-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I/cg6bp+mwTfNxvM/F87Dlm1YRxktBf8Wb7h3qCl1dO6hosh1OkfrJMdUIwbh4Aw YUqUyXb3GV26kNSWgTxhPQ== 0000950134-01-001965.txt : 20010308 0000950134-01-001965.hdr.sgml : 20010308 ACCESSION NUMBER: 0000950134-01-001965 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010307 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARBO CERAMICS INC CENTRAL INDEX KEY: 0001009672 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 721100013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-15903 FILM NUMBER: 1563103 BUSINESS ADDRESS: STREET 1: 600 EAST LAS COLINAS BLVD STREET 2: STE 1520 CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 2144010090 MAIL ADDRESS: STREET 1: 600 E LAS COLINAS BLVD STREET 2: STE 1520 CITY: IRVING STATE: TX ZIP: 75039 10-K405 1 d84697e10-k405.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2000. [ ] 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)
6565 MACARTHUR BOULEVARD SUITE 1050 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 28, 2001, as reported on the New York Stock Exchange, was approximately $198,488,550. 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 28, 2001, Registrant had outstanding 14,875,850 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's Annual Meeting of Shareholders to be held April 10, 2001 are incorporated by reference in Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEM 1. BUSINESS GENERAL CARBO Ceramics Inc. is the world's largest producer and supplier of ceramic proppants for use in the hydraulic fracturing of natural gas and oil wells. Demand for ceramic proppants depends primarily 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, called a 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. There are three primary types of proppant that can be utilized in the hydraulic fracturing process: sand, resin-coated sand and ceramic. Sand is the least expensive proppant, resin-coated sand is more expensive and ceramic proppants are typically the highest cost. The higher initial cost of ceramic proppants is justified by the fact that the use of these proppants in certain well conditions results in increased production of oil and gas and increased cash flow for the operators of oil and gas wells. The increased production rates are primarily attributable to the higher strength and more uniform size and shape of ceramic proppants versus alternative materials. 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 nearly 60% of the ceramic proppants and 8% of all proppants used worldwide. During the year ended December 31, 2000, the Company generated approximately 63% of its revenues in the U.S. and 37% 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. 1 3 CARBOECONOPROP(R), introduced in 1992 to compete directly with sand-based proppants, has been 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. 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. 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. During the year 2000, the McIntyre facility increased production to approximately 60 percent of its design capacity. In total, the Company's manufacturing facilities operated at approximately 70 percent of capacity in 2000. 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. CUSTOMERS AND MARKETING The Company's largest customers are, in alphabetical order, BJ Services Company, Halliburton Company and Schlumberger, the three largest participants in the worldwide petroleum pressure pumping industry. These companies collectively accounted for approximately 78 percent of the Company's 2000 revenues and approximately 85 percent of the Company's 1999 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 2 4 companies to hydraulically fracture wells. The Company works both with the pressure pumping service companies and directly with the operators of natural gas and oil wells to present the economic advantages of using ceramic proppants. 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 oilfield 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 expanded its technical sales force in 2000 and plans to continue to increase its efforts to educate end users on the benefits of using ceramic proppants in the future. 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 Senior Vice President of Marketing and Technology coordinates worldwide sales and marketing activities. The Company's export marketing efforts in 2000 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 37%, 39% and 35% of the Company's sales for 2000, 1999 and 1998, 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:
LOCATION 2000 1999 1998 - -------- ----- ----- ----- ($ IN MILLIONS) United States............................................... $58.9 $42.3 $54.3 International............................................... 34.4 27.4 29.8 ----- ----- ----- Total............................................. $93.3 $69.7 $84.1 ===== ===== =====
DISTRIBUTION The Company maintains finished goods inventories at its plants in New Iberia, Louisiana, Eufaula, Alabama, and McIntyre, Georgia, and at eight remote stocking facilities located in: Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas; Fairbanks, Alaska; Edmonton, Alberta, Canada; Rotterdam, The Netherlands; and Tianjin and Shanghai, 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 149 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 3 5 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 and typically purchased on the spot market. The Company has entered into an agreement with a sole supplier to supply its anticipated need for this ore in 2001. For the production of CARBOPROP(R), the Company uses bauxitic clay mined in 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 is currently evaluating alternative sources of supply. 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. 4 6 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 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. 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 the plant operated at approximately 60 percent of its design capacity in 2000. The plant is 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. 5 7 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 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)
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, 2000, the Company had 168 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 6 8 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 5,000 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 are 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 a nominal 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. From time to time, the Company is the subject of legal proceedings arising in the ordinary course of business. The Company does not believe that any of these proceedings will have a material adverse effect on its business or its results from operations. 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 2000. EXECUTIVE OFFICERS OF THE REGISTRANT Jesse P. Orsini (age, 60): 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, 52): 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. 7 9 Dr. C. Mark Pearson (age, 44): Dr. Pearson has served as Senior Vice President of Marketing and Technology since January 2000. 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. Paul G. Vitek (age, 41): Mr. Vitek has been the Senior Vice President of Finance and Administration since January 2000. Prior to serving in his current capacity, Mr. Vitek served as Vice President of Finance from February 1996 and has served as Treasurer and Secretary of the Company since 1988. Dr. C. Mark Pearson has been named to succeed Jesse P. Orsini as President and Chief Executive Officer of the Company, upon Mr. Orsini's retirement from the Company on April 10, 2001. 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 Common Stock Market Prices and Dividends The Company's Common Stock is traded on the New York Stock Exchange (ticker symbol CRR). The approximate number of holders, including both record holders and individual participants in security position listings, of the Company's Common Stock at February 28, 2001 was 2,100. High and low stock prices and dividends for the last two fiscal years were:
2000 1999 ----------------------------- ----------------------------- SALES PRICE CASH SALES PRICE CASH ----------------- DIVIDENDS ----------------- DIVIDENDS QUARTER ENDED HIGH LOW DECLARED HIGH LOW DECLARED - ------------- ------- ------- --------- ------- ------- --------- March 31................... $29.500 $20.000 $0.075 $22.250 $14.000 $0.075 June 30.................... 36.250 25.625 0.075 30.438 17.750 0.075 September 30............... 38.250 25.000 0.075 32.250 20.000 0.075 December 31................ 37.875 25.000 0.075 30.000 19.000 0.075
The Company expects to continue its policy of paying quarterly cash dividends at the rate of $0.075 per share, although there is no assurance as to future dividends because they depend on future earnings, capital requirements and financial condition. 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 8 10 Condition and Results of Operations and the financial statements and notes thereto included elsewhere in this Report.
YEARS ENDED DECEMBER 31, ------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Statement of Income Data: Revenues................................. $ 93,324 $ 69,738 $84,095 $85,122 $65,151 Cost of goods sold....................... 57,763 41,718 41,665 42,186 34,517 -------- -------- ------- ------- ------- Gross profit............................. 35,561 28,020 42,430 42,936 30,634 Selling, general and administrative expenses(1)........................... 12,404 11,761 9,977 8,915 8,126 -------- -------- ------- ------- ------- Operating profit......................... 23,157 16,259 32,453 34,021 22,508 Other, net............................... 268 (288) 974 1,004 175 -------- -------- ------- ------- ------- Income before income taxes............... 23,425 15,971 33,427 35,025 22,683 Income taxes............................. 8,595 5,459 12,719 12,936 5,883 -------- -------- ------- ------- ------- Net income............................... $ 14,830 $ 10,512 $20,708 $22,089 $16,800 ======== ======== ======= ======= ======= Earnings per share Basic................................. $ 1.01 $ 0.72 $ 1.42 $ 1.51 ======== ======== ======= ======= Diluted............................... $ 1.00 $ 0.71 $ 1.40 $ 1.50 ======== ======== ======= ======= Pro Forma Data (Unaudited)(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 ======= Balance Sheet Data: Current assets........................... $ 47,415 $ 23,809 $23,783 $46,861 $38,158 Current liabilities excluding bank borrowings............................ 9,415 5,648 8,638 7,616 5,204 Bank borrowings -- current............... -- 1,809 -- -- -- Property, plant and equipment, net....... 78,007 83,171 75,644 34,093 22,247 Total assets............................. 125,422 106,980 99,427 80,954 60,405 Total shareholders' equity............... 106,140 93,400 87,269 70,942 53,234 Cash dividends per share(4).............. $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.15
- --------------- (1) Selling, general and administrative (SG&A) expenses for 2000, 1999 and 1998 include plant start-up costs of $27,000, $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 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. (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 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 influenced by the price of natural gas and oil. In 1997, demand for ceramic proppants increased to the point that 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. Because management believed that the worldwide demand for natural gas would continue to increase due to the abundance, relatively low cost and environmental benefits of natural gas as a source of energy, the Company initiated construction of a new manufacturing facility in McIntyre, Georgia in July 1997. The plant cost approximately $60 million and added 200 million pounds per year of additional capacity (a 60% increase). The Company raised prices on its products by an average of 5%, effective in the first quarter of 1998. Strong demand for ceramic proppants continued through the first half of 1998, with the Company realizing record financial results for the first three-quarters of the year. However, in the second half of 1998, a rapid decline in oil prices resulted in a significant reduction in the number of oil and gas wells drilled and completed. The Company felt the effects of this decline in the fourth quarter of 1998 as revenues decreased by 29 percent versus the previous quarter and 33 percent from the fourth quarter of 1997. Oil and gas prices remained depressed through much of the first half of 1999 and worldwide drilling activity decreased dramatically. In 1999, the worldwide rig count averaged 1,442, a decline of 22 percent from 1998 and 33 percent from 1997. The Company's financial results for 1999 were adversely effected by a decrease in its average selling price due to competitive pressures associated with the depressed industry conditions and by the additional fixed costs incurred in connection with the start-up of its new production facility in McIntyre, Georgia. The price of oil and natural gas and drilling activity improved significantly in 2000. The recovery was particularly evident in the North American natural gas activity that is a key driver of the Company's business. As a result, sales volume, average selling prices, revenues and profitability all increased versus the previous year. The increase in profitability was tempered by the impact of high natural gas prices on the Company's 10 12 manufacturing costs and the continued impact of start-up operations at the McIntyre, Georgia facility early in the year. NET INCOME
PERCENT PERCENT 2000 CHANGE 1999 CHANGE 1998 ------- ------- ------- ------- ------- ($ IN THOUSANDS) Net Income.............................. $14,830 41% $10,512 (49)% $20,708
The Company reported net income for 2000 that was 41% higher than the previous year. A significant increase in oil and gas drilling activity (and in oil and natural gas prices) began during the second quarter 2000 and continued through the remainder of the year. The domestic rig count throughout 2000 was 47 percent higher than 1999, while the average price of natural gas increased by 93 percent over the previous year. Decreased costs at the New Iberia facility (due to higher production rates resulting from an increase in screening capacity) and the start-up of the second line at McIntyre contributed to income improvement, with increased SG&A costs off-setting some of these gains. The Company reported net income for 1999 that was 49 percent below the previous year. A significant reduction in oil and gas drilling activity, combined with higher than expected costs at the Company's manufacturing facilities, start-up costs at the Company's new facility in McIntyre, Georgia and price pressure on high-strength products in the South Texas market were the primary causes of the decline. Individual components of net income are discussed below. REVENUES
PERCENT PERCENT 2000 CHANGE 1999 CHANGE 1998 ------- ------- ------- ------- ------- ($ IN THOUSANDS) Revenues................................ $93,324 34% $69,738 (17)% $84,095
Carbo Ceramics Inc.'s 2000 revenues of $93.3 million were 34 percent higher than 1999 revenues. Total sales volumes increased by 34 percent, with domestic volumes up 39 percent and export volumes up by 25 percent. The increased domestic volumes were driven by a 70% increase in the South Texas market, while increased export sales were led by improved sales into Australia, China, Russia, and Canada. Revenues were also positively impacted by a June 2000 price increase on our CARBOECONOPROP(R) product. The average selling price for the year was $0.241 per pound. While this was unchanged versus the previous year, the average selling price improved in each quarter during 2000 due to a change in the product mix and a price increase on CARBOECONOPROP(R) that went into effect at mid-year. The Company's 1999 revenues of $69.7 million were 17 percent lower than 1998 revenues. Total sales volumes decreased by 12 percent, with domestic volumes down 15 percent and export volumes down 7 percent from 1998. The decline in domestic volumes was due in large part to a significant decline in sales of CARBOECONOPROP(R) into the south Texas market -- the result of a dramatic drop in rig activity in that area of the country, and a significant decrease in Alaskan activity -- the direct result of lower oil prices. Revenues were also negatively impacted by price pressure on high strength products in the South Texas market. The decline in export volume was due primarily to a decrease in sales into the Pacific Rim region. GROSS PROFIT
PERCENT PERCENT 2000 CHANGE 1999 CHANGE 1998 ------- ------- ------- ------- ------- ($ IN THOUSANDS) Gross Profit............................ $35,561 27% $28,020 (34)% $42,430 Gross Profit %.......................... 38% 40% 50%
11 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 increased by 27 percent from 1999 to 2000. Gross profit as a percentage of sales was 38 percent for 2000, compared to 40 percent for 1999. The increase in gross profit was driven primarily by the significant increase in sales volume. The major contributor to reduced gross profit margins was the significant increase in the cost of natural gas at all three manufacturing facilities. Natural gas costs represent approximately 19 percent of the Company's total manufacturing costs in 2000 compared to 12 percent in 1999. The negative effects of the gas price increases were mitigated somewhat by increased production rates at the New Iberia and McIntyre facilities which resulted in lower costs per pound. At the McIntyre facility, throughput rates have improved due to increased familiarity with new equipment and employees. Gross profit for 1999 was $14.4 million lower than 1998. Gross profit as a percentage of sales was 40 percent for 1999, compared to 50 percent for 1998. The significant decrease in gross profit was the result of the decrease in revenues discussed above and an increase in production expenses. The increase in production expenses resulted from management's decision to start-up the new production facility in McIntyre, Georgia despite the weak demand experienced through much of 1999. This decision was made to position the Company for a recovering market in 2000 but caused all three of the Company's manufacturing facilities to operate at less than full capacity. In addition, costs at the New Iberia facility were adversely affected by a six-week maintenance shutdown in May/June to install a new kiln shell and replace the rotation system. These increases in cost were partially offset by lower freight costs experienced in transferring finished goods from the Eufaula manufacturing facility to the remote storage facility in San Antonio, Texas. High freight costs were incurred in 1998 due to rail service problems related to the merger of the Union Pacific and Southern Pacific railway systems. SELLING, GENERAL & ADMINISTRATIVE EXPENSES AND PLANT START-UP COSTS
PERCENT PERCENT 2000 CHANGE 1999 CHANGE 1998 ------- ------- ------- ------- ------ ($ IN THOUSANDS) SG&A..................................... $12,404 5% $11,761 18% $9,977 SG&A as a % of Revenues.................. 13% 17% 12%
Selling, general and administrative expenses increased by $643,000 in 2000 over 1999. However, SG&A expenses decreased as a percentage of sales to 13 percent in 2000 from 17 percent in 1999. The single largest item was a drop in start-up costs related to the new manufacturing facility in McIntyre, Georgia from $1.5 million in 1999 to $27,000 in 2000. Excluding the start-up costs, SG&A expenses increased by $2.1 million (or 20%) from 1999 to 2000. Increased costs in 2000 are those that relate directly to higher activity levels -- distribution, marketing, and management incentive expense, as well as distribution and marketing expenses related to the development of the China market, New York Stock Exchange listing fees, and increased legal expenses. Selling, general and administrative expenses increased by $1.8 million in 1999 over 1998. SG&A expenses also increased as a percentage of sales to 17 percent in 1999 from 12 percent in 1998. The single largest contributor to the increase was start-up costs related to the new manufacturing facility in McIntyre, Georgia. These costs totaled $1.5 million in 1999, compared to $0.5 million 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. That customer was subsequently acquired by one of our three major customers. 12 14 LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of December 31, 2000 were $14.8 million compared to $0.2 million at the beginning of the year. The Company generated cash from operations of $21.7 million and realized proceeds from the issuance of common stock through the exercise of employee stock options of $1.7 million. Total capital expenditures for the year were $1.6 million, cash dividends paid totaled $4.4 million, repayment of debt against the Company's line of credit was $1.8 million, and purchases of investment securities was $1.0 million. There were no major new capital additions during the year and capital spending for the maintenance of existing assets was below the historical average. The Company estimates that normal maintenance capital spending for the existing asset base should be approximately $3.0 million per year. 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 of $10.0 million. As of December 31, 2000, there was no outstanding debt under the credit agreement. 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 2001. See "Forward-Looking Information" under Item 1 hereof. 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-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. 13 15 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-14 of this Report: Report of Independent Auditors Consolidated Balance Sheets at December 31, 2000 and 1999 Consolidated Statements of Income for each of the three years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for each of the three years ended December 31, 2000, 1999 and 1998 (b) Reports on Form 8-K: There were no reports on Form 8-K filed during the fourth quarter of 2000. (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 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 Sr. Vice President, Finance and Chief Financial Officer Dated: March 7, 2001 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 7, 2001 - ----------------------------------------------------- William C. Morris /s/ JESSE P. ORSINI President, Chief Executive March 7, 2001 - ----------------------------------------------------- Officer and Director Jesse P. Orsini (Principal Executive Officer) /s/ PAUL G. VITEK Sr. Vice President, Finance and March 7, 2001 - ----------------------------------------------------- Chief Financial Officer Paul G. Vitek (Principal Financial and Accounting Officer) /s/ CLAUDE E. COOKE, JR. Director March 7, 2001 - ----------------------------------------------------- Claude E. Cooke, Jr. /s/ JOHN J. MURPHY Director March 7, 2001 - ----------------------------------------------------- John J. Murphy /s/ ROBERT S. RUBIN Director March 7, 2001 - ----------------------------------------------------- Robert S. Rubin
15 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, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP New Orleans, Louisiana February 5, 2001 F-1 18 CARBO CERAMICS INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------- 2000 1999 -------- -------- ($ IN THOUSANDS) Current assets: Cash and cash equivalents................................. $ 14,757 $ 193 Investment securities..................................... 1,000 -- Trade accounts receivable................................. 17,783 10,883 Refundable income taxes................................... -- 288 Inventories: Finished goods......................................... 8,407 7,123 Raw materials and supplies............................. 4,067 4,154 -------- -------- Total inventories................................. 12,474 11,277 Prepaid expenses and other current assets................. 570 481 Deferred income taxes..................................... 831 687 -------- -------- Total current assets.............................. 47,415 23,809 Property, plant and equipment: Land and land improvements................................ 944 944 Buildings................................................. 7,442 7,378 Machinery and equipment................................... 92,201 90,092 Construction in progress.................................. 728 1,298 -------- -------- Total............................................. 101,315 99,712 Less accumulated depreciation............................... 23,308 16,541 -------- -------- Net property, plant and equipment...................... 78,007 83,171 -------- -------- Total assets...................................... $125,422 $106,980 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank borrowings........................................... $ -- $ 1,809 Accounts payable.......................................... 1,293 1,477 Accrued payroll and benefits.............................. 1,945 1,954 Accrued freight........................................... 1,816 1,545 Accrued utilities......................................... 937 451 Accrued income taxes...................................... 2,581 -- Other accrued expenses.................................... 843 221 -------- -------- Total current liabilities......................... 9,415 7,457 Deferred income taxes....................................... 9,867 6,123 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: 14,699,500 and 14,602,000 shares issued and outstanding at December 31, 2000 and 1999, respectively........................................... 147 146 Additional paid-in capital................................ 45,225 42,919 Retained earnings......................................... 60,768 50,335 -------- -------- Total shareholders' equity........................ 106,140 93,400 -------- -------- Total liabilities and shareholders' equity........ $125,422 $106,980 ======== ========
The accompanying notes are an integral part of these statements. F-2 19 CARBO CERAMICS INC. CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 ---------- ---------- ---------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues.................................................... $93,324 $69,738 $84,095 Cost of goods sold.......................................... 57,763 41,718 41,665 ------- ------- ------- Gross profit................................................ 35,561 28,020 42,430 Selling, general and administrative expenses................ 12,377 10,297 9,526 Plant start-up costs........................................ 27 1,464 451 ------- ------- ------- Operating profit............................................ 23,157 16,259 32,453 Other income (expense): Interest income........................................... 302 5 800 Interest expense.......................................... (38) (297) -- Other, net................................................ 4 4 174 ------- ------- ------- 268 (288) 974 ------- ------- ------- Income before income taxes.................................. 23,425 15,971 33,427 Income taxes................................................ 8,595 5,459 12,719 ------- ------- ------- Net income.................................................. $14,830 $10,512 $20,708 ======= ======= ======= Earnings per share: Basic..................................................... $ 1.01 $ 0.72 $ 1.42 ======= ======= ======= Diluted................................................... $ 1.00 $ 0.71 $ 1.40 ======= ======= =======
The accompanying notes are an integral part of these statements. F-3 20 CARBO CERAMICS INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ADDITIONAL COMMON PAID-IN RETAINED STOCK CAPITAL EARNINGS TOTAL ------ ---------- -------- -------- ($ IN THOUSANDS) Balances at January 1, 1998.......................... $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 Net income......................................... -- -- 14,830 14,830 Exercise of stock options.......................... 1 1,663 -- 1,664 Income tax benefit from exercise of stock options......................................... -- 643 -- 643 Cash dividends ($0.30 per share)................... -- -- (4,397) (4,397) ---- ------- ------- -------- Balances at December 31, 2000........................ $147 $45,225 $60,768 $106,140 ==== ======= ======= ========
The accompanying notes are an integral part of these statements. F-4 21 CARBO CERAMICS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 ------- -------- -------- ($ IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $14,830 $ 10,512 $ 20,708 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................. 6,767 4,632 2,154 Deferred income taxes..................................... 3,600 2,936 876 Changes in operating assets and liabilities: Trade accounts receivable.............................. (6,900) 417 2,943 Inventories............................................ (1,197) (1,050) (1,846) Prepaid expenses and other current assets.............. (89) 133 47 Accounts payable....................................... (184) (289) (365) Accrued payroll and benefits........................... (9) (655) 161 Accrued freight........................................ 271 753 (59) Accrued utilities...................................... 486 101 (72) Income taxes........................................... 3,512 (554) (752) Other accrued expenses................................. 622 (766) 241 ------- -------- -------- Net cash provided by operating activities................... 21,709 16,170 24,036 INVESTING ACTIVITIES Maturities of investment securities......................... -- -- 13,905 Purchases of investment securities.......................... (1,000) -- -- Purchases of property, plant and equipment.................. (1,603) (14,027) (41,837) ------- -------- -------- Net cash used in investing activities....................... (2,603) (14,027) (27,932) FINANCING ACTIVITIES Proceeds from bank borrowings............................... 5,273 18,059 -- Repayments on bank borrowings............................... (7,082) (16,250) -- Proceeds from issuance of common stock...................... 1,664 -- -- Dividends paid.............................................. (4,397) (4,381) (4,381) ------- -------- -------- Net cash used in financing activities....................... (4,542) (2,572) (4,381) ------- -------- -------- Net increase (decrease) in cash and cash equivalents........ 14,564 (429) (8,277) Cash and cash equivalents at beginning of year.............. 193 622 8,899 ------- -------- -------- Cash and cash equivalents at end of year.................... $14,757 $ 193 $ 622 ======= ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid............................................... $ 38 $ 297 $ -- ======= ======== ======== Income taxes paid........................................... $ 1,483 $ 3,077 $ 12,595 ======= ======== ======== Purchases of property, plant and equipment through accounts payable................................................... $ -- $ -- $ 1,868 ======= ======== ========
The accompanying notes are an integral part of these statements. F-5 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. Finished goods inventories are stored at the three plant sites and eight remote distribution facilities located in: Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas; Fairbanks, Alaska; Edmonton, Alberta, Canada; Rotterdam, The Netherlands; and Tianjin and Shanghai, China. 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. 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, 2000, investment securities consisted of auction-rate preferred stock, which were classified as held-to-maturity. The fair value of the investments approximated the carrying value at December 31, 2000. The Company held no investment securities at December 31, 1999. 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. F-6 23 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Property, Plant and Equipment Property, plant and equipment are stated at cost. Repair and maintenance costs are expensed as incurred. Depreciation is computed on the straight-line method for financial reporting purposes using the following estimated useful lives: Buildings and improvements........................... 15 to 30 years Machinery and equipment.............................. 3 to 30 years
Revenue Recognition Revenue is recognized when title passes to the customer. Shipping and Handling Costs Shipping costs, which consist of transportation costs associated with the delivery of the Company's products to customers, are classified as cost of goods sold. Handling costs are charged to selling, general and administrative expenses and include labor and overhead costs related to maintaining finished goods inventory and operating the Company's remote distribution facilities. Handling costs incurred in 2000, 1999 and 1998 were $3,175,000, $2,616,000 and $2,711,000, respectively. 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 2000, 1999 and 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. The Company incurred no start-up costs beyond the first quarter of 2000. 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 incurred in 2000, 1999 and 1998 were $676,000, $703,000 and $81,000, respectively. Stock Based Compensation 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. F-7 24 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. BANK BORROWINGS Under the terms of an unsecured revolving credit agreement with a bank, dated December 31, 2000, the Company may borrow up to $10.0 million through December 31, 2003, with the option of choosing either the bank's fluctuating Base Rate or LIBOR Fixed Rate (as defined in the credit agreement). At December 31, 2000 the unused portion of the credit facility was $10.0 million. The credit agreement requires the Company to maintain certain financial ratios. The terms of the credit agreement further provide for certain affirmative and negative covenants, including a restriction on capital expenditures. The Company was in compliance with these covenants at December 31, 2000. Commitment fees are payable quarterly at the annual rate of three-eighths of one percent of the unused line of credit. 3. LEASES The Company leases railroad equipment under operating leases. Minimum future rental payments due under non-cancelable operating leases with remaining terms in excess of one year as of December 31, 2000 are as follows ($ in thousands): 2001....................................................... $ 652 2002....................................................... 451 2003....................................................... 368 2004....................................................... 335 2005....................................................... 52 ------ Total............................................ $1,858 ======
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 $1,560,000 in 2000, $1,168,000 in 1999, and $800,000 in 1998. 4. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
2000 1999 ------- ------- ($ IN THOUSANDS) Deferred tax assets: Employee benefits........................................... $ 152 $ 200 Inventories................................................. 523 457 Other....................................................... 156 30 ------ ------ Total deferred tax assets......................... 831 687 ------ ------ Deferred tax liabilities: Depreciation................................................ 9,749 6,007 Other....................................................... 118 116 ------ ------ Total deferred tax liabilities.................... 9,867 6,123 ------ ------ Net deferred tax liabilities...................... $9,036 $5,436 ====== ======
F-8 25 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the provision for income taxes are as follows:
2000 1999 1998 ------ ------ ------- ($ IN THOUSANDS) Current: Federal................................................. $4,450 $2,285 $10,596 State................................................... 545 238 1,247 ------ ------ ------- Total current................................... 4,995 2,523 11,843 ------ ------ ------- Deferred: Federal................................................. 3,208 2,695 784 State................................................... 392 241 92 ------ ------ ------- Total deferred.................................. 3,600 2,936 876 ------ ------ ------- $8,595 $5,459 $12,719 ====== ====== =======
The reconciliation of income taxes computed at the U.S. statutory tax rate to the Company's income tax expense is as follows:
2000 1999 1998 ---------------- ---------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------- ------- ($ IN THOUSANDS) U.S. statutory rate............. $8,199 35.0% $5,592 35.0% $11,715 35.0% State income taxes, net of federal tax benefit........... 937 4.0 479 3.0 1,339 4.0 Foreign sales corporation benefit and other............. (541) (2.3) (612) (3.8) (335) (1.0) ------ ---- ------ ---- ------- ---- $8,595 36.7% $5,459 34.2% $12,719 38.0% ====== ==== ====== ==== ======= ====
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. On January 8, 2001, the Board of Directors declared a cash dividend of $0.075 per share. The dividend is payable on February 15, 2001 to shareholders of record on January 31, 2001. 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 26 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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'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 2000, 1999 and 1998, respectively: risk-free interest rates of 5.00%, 6.40% and 4.44%; a dividend yield of 1.0%; volatility factors of the expected market price of the Company's Common Stock of .509, .464 and .452; 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:
2000 1999 1998 ----------- ----------- ----------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Net income: As reported......................................... $14,830 $10,512 $20,708 ======= ======= ======= Pro forma including the effect of options........... $14,133 $ 9,498 $19,793 ======= ======= ======= Basic earnings per share: As reported......................................... $ 1.01 $ 0.72 $ 1.42 ======= ======= ======= Pro forma including the effect of options........... $ 0.96 $ 0.65 $ 1.36 ======= ======= ======= Diluted earnings per share: As reported......................................... $ 1.00 $ 0.71 $ 1.40 ======= ======= ======= Pro forma including the effect of options........... $ 0.95 $ 0.65 $ 1.34 ======= ======= =======
F-10 27 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
2000 1999 1998 -------------------------- -------------------------- -------------------------- OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE ------- ---------------- ------- ---------------- ------- ---------------- Outstanding -- beginning of year................ 925 $20 895 $20 850 $20 Granted.................. 20 23 30 24 45 26 Exercised................ 97 17 -- -- Forfeited................ 30 29 -- -- ------ ------ ------ Outstanding -- end of year................... 818 $21 925 $20 895 $20 ====== ====== ====== Exercisable at end of year................... 704 $20 579 $19 355 $19 Weighted-average fair value of options granted during the year................... $10.63 $10.93 $10.96
Following is a summary of the status of fixed options outstanding at December 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS - ------------------------------------------------------- -------------------------- EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE PRICE OPTIONS REMAINING EXERCISE OPTIONS EXERCISE RANGE (000) CONTRACTUAL LIFE PRICE (000) PRICE - -------- ------- ---------------- ---------------- ------- ---------------- $17-24 668 6 years $18 596 $17 32-35 150 7 years 33 108 32 --- --- 818 21 704 20 === ===
7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
2000 1999 1998 ----------- ----------- ----------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator for basic and diluted earnings per share: Net income.................................. $ 14,830 $ 10,512 $ 20,708 Denominator: Denominator for basic earnings per share -- weighted average shares.................. 14,655,679 14,602,000 14,602,000 Effect of dilutive securities: Employee stock options (See Note 6)...... 170,624 109,865 168,709 ----------- ----------- ----------- Dilutive potential common shares............ 170,624 109,865 168,709 ----------- ----------- ----------- Denominator for diluted earnings per share-- adjusted weighted-average shares......... 14,826,303 14,711,865 14,770,709 =========== =========== =========== Basic earnings per share...................... $ 1.01 $ 0.72 $ 1.42 =========== =========== =========== Diluted earnings per share.................... $ 1.00 $ 0.71 $ 1.40 =========== =========== ===========
F-11 28 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. QUARTERLY OPERATING RESULTS -- (UNAUDITED) Quarterly results of operations for the years ended December 31, 2000 and 1999 were as follows:
THREE MONTHS ENDED, ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) 2000 Revenues................................. $22,101 $21,998 $25,269 $23,956 Gross profit............................. 6,747 9,080 10,302 9,432 Net income............................... 2,462 3,825 4,355 4,188 Earnings per share Basic.................................. $ 0.17 $ 0.26 $ 0.30 $ 0.28 Diluted................................ $ 0.17 $ 0.26 $ 0.29 $ 0.28 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
Quarterly data may not sum to the full year data reported in the Company's consolidated financial statements due to rounding. 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, 2000:
MAJOR CUSTOMERS ------------------ A B C OTHERS TOTAL ---- ---- ---- ------ ----- 2000............................................... 35.4% 22.4% 20.2% 22.0% 100% 1999............................................... 38.7% 30.0% 16.4% 14.9% 100% 1998............................................... 43.4% 26.1% 18.2% 12.3% 100%
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 37%, 39% and 35% of the Company's revenues for 2000, 1999, and 1998, respectively.
2000 1999 1998 ----- ----- ----- ($ IN MILLIONS) Location United States............................................. $58.9 $42.3 $54.3 International............................................. 34.4 27.4 29.8 ----- ----- ----- Total............................................. $93.3 $69.7 $84.1 ===== ===== =====
F-12 29 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 11. BENEFIT PLANS The Company has a defined contribution savings and profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. Employees who have completed one year of service are eligible to participate. Employees may contribute up to 15% of their monthly compensation. For employee contributions up to 5% of monthly compensation, the Company matches the employee contribution at a rate of 50%. Additional contributions by the Company are discretionary and are determined annually by the Board of Directors. These discretionary contributions to the plan are allocated to the participants pro rata based on their respective salary levels. Benefit costs recognized as expense under this plan consisted of the following:
2000 1999 1998 ---- ---- ---- ($ IN THOUSANDS) Contributions: Profit sharing............................................ $325 $275 $207 Savings................................................... 191 151 145 ---- ---- ---- $516 $426 $352 ==== ==== ====
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. The Company anticipates termination of the agreement by its terms during 2001 and is currently evaluating alternative sources of supply. 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, 2000. 13. EMPLOYMENT AGREEMENTS The Company has an employment agreement with its current President, which will expire upon his retirement, scheduled for April 10, 2001. 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 April 10, 2001, the Company will be obligated to pay the President two years base salary and a prorated incentive bonus. In addition, all non-vested 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. The Company has an employment agreement with its Senior Vice President of Marketing and Technology (President Elect), which becomes effective April 10, 2001. The agreement expires on F-13 30 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 2002. 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 December 31, 2002, the Company will be obligated to pay the President two years base salary and a prorated incentive bonus. In addition, all non-vested stock options granted to the President will vest immediately and become exercisable. The agreement also contains a two-year non-competition covenant that would become effective upon termination for any reason. 14. LEGAL PROCEEDINGS The Company is subject to legal proceedings, claims, and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. F-14 31 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 4.1 to the registrant's Form S-1 Registration Statement No. 333-1884) 10.1 -- Second Amended and Restated Credit Agreement dated as of December 31, 2000, 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. (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 (incorporated by reference to exhibit 10.10 to the registrant's Form 10-K Annual Report for the year ended December 31, 1999) 10.11 -- Form of Employment Agreement between CARBO Ceramics Inc. and C. Mark Pearson 23.1 -- Consent of Ernst & Young LLP
EX-10.1 2 d84697ex10-1.txt SECOND AMENDED AND RESTATED CREDIT AGREEMENT 1 EXHIBIT 10.1 U.S. $10,000,000 SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 31, 2000 Between CARBO CERAMICS INC. as Borrower and BROWN BROTHERS HARRIMAN & CO. as Lender 2 ARTICLE I DEFINITIONS............................. 3 SECTION 1.01. Definitions.............................................. 3 SECTION 1.02. Accounting and Other Terms............................... 8 ARTICLE II AMOUNT AND TERMS OF THE COMMITMENT.................. 8 SECTION 2.01. The Commitment........................................... 8 SECTION 2.02. Making the Advances...................................... 9 SECTION 2.03. Commitment Fee........................................... 9 SECTION 2.04. Optional Termination of the Commitment................... 9 SECTION 2.05. Selection of Interest Options............................ 10 SECTION 2.06. Interest Rate Options.................................... 13 SECTION 2.07. Special Provisions for LIBOR Rate Advances............... 15 SECTION 2.08. Prepayments.............................................. 17 SECTION 2.09. Indemnity and Release.................................... 17 SECTION 2.10. Payments and Computations................................ 18 SECTION 2.11. Evidence of Debt......................................... 19 ARTICLE III CONDITIONS OF LENDING........................ 19 SECTION 3.01. Condition Precedent to Initial Advance................... 19 SECTION 3.02. Conditions Precedent to All Advances..................... 21 ARTICLE IV REPRESENTATIONS AND WARRANTIES.................. 22 SECTION 4.01. Representations and Warranties........................... 22 ARTICLE V COVENANTS OF THE BORROWER....................... 25 SECTION 5.01. Affirmative Covenants.................................... 25 SECTION 5.02. Negative Covenants....................................... 30 ARTICLE VI EVENTS OF DEFAULT.......................... 31 SECTION 6.01. Events of Default........................................ 31 ARTICLE VII MISCELLANEOUS............................ 35 SECTION 7.01. Amendments, Etc.......................................... 35 SECTION 7.02. Notices, Etc............................................. 35 SECTION 7.03. No Waiver; Remedies...................................... 35 SECTION 7.04. Costs, Expenses, and Taxes............................... 36 SECTION 7.05. Right of Set-off......................................... 36 SECTION 7.06. Binding Effect........................................... 37 SECTION 7.07. Governing Law............................................ 37 SECTION 7.08. Merger of Agreements..................................... 38
3 Schedule I - Litigation Schedule II - Permitted Liens Exhibit A - Promissory Note Exhibit B - Rollover Notice Exhibit C - No-Default Certificate 4 SECOND AMENDED AND RESTATED CREDIT AGREEMENT Dated as of December 31, 2000 This Second Amended and Restated Credit Agreement is made and effective as of December 31, 2000, by and between CARBO CERAMICS INC., a Delaware corporation (the "Borrower"), and BROWN BROTHERS HARRIMAN & CO., a New York limited partnership (the "Lender"). WITNESSETH: WHEREAS, the Lender and the Borrower entered into a First Amended and Restated Credit Agreement dated February 12, 1998, as amended by a First Amendment dated as of March 31, 1999, a Second Amendment dated as of December 31, 1999, and a Third Amendment dated as of March 31, 2000 (as so amended, the "Credit Agreement"), pursuant to which the Lender committed, among other things, to make loans, advances, and other credit facilities available to the Borrower; WHEREAS, the parties desire to amend and restate the Credit Agreement in its entirety, as hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing, for other valuable consideration hereby acknowledged, and subject to the other terms and conditions hereof, the Lender and the Borrower agree that the Credit Agreement shall be and is hereby amended and restated in its entirety, effective the date hereof, as follows: 5 ARTICLE I DEFINITIONS SECTION 1.01. Definitions. As used in this Agreement, the following terms shall have the respective meanings indicated below (such meanings to be applicable equally to both the singular and plural forms of such terms). "Adjusted LIBOR Rate" means, an interest rate per annum (rounded upwards, if necessary, to the next higher 1/100 of 1%) equal to the quotient obtained by dividing (a) the LIBOR Rate for such LIBOR Interest Period by (b) a percentage equal to one hundred percent (100%) minus the Eurodollar Reserve Percentage applicable during such LIBOR Interest Period (or, if more than one Eurodollar Reserve Percentage is so applicable, minus the daily average of such Eurodollar Reserve Percentage for those days in such LIBOR Interest Period during which any such Eurodollar Reserve Percentage may be so applicable). "Advance" shall mean a disbursement by the Lender to or for the benefit of the Borrower, all as set forth in Section 2.01 hereof. "Agreement" means this Second Amended and Restated Credit Agreement, and all amendments, modifications, and supplements thereto. "Applicable Contract Rate" means either the Base Rate or the LIBOR Fixed Rate, whichever is in effect during the particular time period in question pursuant to the provisions of this Agreement. "Authorized Officer" means, with respect to any act to be performed or duty to be discharged by any entity which is not an individual, any officer or other representative thereof then authorized to perform such act or discharge such duty. "Base Rate" means a fluctuating rate per annum which shall be equal to one-half of one percent (.50%) below the rate of interest established by the Lender in New York, New York, from 3 6 time to time as the Lender's base rate of interest charged by the Lender to commercial borrowers in the United States of America. "Base Rate Advance" means an Advance during such time as it bears interest, from time to time, at the Base Rate pursuant to the provisions of this Agreement. "Business Day" means any day other than a Saturday, Sunday, or a public holiday or the equivalent for banks generally under the laws of the State of New York. "Closing Date" means the date first shown herein, as of which this Agreement is executed and effective. "Commitment" has the meaning set forth for such term in Section 2.01 hereof. "Consequential Loss" means, with respect to the Borrower's payment or prepayment of the principal sum of a LIBOR Rate Advance on a day other than the last day of the Interest Period applicable to such LIBOR Rate Advance, any loss or expense incurred by the Lender in redepositing such principal sum, including, without limitation, the sum of (a) the interest which, but for such payment, the Lender would have earned at the applicable LIBOR Fixed Rate, in respect of such LIBOR Rate Advance so paid or prepaid, for the remainder of the LIBOR Interest Period; reduced, if the Lender is reasonably able to redeposit such principal sum so paid for the balance of such LIBOR Interest Period in a New York City bank, by the interest earned by the Lender as a result of so redepositing such principal sum, plus (b) any expense or penalty incurred by the Lender in redepositing the principal sum of such LIBOR Rate Advance. "Conversion Date" has the meaning specified in Section 2.06(c)(2) hereof. "Conversion Option" has the meaning specified in Section 2.06(c)(2) hereof. 4 7 "EBITDA" means the Borrower's earnings before deduction of interest, taxes, depreciation, and amortization. "Employee Plan" means an employee benefit plan or other plan covered by Title IV of ERISA and maintained in whole or in part for employees of the Borrower. "ERISA" means the Employee Retirement Income Security Act of 1974, together with the rules and regulations promulgated thereunder, as in effect from time to time. "Eurodollar Reserve Percentage" means, as of the date of any determination, that reserve percentage actually required to be reserved by the Lender with respect to the Advances, which percentage is applicable during any LIBOR Interest Period (or if more than one such percentage is so applicable, the daily average of such percentages for those days in such LIBOR Interest Period during which any such percentage shall be applicable) under the regulations issued, from time to time, by the Board of Governors of the Federal Reserve System (or other governmental authority having jurisdiction with regard thereto or any successor), for determining the maximum reserve requirements (including, without limitation, basic, supplemental, transitional, emergency, or marginal reserve requirements) for the Lender in respect to liabilities or assets consisting of, or including, "Eurocurrency liabilities" as defined in Regulation D. It shall be assumed, for purposes of computing reserve costs hereunder, that the making and maintaining of the LIBOR Rate Advances have been accomplished by the Lender through the Lender's principal office in New York City, New York. "Event of Default" means any of the events set forth in Section 6.01 hereof. 5 8 "Fixed Charges" means, for any applicable period specified in Section 5.01(c) hereof, the aggregate of the Borrower's interest expense, lease expense, principal payments, dividends and anticipated annual maintenance capital expenditures of $4,000,000. "Increased Costs" shall have the meaning specified in Section 2.07(b) hereof. "Indebtedness" means (i) all indebtedness or other obligations for borrowed money or for the deferred purchase price of property or services, (ii) all indebtedness or other obligations of another person for borrowed money, the deferred purchase price of property or services (except for accounts payable by the Borrower which have been incurred by the Borrower in the ordinary course of its business), or otherwise, the payment or collection of which the Borrower has guaranteed or in respect of which the Borrower has any direct or contingent liability which is reportable on the Borrower's financial statements in accordance with generally accepted accounting principles, (iii) all lease obligations that, in accordance with generally accepted accounting principles consistently applied, have been or should be capitalized on the books of the lessee and, for purposes hereof, the amount of such obligation shall be the capitalized amount thereof determined in accordance with such principles, and (iv) any equity or other interest which, by its terms, is convertible into a debt instrument. "Interest Payment Date" means, as to either a Base Rate Advance or a LIBOR Rate Advance, the first (1st) day of each calendar month during the term of the Commitment. "Interest Rate Option" has the meaning specified in Section 2.06(a) hereof. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended. 6 9 "LIBOR Fixed Rate" means, during the applicable LIBOR Interest Period for a LIBOR Rate Advance, an interest rate per annum which shall be equal to the sum of (a) the LIBOR Rate Margin plus (b) the Adjusted LIBOR Rate for such LIBOR Interest Period. "LIBOR Interest Period" means, with respect to a LIBOR Rate Advance, a period commencing on the date specified by notice from the Borrower to the Lender and ending on (but excluding) the date which is 30, 60, or 90 days thereafter, as the Borrower shall elect. "LIBOR Rate" during each applicable LIBOR Interest Period for a LIBOR Rate Advance, means an interest rate equal to the rate of interest per annum at which U.S. dollar deposits are offered by the Lender to prime banks in the London interbank market at 10:00 a.m. (London time) two Business Days prior to the first (1st) day of such LIBOR Interest Period for a period equal to such LIBOR Interest Period. "LIBOR Rate Advance" means an Advance during such time as it bears interest, from time to time, at the LIBOR Fixed Rate pursuant to the provisions of this Agreement. "LIBOR Rate Margin" means three-quarters of one percent (.75%) per annum. "Loan Documents" means this Agreement, the Note, and all amendments, modifications, and supplements thereto. "Maximum Rate" means the maximum rate of interest, if any, from time to time permitted under federal or Texas laws applicable to the indebtedness evidenced hereby. "No-Default Certificate" means a certificate by an authorized officer of the Borrower, substantially in the form of Exhibit C hereto. "Note" has the meaning set forth for such term in Section 2.11 hereof. 7 10 "Prohibited Transaction" has the meaning specified therefor in Section 4975 of the Internal Revenue Code or Title I of ERISA. "Regulation D" means Regulation D of the Board of Governors of the Federal Reserve System, as from time to time in effect, and shall include any successor or other regulation relating to reserve requirements applicable to member banks of the Federal Reserve System. "Reportable Event" has the meaning specified therefor in Title IV of ERISA. "Rollover Notice" means a notice in the form of Exhibit B hereto. "Termination Date" means December 31, 2003; provided, however, that such date may be extended by mutual consent for additional one-year periods; provided further, however, if so extended, such extended date may be shortened during any such one-year period to the end of any calendar quarter within such one-year period, beginning March 31, 2004, upon not less than thirty (30) days prior written notice from either party to the other party. SECTION 1.02. Accounting and Other Terms. All accounting terms used in this Agreement which are not otherwise defined herein shall be construed in accordance with generally accepted accounting principles consistently applied unless otherwise expressly stated herein. ARTICLE II AMOUNT AND TERMS OF THE COMMITMENT SECTION 2.01. The Commitment. The Lender agrees, on the terms and conditions hereinafter set forth, to make Advances to the Borrower in an aggregate principal amount not to exceed Ten Million Dollars ($10,000,000), as such commitment may be terminated pursuant to Section 2.04 hereof (the "Commitment"). Such Advances shall 8 11 be made from time to time on any Business Day during the period from the Closing Date to the Termination Date. Each Advance shall be in an amount not less than $1,000 or an integral multiple thereof, except that an Advance may be in an amount equal to the entire unused Commitment. Within the limits of the Commitment, the Borrower may borrow, prepay pursuant to Section 2.08, and reborrow under this Section 2.01. SECTION 2.02. Making the Advances. Each Advance shall be made on the same day the Borrower has given notice to the Lender, provided the Lender has received such notice by 12:00 p.m. (New York City time) on such date. Such notice shall be by telephone and shall be promptly confirmed by the Borrower in writing. All such notices shall specify the date and amount thereof. Upon fulfillment by the Borrower of the applicable conditions set forth in Article III, the Lender will make such Advance available to the Borrower in immediately available funds at the Lender's office at 59 Wall Street, New York, New York 10005. SECTION 2.03. Commitment Fee. The Borrower agrees to pay to the Lender a commitment fee on the average daily unused portion of the Commitment from the Closing Date until the Termination Date at the rate of three-eighths (3/8) of one percent (1%) per annum, payable quarterly in arrears on the last Business Day of each fiscal quarter of the Borrower for the then-ending fiscal quarter of the Borrower in each year during such period, commencing March 31, 2001, and ending on the Termination Date. SECTION 2.04. Optional Termination of the Commitment. The Borrower shall have the right, upon (i) at least thirty (30) days' notice to the Lender prior to the end of each fiscal quarter of the Borrower after the first anniversary of the Closing Date, and (ii) full repayment of all sums, both principal and accrued interest, then outstanding, to terminate the Commitment in whole, but not in part. Simultaneously with any termination of the Commitment under this Section, the Borrower 9 12 shall pay to the Lender the commitment fee earned through the Termination Date on the amount of the Commitment so terminated. SECTION 2.05. Selection of Interest Options. Subject to Section 2.06, and provided that no Event of Default shall have occurred and is continuing, the outstanding principal balance of each Advance shall bear interest at the LIBOR Fixed Rate or the Base Rate, in accordance with the following: (a) Interest on a Base Rate Advance. A Base Rate Advance shall bear interest on the unpaid principal balance thereof, from time to time outstanding, at a fluctuating interest rate per annum which shall, from day to day, be equal to the lesser of either: (1) the Base Rate; or (2) the Maximum Rate. Each change in either the Base Rate or the Maximum Rate (or any component of the Base Rate or the Maximum Rate) as the case may be, shall become effective, without notice to the Borrower (which notice is hereby expressly waived by the Borrower), on the date of each change in either of such interest rates (or any component of any of such interest rates). (b) Interest on a LIBOR Rate Advance. A LIBOR Rate Advance shall bear interest, during each LIBOR Interest Period applicable thereto, on the unpaid principal balance thereof, from time to time outstanding, at an interest rate per annum which shall, from day to day, be equal to the lesser of either: (1) the applicable LIBOR Fixed Rate; or (2) the Maximum Rate. Each change in the Maximum Rate or any component of the Maximum Rate, as the case may be, shall become effective, without notice to the Borrower (which notice is hereby expressly waived by the Borrower) on the date of each change in such interest rate or any component of such interest rate. 10 13 (c) Advance Deemed To Be Base Rate Advance. Unless the Borrower selects the LIBOR Fixed Rate as the Applicable Contract Rate with regard to an Advance, as provided for in this Article II, such Advance shall be deemed to be a Base Rate Advance for the purpose of computing interest thereon pursuant to this Agreement. (d) Interest Recoupment. If, at any time, the Applicable Contract Rate then in effect shall exceed the Maximum Rate, thereby causing the Applicable Contract Rate to be limited to the Maximum Rate, any subsequent reductions in the Applicable Contract Rate shall not reduce the Applicable Contract Rate below the Maximum Rate until the total amount of interest accrued on the unpaid principal balance of the Advances from time to time outstanding during the term thereof, equals the amount of interest which would have accrued thereon if the various Applicable Contract Rates which are applicable to the unpaid principal balances of the Advances from time to time outstanding during the term of this Agreement, had at all times been in effect without the limitation of the Maximum Rate. (e) Final Interest Payment. If on the date of the final payment of all Advances (whether on the Termination Date or otherwise), the total amount of interest actually paid, or accrued, under the provisions of the Loan Documents is less than the total amount of interest which would have accrued if the various Applicable Contract Rates had at all times been applicable to the principal balance of the Advances, from time to time outstanding, during the term of this Agreement, the Borrower agrees to pay, to the extent permitted by applicable law, to the Lender an amount equal to the difference between: (1) the lesser of either (A) the amount of interest which would have accrued on the Advances if the Maximum Rate had at all times been in effect, or (B) the amount of interest which would 11 14 have accrued on the Advances if the various Applicable Contract Rates had at all times been in effect without the limitation of the Maximum Rate; and (2) the amount of interest which has actually accrued or been paid on the Advances through the date of such final payment in accordance with the provisions of the Loan Documents. (f) Interest After Maturity of the Advances. All delinquent payments of principal and/or interest on the Advances shall bear interest at a fluctuating rate per annum equal to the Base Rate plus four percent (4%) from the date due until paid. (g) Interest Payment Dates. Interest on the aggregate principal balance of the Advances from time to time outstanding shall be payable as it accrues on each Interest Payment Date, beginning with the Interest Payment Date following the Closing Date, and continuing on each Interest Payment Date thereafter, until the maturity thereof. (h) Payment on Business Day. If any payment of principal or interest to be made on the Advances shall become due on a day other than a Business Day, such payment may be made on the next succeeding Business Day (unless the result of such extension of time would be to extend the date for such payment into another calendar month, beyond the maturity date of the Advances or beyond the expiration of the applicable LIBOR Interest Period, in such event, said payment shall be made on the Business Day immediately preceding the day on which such payment would otherwise have been due) and such extension of time shall in such case be included in computing of interest, if any, in connection with such payment. (i) Additional Amounts Payable Upon Prepayments or Other Payments of LIBOR Rate Advances. If any LIBOR Rate Advance is to be prepaid, or if the Borrower 12 15 makes any principal payments with respect to any such LIBOR Rate Advance on any date other than the last day of the LIBOR Interest Period for such LIBOR Rate Advance, the Borrower shall reimburse the Lender, on demand, for all Consequential Loss and Increased Costs incurred by Lender, plus all accrued, but unpaid, interest on the amount so prepaid to such prepayment or payment date, together with any other amounts owing to the Lender in connection with such prepayment or payment pursuant to the terms of this Agreement or any of the other Loan Documents. All prepayments (whether optional or otherwise) made pursuant to this Agreement shall be applied first to accrued, but unpaid, interest and then to principal. A certificate of the Lender setting forth the amount of any such loss or cost shall, in the absence of manifest error or bad faith, be final, binding, and conclusive for all purposes. Any conversion of any LIBOR Rate Advance to a Base Rate Advance on a day other than on the last day of the applicable LIBOR Interest Period shall be deemed a principal prepayment for the purpose of this Subsection 2.05(i). SECTION 2.06 Interest Rate Options. (a) Interest Rate Options. Subject to the provisions of this Section 2.06, and provided that no Event of Default has occurred and is continuing, the Borrower shall have the option of having an Advance bear interest at the Base Rate or the LIBOR Fixed Rate (an "Interest Rate Option"); provided, however, that (i) the Borrower may not have more than three (3) Interest Rate Options which select the LIBOR Fixed Rate for the Advances in effect at any one time and (ii) no Interest Rate Option which selects the LIBOR Fixed Rate for any portion of the Advances shall be for an amount less than the principal amount of $2,000,000 plus an integral multiple of $100,000. 13 16 (b) Changes in Interest Rate Options. Each change in Interest Rate Options made pursuant to this Section 2.06 shall, for all purposes of this Agreement, be deemed both a payment of the Base Rate Advance or LIBOR Rate Advance, whichever is applicable, from which such change was made and a borrowing (notwithstanding that the aggregate unpaid principal of the Advances is not thereby changed) of the Base Rate Advance or LIBOR Rate Advance, whichever is applicable, into which such Advance is converted. (c) Selection of Interest Rate Options. The Borrower may select an Interest Rate Option by giving the Lender a Rollover Notice in accordance with the provisions of subsections (1) or (2) below, as applicable, which notice shall specify a LIBOR Interest Period; provided, however, that (i) any LIBOR Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day, unless the result of such extension would be to extend such LIBOR Interest Period into another calendar month, in which event such LIBOR Interest Period shall end on the immediately preceding Business Day; (ii) any LIBOR Interest Period that begins on the last Business Day of a calendar month shall end on the last Business Day of a calendar month; (iii) any LIBOR Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month at the end of such LIBOR Interest Period shall end on the last Business Day of such calendar month; (iv) the length of each LIBOR Interest Period selected by the Borrower shall be irrevocable for the period so selected; and (v) no LIBOR Interest Period shall extend beyond the Termination Date. (1) Selection at Expiration of LIBOR Interest Period. Before the termination of any LIBOR Interest Period, and provided that no Event of Default has 14 17 occurred and is continuing, the Borrower shall give the Lender a Rollover Notice specifying the Interest Rate Option which shall be applicable to such LIBOR Rate Advance upon the expiration of such LIBOR Interest Period. Such Rollover Notice shall be given to the Lender at least three (3) Business Days before the termination of such LIBOR Interest Period. If the Borrower shall specify the LIBOR Fixed Rate, such Rollover Notice shall also specify the length of the succeeding LIBOR Interest Period selected by the Borrower. Each Rollover Notice shall be irrevocable and effective upon receipt thereof by the Lender. If the required Rollover Notice shall not have been timely received by the Lender as herein provided before expiration of the then relevant LIBOR Interest Period, the applicable LIBOR Rate Advance shall be automatically converted to a Base Rate Advance on the last day of the then current LIBOR Interest Period for such LIBOR Rate Advance. (2) Conversion Option. With respect to Base Rate Advances, and provided no Event of Default has occurred and is continuing, the Borrower shall have the option ("Conversion Option"), on any Business Day ("Conversion Date"), to convert from the Base Rate to the LIBOR Fixed Rate by giving the Lender a Rollover Notice specifying such Conversion Option at least three (3) Business Days prior to such Conversion Date. SECTION 2.07 Special Provisions for LIBOR Rate Advances. (a) Unavailability, Illegality, or Inadequacy of the LIBOR Fixed Rate. If at any time the Lender determines (which determination shall, for all purposes, be final, conclusive, and binding on the Borrower) that: (1) the Lender is unable, or that it has become unlawful 15 18 for the Lender to obtain, or cause to be obtained, funds in the London interbank market in order to make, fund, or maintain the principal balances of any LIBOR Rate Advances during any applicable LIBOR Interest Period; or (2) the LIBOR Fixed Rate will not adequately and fairly reflect the cost to the Lender of making, maintaining, or funding LIBOR Rate Advances for such LIBOR Interest Period, the Lender shall so notify the Borrower by telephone or telex (to be confirmed in writing) of such determination, whereupon, until the Lender notifies the Borrower that the circumstances which have given rise to such notice no longer exist, (A) the obligation of the Lender to provide the LIBOR Fixed Rate with respect to such LIBOR Rate Advances shall be suspended, and (B) such LIBOR Rate Advances shall be made, continued as, or converted to Base Rate Advances. (b) Increased Costs. If due either to: (1) the introduction of, or any change (including, without limitation, any change by way of any imposition or increase of reserve requirements) in the interpretation of, any law or regulation, including, without limitation, Regulation D or (2) the compliance by the Lender with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to the Lender of agreeing to make, fund, or maintain the LIBOR Rate Advances (such costs being herein collectively called "Increased Costs"), the Borrower shall, from time to time, upon demand by the Lender, pay to the Lender, such additional amounts as are sufficient to indemnify the Lender against such Increased Costs. Absent manifest error, a certificate as to the amount of such Increased Costs, submitted to the Borrower by the Lender shall, for all purposes, be final, conclusive, and binding on the Borrower. It shall be assumed for purposes of computing Increased Costs, that the making 16 19 and maintaining of LIBOR Rate Advances has been by the Lender's principal office in New York City, New York. (c) Indemnity. Without prejudice to any other provisions of this Agreement or any of the other Loan Documents, the Borrower shall indemnify the Lender against any loss or expense which the Lender (or its branches, subsidiaries, affiliates, or partners) may sustain or incur as a consequence of any Event of Default by the Borrower in making any payment when due of any amount due hereunder or in making any scheduled borrowing hereunder with respect to any LIBOR Rate Advance, including, without limitation, any loss of profit, premium or penalty incurred by the Lender (or its branches, subsidiaries, affiliates, or partners) in respect of funds borrowed by the Lender (or its branches, subsidiaries, affiliates, or partners), for the purpose of maintaining such LIBOR Rate Advance, as determined by the Lender in the exercise of its sole, but reasonable, discretion. Absent manifest error, a certificate as to any such loss or expense submitted by the Lender to the Borrower shall, for all purposes, be final, conclusive, and binding on the Borrower. SECTION 2.08. Prepayments. The Borrower shall have the right to prepay any principal amount of any Advance, in whole or in part, subject to the requirements of Sections 2.05(i) and 2.09, but otherwise without premium or penalty; provided, however, that each such partial prepayment shall be in an integral multiple of $1,000, except that a prepayment may be in an amount equal to the entire outstanding principal balance of all Advances. SECTION 2.09. Indemnity and Release. The Borrower shall indemnify the Lender against any loss or expense which the Lender may sustain or incur as a consequence of any failure by the Borrower to fulfill on the date of any Advance hereunder the applicable conditions set forth 17 20 in Article III, any default in payment or prepayment of the principal amount of any Advance or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, by irrevocable notice of prepayment, or otherwise), or the occurrence of any Event of Default. By its execution hereof, the Borrower hereby certifies to the Lender that as of the date hereof, (i) all representations and warranties heretofore made by it under any credit agreement, promissory note or other instrument or document related thereto which are amended by or which relate to this Agreement are true in all material respects, (ii) the Borrower does not have or claim to have any offset, counterclaim, or defense to any of its obligations under any of such prior instruments or documents, and (iii) in consideration of and to induce the Lender's agreement to the terms of this Agreement, the Borrower, for itself and its successors and assigns, does hereby RELEASE, ACQUIT, and FOREVER DISCHARGE the Lender, its partners, officers, employees, agents, attorneys, other representatives and all other persons, (collectively, the "Indemnitees") who might be liable, from any and all claims, demands, liabilities, and causes of action of whatsoever nature, whether in contract or in tort, or arising under or by virtue of any statute, rule, regulation, or other laws, for all losses and damages, including but not limited to exemplary and punitive damages, that have accrued or may ever accrue to the Borrower and its successors and assigns, and which arise out of, result from, or are caused by any act or omission of any one or more of the Indemnitees on or prior to the date hereof in connection with the Loan Documents, or any matter or thing in connection therewith or related thereto. The Lender shall use its best efforts to mitigate any loss and to reduce any expense for which it is being indemnified pursuant to this Section. SECTION 2.10. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Note not later than 12:00 noon (New York City time) on the day 18 21 when due in lawful money of the United States of America to the Lender for the account of Borrower at the Lender's office at 59 Wall Street, New York, New York 10005, in same day funds. (b) The Borrower hereby authorizes the Lender, if and to the extent payment for interest, principal, or fees is not made when due hereunder or under the Note, to charge from time to time against any of the Borrower's accounts with the Lender any amount so due. (c) Except to the extent the result would cause an interest rate to exceed the Maximum Rate, all computations of interest and of commitment fees hereunder shall be made by the Lender on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or commitment fee is payable. SECTION 2.11. Evidence of Debt. The indebtedness of the Borrower resulting from all Advances made from time to time shall be evidenced by a promissory note of the Borrower, in substantially the form of Exhibit A hereto (the "Note"), delivered to the Lender pursuant to Article III. ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Condition Precedent to Initial Advance. The obligation of the Lender to make its initial Advance is subject to the fulfillment, in a manner satisfactory to the Lender, of each of the following conditions precedent: (a) The making of the Commitment shall not contravene any law, rule, or regulation applicable to the Lender. 19 22 (b) No material adverse change in the condition or operations, financial or otherwise, of the Borrower, as reasonably determined by the Lender, shall have occurred and be continuing since the date of the latest audited financial statements of the Borrower provided to the Lender, the representations and warranties contained in Section 4.01 shall be true and correct, and no event shall have occurred and be continuing, or would result from such Advance, which constitutes or could constitute an Event of Default, as set forth in a certificate from an Authorized Officer of the Borrower dated as of the Closing Date. (c) The Lender shall have received the following, in form and substance satisfactory to the Lender: (i) the Note, duly executed by the Borrower; (ii) a copy of the resolutions of the Borrower's Board of Directors, certified as of the Closing Date by an Authorized Officer thereof, authorizing (A) the transactions contemplated by the Loan Documents to which the Borrower is a party and (B) the execution, delivery, and performance by the Borrower of the Loan Documents; (iii) a certificate, dated as of the Closing Date, of an Authorized Officer of the Borrower, certifying the names and genuine signatures of the officers of the Borrower authorized to sign on behalf of the Borrower the Loan Documents and the other documents to be executed and delivered by the Borrower in connection herewith, together with evidence of the incumbency of such Authorized Officer; (iv) a copy of the Articles of Incorporation of the Borrower, recently certified by the Secretary of State of the State of Delaware; 20 23 (v) a copy of the By-laws of the Borrower, certified as of the Closing Date by an Authorized Officer; (vi) Certificates of Existence and Good Standing of the Borrower, issued by the appropriate government officials of the State of Delaware, the State of Texas and any other applicable jurisdiction, together with any other evidence satisfactory to the Lender that the Borrower has been duly formed, is validly existing and in good standing under the laws of the State of Delaware and has been duly qualified to do business and is in good standing under the laws of the State of Texas and each other jurisdiction where the Borrower does business; (vii) a favorable written opinion of Thompson & Knight, LLP, counsel to the Borrower, dated the Closing Date, as to such matters as the Lender may reasonably request; and (viii) payment of a closing fee of $7,500. SECTION 3.02. Conditions Precedent to All Advances. The obligation of the Lender to make each Advance shall be subject to the further conditions precedent that, on the date of such Advance (a) the Lender shall have received a notice of such Advance as required by Section 2.02 hereof, (b) the following statements shall be true, and by making or sending any such notice of an Advance, the Borrower shall be deemed to have made the following statements to the Lender as of the date on which such notice is made or sent to the Lender: (i) The representations and warranties contained in Section 4.01 are true and correct on and as of the date of such Advance as though made on and as of such date, and 21 24 (ii) No event has occurred and is continuing, or would result from such Advance, which constitutes an Event of Default; and (c) the Lender shall have received such other approvals, opinions, or documents as the Lender may reasonably request. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties. The Borrower represents and warrants as follows: (a) The Borrower is a corporation duly organized and validly existing under the laws of the State of Delaware. The Borrower is duly qualified to do business and in good standing in the States of Texas, Louisiana, Alabama, Georgia and every other jurisdiction in which the transaction of any material portion of its business (as now conducted and as currently contemplated) makes such qualification necessary. (b) The execution, delivery, and performance by the Borrower of each Loan Document is within the Borrower's powers, has been duly authorized by all necessary action, does not contravene (i) the Borrower's charter or by-laws or (ii) any law or governmental regulation or contractual restriction binding on or affecting the Borrower or any of its properties, and does not result in or require the creation of any lien, security interest, or other charge or encumbrance upon or with respect to any of its properties. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, 22 25 delivery, and performance by the Borrower of any Loan Document to which it is or will be a party. (d) This Agreement is, and each Loan Document to which the Borrower will be a party when delivered hereunder, will be the legal, valid, and binding obligations of the Borrower, legally enforceable against the Borrower in accordance with their respective terms. (e) Except as set forth on Schedule I hereto, there is no action, suit, or proceeding pending or threatened against or otherwise affecting the Borrower before any court, arbitrator, or governmental department, commission, board, bureau, agency, or instrumentality, which may materially adversely affect the condition or operations, financial or otherwise, of the Borrower or the ability of the Borrower to perform its obligations under the Loan Documents. (f) The financial statements of the Borrower heretofore provided to the Lender by the Borrower fairly present the financial condition of the Borrower as at the respective dates thereof, and the results of operations of the Borrower for the fiscal periods ended on such respective dates, all in accordance with generally accepted accounting principles consistently applied, subject to changes resulting from normal year-end audit adjustments, and, since December 31, 1999, there has been no material adverse change in such condition or operations. (g) The Borrower is not engaged in the business of extending credit for the purpose of purchasing, carrying, or trading in securities (within the meaning of Regulation T issued by the Board of Governors of the Federal Reserve System), and no proceeds of any 23 26 Advance will be used to purchase, carry, or trade in any such securities or to extend credit to others for the purpose of purchasing, carrying, or trading in any such securities. (h) All federal, state, and local tax returns and other material reports required by applicable law to be filed by the Borrower have been filed, and except with respect to any taxes, assessments, or other governmental charges being contested in good faith by the Borrower, all taxes, assessments, and other governmental charges imposed upon the Borrower or any of its properties which have become due and payable on or prior to the date hereof have been paid. (i) Each Employee Plan, if any, of the Borrower has satisfied the minimum funding standards under the Internal Revenue Code and ERISA applicable thereto, and no Employee Plan, if any, has an accumulated funding deficiency thereunder. The Borrower has not incurred any liability under ERISA to the Pension Benefit Guaranty Corporation with respect to any Employee Plan, and no Reportable Event or other event has occurred which could constitute grounds for the termination of any Employee Plan by the Pension Benefit Guaranty Corporation or the appointment of a trustee to administer any Employee Plan. The Borrower has not participated in any Prohibited Transaction with respect to any Employee Plan or trust created thereunder, and the consummation of the transactions contemplated hereby will not involve any Prohibited Transaction. The Borrower is not in the process of terminating any Employee Plan, which could result in the creation of any material liability for the Borrower. (j) The Borrower has not violated its charter or by-laws or any law, governmental regulation, order, judgment, or any agreement or instrument binding on or affecting it or any 24 27 of its properties in such a manner so as to result in a material adverse change to the condition or operations, financial or otherwise, of the Borrower. (k) Except as set forth on Schedule II hereto, and except as may be created by statute, all of the real property owned by the Borrower, including any and all real property leasehold interests, is free and clear of all liens, security interests, and other charges and encumbrances. (l) The Borrower has not made a material misstatement of or failed to disclose a material fact to the Lender at any time during the course of the negotiations related to this Agreement or in connection with the Advances. (m) No proceeds of any Advance will be used to acquire any security in any transaction which is subject to Sections 13 and 14 of the Securities Exchange Act of 1934. All proceeds of the Advances will be used for general corporate and working capital purposes. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any principal of or interest on the Note shall remain unpaid or the Lender shall have any Commitment hereunder, the Borrower will, unless the Lender shall otherwise consent in writing: (a) Current Ratio. Maintain a ratio of its current assets to its current liabilities of not less than 2.5 to 1.0. (b) Minimum Tangible Net Worth. Maintain an amount of tangible net worth of at least $95,000,000 at all times during its fiscal year 2001, and cause the amount of such 25 28 capital to increase in each fiscal year thereafter by at least fifty percent (50%) of its net income in the immediately preceding fiscal year. (c) Earnings Ratio. Maintain a ratio of its EBITDA to its Fixed Charges greater than 2.5 to 1.0 calculated quarterly on a rolling four (4) quarter basis for the four (4) quarters immediately preceding the date of such calculation. (d) Ratio of Debt to Worth. Maintain a ratio of its total Indebtedness to its tangible net worth of less than 0.5 to 1.0. (e) Capital Expenditures. Maintain its level of capital expenditures in any fiscal year at a level not more than one-half the amount of its EBITDA for the preceding fiscal year. (f) Reporting Requirements. Furnish to the Lender: (i) as soon as available and in any event within 45 days after the end of each quarter of each fiscal year of the Borrower, (A) unaudited financial statements (including a balance sheet, income statement, and statement of cash flows) of the Borrower as of the end of such quarter, in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied and duly certified by the Treasurer of the Borrower as (1) fairly presenting the financial condition of the Borrower at the end of such quarter and the results of the operations of the Borrower for such period (subject to changes resulting from normal year-end audit adjustments) and (2) having been prepared in accordance with generally accepted accounting principles consistently applied, together with a No-Default Certificate of such officer and (B) a copy of SEC Form 10-Q, as filed by the Borrower with the Securities and 26 29 Exchange Commission for such quarter, unless such SEC Form 10-Q is filed with the Securities and Exchange Commission by means of the EDGAR electronic filing system; (ii) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, (A) audited financial statements (including a balance sheet, income statement, and statement of cash flows) of the Borrower for such fiscal year, all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied, accompanied by a report and opinion, based on an end-of-year review, each in form and substance reasonably satisfactory to the Lender, of a public accounting firm reasonably satisfactory to the Lender, together with a No-Default Certificate and (B) a copy of SEC Form 10-K, as filed by the Borrower with the Securities and Exchange Commission for such fiscal year, unless such SEC Form 10-K is filed with the Securities and Exchange Commission by means of the EDGAR electronic filing system; (iii) as soon as possible and in any event within five (5) days after the occurrence of each Event of Default or event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default, and which is continuing on the date of such statement, the statement of the Treasurer or the President of the Borrower setting forth the details of such Event of Default or event and the action which the Borrower proposes to take with respect thereto; (iv) promptly after the filing or receipt thereof, copies of all reports and notices, if any, which the Borrower either (A) files in respect of any Employee Plan 27 30 under the Internal Revenue Code or ERISA with the Internal Revenue Service, the Pension Benefit Guaranty Corporation or the U.S. Department of Labor, or which the Borrower receives from any agency thereof, (B) furnishes to any holders of any Indebtedness of the Borrower, or (C) files with the Securities and Exchange Commission on SEC Form 8-K, if any of the information therein could form the basis of, or any dispute referred to therein which, if determined adversely to the Borrower, could constitute or give rise to, an Event of Default or an event which, with the giving of notice or the lapse of time or both, would constitute an Event of Default; (v) within five Business Days after the knowledge of the Borrower of the commencement thereof, notice of each action, suit, or proceeding before any court, arbitrator, or governmental department, commission, board, bureau, agency, or instrumentality involving a claim which may materially adversely affect the condition or operations, financial or otherwise, of the Borrower; (vi) as soon as available and in any event within 45 days after the end of each fiscal quarter of the Borrower, a quarterly summary setting forth any contingent liability (including but not limited to any liability as a guarantor, surety, warrantor, or account party to a letter of credit) incurred, assumed, or created during such period and any material joint venture or partnership entered into by the Borrower; and (vii) promptly upon request, such other information concerning the condition or operations, financial or otherwise, as the Lender may from time to time reasonably request. 28 31 (g) Maintenance of Existence, Compliance with Laws. Etc. Maintain its legal existence and permits and authority to do business in all jurisdictions where the nature of its business requires such permits and authority to be maintained, and comply in all material respects with all applicable laws, rules, regulations, and orders, such compliance to include, without limitation, compliance with ERISA and all applicable laws pertaining to the environment and workers' health and safety, paying before the same become delinquent all taxes, assessments, and governmental charges or levies imposed upon it or upon its income or profits or upon any of its properties, and paying all lawful claims which if unpaid might become a lien or charge upon any of its properties, except to the extent any such taxes, assessments, governmental charges or levies, and claims may be diligently contested by the Borrower in good faith and by appropriate proceedings, and for which adequate reserves have been established by the Borrower. (h) Insurance. (i) Keep its insurable properties adequately insured at all times by financially sound and reputable insurers to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies similarly situated and in the same or similar businesses, (ii) maintain in full force and effect public liability insurance against claims for personal injury or death or property damage occurring upon, in, about, or in connection with the use of any properties owned, occupied, or controlled by the Borrower, in such amount as shall be reasonably necessary, and (iii) maintain such other insurance as may be required by law. The amounts and types of insurance coverages and the insurers issuing such coverages shall be subject to the Lender's approval, which approval shall not be unreasonably withheld. 29 32 (i) Keeping of Records and Books of Account. Keep adequate records and books of account, with complete entries made in accordance with generally accepted accounting principles consistently applied, reflecting all of its financial transactions. (j) Inspection Rights. Permit the Lender or any of its representatives or agents at any reasonable time and from time to time, upon reasonable notice, to examine and make copies of and abstracts from its records and books of account, to visit and inspect its properties and to discuss its affairs, finances, and accounts with any of the directors or officers thereof, all as the Lender may reasonably request. SECTION 5.02. Negative Covenants. So long as any principal of or interest on the Note shall remain unpaid or the Lender shall have any Commitment hereunder, the Borrower will not, without the prior written consent of the Lender: (a) Liens, Etc. Create or suffer to exist any lien, security interest, or other charge or encumbrance, or any other type of preferential arrangement, upon or with respect to any of its properties, rights, or other assets, whether now owned or hereafter acquired, other than: (i) liens existing as of the date hereof, as shown on Schedule II hereto; and (ii) such other liens as may be mutually agreed upon by the Lender and the Borrower from time to time. (b) Indebtedness. Create, incur, or suffer to exist any Indebtedness which would cause the ratio of its total Indebtedness to its tangible net worth to exceed the ratio specified in Section 5.01(d), above. 30 33 (c) Change in Nature of Business. Change the primary nature of its business from the manufacture of ceramic proppants. (d) Sales, Etc. of Assets. Sell, assign, lease, or otherwise dispose of any of its assets, or any part thereof, including its receivables, except in the ordinary course of business. (e) Consolidation, Merger, Etc. Consolidate with, merge into, or acquire any other entity or convey, transfer, or lease its properties, voting stock, and assets substantially as an entirety to any person or entity, or permit any entity to consolidate with, merge into, or acquire the Borrower or convey, transfer, or lease its properties, voting stock, or assets substantially as an entirety to the Borrower; provided, however, that the Lender's prior written consent shall not be required for any such transaction (i) in which the other party's principal business is the same as or functionally related to the Borrower's principal business and (ii) which, when combined with all other such transactions consummated by the Borrower during any one of its fiscal years does not involve an aggregate payment by the Borrower of consideration in cash, securities, or otherwise, of more than $40,000,000; provided further, that nothing in this subsection (e) shall be deemed to permit the Borrower to incur any Indebtedness not expressly permitted under subsection (b) of this Section 5.02. ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: 31 34 (a) The Borrower shall fail to pay any principal amount of, or interest on, the Note when due; or (b) Any representation or warranty made by the Borrower (or any of its officers) under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made; or (c) The Borrower (i) shall fail to perform or observe any covenant in subsections (c), (d), or (e) of Section 5.02 hereof, or (ii) shall fail to perform or observe any other term, covenant, or agreement contained in any Loan Document on its part to be performed or observed, and which failure continues for a period of fifteen (15) days or more, or (d) The Borrower shall (i) fail to pay any Indebtedness, including all currently existing Indebtedness of the Borrower to the Lender, but excluding Indebtedness evidenced by the Note, of the Borrower, when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, or (ii) fail to perform or observe any term, covenant, or condition on its part to be performed or observed under any agreement or instrument relating to any such Indebtedness, when required to be performed or observed, and such failure shall continue after the applicable grace period, if any, specified in such agreement or instrument; or any such Indebtedness shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) The Borrower shall admit in writing its inability to pay its debts as they come due, or shall make a general assignment for the benefit of creditors; or any proceeding shall 32 35 be instituted by or against the Borrower seeking reorganization, arrangement, adjustment, composition of it or its debts, or any other relief under any law relating to bankruptcy, insolvency, reorganization, or relief of debtors, or seeking appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property; or the Borrower shall take any action to authorize any of the actions set forth above in this subsection (e); or (f) The Borrower shall receive notice of termination of an Employee Plan by reason of the occurrence of a Reportable Event; or (g) The Borrower shall fail to maintain all material licenses, authorizations, and approvals required to operate its business, which failure is not cured to the Lender's satisfaction within fifteen (15) days following the occurrence of such failure; or (h) The Borrower shall liquidate, dissolve, or take any action in contemplation thereof, or there shall be any change in the material terms of Borrower's charter or by-laws without the prior written consent of the Lender, which consent shall not be unreasonably withheld; or (i) The validity or the enforceability of any of the Loan Documents is contested by the Borrower; or (j) The entry of a final non-appealable judgment or order against the Borrower for the payment of money of $1,000,000 or more in excess of amounts covered by third-party insurance, and such judgment or order shall continue unsatisfied and in effect for a period of 60 consecutive days; or 33 36 (k) The failure of the persons who were the shareholders of the Borrower on March 31, 1996 to maintain their beneficial ownership, in the aggregate, of at least fifty-one percent (51%) of the outstanding voting stock of the Borrower; or (l) Any action or proceeding shall be initiated by or against the Borrower or any of its properties wherein the validity of or the Borrower's right to use any patent, copyright, trademark, trade secret, right, permit, license, or any other form of intellectual property owned or held by the Borrower shall be contested, which action or proceeding is not diligently prosecuted in good faith by the Borrower in appropriate proceedings deemed by the Lender to be satisfactory; or (m) Any event which, in the good-faith judgment of the Lender, constitutes or could reasonably be expected to constitute or result in a material adverse change in the financial condition or business operations of the Borrower; then, and in any such event, and the continuance thereof, the Lender may, by notice to the Borrower, (i) declare its obligation to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) declare the principal balances of all Advances and the Note, all accrued but unpaid interest thereon, and other amounts properly payable under this Agreement to be forthwith due and payable, whereupon the principal balances of all Advances and the Note, all such interest, and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by the Borrower, (iii) take such other actions as may be permitted under the Loan Documents, and (iv) exercise any and all other remedies available under applicable law. 34 37 ARTICLE VII MISCELLANEOUS SECTION 7.01. Amendments, Etc. No amendment or waiver of any provision of the Loan Documents, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 7.02. Notices, Etc. Except as otherwise specifically provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic communication) and mailed or telegraphed or delivered, if to the Borrower, at its address at 6565 MacArthur Boulevard, Ste. 1050, Irving, Texas 75038-2461, Attention: Mr. Paul G. Vitek; if to the Lender, at its address at 59 Wall Street, New York, New York 10005, Attention: Credit Department; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall, when mailed or telegraphed, be effective when deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid. SECTION 7.03. No Waiver; Remedies. No failure on the part of the Lender to exercise, and no delay in exercising, any right under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right under any Loan Document preclude any other or further exercise thereof or the exercise of any other right. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies that may be available to the Lender 35 38 at law, in equity, or otherwise. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. SECTION 7.04. Costs, Expenses, and Taxes. (a) The Borrower agrees to pay on demand all costs and expenses reasonably incurred by the Lender in connection with the preparation, execution, delivery, filing, recording, and administration of the Loan Documents and the other documents to be delivered under the Loan Documents, including, without limitation, all fees and out-of-pocket expenses of counsel for the Lender with respect thereto and with respect to advising the Lender as to its rights and responsibilities under the Loan Documents, and all costs and expenses, if any, in connection with the enforcement of the Loan Documents and the other documents to be delivered under the Loan Documents. In addition, the Borrower shall pay any and all stamp and other taxes, excluding taxes imposed on net income and all income and franchise taxes of the United States and any political subdivisions thereof (all such non-excluded taxes being herein referred to as "Taxes") and fees, if any, payable or determined to be payable in connection with the execution and delivery of the Loan Documents and the other documents to be delivered under the Loan Documents, and agrees to save the Lender harmless from and against any and all liabilities with respect to or resulting from any delay by the Borrower in paying or omission to pay such Taxes and fees. SECTION 7.05. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, the Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Borrower against any and all of the obligations of 36 39 the Borrower now or hereafter existing under this Agreement and the Note, irrespective or whether or not the Lender shall have made any demand under this Agreement or the Note and although such obligations may be unmatured. The Lender agrees to use its best efforts to notify the Borrower promptly after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have. SECTION 7.06. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Lender, and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lender. The Lender may, with the Borrower's consent, such consent not to be unreasonably withheld or delayed, assign to one or more banks or entities all or any part of, or may grant participations to one or more banks or other entities in or to all or any part of, any Advance or Advances and the Note, and to the extent of any such assignment or participation (unless otherwise stated therein), the assignee or participant of such assignment or participation shall have the same rights and benefits hereunder and under the Note as it would have if it were the Lender hereunder. SECTION 7.07. Governing Law. The Loan Documents shall be governed by and construed in accordance with the laws of the State of Texas, except to the extent any law, rule, or regulation of the federal government of the United States of America may be applicable, in which case such federal law, rule, or regulation shall govern and control; provided that the provisions of Chapter 346 of the Texas Finance Code shall not be applicable to this Agreement. 37 40 SECTION 7.08 Merger of Agreements. THE LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. CARBO CERAMICS INC. ATTEST: By: --------------------------------- Print Name: --------------------- Title: -------------------------- per pro BROWN BROTHERS HARRIMAN & CO. Print Name: ------------------------- Title: ------------------------------- 38 41 SCHEDULE I Litigation 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 practices in the proppants industry. 42 SCHEDULE II Permitted Liens The following liens, security interests, and other charges and encumbrances are expressly permitted under the terms of this Agreement, and the amounts of such liens, security interests and other charges and encumbrances described in (a), (b) and (c) below shall not exceed $500,000 in the aggregate at any time during the term of this Agreement: (a) Statutory and Good Faith Deposits. (i) Pledges or deposits under workmen's compensation laws, unemployment insurance laws, the Social Security Act, or similar legislation, and (ii) deposits to secure public or statutory obligations of Borrower, surety, customs, appeal, or performance bonds to which Borrower is a party, or the payment of contested taxes or import duties of Borrower, each made and maintained in the ordinary course of business; (b) Statutory Liens. (i) Any lien which is imposed by law, such as those of carriers, warehousemen, and mechanics, if payment of the obligation secured thereby is not yet due, or the validity or amount of which is being contested by appropriate legal proceedings, or (ii) any lien for taxes, assessments, or other governmental charges of levies not yet subject to penalties for nonpayment or the validity or amount of which is being contested by appropriate legal proceedings; (c) Minor Title Defects. Minor survey exceptions, minor encumbrances, easements, or reservations of, or rights of others for, sewers, electric lines, telegraph and telephone lines, rights of way, and other similar purposes, or zoning or other restrictions as to the use of any real property; provided that all of the foregoing, in the aggregate, do not at any time materially detract from the value of said property or materially impair the use of such property in the operation of the business of Borrower. (d) Landlord's Liens. Security interests in favor of Cambridge/Las Colinas Limited Partnership, as lessor, on personal property of the Borrower now or hereafter attached or affixed to or used in or about the premises leased by the said lessor to the Borrower, as lessee, at 6565 MacArthur Boulevard, Suite 1050, Irving, Texas 75038-2461. (e) Equipment. Security interests in (i) a used Caterpillar 938F Wheel Loader in favor of Thompson Tractor Co., Inc., as described in that certain UCC-1 Financing Statement filed with the Secretary of State of the State of Alabama on December 6, 1996, file No. 96-51148 and (ii) a new Caterpillar 928F Wheel Loader in favor of Thompson Tractor Co., Inc., as described in that certain UCC-1 Financing Statement filed with the Secretary of State of the State of Alabama on February 24, 1997, file No. 97-07667. 43 Exhibit A REVOLVING CREDIT NOTE U.S. $10,000,000 Dated: December 31, 2000 FOR VALUE RECEIVED, the undersigned, CARBO CERAMICS INC., a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of BROWN BROTHERS HARRIMAN & CO., a New York limited partnership (the "Lender") the principal amount of each Advance made by the Lender to the Borrower pursuant to the Credit Agreement (as hereinafter defined). All terms not otherwise defined herein shall have the meanings set forth for such terms in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each Advance from the date of such Advance until such principal amount is paid in full, at such interest rate, and payable at such times, as are specified in the Credit Agreement. In no event, however, shall the rate of interest charged hereunder exceed the Maximum Rate. All agreements between the Borrower and the Lender, whether now existing or hereafter arising and whether written for oral, are hereby expressly limited so that in no event, whether by reason of acceleration of the maturity hereof or otherwise, shall the amount paid or agreed to be paid to the holder hereof for the use, forbearance or detention of the money to be loaned hereunder or otherwise exceed the Maximum Rate. In fulfillment of any provision hereof or of any loan agreement or other document evidencing or securing the loan evidenced by this Note, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, then, ipso facto, the obligation to be fulfilled shall be reduced to the limit of such validity; and if the holder of this Note shall ever receive anything of value deemed to be interest under applicable law which would exceed interest at the Maximum Rate, an amount equal to any such excessive interest shall be applied to the reduction of the principal amount owing hereunder and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal hereof, such excess shall be refunded to the Borrower. All sums paid or agreed to be paid to the holder hereof for the use, forbearance, or detention of the indebtedness of the Borrower to the Lender shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full term of such indebtedness until payment in full so that the rate of interest of account of such indebtedness is uniform throughout the term thereof. The provisions of this paragraph shall control all agreements between the Borrower and the Lender. Both principal and interest are payable for the account of Borrower in lawful money of the United States of America to the Lender at its offices at 59 Wall Street, New York, New York 10005, in same day funds. Each Advance made by the Lender to the Borrower and the maturity thereof, and all payments made on account of principal hereof, shall be recorded by the Lender and, prior to any transfer hereof, either endorsed on the grid attached hereto which is part of this Promissory Note or maintained in comparable form within the Lender's internal books and records (which may be electronic). 44 The Borrower hereby affirms and certifies to the Lender that the obligation evidenced by this note was not and will not be incurred for the purposes of purchasing, carrying, or trading in securities, as defined in Regulation T of the Board of Governors of the Federal Reserve System. This Promissory Note is the Note referred to in, and is entitled to the benefits of, the Second Amended and Restated Credit Agreement dated as of December 31, 2000 (the "Credit Agreement") between the Borrower and the Lender. The Credit Agreement, among other things, (i) provides for the making of advances (the "Advances") by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. This Promissory Note shall be governed by and construed in accordance with the laws of the State of Texas, except to the extent any law, rule, or regulation of the federal government of the United States of America may be applicable, in which case such federal law, rule, or regulation shall govern and control; provided that the provisions of Chapter 346 of the Texas Finance Code shall not be applicable to this Promissory Note. CARBO CERAMICS INC. ATTEST: By: ------------------------------- Print Name: ------------------- Title: ------------------------ 45 ADVANCES AND PAYMENTS OF PRINCIPAL
Amount of Unpaid Amount of Principal Principal Notations Date Advance Payment Balance Made By - ---- --------- --------- --------- ---------
46 Exhibit C NO DEFAULT CERTIFICATE Pursuant to Section 5.01(f) of that certain Second Amended and Restated Credit Agreement dated as of December 31, 2000 (the "Credit Agreement"), between Carbo Ceramics Inc. (the "Borrower") and Brown Brothers Harriman & Co. (the "Lender"), the undersigned, being the Treasurer of the Borrower, hereby certifies to the Lender as follows: 1. On and as of the date hereof, no event has occurred which constitutes an Event of Default under the Credit Agreement or which, with the giving of notice or the lapse of time or both, would constitute an Event of Default under the Credit Agreement. 2. As of the Borrower's fiscal quarter ended September 30, 2000, the following statements were true: (a) The ratio of the Borrower's current assets to its current liabilities was 5.29 to 1.0. (b) The Borrower's tangible net worth was $103,054,000. (c) The ratio of the Borrower's EBITDA to its Fixed Charges, for the four (4) quarters ending on September 30, 200 was 3.18 to 1.0. (d) The ratio of the Borrower's total Indebtedness to its tangible net worth was N/A to 1.0. 3. The amount of capital expenditures to the date hereof in the Borrower's current fiscal year is $1,075,000. The amount of the Borrower's EBITDA for the immediately preceding fiscal year was $20,895,000. All initially capitalized terms herein have the same meanings as set forth in the Credit Agreement. IN WITNESS WHEREOF, this instrument is executed by the undersigned as of December 29, 2000. , Treasurer EX-10.11 3 d84697ex10-11.txt FORM OF EMPLOYMENT AGREEMENT - C MARK PEARSON 1 EXHIBIT 10.11 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the "Agreement"), made as of this ____ day of January, 2001, by and between C. Mark Pearson, residing at ____________________________ (the "Executive"), and Carbo Ceramics Inc., a Delaware corporation (the "Company"). WITNESSETH WHEREAS, the Company wishes to employ the Executive as President and Chief Executive Officer of the Company and the Executive wishes to serve the Company in such capacity. NOW, THEREFORE, in consideration of the conditions and covenants set forth herein, it is agreed as follows: 1. Employment, Duties and Agreements. (a) The Company hereby employs the Executive, and the Executive hereby agrees to be employed by the Company during the Term, as the Company's President and Chief Executive Officer on the terms and conditions set forth herein. "Term" shall mean the period commencing on April 10, 2001 (the "Effective Date") and ending on December 31, 2002 (the "Scheduled Termination Date"); provided, that the Term may be terminated prior to the Scheduled Termination Date in accordance with Section 3 hereof. Upon the expiration of the Term on the Scheduled Termination Date, the Executive's employment with the Company shall be at will. (b) The Executive shall have such responsibilities and duties as the Board of Directors of the Company (the "Board") may from time to time reasonably determine consistent with the Executive's position as President and Chief Executive Officer of the Company. In rendering his services hereunder, the Executive shall be subject to, and shall act in accordance with, all reasonable instructions and directions of the Board and all applicable policies and rules thereof. The Executive shall devote the Executive's full working time to the performance of the Executive's responsibilities and duties hereunder. During the Term, the Executive will not, without the prior written consent of the Board, render services, whether or not compensated, to any other person or entity as an employee, independent contractor, director or otherwise (other than as a director of Pinnacle Technologies Inc. and as an adjunct professor at the Colorado School of Mines); provided, however, that nothing herein shall restrict the Executive from rendering services to not-for-profit organizations, including, without limitation, any country club of which he is a member, or managing the Executive's personal investments during the Executive's non-working time. (c) During the Term, the Executive will not engage in any other business affiliation with respect to any entity, including, without limitation, the establishment of a proprietorship or the participation in a partnership or joint venture, or acquire any equity interest in any entity (other than the Company) if (i) such engagement or ownership would interfere with the full-time performance of his responsibilities and duties hereunder or (ii) such entity is 2 engaged in the business of production, supply or distribution of proppants used in the hydraulic fracturing of natural gas and oil wells. The Executive represents and warrants that, as of the Effective Date, the Executive will not be engaged in any such business affiliation and will not own any such equity interests. 2. Compensation. During the Term, the Executive shall be entitled to the following compensation. (a) The Company shall pay the Executive a base salary at the rate of $200,000 per annum, payable in accordance with the Company's normal payroll practices ("Base Salary"). The Board shall have the right to review the Executive's performance and compensation from time to time and may, in its sole discretion, increase his Base Salary based on such factors as the Board deems appropriate. (b) The Executive will be paid an incentive bonus with respect to each fiscal year during the Term equal to the sum of (i) 0.5% of the Company's earnings before interest income and expense and taxes for such fiscal year ("EBIT") up to $20,000,000, plus (ii) 1.0% of EBIT in excess of $20,000,000 ("Incentive Bonus"). The amount to be paid under this Section 2(b) with respect to fiscal year 2001 shall be equal to the Incentive Bonus for such fiscal year (calculated in accordance with the preceding sentence) multiplied by 266/365. Any such Incentive Bonus shall be paid to the Executive as soon as practicable and in any event within thirty (30) days after the completion of the audited financial statements and determination of EBIT for such fiscal year. (c) The Executive shall be entitled to four (4) weeks of paid vacation during each calendar year of the Term in accordance with the Company's standard vacation policy and practices; provided, that with respect to calendar year 2001, the Executive shall be entitled hereunder to paid vacation of four (4) weeks minus the number of vacation days which he has taken during the period commencing on January 1, 2001 and ending on the Effective Date. The Executive shall take vacations only at such times as are consistent with reasonable business needs of the Company. (d) The Company shall reimburse the Executive for all reasonable, ordinary and necessary expenses incurred by the Executive in the performance of the Executive's duties hereunder, provided that the Executive accounts to the Company for such expenses in a manner reasonably prescribed by the Company. (e) The Executive shall be entitled to such benefits and perquisites as are generally made available to senior executive officers of the Company, provided that the Executive shall not be eligible to participate in the Company's Incentive Compensation Plan. 3. Early Termination of the Term. The Term shall terminate prior to the Scheduled Termination Date upon the occurrence of any of the following events. (a) The Term and the Executive's employment hereunder shall terminate upon written notice to the Executive by the Company specifying Disability as the basis for such termination. In respect of such termination, the Company shall pay to the Executive (i) within thirty (30) days after such termination, the Executive's earned but unpaid Base Salary, earned but 2 3 unused vacation (determined in accordance with the Company's standard vacation policy and practices) and reimbursement for expenses incurred (in accordance with Section 2(d) hereof), all as of the date of such termination, and (ii) as soon as practicable and in any event within thirty (30) days after the completion of the audited financial statements and determination of EBIT for the fiscal year in which such termination takes place, an amount equal to the Incentive Bonus for such fiscal year (calculated in accordance with the first sentence of Section 2(b)) multiplied by a fraction, the numerator of which is the number of days in the period commencing on January 1 of the year in which such termination takes place and ending on the date of such termination (inclusive) and the denominator of which is 365. The Executive shall not be entitled to any further compensation or payments hereunder. "Disability" shall mean a physical or mental impairment of the Executive that (A) qualifies the Executive for (x) disability benefits under any long-term disability plan maintained by the Company or (y) Social Security disability benefits or (B) has prevented or, at the date of determination, will reasonably be likely to prevent, the Executive from performing the essential functions of his position for a period of six (6) consecutive months. The existence of a Disability shall be determined by the Board in its absolute discretion. The Executive agrees to submit to medical examinations by a licensed medical doctor selected by the Board to determine whether a Disability exists, as the Board may request from time to time. (b) The Company may terminate the Term and the Executive's employment hereunder for Cause. Termination for Cause shall be effective upon written notice to the Executive by the Company specifying that such termination is for Cause. In respect of such termination, the Company shall pay to the Executive, within thirty (30) days after such termination, the Executive's earned but unpaid Base Salary, earned but unused vacation (determined in accordance with the Company's standard vacation policy and practices) and reimbursement for expenses incurred (in accordance with Section 2(d) hereof), all as of the date of such termination. The Executive shall not be entitled to any further compensation or payments hereunder. "Cause" shall mean: (i) any material violation by the Executive of this Agreement; (ii) any failure by the Executive substantially to perform his duties hereunder; (iii) any act or omission involving dishonesty, fraud, willful misconduct or gross negligence on the part of the Executive that is or may be materially injurious to the Company; and (iv) any felony or other crime involving moral turpitude committed by the Executive. If the basis for terminating the Executive's employment for Cause is the result of a violation or failure described in clause (i) or (ii) of the foregoing definition of "Cause" and the majority of the Board (excluding the Executive, if he is a member of the Board) reasonably determines that such violation or failure is capable of being remedied, the Board shall give the Executive thirty (30) days' prior written notice of the Company's intent to terminate the Executive's employment for Cause, which notice shall set forth the violation or failure forming the basis for the determination to terminate the Executive's employment for Cause. The Executive shall have the right to remedy such violation or failure within a reasonable period of time (as determined by the Board), provided that the Executive begins to take appropriate steps to remedy such violation or failure within ten (10) days of the date of such written notice and diligently prosecutes such efforts thereafter. The Term and the Executive's employment hereunder may not be terminated for Cause unless a majority of the Board (excluding the Executive, if he is a member of the Board) finds in good faith that termination for Cause is justified and, if the basis for terminating the Executive's employment for Cause arises as a result of a violation or failure described in clause (i) or (ii) of the definition of "Cause", that the violation or failure has not been remedied within 3 4 the period of time designated by the Board or that there is no reasonable prospect that the Executive will remedy the violation or failure forming the basis for terminating his employment for Cause. (c) The Term and the Executive's employment hereunder shall terminate upon the death of the Executive. In respect of such termination, the Company shall pay to the Executive's estate or any beneficiary previously designated by the Executive in writing (a "Designated Beneficiary") (i) within thirty (30) days after such termination, the Executive's earned but unpaid Base Salary, earned but unused vacation (determined in accordance with the Company's standard vacation policy and practices) and reimbursement for expenses incurred (in accordance with Section 2(d) hereof), all as of the date of such termination, and (ii) as soon as practicable and in any event within thirty (30) days after the completion of the audited financial statements and determination of EBIT for the fiscal year in which such termination takes place, an amount equal to the Incentive Bonus for such fiscal year (calculated in accordance with the first sentence of Section 2(b)) multiplied by a fraction, the numerator of which is the number of days in the period commencing on January 1 of the year in which such termination takes place and ending on the date of such termination (inclusive) and the denominator of which is 365. The Executive, his estate and his Designated Beneficiary shall not be entitled to any further compensation or payments hereunder. (d) The Company may terminate the Term and the Executive's employment hereunder at any time without Cause. Such termination without Cause shall be effective upon written notice to the Executive from the Company of such termination. In respect of such termination, the Company shall pay to the Executive (i) within thirty (30) days after such termination, the Executive's earned but unpaid Base Salary, earned but unused vacation (determined in accordance with the Company's standard vacation policy and practices) and reimbursement for expenses incurred (in accordance with Section 2(d) hereof), all as of the date of such termination, and (ii) as soon as practicable and in any event within thirty (30) days after the completion of the audited financial statements and determination of EBIT for the fiscal year in which such termination takes place, an amount equal to the Incentive Bonus for such fiscal year (calculated in accordance with the first sentence of Section 2(b)) multiplied by a fraction, the numerator of which is the number of days in the period commencing on January 1 of the year in which such termination takes place and ending on the date of such termination (inclusive) and the denominator of which is 365. In addition, the Company shall continue to pay to the Executive (or to the Executive's estate or Designated Beneficiary, if the Executive should die during such two-year period) the Executive's Base Salary (at the level in effect immediately preceding such termination) for two years following the date of such termination of employment without Cause in accordance with the Company's normal payroll practices. The Executive (or his estate or Designated Beneficiary) shall not be entitled to any further compensation or payments hereunder. No salary continuation payments made pursuant to this Section 3(d) will constitute compensation for any purpose under any retirement plan or other employee benefit plan, program, arrangement or agreement of the Company, and no period during which such payments are made to the Executive pursuant to this Section 3(d) shall constitute a period of employment with the Company for any such purposes. In respect of such termination, all outstanding stock options granted to the Executive by the Company pursuant to the Carbo Ceramics Inc. 1996 Stock Option Plan for Key Employees (the "Option Plan"), whether or not they were exercisable at the time of such termination of employment without Cause, shall become fully and 4 5 immediately exercisable and shall remain exercisable until the expiration of thirty (30) days after such termination, on which date they shall expire; provided, however, that no such stock option shall be exercisable after the expiration of ten (10) years after the date such stock option was granted to the Executive. (e) During the one-year period following a Change in Control of the Company, the Company may terminate the Term and the Executive's employment hereunder without Cause or the Executive may voluntarily terminate the Term and his employment hereunder for Good Reason. Such termination shall be effective upon written notice to the Executive from the Company or from the Executive to the Company, as applicable, of such termination. In respect of such termination, in lieu of all other amounts or benefits to which the Executive would be entitled pursuant to any other provisions of Section 3 of this Agreement, the Company shall pay to the Executive, within thirty (30) days after such termination (i) the Executive's earned but unpaid Base Salary, earned but unused vacation (determined in accordance with the Company's standard vacation policy and practices) and reimbursement for expenses incurred (in accordance with Section 2(d) hereof), all as of the date of such termination, (ii) an amount equal to the Incentive Bonus with respect to the fiscal year immediately preceding the fiscal year in which such termination takes place (calculated in accordance with the first sentence of Section 2(b)) multiplied by a fraction, the numerator of which is the number of days in the period commencing on January 1 of the year in which such termination takes place and ending on the date of such termination (inclusive) and the denominator of which is 365 and (iii) an amount equal to two times the Executive's Base Salary (at the rate in effect as of the date of such termination). In respect of such termination, all outstanding stock options granted to the Executive by the Company pursuant to the Option Plan, whether or not they were exercisable at the time of such termination of employment, shall become fully and immediately exercisable and shall remain exercisable until the expiration of thirty (30) days after such termination, on which date they shall expire; provided, however, that no such stock option shall be exercisable after the expiration of ten (10) years after the date such stock option was granted to the Executive. (f) For purposes of Section 3(e) hereof: (1) "Change in Control" shall mean (i) the occurrence of a change in control of the Company of a nature that would be required to be reported or is reported in response to Item 1 of the current report on Form 8-K, as in effect on the Effective Date, pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); or (ii) any "Person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's outstanding securities (other than any Person who was a "beneficial owner" of securities of the Company representing 30% or more of the combined voting power of the Company's outstanding securities prior to the Effective Date); or (iii) individuals who constitute the Board on the Effective Date (the "Incumbent Board") cease for any reason to constitute at least a majority of the members of the Board, provided that any person becoming a director subsequent to the Effective Date whose appointment to fill a vacancy or to fill a new Board position was approved by a 5 6 vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's shareholders was approved by the same nominating committee serving under an Incumbent Board, shall be, for purposes of this clause (iii), considered as though he were a member of the Incumbent Board; or (iv) the occurrence of any of the following of which the Incumbent Board does not approve (A) merger or consolidation in which the Company is not the surviving corporation or (B) sale of all or substantially all of the assets of the Company; or (v) stockholder approval pursuant to a proxy statement soliciting proxies from stockholders of the Company, by someone other than the then current management of the Company, of a plan of reorganization, merger or consolidation of the Company with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan of reorganization are exchanged or converted into cash or property or securities not issued by the Company. (2) "Good Reason" shall mean, without the Executive's express written consent, the occurrence of any one or more of the following: (i) the assignment of the Executive to duties materially inconsistent with the Executive's authorities, duties, responsibilities and status (including offices, titles, and reporting requirements) as an officer of the Company, or a reduction or alteration in the nature or status of the Executive's authorities, duties, or responsibilities from those in effect immediately prior to the Change in Control, including a failure to reelect the Executive to, or a removal of him from, any office of the Company that the Executive held immediately prior to the Change in Control; or (ii) the Company's requiring the Executive to be based at a location more than 50 miles from Irving, Texas, except for required travel on the Company's business to an extent substantially consistent with the Executive's business obligations immediately prior to the Change in Control; or (iii) the Company materially breaches this Agreement or any other written agreement with the Executive; or (iv) a material reduction in the Executive's level of participation in any of the Company's welfare benefit, retirement or other employee benefit plans, policies, practices, or arrangements in which the Executive participates as of the date of the Change in Control. 4. Restrictive Covenants. (a) The Executive agrees that all information pertaining to the prior, current or contemplated business of the Company and its corporate affiliates, and their officers, directors, employees, agents, shareholders and customers (excluding (i) publicly available information (in substantially the form in which it is publicly available) unless such information is publicly available by reason of unauthorized disclosure by the Executive or by any person or entity of whose intention to make such unauthorized disclosure the Executive is aware and (ii) information of a general nature not pertaining exclusively to the Company that generally would be acquired in similar employment with another company) constitutes a valuable and confidential asset of the Company. Such information includes, without limitation, information related to trade secrets, customer lists, production techniques, and financial information of the Company. The Executive agrees that he shall, during the Term and continuing thereafter, (A) 6 7 hold all such information in trust and confidence for the Company and its corporate affiliates, and (B) not use or disclose any such information to any person, firm, corporation or other entity other than under court order or other legal or regulatory requirement. (b) Upon expiration of the Term and continuing for a period ending two (2) years after the Executive's employment by the Company terminates for any reason whatsoever, the Executive agrees that the Executive will not, directly or indirectly, own, manage, operate, control, be employed by (whether as an employee, consultant, independent contractor or otherwise, and whether or not for compensation) or render services to any person, firm, corporation or other entity, in whatever form, engaged in (i) the business of supply or distribution of proppants used in the hydraulic fracturing of natural gas and oil wells ("Proppants") other than Baker Hughes Inc., BJ Services Company, Schlumberger Limited, Halliburton Company and OSCA, Inc. or (ii) the business of production of Proppants. (c) During the Term and continuing for a period ending twelve (12) months after the Executive's employment terminates for any reason whatsoever, the Executive agrees that the Executive will not, directly or indirectly, individually or on behalf of other persons, solicit, aid or induce (i) then remaining employees of the Company or its corporate affiliates to leave their employment with the Company or its corporate affiliates in order to accept employment with or render services to or with another person, firm, corporation or other entity, or assist or aid any other person, firm, corporation or other entity in identifying or hiring such employees or (ii) any customer of the Company or its corporate affiliates who was a customer of the Company or its corporate affiliates at any time during which the Executive was actively employed by the Company to purchase products or services then sold by the Company or its corporate affiliates from another person, firm, corporation or other entity, or assist or aid any other person or entity in identifying or soliciting any such customer. (d) Prior to agreeing to, or commencing to, act as an employee, officer, director, trustee, principal, agent or other representative of any type of business other than as an employee of the Company during the period in which the non-competition agreement, as described in Section 4(b), applies, the Executive shall (i) disclose such agreement in writing to the Company and (ii) disclose to the other entity with which he proposes to act in such capacity, or to the other principal together with whom he proposes to act as a principal, the existence of this Agreement, including, in particular, the non-disclosure agreement contained in Section 4(a), the non-competition agreement contained in Section 4(b), and the non-solicitation agreement contained in Section 4(c). (e) With respect to the restrictive covenants set forth in Sections 4(a), 4(b) and 4(c), the Executive acknowledges and agrees as follows. (i) The specified duration of a restrictive covenant shall be extended by and for the term of any period during which the Executive is in violation of such covenant. (ii) The restrictive covenants are in addition to any rights the Company may have in law or at equity. 7 8 (iii) It is impossible to measure in money the damages which will accrue to the Company in the event that the Executive breaches any of the restrictive covenants. Therefore, if the Executive breaches any restrictive covenant, the Company and its corporate affiliates shall be entitled to an injunction restraining the Executive from violating such restrictive covenants. If the Company or any of its corporate affiliates shall institute any action or proceeding to enforce a restrictive covenant, the Executive hereby waives the claim or defense that the Company or any of its corporate affiliates has an adequate remedy at law and the Executive agrees not to assert in any such action or proceeding the claim or defense that the Company or any of its corporate affiliates has an adequate remedy at law. The foregoing shall not prejudice the Company's or its corporate affiliates' right to require the Executive to account for and pay over to the Company or its corporate affiliates, and the Executive hereby agrees to account for and pay over, the compensation, profits, monies, accruals or other benefits derived or received by the Executive as a result of any transaction constituting a breach of the restrictive covenants. (f) The restrictions in this Section 4 shall be in addition to any restrictions imposed on the Executive by statute or at common law. 5. Arbitration of Disputes. (a) Any disagreement, dispute, controversy or claim arising out of or relating to this Agreement or the interpretation or validity hereof shall be settled exclusively and finally by arbitration. It is specifically understood and agreed that any disagreement, dispute or controversy which cannot be resolved between the parties, including without limitation any matter relating to interpretation of this Agreement, may be submitted to arbitration irrespective of the magnitude thereof, the amount in controversy or whether such disagreement, dispute or controversy would otherwise be considered justiciable or ripe for resolution by a court or arbitral tribunal. Notwithstanding this Section 5, the Company shall be entitled to institute a court action or proceeding for injunctive relief as provided in Section 4 of this Agreement. (b) The arbitration shall be conducted in accordance with the Commercial Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association ("AAA"). (c) The arbitral tribunal shall consist of one arbitrator. The parties to the arbitration jointly shall directly appoint such arbitrator within thirty (30) days of initiation of the arbitration. If the parties shall fail to appoint such arbitrator as provided above, such arbitrator shall be appointed by the AAA as provided in the Arbitration Rules and shall be a person who (i) maintains his principal place of business within thirty (30) miles of the City of Irving, Texas and (ii) has substantial experience in executive compensation. The parties shall each pay an equal portion of the fees, if any, and expenses of such arbitrator. (d) The arbitration shall be conducted within thirty (30) miles of the City of Irving, Texas or in such other city in the United States of America as the parties to the dispute may designate by mutual written consent. 8 9 (e) At any oral hearing of evidence in connection with the arbitration, each party thereto or its legal counsel shall have the right to examine its witnesses and to cross-examine the witnesses of any opposing party. No evidence of any witness shall be presented unless the opposing party or parties shall have the opportunity to cross-examine such witness, except as the parties to the dispute otherwise agree in writing or except under extraordinary circumstances where the interests of justice require a different procedure. (f) Any decision or award of the arbitral tribunal shall be final and binding upon the parties to the arbitration proceeding. The parties hereto hereby waive to the extent permitted by law any rights to appeal or to seek review of such award by any court or tribunal. (g) Nothing herein contained shall be deemed to give the arbitral tribunal any authority, power, or right to alter, change, amend, modify, add to or subtract from any of the provisions of this Agreement. (h) Notwithstanding anything to the contrary in this Agreement, the arbitration provisions set forth in this Section 5 shall be governed exclusively by the Federal Arbitration Act, Title 9, United States Code. 6. Miscellaneous. (a) Each provision hereof is severable from this Agreement, and if one or more provisions hereof are declared invalid the remaining provisions shall nevertheless remain in full force and effect. If any provision of this Agreement is so broad, in scope or duration or otherwise, as to be unenforceable, such provision shall be interpreted to be only so broad as is enforceable. (b) Any notice to be given hereunder shall be given in writing. Notice shall be deemed to be given when delivered by hand to the party to whom notice is being given, or ten (10) days after being mailed, postage prepaid, registered with return receipt requested, or sent by facsimile transmission with a confirmation by registered or certified mail, postage prepaid. Notices to the Executive should be addressed to the Executive as follows: C. Mark Pearson c/o Carbo Ceramics Inc. 6565 MacArthur Boulevard, Suite 1050 Irving, Texas 75039 Notices to the Company should be sent as follows: Carbo Ceramics Inc. 6565 MacArthur Boulevard, Suite 1050 Irving, Texas 75039 Attn: Secretary 9 10 with copies sent to: Cleary Gottlieb, Steen & Hamilton One Liberty Plaza New York, NY 10006 Attn: Stephen H. Shalen, Esq. Either party may change the address or person to whom notices should be sent to by notifying the other party in accordance with this Section 6(b). (c) The failure to enforce at any time any of the provisions of this Agreement or to require at any time performance by the other party of any of the provisions hereof shall in no way be construed to be a waiver of such provisions or to affect the validity of this Agreement, or any part hereof, or the right of either party thereafter to enforce each and every such provision in accordance with the terms of this Agreement. (d) This Agreement contains the entire agreement between the parties with respect to the employment of the Executive by the Company after the Effective Date and supersedes any and all prior understandings, agreements or correspondence between the parties regarding such employment. It may not be amended or extended in any respect except by a writing signed by both parties hereto. (e) The parties hereto acknowledge and agree that each party has reviewed and negotiated the terms and provisions of this Agreement and has contributed to its preparation (with advice of counsel, if desired). Accordingly, the rule of construction to the effect that ambiguities are resolved against the drafting party shall not be employed in the interpretation of this Agreement. Rather, the terms of this Agreement shall be construed fairly as to both parties hereto and not in favor of or against either party, regardless of which party generally was responsible for the preparation of this Agreement. (f) This Agreement shall be governed by, and interpreted in accordance with, the laws of Texas, without reference to its principles of conflict of laws. (g) This Agreement shall not be assignable by either party hereto without the written consent of the other, provided, however, that the Company may, without the written consent of the Executive, assign this Agreement to (i) any entity with which the Company is merged or consolidated or to which the Company transfers substantially all of its assets or (ii) any entity controlling, under common control with or controlled by the Company. (h) This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same instrument. (i) The headings in this Agreement are inserted for convenience of reference only and shall not be a part of or control or affect the meaning of any provision hereof. 10 11 IN WITNESS WHEREOF, the Company has caused this 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: ------------------------------- ----------------------------------- C. Mark Pearson 11 EX-23.1 4 d84697ex23-1.txt CONSENT OF ERNST & YOUNG LLP 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 February 5, 2001, 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, 2000. New Orleans, Louisiana March 6, 2001 -----END PRIVACY-ENHANCED MESSAGE-----