8,515) 17,213 (4,213)
Cash and cash equivalents at beginning of year.............. 17,414 201 4,414
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 8,899 $ 17,414 $ 201
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ -- $ 92 $ --
======== ======== ========
Income taxes paid........................................... $ 12,021 $ 669 $ --
======== ======== ========
Purchases of property, plant and equipment through accounts
payable................................................... $ -- $ -- $ 866
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 21
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CARBO Ceramics Inc. (the "Company") was formed in 1987 and is a
manufacturer of ceramic proppants. The Company has production plants in New
Iberia, Louisiana and Eufaula, Alabama and primarily markets its proppant
products through pumping service companies that perform hydraulic fracturing for
major oil and gas companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CARBO
Ceramics Inc. and its wholly owned subsidiary, CARBO Ceramics Sales Corporation.
CARBO Ceramics Sales Corporation was formed on July 31, 1996 under the laws of
Barbados. All significant intercompany transactions have been eliminated.
CONCENTRATION OF CREDIT RISK
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Receivables are
generally due within 30 days. The majority of the Company's receivables are from
customers in the petroleum pressure pumping industry. Credit losses historically
have been insignificant.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash equivalents approximate fair value.
INVESTMENT SECURITIES
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
both the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. At December 31,
1997, all investment securities were classified as held-to-maturity. The fair
value of the investments approximated the carrying value at December 31, 1997.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Finished goods inventories include costs of materials, plant labor and
overhead incurred in the production of the Company's products.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
on the straight-line method for financial reporting purposes using the following
estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements.................................. 15 years
Machinery and equipment..................................... 3 to 15 years
</TABLE>
REVENUE RECOGNITION
Revenue is recognized when title passes to the customer.
F-6
<PAGE> 22
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." Prior to April 24,
1996, the shareholders of the Company had elected S Corporation status under the
Internal Revenue Code and certain comparable state tax laws. As a result, the
Company's taxable income for federal and certain state jurisdictions where the
Company had significant operations was reported on the tax returns of its
shareholders.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement No. 128
requirements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. BANK BORROWINGS
The Company has a Secured Revolving Credit Agreement (the "Credit
Agreement") with a bank under which it may borrow up to $9.0 million at 0.5%
above the bank's Base Rate (as defined in the Credit Agreement) through January
31, 1998. The weighted-average interest rate on the Credit Agreement was 8.75%
for 1996. There were no borrowings against the line of credit in 1997. Under the
terms of the Credit Agreement, the Company is required to maintain certain bank
accounts with the lender, with balances equal to transactional and
investment-related charges. The terms of the Credit Agreement further provide
for certain affirmative and negative covenants, including a restriction on
capital expenditures.
3. LEASES
The Company leases railroad equipment under operating leases. Minimum
future rental payments due under noncancelable operating leases with remaining
terms in excess of one year as of December 31, 1997 are as follows ($ in
thousands):
<TABLE>
<S> <C>
1998................................................ $ 508
1999................................................ 345
2000................................................ 174
2001................................................ 108
2002................................................ 108
------
$1,243
======
</TABLE>
Leases generally provide for renewal options for periods from one to five
years at their fair rental value at the time of renewal. In the normal course of
business, operating leases are generally renewed or replaced by other leases.
Rent expense for all operating leases was $920,000 in 1997, $740,000 in 1996,
and $732,000 in 1995.
F-7
<PAGE> 23
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Since its formation through April 24, 1996, the Company elected to be
treated for federal and certain state income tax purposes as an S Corporation.
As a result, earnings of the Company have been taxed directly to the
shareholders of the Company rather than to the Company. Prior to the completion
of its initial public offering, the Company terminated its S Corporation
election and, accordingly, became subject to federal and state income taxes. The
deferred tax effects of the change in tax status increased net income for 1996
by $884,000. The Company also recorded a deferred tax asset of $3.5 million with
a corresponding increase in additional paid-in capital in 1996 related to the
vesting of 800,000 restricted shares of Common Stock held by the Company's Chief
Executive Officer upon the occurrence of the initial public offering. The
Company realized the full benefit of this deferred tax asset during 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1997 and
1996 are as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Employee benefits......................................... $ 271 $ 288
Inventories............................................... 377 427
Other..................................................... 124 134
------ ------
Total deferred tax assets......................... 772 849
------ ------
Deferred tax liabilities:
Depreciation.............................................. 2,356 1,929
Other..................................................... 40 38
------ ------
Total deferred tax liabilities.................... 2,396 1,967
------ ------
Net deferred tax liabilities...................... $1,624 $1,118
====== ======
</TABLE>
Significant components of the provision for income taxes for the years
ended December 31, 1997 and 1996 are as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Current:
Federal................................................... $11,082 $ 764
State..................................................... 1,348 515
------- ------
Total current..................................... 12,430 1,279
------- ------
Deferred:
Federal................................................... 451 4,481
State..................................................... 55 123
------- ------
Total deferred.................................... 506 4,604
------- ------
$12,936 $5,883
======= ======
</TABLE>
F-8
<PAGE> 24
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES -- (CONTINUED)
The reconciliation of income taxes computed at the U.S. federal statutory
tax rate to the Company's income tax expense for 1997 and pro forma income tax
expense for 1996 is as follows ($ in thousands):
<TABLE>
<CAPTION>
1997 1996
------------------ -----------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ -------
<S> <C> <C> <C> <C>
U.S. statutory rate............................ $12,259 35.0% $7,712 34.0%
State income taxes, net of federal tax
benefit...................................... 1,403 4.0 907 4.0
Foreign sales corporation benefit.............. (726) (2.1) (226) (1.0)
------- ---- ------ ----
$12,936 36.9% $8,393 37.0%
======= ==== ====== ====
</TABLE>
5. SHAREHOLDERS' EQUITY
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by shareholders and do not have cumulative voting rights. Subject
to preferences of any Preferred Stock that may be issued in the future, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available for that purpose. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable.
Prior to 1996, the Company issued to its President and Chief Executive
Officer shares of Common Stock, pursuant to restricted stock agreements, as
compensation for future services. These shares had dividend rights; however,
sale of the shares was restricted prior to vesting which was subject to the
occurrence of certain events, including the initial public offering of the
Company's Common Stock. The restricted stock vested upon the occurrence of the
initial public offering on April 26, 1996 and the remaining balance of unearned
compensation was recorded as compensation expense. Compensation expense totaled
$1.3 million in 1996 and $438,000 in 1995.
Prior to April 17, 1996, the Company's authorized capital stock consisted
of 20,000 shares of Common Stock, of which 6,001 shares were issued and
outstanding, and 2,000 shares of Class B Common Stock, of which 150 shares were
issued and outstanding. On April 17, 1996, the Company (i) caused the conversion
of all issued and outstanding shares of its Class B Common Stock into shares of
Common Stock, and (ii) effected a 2,000 for 1 split of the Common Stock. All
capital amounts, share and per share data in the accompanying financial
statements have been retroactively restated, where appropriate, to reflect the
stock split.
On January 14, 1998, the Board of Directors declared a cash dividend of
$0.075 per share. The dividend is payable on February 15, 1998 to shareholders
of record on January 30, 1998.
PREFERRED STOCK
The Company's charter authorizes the issuance of 5,000 shares of Preferred
Stock. The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the Company's shareholders. No shares of
F-9
<PAGE> 25
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHAREHOLDERS' EQUITY -- (CONTINUED)
Preferred Stock are currently outstanding, and the Company has no present plans
to issue any shares of Preferred Stock.
6. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The Company's 1996 Stock Option Plan for Key Employees (the "Option Plan")
has authorized the grant of options to purchase an aggregate of 1,000,000 shares
of the Company's Common Stock to certain officers and key employees of the
Company chosen by a committee appointed by the Board of Directors (the
"Compensation Committee") to administer such plan. Under the Option Plan, all
options granted have 10 year terms, and conditions relating to the vesting and
exercise of options are determined by the Compensation Committee for each
option. Options granted under the Option Plan are "nonstatutory options"
(options which do not afford income tax benefits to recipients, but the exercise
of which may provide tax deductions for the Company). Each option will have an
exercise price per share equal to the fair market value of a share of Common
Stock on the date of grant and no individual employee may be granted options to
purchase more than an aggregate of 500,000 shares of Common Stock. The options
vest annually over a four-year period.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of 5.34%
and 6.19%; dividend yields of 1.0% and 1.5%; volatility factors of the expected
market price of the Company's Common Stock of .337 and .300; and a weighted
average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options (net of related expected tax benefits) is amortized to expense over the
options' vesting period. Since the Company's options generally vest over a
four-year period, the pro forma disclosures are not indicative of future amounts
until Statement 123 is
F-10
<PAGE> 26
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLAN -- (CONTINUED)
applied to all outstanding, nonvested options. The Company's pro forma
information for 1997 and 1996 follows ($ in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Net income:
As reported (pro forma in 1996)........................... $22,089 $14,290
======= =======
Pro forma including the effect of options................. $21,539 $13,870
======= =======
Basic earnings per share:
As reported (pro forma in 1996)........................... $ 1.51 $ 0.98
======= =======
Pro forma including the effect of options................. $ 1.48 $ 0.95
======= =======
Diluted earnings per share:
As reported (pro forma in 1996)........................... $ 1.50 $ 0.97
======= =======
Pro forma including the effect of options................. $ 1.46 $ 0.95
======= =======
</TABLE>
The earnings per share amounts prior to 1997 have been restated to comply
with Statement of Financial Accounting Standards No. 128, "Earnings per Share."
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
------- ---------------- ------- ----------------
<S> <C> <C> <C> <C>
Outstanding-beginning of year.......... 700 $17 --
Granted................................ 260 $27 700 $17
Exercised.............................. -- --
Forfeited.............................. (110) $17 --
----- ----
Outstanding-end of year................ 850 $20 700 $17
===== ====
Exercisable at end of year............. 148 $17 -- --
Weighted-average fair value of options
granted during the year.............. $9.38 $5.51
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 ranged from
$17.00 to $32.25. The weighted-average remaining contractual life of those
options is 8.7 years.
F-11
<PAGE> 27
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator for basic and diluted earnings per
share:
Net income (pro forma for 1996 and 1995).... $ 22,089 $ 14,290 $ 13,679
Denominator:
Denominator for basic earnings per share --
weighted average shares (pro forma for
1996 and 1995)........................... 14,602,000 14,602,000 14,602,000
Effect of dilutive securities:
Employee stock options (See Note 6)...... 169,102 71,368 --
----------- ----------- -----------
Dilutive potential common shares............ 169,102 71,368 --
----------- ----------- -----------
Denominator for diluted earnings per share--
adjusted weighted-average shares......... 14,771,102 14,673,368 14,602,000
=========== =========== ===========
Basic earnings per share...................... $ 1.51 $ 0.98 $ 0.94
=========== =========== ===========
Diluted earnings per share.................... $ 1.50 $ 0.97 $ 0.94
=========== =========== ===========
</TABLE>
For 1996 and 1995, pro forma weighted-average shares is based on 12,302,000
shares of Common Stock outstanding during the year increased by the assumed
issuance of 2,300,000 shares of Common Stock to pay S Corporation distributions
of $29.1 million.
8. PRO FORMA NET INCOME
Pro forma net income for 1996 and 1995 reflects a provision for income
taxes at an effective rate of approximately 37% to illustrate how historical net
income might have been affected if the Company had not been an S Corporation for
income tax purposes. The Company elected to be treated as an S Corporation
pursuant to the Internal Revenue Code from June 23, 1987 through April 23, 1996,
immediately after which it terminated its S Corporation election in conjunction
with the initial public offering. As a result, the Company was not subject to
federal income taxes during this period. By election of the shareholders, S
Corporation status was also applicable to the state jurisdictions where the
Company had significant operations.
F-12
<PAGE> 28
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. QUARTERLY OPERATING RESULTS -- (UNAUDITED)
Quarterly results of operations for the years ended December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Revenues................................. $17,840 $20,893 $23,062 $23,327
Gross profit............................. 8,993 10,347 11,469 12,127
Net income............................... 4,586 5,449 5,939 6,115
Earnings per share
Basic.................................. $ 0.31 $ 0.37 $ 0.41 $ 0.42
Diluted................................ $ 0.31 $ 0.37 $ 0.40 $ 0.41
1996
Revenues................................. $13,033 $17,399 $17,898 $16,821
Gross profit............................. 6,140 8,017 8,466 8,011
Net income............................... 4,375 4,022 4,349 4,054
Pro forma net income (see Note 8)........ 2,712 3,115 4,349 4,054
Pro forma earnings per share:
Basic.................................. $ 0.19 $ 0.21 $ 0.30 $ 0.28
Diluted................................ $ 0.19 $ 0.21 $ 0.30 $ 0.28
</TABLE>
Quarterly data may not sum to the full year data reported in the Company's
consolidated financial statements due to rounding. The 1996 and first three
quarters of 1997 earnings per share amounts have been restated to comply with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
10. SALES TO CUSTOMERS
The following schedule presents the percentages of total revenues related
to the Company's three major customers for the three-year period ended December
31, 1997:
<TABLE>
<CAPTION>
MAJOR CUSTOMERS
-----------------------
A B C OTHERS TOTAL
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
1997..................................... 35.4% 27.8% 20.5% 16.3% 100%
1996..................................... 34.1% 28.6% 21.7% 15.6% 100%
1995..................................... 29.6% 27.3% 24.9% 18.2% 100%
</TABLE>
The percentages of total revenues for two major customers have been
combined for 1995 to reflect a combination of operations by those customers in
1995.
11. INTERNATIONAL SALES
The Company's ceramic proppants are used worldwide by U.S. customers
operating abroad and by foreign customers. Sales outside the United States
accounted for 37%, 31% and 37% of the Company's revenues for 1997, 1996, and
1995, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
($ IN MILLIONS)
<S> <C> <C> <C>
Location
United States............................................. $53.3 $45.3 $36.8
International............................................. 31.8 19.9 21.2
----- ----- -----
Total............................................. $85.1 $65.2 $58.0
===== ===== =====
</TABLE>
F-13
<PAGE> 29
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. BENEFIT PLANS
The Company has a defined contribution savings and profit sharing plan
pursuant to Section 401(k) of the Internal Revenue Code. Employees who have
completed one year of service are eligible to participate. Employees may
contribute up to 15% of their monthly compensation.
For employee contributions up to 5% of monthly compensation, the Company
matches the employee contribution at a rate of 50%. Additional contributions by
the Company are discretionary and are determined annually by the Board of
Directors. These discretionary contributions to the plan are allocated to the
participants on a pro rata basis based on their respective salary levels.
Benefit costs recognized as expense under this plan consisted of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
($ IN THOUSANDS)
<S> <C> <C> <C>
Contributions:
Profit sharing............................................ $209 $189 $194
Savings................................................... 116 107 106
---- ---- ----
$325 $296 $300
==== ==== ====
</TABLE>
13. COMMITMENTS
In 1995, the Company entered into an agreement with a supplier to purchase
200,000 tons of green ore for its New Iberia, Louisiana plant at a specified
contract price. The Company has purchased the minimum tonnage required by the
agreement. All of the green ore purchased by the Company will be processed by
the supplier at a specified price. The Company is required to purchase at least
80% of its estimated annual requirements of processed ore from the supplier
until all green ore purchased under the agreement has been processed.
In 1995, the Company entered into an agreement with a supplier to purchase
kaolin for its Eufaula, Alabama plant at a specified contract price. The term of
the agreement is eight years commencing January 1, 1996. Beginning January 1,
1997, the agreement requires the Company to purchase from the supplier at least
80% of the Company's estimated annual requirements of kaolin for its Eufaula
plant.
In 1997, the Company entered into an agreement with a supplier to purchase
kaolin for its McIntyre, Georgia plant at a specified contract price. The term
of the agreement is twenty years commencing on January 1, 1998. The Company has
the right to purchase up to 2.5 million tons of kaolin during the term of the
agreement. The agreement requires the Company to purchase from the supplier at
least 80% of the Company's estimated annual requirements of kaolin for its
McIntyre plant.
The Company was in compliance with the terms of all agreements through
December 31, 1997.
The Company commenced construction in 1997 of a new manufacturing facility
in McIntyre, Georgia at a total estimated cost of $40 million. Construction in
progress of $11.4 million at December 31, 1997 includes $7.8 million related to
the new facility. The new facility is scheduled to be fully operational in the
fourth quarter of 1998.
14. EMPLOYMENT AGREEMENT
The Company has an employment agreement with its President which expires
June 30, 2000. The agreement provides for an annual base salary and an incentive
bonus as defined in the agreement. In the event the President is terminated
without cause prior to June 30, 2000, the Company will be obligated to pay the
President two years base salary and a prorated incentive bonus. In addition, all
nonvested stock options granted to the President will vest immediately and
become exercisable. The agreement also contains a five-year non-competition
covenant that would become effective upon termination for any reason.
F-14
<PAGE> 30
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Certificate of Incorporation of CARBO Ceramics Inc.
(incorporated by reference to exhibit 3.1 to the
registrant's Form S-1 Registration Statement No.
333-1884)
3.2 -- Bylaws of CARBO Ceramics Inc. (incorporated by reference
to exhibit 3.2 to the registrant's Form S-1 Registration
Statement No. 333-1884)
4.1 -- Form of Common Stock Certificate of CARBO Ceramics Inc.
(incorporated by reference to exhibit to the registrant's
Form S-1 Registration Statement No. 333-1884)
10.1 -- First Amended and Restated Credit Agreement dated as of
February 12, 1998, between Brown Brothers Harriman & Co.
and CARBO Ceramics Inc.
10.2 -- Form of Tax Indemnification Agreement between CARBO
Ceramics Inc. and William C. Morris, Robert S. Rubin,
Lewis C. Glucksman, George A. Wiegers, William A.
Griffin, and Jesse P. Orsini (incorporated by reference
to exhibit 10.2 to the registrant's Form S-1 Registration
Statement No. 333-1884)
10.3 -- Form of Employment Agreement between CARBO Ceramics Inc.
and Jesse P. Orsini (incorporated by reference to exhibit
10.4 to the registrant's Form S-1 Registration Statement
No. 333-1884)
10.4 -- Purchase and Sale Agreement dated as of March 31, 1995,
between CARBO Ceramics Inc. and GEO Specialty Chemicals,
Inc., as amended (incorporated by reference to exhibit
10.5 to the registrant's Form S-1 Registration Statement
No. 333-1884)
10.5 -- Raw Material Requirements Agreement dated as of November
21, 1995, between CARBO Ceramics Inc. and C-E Minerals
Inc. (incorporated by reference to exhibit 10.6 to the
registrant's Form S-1 Registration Statement No.
333-1884)
10.6 -- Incentive Compensation Plan (incorporated by reference to
exhibit 10.8 to the registrant's Form S-1 Registration
Statement No. 333-1884)
10.7 -- CARBO Ceramics Inc. 1996 Stock Option Plan for Key
Employees (incorporated by reference to exhibit 10.9 to
the registrant's Form S-1 Registration Statement No.
333-1884)
10.8 -- Form of Stock Option Award Agreement (incorporated by
reference to exhibit 10.10 to the registrant's Form S-1
Registration Statement No. 333-1884)
10.9 -- Raw Material Supply Agreement dated as of November 18,
1997 between CARBO Ceramics Inc. and Arcilla Mining and
Land Co.
23.1 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.1
U.S. $10,000,000
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of February 12, 1998
Between
CARBO CERAMICS INC.
as Borrower
and
BROWN BROTHERS HARRIMAN & CO.
as Lender
<PAGE> 2
<TABLE>
<S> <C> <C>
ARTICLE I
DEFINITIONS . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.01. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SECTION 1.02. Accounting and Other Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE II
AMOUNT AND TERMS OF THE COMMITMENT . . . . . . . . . . . . . . 7
SECTION 2.01. The Commitment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 2.02. Making the Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.03. Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.04. Optional Termination of the Commitment . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 2.05. Selection of Interest Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2.06 Interest Rate Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 2.07 Special Provisions for LIBOR Rate Advances . . . . . . . . . . . . . . . . . . . . 15
SECTION 2.08. Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.09. Indemnity and Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 2.10. Payments and Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 2.11. Evidence of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE III
CONDITIONS OF LENDING . . . . . . . . . . . . . . . . . . 19
SECTION 3.01. Condition Precedent to Initial Advance . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 3.02. Conditions Precedent to All Advances . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE IV
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 21
SECTION 4.01. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE V
COVENANTS OF THE BORROWER . . . . . . . . . . . . . . . . . 25
SECTION 5.01. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 5.02. Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE VI
EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . 31
SECTION 6.01. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE VII
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . 34
SECTION 7.01. Amendments, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 7.02. Notices, Etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 7.03. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 7.04. Costs, Expenses, and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7.05. Right of Set-off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 7.06. Binding Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.07. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 7.08 Merger of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
<PAGE> 3
Schedule I - Litigation
Schedule II - Permitted Liens
Exhibit A - Promissory Note
Exhibit B - Rollover Notice
Exhibit C - No-Default Certificate
<PAGE> 4
FIRST AMENDED AND RESTATED
CREDIT AGREEMENT
Dated as of February 12, 1998
This First Amended and Restated Credit Agreement is made and effective
as of February 12, 1998, by and between CARBO CERAMICS INC., a Delaware
corporation (the "Borrower"), and BROWN BROTHERS HARRIMAN & CO., a New York
limited partnership (the "Lender").
WITNESSETH:
WHEREAS, the Lender and the Borrower entered into a Credit Agreement
dated December 27, 1993, as amended by a First Amendment to Credit Agreement
dated as of April 3, 1995, as affected by certain waivers and modifications
contained in that certain letter agreement dated as of April 3, 1996, and as
further amended by a Second Amendment to Credit Agreement dated as of April 22,
1996, a Third Amendment to Credit Agreement dated as of December 31, 1997, and
a Fourth Amendment to Credit Agreement dated as of January 30, 1998, by and
between the Lender and the Borrower (as so amended and affected, the "Credit
Agreement"), pursuant to which the Lender committed, among other things, to
make loans, advances, and other credit facilities available to the Borrower;
WHEREAS, the parties desire to amend and restate the Credit Agreement
in its entirety, as hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing, for other valuable
consideration hereby acknowledged, and subject to the other terms and
conditions hereof, the Lender and the Borrower agree that the Credit Agreement
shall be and is hereby amended and restated in its entirety, effective the date
hereof, as follows:
<PAGE> 5
ARTICLE I
DEFINITIONS
SECTION 1.01. Definitions. As used in this Agreement, the following
terms shall have the respective meanings indicated below (such meanings to be
applicable equally to both the singular and plural forms of such terms).
"Adjusted LIBOR Rate" means, an interest rate per annum (rounded
upwards, if necessary, to the next higher 1/100 of 1%) equal to the quotient
obtained by dividing (a) the LIBOR Rate for such LIBOR Interest Period by (b) a
percentage equal to one hundred percent (100%) minus the Eurodollar Reserve
Percentage applicable during such LIBOR Interest Period (or, if more than one
Eurodollar Reserve Percentage is so applicable, minus the daily average of such
Eurodollar Reserve Percentage for those days in such LIBOR Interest Period
during which any such Eurodollar Reserve Percentage may be so applicable).
"Advance" shall mean a disbursement by the Lender to or for the
benefit of the Borrower, all as set forth in Section 2.01 hereof.
"Agreement" means this First Amended and Restated Credit Agreement,
and all amendments, modifications, and supplements thereto.
"Applicable Contract Rate" means either the Base Rate or the LIBOR
Fixed Rate, whichever is in effect during the particular time period in
question pursuant to the provisions of this Agreement.
"Authorized Officer" means, with respect to any act to be performed or
duty to be discharged by any entity which is not an individual, any officer or
other representative thereof then authorized to perform such act or discharge
such duty.
"Base Rate" means a fluctuating rate per annum which shall be equal to
the rate of interest
<PAGE> 6
established by the Lender in New York, New York, from time to time, as the
Lender's base rate of interest charged by Lender to commercial borrowers in the
United States of America.
"Base Rate Advance" means an Advance during such time as it bears
interest, from time to time, at the Base Rate pursuant to the provisions of
this Agreement.
"Business Day" means any day other than a Saturday, Sunday, or a
public holiday or the equivalent for banks generally under the laws of the
State of New York.
"Closing Date" means the date first shown herein, as of which this
Agreement is executed and effective.
"Commitment" has the meaning set forth for such term in Section 2.01
hereof.
"Consequential Loss" means, with respect to the Borrower's payment or
prepayment of the principal sum of a LIBOR Rate Advance on a day other than the
last day of the Interest Period applicable to such LIBOR Rate Advance, any loss
or expense incurred by the Lender in redepositing such principal sum,
including, without limitation, the sum of (a) the interest which, but for such
payment, the Lender would have earned at the applicable LIBOR Fixed Rate, in
respect of such LIBOR Rate Advance so paid or prepaid, for the remainder of the
LIBOR Interest Period; reduced, if the Lender is reasonably able to redeposit
such principal sum so paid for the balance of such LIBOR Interest Period in a
New York City bank, by the interest earned by the Lender as a result of so
redepositing such principal sum, plus (b) any expense or penalty incurred by
the Lender in redepositing the principal sum of such LIBOR Rate Advance.
"Conversion Date" has the meaning specified in Section 2.06(c)(2)
hereof.
"Conversion Option" has the meaning specified in Section 2.06(c)(2)
hereof.
3
<PAGE> 7
"EBITDA" means the Borrower's earnings before deduction of interest,
taxes, depreciation, and amortization.
"Employee Plan" means an employee benefit plan or other plan covered
by Title IV of ERISA and maintained in whole or in part for employees of the
Borrower.
"ERISA" means the Employee Retirement Income Security Act of 1974,
together with the rules and regulations promulgated thereunder, as in effect
from time to time.
"Eurodollar Reserve Percentage" means, as of the date of any
determination, that reserve percentage actually required to be reserved by the
Lender with respect to the Advances, which percentage is applicable during any
LIBOR Interest Period (or if more than one such percentage is so applicable,
the daily average of such percentages for those days in such LIBOR Interest
Period during which any such percentage shall be applicable) under the
regulations issued, from time to time, by the Board of Governors of the Federal
Reserve System (or other governmental authority having jurisdiction with regard
thereto or any successor), for determining the maximum reserve requirements
(including, without limitation, basic, supplemental, transitional, emergency,
or marginal reserve requirements) for the Lender in respect to liabilities or
assets consisting of, or including, "Eurocurrency liabilities" as defined in
Regulation D. It shall be assumed, for purposes of computing reserve costs
hereunder, that the making and maintaining of the LIBOR Rate Advances have been
accomplished by the Lender through the Lender's principal office in New York
City, New York.
"Event of Default" means any of the events set forth in Section 6.01
hereof.
"Fixed Charges" means, for any applicable period specified in Section
5.01(c) hereof, the
4
<PAGE> 8
aggregate of the Borrower's interest expense, lease expense, principal
payments, dividends and anticipated annual maintenance capital expenditures of
$4,000,000.
"Increased Costs" shall have the meaning specified in Section 2.07(b)
hereof.
"Indebtedness" means (i) all indebtedness or other obligations for
borrowed money or for the deferred purchase price of property or services, (ii)
all indebtedness or other obligations of another person for borrowed money, the
deferred purchase price of property or services (except for accounts payable by
the Borrower which have been incurred by the Borrower in the ordinary course of
its business), or otherwise, the payment or collection of which the Borrower
has guaranteed or in respect of which the Borrower has any direct or contingent
liability which is reportable on the Borrower's financial statements in
accordance with generally accepted accounting principles, (iii) all lease
obligations that, in accordance with generally accepted accounting principles
consistently applied, have been or should be capitalized on the books of the
lessee and, for purposes hereof, the amount of such obligation shall be the
capitalized amount thereof determined in accordance with such principles, and
(iv) any equity or other interest which, by its terms, is convertible into a
debt instrument.
"Interest Payment Date" means, as to either a Base Rate Advance or a
LIBOR Rate Advance, the first (1st) day of each calendar month during the term
of the Commitment.
"Interest Rate Option" has the meaning specified in Section 2.06(a)
hereof.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as
amended.
"LIBOR Fixed Rate" means, during the applicable LIBOR Interest Period
for a LIBOR Rate Advance, an interest rate per annum which shall be equal to
the sum of (a) the LIBOR Rate
5
<PAGE> 9
Margin plus (b) the Adjusted LIBOR Rate for such LIBOR Interest Period.
"LIBOR Interest Period" means, with respect to a LIBOR Rate Advance, a
period commencing on the date specified by notice from the Borrower to the
Lender and ending on (but excluding) the date which is 30, 60, or 90 days
thereafter, as the Borrower shall elect.
"LIBOR Rate" during each applicable LIBOR Interest Period for a LIBOR
Rate Advance, means an interest rate equal to the rate of interest per annum at
which U.S. dollar deposits are offered by the Lender to prime banks in the
London interbank market at 10:00 a.m. (London time) two Business Days prior to
the first (1st) day of such LIBOR Interest Period for a period equal to such
LIBOR Interest Period.
"LIBOR Rate Advance" means an Advance during such time as it bears
interest, from time to time, at the LIBOR Fixed Rate pursuant to the provisions
of this Agreement.
"LIBOR Rate Margin" means three-quarters of one percent (.75%) per
annum.
"Loan Documents" means this Agreement, the Note, and all amendments,
modifications, and supplements thereto.
"Maximum Rate" means the maximum rate of interest, if any, from time
to time permitted under federal or Texas laws applicable to the indebtedness
evidenced hereby.
"No-Default Certificate" means a certificate by an authorized officer
of the Borrower, substantially in the form of Exhibit C hereto.
"Note" has the meaning set forth for such term in Section 2.11 hereof.
"Prohibited Transaction" has the meaning specified therefor in Section
4975 of the Internal Revenue Code or Title I of ERISA.
6
<PAGE> 10
"Regulation D" means Regulation D of the Board of Governors of the
Federal Reserve System, as from time to time in effect, and shall include any
successor or other regulation relating to reserve requirements applicable to
member banks of the Federal Reserve System.
"Reportable Event" has the meaning specified therefor in Title IV of
ERISA.
"Rollover Notice" means a notice in the form of Exhibit B hereto.
"Termination Date" means December 31, 2000; provided, however, that
such date may be extended by mutual consent for additional one-year periods;
provided further, however, if so extended, such extended date may be shortened
during any such one-year period to the end of any calendar quarter within such
one-year period, beginning March 31, 2001, upon not less than thirty (30) days
prior written notice from either party to the other party.
SECTION 1.02. Accounting and Other Terms. All accounting terms
used in this Agreement which are not otherwise defined herein shall be
construed in accordance with generally accepted accounting principles
consistently applied unless otherwise expressly stated herein.
ARTICLE II
AMOUNT AND TERMS OF THE COMMITMENT
SECTION 2.01. The Commitment. The Lender agrees, on the terms and
conditions hereinafter set forth, to make Advances to the Borrower in an
aggregate principal amount not to exceed Ten Million Dollars ($10,000,000), as
such commitment may be terminated pursuant to Section 2.04 hereof (the
"Commitment"). Such Advances shall be made from time to time on any Business
Day during the period from the Closing Date to the Termination Date. Each
Advance
7
<PAGE> 11
shall be in an amount not less than $100,000 or an integral multiple thereof,
except that an Advance may be in an amount equal to the entire unused
Commitment. Within the limits of the Commitment, the Borrower may borrow,
prepay pursuant to Section 2.08, and reborrow under this Section 2.01.
SECTION 2.02. Making the Advances. Each Advance shall be made on
the same day the Borrower has given notice to the Lender, provided the Lender
has received such notice by 12:00 p.m. (New York City time) on such date. Such
notice shall be by telephone and shall be promptly confirmed by the Borrower in
writing. All such notices shall specify the date and amount thereof. Upon
fulfillment by the Borrower of the applicable conditions set forth in Article
III, the Lender will make such Advance available to the Borrower in immediately
available funds at the Lender's office at 59 Wall Street, New York, New York
10005.
SECTION 2.03. Commitment Fee. The Borrower agrees to pay to the
Lender a commitment fee on the average daily unused portion of the Commitment
from the Closing Date until the Termination Date at the rate of three-eighths
(3/8) of one percent (1%) per annum, payable quarterly in arrears on the first
Business Day of each fiscal quarter of the Borrower for the immediately
preceding fiscal quarter of the Borrower in each year during such period,
commencing April 1, 1998, and ending on the Termination Date.
SECTION 2.04. Optional Termination of the Commitment. The Borrower
shall have the right, upon (i) at least thirty (30) days' notice to the Lender
prior to the end of each fiscal quarter of the Borrower after the first
anniversary of the Closing Date, and (ii) full repayment of all sums, both
principal and accrued interest, then outstanding, to terminate the
8
<PAGE> 12
Commitment in whole, but not in part. Simultaneously with any termination of
the Commitment under this Section, the Borrower shall pay to the Lender the
commitment fee earned through the Termination Date on the amount of the
Commitment so terminated.
SECTION 2.05. Selection of Interest Options. Subject to Section
2.06, and provided that no Event of Default shall have occurred and is
continuing, the outstanding principal balance of each Advance shall bear
interest at the LIBOR Fixed Rate or the Base Rate, in accordance with the
following:
(a) Interest on a Base Rate Advance. A Base Rate Advance
shall bear interest on the unpaid principal balance thereof, from time
to time outstanding, at a fluctuating interest rate per annum which
shall, from day to day, be equal to the lesser of either: (1) the
Base Rate; or (2) the Maximum Rate. Each change in either the Base
Rate or the Maximum Rate (or any component of the Base Rate or the
Maximum Rate) as the case may be, shall become effective, without
notice to the Borrower (which notice is hereby expressly waived by the
Borrower), on the date of each change in either of such interest rates
(or any component of any of such interest rates).
(b) Interest on a LIBOR Rate Advance. A LIBOR Rate
Advance shall bear interest, during each LIBOR Interest Period
applicable thereto, on the unpaid principal balance thereof, from time
to time outstanding, at an interest rate per annum which shall, from
day to day, be equal to the lesser of either: (1) the applicable
LIBOR Fixed Rate; or (2) the Maximum Rate. Each change in the Maximum
Rate or any component of the Maximum Rate, as the case may be, shall
become effective, without notice to the
9
<PAGE> 13
Borrower (which notice is hereby expressly waived by the Borrower) on
the date of each change in such interest rate or any component of such
interest rate.
(c) Advance Deemed To Be Base Rate Advance. Unless the
Borrower selects the LIBOR Fixed Rate as the Applicable Contract Rate
with regard to an Advance, as provided for in this Article II, such
Advance shall be deemed to be a Base Rate Advance for the purpose of
computing interest thereon pursuant to this Agreement.
(d) Interest Recoupment. If, at any time, the Applicable
Contract Rate then in effect shall exceed the Maximum Rate, thereby
causing the Applicable Contract Rate to be limited to the Maximum
Rate, any subsequent reductions in the Applicable Contract Rate shall
not reduce the Applicable Contract Rate below the Maximum Rate until
the total amount of interest accrued on the unpaid principal balance
of the Advances from time to time outstanding during the term thereof,
equals the amount of interest which would have accrued thereon if the
various Applicable Contract Rates which are applicable to the unpaid
principal balances of the Advances from time to time outstanding
during the term of this Agreement, had at all times been in effect
without the limitation of the Maximum Rate.
(e) Final Interest Payment. If on the date of the final
payment of all Advances (whether on the Termination Date or
otherwise), the total amount of interest actually paid, or accrued,
under the provisions of the Loan Documents is less than the total
amount of interest which would have accrued if the various Applicable
Contract Rates had at all times been applicable to the principal
balance of the Advances, from time to time
10
<PAGE> 14
outstanding, during the term of this Agreement, the Borrower agrees to
pay, to the extent permitted by applicable law, to the Lender an
amount equal to the difference between: (1) the lesser of either (A)
the amount of interest which would have accrued on the Advances if the
Maximum Rate had at all times been in effect, or (B) the amount of
interest which would have accrued on the Advances if the various
Applicable Contract Rates had at all times been in effect without the
limitation of the Maximum Rate; and (2) the amount of interest which
has actually accrued or been paid on the Advances through the date of
such final payment in accordance with the provisions of the Loan
Documents.
(f) Interest After Maturity of the Advances. All
delinquent payments of principal and/or interest on the Advances shall
bear interest at a fluctuating rate per annum equal to the Base Rate
plus four percent (4%) from the date due until paid.
(g) Interest Payment Dates. Interest on the aggregate
principal balance of the Advances from time to time outstanding shall
be payable as it accrues on each Interest Payment Date, beginning with
the Interest Payment Date following the Closing Date, and continuing
on each Interest Payment Date thereafter, until the maturity thereof.
(h) Payment on Business Day. If any payment of principal
or interest to be made on the Advances shall become due on a day other
than a Business Day, such payment may be made on the next succeeding
Business Day (unless the result of such extension of time would be to
extend the date for such payment into another calendar month, beyond
the maturity date of the Advances or beyond the expiration of the
applicable LIBOR Interest Period, in such event, said payment shall be
made on the
11
<PAGE> 15
Business Day immediately preceding the day on which such payment would
otherwise have been due) and such extension of time shall in such case
be included in computing of interest, if any, in connection with such
payment.
(i) Additional Amounts Payable Upon Prepayments or Other
Payments of LIBOR Rate Advances. If any LIBOR Rate Advance is to be
prepaid, or if the Borrower makes any principal payments with respect
to any such LIBOR Rate Advance on any date other than the last day of
the LIBOR Interest Period for such LIBOR Rate Advance, the Borrower
shall reimburse the Lender, on demand, for all Consequential Loss and
Increased Costs incurred by Lender, plus all accrued, but unpaid,
interest on the amount so prepaid to such prepayment or payment date,
together with any other amounts owing to the Lender in connection with
such prepayment or payment pursuant to the terms of this Agreement or
any of the other Loan Documents. All prepayments (whether optional or
otherwise) made pursuant to this Agreement shall be applied first to
accrued, but unpaid, interest and then to principal. A certificate of
the Lender setting forth the amount of any such loss or cost shall, in
the absence of manifest error or bad faith, be final, binding, and
conclusive for all purposes. Any conversion of any LIBOR Rate Advance
to a Base Rate Advance on a day other than on the last day of the
applicable LIBOR Interest Period shall be deemed a principal
prepayment for the purpose of this Subsection 2.05(i).
SECTION 2.06 Interest Rate Options.
(a) Interest Rate Options. Subject to the provisions of
this Section 2.06, and provided that no Event of Default has occurred
and is continuing, the Borrower shall have
12
<PAGE> 16
the option of having an Advance bear interest at the Base Rate or the
LIBOR Fixed Rate (an "Interest Rate Option"); provided, however, that
(i) the Borrower may not have more than three (3) Interest Rate
Options which select the LIBOR Fixed Rate for the Advances in effect
at any one time and (ii) no Interest Rate Option which selects the
LIBOR Fixed Rate for any portion of the Advances shall be for an
amount less than the principal amount of $2,000,000 plus an integral
multiple of $100,000.
(b) Changes in Interest Rate Options. Each change in
Interest Rate Options made pursuant to this Section 2.06 shall, for
all purposes of this Agreement, be deemed both a payment of the Base
Rate Advance or LIBOR Rate Advance, whichever is applicable, from
which such change was made and a borrowing (notwithstanding that the
aggregate unpaid principal of the Advances is not thereby changed) of
the Base Rate Advance or LIBOR Rate Advance, whichever is applicable,
into which such Advance is converted.
(c) Selection of Interest Rate Options. The Borrower may
select an Interest Rate Option by giving the Lender a Rollover Notice
in accordance with the provisions of subsections (1) or (2) below, as
applicable, which notice shall specify a LIBOR Interest Period;
provided, however, that (i) any LIBOR Interest Period which would
otherwise end on a day which is not a Business Day shall be extended
to the next succeeding Business Day, unless the result of such
extension would be to extend such LIBOR Interest Period into another
calendar month, in which event such LIBOR Interest Period shall end on
the immediately preceding Business Day; (ii) any LIBOR Interest Period
that begins
13
<PAGE> 17
on the last Business Day of a calendar month shall end on the last
Business Day of a calendar month; (iii) any LIBOR Interest Period
which begins on a day for which there is no numerically corresponding
day in the calendar month at the end of such LIBOR Interest Period
shall end on the last Business Day of such calendar month; (iv) the
length of each LIBOR Interest Period selected by the Borrower shall be
irrevocable for the period so selected; and (v) no LIBOR Interest
Period shall extend beyond the Termination Date.
(1) Selection at Expiration of LIBOR Interest
Period. Before the termination of any LIBOR Interest Period,
and provided that no Event of Default has occurred and is
continuing, the Borrower shall give the Lender a Rollover
Notice specifying the Interest Rate Option which shall be
applicable to such LIBOR Rate Advance upon the expiration of
such LIBOR Interest Period. Such Rollover Notice shall be
given to the Lender at least three (3) Business Days before
the termination of such LIBOR Interest Period. If the
Borrower shall specify the LIBOR Fixed Rate, such Rollover
Notice shall also specify the length of the succeeding LIBOR
Interest Period selected by the Borrower. Each Rollover
Notice shall be irrevocable and effective upon receipt thereof
by the Lender. If the required Rollover Notice shall not have
been timely received by the Lender as herein provided before
expiration of the then relevant LIBOR Interest Period, the
applicable LIBOR Rate Advance shall be automatically converted
to a Base Rate Advance on the last day of the then current
LIBOR
14
<PAGE> 18
Interest Period for such LIBOR Rate Advance.
(2) Conversion Option. With respect to Base Rate
Advances, and provided no Event of Default has occurred and is
continuing, the Borrower shall have the option ("Conversion
Option"), on any Business Day ("Conversion Date"), to convert
from the Base Rate to the LIBOR Fixed Rate by giving the
Lender a Rollover Notice specifying such Conversion Option at
least three (3) Business Days prior to such Conversion Date.
SECTION 2.07 Special Provisions for LIBOR Rate Advances.
(a) Unavailability, Illegality, or Inadequacy of the
LIBOR Fixed Rate. If at any time the Lender determines (which
determination shall, for all purposes, be final, conclusive, and
binding on the Borrower) that: (1) the Lender is unable, or that it
has become unlawful for the Lender to obtain, or cause to be obtained,
funds in the London interbank market in order to make, fund, or
maintain the principal balances of any LIBOR Rate Advances during any
applicable LIBOR Interest Period; or (2) the LIBOR Fixed Rate will not
adequately and fairly reflect the cost to the Lender of making,
maintaining, or funding LIBOR Rate Advances for such LIBOR Interest
Period, the Lender shall so notify the Borrower by telephone or telex
(to be confirmed in writing) of such determination, whereupon, until
the Lender notifies the Borrower that the circumstances which have
given rise to such notice no longer exist, (A) the obligation of the
Lender to provide the LIBOR Fixed Rate with respect to such LIBOR Rate
Advances shall be suspended, and (B) such LIBOR Rate Advances shall be
made, continued as, or
15
<PAGE> 19
converted to Base Rate Advances.
(b) Increased Costs. If due either to: (1) the
introduction of, or any change (including, without limitation, any
change by way of any imposition or increase of reserve requirements)
in the interpretation of, any law or regulation, including, without
limitation, Regulation D or (2) the compliance by the Lender with any
guideline or request from any central bank or other governmental
authority (whether or not having the force of law), there shall be any
increase in the cost to the Lender of agreeing to make, fund, or
maintain the LIBOR Rate Advances (such costs being herein collectively
called "Increased Costs"), the Borrower shall, from time to time, upon
demand by the Lender, pay to the Lender, such additional amounts as
are sufficient to indemnify the Lender against such Increased Costs.
Absent manifest error, a certificate as to the amount of such
Increased Costs, submitted to the Borrower by the Lender shall, for
all purposes, be final, conclusive, and binding on the Borrower. It
shall be assumed for purposes of computing Increased Costs, that the
making and maintaining of LIBOR Rate Advances has been by the Lender's
principal office in New York City, New York.
(c) Indemnity. Without prejudice to any other provisions
of this Agreement or any of the other Loan Documents, the Borrower
shall indemnify the Lender against any loss or expense which the
Lender (or its branches, subsidiaries, affiliates, or partners) may
sustain or incur as a consequence of any Event of Default by the
Borrower in making any payment when due of any amount due hereunder or
in making any scheduled borrowing hereunder with respect to any LIBOR
Rate Advance, including, without
16
<PAGE> 20
limitation, any loss of profit, premium or penalty incurred by the
Lender (or its branches, subsidiaries, affiliates, or partners) in
respect of funds borrowed by the Lender (or its branches,
subsidiaries, affiliates, or partners), for the purpose of maintaining
such LIBOR Rate Advance, as determined by the Lender in the exercise
of its sole, but reasonable, discretion. Absent manifest error, a
certificate as to any such loss or expense submitted by the Lender to
the Borrower shall, for all purposes, be final, conclusive, and
binding on the Borrower.
SECTION 2.08. Prepayments. The Borrower shall have the right to
prepay any principal amount of any Advance, in whole or in part, subject to the
requirements of Sections 2.05(i) and 2.09, but otherwise without premium or
penalty; provided, however, that each such partial prepayment shall be in an
integral multiple of $100,000, except that a prepayment may be in an amount
equal to the entire outstanding principal balance of all Advances.
SECTION 2.09. Indemnity and Release. The Borrower shall indemnify
the Lender against any loss or expense which the Lender may sustain or incur as
a consequence of any failure by the Borrower to fulfill on the date of any
Advance hereunder the applicable conditions set forth in Article III, any
default in payment or prepayment of the principal amount of any Advance or any
part thereof or interest accrued thereon, as and when due and payable (at the
due date thereof, by irrevocable notice of prepayment, or otherwise), or the
occurrence of any Event of Default. By its execution hereof, the Borrower
hereby certifies to the Lender that as of the date hereof, (i) all
representations and warranties heretofore made by it under any credit
agreement, promissory note or other instrument or document related thereto
which are amended
17
<PAGE> 21
by or which relate to this Agreement are true in all material respects, (ii)
the Borrower does not have or claim to have any offset, counterclaim, or
defense to any of its obligations under any of such prior instruments or
documents, and (iii) in consideration of and to induce the Lender's agreement
to the terms of this Agreement, the Borrower, for itself and its successors and
assigns, does hereby RELEASE, ACQUIT, and FOREVER DISCHARGE the Lender, its
partners, officers, employees, agents, attorneys, other representatives and all
other persons, (collectively, the "Indemnitees") who might be liable, from any
and all claims, demands, liabilities, and causes of action of whatsoever
nature, whether in contract or in tort, or arising under or by virtue of any
statute, rule, regulation, or other laws, for all losses and damages, including
but not limited to exemplary and punitive damages, that have accrued or may
ever accrue to the Borrower and its successors and assigns, and which arise out
of, result from, or are caused by any act or omission of any one or more of the
Indemnitees on or prior to the date hereof in connection with the Loan
Documents, or any matter or thing in connection therewith or related thereto.
The Lender shall use its best efforts to mitigate any loss and to reduce any
expense for which it is being indemnified pursuant to this Section.
SECTION 2.10. Payments and Computations. (a) The Borrower shall
make each payment hereunder and under the Note not later than 12:00
noon (New York City time) on the day when due in lawful money of the
United States of America to the Lender for the account of Borrower at
the Lender's office at 59 Wall Street, New York, New York 10005, in
same day funds.
(b) The Borrower hereby authorizes the Lender, if and to the
extent payment for
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interest, principal, or fees is not made when due hereunder or under
the Note, to charge from time to time against any of the Borrower's
accounts with the Lender any amount so due.
(c) Except to the extent the result would cause an interest
rate to exceed the Maximum Rate, all computations of interest and of
commitment fees hereunder shall be made by the Lender on the basis of
a year of 360 days for the actual number of days (including the first
day but excluding the last day) occurring in the period for which such
interest or commitment fee is payable.
SECTION 2.11. Evidence of Debt. The indebtedness of the Borrower
resulting from all Advances made from time to time shall be evidenced by a
promissory note of the Borrower, in substantially the form of Exhibit A hereto
(the "Note"), delivered to the Lender pursuant to Article III.
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Condition Precedent to Initial Advance. The
obligation of the Lender to make its initial Advance is subject to the
fulfillment, in a manner satisfactory to the Lender, of each of the following
conditions precedent:
(a) The making of the Commitment shall not contravene any
law, rule, or regulation applicable to the Lender.
(b) No material adverse change in the condition or
operations, financial or otherwise, of the Borrower, as reasonably
determined by the Lender, shall have occurred
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and be continuing since the date of the latest audited financial
statements of the Borrower provided to the Lender, the representations
and warranties contained in Section 4.01 shall be true and correct,
and no event shall have occurred and be continuing, or would result
from such Advance, which constitutes or could constitute an Event of
Default, as set forth in a certificate from an Authorized Officer of
the Borrower dated as of the Closing Date.
(c) The Lender shall have received on or before the
Closing Date the following, in form and substance satisfactory to the
Lender:
(i) the Note, duly executed by the Borrower;
(ii) a copy of the resolutions of the Borrower's
Board of Directors, certified as of the Closing Date by an
Authorized Officer thereof, authorizing (A) the transactions
contemplated by the Loan Documents to which the Borrower is a
party and (B) the execution, delivery, and performance by the
Borrower of the Loan Documents;
(iii) a certificate, dated as of the Closing Date,
of an Authorized Officer of the Borrower, certifying the names
and genuine signatures of the officers of the Borrower
authorized to sign on behalf of the Borrower the Loan
Documents and the other documents to be executed and delivered
by the Borrower in connection herewith, together with evidence
of the incumbency of such Authorized Officer;
(iv) a copy of the Articles of Incorporation of
the Borrower, recently certified by the Secretary of State of
the State of Delaware;
(v) a copy of the By-laws of the Borrower,
certified as of the Closing
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Date by an Authorized Officer;
(vi) Certificates of Existence and Good Standing
of the Borrower, issued by the appropriate government
officials of the State of Delaware, the State of Texas and any
other applicable jurisdiction, together with any other
evidence satisfactory to the Lender that the Borrower has been
duly formed, is validly existing and in good standing under
the laws of the State of Delaware and has been duly qualified
to do business and is in good standing under the laws of the
State of Texas and each other jurisdiction where the Borrower
does business;
(vii) a favorable written opinion of Thompson &
Knight, P.C., counsel to the Borrower, dated the Closing Date,
as to such matters as the Lender may reasonably request; and
(viii) payment of a closing fee of $25,000.
SECTION 3.02. Conditions Precedent to All Advances. The obligation
of the Lender to make each Advance shall be subject to the further conditions
precedent that, on the date of such Advance (a) the Lender shall have received
a notice of such Advance as required by Section 2.02 hereof, (b) the following
statements shall be true, and by making or sending any such notice of an
Advance, the Borrower shall be deemed to have made the following statements to
the Lender as of the date on which such notice is made or sent to the Lender:
(i) The representations and warranties contained
in Section 4.01 are true and correct on and as of the date of
such Advance as though made on and as of such date, and
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(ii) No event has occurred and is continuing, or
would result from such Advance, which constitutes an Event of
Default; and
(c) the Lender shall have received such other approvals, opinions, or documents
as the Lender may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties. The Borrower
represents and warrants as follows:
(a) The Borrower is a corporation duly organized and
validly existing under the laws of the State of Delaware. The Borrower
is duly qualified to do business and in good standing in the States of
Texas, Louisiana, Alabama, and every other jurisdiction in which the
transaction of any material portion of its business (as now conducted
and as currently contemplated) makes such qualification necessary.
(b) The execution, delivery, and performance by the
Borrower of each Loan Document is within the Borrower's powers, has
been duly authorized by all necessary action, does not contravene (i)
the Borrower's charter or by-laws or (ii) any law or governmental
regulation or contractual restriction binding on or affecting the
Borrower or any of its properties, and does not result in or require
the creation of any lien, security interest, or other charge or
encumbrance upon or with respect to any of its properties.
(c) No authorization or approval or other action by, and
no notice to or filing with, any governmental authority or regulatory
body is required for the due execution,
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delivery, and performance by the Borrower of any Loan Document to
which it is or will be a party.
(d) This Agreement is, and each Loan Document to which
the Borrower will be a party when delivered hereunder, will be the
legal, valid, and binding obligations of the Borrower, legally
enforceable against the Borrower in accordance with their respective
terms.
(e) Except as set forth on Schedule I hereto, there is no
action, suit, or proceeding pending or threatened against or otherwise
affecting the Borrower before any court, arbitrator, or governmental
department, commission, board, bureau, agency, or instrumentality,
which may materially adversely affect the condition or operations,
financial or otherwise, of the Borrower or the ability of the Borrower
to perform its obligations under the Loan Documents.
(f) The financial statements of the Borrower heretofore
provided to the Lender by the Borrower fairly present the financial
condition of the Borrower as at the respective dates thereof, and the
results of operations of the Borrower for the fiscal periods ended on
such respective dates, all in accordance with generally accepted
accounting principles consistently applied, subject to changes
resulting from normal year-end audit adjustments, and, since December
31, 1996, there has been no material adverse change in such condition
or operations.
(g) The Borrower is not engaged in the business of
extending credit for the purpose of purchasing, carrying, or trading
in securities (within the meaning of
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Regulation T issued by the Board of Governors of the Federal Reserve
System), and no proceeds of any Advance will be used to purchase,
carry, or trade in any such securities or to extend credit to others
for the purpose of purchasing, carrying, or trading in any such
securities.
(h) All federal, state, and local tax returns and other
material reports required by applicable law to be filed by the
Borrower have been filed, and except with respect to any taxes,
assessments, or other governmental charges being contested in good
faith by the Borrower, all taxes, assessments, and other governmental
charges imposed upon the Borrower or any of its properties which have
become due and payable on or prior to the date hereof have been paid.
(i) Each Employee Plan, if any, of the Borrower has
satisfied the minimum funding standards under the Internal Revenue
Code and ERISA applicable thereto, and no Employee Plan, if any, has
an accumulated funding deficiency thereunder. The Borrower has not
incurred any liability under ERISA to the Pension Benefit Guaranty
Corporation with respect to any Employee Plan, and no Reportable Event
or other event has occurred which could constitute grounds for the
termination of any Employee Plan by the Pension Benefit Guaranty
Corporation or the appointment of a trustee to administer any Employee
Plan. The Borrower has not participated in any Prohibited Transaction
with respect to any Employee Plan or trust created thereunder, and the
consummation of the transactions contemplated hereby will not involve
any Prohibited Transaction. The Borrower is not in the process of
terminating any Employee Plan, which could result in the creation of
any
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material liability for the Borrower.
(j) The Borrower has not violated its charter or by-laws
or any law, governmental regulation, order, judgment, or any agreement
or instrument binding on or affecting it or any of its properties in
such a manner so as to result in a material adverse change to the
condition or operations, financial or otherwise, of the Borrower.
(k) Except as set forth on Schedule II hereto, and except
as may be created by statute, all of the real property owned by the
Borrower, including any and all real property leasehold interests, is
free and clear of all liens, security interests, and other charges and
encumbrances.
(l) The Borrower has not made a material misstatement of
or failed to disclose a material fact to the Lender at any time during
the course of the negotiations related to this Agreement or in
connection with the Advances.
(m) No proceeds of any Advance will be used to acquire
any security in any transaction which is subject to Sections 13 and 14
of the Securities Exchange Act of 1934. All proceeds of the Advances
will be used for general corporate and working capital purposes.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any principal of
or interest on the Note shall remain unpaid or the Lender shall have any
Commitment hereunder, the Borrower will, unless the Lender shall otherwise
consent in writing:
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(a) Current Ratio. Maintain a ratio of its current
assets to its current liabilities of not less than 2.5 to 1.0.
(b) Minimum Tangible Net Worth. Maintain an amount of
tangible net worth of at least $60,000,000 at all times during
its fiscal year 1998, and cause the amount of such capital to
increase in each fiscal year thereafter by at least fifty
percent (50%) of its net income in the immediately preceding
fiscal year.
(c) Earnings Ratio. Maintain a ratio of its EBITDA to
its Fixed Charges greater than 2.5 to 1.0 calculated quarterly
on a rolling four (4) quarter basis for the four (4) quarters
immediately preceding the date of such calculation.
(d) Ratio of Debt to Worth. Maintain a ratio of its
total Indebtedness to its tangible net worth of less than 0.5
to 1.0.
(e) Capital Expenditures. Maintain its level of capital
expenditures in any fiscal year at a level not more than twice
the amount of its EBITDA for the preceding fiscal year.
(f) Reporting Requirements. Furnish to the Lender:
(i) as soon as available and in any event within
45 days after the end of each quarter of each fiscal year of
the Borrower, (A) unaudited financial statements (including a
balance sheet, income statement, and statement of cash flows)
of the Borrower as of the end of such quarter, in reasonable
detail, prepared in accordance with generally accepted
accounting principles consistently applied and duly certified
by the Treasurer of the Borrower as (1) fairly presenting
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the financial condition of the Borrower at the end of such
quarter and the results of the operations of the Borrower for
such period (subject to changes resulting from normal year-end
audit adjustments) and (2) having been prepared in accordance
with generally accepted accounting principles consistently
applied, together with a No-Default Certificate of such
officer, together with (B) a copy of SEC Form 10-Q, as filed
by the Borrower with the Securities and Exchange Commission
for such quarter;
(ii) as soon as available and in any event within
90 days after the end of each fiscal year of the Borrower, (A)
audited financial statements (including a balance sheet,
income statement, and statement of cash flows) of the Borrower
for such fiscal year, all in reasonable detail, prepared in
accordance with generally accepted accounting principles
consistently applied, accompanied by a report and opinion and
a No-Default Certificate, based on an end-of-year review, each
in form and substance reasonably satisfactory to the Lender,
of a public accounting firm reasonably satisfactory to the
Lender, together with (B) a copy of SEC Form 10-K, as filed by
the Borrower with the Securities and Exchange Commission for
such fiscal year;
(iii) as soon as possible and in any event within
five (5) days after the occurrence of each Event of Default or
event which, with the giving of notice or the lapse of time or
both, would constitute an Event of Default, and which is
continuing on the date of such statement, the statement of the
Treasurer or the
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President of the Borrower setting forth the details of such
Event of Default or event and the action which the Borrower
proposes to take with respect thereto;
(iv) promptly after the filing or receipt thereof,
copies of all reports and notices, if any, which the Borrower
either (A) files in respect of any Employee Plan under the
Internal Revenue Code or ERISA with the Internal Revenue
Service, the Pension Benefit Guaranty Corporation or the U.S.
Department of Labor, or which the Borrower receives from any
agency thereof, (B) furnishes to any holders of any
Indebtedness of the Borrower, or (C) files with the Securities
and Exchange Commission on SEC Form 8-K, if any of the
information therein could form the basis of, or any dispute
referred to therein which, if determined adversely to the
Borrower, could constitute or give rise to, an Event of
Default or an event which, with the giving of notice or the
lapse of time or both, would constitute an Event of Default;
(v) within five Business Days after the knowledge
of the Borrower of the commencement thereof, notice of each
action, suit, or proceeding before any court, arbitrator, or
governmental department, commission, board, bureau, agency, or
instrumentality involving a claim which may materially
adversely affect the condition or operations, financial or
otherwise, of the Borrower;
(vi) as soon as available and in any event within
45 days after the end of each fiscal quarter of the Borrower,
a quarterly summary setting forth any contingent liability
(including but not limited to any liability as a guarantor,
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surety, warrantor, or account party to a letter of credit)
incurred, assumed, or created during such period and any
material joint venture or partnership entered into by the
Borrower; and
(vii) promptly upon request, such other information
concerning the condition or operations, financial or
otherwise, as the Lender may from time to time reasonably
request.
(g) Maintenance of Existence, Compliance with Laws. Etc.
Maintain its legal existence and permits and authority to do business
in all jurisdictions where the nature of its business requires such
permits and authority to be maintained, and comply in all material
respects with all applicable laws, rules, regulations, and orders,
such compliance to include, without limitation, compliance with ERISA
and all applicable laws pertaining to the environment and workers'
health and safety, paying before the same become delinquent all taxes,
assessments, and governmental charges or levies imposed upon it or
upon its income or profits or upon any of its properties, and paying
all lawful claims which if unpaid might become a lien or charge upon
any of its properties, except to the extent any such taxes,
assessments, governmental charges or levies, and claims may be
diligently contested by the Borrower in good faith and by appropriate
proceedings, and for which adequate reserves have been established by
the Borrower.
(h) Insurance. (i) Keep its insurable properties
adequately insured at all times by financially sound and reputable
insurers to such extent and against such risks, including fire and
other risks insured against by extended coverage, as is customary with
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companies similarly situated and in the same or similar businesses,
(ii) maintain in full force and effect public liability insurance
against claims for personal injury or death or property damage
occurring upon, in, about, or in connection with the use of any
properties owned, occupied, or controlled by the Borrower, in such
amount as shall be reasonably necessary, and (iii) maintain such other
insurance as may be required by law. The amounts and types of
insurance coverages and the insurers issuing such coverages shall be
subject to the Lender's approval, which approval shall not be
unreasonably withheld.
(i) Keeping of Records and Books of Account. Keep
adequate records and books of account, with complete entries made in
accordance with generally accepted accounting principles consistently
applied, reflecting all of its financial transactions.
(j) Inspection Rights. Permit the Lender or any of its
representatives or agents at any reasonable time and from time to
time, upon reasonable notice, to examine and make copies of and
abstracts from its records and books of account, to visit and inspect
its properties and to discuss its affairs, finances, and accounts with
any of the directors or officers thereof, all as the Lender may
reasonably request.
SECTION 5.02. Negative Covenants. So long as any principal of or
interest on the Note shall remain unpaid or the Lender shall have any
Commitment hereunder, the Borrower will not, without the prior written consent
of the Lender:
(a) Liens, Etc. Create or suffer to exist any lien,
security interest, or other charge or encumbrance, or any other type
of preferential arrangement, upon or with
30
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respect to any of its properties, rights, or other assets, whether now
owned or hereafter acquired, other than:
(i) liens existing as of the date hereof, as
shown on Schedule II hereto; and
(ii) such other liens as may be mutually agreed
upon by the Lender and the Borrower from time to time.
(b) Indebtedness. Create, incur, or suffer to exist any
Indebtedness which would cause the ratio of its total Indebtedness to
its tangible net worth to exceed the ratio specified in Section
5.01(d), above.
(c) Change in Nature of Business. Change the primary
nature of its business from the manufacture of ceramic proppants.
(d) Sales, Etc. of Assets. Sell, assign, lease, or
otherwise dispose of any of its assets, or any part thereof, including
its receivables, except in the ordinary course of business.
(e) Consolidation, Merger, Etc. Consolidate with, merge
into, or acquire any other entity or convey, transfer, or lease its
properties, voting stock, and assets substantially as an entirety to
any person or entity, or permit any entity to consolidate with, merge
into, or acquire the Borrower or convey, transfer, or lease its
properties, voting stock, or assets substantially as an entirety to
the Borrower; provided, however, that the Lender's prior written
consent shall not be required for any such transaction (i) in which
the other party's principal business is the same as or functionally
related to the
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Borrower's principal business and (ii) which, when combined with all
other such transactions consummated by the Borrower during any one of
its fiscal years does not involve an aggregate payment by the Borrower
of consideration in cash, securities, or otherwise, of more than
$40,000,000; provided further, that nothing in this subsection (e)
shall be deemed to permit the Borrower to incur any Indebtedness not
expressly permitted under subsection (b) of this Section 5.02.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following events
("Events of Default") shall occur and be continuing:
(a) The Borrower shall fail to pay any principal amount
of, or interest on, the Note when due; or
(b) Any representation or warranty made by the Borrower
(or any of its officers) under or in connection with any Loan Document
shall prove to have been incorrect in any material respect when made;
or
(c) The Borrower (i) shall fail to perform or observe any
covenant in subsections (c), (d), or (e) of Section 5.02 hereof, or
(ii) shall fail to perform or observe any other term, covenant, or
agreement contained in any Loan Document on its part to be performed
or observed, and which failure continues for a period of fifteen (15)
days or more, or
(d) The Borrower shall (i) fail to pay any Indebtedness,
including all currently
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existing Indebtedness of the Borrower to the Lender, but excluding
Indebtedness evidenced by the Note, of the Borrower, when due (whether
by scheduled maturity, required prepayment, acceleration, demand, or
otherwise) and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to
such Indebtedness, or (ii) fail to perform or observe any term,
covenant, or condition on its part to be performed or observed under
any agreement or instrument relating to any such Indebtedness, when
required to be performed or observed, and such failure shall continue
after the applicable grace period, if any, specified in such agreement
or instrument; or any such Indebtedness shall be declared to be due
and payable, or required to be prepaid (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof;
or
(e) The Borrower shall admit in writing its inability to
pay its debts as they come due, or shall make a general assignment for
the benefit of creditors; or any proceeding shall be instituted by or
against the Borrower seeking reorganization, arrangement, adjustment,
composition of it or its debts, or any other relief under any law
relating to bankruptcy, insolvency, reorganization, or relief of
debtors, or seeking appointment of a receiver, trustee, or other
similar official for it or for any substantial part of its property;
or the Borrower shall take any action to authorize any of the actions
set forth above in this subsection (e); or
(f) The Borrower shall receive notice of termination of
an Employee Plan by reason of the occurrence of a Reportable Event; or
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(g) The Borrower shall fail to maintain all material
licenses, authorizations, and approvals required to operate its
business, which failure is not cured to the Lender's satisfaction
within fifteen (15) days following the occurrence of such failure; or
(h) The Borrower shall liquidate, dissolve, or take any
action in contemplation thereof, or there shall be any change in the
material terms of Borrower's charter or by-laws without the prior
written consent of the Lender, which consent shall not be unreasonably
withheld; or
(i) The validity or the enforceability of any of the Loan
Documents is contested by the Borrower; or
(j) The entry of a final non-appealable judgment or order
against the Borrower for the payment of money of $1,000,000 or more in
excess of amounts covered by third-party insurance, and such judgment
or order shall continue unsatisfied and in effect for a period of 60
consecutive days; or
(k) The failure of the persons who were the shareholders
of the Borrower on March 31, 1996 to maintain their beneficial
ownership, in the aggregate, of at least fifty-one percent (51%) of
the outstanding voting stock of the Borrower; or
(l) Any action or proceeding shall be initiated by or
against the Borrower or any of its properties wherein the validity of
or the Borrower's right to use any patent, copyright, trademark, trade
secret, right, permit, license, or any other form of intellectual
property owned or held by the Borrower shall be contested, which
action or proceeding is not diligently prosecuted in good faith by the
Borrower in appropriate proceedings
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deemed by the Lender to be satisfactory; or
(m) Any event which, in the good-faith judgment of the
Lender, constitutes or could reasonably be expected to constitute or
result in a material adverse change in the financial condition or
business operations of the Borrower;
then, and in any such event, and the continuance thereof, the Lender may, by
notice to the Borrower, (i) declare its obligation to make Advances to be
terminated, whereupon the same shall forthwith terminate, and (ii) declare the
principal balances of all Advances and the Note, all accrued but unpaid
interest thereon, and other amounts properly payable under this Agreement to be
forthwith due and payable, whereupon the principal balances of all Advances and
the Note, all such interest, and all such amounts shall become and be forthwith
due and payable, without presentment, demand, protest, or further notice of any
kind, all of which are hereby expressly waived by the Borrower, (iii) take such
other actions as may be permitted under the Loan Documents, and (iv) exercise
any and all other remedies available under applicable law.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Amendments, Etc. No amendment or waiver of any
provision of the Loan Documents, nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Lender, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given.
SECTION 7.02. Notices, Etc. Except as otherwise specifically
provided herein, all
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notices and other communications provided for hereunder shall be in writing
(including telegraphic communication) and mailed or telegraphed or delivered,
if to the Borrower, at its address at 600 East Las Colinas Boulevard, Suite
1520, Irving, Texas 75039, Attention: Mr. Paul G. Vitek; if to the Lender, at
its address at 59 Wall Street, New York, New York 10005, Attention: Credit
Department; or, as to each party, at such other address as shall be designated
by such party in a written notice to the other party. All such notices and
communications shall, when mailed or telegraphed, be effective when deposited
in the mails or delivered to the telegraph company, respectively, addressed as
aforesaid.
SECTION 7.03. No Waiver; Remedies. No failure on the part of the
Lender to exercise, and no delay in exercising, any right under any Loan
Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under any Loan Document preclude any other or further
exercise thereof or the exercise of any other right. The remedies provided in
the Loan Documents are cumulative and not exclusive of any remedies that may be
available to the Lender at law, in equity, or otherwise. No notice to or demand
on the Borrower in any case shall entitle the Borrower to any other or further
notice or demand in similar or other circumstances.
SECTION 7.04. Costs, Expenses, and Taxes. (a) The Borrower agrees
to pay on demand all costs and expenses reasonably incurred by the Lender in
connection with the preparation, execution, delivery, filing, recording, and
administration of the Loan Documents and the other documents to be delivered
under the Loan Documents, including, without limitation, all fees and
out-of-pocket expenses of counsel for the Lender with respect thereto and
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with respect to advising the Lender as to its rights and responsibilities under
the Loan Documents, and all costs and expenses, if any, in connection with the
enforcement of the Loan Documents and the other documents to be delivered under
the Loan Documents. In addition, the Borrower shall pay any and all stamp and
other taxes, excluding taxes imposed on net income and all income and franchise
taxes of the United States and any political subdivisions thereof (all such
non-excluded taxes being herein referred to as "Taxes") and fees, if any,
payable or determined to be payable in connection with the execution and
delivery of the Loan Documents and the other documents to be delivered under
the Loan Documents, and agrees to save the Lender harmless from and against any
and all liabilities with respect to or resulting from any delay by the Borrower
in paying or omission to pay such Taxes and fees.
SECTION 7.05. Right of Set-off. Upon the occurrence and during the
continuance of any Event of Default, the Lender is hereby authorized at any
time and from time to time, to the fullest extent permitted by law, to set off
and apply any and all deposits (general or special, time or demand, provisional
or final) at any time held and other indebtedness at any time owing by the
Lender to or for the credit or the account of the Borrower against any and all
of the obligations of the Borrower now or hereafter existing under this
Agreement and the Note, irrespective or whether or not the Lender shall have
made any demand under this Agreement or the Note and although such obligations
may be unmatured. The Lender agrees to use its best efforts to notify the
Borrower promptly after any such set-off and application, provided that the
failure to give such notice shall not affect the validity of such set-off and
application. The rights of the Lender under this Section are in addition to
other rights and remedies (including, without
37
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limitation, other rights of set-off) which the Lender may have.
SECTION 7.06. Binding Effect. This Agreement shall be binding upon
and inure to the benefit of the Borrower and the Lender, and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the prior written
consent of the Lender. The Lender may, with the Borrower's consent, such
consent not to be unreasonably withheld or delayed, assign to one or more banks
or entities all or any part of, or may grant participations to one or more
banks or other entities in or to all or any part of, any Advance or Advances
and the Note, and to the extent of any such assignment or participation (unless
otherwise stated therein), the assignee or participant of such assignment or
participation shall have the same rights and benefits hereunder and under the
Note as it would have if it were the Lender hereunder.
SECTION 7.07. Governing Law. The Loan Documents shall be governed
by and construed in accordance with the laws of the State of Texas, except to
the extent any law, rule, or regulation of the federal government of the United
States of America may be applicable, in which case such federal law, rule, or
regulation shall govern and control; provided that the provisions of Chapter 15
of the Texas Credit Code shall not be applicable to this Agreement.
SECTION 7.08 Merger of Agreements. THE LOAN DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
38
<PAGE> 42
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
CARBO CERAMICS INC.
ATTEST:
By:
-------------------------------------
Print Name:
--------------------------
Title:
- ----------------------------- -------------------------------
per pro BROWN BROTHERS HARRIMAN & CO.
-----------------------------------------
Print Name:
------------------------------
Title:
-----------------------------------
39
<PAGE> 43
SCHEDULE I
Litigation
<PAGE> 44
SCHEDULE II
Permitted Liens
The following liens, security interests, and other charges and
encumbrances are expressly permitted under the terms of this Agreement, and the
amounts of such liens, security interests and other charges and encumbrances
described in (a), (b) and (c) below shall not exceed $500,000 in the aggregate
at any time during the term of this Agreement:
(a) Statutory and Good Faith Deposits. (i) Pledges or deposits
under workmen's compensation laws, unemployment insurance laws, the Social
Security Act, or similar legislation, and (ii) deposits to secure public or
statutory obligations of Borrower, surety, customs, appeal, or performance
bonds to which Borrower is a party, or the payment of contested taxes or import
duties of Borrower, each made and maintained in the ordinary course of
business;
(b) Statutory Liens. (i) Any lien which is imposed by law, such
as those of carriers, warehousemen, and mechanics, if payment of the obligation
secured thereby is not yet due, or the validity or amount of which is being
contested by appropriate legal proceedings, or (ii) any lien for taxes,
assessments, or other governmental charges of levies not yet subject to
penalties for nonpayment or the validity or amount of which is being contested
by appropriate legal proceedings;
(c) Minor Title Defects. Minor survey exceptions, minor
encumbrances, easements, or reservations of, or rights of others for, sewers,
electric lines, telegraph and telephone lines, rights of way, and other similar
purposes, or zoning or other restrictions as to the use of any real property;
provided that all of the foregoing, in the aggregate, do not at any time
materially detract from the value of said property or materially impair the use
of such property in the operation of the business of Borrower.
(d) Landlord's Liens. Security interests in favor of
Cambridge/Las Colinas Limited Partnership, as lessor, on personal property of
the Borrower now or hereafter attached or affixed to or used in or about the
premises leased by the said lessor to the Borrower, as lessee, at Cigna Tower,
600 E. Las Colinas Blvd., Suite 1520, Irving, Texas 75039.
(e) Equipment. Security interests in (i) a used Caterpillar 938F
Wheel Loader in favor of Thompson Tractor Co., Inc., as described in that
certain UCC-1 Financing Statement filed with the Secretary of State of the
State of Alabama on December 6, 1996, file No. 96-51148 and (ii) a new
Caterpillar 928F Wheel Loader in favor of Thompson Tractor Co., Inc., as
described in that certain UCC-1 Financing Statement filed with the Secretary of
State of the State of Alabama on February 24, 1997, file No. 97-07667.
<PAGE> 45
REVOLVING CREDIT NOTE
U.S. $10,000,000
Dated: February 12, 1998
FOR VALUE RECEIVED, the undersigned, CARBO CERAMICS INC., a Delaware
corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of BROWN
BROTHERS HARRIMAN & CO., a New York limited partnership (the "Lender") the
principal amount of each Advance made by the Lender to the Borrower pursuant to
the Credit Agreement (as hereinafter defined). All terms not otherwise defined
herein shall have the meanings set forth for such terms in the Credit
Agreement.
The Borrower promises to pay interest on the unpaid principal amount
of each Advance from the date of such Advance until such principal amount is
paid in full, at such interest rate, and payable at such times, as are
specified in the Credit Agreement. In no event, however, shall the rate of
interest charged hereunder exceed the Maximum Rate.
All agreements between the Borrower and the Lender, whether now
existing or hereafter arising and whether written for oral, are hereby
expressly limited so that in no event, whether by reason of acceleration of the
maturity hereof or otherwise, shall the amount paid or agreed to be paid to the
holder hereof for the use, forbearance or detention of the money to be loaned
hereunder or otherwise exceed the Maximum Rate. In fulfillment of any provision
hereof or of any loan agreement or other document evidencing or securing the
loan evidenced by this Note, at the time performance of such provision shall be
due, shall involve transcending the limit of validity prescribed by law, then,
ipso facto, the obligation to be fulfilled shall be reduced to the limit of
such validity; and if the holder of this Note shall ever receive anything of
value deemed to be interest under applicable law which would exceed interest at
the Maximum Rate, an amount equal to any such excessive interest shall be
applied to the reduction of the principal amount owing hereunder and not to the
payment of interest, or if such excessive interest exceeds the unpaid balance
of principal hereof, such excess shall be refunded to the Borrower. All sums
paid or agreed to be paid to the holder hereof for the use, forbearance, or
detention of the indebtedness of the Borrower to the Lender shall, to the
extent permitted by applicable law, be amortized, prorated, allocated, and
spread throughout the full term of such indebtedness until payment in full so
that the rate of interest of account of such indebtedness is uniform throughout
the term thereof. The provisions of this paragraph shall control all agreements
between the Borrower and the Lender.
Both principal and interest are payable for the account of Borrower in
lawful money of the United States of America to the Lender at its offices at 59
Wall Street, New York, New York 10005, in same day funds. Each Advance made by
the Lender to the Borrower and the maturity thereof, and all payments made on
account of principal hereof, shall be recorded by the Lender and, prior to any
transfer hereof, either endorsed on the grid attached hereto which is part of
this Promissory Note or maintained in comparable form within the Lender's
internal books and records (which may be electronic).
<PAGE> 46
The Borrower hereby affirms and certifies to the Lender that the
obligation evidenced by this note was not and will not be incurred for the
purposes of purchasing, carrying, or trading in securities, as defined in
Regulation T of the Board of Governors of the Federal Reserve System.
This Promissory Note is the Note referred to in, and is entitled to
the benefits of, the First Amended and Restated Credit Agreement dated as of
February 12, 1998 (the "Credit Agreement") between the Borrower and the Lender.
The Credit Agreement, among other things, (i) provides for the making of
advances (the "Advances") by the Lender to the Borrower from time to time in an
aggregate amount not to exceed at any time outstanding the U.S. dollar amount
first above mentioned, the indebtedness of the Borrower resulting from each
such Advance being evidenced by this Promissory Note, and (ii) contains
provisions for acceleration of the maturity hereof upon the happening of
certain stated events and also for prepayments on account of principal hereof
prior to the maturity hereof upon the terms and conditions therein specified.
This Promissory Note shall be governed by and construed in accordance with the
laws of the State of Texas, except to the extent any law, rule, or regulation
of the federal government of the United States of America may be applicable, in
which case such federal law, rule, or regulation shall govern and control;
provided that the provisions of Chapter 15 of the Texas Credit Code shall not
be applicable to this Promissory Note.
CARBO CERAMICS INC.
ATTEST:
By:
-------------------------------------
Print Name:
--------------------------
Title:
- ----------------------------- -------------------------------
<PAGE> 47
ADVANCES AND PAYMENTS OF PRINCIPAL
<TABLE>
<CAPTION>
Amount of Unpaid
Amount of Principal Principal Notations
Date Advance Payment Balance Made By
- ---- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE> 48
ROLLOVER AND CONVERSION NOTICE
DATE: ____________, 19__
LENDER: Brown Brothers Harriman & Co.
BORROWER: Carbo Ceramics Inc.
This notice is delivered pursuant to that certain First Amended and
Restated Credit Agreement dated as of February 12, 1998, between Brown Brothers
Harriman & Co, a New York limited partnership (the "Lender"), and Carbo
Ceramics Inc., a Delaware corporation (the "Borrower"). All the defined terms
contained in the Agreement have the same meanings when used herein.
1. Please be advised that the Borrower currently has an
outstanding principal indebtedness under an Advance in the amount of
$____________, bearing interest at the ______ Rate (Base Rate or LIBOR Fixed
Rate), [and the present LIBOR Interest Period for which ends on ____________,
19__ (if such Advance presently bears interest at the LIBOR Fixed Rate).]
2. Effective as of ____________, 19__ [which must be the last day
of the present LIBOR Interest Period if the Advance bears interest at the LIBOR
Fixed Rate], the Borrower requests that the principal indebtedness under such
Advance bear interest at the __________ Rate (Base Rate or LIBOR Fixed Rate)
[and (if such Advance is to bear interest at the LIBOR Fixed Rate) such balance
shall have a LIBOR Interest Period ending on ____________, 19__ (30, 60, or 90
days thereafter, but not later than the Termination Date).]
The Borrower hereby certifies to the Lender that on, and as of, the
date hereof the representations and warranties made in all of the Loan
Documents are, and will be, true and correct in all material respects, and no
Event of Default or any event which, with notice or lapse of time or both,
could become an Event of Default has occurred and is continuing.
Very truly yours,
CARBO CERAMICS INC.
By:
-------------------------------------
Print Name:
--------------------------
Title:
-------------------------------
<PAGE> 49
NO DEFAULT CERTIFICATE
Pursuant to Section 5.01(f) of that certain First Amended and Restated
Credit Agreement dated as of February 12, 1998 (the "Credit Agreement"),
between Carbo Ceramics Inc. (the "Borrower") and Brown Brothers Harriman & Co.
(the "Lender"), the undersigned, being the Treasurer of the Borrower, hereby
certifies to the Lender as follows:
On and as of the date hereof, no event has occurred which constitutes
an Event of Default under the Credit Agreement or which, with the giving of
notice or the lapse of time or both, would constitute an Event of Default under
the Credit Agreement.
IN WITNESS WHEREOF, this instrument is executed by the undersigned as
of __________________, 199_.
-----------------------------------------
, Treasurer
------------------------------
<PAGE> 1
Exhibit 10.9
RAW MATERIAL REQUIREMENTS AGREEMENT
THIS AGREEMENT (herein called "Agreement") made as of
____________________, 1997, between Arcilla Mining & Land Co., a corporation
organized and existing under the laws of the state of Georgia and having an
office at P.O. Box 1371, Milledgeville, Georgia 31061 ("Seller"), and CARBO
Ceramics Inc., a corporation organized and existing under the laws of the state
of Delaware and having an office at 600 East Las Colinas Boulevard, Suite 1520,
Irving, Texas 75039 ("Purchaser").
W I T N E S S E T H:
WHEREAS, Purchaser desires to purchase a supply of kaolin, a naturally
occurring mineral more particularly described (and meeting the specifications
set forth) in Exhibit A hereto (the "Product"), and,
WHEREAS, Seller is able and desires to supply Purchaser with such
Product,
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties agree as follows:
1. TERM
The term of this Agreement shall be twenty (20) years commencing
January 1, 1998, and ending December 31, 2017.
2. SELLER'S RESPONSIBILITIES
Seller shall be specifically responsible for the following (herein
called the "Work"):
A. Obtaining and maintaining a valid mining permit from the State
of Georgia and any other governmental body which requires
Seller to have a license or permit to mine and remove Product
from the Subject Properties pursuant to this Agreement.
B. Removing overburden from the Subject Properties in a manner so
as to allow Purchaser unimpeded access to a minimum of 40,000
tons of Product at any given time.
C. Maintaining roads to, from and across the Property in a manner
suitable to mine and remove from the Property the Product
described in this Contract.
1
<PAGE> 2
D. Reclaiming the Property in accordance with the permit(s)
Seller has obtained.
E. Providing to Purchaser a site of location, size and character
upon which to stockpile approximately 5,000 tons of the
Product and Seller shall mine such stockpile of 5,000 tons of
the Product at a cost to Purchaser of $1.35 per ton to be paid
upon completion of the stockpile. Seller shall maintain such
stockpile at all times during this Agreement.
F. Seller shall mine sufficient quantities of the Product to fill
orders made by Purchaser on an "as needed" basis.
G. Seller shall deliver to the Purchaser's manufacturing plant
(the "Plant") in Wilkinson County, Georgia the quantities of
the Product ordered by Purchaser.
3. QUANTITY
A. During the term of this Agreement, Seller shall make available
for sale to Purchaser and Purchaser shall have the right to
purchase from Seller up to 2,500,000 tons of the Product. For
the purposes of this agreement, a "ton" shall be defined as a
weight of 2000 pounds of wet, crude Product. "Wet" shall be
defined as any moisture content up to and including the
maximum amount specified in Exhibit A hereto.
B. In each year during the term of this Agreement, Purchaser
shall be obligated to purchase from Seller, as a minimum,
eighty percent (80%) of its actual annual requirements of the
Product during such year for its operations in Wilkinson
County, Georgia. In the event Seller fails to deliver Product
in a timely manner which has been ordered by Purchaser and
Purchaser purchases such Product from another source,
Purchaser shall deduct the amount of such purchase from the
minimum purchase requirements set out in the preceding
sentence.
4. PRICE
A. The price for the Product purchased from Seller shall be $6.00
per ton (the "Base Price Per Ton") delivered to Purchaser's
plant in Wilkinson County, Georgia.
B. The Base Price Per Ton, as adjusted from time to time, shall
be adjusted on May 1 of each year, beginning May 1, 1998,
using the percentage change between the previous two calendar
years' average monthly Producer Price Index ("PPI") for Kaolin
and Ball Clay (Product Code 1455) as published by the U.S.
Department of Labor, Bureau of Labor Statistics. (For an
example of the calculation, see Appendix B.)
2
<PAGE> 3
C. Beginning May 1, 1998, in addition to the Base Price Per Ton,
for each ton of Product mined and delivered to Purchaser,
Purchaser shall pay to Seller or Seller shall credit to
Purchaser a fuel cost adjustment (the "Fuel Cost Adjustment").
The Fuel Cost Adjustment shall be $1.20 multiplied by the sum
of one plus the percentage change between 1997 and the year
immediately preceding the calculation in the average monthly
Producer Price Index ("PPI") for No. 2 Diesel Fuel (product
code 2911-413) as published by the U.S. Department of Labor,
Bureau of Labor Statistics, less $1.20. (For an example of
the calculation, see Appendix B.)
D. In addition to the Price Per Ton, Purchaser shall pay to
Seller any royalty costs in excess of $1.40 per ton of Product
mined and delivered to Purchaser, which are payable by Seller
pursuant to the terms of written agreements with the
landowners of the Subject Properties in effect on the date
hereof.
5. DELIVERY
A. Purchaser shall advise Seller within 180 days prior to the
start-up of its Wilkinson County, Georgia, plant of the
tonnage of its projected 1998 and 1999 purchases, and shall
thereafter advise Seller on or before October 1 of each year,
beginning October 1, 1999, of the tonnage of the Product it
projects to purchase during the next calendar year. Such
projections should be estimates only and Purchaser shall not
be committed to purchase such amounts. Purchaser shall use
reasonable efforts to advise Seller promptly in the event of
any change in its annual purchase projections for any year.
B. Purchaser and Seller shall communicate regularly, and Seller
shall ensure the availability of Product for sale hereunder on
an "as needed" basis. Purchaser shall use its best efforts
(to the extent feasible) to space evenly its actual purchases
of the Product, and Seller shall be obligated to fill such
orders.
C. Risk of loss and title shall pass to Purchaser upon delivery
to Purchaser's plant in Wilkinson County, Georgia.
6. PAYMENT
Invoices for Product sold and delivered hereunder shall be sent to
Purchaser on a monthly basis. Payment for the Product sold and
delivered hereunder shall be net thirty (30) days from date of
invoice.
3
<PAGE> 4
7. ASCERTAINMENT OF WEIGHT
The weight of the Product delivered shall be determined by weighing on
state-certified scales located at Purchaser's manufacturing facility
in Wilkinson County, Georgia. Invoices shall include a copy of the
weight- ticket covering the Product being invoiced.
4
<PAGE> 5
8. WARRANTY
Seller warrants that the kaolin material when delivered to Purchaser's
facility will conform to all chemical and physical properties for the
Product listed in Exhibit A hereto. Seller warrants that the Product
delivered hereunder shall be free of contaminants and other foreign
substances rendering the Product unsuitable for the economic use of
Purchaser. In the event that kaolin material delivered to Purchaser
does not conform to all chemical and physical properties listed in
Exhibit A hereto, or is contaminated with foreign substances, all such
non-conforming kaolin material shall be removed by Seller and there
shall be no invoice issued by Seller for the non-conforming kaolin
material.
9. RESERVED ORE & SELLER'S REPRESENTATION OF TITLE AND INDUCEMENTS TO
PURCHASER
Seller hereby represents that it holds title to or the right to mine
crude Product located on the real property listed herein (herein
called the "Subject Properties" or "Property") which will be reserved
by Seller for sale to Purchaser:
Property Tons of Product
-------- ---------------
(a) Approximately 70 acres described 2,000,000+ tons
on Exhibit B
(b) 8 acres described 500,000 tons
on Exhibit C
(c) 101.6 acres described on Exhibit D Back Up Tonnage Only
Seller covenants that it has a good and marketable title, in fee
simple or leasehold estate, to the Subject Properties, that there are
no liens, mortgages or encumbrances against the same and Seller
warrants the title to all Product which Purchaser, its successors and
assigns may remove or receive from the Subject Properties for
processing and/or sale as against the lawful claims of all persons
whomsoever. Seller shall provide to Purchaser evidence, such as a
current title report or title insurance commitment, of (i) Seller's
good and marketable title to the portions of the Subject Properties
which Seller owns in fee simple and (ii) Seller's lessor's good and
marketable title to the portions of the Subject Properties as to which
Seller holds a leasehold estate. Also, Seller shall provide to
Purchaser a copy of the lease agreement covering these portions of the
Subject Properties as to which Seller holds a leasehold estate and
letter signed by the lessor in the form of Exhibit E attached hereto.
Seller further covenants that hereafter Seller will not create nor
permit the existence of any liens or encumbrances against the minerals
or surface which will in any way adversely affect the rights of
Purchaser hereunder. Upon any default of Seller with respect to the
covenants and warranties herein contained, it is agreed that the
Purchaser shall have the privilege of paying-off, discharging and
satisfying any such lien
5
<PAGE> 6
or encumbrance and that the amount of any such payment or payments
made by Purchaser for such purposes, together with interest thereon at
the prime rate (as published in the Wall Street Journal on the date of
default declaration) plus two (2) per cent per year, may be deducted
by Purchaser from the payments herein provided to be paid to the
Seller.
Seller further warrants that (a) Seller has a good and lawful right,
and full power to convey the Product on the Subject Properties and to
authorize entry for the purposes(s) herein set forth, that the same
are free from all encumbrances; (b) the Subject Properties connect to
adjacent public roads and all present exits and entrances to the
Subject Properties via adjacent public roads are without restriction;
(c) Seller is not a party to any litigation affecting the Subject
Properties, the Product thereon, or Seller's rights to sell the
Product on said Subject Properties or any interest therein and the
Seller knows of no litigation or threatened litigation affecting the
said Product and/or the Subject Properties; (d) Seller has no
knowledge or information of any facts or circumstances that would
adversely affect the use of the Subject Properties for mining
operations that are not set forth herein; and (e) that Seller has not
committed, except as otherwise set forth herein, nor will Seller in
the future commit, any act or acts which will encumber or cause a lien
to be placed against said Product and/or the Subject Properties.
10. INDEMNIFICATION
To the fullest extent permitted by law, the Seller shall indemnify and
hold harmless the Purchaser, and agents and employees of Purchaser
from and against claims, damages, losses and expenses, including but
not limited to attorneys' fees, arising out of or resulting from
performance of the Work, provided that such claim, damage, loss or
expense is attributable to bodily injury, sickness, disease or death,
or to injury to or destruction of tangible property (other than the
Work itself) including loss of use resulting therefrom, but only to
the extent caused in whole or in part by negligent acts or omissions
or breach of this Agreement by the Seller or anyone directly or
indirectly employed by Seller or anyone for whose acts Seller may be
liable, regardless of whether or not such claim, damage, loss or
expense is caused in part by the negligence of a party indemnified
hereunder.
11. INSURANCE
The Seller shall purchase from and maintain in a company or companies
lawfully authorized to do business in the jurisdiction in which the
Subject Properties are located such insurance as will protect the
Seller from claims set forth below which may arise out of or result
from the Seller's operations under the Agreement and for which the
Seller may be legally liable, whether such operations be by the Seller
or by a subcontractor or by anyone directly or indirectly employed by
any of them, or by anyone for whose acts any of them may be liable:
A. claims under workers' or workmen's compensation, disability
benefits and other similar employee benefit acts which are
applicable to the Work to be performed;
6
<PAGE> 7
B. claims for damages because of bodily injury, occupational
sickness or disease, or death of the Seller's employees;
C. claims for damages because of bodily injury, sickness or
disease, or death of any person other than the Seller's
employees;
D. claims for damages insured by usual personal injury liability
coverage which are sustained (1) by a person as a result of an
offense directly or indirectly related to employment of such
person by the Seller, or (2) by another person;
E. claims for damages because of injury to or destruction of
tangible property, including loss of use resulting therefrom;
F. claims for damages because of bodily injury, death of a person
or property damage arising out of ownership, maintenance or
use of a motor vehicle; and
G. claims involving contractual liability insurance applicable to
the Seller's obligations under Paragraph 10.
The insurance required by this paragraph shall be written for not less
than limits of liability specified herein or required by law, whichever
coverage is greater. Coverages shall be written on an occurrence basis and
shall be maintained without interruption from date of commencement of the Work
until date of termination of this Agreement.
Certificates of Insurance acceptable to the Purchaser shall be filed
with the Purchaser prior to commencement of the Work. These Certificates and
the insurance policies required by this Paragraph 11 shall contain a provision
that coverages afforded under the policies will not be canceled or allowed to
expire until at least 30 days' prior written notice has been given to the
Purchaser. Seller shall provide evidence of continued insurance on the
anniversary date of each policy of insurance.
Seller shall maintain worker's compensation in at least the minimum
amount stipulated under the Georgia worker's compensation statutes, including
Employers Liability with a limit of at least:
Statutory - Georgia Benefits
Employer's Liability $100,000 Each Accident
$1,000,000 Disease - Policy Limit
$1,000,000 Disease - Each Employee
Seller shall maintain Commercial General Liability, written on an
occurrence basis, including Seller's Liability; Independent Contractors
Liability; Contractual Liability; Completed
7
<PAGE> 8
Operations and Products Liability; Personal Injury Coverage and broad form
Property Damage extended to apply to completed operations; and no property
damage liability exclusions pertaining to loss by explosion, collapse or
underground damage.
Bodily Injury and Property Damage Liability:
General Aggregate per Project $2,000,000
Products Completed Operations Aggregate $2,000,000
Personal and Advertising Injury $1,000,000
Each Occurrence $1,000,000
Products Completed Operations shall be maintained for a minimum period of
one (1) year after final payment.
Umbrella/Excess Liability:
Annual Aggregate $5,000,000
Each Occurrence $5,000,000
Automobile Liability including non-ownership and hired car coverage
as well as owned vehicles:
Bodily Injury and Property Damage:
Combined Single Limit $1,000,000
Contractor shall not commence Work at the Subject Properties under
this Agreement until it has obtained all required insurance and until such
insurance has been approved by the Purchaser. Approval of the insurance by the
Purchaser shall not relieve or decrease the liability of the Seller hereunder.
Certificates of Insurance shall be filed with the Seller prior to commencing
Work.
The required insurance shall be written by a Company licensed to do
business in the state in which the Subject Properties are located, at the time
the policy is issued. In addition, the Company shall be acceptable to the
Owner. All liability insurance policies shall name Purchaser additional
insured, IT BEING THE INTENT THAT SUCH POLICIES AFFORD SELLER AND PURCHASER
COVERAGE AGAINST THEIR NEGLIGENCE ARISING OUT OF PERFORMANCE OF THE WORK, and
shall provide that coverage of Purchaser thereunder is primary in the event of
overlapping coverage which may be carried by Purchaser.
8
<PAGE> 9
The Seller shall not cause any insurance to be canceled nor permit any
insurance to lapse. All insurance policies shall include a clause to the
effect that the policy shall not be canceled or reduced, restricted or limited
until thirty (30) days after the Purchaser has received written notice.
Certificates of insurance shall contain transcripts from the proper office of
the insurer, evidencing in particular those insured, the extent of insurance,
the location and operations in which the insurance applies, the expiration date
and the above mentioned notice of cancellation clause. An acceptable
Certificate of Insurance Form shall be insurance industry standard ACORD Form
27.
12. FORCE MAJEURE
A. The term "Force Majeure" as used herein shall mean acts of
God, natural calamities, acts of the public enemy, blockades,
insurrections, strikes, slowdowns, riots, wars, disorders,
civil disturbances, fires, explosions, storms, floods,
landslides, washouts, labor or material shortages, boycotts,
breakdowns or damage to plants, equipment or facilities,
interruptions to transport, embargoes, acts of military
authorities, acts of local or federal governmental agencies or
regulatory bodies, court actions, arrests and constraints and,
without limitation by enumeration, any other cause or causes
not reasonably within the control and without the fault or
negligence of the party affected which wholly or partly
prevents the mining, processing, loading or transportation of
Product by Seller or the receiving, transporting, accepting or
using of the Product by Purchaser.
B. If because of Force Majeure, either party hereto is unable to
carry out its obligations under this Agreement and if such
party shall promptly give to the other written notice of such
Force Majeure, including a complete description thereof, then
the obligation of the party giving such notice shall be
suspended to the extent made necessary by Force Majeure and
during its continuance; provided, however, that the party
giving such notice shall use its best efforts to eliminate
such Force Majeure insofar as possible with a minimum of
delay. No event of Force Majeure shall relieve Purchaser of
its obligation to make payments due for Product delivered by
Seller under this Agreement.
13. EVENTS OF DEFAULT
In the absence of the existence of force majeure as defined in
paragraph 12, if any of the following events ("Events of Default")
shall occur and be continuing:
A. Any amount due hereunder, unless being disputed in good faith,
shall remain unpaid for thirty (30) days after becoming due,
and the party adversely affected shall have delivered a notice
to the party owing such amount stating the amount due and
unpaid, and the party owing (and not disputing same in good
faith) shall not have paid such amount within thirty (30) days
after the delivery of such notice; or
9
<PAGE> 10
B. Seller shall fail or refuse to provide to Purchaser the amount
of Product as specified from time to time hereunder by
Purchaser at the time requested by Purchaser; or
C. Any deliveries of kaolin materials to Purchaser hereunder
shall fail to meet the quality specifications provided in
Exhibit A; or
D. Any other covenant, obligation or agreement by either party
hereunder shall not be performed or observed within twenty
(20) days after written notice of the nonperformance thereof
shall have been delivered to the nonperforming party by the
other party; or
E. Either party shall:
(1) Fail to pay any judgment in an amount which would
materially affect the net worth of such party within
sixty (60) days after issuance of a writ of execution
upon such final judgment;
(2) Apply for or consent to the appointment of a
receiver, trustee or liquidator of such party or of
all or a substantial part of its assets;
(3) Make a general assignment for the benefit of its
creditors;
(4) Be adjudicated bankrupt or insolvent, or file a
voluntary petition in bankruptcy;
(5) File a petition or an answer seeking reorganization
under any insolvency law; or
(6) File an answer admitting the material allegations of,
or consent to, or default in answering, a petition
filed against it in any bankruptcy, reorganization or
insolvency proceeding; or
F. An order, judgment or decree shall be entered by any court of
competent jurisdiction approving a petition seeking
reorganization of such party or appointing a receiver, trustee
or liquidator of a party or of all or a substantial part of
its assets and such order, judgment or decree shall continue
unstayed and in effect for a period of thirty (30) consecutive
days;
G. Any of the representations or warranties made by a party
herein shall be or become untrue in any material respect; or
H. Seller shall be in default under any lease of any portion of
the Subject Properties after expiration of any cure periods
permitted by the lease.
10
<PAGE> 11
then the party adversely affected by such Event of Default shall, in addition
to other remedies available to such party at law or in equity, have any one (1)
or more of the following remedies:
(1) The party adversely affected by such Event of Default
may by written notice delivered to the other party
decline to perform under this Agreement until such
Event of Default shall have been cured or shall no
longer exist, without relieving the defaulting party
of any of its obligations hereunder;
(2) The party adversely affected by such Event of Default
may, effective upon twenty (20) days' written notice
to such effect delivered to the other party,
terminate this Agreement without relieving the other
party from any liability which shall have accrued or
attached on or prior to the effective date of such
termination; and/or
(3) If Seller is in default for failure to deliver
Product at the time requested or for delivering
kaolin materials failing to meet quality
specifications, Purchaser may recover all damages
caused by such failure or Purchaser may purchase such
quantities of Product from another source and Seller
shall reimburse Purchaser within twenty (20) days
from invoice for any additional cost incurred by
Purchaser above the Price Per Ton provided herein and
for any costs incidental to obtaining such other
supply. Termination of this Contract for any of the
causes herein contained shall be without prejudice to
any other right or remedy provided by this Contract
or at law or in equity. Failure of either Purchaser
or Seller immediately to exercise its rights in any
Event of Default will not constitute waiver of the
injured party's rights. Both parties agree to use
their best efforts to minimize the amount of damages
that may be incurred as the result of an Event of
Default.
14. NOTICE
All notices under this Contract required or permitted to be given by
Purchaser to Seller and all payments to be made by Purchaser to Seller
hereunder shall be delivered personally to Seller or sent to Seller at
Seller's address: Arcilla Mining & Land Co., P.O. Box 1371,
Milledgeville, Georgia 31061, or at such other address as Seller may
hereafter furnish (by "Notice" as hereinafter described) to Purchaser.
All notices herein required or permitted to be given by Seller to
Purchaser shall be sent by registered or certified United States mail,
return receipt requested, addressed to Purchaser at CARBO Ceramics
Inc., Attn. Paul G. Vitek, 600 East Las Colinas Boulevard, Suite
1520, Irving, TX 75039, or at such other address as Purchaser may
hereafter furnish (by "Notice" as hereinafter described) to Seller.
11
<PAGE> 12
15. ENTIRE AGREEMENT
This written instrument contains the entire agreement between the
parties hereto concerning the subject matter hereof, and there are no
other understandings or agreements between said parties or either of
them in respect hereto. No change, addition to or waiver of the terms
and provision hereof shall be binding upon either party unless
approved in writing by an authorized representative of such party, and
no modifications shall be effected by the acknowledgment or acceptance
of forms containing other or different terms and conditions. This
Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall
constitute a single instrument.
16. ASSIGNMENT
This Agreement shall be binding on the legal successors of the parties
hereto, but shall not otherwise be assignable by either party without
the written consent of the other.
17. INDEPENDENT CONTRACTOR
Seller shall be considered an independent contractor and shall not be
considered a partner, employee, agent or servant of Purchaser.
18. APPLICABLE LAW
This Agreement and the language used herein shall be construed and
enforced in accordance with the laws of the State of Georgia.
12
<PAGE> 13
19. MEMORANDUM OF THIS AGREEMENT
Seller and Purchaser agree to execute and record in the real property
records of the county where the Subject Properties are located a
memorandum of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
ARCILLA MINING & LAND CO.
By
--------------------------------
Name:
------------------------------
Title:
-----------------------------
CARBO CERAMICS INC.
By
---------------------------------
Name:
--------------------------------
Title:
-------------------------------
13
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-25845)pertaining to the CARBO Ceramics Inc. 1996 Stock Option
Plan for Key Employees of our report dated January 23, 1998 with respect to the
consolidated financial statements of CARBO Ceramics Inc. included in the Annual
Report on Form 10-K for the year ended December 31, 1997.
ERNST & YOUNG LLP
New Orleans, Louisiana
March 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,899
<SECURITIES> 13,905
<RECEIVABLES> 14,243
<ALLOWANCES> 0
<INVENTORY> 8,381
<CURRENT-ASSETS> 46,861
<PP&E> 43,905
<DEPRECIATION> (9,812)
<TOTAL-ASSETS> 80,954
<CURRENT-LIABILITIES> 7,616
<BONDS> 0
0
0
<COMMON> 146
<OTHER-SE> 70,796
<TOTAL-LIABILITY-AND-EQUITY> 80,954
<SALES> 85,122
<TOTAL-REVENUES> 85,122
<CGS> 42,186
<TOTAL-COSTS> 42,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 35,025
<INCOME-TAX> 12,936
<INCOME-CONTINUING> 22,089
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<EPS-PRIMARY> 1.51
<EPS-DILUTED> 1.50
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