<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, 1999.
[ ] 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. [X]
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
February 29, 2000, as reported on the Nasdaq National Market, was approximately
$65,987,325. 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 February 29, 2000, 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 11, 2000 are incorporated by reference in Part
III.
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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.
Hydraulic fracturing is the most widely used method of increasing
production from oil and gas wells. The hydraulic fracturing process consists of
pumping fluids down a natural gas or oil well at pressures sufficient to create
fractures in the hydrocarbon-bearing rock 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 proppant 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.
Based on the Company's internally generated market information and
information contained in the United States Geological Survey Minerals Yearbook,
the Company estimates that it supplies 60% of the ceramic proppants and 8% of
all proppants used worldwide. During the year ended December 31, 1999, the
Company generated approximately 61% of its revenues in the U.S. and 39% in
international markets.
PRODUCTS
The Company manufactures four distinct ceramic proppants. CARBOHSP(TM) 2000
and CARBOPROP(R) are premium priced, high strength proppants designed primarily
for use in deep gas wells. CARBOHSP(TM) 2000 was introduced in January 2000 and
is an improved version of CARBOHSP(TM), which was introduced in 1979 as the
original ceramic proppant. CARBOHSP(TM) 2000 has the highest strength of the
ceramic proppants manufactured by CARBO Ceramics and is used primarily in the
fracturing of deep gas wells. CARBOPROP(R), which was introduced by the Company
in 1982, is slightly lower in weight and strength than CARBOHSP(TM) 2000 and was
developed for use in deep gas wells that do not require the strength of
CARBOHSP(TM) 2000.
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 product's 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.
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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. These companies collectively
accounted for approximately 85% of the Company's 1999 revenues and approximately
88% of the Company's 1998 revenues. However, the end users of the Company's
products are the operators of natural gas and oil wells that hire the pressure
pumping service companies to hydraulically fracture wells. The Company has
historically worked 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 quality and delivery
performance.
The Company recognizes the importance of a technical marketing program when
selling a product that offers financial benefits over time but is initially more
costly than alternative products. The Company must market its products both to
its direct customers and to owners and operators of 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.
Beginning in 1999, the Company increased its marketing efforts to production
companies. The Company intends to expand its technical sales force in 2000 and
continue to increase its efforts to educate end users on the benefits of using
ceramic proppants. The Company currently 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
in 1999 were conducted through its sales office in Aberdeen, Scotland and
through commissioned sales agents located in South America, China 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 39%, 35% and 37% of the Company's sales for 1999, 1998 and 1997,
respectively.
The distribution of the Company's export and domestic revenues is shown
below, based upon the region in which the customer used the proppants:
<TABLE>
<CAPTION>
LOCATION 1999 1998 1997
- -------- ----- ----- -----
($ IN MILLIONS)
<S> <C> <C> <C>
United States............................................... $42.3 $54.3 $53.3
International............................................... 27.4 29.8 31.8
----- ----- -----
Total............................................. $69.7 $84.1 $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 8% of all proppants used by the oilfield services companies that
perform fracturing services worldwide.
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Competition for CARBOHSP(TM) 2000 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 Unimin Corp., Badger Mining Corp., Fairmount Minerals Limited, Inc. and
Ogelbay-Norton Company. The leading suppliers of resin-coated sand are Borden
Proppants Corp. and Santrol, a subsidiary of Fairmount Minerals.
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, beginning in 1997 and continuing
through the first half of 1998, it became obvious to the management of the
Company that previous capacity additions were insufficient to satisfy demand in
an improving market. The Company addressed this issue through the construction
of a new manufacturing facility in McIntyre, Georgia, which was completed and
began limited production in June 1999. When fully operational, the McIntyre
facility will increase the manufacturing capacity of the Company by
approximately 60 percent or 200 million pounds per year.
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, Eufaula, Alabama, and McIntyre, Georgia, and at seven remote
stocking facilities located in: Rock Springs, Wyoming; Oklahoma City, Oklahoma;
San Antonio, Texas; Fairbanks, Alaska; Edmonton, Alberta, Canada; Rotterdam, The
Netherlands; and Tianjin, China. The North American 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
in each location. 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 sites in the Netherlands and China are
supplied by container ship. In total, the Company leases 123 rail cars for use
in the distribution of its products. 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.
RAW MATERIALS
Ceramic proppants are made from alumina-bearing ores (commonly referred to
as bauxite, bauxitic clay or kaolin, depending on the alumina content), that 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.
For the production of CARBOHSP(TM) 2000, the Company uses calcined,
abrasive-grade bauxite imported from Australia. The Company has entered into an
agreement with a sole supplier to supply its anticipated need for this ore in
2000. For the production of CARBOPROP(R), the Company uses bauxitic clay mined
in
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Arkansas. The Company has entered into a contract for the processing and supply
of Arkansas bauxitic clay. The Company believes that this agreement, which
stipulates a fixed price for the ore, subject to annual upward adjustments in
accordance with a producer price index, will provide a sufficient supply of
bauxite and bauxitic clay to meet its anticipated requirement through 2001.
The Company's Eufaula facility exclusively employs locally mined uncalcined
kaolin for the production of CARBOLITE(R) and CARBOECONOPROP(R). The Company has
entered into a contract that requires a 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.
The new production facility in McIntyre, Georgia, uses the imported
calcined bauxite and domestic bauxitic clays discussed above for the production
of CARBOHSP(TM) 2000 and CARBOPROP(R) and uses locally mined uncalcined kaolin
for the production of CARBOLITE(R) and CARBOECONOPROP(R). The Company has
entered into a long-term supply agreement for kaolin that stipulates a fixed
price subject to annual adjustments for changes in the producer price index and
fuel costs. The agreement requires the Company to purchase at least 80% of the
McIntyre facility's annual kaolin requirement from the supplier. 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 2,500 degreesF to 3,000 degreesF in a rotary kiln.
The Company uses two different methods to produce ceramic proppants. The
Company's plants in New Iberia, Louisiana, and McIntyre, Georgia, use a dry
process (the "Dry Process") which starts with bauxite, bauxitic clay or kaolin
that 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. For the
production of CARBOHSP(TM) 2000 and CARBOPROP(R), calcined ores are received at
the plant and ground into a dry powder. For the production of CARBOLITE(R) and
CARBOECONOPROP(R) at the McIntyre plant, ores are calcined at the plant before
being ground into a powder. Pellets are formed by combining the powder with
water and binders and introducing the mixture into high-shear mixers. 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 into a dryer that causes the slurry to harden into green
pellets. These green pellets are then sintered in rotary kilns. The Company
believes that the Wet Process is unique to its plant in Eufaula, Alabama.
PATENT PROTECTION
The Company's ceramic proppants are made by processes and techniques that
involve a high degree of proprietary technology, some of which are 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 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
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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
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). In February 1996,
the Company commenced operation 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 250 million pounds at the Eufaula
facility.
In June 1999, the Company substantially completed construction of a new
manufacturing facility in McIntyre, Georgia. Design capacity of the plant is 200
million pounds per year and the total cost of the plant was approximately $60
million. Initial cost estimates for the plant were approximately $40 million.
However, the size and complexity of the plant increased during the completion of
engineering, causing completion costs to increase. The plant consists of two
distinct production lines housed in a single building. Initial production was
generated from the first production line in June 1999 and full design throughput
was achieved on that line in November 1999. Initial production from the second
production line began in December 1999 and that plant is expected to be capable
of operating at full capacity in early 2000. 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.
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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
Plant 1............ 1979 20 CARBOHSP(TM) 2000 and CARBOPROP(R)
Plant 2............ 1981 40 CARBOHSP(TM) 2000 and CARBOPROP(R)
1995 Expansion... 1995 40 CARBOHSP(TM) 2000 and CARBOPROP(R)
---
Total...... 100
===
Eufaula, Alabama
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
1999 200 CARBOLITE(R), CARBOECONOPROP(R)
===
CARBOHSP(TM) 2000 and CARBOPROP(R)
</TABLE>
ORDER BACKLOG
The Company generally supplies its customers with products on a
just-in-time basis and 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, 1999, the Company had 159 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
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cautioned not to place undue reliance on these forward-looking statements, each
of which speaks 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, owns its manufacturing
facilities, land and substantially all of the related production equipment in
New Iberia, Louisiana, and Eufaula, Alabama, and leases its McIntyre, Georgia,
facility through 2009 at which time title will be conveyed to the Company.
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 facility in McIntyre, Georgia includes real property, consisting of
approximately 36 acres, plant and equipment that is leased by the Company from
the Development Authority of Wilkinson County. The term of the lease commenced
on September 1, 1997 and terminates on January 1, 2009. At the termination of
the lease, title to all of the real property, plant and equipment will be
conveyed to the Company in exchange for nominal consideration. The Company has
the right to purchase the property, plant and equipment at any time during the
term of the lease for an agreed upon price.
The Company's customer service and distribution operations are located at
the New Iberia facility, while its quality control, testing and development
functions operate at the New Iberia, Eufaula and McIntyre facilities. The
Company owns distribution facilities in San Antonio, Texas, Rock Springs,
Wyoming and Edmonton, Alberta, Canada.
ITEM 3. LEGAL PROCEEDINGS
On April 26, 1999, the Company was served with a U.S. federal grand jury
subpoena requesting the production of documents in connection with an
investigation by the Antitrust Division of the U.S. Department of Justice of
possible anti-competitive activity in the proppants industry. The Company has
complied with this request. It is not possible at this time to predict how this
investigation will proceed or the effect, if any, of its ultimate outcome on the
Company.
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 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
Jesse P. Orsini (age, 59): 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.
Terry P. Keefe (age, 51): 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, 43): 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.
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Paul G. Vitek (age, 41): Mr. Vitek has been the Vice President of Finance
since February 1996 and has served as Treasurer and Secretary of the Company
since 1988.
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 1999
and 1998 as reported by NASDAQ were as follows:
<TABLE>
<CAPTION>
LOW HIGH
------- -------
<S> <C> <C>
1999
First quarter............................................. $14.000 $22.250
Second quarter............................................ 17.750 30.438
Third quarter............................................. 20.000 32.250
Fourth quarter............................................ 19.000 30.000
1998
First quarter............................................. $26.625 $39.000
Second quarter............................................ 32.500 38.000
Third quarter............................................. 16.250 36.000
Fourth quarter............................................ 16.688 29.250
</TABLE>
(b) Holders
As of February 17, 2000, there were 14,602,000 shares of common stock
outstanding held by 31 holders of record and approximately 465 beneficial
holders.
(c) Dividends
The Company paid quarterly cash dividends of $0.075 per share on its Common
Stock in 1999 and 1998. 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.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
consolidated 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,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Revenues.............................. $ 69,738 $84,095 $85,122 $65,151 $58,001
Cost of goods sold.................... 41,718 41,665 42,186 34,517 29,297
-------- ------- ------- ------- -------
Gross profit.......................... 28,020 42,430 42,936 30,634 28,704
Selling, general and administrative
expenses(1)........................ 11,761 9,977 8,915 8,126 7,148
-------- ------- ------- ------- -------
Operating profit...................... 16,259 32,453 34,021 22,508 21,556
Other, net............................ (288) 974 1,004 175 157
-------- ------- ------- ------- -------
Income before income taxes............ 15,971 33,427 35,025 22,683 21,713
Income taxes.......................... 5,459 12,719 12,936 5,883 --
-------- ------- ------- ------- -------
Net income............................ $ 10,512 $20,708 $22,089 $16,800 $21,713
======== ======= ======= ======= =======
Earnings per share
Basic.............................. $ 0.72 $ 1.42 $ 1.51
======== ======= =======
Diluted............................ $ 0.71 $ 1.40 $ 1.50
======== ======= =======
Pro Forma Data (Unaudited)(2):
Income before income taxes............ $22,683 $21,713
Pro forma income taxes................ 8,393 8,034
------- -------
Pro forma net income.................. $14,290 $13,679
======= =======
Pro forma earnings per share (3)
Basic.............................. $ 0.98 $ 0.94
======= =======
Diluted............................ $ 0.97 $ 0.94
======= =======
Balance Sheet Data:
Current assets........................ $ 23,809 $23,783 $46,861 $38,158 $17,085
Current liabilities excluding bank
borrowings......................... 5,648 8,638 7,616 5,204 4,928
Bank borrowings -- current............ 1,809 -- -- -- 2,780
Property, plant and equipment, net.... 83,171 75,644 34,093 22,247 22,004
Total assets.......................... 106,980 99,427 80,954 60,405 39,089
Total shareholders' equity............ 93,400 87,269 70,942 53,234 31,381
Cash dividends per share(4)........... $ 0.30 $ 0.30 $ 0.30 $ 0.15
</TABLE>
- ---------------
(1) Selling, general and administrative (SG&A) expenses for 1999 and 1998
include plant start-up costs of $1,464,000 and $451,000, respectively. In
1996, SG&A expenses 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 years ended December 31, 1996 and 1995 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.
(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.
9
<PAGE> 11
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 be crushed under high
closure stress. Consequently, the level of deep drilling activity (generally
defined as wells deeper than 7,500 feet) influences the Company's business.
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 require 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 1986 through 1996, the ceramic proppant industry 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
new ceramic proppants aimed at increasing the use of ceramic proppants in the
fracturing of medium depth wells, which had previously been fractured with
sand-based proppants. CARBOLITE(R) was introduced in 1986 and is the Company's
most popular product in the oil-dominated export market. CARBOECONOPROP(R),
which was introduced in 1992, has been widely accepted in the industry and has
been the Company's fastest 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 foreseeable future.
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 the availability of all
ceramic products was limited. Based on the strong market demand, the Company
raised prices on its products by an average of 5%, effective in the first
quarter 1997. Drilling activity and the demand for ceramic proppants remained
strong throughout 1997 and the Company generated record earnings for the year.
The Company raised prices on its products by an average of 5%, effective in the
first quarter of 1998. Strong demand for ceramic proppants continued through the
first half of 1998, with the Company realizing record financial results for the
first three quarters of the year. However, in the second half of 1998, a rapid
decline in oil prices resulted in a significant reduction in the number of oil
and gas wells drilled and completed. The Company felt the effects of this
decline in the fourth quarter of 1998 as revenues decreased by 29 percent versus
the previous quarter and 33 percent from the fourth quarter of 1997.
Oil prices remained depressed through much of the first half of 1999 and
worldwide drilling activity decreased dramatically. In 1999, the worldwide rig
count averaged 1,442, a decline of 22 percent from 1998 and 33 percent from
1997. Future growth in the Company's revenues and net income are dependent on
the future demand for ceramic proppants that is generated from the demand for
natural gas and oil worldwide and on the Company's ability to continue to
penetrate the market for sand-based proppants. Management believes
10
<PAGE> 12
that the worldwide 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 its
new manufacturing facility in McIntyre, Georgia in July 1997. When fully
complete, the plant will cost approximately $60 million. Initial capacity of the
plant is expected to be 200 million pounds per year, an increase of
approximately 60% over current manufacturing capacity. The first line of the new
facility was started up in June 1999, and was running at 100% of design capacity
for portions of the fourth quarter of 1999. The Company expects to complete the
start-up of the second line in early 2000.
NET INCOME
<TABLE>
<CAPTION>
PERCENT PERCENT
1999 CHANGE 1998 CHANGE 1997
------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net Income.............................. $10,512 (49)% $20,708 (6)% $22,089
</TABLE>
The Company reported net income for 1999 that was 49 percent below the
previous year. A significant reduction in oil and gas drilling activity,
combined with higher than expected costs at the Company's manufacturing
facilities, start-up costs at the Company's new facility in McIntyre, Georgia,
and price pressure on the high strength products in the South Texas market were
the primary causes of the decline.
Although the Company reported record net income through the first nine
months of 1998, a dramatic reduction in oil prices and related drilling activity
resulted in a significant decline in the Company's sales volume in the fourth
quarter of 1998. As a result, net income for 1998 declined by 6 percent from
1997.
Individual components of net income are discussed below.
REVENUES
<TABLE>
<CAPTION>
PERCENT PERCENT
1999 CHANGE 1998 CHANGE 1997
------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $69,738 (17)% $84,095 (1)% $85,122
</TABLE>
CARBO Ceramics Inc.'s 1999 revenues of $69.7 million were 17 percent lower
than 1998 revenues. Total sales volumes decreased by 12 percent, with domestic
volumes down 15 percent and export volumes down 7 percent from 1998. The decline
in domestic volumes was due in large part to a significant decline in sales of
CARBOECONOPROP(R) into the south Texas market -- the result of a dramatic drop
in rig activity in that area of the country, and a significant decrease in
Alaskan activity -- the direct result of lower oil prices. Revenues were also
negatively impacted by price pressure on high strength products in the South
Texas market. The decline in export volume was due primarily to a decrease in
sales into the Pacific Rim region.
The Company's 1998 revenues of $84.1 million were 1% lower than revenues in
1997. Sales volume decreased 3% from 1997, but the effect of this was offset by
an increase in the average selling price that was the result of a price increase
of approximately 5% which became effective in January 1998. Domestic sales
volumes increased 1% from 1997, while export volumes decreased 10%. The most
substantial volume decline occurred in Russia where the Company experienced a
76% decrease from 1997 to 1998. Despite the overall slow down in drilling
activity in 1998, the volume of CARBOECONOPROP(R) products sold increased by 20%
over 1997. The largest part of this increase was represented by sales into
Mexico.
GROSS PROFIT
<TABLE>
<CAPTION>
PERCENT PERCENT
1999 CHANGE 1998 CHANGE 1997
------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross Profit............................ $28,020 (34)% $42,430 (1)% $42,936
Gross Profit %.......................... 40% 50% 50%
</TABLE>
11
<PAGE> 13
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 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 1999 was $14,410,000 lower than 1998. Gross profit as a
percentage of sales was 40 percent for 1999, compared to 50 percent for 1998.
The significant decrease in gross profit was the result of the decrease in
revenues discussed above and an increase in production expenses. The increase is
production expenses was the direct result of management's decision to start-up
the new production facility in McIntyre, Georgia despite the weak demand
experienced through much of 1999. This decision was made to position the Company
for a recovering market in 2000 but resulted in all three of the Company's
manufacturing facilities operating at less than full capacity. In addition,
costs at the New Iberia facility were adversely affected by a six-week
maintenance shutdown in May/June to install a new kiln shell and replace the
rotation system. These increases in cost were partially offset by lower freight
costs experienced in transferring finished goods from the Eufaula manufacturing
facility to the remote storage facility in San Antonio, Texas. High freight
costs were incurred in 1998 due to rail service problems related to the merger
of the Union Pacific and Southern Pacific railway systems.
Gross profit for 1998 decreased by $506,000 from 1997. Gross profit as a
percentage of sales remained unchanged at 50% for 1998 as compared to 1997. The
positive effects of the price increase in January 1998 and lower manufacturing
costs at the New Iberia manufacturing facility were offset by an increase in the
percentage of lower-priced CARBOECONOPROP(R) sales (52% of 1998 volume compared
to 42% of 1997 volume) and an increase in freight costs incurred in transferring
material from the Eufaula, Alabama manufacturing facility to the remote storage
facility in San Antonio, Texas. The increased freight costs were the result of
rail service problems, including delays in delivery and improper routing of rail
cars following the merger of the Union Pacific and Southern Pacific railway
systems. The lower production costs achieved at New Iberia were the result of
improved efficiency due to increased production and lower maintenance spending
as compared to 1997.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES AND PLANT START-UP EXPENSES
<TABLE>
<CAPTION>
PERCENT PERCENT
1999 CHANGE 1998 CHANGE 1997
------- ------- ------ ------- ------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SG&A.............................................. $11,761 18% $9,977 12% $8,915
SG&A as a % of Revenues........................... 16.9% 11.9% 10.5%
</TABLE>
Selling, general and administrative expenses increased by $1,784,000 in
1999 over 1998. SG&A expenses also increased as a percentage of sales to 16.9
percent in 1999 from 11.9 percent in 1998. The single largest contributor to
these increased costs was start-up expenses related to the new manufacturing
facility in McIntyre, Georgia. These expenses totaled $1,464,000 in 1999,
compared to $451,000 during 1998. Other significant items include expenses
related to exploring the marketing and manufacturing potentials in China, New
Iberia plant trials to develop products for non-oilfield applications (charged
to research and development), legal fees related to a Department of Justice
inquiry, and a write-off of most of the receivables of one of our customers.
This customer has subsequently been acquired by one of our three major
customers.
Selling, general and administrative expenses increased by $1,062,000 in
1998 over 1997. SG&A expenses also increased as a percentage of sales to 11.9%
in 1998 from 10.5% in 1997. The largest increases were in marketing expenses.
Additional sales personnel were employed in anticipation of additional
manufacturing capacity and to explore new markets for our products outside the
oilfield. In addition, the Company has contracted with an outside consultant to
provide assistance to our marketing department in developing technical sales
presentations. An increase in depreciation expense resulted from expansions at
the Company's Edmonton, Canada and Rock Springs, Wyoming remote storage
facilities, both of which were completed during the first half of 1998. The
Company also incurred $451,000 of start-up expenses during 1998 related to the
construction of the new manufacturing facility in McIntyre, Georgia.
12
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of December 31, 1999 were $0.2 million
compared to $0.6 million at the beginning of the year. The Company generated
cash from operations of $16.2 million. Total capital expenditures for the year
were $14.0 million, cash dividends paid totaled $4.4 million and net proceeds
from bank borrowings during the year totaled $1.8 million.
Capital spending on the new Georgia manufacturing facility, scheduled to be
100% completed by early 2000, was $11.8 million. The balance of $2.2 million was
spent on the normal replacement of capital equipment.
The Company plans to spend approximately $0.2 million for the completion of
its new manufacturing facility in McIntyre, Georgia in 2000, with funding
expected to be provided 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.
The Company maintains an unsecured line of credit in the amount of $10.0
million. As of December 31, 1999, there was $1.8 million outstanding under the
credit agreement. As of February 28, 2000 the Company had an outstanding balance
of $0.9 million under this line of credit. The Company anticipates that cash
provided by operating activities and funds available under its line of credit
will be sufficient to meet planned operating expenses, tax obligations and
capital expenditures through 2000. The Company is currently engaged in
discussions to extend or renew its line of credit beyond 2000.
See "Forward-Looking Information" under Item 1 hereof.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. During 1999, the company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $49,000 during 1999 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its critical
computer applications and those of its suppliers and vendors throughout 2000 to
ensure that any latent Year 2000 matters that may arise are promptly addressed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have operations subject to material risk of foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolio. The Company has a $10.0 million line of
credit with its primary commercial bank. Under the terms of the revolving credit
agreement, the Company may elect to pay interest at either a fluctuating base
rate established by the bank from time to time or at a rate based on the rate
established in the London inter-bank market. The Company does not believe that
it has any material exposure to market risk associated with interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in pages F-1 through
F-12 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
<PAGE> 15
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.
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-12 of this Report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Income for each of the three
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for each of
the three years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for each of the three
years ended December 31, 1999, 1998 and 1997
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1999.
(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.
14
<PAGE> 16
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 3, 2000
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 3, 2000
- -----------------------------------------------------
William C. Morris
/s/ JESSE P. ORSINI President, Chief Executive March 3, 2000
- ----------------------------------------------------- Officer and Director
Jesse P. Orsini (Principal Executive
Officer)
/s/ PAUL G. VITEK Vice President, Finance and March 3, 2000
- ----------------------------------------------------- Chief Financial Officer
Paul G. Vitek (Principal Financial and
Accounting Officer)
/s/ CLAUDE E. COOKE, JR. Director March 3, 2000
- -----------------------------------------------------
Claude E. Cooke, Jr.
/s/ JOHN J. MURPHY Director March 3, 2000
- -----------------------------------------------------
John J. Murphy
/s/ ROBERT S. RUBIN Director March 3, 2000
- -----------------------------------------------------
Robert S. Rubin
</TABLE>
15
<PAGE> 17
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, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
New Orleans, Louisiana
January 28, 2000
F-1
<PAGE> 18
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- -------
($ IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 193 $ 622
Trade accounts receivable................................. 10,883 11,300
Refundable income taxes................................... 288 --
Inventories:
Finished goods......................................... 7,123 5,795
Raw materials and supplies............................. 4,154 4,432
-------- -------
Total inventories................................. 11,277 10,227
Prepaid expenses and other current assets................. 481 614
Deferred income taxes..................................... 687 1,020
-------- -------
Total current assets.............................. 23,809 23,783
Property, plant and equipment:
Land and land improvements................................ 944 459
Buildings................................................. 7,378 4,613
Machinery and equipment................................... 90,092 30,772
Construction in progress.................................. 1,298 51,709
-------- -------
Total............................................. 99,712 87,553
Less accumulated depreciation............................. 16,541 11,909
-------- -------
Net property, plant and equipment...................... 83,171 75,644
-------- -------
Total assets...................................... $106,980 $99,427
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank borrowings........................................... $ 1,809 $ --
Accounts payable.......................................... 1,477 3,634
Accrued payroll and benefits.............................. 1,954 2,609
Accrued freight........................................... 1,545 792
Accrued utilities......................................... 451 350
Accrued income taxes...................................... -- 266
Other accrued expenses.................................... 221 987
-------- -------
Total current liabilities......................... 7,457 8,638
Deferred income taxes....................................... 6,123 3,520
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......................................... 50,335 44,204
-------- -------
Total shareholders' equity........................ 93,400 87,269
-------- -------
Total liabilities and shareholders' equity........ $106,980 $99,427
======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-2
<PAGE> 19
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues.................................................... $69,738 $84,095 $85,122
Cost of goods sold.......................................... 41,718 41,665 42,186
------- ------- -------
Gross profit................................................ 28,020 42,430 42,936
Selling, general and administrative expenses................ 10,297 9,526 8,915
Plant start-up costs........................................ 1,464 451 --
------- ------- -------
Operating profit............................................ 16,259 32,453 34,021
Other income (expense):
Interest income........................................... 5 800 1,024
Interest expense.......................................... (297) -- (55)
Other, net................................................ 4 174 35
------- ------- -------
(288) 974 1,004
------- ------- -------
Income before income taxes.................................. 15,971 33,427 35,025
Income taxes................................................ 5,459 12,719 12,936
------- ------- -------
Net income.................................................. $10,512 $20,708 $22,089
======= ======= =======
Earnings per share:
Basic..................................................... $ 0.72 $ 1.42 $ 1.51
======= ======= =======
Diluted................................................... $ 0.71 $ 1.40 $ 1.50
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 20
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances at January 1, 1997........................... $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
Net income.......................................... -- -- 20,708 20,708
Cash dividends ($0.30 per share).................... -- -- (4,381) (4,381)
---- ------- -------- -------
Balances at December 31, 1998......................... 146 42,919 44,204 87,269
Net income.......................................... -- -- 10,512 10,512
Cash dividends ($0.30 per share).................... -- -- (4,381) (4,381)
---- ------- -------- -------
Balances at December 31, 1999......................... $146 $42,919 $ 50,335 $93,400
==== ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 21
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
($ IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 10,512 $ 20,708 $ 22,089
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation............................................. 4,632 2,154 1,953
Deferred income taxes.................................... 2,936 876 506
Changes in operating assets and liabilities:
Trade accounts receivable............................. 417 2,943 (3,341)
Inventories........................................... (1,050) (1,846) 4
Prepaid expenses and other current assets............. 133 47 (53)
Accounts payable...................................... (289) (365) 708
Accrued payroll and benefits.......................... (655) 161 611
Accrued freight....................................... 753 (59) 192
Accrued utilities..................................... 101 (72) 96
Income taxes.......................................... (554) (752) 409
Other accrued expenses................................ (766) 241 396
-------- -------- --------
Net cash provided by operating activities........ 16,170 24,036 23,570
INVESTING ACTIVITIES
Maturities of investment securities........................ -- 13,905 --
Purchases of investment securities......................... -- -- (13,905)
Purchases of property, plant and equipment................. (14,027) (41,837) (13,799)
-------- -------- --------
Net cash used in investing activities............ (14,027) (27,932) (27,704)
FINANCING ACTIVITIES
Proceeds from bank borrowings.............................. 18,059 -- --
Repayments on bank borrowings.............................. (16,250) -- --
Dividends paid............................................. (4,381) (4,381) (4,381)
-------- -------- --------
Net cash used in financing activities............ (2,572) (4,381) (4,381)
-------- -------- --------
Net decrease in cash and cash equivalents.................. (429) (8,277) (8,515)
Cash and cash equivalents at beginning of year............. 622 8,899 17,414
-------- -------- --------
Cash and cash equivalents at end of year................... $ 193 $ 622 $ 8,899
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid.............................................. $ 297 $ -- $ --
======== ======== ========
Income taxes paid.......................................... $ 3,077 $ 12,595 $ 12,021
======== ======== ========
Purchases of property, plant and equipment through accounts
payable.................................................. $ -- $ 1,868 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 22
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 operating
in New Iberia, Louisiana, Eufaula, Alabama and McIntyre, Georgia. The Company
predominantly 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 subsidiaries, CARBO Ceramics Sales
Corporation and CARBO Ceramics (UK) Limited. CARBO Ceramics Sales Corporation
was formed on July 31, 1996 under the laws of Barbados. CARBO Ceramics (UK)
Limited was formed on December 19, 1997 under the laws of Scotland. 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.
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 to 30 years
Machinery and equipment..................................... 3 to 30 years
</TABLE>
Revenue Recognition
Revenue is recognized when title passes to the customer.
Cost of Start-Up Activities
Effective January 1, 1999, the Company adopted Statement of Position 98-5,
"Reporting on the Costs of Start-Up Activities," issued by the American
Institute of Certified Public Accountants. This Statement requires that costs
related to start-up activities, including organization costs, be expensed as
incurred. The Company's policy has always been to expense the costs of start-up
operations. Start-up costs for 1999 and
F-6
<PAGE> 23
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 represent labor, materials and utilities expended in bringing installed
equipment to normal operating conditions at the Company's new production
facility in McIntyre, Georgia.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
Research and Development Costs
Research and development costs are charged to operations when incurred and
are included in selling, general and administrative expenses. The amounts
charged in 1999, 1998 and 1997 were $703,000, $81,000 and $168,000,
respectively.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform to the 1999 presentation.
2. BANK BORROWINGS
The Company has a Secured Revolving Credit Agreement (the "Credit
Agreement"), as amended, with a bank under which it may borrow up to $10.0
million optionally at either the bank's Base Rate or LIBOR Fixed Rate (as
defined in the Credit Agreement) through December 31, 2000. The weighted-average
interest rate on borrowings against the Credit Agreement was 8.11% for 1999 and
8.62% for 1998. Outstanding borrowings under the Credit Agreement at December
31, 1999 amount to $1,809,000. The Credit Agreement requires that the Company
maintain certain financial ratios and keep certain bank accounts with the
lender, with balances equal to transactional and investment-related charges. The
terms of the Credit Agreement further provide for certain affirmative and
negative covenants, including a restriction on capital expenditures. The Company
was in compliance with these covenants at December 31, 1999.
3. LEASES
The Company leases railroad equipment under operating leases. Minimum
future rental payments due under non-cancelable operating leases with remaining
terms in excess of one year as of December 31, 1999 are as follows ($ in
thousands):
<TABLE>
<S> <C>
2000........................................................ $452
2001........................................................ 236
2002........................................................ 236
2003........................................................ 236
2004........................................................ 214
</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 $1,168,000 in 1999, $800,000 in 1998,
and $920,000 in 1997.
F-7
<PAGE> 24
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
($ IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Employee benefits......................................... $ 200 $ 436
Inventories............................................... 457 356
Other..................................................... 30 228
------ ------
Total deferred tax assets......................... 687 1,020
------ ------
Deferred tax liabilities:
Depreciation.............................................. 6,007 3,359
Other..................................................... 116 161
------ ------
Total deferred tax liabilities.................... 6,123 3,520
------ ------
Net deferred tax liabilities...................... $5,436 $2,500
====== ======
</TABLE>
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal................................................ $2,285 $10,596 $11,082
State.................................................. 238 1,247 1,348
------ ------- -------
Total current.................................. 2,523 11,843 12,430
------ ------- -------
Deferred:
Federal................................................ 2,695 784 451
State.................................................. 241 92 55
------ ------- -------
Total deferred................................. 2,936 876 506
------ ------- -------
$5,459 $12,719 $12,936
====== ======= =======
</TABLE>
The reconciliation of income taxes computed at the U.S. statutory tax rate
to the Company's income tax expense is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. statutory rate.............. $5,592 35.0% $11,715 35.0% $12,259 35.0%
State income taxes, net of
federal tax benefit............ 479 3.0 1,339 4.0 1,403 4.0
Foreign sales corporation benefit
and other...................... (612) (3.8) (335) (1.0) (726) (2.1)
------ ---- ------- ---- ------- ----
$5,459 34.2% $12,719 38.0% $12,936 36.9%
====== ==== ======= ==== ======= ====
</TABLE>
F-8
<PAGE> 25
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
On January 11, 2000, the Board of Directors declared a cash dividend of
$0.075 per share. The dividend is payable on February 15, 2000 to shareholders
of record on January 31, 2000.
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
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 "non-statutory 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 1999, 1998 and 1997, respectively:
F-9
<PAGE> 26
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk-free interest rates of 6.40%, 4.44% and 5.34%; a dividend yield of 1.0%;
volatility factors of the expected market price of the Company's Common Stock of
.464, .452 and .337; 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 that 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. The Company's pro forma information follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
($ IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income:
As reported............................................... $10,512 $20,708 $22,089
======= ======= =======
Pro forma including the effect of options................. $ 9,498 $19,793 $21,539
======= ======= =======
Basic earnings per share:
As reported............................................... $ 0.72 $ 1.42 $ 1.51
======= ======= =======
Pro forma including the effect of options................. $ 0.65 $ 1.36 $ 1.48
======= ======= =======
Diluted earnings per share:
As reported............................................... $ 0.71 $ 1.40 $ 1.50
======= ======= =======
Pro forma including the effect of options................. $ 0.65 $ 1.34 $ 1.46
======= ======= =======
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning
of year................. 895 $20 850 $20 700 $17
Granted................... 30 24 45 26 260 27
Exercised................. -- -- --
Forfeited................. -- -- (110) 17
------ ------ -----
Outstanding -- end of
year.................... 925 $20 895 $20 850 $20
====== ====== =====
Exercisable at end of
year.................... 579 $19 355 $19 148 $17
Weighted-average fair
value of options granted
during the year......... $10.93 $10.96 $9.38
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 ranged from
$17.00 to $34.63. The weighted-average remaining contractual life of those
options is 8.1 years.
F-10
<PAGE> 27
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator for basic and diluted earnings per share:
Net income.......................................... $ 10,512 $ 20,708 $ 22,089
Denominator:
Denominator for basic earnings per share-weighted
average shares................................... 14,602,000 14,602,000 14,602,000
Effect of dilutive securities:
Employee stock options (See Note 6).............. 109,865 168,709 169,102
----------- ----------- -----------
Dilutive potential common shares.................... 109,865 168,709 169,102
----------- ----------- -----------
Denominator for diluted earnings per
share -- adjusted weighted-average shares........ 14,711,865 14,770,709 14,771,102
=========== =========== ===========
Basic earnings per share.............................. $ 0.72 $ 1.42 $ 1.51
=========== =========== ===========
Diluted earnings per share............................ $ 0.71 $ 1.40 $ 1.50
=========== =========== ===========
</TABLE>
8. QUARTERLY OPERATING RESULTS -- (UNAUDITED)
Quarterly results of operations for the years ended December 31, 1999 and
1998 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>
1999
Revenues................................. $20,078 $15,404 $16,888 $17,368
Gross profit............................. 10,002 6,978 6,021 5,019
Net income............................... 4,099 2,528 2,472 1,413
Earnings per share
Basic.................................. $ 0.28 $ 0.17 $ 0.17 $ 0.10
Diluted................................ $ 0.28 $ 0.17 $ 0.17 $ 0.10
1998
Revenues................................. $22,617 $23,764 $22,013 $15,701
Gross profit............................. 11,517 11,879 11,238 7,796
Net income............................... 5,792 6,182 5,366 3,368
Earnings per share:
Basic.................................. $ 0.40 $ 0.42 $ 0.37 $ 0.23
Diluted................................ $ 0.39 $ 0.42 $ 0.36 $ 0.23
</TABLE>
Quarterly data may not sum to the full year data reported in the Company's
consolidated financial statements due to rounding.
F-11
<PAGE> 28
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. 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, 1999:
<TABLE>
<CAPTION>
MAJOR CUSTOMERS
---------------------
A B C OTHERS TOTAL
----- ----- ----- ------ -----
<S> <C> <C> <C> <C> <C>
1999......................................... 38.7% 30.0% 16.4% 14.9% 100%
1998......................................... 43.4% 26.1% 18.2% 12.3% 100%
1997......................................... 35.4% 27.8% 20.5% 16.3% 100%
</TABLE>
10. 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 39%, 35% and 37% of the Company's revenues for 1999, 1998, and
1997, respectively.
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
($ IN MILLIONS)
<S> <C> <C> <C>
Location
United States............................................. $42.3 $54.3 $53.3
International............................................. 27.4 29.8 31.8
----- ----- -----
Total............................................. $69.7 $84.1 $85.1
===== ===== =====
</TABLE>
11. BENEFIT PLANS
The Company has a defined contribution savings and profit sharing plan
pursuant to Section 401(k) of the Internal Revenue Code. Employees who have
completed one year of service are eligible to participate. Employees may
contribute up to 15% of their monthly compensation.
For employee contributions up to 5% of monthly compensation, the Company
matches the employee contribution at a rate of 50%. Additional contributions by
the Company are discretionary and are determined annually by the Board of
Directors. These discretionary contributions to the plan are allocated to the
participants pro rata based on their respective salary levels.
Benefit costs recognized as expense under this plan consisted of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
($ IN THOUSANDS)
<S> <C> <C> <C>
Contributions:
Profit sharing............................................ $275 $207 $209
Savings................................................... 151 145 116
---- ---- ----
$426 $352 $325
==== ==== ====
</TABLE>
12. COMMITMENTS
In 1995, the Company entered into an agreement with a supplier to purchase
options to purchase 200,000 tons of green ore for its New Iberia, Louisiana
plant at a specified contract price. All of the green ore purchased by the
Company pursuant to the options 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
pursuant to the options has been processed.
F-12
<PAGE> 29
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999.
13. EMPLOYMENT AGREEMENT
The Company has an employment agreement with its President, which expires
June 30, 2001, as amended. 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, 2001, 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-13
<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 4.1 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. (incorporated by reference to
exhibit 10.1 to the registrant's Form 10-K Annual Report
for the year ended December 31, 1997)
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. (incorporated by reference to exhibit 10.9 to
the registrant's Form 10-K Annual Report for the year
ended December 31, 1997)
10.10 -- Amendment to Employment Agreement between CARBO Ceramics
Inc. and Jesse P. Orsini
23.1 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 1
AMENDMENT TO EMPLOYMENT AGREEMENT
Amendment to Employment Agreement, made as of this 11th day of November,
1999 by and between Jesse P. Orsini, residing at 3713 Santiago Court, Irving,
Texas (the "Executive"), and Carbo Ceramics Inc., a Delaware corporation (the
"Company").
WITNESSETH
WHEREAS, the Company currently employs the Executive as President and
Chief Executive Officer of the Company under the terms of an Employment
Agreement dated as of April 19, 1996 (the "Agreement"); and
WHEREAS, the Company and the Executive desire to amend the Agreement to
extend the term thereof.
NOW, THEREFORE, it is hereby agreed between the parties as follows:
1. Section 1(a) of the Agreement is hereby amended by deleting the
reference to "June 30, 2000" in the second sentence thereof and inserting in
lieu thereof a reference to "June 30, 2001".
2. Section 2(b) of the Agreement is hereby amended by (a) deleting the
reference to "fiscal year 2000" in the third sentence thereof and inserting in
lieu thereof a reference to "fiscal year 2001", and (b) deleting the reference
to "182/366" in the third sentence thereof and inserting in lieu thereof a
reference to "181/365".
3. Section 2(c) of the Agreement is hereby amended by deleting the
reference to "calendar year 2000" in the first sentence thereof and inserting in
lieu thereof a reference to "calendar year 2001".
4. Except as expressly set forth herein, the Agreement and all of the
terms and provisions thereof shall remain in full force and effect.
IN WITNESS WHEREOF, the Company has caused this Amendment to Employment
Agreement to be signed by its duly authorized representative and the Executive
has hereunto set his hand as of the day and year first above written.
CARBO CERAMICS INC.
By: /s/ WILLIAM C. MORRIS
-----------------------------------------
William C. Morris, Chairman
/s/ JESSE P. ORSINI
-----------------------------------------
Jesse P. Orsini
<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 28, 2000 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, 1999.
ERNST & YOUNG LLP
New Orleans, Louisiana
March 2, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 193
<SECURITIES> 0
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0
0
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</TABLE>
