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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 0-28178
CARBO CERAMICS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-1100013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
600 E. LAS COLINAS BOULEVARD
SUITE 1520
IRVING, TEXAS 75039
(Address of principal executive offices)
(972) 401-0090
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Common Stock on March
6, 1998, as reported on the Nasdaq National Market, was approximately
$105,937,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 6, 1998, Registrant had outstanding 14,602,000 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held April 14, 1998 are incorporated by reference in Part
III.
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PART I
ITEM 1. BUSINESS
GENERAL
CARBO Ceramics Inc. is the world's largest producer and supplier of ceramic
proppants for use in the hydraulic fracturing of natural gas and oil wells.
Demand for ceramic proppants depends generally upon the demand for natural gas
and oil and on the number of natural gas and oil wells drilled, completed or
recompleted worldwide. More specifically, the demand for ceramic proppants is
dependent on the number of oil and gas wells that are hydraulically fractured to
stimulate production.
The hydraulic fracturing process consists of pumping fluids down a natural
gas or oil well at pressures and flow rates sufficient to split the hydrocarbon
bearing formation and create fractures in the formation. A granular material,
such as ceramic proppant or sand-based proppant, is suspended in the fluid and
packs the newly created fracture, keeping the fracture open once high-pressure
pumping stops. The proppant-filled fracture creates a permeable channel through
which the hydrocarbons can flow more freely from the formation to the well and
then to the surface.
CARBO Ceramics was formed in 1987 for the purpose of purchasing the assets
of Standard Oil Proppants Company Ltd. (SOPCO). SOPCO was a joint venture formed
to operate the combined proppant businesses of the Carborundum Company and
Dresser Industries. These proppants businesses were started in 1978 and 1984
respectively. While the Carborundum Company and Dresser Industries had primarily
manufactured high strength, premium priced proppants for use in very deep wells,
CARBO Ceramics has pursued a strategy of introducing new, lower-priced,
lightweight, intermediate strength ceramic proppants to capture a greater
portion of the large market for sand-based proppants.
The Company estimates that it supplies 60% of the ceramic proppants and 5%
of all proppants used worldwide.
PRODUCTS
The Company's four product lines cover the entire spectrum of commercially
available ceramic proppants. CARBOHSP(TM) and CARBOPROP(R) are premium priced,
high strength proppants designed primarily for use in deep gas wells.
CARBOHSP(TM), which was introduced in 1979, is the original ceramic proppant,
formerly marketed as "Sintered Bauxite". CARBOHSP(TM) offers the highest level
of strength and conductivity for use primarily in deep gas wells. CARBOPROP(R),
which was introduced by the Company in 1982, is slightly lower in weight and
strength than CARBOHSP(TM) and was developed for use in deep gas wells that do
not require the strength of CARBOHSP(TM).
The CARBOLITE(R) and CARBOECONOPROP(R) products are lightweight,
intermediate strength proppants designed for use in gas wells of moderate depth
and shallower oil wells. The products are manufactured and sold to compete
directly with sand-based proppants. CARBOLITE(R), introduced in 1984, is used in
medium depth oil and gas wells, where the additional strength of ceramic
proppants may not be essential, but where higher production rates can be
achieved due to the products' roundness and uniform grain size.
CARBOECONOPROP(R), introduced in 1992 to compete directly with sand-based
proppants, is the Company's lowest priced and fastest growing product. The
introduction of CARBOECONOPROP(R) has resulted in ceramics being used in many
new markets by end users that had not previously used ceramic proppants. The
Company believes that many of the users of CARBOECONOPROP(R) had previously used
sand or resin-coated sand. The Company further believes that its ability to
continue to penetrate the market for sand-based proppants in 1997 was limited by
its production capacity for lightweight ceramic proppants.
CUSTOMERS AND MARKETING
The Company's largest customers are, in alphabetical order, BJ Services
Company, Dowell and Halliburton Company, the three largest participants in the
worldwide petroleum pressure pumping industry.
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These companies collectively accounted for approximately 84% of the Company's
1997 revenues. The Company's other customers include primarily foreign pumping
service companies, that compete in the worldwide fracturing business. The end
users of the Company's products, however, are the operators of natural gas and
oil wells that engage pumping service companies to hydraulically fracture wells
to improve the recovery of natural gas or oil wells, thereby enhancing the rate
of return on the investment made in such wells. The Company works with the
pressure pumping service companies to present the advantages of using ceramic
proppants to the operators of natural gas and oil wells. The Company generally
supplies its customers with products on a just-in-time basis, with transactions
governed by individual purchase orders. Continuing sales of product depend on
the Company's direct customers and the well operators being satisfied with both
product and delivery performance.
The Company recognizes the importance of aggressive marketing when
introducing a technically advanced and performance enhancing, but intrinsically
more costly, product. The Company must market its products both to its direct
customers and to owners and operators of the natural gas and oil wells. The
Company's sales and marketing staff regularly calls on and keeps close contact
with the people who are influential in the proppant purchasing decision:
production companies, regional offices of well service companies that offer
pressure pumping services, and various completion engineering consultants. The
Company provides a variety of technical support services and has developed
computer software that models the return on investment achievable by using the
Company's ceramic proppants versus that of other proppants in the hydraulic
fracturing of a natural gas or oil well.
The Company's Vice President of Marketing and Technology coordinates
worldwide sales and marketing activities. The Company's export marketing efforts
are conducted through its sales office in Aberdeen, Scotland and through two
commissioned sales agents located in South America and Australia.
The Company's ceramic proppants are used worldwide by U.S. customers
operating abroad and by foreign customers. Sales outside the United States
accounted for 37%, 31% and 37% of the Company's sales for 1995, 1996 and 1997,
respectively.
The distribution of the Company's export and domestic revenues is shown
below, based upon the region in which proppants were used by the customer:
1995 1996 1997
----- ----- -----
($ IN MILLIONS)
LOCATION
United States........................................... $36.8 $45.3 $53.3
International........................................... 21.2 19.9 31.8
----- ----- -----
Total........................................... $58.0 $65.2 $85.1
===== ===== =====
COMPETITION AND MARKET SHARE
The Company's chief worldwide competitor is Norton-Alcoa Proppants
("Norton-Alcoa"). Norton-Alcoa is a joint venture of Compagnie de Saint-Gobain,
a French glass and materials company, and Aluminum Company of America.
Norton-Alcoa manufactures ceramic proppants that directly compete with each of
the Company's products. In addition, Mineraco Curimbaba ("Curimbaba"), based in
Brazil, manufactures a sintered bauxite product similar to the Company's
CARBOHSP(TM), which is marketed in the United States under the name
"Sinterball". The Company believes that Curimbaba has not expanded its U.S.
product line to include a full range of ceramic proppants and is unlikely to do
so in light of patents held by the Company and Norton-Alcoa. The Company
believes that it supplies approximately 60% of the ceramic proppants and
approximately 5% of all proppants used by the oilfield services companies that
perform fracturing services worldwide.
Competition for CARBOHSP(TM) and CARBOPROP(R) includes ceramic proppants
manufactured by Norton-Alcoa and Curimbaba. The Company's CARBOLITE(R) and
CARBOECONOPROP(R) products compete with ceramic proppants produced by
Norton-Alcoa and with sand-based proppants for use in the hydraulic fracturing
of medium depth natural gas and oil wells. The leading suppliers of mined sand
are
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Unimin Corp., Badger Mining Corp., Wedron Silica Co., Ogelbay-Norton Company and
Colorado Silica Sand, Inc. The leading suppliers of resin-coated sand are Borden
Proppants Corp. and Santrol, a subsidiary of Fairmont Minerals Limited, Inc.
The Company believes that the most significant factors that influence a
customer's decision to purchase the Company's products are: (i)
price/performance ratio, (ii) on-time delivery performance, (iii) technical
support and (iv) proppant availability. The Company believes that its products
are competitively priced and that its delivery performance is excellent. The
Company also believes that its superior technical support has enabled it to
persuade customers to use ceramic proppants in an increasingly broad range of
applications and thus increased the overall market for the Company's products.
Prior to 1997, the Company had generally maintained sufficient inventory to
satisfy demand for its products. However, in 1997, it became obvious to the
management of the Company that previous capacity additions were insufficient to
satisfy demand in an improving market. The Company has addressed this issue
through the construction of a new manufacturing facility in McIntyre, Georgia
which is scheduled for completion in the fourth quarter of 1998.
The Company continually conducts testing and development activities with
respect to alternative raw materials to be used in the Company's existing
production methods and alternative production methods. The Company is not aware
of the development of alternative products for use as proppants in the hydraulic
fracturing process. The Company believes that the main barriers to entry for
additional competitors are the patent rights held by the Company and certain of
its current competitors and the capital costs involved in building production
facilities of sufficient size to be operated efficiently.
DISTRIBUTION
The Company maintains finished goods inventories at its plants in New
Iberia, Louisiana, and Eufaula, Alabama, and at six remote stocking facilities
located in: Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas;
Fairbanks, Alaska; Edmonton, Alberta, Canada; and Rotterdam, The Netherlands.
The remote stocking facilities consist of bulk storage silos with truck trailer
loading facilities. The Company owns the facilities in San Antonio, Rock Springs
and Edmonton and subcontracts the operation of the facilities and transportation
to a local trucking company. The remaining stocking facilities are owned and
operated by local trucking companies under contract with the Company. The North
American sites are supplied by rail, and the site in the Netherlands is supplied
by container ship. In total, the Company leases 79 rails cars, and owns or
leases 62 dedicated trailers. The price of the Company's products sold for
delivery in the lower 48 United States and Canada includes just-in-time delivery
of proppants to the operator's well site, which eliminates the need for
customers to maintain an inventory of ceramic proppants.
The Company increased storage capacity at its remote storage facilities in
San Antonio, Rock Springs and Edmonton in 1997 at a cost of approximately $4.1
million.
RAW MATERIALS
Ceramic proppants are made from alumina-bearing ores (commonly referred to
as bauxite, bauxitic clay or kaolin, depending on the alumina content), which
are readily available on the world market. Bauxite is largely used in the
production of aluminum metal, refractory material and abrasives. The main
deposits of alumina-bearing ores in the United States are in Arkansas, Alabama
and Georgia; other economically mineable deposits are located in Australia,
China, Jamaica, Russia and Surinam.
The Company's New Iberia facility currently uses bauxite imported from
Australia and bauxitic clay mined in Arkansas. The Company has decreased its
dependence on imported bauxite and bauxitic clay as it has entered into a
long-term contract for the processing and supply of Arkansas bauxite and
bauxitic clay for use at the New Iberia facility. The Company believes that this
agreement, which stipulates a fixed price, subject to annual upward adjustments
in accordance with a producer price index, will provide a sufficient supply of
bauxite and bauxitic clay to meet the requirements of the New Iberia facility
through 1999.
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The Company's Eufaula facility exclusively employs locally mined uncalcined
kaolin, and the Company has entered into a contract requiring the supplier to
sell to the Company up to 200,000 net tons of kaolin per year and the Company to
purchase from the supplier 80% of the Eufaula facility's annual kaolin
requirements, each through 2003. This agreement stipulates a fixed price,
subject to annual adjustment in accordance with fluctuations (within an 8%
annual limit) in the producer price index. Raw material costs for the Eufaula
facility are substantially below those for the New Iberia plant, due to the
Eufaula facility's proximity to raw material reserves and use of uncalcined raw
materials.
The new production facility in McIntyre, Georgia will also utilize
primarily locally mined uncalcined kaolin. The Company has entered into a
long-term supply agreement for these raw materials which stipulates a fixed
price subject to annual adjustments for changes in the producer price index and
fuel costs. The supply contract provides for a twenty-year supply of raw
materials.
PRODUCTION PROCESS
Ceramic proppants are made by grinding or dispersing ore to a fine powder,
combining the powder into small, green (i.e., unfired) pellets and sintering the
pellets at 2,500F to 3,000F in a rotary kiln.
The Company uses two different methods to produce ceramic proppants. The
Company's plant in New Iberia, Louisiana, uses a dry process (the "Dry Process")
which starts with bauxite or bauxitic clay which has been dried to remove both
free water and water which was chemically bound within the ore. This drying
process is referred to as calcining. The calcined ores are received at the plant
and ground into a dry powder. Pellets are formed by combining the powder with
water and binders and introducing the mixture into a high-shear mixer. The
process is completed once the green pellets are sintered in a rotary kiln. The
Company's competitors also use the Dry Process to produce ceramic proppants.
The Company's plant in Eufaula, Alabama, uses a wet process (the "Wet
Process"), which starts with moist, uncalcined kaolin from local mines. The
kaolin is dispersed with chemicals in a water slurry. With an atomizer, the
slurry is sprayed like a mist into a dryer which causes the slurry to harden
into green pellets. Finally, these green pellets are sintered in rotary kilns.
The Company believes that the Wet Process is unique to its plant in Eufaula,
Alabama.
The Company's plant in McIntrye, Georgia will use the Dry Process. However,
the Company expects to maintain lower production costs at this facility by
purchasing locally mined ore and performing the calcining process itself.
PATENT PROTECTION
The Company's ceramic proppants are made by processes and techniques that
involve a high degree of proprietary technology, some of which is protected by
patents.
The Company owns outright six issued U.S. patents and seven issued foreign
patents; three of these U.S. patents and four of these foreign patents relate to
the CARBOPROP(R) product produced by the Dry Process.
The Company jointly owns with A/S NIRO Atomizer ("NIRO"), the Danish
designer and manufacturer of the spray atomizer device used in the Wet Process,
three issued U.S. patents and 17 issued foreign patents. The patents owned
jointly with NIRO generally relate to the Wet Process, and the products produced
thereby (CARBOLITE(R) and CARBOECONOPROP(R)).
The current versions of the Company's six most important U.S. patents
expire at various times in the years 2002 through 2009 with its two key product
patents expiring in 2006 and 2009. The Company believes that these patents have
been and will continue to be important in enabling the Company to compete in the
market to supply proppants to the natural gas and oil industry. The Company
intends to enforce and has in the past vigorously enforced its patents. The
Company may be involved from time to time in the future, as it has been in the
past, in litigation to determine the enforceability, scope and validity of its
patent rights. Past disputes with its main competitor have been resolved in ways
that permit the Company to continue to benefit fully from its patent rights. The
Company and this competitor have cross-licensed certain of their respective
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patents relating to intermediate and low density proppants on both a
royalty-free and royalty-bearing basis. (Royalties under these licenses are not
material to the Company's financial results.) The Company and NIRO have not
granted any licenses to third parties relating to the use of the Wet Process. As
a result of these cross licensing arrangements, both the Company and its main
competitor are able to produce a broad range of ceramic proppants, while third
parties are unlikely to be able to enter the ceramic proppants market without
infringing on the patent rights held by the Company, its main competitor or
both.
PRODUCTION CAPACITY
The Company believes that constructing adequate capacity ahead of demand
while incorporating new technology to reduce manufacturing costs are important
competitive strategies to increase its overall share of the market for
proppants. Prior to 1993, the Company's production capacity was substantially in
excess of its sales requirements. Since that time, however, the Company has been
expanding its capacity in order to meet the generally increasing demand for its
products. In October 1993, the Company increased the capacity of the Eufaula
facility from 90 million pounds per year to 170 million pounds per year, in
response to the increasing demand for the Company's CARBOLITE(R) and
CARBOECONOPROP(R) products. In May 1995, the Company completed a 40 million
pound per year capacity expansion at the New Iberia facility, intended to meet
increasing demand for CARBOHSP(TM) and CARBOPROP(R). Most recently, in February
1996, the Company commenced operations of its second 80 million pound per year
expansion of the Eufaula plant. Total annual capacity is currently 100 million
pounds at the New Iberia facility and is 250 million pounds at the Eufaula
facility.
In July 1997, the Company began construction of a new $40 million
manufacturing facility in McIntyre, Georgia. The plant is expected to be
completed in the fourth quarter of 1998 and is expected to have initial capacity
of 200 million pounds per year. The plant will be capable of producing all of
the Company's product lines and has been designed to be expandable to a capacity
of 400 million pounds per year.
The following table sets forth the date of construction of and recent
expansion of the Company's manufacturing facilities:
YEAR OF ANNUAL
LOCATION COMPLETION CAPACITY PRODUCTS
-------- ------------ --------- --------
(MILLIONS
OF
POUNDS)
New Iberia, Louisiana
Unit 1............. 1979 20 CARBOHSP(TM) and CARBOPROP(R)
Unit 2............. 1981 40 CARBOHSP(TM) and CARBOPROP(R)
1995
Expansion..... 1995 40 CARBOHSP(TM) and CARBOPROP(R)
---
Total...... 100
===
Eufaula, Alabama
Unit 3............. 1983 90 CARBOLITE(R) and CARBOECONOPROP(R)
1993
Expansion..... 1993 80 CARBOLITE(R) and CARBOECONOPROP(R)
1996
Expansion..... 1996 80 CARBOLITE(R) and CARBOECONOPROP(R)
---
Total...... 250
===
McIntyre, Georgia(1)
Units 1 and 2...... 1998 200 CARBOLITE(R), CARBOECONOPROP(R)
CARBOHSP(TM) and CARBOPROP(R)
- ---------------
(1) The McIntyre, Georgia plant is expected to be completed in the fourth
quarter of 1998, and is expected to have an initial installed capacity of
200 million pounds per year.
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ORDER BACKLOG
The Company generally operates without any material backlog.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS
The Company believes that its operations are in substantial compliance with
applicable federal, state and local environmental and safety laws and
regulations. The Company does not anticipate any significant expenditures in
order to continue to comply with such laws and regulations.
EMPLOYEES
At December 31, 1997, the Company had 117 full-time employees. In addition
to the services of its employees, the Company employs the services of
consultants as required. The Company's employees are not represented by labor
unions. There have been no work stoppages or strikes during the last three years
that have resulted in the loss of production or production delays. The Company
believes its relations with its employees are satisfactory.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K, the Company's Annual
Report to Shareholders, any Form 10-Q or any Form 8-K of the Company or any
other written or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from such statements. This document contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning, among other things, the Company's
prospects, developments and business strategies for its operations, all of which
are subject to certain risks, uncertainties and assumptions. These risks and
uncertainties include but are not limited to, changes in the demand for oil and
natural gas, the development of alternative stimulation techniques and the
development of alternative proppants for use in hydraulic fracturing. The words
"believe", "expect", "anticipate", "project" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made. The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters (approximately 2,700
square feet of leased office space) in Irving, Texas, and owns its manufacturing
facilities, land and substantially all of the related production equipment in
New Iberia, Louisiana, and Eufaula, Alabama.
The facility in New Iberia, Louisiana, located on 24 acres of land owned by
the Company, consists of two production units (approximately 85,000 square
feet), a laboratory (approximately 4,000 square feet) and an office building
(approximately 3,000 square feet). The Company also owns an 80,000 square foot
warehouse on the plant grounds in New Iberia, Louisiana.
The facility in Eufaula, Alabama, located on 14 acres of land owned by the
Company, consists of one production unit (approximately 111,000 square feet), a
laboratory (approximately 2,000 square feet) and an office (approximately 1,700
square feet).
The Company's customer service and distribution operations are located at
the New Iberia facility, while its quality control, testing and development
functions operate out of both the New Iberia and Eufaula facilities. The Company
owns distribution facilities in San Antonio, Texas, Rock Springs, Wyoming and
Edmonton, Alberta, Canada.
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ITEM 3. LEGAL PROCEEDINGS
The Company is not currently engaged in any material pending legal
proceedings and is not currently aware of any claims that are likely to give
rise to such proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
Jesse P. Orsini (age, 57): Mr. Orsini, President and Chief Executive
Officer, has served as President, Chief Executive Officer and a Director of the
Company since its organization in 1987.
Paul G. Vitek (age, 39): Mr. Vitek has been the Vice President of Finance
since February 1996 and has served as Treasurer and Secretary of the Company
since 1988.
Terry P. Keefe (age, 49): Mr. Keefe has been Vice President of
Manufacturing since July 1997. Prior to being elected Vice President of
Manufacturing, Mr. Keefe was Plant Manager of the Company's Eufaula, Alabama
plant since the organization of the Company in 1987.
Dr. C. Mark Pearson (age, 41): Dr. Pearson joined the Company as Vice
President of Marketing and Technology in March 1997. Prior to joining the
Company, Dr. Pearson served as Associate Professor of Petroleum Engineering at
the Colorado School of Mines from December 1995 and held various engineering and
management positions with Arco Petroleum Company from 1984 through December
1995.
All officers are elected at the Annual Meeting of the Board of Directors
for one-year terms or until their successors are duly elected. There are no
arrangements between any officer and any other person pursuant to which he was
selected as an officer. There is no family relationship between any of the named
executive officers or between any of them and the Company's directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Market Information
The Company's Common Stock began trading on the NASDAQ National Market
under the symbol CRBO upon completion of the Company's initial public offering
on April 23, 1996. Per share stock prices for the quarterly periods during 1997
and 1996 as reported by NASDAQ were as follows:
LOW HIGH
------- -------
1997
First quarter............................................. 18 3/8 21 3/4
Second quarter............................................ 18 1/2 28 1/2
Third quarter............................................. 26 33 1/2
Fourth quarter............................................ 32 38 1/2
1996
Second quarter............................................ 18 1/4 24 1/4
Third quarter............................................. 18 1/2 22 3/4
Fourth quarter............................................ 18 7/8 21
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(b) Holders
The approximate number of shareholders of record of Common Stock on March
6, 1998 was 18. However, from available information, the Company believes that
the total number of shareholders of Common Stock is approximately 1,100.
(c) Dividends
The Company paid quarterly cash dividends of $0.075 per share on its Common
Stock in 1997 and in the third and fourth quarters of 1996. The Company's
current intention, subject to its financial condition, the amount of funds
generated from operations and the level of capital expenditures, is to continue
to pay quarterly dividends to shareholders of its Common Stock at the rate of
$0.075 per share.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from financial statements
of the Company. The data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements and notes thereto included elsewhere in this Report.
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Revenues..................................... $85,122 $65,151 $58,001 $53,310 $41,894
Cost of goods sold........................... 42,186 34,517 29,297 26,630 20,613
------- ------- ------- ------- -------
Gross profit................................. 42,936 30,634 28,704 26,680 21,281
Selling, general and administrative
expenses(1)................................ 8,915 8,126 7,148 6,194 5,940
------- ------- ------- ------- -------
Operating profit............................. 34,021 22,508 21,556 20,486 15,341
Other income, net............................ 1,004 175 157 291 198
------- ------- ------- ------- -------
Income before income taxes................... 35,025 22,683 21,713 20,777 15,539
Income taxes................................. 12,936 5,883 -- -- --
------- ------- ------- ------- -------
Net income................................... $22,089 $16,800 $21,713 $20,777 $15,539
======= ======= ======= ======= =======
Earnings per share
Basic...................................... $ 1.51
=======
Diluted.................................... $ 1.50
=======
PRO FORMA DATA(2):
Income before income taxes................... $22,683
Pro forma income taxes....................... 8,393
-------
Pro forma net income......................... $14,290
=======
Pro forma earnings per share(3)
Basic...................................... $ 0.98
=======
Diluted.................................... $ 0.97
=======
DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Current assets............................... $46,861 $38,158 $17,085 $18,301 $13,353
Current liabilities excluding bank
borrowings................................. 7,616 5,204 4,928 3,788 3,211
Bank borrowings-current...................... -- -- 2,780 -- --
Property, plant and equipment, net........... 34,093 22,247 22,004 10,854 9,175
Total assets................................. 80,954 60,405 39,089 29,154 22,527
Total shareholders' equity................... 70,942 53,234 31,381 25,366 19,316
Cash dividends per share(4).................. $ 0.30 $ 0.15
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(1) Selling, general and administrative expenses for the year ended December
31, 1996 include an incremental charge of $877,225 relating to the
accelerated recognition of compensation expense for the vesting of
restricted stock in connection with the Company's initial public offering.
(2) Pro forma data reflects the effects on historical income statement data for
the year ended December 31, 1996 as if the Company had been treated as a C
Corporation for the entire year for income tax purposes, with an estimated
effective income tax rate of 37%. The Company terminated its S Corporation
election on April 23, 1996 prior to its initial public offering.
(3) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of earnings per share and the
impact of Statement No. 128, see the notes to the consolidated financial
statements beginning on page F-6.
(4) Cash dividends per share for 1996 is based on cash dividends declared
subsequent to the Company's initial public offering and does not include S
Corporation distributions paid prior to and in conjunction with the initial
public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL BUSINESS CONDITIONS
CARBO Ceramics Inc. manufactures and sells ceramic proppants for use in the
hydraulic fracturing of oil and natural gas wells. Hydraulic fracturing is the
most common technique used to stimulate production from hydrocarbon bearing
formations. The process involves pumping fluids into an oil or gas well at very
high pressure in order to fracture the rock formation that contains the
hydrocarbons. As the fracture is created, the fluids are blended with granular
materials, or proppants, which fill the fracture and prop it open after the
pressure pumping ceases. The proppant filled fracture creates a highly permeable
channel that enables the oil or gas to flow more freely from the formation,
thereby increasing production from the well.
Ceramic proppants are premium products that are sold at higher prices than
sand or resin-coated sand, the two primary alternative proppants. The principal
advantage of ceramic proppants is that they are stronger than sand-based
proppants. The higher strength of ceramic proppants results in higher production
rates in deep wells where sand or resin-coated sand may crush under high closure
stress. Consequently, the Company's business is influenced by the level of deep
drilling activity (generally defined as wells deeper than 7,500 feet). Ceramic
proppants are also more uniform in size and shape than sand-based proppants.
This uniformity can result in higher production rates than sand-based proppants
when used in wells that do not otherwise need ceramics for their higher
strength.
As deep drilling, particularly in North America, is typically focused on
the production of natural gas, the Company's business is significantly impacted
by the number of natural gas wells drilled in North America. In markets outside
North America, sales of the Company's products are less dependent on natural gas
markets but are influenced by the overall level of drilling activity.
Furthermore, because the decision to use ceramic proppants is based on the
present value economics of comparing the higher cost of ceramic proppants to the
future value derived from increased production rates, the Company's business is
secondarily influenced by the price of natural gas and oil.
From 1987 through 1996, the Company's revenues grew at a compound annual
rate of 21% despite relatively modest growth in the total number of gas wells
drilled. In 1997, the most active year for drilling activity in the last decade,
the Company's revenues increased by over 30% from 1996.
From 1986 through 1996, the ceramic proppant industry has had productive
capacity in excess of demand. The competitive pressure brought on by this excess
capacity made it difficult for the Company to raise prices on its products.
However, the Company continued to grow its revenues through the introduction of
CARBOECONOPROP(R), a new product introduced in 1992, aimed at increasing the use
of ceramic proppants in the fracturing of medium depth wells, which had
previously been fractured with sand-based proppants. CARBOECONOPROP(R) has been
widely accepted in the industry and has been the Company's fastest
9
11
growing product line over the past five years. The Company expects that
CARBOECONOPROP(R) will continue to be the fastest growing product line in the
future and, as a result, gross profit margins will decline slightly.
In the latter half of 1996, the industry began to operate near full
capacity and product availability on certain product lines was limited. In 1997,
demand for ceramic proppants continued to increase and availability of all
products was limited. In light of this fact, the Company raised prices on its
products by an average of 5% effective in the first quarter 1997. This price
increase was the first across-the-board price increase that the Company had
realized since 1991.
Future growth in the Company's revenues and net income are dependent on the
future demand for natural gas in North America and the demand for hydrocarbons
worldwide. Management believes that the demand for natural gas will continue to
increase due to the abundance, relatively low cost and environmental benefits of
natural gas as a source of energy. With this in mind, the Company initiated
construction of a new manufacturing facility in McIntyre, Georgia in July 1997.
The plant will cost approximately $40 million to construct and is expected to be
completed in the fourth quarter of 1998. Initial capacity of the plant is
expected to be 200 million pounds per year, an increase of 57% over current
manufacturing capacity.
IMPACT OF YEAR 2000
The Company has developed a plan to modify its information technology to be
ready for the year 2000 and has begun converting critical data processing
systems. The Company currently expects the project to be substantially complete
by early 1999, to cost less than $100,000 and have no significant effect on
operations.
REVENUES
PERCENT PERCENT
1997 CHANGE 1996 CHANGE 1995
------- ------- ------- ------- -------
($ IN THOUSANDS)
Revenues....................................... $85,122 31% $65,151 12% $58,001
CARBO Ceramics Inc.'s 1997 revenues of $85.1 million established a new
annual record for the Company and were 31% higher than revenues in 1996. While
sales volume increased 24% from 1996, revenues grew at a faster pace due to an
increase in the average selling price that was the result of a price increase of
approximately 5% which became effective in January 1997. Domestic volumes
increased 13% from 1996 as strong demand for natural gas resulted in a 30%
increase in drilling activity. Export volumes increased 51% as the Company's
products became more widely accepted in the international oil markets. The
fastest growing product during 1997 was CARBOLITE(R), which increased 47% from
1996. The largest part of this increase was in export sales, to Russia,
Australia and the North Sea.
Revenues were $65.2 million for the year ended December 31, 1996, an
increase of 12% over 1995 revenues of $58.0 million. While sales volume
increased 15% from 1995, revenues grew at a slower pace because of a shift in
the product mix toward CARBOECONOPROP(R), the Company's lowest price product,
targeted at penetrating the market for sand and resin-coated sand. For the year
ended 1996, CARBOECONOPROP(R) accounted for 43% of the Company's total sales
volume, up from 40% in 1995. In addition, revenue growth lagged volume growth
due to lower pricing in Europe and South Texas, as the Company protected its
market share by matching lower prices established by its competitors.
GROSS PROFIT
PERCENT PERCENT
1997 CHANGE 1996 CHANGE 1995
------- ------- ------- ------- -------
($ IN THOUSANDS)
Gross Profit................................... $42,936 40% $30,634 7% $28,704
Gross Profit %................................. 50% 47% 49%
The Company's cost of goods sold consists of manufacturing costs and
packaging and transportation expenses associated with the delivery of the
Company's products to its customers. Variable manufacturing
10
12
expenses include raw materials, labor, utilities and repair and maintenance
supplies. Fixed manufacturing expenses include depreciation, property taxes on
production facilities, insurance and factory overhead.
Gross profit for 1997 increased $12.3 million or 40% from 1996. Gross
profit as a percentage of revenues increased from 47% to 50% due to the higher
average selling price resulting from the 5% price increase which became
effective in January 1997 and lower manufacturing costs in the New Iberia
manufacturing facility. The lower costs achieved in New Iberia were primarily
the result of improved efficiency due to increased production at the plant
versus the previous year. Production volumes also increased at the Eufaula
manufacturing facility due to a mid-year capacity expansion project but this was
offset by higher raw material prices resulting from a consolidation of suppliers
in the Eufaula area.
Gross profit for 1996 increased by $1.9 million or 7% from 1995. Gross
profit as a percentage of revenues decreased from 49% to 47% due to lower
average selling prices for the Company's products and increases in raw materials
and labor. Raw material costs at the New Iberia facility increased due to an
increase in demand for CARBOHSP(TM) which requires a higher grade and higher
cost raw material to produce than CARBOPROP(R). Raw material costs at the
Eufaula facility increased due to the negotiation of a new supply contract that
was necessitated by a consolidation of suppliers in the Eufaula area.
Depreciation included in cost of goods sold increased by $788,000 from 1995 due
to the effect of the full year's depreciation on plant expansions completed
during 1995.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
PERCENT PERCENT
1997 CHANGE 1996 CHANGE 1995
------- ------- ------- ------- -------
($ IN THOUSANDS)
SG&A............................................... $ 8,915 10% $ 8,126 14% $ 7,148
SG&A as a % of Revenues............................ 10.5% 12.5% 12.3%
Selling, general and administrative expenses increased by $789,000 in 1997
over 1996. While SG&A expenses decreased as a percentage of revenues, there was
a substantial change in the composition of these expenses from 1996 to 1997. In
connection with the initial public offering of the Company's Common Stock in
1996, the vesting of restricted stock previously granted to the Company's
President and Chief Executive Officer was accelerated. This resulted in non-cash
compensation expense of $1,316,000 in 1996, where none was present in 1997.
These reductions in 1997 were partially offset by new costs incurred in
connection with regulatory filing costs, listing expenses and shareholder
communication costs associated with being a publicly traded company. Other SG&A
components that increased were those that vary with sales volume or
profitability including warehouse and shipping expenses, commissions expense and
incentive compensation.
Selling, general and administrative expenses increased by $978,000 in 1996
over 1995. While SG&A expenses increased only slightly as a percentage of
revenues, there was a substantial change in the composition of these expenses in
1996. Prior to the initial public offering of the Company's Common Stock, a
consulting agreement with the Company's Chairman was terminated in April 1996.
As a result, expenses recognized in connection with the consulting agreement
decreased by $717,000 in 1996 as compared to 1995. In connection with the
initial public offering, the vesting of restricted stock previously granted to
the Company's President and Chief Executive Officer was accelerated. This
acceleration resulted in an incremental non-cash compensation expense of
$877,000 over 1995. Other increases in SG&A expenses in 1996 were variable
expenses that increased due to higher sales volume. These variable expenses
include warehouse charges, incentive compensation and franchise taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of December 31, 1997 were $8.9 million
compared to $17.4 million at the beginning of the year. The Company generated
cash from operations of $23.6 million. Cash used in investing and financing
activities totaled $32.1 million. As of December 31, 1997 the Company held $13.9
million in investments expected to be held to maturity. These investments
consisted solely of U.S. Government Securities.
11
13
Total capital expenditures for property, plant and equipment during 1997
were $13.8 million. Spending on the new Georgia manufacturing facility scheduled
to be completed by the 4th quarter of 1998 was $7.8 million, expansion of the
San Antonio storage facility -- $1.8 million, acquisition of Rock Springs
Terminal -- $1.3 million, Canadian remote storage expansion -- $1.1 million,
Eufaula capacity expansion and kiln shell replacement -- $1.3 million. The
balance of $.5 million was spent on the normal replacement of capital equipment.
Other investing activities during the year involved the purchase of $13.9
million of held-to-maturity investments (U.S. Government Securities).
The Company paid $4.4 million in dividends during 1997.
The Company plans to spend approximately $32 million for the completion of
its new manufacturing facility in McIntyre, Georgia during 1998, with funding
expected to be provided entirely by cash generated from operations. The
Company's current intention, subject to its financial condition, the amount of
funds generated from operations and the level of capital expenditures, is to
continue to pay quarterly dividends to shareholders of its Common Stock at the
rate of $0.075 per share.
In 1997, the Company maintained an unsecured line of credit in the amount
of $9.0 million. As of December 31, 1997, there were no borrowings outstanding
under this credit agreement. An amended and restated credit agreement under
which the Company may borrow up to $10.0 million through December 31, 2000 was
executed on February 12, 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in pages F-1 through
F-14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in
that the Registrant will file a definitive proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
that specifically address the items set forth herein are incorporated by
reference. Such incorporation does not include the Compensation Committee Report
or the Performance Graph included in the Proxy Statement.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement. Information
concerning executive officers is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
12
14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Consolidated Financial Statements:
The consolidated financial statements of CARBO Ceramics Inc. listed
below are contained in pages F-1 through F-14 of this Report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for each of the three years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Shareholders' Equity for each of the three
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997, 1996 and 1995
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the fourth quarter of
1997.
(c) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as
part of, or incorporated by reference into, this Report.
(d) Financial Statement Schedules:
All schedules have been omitted since they are either not required or
not applicable.
13
15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARBO CERAMICS INC.
By: /s/ JESSE P. ORSINI
----------------------------------
Jesse P. Orsini
President and Chief Executive
Officer
By: /s/ PAUL G. VITEK
----------------------------------
Paul G. Vitek
Vice President, Finance
Dated: March 16, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jesse P. Orsini and Paul G. Vitek,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM C. MORRIS Chairman of the Board March 16, 1998
- -----------------------------------------------------
William C. Morris
/s/ JESSE P. ORSINI President, Chief Executive March 16, 1998
- ----------------------------------------------------- Officer and Director
Jesse P. Orsini (Principal Executive Officer)
/s/ PAUL G. VITEK Chief Financial Officer March 16, 1998
- ----------------------------------------------------- (Principal Financial and
Paul G. Vitek Accounting Officer)
/s/ CLAUDE E. COOKE, JR. Director March 16, 1998
- -----------------------------------------------------
Claude E. Cooke, Jr.
/s/ WILLIAM A. GRIFFIN, JR. Director March 16, 1998
- -----------------------------------------------------
William A. Griffin, Jr.
/s/ JOHN J. MURPHY Director March 16, 1998
- -----------------------------------------------------
John J. Murphy
/s/ ROBERT S. RUBIN Director March 16, 1998
- -----------------------------------------------------
Robert S. Rubin
14
16
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CARBO Ceramics Inc.
We have audited the accompanying consolidated balance sheets of CARBO
Ceramics Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CARBO Ceramics
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New Orleans, Louisiana
January 23, 1998
F-1
17
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
------------------
1997 1996
------- -------
($ IN THOUSANDS)
Current assets:
Cash and cash equivalents................................. $ 8,899 $17,414
Investment securities..................................... 13,905 --
Trade accounts receivable................................. 14,243 10,902
Inventories:
Finished goods......................................... 4,347 4,478
Raw materials and supplies............................. 4,034 3,907
------- -------
Total inventories................................. 8,381 8,385
Prepaid expenses and other current assets................. 661 608
Deferred income taxes..................................... 772 849
------- -------
Total current assets.............................. 46,861 38,158
Property, plant and equipment:
Land and land improvements................................ 214 57
Buildings................................................. 4,536 4,536
Machinery and equipment................................... 27,773 25,112
Construction in progress.................................. 11,382 401
------- -------
Total............................................. 43,905 30,106
Less accumulated depreciation............................. 9,812 7,859
------- -------
Net property, plant and equipment................. 34,093 22,247
------- -------
Total assets...................................... $80,954 $60,405
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 2,131 $ 1,423
Accrued payroll and benefits.............................. 2,448 1,837
Accrued freight........................................... 851 659
Accrued utilities......................................... 422 326
Accrued income taxes...................................... 1,018 609
Other accrued expenses.................................... 746 350
------- -------
Total current liabilities......................... 7,616 5,204
Deferred income taxes....................................... 2,396 1,967
Shareholders' equity:
Preferred stock, par value $0.01 per share, 5,000 shares
authorized: none outstanding........................... -- --
Common stock, par value $0.01 per share, 40,000,000 shares
authorized: 14,602,000 shares issued and outstanding... 146 146
Additional paid-in capital................................ 42,919 42,919
Retained earnings......................................... 27,877 10,169
------- -------
Total shareholders' equity........................ 70,942 53,234
------- -------
Total liabilities and shareholders' equity........ $80,954 $60,405
======= =======
The accompanying notes are an integral part of these statements.
F-2
18
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues.................................................... $85,122 $65,151 $58,001
Cost of goods sold.......................................... 42,186 34,517 29,297
------- ------- -------
Gross profit................................................ 42,936 30,634 28,704
Selling, general and administrative expenses................ 8,915 8,126 7,148
------- ------- -------
Operating profit............................................ 34,021 22,508 21,556
Other income (expense):
Interest income, net...................................... 969 240 160
Other income, net......................................... 35 (65) (3)
------- ------- -------
1,004 175 157
------- ------- -------
Income before income taxes.................................. 35,025 22,683 21,713
Income taxes................................................ 12,936 5,883 --
------- ------- -------
Net income.................................................. $22,089 $16,800 $21,713
======= ======= =======
Pro forma data:
Income before income taxes................................ $22,683 $21,713
Income taxes.............................................. 8,393 8,034
------- -------
Net income................................................ $14,290 $13,679
======= =======
Earnings per share (pro forma for 1996 and 1995):
Basic..................................................... $ 1.51 $ 0.98 $ 0.94
======= ======= =======
Diluted................................................... $ 1.50 $ 0.97 $ 0.94
======= ======= =======
The accompanying notes are an integral part of these statements.
F-3
19
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS B ADDITIONAL
COMMON COMMON PAID-IN UNEARNED RETAINED
STOCK STOCK CAPITAL COMPENSATION EARNINGS TOTAL
------ ------- ---------- ------------ -------- --------
($ IN THOUSANDS)
BALANCES AT JANUARY 1, 1995............. $120 $ 3 $ 6,626 $(1,754) $ 20,372 $ 25,367
Net income............................ -- -- -- -- 21,713 21,713
Amortization of unearned
compensation....................... -- -- -- 438 -- 438
Cash distributions.................... -- -- -- -- (16,137) (16,137)
---- ---- ------- ------- -------- --------
BALANCES AT DECEMBER 31, 1995........... 120 3 6,626 (1,316) 25,948 31,381
Net income............................ -- -- -- -- 16,800 16,800
Amortization of unearned
compensation....................... -- -- -- 1,316 -- 1,316
Distributions to shareholders paid
prior to and in connection with
initial public offering ($2.67 per
share)............................. -- -- (2,455) -- (30,389) (32,844)
Conversion of Class B Common Stock to
Common Stock....................... 3 (3) -- -- -- --
Deferred tax asset related to vesting
of restricted stock................ -- -- 3,486 -- -- 3,486
Net proceeds from initial public
offering........................... 23 -- 35,262 -- -- 35,285
Cash dividends ($0.15 per share)...... -- -- -- -- (2,190) (2,190)
---- ---- ------- ------- -------- --------
BALANCES AT DECEMBER 31, 1996........... 146 -- 42,919 -- 10,169 53,234
Net income............................ -- -- -- -- 22,089 22,089
Cash dividends ($0.30 per share)...... -- -- -- -- (4,381) (4,381)
---- ---- ------- ------- -------- --------
BALANCES AT DECEMBER 31, 1997........... $146 $ -- $42,919 $ -- $ 27,877 $ 70,942
==== ==== ======= ======= ======== ========
The accompanying notes are an integral part of these statements.
F-4
20
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
1997 1996 1995
-------- -------- --------
($ IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $ 22,089 $ 16,800 $ 21,713
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 1,953 1,901 1,117
Amortization.............................................. -- 1,316 438
Deferred income taxes..................................... 506 4,604 --
Changes in operating assets and liabilities:
Trade accounts receivable.............................. (3,341) (2,119) 36
Inventories............................................ 4 (554) (3,046)
Prepaid expenses and other current assets.............. (53) (338) 13
Accounts payable....................................... 708 205 269
Accrued payroll and benefits........................... 611 271 358
Accrued freight........................................ 192 53 (118)
Accrued utilities...................................... 96 44 (4)
Accrued income taxes................................... 409 609 --
Other accrued expenses................................. 396 (40) 156
-------- -------- --------
Net cash provided by operating activities................... 23,570 22,752 20,932
INVESTING ACTIVITIES
Purchases of investment securities.......................... (13,905) -- --
Purchases of property, plant and equipment.................. (13,799) (3,010) (11,788)
-------- -------- --------
Net cash used in investing activities....................... (27,704) (3,010) (11,788)
FINANCING ACTIVITIES
Proceeds from bank borrowings............................... -- 7,180 2,780
Repayments on bank borrowings............................... -- (9,960) --
Net proceeds from initial public offering................... -- 35,285 --
Distributions paid to shareholders.......................... -- (32,844) (16,137)
Dividends paid.............................................. (4,381) (2,190) --
-------- -------- --------
Net cash used in financing activities....................... (4,381) (2,529) (13,357)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........ (8,515) 17,213 (4,213)
Cash and cash equivalents at beginning of year.............. 17,414 201 4,414
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 8,899 $ 17,414 $ 201
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ -- $ 92 $ --
======== ======== ========
Income taxes paid........................................... $ 12,021 $ 669 $ --
======== ======== ========
Purchases of property, plant and equipment through accounts
payable................................................... $ -- $ -- $ 866
======== ======== ========
The accompanying notes are an integral part of these statements.
F-5
21
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CARBO Ceramics Inc. (the "Company") was formed in 1987 and is a
manufacturer of ceramic proppants. The Company has production plants in New
Iberia, Louisiana and Eufaula, Alabama and primarily markets its proppant
products through pumping service companies that perform hydraulic fracturing for
major oil and gas companies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CARBO
Ceramics Inc. and its wholly owned subsidiary, CARBO Ceramics Sales Corporation.
CARBO Ceramics Sales Corporation was formed on July 31, 1996 under the laws of
Barbados. All significant intercompany transactions have been eliminated.
CONCENTRATION OF CREDIT RISK
The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. Receivables are
generally due within 30 days. The majority of the Company's receivables are from
customers in the petroleum pressure pumping industry. Credit losses historically
have been insignificant.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The carrying amounts
reported in the balance sheet for cash equivalents approximate fair value.
INVESTMENT SECURITIES
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
both the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. At December 31,
1997, all investment securities were classified as held-to-maturity. The fair
value of the investments approximated the carrying value at December 31, 1997.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Finished goods inventories include costs of materials, plant labor and
overhead incurred in the production of the Company's products.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is computed
on the straight-line method for financial reporting purposes using the following
estimated useful lives:
Buildings and improvements.................................. 15 years
Machinery and equipment..................................... 3 to 15 years
REVENUE RECOGNITION
Revenue is recognized when title passes to the customer.
F-6
22
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
INCOME TAXES
Income taxes have been provided using the liability method in accordance
with FASB Statement No. 109, "Accounting for Income Taxes." Prior to April 24,
1996, the shareholders of the Company had elected S Corporation status under the
Internal Revenue Code and certain comparable state tax laws. As a result, the
Company's taxable income for federal and certain state jurisdictions where the
Company had significant operations was reported on the tax returns of its
shareholders.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement No. 128
requirements.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. BANK BORROWINGS
The Company has a Secured Revolving Credit Agreement (the "Credit
Agreement") with a bank under which it may borrow up to $9.0 million at 0.5%
above the bank's Base Rate (as defined in the Credit Agreement) through January
31, 1998. The weighted-average interest rate on the Credit Agreement was 8.75%
for 1996. There were no borrowings against the line of credit in 1997. Under the
terms of the Credit Agreement, the Company is required to maintain certain bank
accounts with the lender, with balances equal to transactional and
investment-related charges. The terms of the Credit Agreement further provide
for certain affirmative and negative covenants, including a restriction on
capital expenditures.
3. LEASES
The Company leases railroad equipment under operating leases. Minimum
future rental payments due under noncancelable operating leases with remaining
terms in excess of one year as of December 31, 1997 are as follows ($ in
thousands):
1998................................................ $ 508
1999................................................ 345
2000................................................ 174
2001................................................ 108
2002................................................ 108
------
$1,243
======
Leases generally provide for renewal options for periods from one to five
years at their fair rental value at the time of renewal. In the normal course of
business, operating leases are generally renewed or replaced by other leases.
Rent expense for all operating leases was $920,000 in 1997, $740,000 in 1996,
and $732,000 in 1995.
F-7
23
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Since its formation through April 24, 1996, the Company elected to be
treated for federal and certain state income tax purposes as an S Corporation.
As a result, earnings of the Company have been taxed directly to the
shareholders of the Company rather than to the Company. Prior to the completion
of its initial public offering, the Company terminated its S Corporation
election and, accordingly, became subject to federal and state income taxes. The
deferred tax effects of the change in tax status increased net income for 1996
by $884,000. The Company also recorded a deferred tax asset of $3.5 million with
a corresponding increase in additional paid-in capital in 1996 related to the
vesting of 800,000 restricted shares of Common Stock held by the Company's Chief
Executive Officer upon the occurrence of the initial public offering. The
Company realized the full benefit of this deferred tax asset during 1996.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1997 and
1996 are as follows ($ in thousands):
1997 1996
------ ------
Deferred tax assets:
Employee benefits......................................... $ 271 $ 288
Inventories............................................... 377 427
Other..................................................... 124 134
------ ------
Total deferred tax assets......................... 772 849
------ ------
Deferred tax liabilities:
Depreciation.............................................. 2,356 1,929
Other..................................................... 40 38
------ ------
Total deferred tax liabilities.................... 2,396 1,967
------ ------
Net deferred tax liabilities...................... $1,624 $1,118
====== ======
Significant components of the provision for income taxes for the years
ended December 31, 1997 and 1996 are as follows ($ in thousands):
1997 1996
------- ------
Current:
Federal................................................... $11,082 $ 764
State..................................................... 1,348 515
------- ------
Total current..................................... 12,430 1,279
------- ------
Deferred:
Federal................................................... 451 4,481
State..................................................... 55 123
------- ------
Total deferred.................................... 506 4,604
------- ------
$12,936 $5,883
======= ======
F-8
24
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES -- (CONTINUED)
The reconciliation of income taxes computed at the U.S. federal statutory
tax rate to the Company's income tax expense for 1997 and pro forma income tax
expense for 1996 is as follows ($ in thousands):
1997 1996
------------------ -----------------
AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ -------
U.S. statutory rate............................ $12,259 35.0% $7,712 34.0%
State income taxes, net of federal tax
benefit...................................... 1,403 4.0 907 4.0
Foreign sales corporation benefit.............. (726) (2.1) (226) (1.0)
------- ---- ------ ----
$12,936 36.9% $8,393 37.0%
======= ==== ====== ====
5. SHAREHOLDERS' EQUITY
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by shareholders and do not have cumulative voting rights. Subject
to preferences of any Preferred Stock that may be issued in the future, the
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared from time to time by the Board of Directors out of funds
legally available for that purpose. In the event of liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. The Common
Stock has no preemptive or conversion rights or other subscription rights. There
are no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and nonassessable.
Prior to 1996, the Company issued to its President and Chief Executive
Officer shares of Common Stock, pursuant to restricted stock agreements, as
compensation for future services. These shares had dividend rights; however,
sale of the shares was restricted prior to vesting which was subject to the
occurrence of certain events, including the initial public offering of the
Company's Common Stock. The restricted stock vested upon the occurrence of the
initial public offering on April 26, 1996 and the remaining balance of unearned
compensation was recorded as compensation expense. Compensation expense totaled
$1.3 million in 1996 and $438,000 in 1995.
Prior to April 17, 1996, the Company's authorized capital stock consisted
of 20,000 shares of Common Stock, of which 6,001 shares were issued and
outstanding, and 2,000 shares of Class B Common Stock, of which 150 shares were
issued and outstanding. On April 17, 1996, the Company (i) caused the conversion
of all issued and outstanding shares of its Class B Common Stock into shares of
Common Stock, and (ii) effected a 2,000 for 1 split of the Common Stock. All
capital amounts, share and per share data in the accompanying financial
statements have been retroactively restated, where appropriate, to reflect the
stock split.
On January 14, 1998, the Board of Directors declared a cash dividend of
$0.075 per share. The dividend is payable on February 15, 1998 to shareholders
of record on January 30, 1998.
PREFERRED STOCK
The Company's charter authorizes the issuance of 5,000 shares of Preferred
Stock. The Board of Directors has the authority to issue the Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the Company's shareholders. No shares of
F-9
25
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. SHAREHOLDERS' EQUITY -- (CONTINUED)
Preferred Stock are currently outstanding, and the Company has no present plans
to issue any shares of Preferred Stock.
6. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
The Company's 1996 Stock Option Plan for Key Employees (the "Option Plan")
has authorized the grant of options to purchase an aggregate of 1,000,000 shares
of the Company's Common Stock to certain officers and key employees of the
Company chosen by a committee appointed by the Board of Directors (the
"Compensation Committee") to administer such plan. Under the Option Plan, all
options granted have 10 year terms, and conditions relating to the vesting and
exercise of options are determined by the Compensation Committee for each
option. Options granted under the Option Plan are "nonstatutory options"
(options which do not afford income tax benefits to recipients, but the exercise
of which may provide tax deductions for the Company). Each option will have an
exercise price per share equal to the fair market value of a share of Common
Stock on the date of grant and no individual employee may be granted options to
purchase more than an aggregate of 500,000 shares of Common Stock. The options
vest annually over a four-year period.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: risk-free interest rates of 5.34%
and 6.19%; dividend yields of 1.0% and 1.5%; volatility factors of the expected
market price of the Company's Common Stock of .337 and .300; and a weighted
average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options (net of related expected tax benefits) is amortized to expense over the
options' vesting period. Since the Company's options generally vest over a
four-year period, the pro forma disclosures are not indicative of future amounts
until Statement 123 is
F-10
26
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCK OPTION PLAN -- (CONTINUED)
applied to all outstanding, nonvested options. The Company's pro forma
information for 1997 and 1996 follows ($ in thousands, except per share data):
1997 1996
------- -------
Net income:
As reported (pro forma in 1996)........................... $22,089 $14,290
======= =======
Pro forma including the effect of options................. $21,539 $13,870
======= =======
Basic earnings per share:
As reported (pro forma in 1996)........................... $ 1.51 $ 0.98
======= =======
Pro forma including the effect of options................. $ 1.48 $ 0.95
======= =======
Diluted earnings per share:
As reported (pro forma in 1996)........................... $ 1.50 $ 0.97
======= =======
Pro forma including the effect of options................. $ 1.46 $ 0.95
======= =======
The earnings per share amounts prior to 1997 have been restated to comply
with Statement of Financial Accounting Standards No. 128, "Earnings per Share."
A summary of the Company's stock option activity, and related information
for the years ended December 31, 1997 and 1996 follows:
1997 1996
-------------------------- --------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE
------- ---------------- ------- ----------------
Outstanding-beginning of year.......... 700 $17 --
Granted................................ 260 $27 700 $17
Exercised.............................. -- --
Forfeited.............................. (110) $17 --
----- ----
Outstanding-end of year................ 850 $20 700 $17
===== ====
Exercisable at end of year............. 148 $17 -- --
Weighted-average fair value of options
granted during the year.............. $9.38 $5.51
Exercise prices for options outstanding as of December 31, 1997 ranged from
$17.00 to $32.25. The weighted-average remaining contractual life of those
options is 8.7 years.
F-11
27
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
1997 1996 1995
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per
share:
Net income (pro forma for 1996 and 1995).... $ 22,089 $ 14,290 $ 13,679
Denominator:
Denominator for basic earnings per share --
weighted average shares (pro forma for
1996 and 1995)........................... 14,602,000 14,602,000 14,602,000
Effect of dilutive securities:
Employee stock options (See Note 6)...... 169,102 71,368 --
----------- ----------- -----------
Dilutive potential common shares............ 169,102 71,368 --
----------- ----------- -----------
Denominator for diluted earnings per share--
adjusted weighted-average shares......... 14,771,102 14,673,368 14,602,000
=========== =========== ===========
Basic earnings per share...................... $ 1.51 $ 0.98 $ 0.94
=========== =========== ===========
Diluted earnings per share.................... $ 1.50 $ 0.97 $ 0.94
=========== =========== ===========
For 1996 and 1995, pro forma weighted-average shares is based on 12,302,000
shares of Common Stock outstanding during the year increased by the assumed
issuance of 2,300,000 shares of Common Stock to pay S Corporation distributions
of $29.1 million.
8. PRO FORMA NET INCOME
Pro forma net income for 1996 and 1995 reflects a provision for income
taxes at an effective rate of approximately 37% to illustrate how historical net
income might have been affected if the Company had not been an S Corporation for
income tax purposes. The Company elected to be treated as an S Corporation
pursuant to the Internal Revenue Code from June 23, 1987 through April 23, 1996,
immediately after which it terminated its S Corporation election in conjunction
with the initial public offering. As a result, the Company was not subject to
federal income taxes during this period. By election of the shareholders, S
Corporation status was also applicable to the state jurisdictions where the
Company had significant operations.
F-12
28
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. QUARTERLY OPERATING RESULTS -- (UNAUDITED)
Quarterly results of operations for the years ended December 31, 1997 and
1996 were as follows:
THREE MONTHS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Revenues................................. $17,840 $20,893 $23,062 $23,327
Gross profit............................. 8,993 10,347 11,469 12,127
Net income............................... 4,586 5,449 5,939 6,115
Earnings per share
Basic.................................. $ 0.31 $ 0.37 $ 0.41 $ 0.42
Diluted................................ $ 0.31 $ 0.37 $ 0.40 $ 0.41
1996
Revenues................................. $13,033 $17,399 $17,898 $16,821
Gross profit............................. 6,140 8,017 8,466 8,011
Net income............................... 4,375 4,022 4,349 4,054
Pro forma net income (see Note 8)........ 2,712 3,115 4,349 4,054
Pro forma earnings per share:
Basic.................................. $ 0.19 $ 0.21 $ 0.30 $ 0.28
Diluted................................ $ 0.19 $ 0.21 $ 0.30 $ 0.28
Quarterly data may not sum to the full year data reported in the Company's
consolidated financial statements due to rounding. The 1996 and first three
quarters of 1997 earnings per share amounts have been restated to comply with
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
10. SALES TO CUSTOMERS
The following schedule presents the percentages of total revenues related
to the Company's three major customers for the three-year period ended December
31, 1997:
MAJOR CUSTOMERS
-----------------------
A B C OTHERS TOTAL
----- ----- ----- ------ ------
1997..................................... 35.4% 27.8% 20.5% 16.3% 100%
1996..................................... 34.1% 28.6% 21.7% 15.6% 100%
1995..................................... 29.6% 27.3% 24.9% 18.2% 100%
The percentages of total revenues for two major customers have been
combined for 1995 to reflect a combination of operations by those customers in
1995.
11. INTERNATIONAL SALES
The Company's ceramic proppants are used worldwide by U.S. customers
operating abroad and by foreign customers. Sales outside the United States
accounted for 37%, 31% and 37% of the Company's revenues for 1997, 1996, and
1995, respectively.
1997 1996 1995
----- ----- -----
($ IN MILLIONS)
Location
United States............................................. $53.3 $45.3 $36.8
International............................................. 31.8 19.9 21.2
----- ----- -----
Total............................................. $85.1 $65.2 $58.0
===== ===== =====
F-13
29
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. BENEFIT PLANS
The Company has a defined contribution savings and profit sharing plan
pursuant to Section 401(k) of the Internal Revenue Code. Employees who have
completed one year of service are eligible to participate. Employees may
contribute up to 15% of their monthly compensation.
For employee contributions up to 5% of monthly compensation, the Company
matches the employee contribution at a rate of 50%. Additional contributions by
the Company are discretionary and are determined annually by the Board of
Directors. These discretionary contributions to the plan are allocated to the
participants on a pro rata basis based on their respective salary levels.
Benefit costs recognized as expense under this plan consisted of the
following:
1997 1996 1995
---- ---- ----
($ IN THOUSANDS)
Contributions:
Profit sharing............................................ $209 $189 $194
Savings................................................... 116 107 106
---- ---- ----
$325 $296 $300
==== ==== ====
13. COMMITMENTS
In 1995, the Company entered into an agreement with a supplier to purchase
200,000 tons of green ore for its New Iberia, Louisiana plant at a specified
contract price. The Company has purchased the minimum tonnage required by the
agreement. All of the green ore purchased by the Company will be processed by
the supplier at a specified price. The Company is required to purchase at least
80% of its estimated annual requirements of processed ore from the supplier
until all green ore purchased under the agreement has been processed.
In 1995, the Company entered into an agreement with a supplier to purchase
kaolin for its Eufaula, Alabama plant at a specified contract price. The term of
the agreement is eight years commencing January 1, 1996. Beginning January 1,
1997, the agreement requires the Company to purchase from the supplier at least
80% of the Company's estimated annual requirements of kaolin for its Eufaula
plant.
In 1997, the Company entered into an agreement with a supplier to purchase
kaolin for its McIntyre, Georgia plant at a specified contract price. The term
of the agreement is twenty years commencing on January 1, 1998. The Company has
the right to purchase up to 2.5 million tons of kaolin during the term of the
agreement. The agreement requires the Company to purchase from the supplier at
least 80% of the Company's estimated annual requirements of kaolin for its
McIntyre plant.
The Company was in compliance with the terms of all agreements through
December 31, 1997.
The Company commenced construction in 1997 of a new manufacturing facility
in McIntyre, Georgia at a total estimated cost of $40 million. Construction in
progress of $11.4 million at December 31, 1997 includes $7.8 million related to
the new facility. The new facility is scheduled to be fully operational in the
fourth quarter of 1998.
14. EMPLOYMENT AGREEMENT
The Company has an employment agreement with its President which expires
June 30, 2000. The agreement provides for an annual base salary and an incentive
bonus as defined in the agreement. In the event the President is terminated
without cause prior to June 30, 2000, the Company will be obligated to pay the
President two years base salary and a prorated incentive bonus. In addition, all
nonvested stock options granted to the President will vest immediately and
become exercisable. The agreement also contains a five-year non-competition
covenant that would become effective upon termination for any reason.
F-14
30
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Certificate of Incorporation of CARBO Ceramics Inc.
(incorporated by reference to exhibit 3.1 to the
registrant's Form S-1 Registration Statement No.
333-1884)
3.2 -- Bylaws of CARBO Ceramics Inc. (incorporated by reference
to exhibit 3.2 to the registrant's Form S-1 Registration
Statement No. 333-1884)
4.1 -- Form of Common Stock Certificate of CARBO Ceramics Inc.
(incorporated by reference to exhibit to the registrant's
Form S-1 Registration Statement No. 333-1884)
10.1 -- First Amended and Restated Credit Agreement dated as of
February 12, 1998, between Brown Brothers Harriman & Co.
and CARBO Ceramics Inc.
10.2 -- Form of Tax Indemnification Agreement between CARBO
Ceramics Inc. and William C. Morris, Robert S. Rubin,
Lewis C. Glucksman, George A. Wiegers, William A.
Griffin, and Jesse P. Orsini (incorporated by reference
to exhibit 10.2 to the registrant's Form S-1 Registration
Statement No. 333-1884)
10.3 -- Form of Employment Agreement between CARBO Ceramics Inc.
and Jesse P. Orsini (incorporated by reference to exhibit
10.4 to the registrant's Form S-1 Registration Statement
No. 333-1884)
10.4 -- Purchase and Sale Agreement dated as of March 31, 1995,
between CARBO Ceramics Inc. and GEO Specialty Chemicals,
Inc., as amended (incorporated by reference to exhibit
10.5 to the registrant's Form S-1 Registration Statement
No. 333-1884)
10.5 -- Raw Material Requirements Agreement dated as of November
21, 1995, between CARBO Ceramics Inc. and C-E Minerals
Inc. (incorporated by reference to exhibit 10.6 to the
registrant's Form S-1 Registration Statement No.
333-1884)
10.6 -- Incentive Compensation Plan (incorporated by reference to
exhibit 10.8 to the registrant's Form S-1 Registration
Statement No. 333-1884)
10.7 -- CARBO Ceramics Inc. 1996 Stock Option Plan for Key
Employees (incorporated by reference to exhibit 10.9 to
the registrant's Form S-1 Registration Statement No.
333-1884)
10.8 -- Form of Stock Option Award Agreement (incorporated by
reference to exhibit 10.10 to the registrant's Form S-1
Registration Statement No. 333-1884)
10.9 -- Raw Material Supply Agreement dated as of November 18,
1997 between CARBO Ceramics Inc. and Arcilla Mining and
Land Co.
23.1 -- Consent of Ernst & Young LLP
27.1 -- Financial Data Schedule