-----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, AAL45KntYdvgqA3Jj4l4lS32rj8cFjmdF6lX9CfoBUo+lIsAfBN6/KKoSkt5avPh BTjz/iVqeoAeEiNYman2zg== 0000950134-06-004418.txt : 20060307 0000950134-06-004418.hdr.sgml : 20060307 20060307165330 ACCESSION NUMBER: 0000950134-06-004418 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060307 DATE AS OF CHANGE: 20060307 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15903 FILM NUMBER: 06670640 BUSINESS ADDRESS: STREET 1: 6565 MACARTHUR BOULEVARD STREET 2: SUITE 1050 CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 2144010090 MAIL ADDRESS: STREET 1: 6565 MACARTHUR BOULEVARD STREET 2: SUITE 1050 CITY: IRVING STATE: TX ZIP: 75039 10-K 1 d33288e10vk.htm FORM 10-K e10vk
 

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-K
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2005
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
    For the transition period from           to          
 
Commission File Number 0-28178
CARBO Ceramics Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware
  72-1100013
(State or other jurisdiction of
incorporation or organization) 		  (I.R.S. Employer
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
Preferred Stock Purchase Rights
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
 
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 þ     No o
 
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.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the Common Stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on June 30, 2005 as reported on the New York Stock Exchange, was approximately $917,166,355. Shares of Common Stock held by each officer and director and by each person who owns 10% 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 20, 2006, Registrant had outstanding 24,321,412 shares of Common Stock.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Proxy Statement for Registrant’s Annual Meeting of Shareholders to be held April 18, 2006, are incorporated by reference in Parts II and III.
 

 

 
PART I
 
Item 1.   Business
 
General
 
CARBO Ceramics Inc. (the “Company”) is the world’s largest producer and supplier of ceramic proppant for use in the hydraulic fracturing of natural gas and oil wells. In addition, the Company is the largest provider of fracture diagnostic services through its subsidiary, Pinnacle Technologies, Inc. (“Pinnacle”).
 
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 proppant, is suspended and transported in the fluid and fills the fracture, “propping” it 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 proppant is typically the highest cost. The higher initial cost of ceramic proppant is justified by the fact that the use of these proppants in certain well conditions results in an increase in the production rate of oil and gas, an increase in the total oil or gas that can be recovered from the well and, consequently, an increase in cash flow for the operators of the well. The increased production rates are primarily attributable to the higher strength and more uniform size and shape of ceramic proppant versus alternative materials.
 
Based on the Company’s internally generated market information, the Company estimates that it supplies approximately 40% of the ceramic proppant and 7% of all proppant used worldwide. During the year ended December 31, 2005, the Company generated approximately 60% of its revenues in the U.S. and 40% in international markets.
 
Pinnacle provides fracture diagnostic services, sells fracture simulation software and provides fracture design services to oil and gas companies worldwide. Pinnacle’s fracture simulation software FracproPT1 is the most widely used model in the world. Using proprietary technology and software, Pinnacle can map fractures as they are created, providing well operators with key information regarding the dimensions and orientation of the fracture. This information is vital to optimizing the design of individual fracture treatments and well placement in a reservoir. The Company currently estimates that less than 3% of wells fractured worldwide utilize fracture diagnostics.
 
Demand for ceramic proppant and fracture diagnostic services depends primarily upon the demand for natural gas and oil and on the number of natural gas and oil wells drilled, completed or re-completed worldwide. More specifically, the demand for the Company’s products and services is dependent on the number of oil and gas wells that are hydraulically fractured to stimulate production.
 
The Company conducts its business within two operating segments: 1) Proppant and 2) Fracture and Reservoir Diagnostics. Financial information about these operating segments is provided in Note 10 to the Company’s Consolidated Financial Statements.
 
Products
 
The Company manufactures four distinct ceramic proppants. CARBOHSP® and CARBOPROP® are premium priced, high strength proppants designed primarily for use in deep gas wells. CARBOHSP® was the original ceramic proppant and was introduced in 1979. The Company continues to manufacture and sell an improved version of this original product. CARBOHSP® has the highest strength of any of the ceramic proppants manufactured by the Company and is used primarily in the fracturing of deep gas wells. CARBOPROP®, which was
 
 
(1) Fracpro® is a registered trademark of Gas Research Institute (“GRI”) and is used by Pinnacle with permission of GRI.


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introduced by the Company in 1982, is slightly lower in weight and strength than CARBOHSP® and was developed for use in deep gas wells that do not require the strength of CARBOHSP®.
 
CARBOLITE® and CARBOECONOPROP® are lightweight proppants designed for use in gas wells of moderate depth and shallower oil wells. CARBOLITE®, introduced in 1984, is used in medium depth oil and gas wells, where the additional strength of ceramic proppant may not be essential, but where higher production rates can be achieved due to the product’s uniform size and spherical shape. CARBOLITE® is the Company’s product most commonly used in oil wells. CARBOECONOPROP®, introduced in 1992 to compete directly with sand-based proppant, is the Company’s lowest priced product and sales volume of this product has grown at a faster rate than the Company’s other ceramic proppants. The introduction of CARBOECONOPROP® has resulted in ceramic proppant being used by operators of oil and gas wells that had not previously used ceramics. The Company believes that many of the users of CARBOECONOPROP® had previously used sand or resin-coated sand.2
 
Competition
 
The Company’s largest worldwide competitor is Saint-Gobain Proppants (“Saint-Gobain”), formerly Norton Proppants. Saint-Gobain Proppants is a division of Compagnie de Saint-Gobain, a large French glass and materials company. Saint-Gobain manufactures ceramic proppants that directly compete with each of the Company’s products. Saint-Gobain’s primary manufacturing facility is located in Fort Smith, Arkansas. In addition, Mineracao Curimbaba (“Curimbaba”), based in Brazil, manufactures a sintered bauxite product similar to the Company’s CARBOHSP®, which is marketed in the United States under the name “Sinterball”. Curimbaba has notified the Company that it intends to introduce an intermediate strength ceramic proppant similar to the Company’s CARBOPROP® upon the expiration of the intermediate strength proppant patent held by the Company in November 2006. The Company believes that Curimbaba has not expanded its U.S. product line to include a lightweight ceramic proppant and is unlikely to do so in light of patents held by the Company.
 
Borovichi Refractory Plant (“Borovichi”) is a manufacturer of ceramic proppant located in Borovichi, Russia, that began producing proppant in 1996. The Company is aware of a second competitor in Russia, FORES Refractory Plant (“FORES”). While the Company has limited information about Borovichi and FORES, the Company believes that each of these companies currently manufactures primarily intermediate strength ceramic proppant and markets its products primarily within the Russian Federation. The Company also believes that these companies have added manufacturing capacity in recent years and now provide a majority of the ceramic proppant used in the Russian Federation. In addition, the Company is aware of three small manufacturers located in Russia that have not produced volumes sufficient to impact the market to date. The Company is also aware of two significant manufacturers of ceramic proppant in China: Yixing Orient Petroleum Proppant Company, Ltd. and GuiZhou LinHai New Material Company, Ltd. Each of these companies produces intermediate strength ceramic proppants that are marketed primarily in China.
 
Competition for CARBOHSP® and CARBOPROP® principally includes ceramic proppant manufactured by Saint-Gobain, Curimbaba and Borovichi. The entry of additional competitors into the market to supply ceramic proppant following expiration of our U.S. patent rights relating to these products in late 2006 could, as described in “Risk Factors — We rely on certain patents,” have a material adverse effect on our results of operations and financial condition. The Company’s CARBOLITE® and CARBOECONOPROP® products compete primarily with ceramic proppant produced by Saint-Gobain and with sand-based proppant 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 Chemical, Inc. Oilfield Products Group 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
 
 
(2) CARBOHSP®, CARBOPROP®, CARBOLITE®, and CARBOECONOPROP® are registered marks of CARBO Ceramics Inc.


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customers to use ceramic proppant in an increasingly broad range of applications and thus increased the overall market for the Company’s products. Since 1993, the Company has consistently expanded its manufacturing capacity and plans to continue its strategy of adding capacity to meet anticipated future increases in sales demand.
 
The Company continually conducts testing and development activities with respect to alternative raw materials to be used in the Company’s existing and alternative production methods. The Company is not aware of the development of alternative products for use as proppant in the hydraulic fracturing process that would significantly impact the use of ceramic proppants. The Company believes that the main barriers to entry into the ceramic proppant industry are the patent rights held by the Company and certain of its current competitors, the “know-how” and trade secrets necessary to manufacture a competitive product 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 Energy Services, Inc. and Schlumberger Limited, the three largest participants in the worldwide petroleum pressure pumping industry. These companies collectively accounted for approximately 65% of the Company’s 2005 and 2004 revenues. However, the end users of the Company’s products are the operators of natural gas and oil wells that hire the pressure pumping service companies to hydraulically fracture wells. The Company works both with the pressure pumping service companies and directly with the operators of natural gas and oil wells to present the technical and economic advantages of using ceramic proppant. 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 markets 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. The Company actively markets its products to owners of oil and gas wells and has continued to expand its relationships with these production companies each year. The Company increased the size of its technical sales force in recent years and plans to continue to increase its efforts to educate end users on the benefits of using ceramic proppant. While the Company’s products have historically been used in very deep wells that require high-strength proppant, the Company believes that there is economic benefit to well operators of using ceramic proppant in shallower wells that do not necessarily require a high-strength proppant. The Company believes that its education-based technical marketing efforts have allowed it to capture a greater portion of the market for sand-based proppant in recent years and will continue to do so in the future.
 
The Company provides a variety of technical support services and has developed computer software that models the return on investment achievable by using the Company’s ceramic proppant versus other proppant in the hydraulic fracturing of a natural gas or oil well. In addition to the increased technical marketing effort, the Company has engaged in large-scale field trials to demonstrate the economic benefits of its products and validate the findings of its computer simulations. Occasionally, the Company provides proppant to production companies for field trials, on a discounted basis, in exchange for a production company’s agreement to provide production data for direct comparison of the results of fracturing with ceramic proppant as compared to alternative proppants.
 
The Company’s worldwide sales and marketing activities are coordinated by its North American and international marketing managers. The Company’s international marketing efforts in 2005 were conducted through its sales offices in Aberdeen, Scotland, and Moscow, Russia, through commissioned sales agents located in South America, China and Australia, and through a distributor in Saudi Arabia.
 
The Company’s products and services are used worldwide by U.S. customers operating domestically and abroad, and by foreign customers. Sales outside the United States accounted for 40%, 47% and 36% of the Company’s sales for 2005, 2004 and 2003, respectively. The decrease in international sales in 2005 was primarily


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attributable to decreased demand for the Company’s products in Russia. The primary reason for the sales decline in Russia was an increase in the availability of locally produced proppant in that region, the pricing of which excludes the customs duties, tariffs and transportation expenses associated with imported products. The Company is addressing this situation through the construction of a manufacturing facility in Kopeysk, Russia. The distribution of the Company’s international and domestic revenues is shown below, based upon the region in which the customer used the products and services:
 
                         
    For the Years Ended December 31,  
    2005     2004     2003  
    ($ in millions)  
 
Location
                       
United States
  $ 152.6     $ 118.7     $ 108.0  
International
    100.1       104.4       61.9  
                         
Total
  $ 252.7     $ 223.1     $ 169.9  
                         
 
Distribution
 
The Company maintains finished goods inventories at its plants in New Iberia, Louisiana; Eufaula, Alabama; McIntyre, Georgia; Toomsboro, Georgia; and Luoyang, China; and at 11 remote stocking facilities located in Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas; Edmonton, Alberta, Canada; Grande Prairie, Alberta, Canada; Rotterdam, The Netherlands; Jebel Ali, United Arab Emirates; Adelaide, Australia; Tianjin, China; Surgut, Russia; and Singapore. 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, Edmonton and Grande Prairie and subcontracts the operation of the facilities and transportation to a local trucking company in each location. The remaining North American stocking facilities are owned and operated by local companies under contract with the Company. International remote stocking sites are duty-free warehouses operated by independent owners. North American sites are typically supplied by rail, and international sites are typically supplied by container ship. In total, the Company leases 438 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 proppant to the operator’s well site, which eliminates the need for customers to maintain an inventory of ceramic proppant.
 
Raw Materials
 
Ceramic proppant is made from alumina-bearing ores (commonly referred to as clay, bauxite, bauxitic clay or kaolin, depending on the alumina content), that are readily available on the world market. Bauxite is largely used in the production of aluminum metal, refractory material and abrasives. The main known deposits of alumina-bearing ores in the United States are in Arkansas, Alabama and Georgia; other economically mineable known deposits are located in Australia, Brazil, China, Gabon, India, Jamaica, Russia and Surinam.
 
For the production of CARBOHSP® in the Company’s New Iberia, Louisiana, and McIntyre, Georgia, facilities, the Company uses bauxite imported from Australia, and typically purchases its annual requirements at the seller’s current prices. The Company has entered into an agreement with a foreign supplier to supply its anticipated need for this ore at a fixed price through 2007. While prices for the material are fixed through 2007, the Company has seen recent increases in the cost (which is borne by the Company) of transporting this material to the U.S. For the production of CARBOPROP®, also produced in both New Iberia and McIntyre, the Company uses a variety of materials that meet specific chemical and mineralogical requirements. Raw material for the production of CARBOPROP® may be either bauxitic clays or a blend of bauxite and kaolin, either of which is readily available to the Company at sellers’ current prices or through long-term contracts.
 
The Company’s Eufaula facility uses primarily locally mined kaolin for the production of CARBOLITE® and CARBOECONOPROP®. 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 70% of the Eufaula facility’s annual kaolin requirements through 2010.


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The Company’s two production facilities in Wilkinson County, Georgia, use locally mined uncalcined kaolin for the production of CARBOECONOPROP®. During 2002 and 2003, the Company acquired on both a fee simple and leasehold basis, acreage in Wilkinson County, Georgia, which contains approximately 12 million tons of raw material suitable for production of CARBOLITE® and CARBOECONOPROP®. At current production rates (including anticipated production rates for the Toomsboro plant) the acquired raw material would supply the needs of the two Georgia facilities for a period in excess of 30 years. The Company has entered into a long-term agreement with a third party to mine and transport this material at a fixed price subject to annual adjustment. The agreement requires the Company to utilize the third party to mine and transport at least 80% of the McIntyre facility’s annual kaolin requirement.
 
The Company’s production facility in Luoyang, China, uses kaolin and bauxite for the production of CARBOPROP® and CARBOLITE®. Each of these materials is purchased under long-term contracts with a minimum initial term of eight years, of which four years remain. The contracts stipulate a fixed price subject to periodic adjustment. Under the terms of the agreement covering the purchase of bauxite, the Company has an obligation to purchase, in total, a minimum of 10,000 metric tons of bauxite per year or 100% of its annual requirements for bauxite if it purchases less than 10,000 metric tons per year. Under the terms of the agreement covering the purchase of kaolin, the Company has an obligation to purchase a minimum of 80% of its annual requirement for kaolin from a single supplier.
 
Production Process
 
Ceramic proppants are made by grinding or dispersing ore to a fine powder, combining the powder into small pellets and firing the pellets in a rotary kiln. The Company uses two different methods to produce ceramic proppant. The Company’s plants in New Iberia, Louisiana, McIntyre, Georgia, and Luoyang, China, use a dry process (the “Dry Process”) which utilizes clay, bauxite, bauxitic clay or kaolin. The raw material is ground, pelletized and screened. The manufacturing process is completed by firing the product in a rotary kiln. The Company believes its competitors also use some form of the Dry Process to produce their ceramic proppant.
 
The Company’s plants in Eufaula, Alabama, and Toomsboro, Georgia, use a wet process (the “Wet Process”), which starts with kaolin from local mines which is formed into a slurry. The slurry is then pelletized in a dryer and the pellets are then fired in a rotary kiln. The Company believes it is the only company in the ceramic proppant industry that utilizes the Wet Process.
 
Patent Protection and Intellectual Property
 
The Company makes ceramic proppant by processes and techniques that involve a high degree of proprietary technology, some of which are protected by patents.
 
The Company owns four U.S. patents and one Argentinean patent. Two of these U.S. patents and the Argentinean patent relate to the CARBOPROP® product. One of these U.S. patents relates to the CARBOLITE® and CARBOECONOPROP® products. The Company’s U.S. patents relating to the CARBOPROP® product expire in 2006 as is discussed in “Item 1. Business — Competition” and “Item 1A. Risk Factors — We rely on certain patents.” The Company’s Argentinean patent relating to the CARBOPROP® product expires in 2008. The Company’s U.S. patents relating to the CARBOLITE® and CARBOECONOPROP® products expire in 2009.
 
The Company owns five U.S. patent applications (together with a number of counterpart applications pending in foreign jurisdictions) that cover ceramic proppant and processes for making ceramic proppant. The Company also owns three U.S. patent applications (together with a number of counterpart applications pending in foreign jurisdictions) that cover scouring and grinding media, and processes for their preparation. The Company also owns one U.S. patent application that covers ceramic foundry media, and processes for making ceramic foundry media. The applications are in various stages of the patent prosecution process, and patents may not issue on such applications in any jurisdiction for some time, if they issue at all.
 
The Company believes that its patents have been and will continue to be important in enabling the Company to compete in the market to supply proppant to the natural gas and oil industry. The Company intends to enforce, and has in the past vigorously enforced, its patents. The Company is currently, as described below under “Item 3. Legal


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Proceedings,” and may from time to time in the future be, involved in litigation to determine the enforceability, scope and validity of its patent rights. Past disputes with the Company’s main competitor have been resolved in settlements 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 proppant on both a royalty-free and royalty-bearing basis. Royalties under these licenses are not material to the Company’s financial results. As a result of these cross licensing arrangements, the Company is able to produce a broad range of ceramic proppant while third parties are unlikely, during the term of such patents, to be able to produce certain of these ceramic proppants without infringing on the patent and/or licensing rights held by the Company, the above-referenced competitor or both. In addition to patent rights, the Company uses a significant amount of trade secrets, or “Know-how,” and other proprietary information and technology in the conduct of its business. None of this “Know-how” and technology is licensed to or from third parties.
 
Pinnacle provides engineering services to the energy industry, using processes and techniques that involve a high degree of proprietary technology, some of which are protected by patents. Pinnacle owns six U.S. patents, one of which is co-owned with Halliburton Energy Services, Inc. Some of these U.S. patents are licensed to third parties, however such licenses are not material to Pinnacle’s financial results. Two of these U.S. patents relate to systems and methods for determining the orientation of natural fractures using sensors in observation wells to receive and evaluate signals indicative of microseismic events and movement along the surface of the fractures. One of these patents expires in 2018 and the other expires in 2023. The U.S. patent that is co-owned with Halliburton Energy Services, Inc. relates to methods of fracturing a formation using tiltmeters to detect dimensions of the fracture, and comparing the measured magnitude of the fracture dimension with a predetermined modeled magnitude of the same fracture dimension. This patent expires in 2023. Another of Pinnacle’s U.S. patents, which will expire in 2018 relates to systems for facilitating information retrieval while drilling a well that include fiber optic cables adapted for insertion into a drill string. Another of Pinnacle’s U.S. patents will expire in 2017 and relates to systems for monitoring fracturing that include vertical tilt array and/or linear sensing arrays. Another of Pinnacle’s U.S. patents relates to microseismic event detectors that analyze microseismic waves sensed at receiver stations. This patent expires in 2016.
 
Pinnacle also owns three U.S. patent applications (together with a number of counterparts pending in foreign jurisdictions) that relate to certain of its proprietary systems for monitoring and analyzing microseismic events and fractures. The patent applications are in various stages of the patent prosecution process, and patents may not issue on such applications in any jurisdiction for some time, if they issue at all. Pinnacle also licenses several patents from third parties for use in its business. In addition to patent rights, Pinnacle uses a significant amount of “Know-how” and other proprietary technology in the conduct of its business, and a substantial portion of this “Know-how” and technology is licensed by Pinnacle from third parties.
 
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 proppant. Prior to 1993, the Company’s production capacity was in excess of its sales requirements. Since that time, the Company has been expanding its capacity in order to meet the generally increasing demand for its products. In 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® and CARBOECONOPROP® products. In 1995, the Company completed a 40 million-pound per year capacity expansion at the New Iberia facility, intended to meet increasing demand for CARBOHSP® and CARBOPROP®. In 1996, the Company commenced operation of its second 80 million-pound per year expansion of the Eufaula plant bringing total capacity at the facility to 250 million pounds per year. Subsequent modifications to the Eufaula plant and revisions to certain permits increased its capacity to 260 million pounds per year in late 2004. In 2003, the Company completed installation of additional equipment in its New Iberia facility to increase production to 120 million pounds per year.
 
In June 1999, the Company completed construction of a new manufacturing facility in McIntyre, Georgia. Design capacity of the plant was 200 million pounds per year and the total initial cost of the plant was approximately


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$60 million. During 2002 and 2003, the Company spent approximately $17.2 million to expand the capacity of the McIntyre facility to 275 million pounds per year. This expansion was completed in early 2003.
 
In 2002, the Company completed construction of a new manufacturing facility in Luoyang, China, at a cost of approximately $10 million. In 2004, the Company added a second production line to the Luoyang, China, facility at a cost of approximately $6 million. The annual capacity at the Luoyang, China, facility is 100 million pounds.
 
In early 2006, the Company substantially completed construction of a new manufacturing facility in Toomsboro, Georgia. The cost of this facility was approximately $61 million, and the facility is expected to have annual capacity of 250 million pounds when fully operational later this year. This plant has been designed to efficiently produce high volumes of the Company’s low-cost, lightweight CARBOECONOPROP®. The facility has been designed to accommodate future expansion to a total capacity of up to one billion pounds per year through the construction of up to three additional production lines, each of which would have annual capacity of 250 million pounds per year. The addition of these subsequent lines will be dependent on the expected future demand for the Company’s products. The Company also initiated construction of a manufacturing facility in Kopeysk, Russia, in June, 2005. The facility in Russia is expected to be completed in the fourth quarter of 2006 and is expected to have an annual capacity of 100 million pounds when fully operational in 2007.
 
The following table sets forth the current capacity of each of the Company’s existing manufacturing facilities:
 
             
    Annual
 		     
Location
  Capacity    
Products
    (Millions of pounds)      
New Iberia, Louisiana
    120     CARBOHSP® and CARBOPROP®
Eufaula, Alabama
    260     CARBOLITE® and CARBOECONOPROP®
McIntyre, Georgia
    275     CARBOLITE®, CARBOECONOPROP®
CARBOHSP® and CARBOPROP®
Toomsboro, Georgia
    250     CARBOECONOPROP®
Luoyang, China
    100     CARBOPROP® and CARBOLITE®
             
Total current capacity
    1,005      
 
The Company generally supplies its customers with products on a just-in-time basis and operates without any material backlog.
 
Long-Lived Assets By Geographic Area
 
Long-lived assets, consisting of net property, plant and equipment and goodwill, as of December 31 in the United States and other countries are as follows:
 
                         
    2005     2004     2003  
    ($ in millions)  
 
Long-lived assets:
                       
United States
  $ 169.7     $ 130.2     $ 124.1  
International (primarily China and Russia)
    31.6       17.0       14.4  
                         
Total
  $ 201.3     $ 147.2     $ 138.5  
                         
 
Risks associated with the Company’s international operations are described under “Item 1A. Risk Factors — Our international operations subject us to risks inherent in doing business on an international level that could adversely impact our results of operations.”
 
Environmental and Other Governmental Regulations
 
The Company believes that its operations are in substantial compliance with applicable domestic and foreign federal, state and local environmental and safety laws and regulations. The Company does not anticipate any significant expenditure in order to continue to comply with such laws and regulations.


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Employees
 
At December 31, 2005, the Company had 530 employees worldwide. 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. The words “believe”, “expect”, “anticipate”, “project” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, 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. The Company’s forward-looking statements are based on assumptions that we believe to be reasonable but that may not prove to be accurate. All of the Company’s forward-looking information is subject to risks and uncertainties that could cause actual results to differ materially from the results expected. Although it is not possible to identify all factors, these risks and uncertainties include the risk factors discussed below.
 
The Company’s results of operations could be adversely affected if its business assumptions do not prove to be accurate or if adverse changes occur in the Company’s business environment, including but not limited to:
 
  •  a potential decline in the demand for oil and natural gas;
 
  •  potential declines or increased volatility in oil and natural gas prices that would adversely affect our customers, the energy industry or our production costs;
 
  •  potential reductions in spending on exploration and development drilling in the oil and natural gas industry that would reduce demand for our products and services;
 
  •  an increase in competition in the proppant market;
 
  •  the development of alternative stimulation techniques;
 
  •  the development of alternative proppants for use in hydraulic fracturing;
 
  •  general global economic and business conditions;
 
  •  fluctuations in foreign currency exchange rates; and
 
  •  the potential expropriation of assets by foreign governments.
 
The Company’s results of operations could also be adversely affected as a result of worldwide economic, political and military events, including war, terrorist activity or initiatives by the Organization of the Petroleum Exporting Countries. For further information, see “Item 1A. Risk factors.”
 
Available Information
 
The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on the Company’s internet website at http://www.carboceramics.com as soon as reasonably practicable after such material is filed with, or furnished to, the Securities and Exchange Commission (“SEC”).
 
The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, Room 1580, N.E., NW, Washington DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site


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that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at http://www.sec.gov.
 
Item 1A  Risk Factors
 
You should consider carefully the trends, risks and uncertainties described below and other information in this Form 10-K and subsequent reports filed with the SEC before making any investment decision with respect to our securities. If any of the following trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline, and you could lose all or part of your investment.
 
Our business and financial performance depend on the level of activity in the natural gas and oil industries.
 
Our operations are materially dependent upon the levels of activity in natural gas and oil exploration, development and production. These activity levels are affected by both short-term and long-term trends in natural gas and oil prices. In recent years, natural gas and oil prices and, therefore, the level of exploration, development and production activity, have experienced significant fluctuations. Worldwide economic, political and military events, including war, terrorist activity, events in the Middle East and initiatives by the Organization of Petroleum Exporting Countries, have contributed, and are likely to continue to contribute, to price volatility. A prolonged reduction in natural gas and oil prices would depress the level of natural gas and oil exploration, development, production and well completions activity and result in a corresponding decline in the demand for our products. Such a decline could have a material adverse effect on our results of operations and financial condition.
 
Our business and financial performance could suffer if new processes are developed to replace hydraulic fracturing.
 
Substantially all of our products are proppants used in the completion and re-completion of natural gas and oil wells through the process of hydraulic fracturing. The development of new processes for the completion of natural gas and oil wells leading to a reduction in or discontinuation of the use of the hydraulic fracturing process could cause a decline in demand for our products and could have a material adverse effect on our results of operations and financial condition.
 
We may be adversely affected by decreased demand for ceramic proppant or the development by our competitors of effective alternative proppants.
 
Ceramic proppant is a premium product capable of withstanding higher pressure and providing more highly conductive fractures than mined sand, which is the most commonly used proppant type. Although we believe that the use of ceramic proppant generates higher production rates and more favorable production economics than mined sand, a significant shift in demand from ceramic proppant to mined sand could have a material adverse effect on our results of operations and financial condition. The development and use of effective alternative proppant could also cause a decline in demand for our products, and could have a material adverse effect on our results of operations and financial condition.
 
We operate in a competitive market.
 
We compete with at least two other principal suppliers of ceramic proppant, as well as with suppliers of sand and resin-coated sand for use as proppant, in the hydraulic fracturing of natural gas and oil wells. The proppant market is highly competitive and no one supplier is dominant.
 
We rely upon, and receive a significant percentage of our revenues from, a limited number of key customers.
 
During 2005, our largest customers were, in alphabetical order, BJ Services Company, Halliburton Energy Services, Inc. and Schlumberger Limited, the three largest participants in the worldwide petroleum pressure pumping industry. Although the end users of our products are numerous operators of natural gas and oil wells that


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hire the pressure pumping service companies to hydraulically fracture wells, these three customers accounted collectively for approximately 65% of our 2005 revenues. We generally supply our domestic pumping service customers with products on a just-in-time basis, with transactions governed by individual purchase orders. Continuing sales of product depend on our direct customers and the end user well operators being satisfied with both product quality and delivery performance. Although we believe our relations with our customers and the major well operators are satisfactory, a material decline in the level of sales to any one of our major customers due to unsatisfactory product performance, delivery delays or any other reason could have a material adverse effect on our results of operations and financial condition.
 
We rely on certain patents.
 
We own four United States patents and one Argentinean patent. These patents generally cover the manufacture and use of our products. The U.S. patents expire at various times in the years 2006 through 2019, with two key product patents expiring in 2006 and one key patent expiring in 2009. We believe that these patents have been and will continue to be important in enabling us to compete in the market to supply proppant to the natural gas and oil industry. There can be no assurance that our patents will not be challenged or circumvented by competitors in the future or will provide us with any competitive advantage, or that other companies will not be able to market functionally similar products without violating our patent rights. In addition, if our patents are challenged, there can be no assurance that they will be upheld. The entry of additional competitors into the market to supply ceramic proppant following expiration of our U.S. patent rights could have a material adverse effect on our results of operations and financial condition.
 
We intend to enforce and have in the past vigorously enforced our patents. We are involved from time to time in litigation to determine the enforceability, scope and validity of our patent rights. For information about litigation in which the Company is currently involved, see “Item 3. Legal Proceedings.” Any such litigation could result in substantial cost to us and diversion of effort by our management and technical personnel.
 
Significant increases in fuel prices for any extended periods of time will increase our operating expenses.
 
The price and supply of natural gas is unpredictable, and can fluctuate significantly based on international political and economic circumstances, as well as other events outside our control, such as changes in supply and demand due to weather conditions, actions by OPEC and other oil and gas producers, regional production patterns and environmental concerns. Natural gas is a significant component of our direct manufacturing costs and price escalations will likely increase our operating expenses and can have a negative impact on income from operations and cash flows. We operate in a competitive marketplace and may not be able to pass through all of the increased costs that could result from an increase in the cost of natural gas.
 
We are exposed to increased costs associated with complying with increasing and new regulation of corporate governance and disclosure standards
 
We have expended significant resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including under the Sarbanes-Oxley Act of 2002, new SEC regulations and New York Stock Exchange rules. Our compliance effort has resulted in increased expenses and these expenses are expected to continue.
 
Environmental compliance costs and liabilities could reduce our earnings and cash available for operations.
 
We are subject to increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges and waste management. We incur, and expect to continue to incur, capital and operating costs to comply with environmental laws and regulations. The technical requirements of environmental laws and regulations are becoming increasingly expensive, complex and stringent. These laws may provide for “strict liability” for damages to natural resources or threats to public health and safety. Strict liability can render a party liable for environmental damage without regard to negligence or fault on the part of


10

 

the party. Some environmental laws provide for joint and several strict liability for remediation of spills and releases of hazardous substances.
 
We use some hazardous substances and generate certain industrial wastes in our operations. In addition, many of our current and former properties are or have been used for industrial purposes. Accordingly, we could become subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances. In addition, stricter enforcement of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could reduce our earnings and our cash available for operations.
 
Our international operations subject us to risks inherent in doing business on an international level that could adversely impact our results of operations.
 
International revenues accounted for approximately 40%, 47% and 36% of our total revenues in 2005, 2004 and 2003. We cannot assure you that we will be successful in overcoming the risks that relate to or arise from operating in international markets. Risks inherent in doing business on an international level include, among others, the following:
 
  •  economic and political instability (including as a result of the threat or occurrence of armed international conflict or terrorist attacks);
 
  •  changes in regulatory requirements, tariffs, customs, duties and other trade barriers;
 
  •  transportation delays;
 
  •  power supply shortages and shutdowns;
 
  •  difficulties in staffing and managing foreign operations and other labor problems;
 
  •  currency convertibility and repatriation;
 
  •  taxation of our earnings and the earnings of our personnel;
 
  •  potential expropriation of assets by foreign governments; and
 
  •  other risks relating to the administration of or changes in, or new interpretations of, the laws, regulations and policies of the jurisdictions in which we conduct our business.
 
In particular, we are subject to risks associated with our production facilities in Luoyang, China, and Kopeysk, Russian Federation. The legal systems in both China and Russia are still developing and are subject to change. Accordingly, our operations and orders for products in both countries could be adversely impacted by changes to or interpretation of each country’s law. Further, if manufacturing in the region is disrupted, our overall capacity could be significantly reduced and sales and/or profitability could be negatively impacted.
 
The market price of our common stock will fluctuate, and could fluctuate significantly.
 
The market price of the common stock will fluctuate, and could fluctuate significantly, in response to various factors and events, including the following:
 
  •  the liquidity of the market for our common stock;
 
  •  differences between our actual financial or operating results and those expected by investors and analysts;
 
  •  changes in analysts’ recommendations or projections;
 
  •  new statutes or regulations or changes in interpretations of existing statutes and regulations affecting our business;


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  •  changes in general economic or market conditions; and
 
  •  broad market fluctuations.
 
Our actual results could differ materially from results anticipated in forward-looking statements we make.
 
Some of the statements included or incorporated by reference in this Form 10-K are forward-looking statements. These forward-looking statements include statements relating to trends in the natural gas and oil industries, the demand for ceramic proppant and our performance in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” sections of this Form 10-K. In addition, we have made and may continue to make forward-looking statements in other filings with the SEC, and in written material, press releases and oral statements issued by us or on our behalf. Forward-looking statements include statements regarding the intent, belief or current expectations of the Company or its officers. Our actual results could differ materially from those anticipated in these forward-looking statements. (See “Business — Forward-Looking Information.”)
 
Item 1B.  Unresolved Staff Comments
 
Not applicable.
 
Item 2.   Properties
 
The Company maintains its corporate headquarters (approximately 8,000 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 and Toomsboro, Georgia, facilities through 2016, at which time title will be conveyed to the Company. The Company owns the buildings and production equipment at its facility in Luoyang, China, and has been granted use of the land on which the facility is located through 2051 under the terms of a land use agreement with the People’s Republic of China. The Company maintains a sales office in Houston, Texas (approximately 2,100 square feet of leased office space).
 
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 facilities in McIntyre and Toomsboro, Georgia, include real property, plant and equipment that are leased by the Company from the Development Authority of Wilkinson County. The term of the lease, which covers both locations, commenced on September 1, 1997, and terminates on December 1, 2016. Under the terms of the lease, as amended in 2003, the Company is responsible for all costs incurred in connection with the premises, including costs of construction of the plant and equipment. As an inducement to locate the facility in Wilkinson County, Georgia, the Company received certain ad-valorem property tax incentives. The lease and a related memorandum of understanding define a negotiated value of the Company’s leasehold interest during the term of the lease. The lease also calls for annual payments of additional rent to the Development Authority of Wilkinson County. The total additional rent payments are immaterial in relation to the cost of the facility borne by the Company. 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 plus payment of any additional rent due to the Development Authority of Wilkinson County through the remaining lease term.
 
The facility in McIntyre, Georgia, is located on approximately 36 acres of real property and consists of various production and support buildings (approximately 160,600 square feet), a laboratory building (approximately


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3,000 square feet), a warehouse building (approximately 29,000 square feet) and an administrative building (approximately 3,500 square feet).
 
The facility in Toomsboro, Georgia, is located on approximately 13 acres of an approximately 786-acre tract of property leased by the Company. The facility consists of various production and support buildings (approximately 107,000 square feet), two laboratory buildings (approximately 1,300 square feet), and an administrative building (approximately 5,600 square feet).
 
The facility in Luoyang, China, is located on approximately 11 acres and consists of various production and support buildings (approximately 106,000 square feet), a laboratory (approximately 6,000 square feet), and two administrative buildings (each of which is approximately 6,000 square feet).
 
The facility under construction in Kopeysk, Russia, is located on approximately 60 acres and will consist of various production and support buildings (approximately 98,000 square feet) and an administrative building (approximately 5,000 square feet).
 
The Company’s customer service and distribution operations are located at the New Iberia facility, while its quality control, testing and development functions operate at the New Iberia, Eufaula and McIntyre facilities. The Company owns distribution facilities in San Antonio, Texas; Rock Springs, Wyoming; and Edmonton and Grande Prairie, Alberta, Canada.
 
During 2002 and 2003, the Company completed the acquisition of approximately 1,500 acres of land and leasehold interests in Wilkinson County, Georgia, near its plants in McIntyre and Toomsboro, Georgia. The land contains approximately 12 million tons of raw material for use in the production of the Company’s lightweight ceramic proppants. The Company has contracted with a third party to mine and haul the reserves and bear the responsibility for subsequent reclamation of the mined areas.
 
Pinnacle leases its corporate headquarters in San Francisco, California (approximately 6,800 square feet), and maintains leased offices totaling approximately 27,000 square feet in Houston, Texas; Centennial, Colorado; Delft, The Netherlands; and Calgary, Alberta, Canada. Pinnacle also owns its field office (approximately 2,800 square feet) in Bakersfield, California.
 
Item 3.   Legal Proceedings
 
The Company and China Ceramic Proppants Ltd (“China Ceramic”) are currently involved in litigation in Canadian federal district court to determine if China Ceramic’s distribution of intermediate strength product infringed a patent owned by the Company during the term of that patent. The Company does not believe that this proceeding will have a material effect on its business or its results of operations.
 
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 effect on its business or its results of 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 2005.
 
Executive Officers of the Registrant
 
Jesse P. Orsini (age 65) was elected on December 2, 2005, by the Company’s Board of Directors to serve as President and Chief Executive Officer and a Director of the Company. Mr. Orsini previously served as President and Chief Executive Officer of the Company from 1978 to 2001 and as a Director of the Company from 1987 to 2003. Mr. Orsini also serves as a Director to Unifrax Corporation (a maker of high temperature insulation products).
 
Paul G. Vitek (age 47) has been the Senior Vice President of Finance and Administration and Chief Financial Officer 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.


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Mark L. Edmunds (age 50) has been the Vice President, Operations since April 2002. From 2000 until joining the Company, Mr. Edmunds served as Business Unit Manager and Plant Manager for FMC Corporation. Prior to 2000, Mr. Edmunds served Union Carbide Corporation and The Dow Chemical Company in a variety of management positions including Director of Operations, Director of Internal Consulting and Manufacturing Operations Manager.
 
Christopher A. Wright (age 41) has been a Vice President of the Company since May 2002. Mr. Wright has been President of Pinnacle Technologies, Inc., a provider of fracture diagnostic products and services, and subsidiary of the Company, since its founding in 1992.
 
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 Stockholder 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 15, 2006, was 13,611.
 
High and low stock prices and dividends for the last two fiscal years (giving effect to the Company’s three-for-two stock split effective August 19, 2005) were:
 
                                                 
    2005     2004  
                Cash
 		                Cash
 		 
    Sales Price     Dividends
 		    Sales Price     Dividends
 		 
Quarter Ended
  High     Low     Declared     High     Low     Declared  
 
March 31
  $ 50.20     $ 40.74     $ 0.08     $ 43.72     $ 32.89     $ 0.07  
June 30
    52.40       42.40       0.08       48.76       40.22       0.07  
September 30
    67.99       51.91       0.10       48.33       42.27       0.08  
December 31
    66.43       51.45       0.10       51.49       44.79       0.08  
 
The Company currently expects to continue its policy of paying quarterly cash dividends, although there can be no assurance as to future dividends because they depend on future earnings, capital requirements and financial condition.
 
Securities Authorized for Issuance Under Equity Compensation Plans
 
The remainder of the information required by this Item is incorporated by reference to the Company’s Proxy Statement.


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Item 6.   Selected Financial Data
 
The following selected financial data are derived from the audited Consolidated Financial Statements of the Company. The data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.
 
                                         
    Years Ended December 31,  
    2005     2004     2003     2002     2001  
    ($ in thousands, except per share data)  
 
Statement of Income Data:
                                       
Revenues
  $ 252,673     $ 223,054     $ 169,936     $ 126,308     $ 137,226  
Cost of sales
    153,941       131,648       103,769       79,425       82,919  
                                         
Gross profit
    98,732       91,406       66,167       46,883       54,307  
Selling, general and administrative expenses (1)
    28,432       26,008       19,153       16,203       14,732  
                                         
Operating profit
    70,300       65,398       47,014       30,680       39,575  
Other, net
    1,783       824       73       563       1,106  
                                         
Income before income taxes
    72,083       66,222       47,087       31,243       40,681  
Income taxes
    25,463       24,549       17,518       11,529       14,483  
                                         
Net income
  $ 46,620     $ 41,673     $ 29,569     $ 19,714     $ 26,198  
                                         
Earnings per share
                                       
Basic
  $ 1.94     $ 1.75     $ 1.27     $ 0.86     $ 1.17  
                                         
Diluted
  $ 1.93     $ 1.73     $ 1.26     $ 0.85     $ 1.16  
                                         
 
                                         
    December 31,  
    2005     2004     2003     2002     2001  
    ($ in thousands, except per share data)  
 
Balance Sheet Data:
                                       
Current assets
  $ 148,287     $ 146,282     $ 92,709     $ 64,867     $ 76,502  
Current liabilities excluding bank borrowings
    36,309       29,192       16,432       17,940       11,127  
Bank borrowings-current
    —       —       —       —       —  
Property, plant and equipment, net
    179,500       125,385       116,664       111,797       82,527  
Total assets
    355,796       297,517       235,124       199,610       159,029  
Total shareholders’ equity
    293,366       244,367       200,139       168,585       136,942  
Cash dividends per share
  $ 0.36     $ 0.29     $ 0.25     $ 0.24     $ 0.23  
 
 
(1) Selling, general and administrative (SG&A) expenses for 2005, 2004, 2003, 2002 and 2001 include costs of start-up activities of $1,092,000, none, $80,000, $1,099,000 and $35,000, respectively. Start-up costs for 2005 are related primarily to the new production facility in Toomsboro, Georgia. Start-up costs for 2003 are related to expansion of the McIntyre and New Iberia facilities and initial operation of the new China facility. Start-up costs for 2002 and 2001 are related to the new production facility in China, including organizational and administrative costs associated with plant construction plus labor, materials and utilities expended to bring installed equipment to operating condition. SG&A expenses in 2002 also include the accrual of a $993,000 reserve related to a legal judgment against the Company. SG&A expenses in 2005, 2004 and 2003 also include losses of $95,000, $1,144,000 and $717,000, respectively, associated with the disposal of certain equipment and impairment of certain Pinnacle software.


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Executive Level Overview
 
CARBO Ceramics Inc. generates revenue primarily through the sale of products and services to the oil and gas industry. The Company conducts its business within two operating segments: 1) Proppant and 2) Fracture and Reservoir Diagnostics. The Company’s principal business, the Proppant segment, consists of manufacturing and selling ceramic proppant for use in the hydraulic fracturing of oil and natural gas wells. Through its Fracture and Reservoir Diagnostics segment, the Company provides fracture mapping and reservoir diagnostic services, sells fracture simulation software and provides engineering services to oil and gas companies worldwide. These services and software are provided through the Company’s wholly-owned subsidiary Pinnacle Technologies, Inc.
 
The Company’s products and services help oil and gas producers increase production and recovery rates from their wells, thereby lowering overall reservoir development costs. As a result, the Company’s business is dependent to a large extent on the level of drilling activity in the oil and gas industry worldwide. However, the Company has increased its revenues and income over an extended period and across various industry business cycles by increasing its share of the worldwide market for all types of proppant. While the Company’s ceramic proppants are more expensive than alternative non-ceramic proppants, the Company has been able to demonstrate the cost-effectiveness of its products to numerous operators of oil and gas wells through increased technical marketing activity. The Company believes its future prospects will benefit from both an expected increase in drilling activity worldwide and the desire of industry participants to improve production results and lower their overall development costs.
 
In recent years, the Company has expanded its operations outside the United States. International revenues represented 40%, 47% and 36% of total revenues in 2005, 2004 and 2003, respectively. In 2002 the Company constructed its first manufacturing facility located outside the United States in the city of Luoyang, China and completed a second production line in 2004 that doubled the capacity of that facility. In 2004, the Company also opened a sales office in Moscow, Russian Federation, and established distribution operations in the country. In 2005, the Company broke ground on a new manufacturing facility in the city of Kopeysk, Russian Federation. The Company believes international operations will continue to represent an important role in its future growth.
 
Revenue growth in recent years has been driven largely by increases in ceramic proppant sales volume, but fracture diagnostic services are becoming a more important part of revenue growth. Because the Company’s ceramic proppant products compete in part against lower-cost alternatives, the Company expects more of its future revenue growth to be derived from an increase in sales volume than from an increase in the selling price of its products. As a result, the Company initiated construction of significant new manufacturing capacity in 2004 to meet anticipated future demand. The Company began producing product from its new manufacturing facility in Toomsboro, Georgia in January 2006. That plant is designed to have production capacity of 250 million pounds per year when fully operational, adding 33% more capacity to the Company’s total manufacturing capacity. The facility is expected to produce between 150 million and 200 million pounds in 2006. Construction of the manufacturing plant in Russia is expected to be completed during the fourth quarter of 2006. That plant is designed to have initial production capacity of 100 million pounds per year.
 
The Company’s gross profit margins for its proppant business are principally impacted by manufacturing costs and the Company’s production levels as a percentage of its capacity. While most direct production expenses have been relatively stable or predictable over time, natural gas, which is used in the production process by the Company’s domestic manufacturing facilities, has varied from approximately 12% to 39% of total monthly direct production expense over the last three years due to the price volatility of this fuel source. During 2005, market prices of natural gas increased sharply, peaking during the fourth quarter of the year. While the Company had contracted for most of its domestic natural gas requirements through October 2005, beginning in November, the Company began paying current market rates for all of its domestic requirements. As a result, the average price of natural gas delivered to the Company’s U.S. manufacturing facilities increased 65% during the fourth quarter of 2005 compared to the average price during the first three quarters of the year. In an effort to mitigate volatility in the cost of natural gas purchases and reduce exposure to short term spikes in the price of this commodity, the Company resumed purchasing portions of its future natural gas requirements at various times during the year in late 2005. Despite the efforts to reduce exposure to changes in natural gas prices, it is possible that, given the significant


16

 

portion of manufacturing costs represented by this fuel, changes in net income may not fully reflect changes in revenue.
 
Management believes the addition of new manufacturing capacity is critical to the Company’s ability to continue its long-term growth in sales volume and revenue for ceramic proppant. Since 1997, the Company has more than doubled its production capacity and, by the end of 2005, had substantially completed construction at a second manufacturing plant in Toomsboro, Georgia. This facility began production in January 2006 and is expected to increase the Company’s total manufacturing capacity by 250 million pounds per year when fully operational. In 2006, the new plant is expected to produce between 150 and 200 million pounds of proppant. While the Company has operated near or at full capacity for much of the previous ten years, the addition of significant new capacity in the future could adversely impact gross profit and operating margins if the timing of this new capacity does not match increases in demand for the Company’s products.
 
As the Company’s sales volume has increased, and as the Company has expanded in international markets, there has been an increase in activities and expenses related to marketing, distribution, research and development, and finance and administration. As a result, selling, general and administrative expenses have increased in recent years. In the future, the Company expects to continue to actively pursue new business opportunities by:
 
  •  increasing marketing activities,
 
  •  improving and expanding its distribution capabilities,
 
  •  focusing on new product development, and
 
  •  increasing international activities.
 
The Company expects that these activities will generate increased revenue and that selling, general and administrative expenses as a percentage of revenue will not change significantly.
 
General Business Conditions
 
The Company’s proppant business is significantly impacted by the number of natural gas wells drilled in North America, where the majority of wells are hydraulically fractured. 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 and hydraulic fracturing activity. Furthermore, because the decision to use ceramic proppant is based on comparing the cost of ceramic proppant to the future value derived from increased production rates, the Company’s business is influenced by the current and expected prices of natural gas and oil.
 
Natural gas prices and drilling activity in the North American market have steadily increased over the past three years. In 2003, activity levels in North America rebounded from a prior year decline and the Company established sales volume records in a number of regions including the U.S. Rocky Mountains, Canada and East Texas. In addition, the Company experienced significant sales growth in overseas markets due to an increase in drilling and fracturing activity in Europe and Asia. Throughout 2004, worldwide oil and natural gas prices and related drilling activity levels remained very strong. As a result, the Company experienced record demand for its products worldwide. In 2005, the average natural gas rig count increased by 15% in the U.S. and 24% in Canada compared to 2004, and the Company again established new sales volume records in a number of regions in North America. While overseas drilling activity remained strong in 2005, and the Company saw an increase in sales volume in many regions outside of North America, the Company lost ground in the Russian market compared to 2004 due to an increase in the availability of locally produced Russian ceramic proppant. The Company is addressing this situation through construction of a manufacturing facility in Russia.
 
The Company’s fracture and reservoir diagnostics business is also impacted by the level of global drilling and hydraulic fracturing activity. In 2005 this business benefited from both an increase in the level of global activity and increased acceptance and utilization of the fracture mapping services in the Barnett Shale formation in North Central Texas and other unconventional natural gas formations. The Company believes that the demand for the services provided by its fracture and reservoir diagnostic business will increase as oil and gas production companies develop increasingly complex, unconventional reservoirs in North America.


17

 

Critical Accounting Policies
 
The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions (see Note 1 to the Consolidated Financial Statements). The Company believes that, of its significant accounting policies, the following may involve a higher degree of judgment and complexity.
 
Revenue is recognized when title passes to the customer (generally upon delivery of products) or at the time services are performed. The Company generates a significant portion of its revenues and corresponding accounts receivable from sales to the petroleum pressure pumping industry. In addition, the Company generates a significant portion of its revenues and corresponding accounts receivable from sales to three major customers, all of which are in the petroleum pressure pumping industry. As of December 31, 2005, approximately 55% of the balance in accounts receivable was attributable to those three customers. The Company records an allowance for doubtful accounts based on a percentage of sales and periodically evaluates the allowance based on a review of trade accounts receivable. Trade accounts receivable are periodically reviewed for collectibility based on customers’ past credit history and current financial condition, and the allowance is adjusted, if necessary. If a prolonged economic downturn in the petroleum pressure pumping industry were to occur or, for some other reason, any of the Company’s primary customers were to experience significant adverse conditions, the Company’s estimates of the recoverability of accounts receivable could be reduced by a material amount and the allowance for doubtful accounts could be increased by material amounts. At December 31, 2005, the allowance for doubtful accounts totaled $1.3 million.
 
Inventory is stated at the lower of cost or market. Obsolete or unmarketable inventory historically has been insignificant and generally written off when identified. Assessing the ultimate realization of inventories requires judgments about future demand and market conditions, and management believes that current inventories are properly valued at cost. Accordingly, no reserve to write-down inventories has been recorded. If actual market conditions are less favorable than those projected by management, inventory write-downs may be required.
 
Income taxes are provided for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”. This standard takes into account the differences between financial statement treatment and tax treatment of certain transactions. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates is recognized as income or expense in the period that includes the enactment date. This calculation requires the Company to make certain estimates about its future operations. Changes in state, federal and foreign tax laws, as well as changes in the Company’s financial condition, could affect these estimates.
 
Long-lived assets, which include property, plant and equipment, goodwill and other intangibles, and other assets comprise a significant amount of the Company’s total assets. The Company makes judgments and estimates in conjunction with the carrying value of these assets, including amounts to be capitalized, depreciation and amortization methods and useful lives. Additionally, the carrying values of these assets are periodically reviewed for impairment or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. An impairment loss is recorded in the period in which it is determined that the carrying amount is not recoverable. This requires the Company to make long-term forecasts of its future revenues and costs related to the assets subject to review. These forecasts require assumptions about demand for the Company’s products and services, future market conditions and technological developments. Significant and unanticipated changes to these assumptions could require a provision for impairment in a future period.
 
Results of Operations
 
Net Income
 
                                         
          Percent
 		          Percent
 		       
    2005     Change     2004     Change     2003  
    ($ in thousands)  
 
Net Income
  $ 46,620       12 %   $ 41,673       41 %   $ 29,569  


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For the year ended December 31, 2005, net income of $46.6 million established a new record and represented a 12% increase compared to the previous record of $41.7 million for the year ended December 31, 2004. The increase in net income was driven primarily by the record level of revenues generated in 2005. The increase in revenues was due to increases in both sales volume and the average selling price of ceramic proppant and an increase in revenues from fracture and reservoir diagnostics. The revenue gain was partially offset by the impact of higher costs for natural gas and freight and an increase in selling, general and administrative expenses. The Company’s ability to increase sales volume of proppant in 2005 was limited by manufacturing capacity and inventory levels.
 
For the year ended December 31, 2004, the Company reported net income of $41.7 million, 41% ahead of the year ended December 31, 2003. Net income increased mainly due to an increase in revenues combined with cost efficiencies gained from operating the Company’s proppant manufacturing facilities at higher throughput rates compared to 2003. The higher level of revenues generated in 2004 resulted from a substantial increase in sales volume and a slight increase in the average selling price of proppant along with increased revenues from fracture and reservoir diagnostics. The improvements in revenue and operating efficiency were partially offset by the higher cost of natural gas and higher selling, general and administrative expenses compared to 2003, and a loss on the impairment or disposal of assets in 2004 resulting primarily from the replacement of manufacturing equipment in the Company’s proppant operations.
 
Individual components of financial results by operating segment are discussed below.
 
Revenues
 
                                         
          Percent
 		          Percent
 		       
    2005     Change     2004     Change     2003  
    ($ in thousands)  
 
Consolidated revenues
  $ 252,673       13 %   $ 223,054       31 %   $ 169,936  
Revenues by operating segment:
                                       
Proppant
  $ 225,751       12 %   $ 201,039       29 %   $ 155,760  
Fracture and Reservoir Diagnostics
  $ 26,922       22 %   $ 22,015       55 %   $ 14,176  
 
Proppant segment revenues of $225.8 million for 2005 exceeded 2004 revenues of $201.0 million by 12% due to 6% increases in both sales volume and the average selling price of proppant. Worldwide proppant sales volume totaled 771.8 million pounds for 2005 compared to 725.7 million pounds for 2004. Demand for proppant was strong throughout the year, but sales volume was consistently limited by the Company’s production capacity and inventory levels. Increased natural gas drilling activity in North America spurred demand for proppant that led to a 24% increase in North American sales volume compared to 2004 and resulted in new sales volume records in the U.S., Canada and Mexico. U.S. sales volume increased 18% versus the previous year while sales to Canada and Mexico increased 37% and 81%, respectively. Sales increases in North America were partially offset by a 34% decline in overseas sales volume compared to the record level of overseas sales set in 2004. The primary reason for the overseas sales decline was a slowdown in Russian sales due to an increase in the availability of locally produced proppant in that region, the pricing of which excludes the customs duties, tariffs and transportation expenses associated with imported products. The Company is addressing this situation through the construction of a manufacturing facility in Kopeysk, Russia, which is expected to be completed in the fourth quarter of 2006. Excluding sales to Russia, overseas sales volume increased 2% compared to 2004; however, Russian sales still led all overseas markets in 2005. International sales, which include overseas markets and the North American markets of Canada and Mexico, accounted for 40% of sales volume in 2005 compared to 46% in 2004. The average selling price of proppant was $0.293 per pound in 2005 compared to $0.277 in 2004. The higher average selling price was due to an increase in list prices for the Company’s products and energy surcharges that went into effect during 2005.
 
Fracture and Reservoir Diagnostics segment revenues of $26.9 million for 2005 increased 22% compared to $22.0 million for 2004. The increase in revenues from the prior year was primarily due to a 25% increase in mapping services related to gas well completions in North America. Fracture and Reservoir Diagnostics revenue benefited from an increase in global drilling and fracturing activity in 2005 as well as increased acceptance and utilization of the Company’s fracture mapping services in the Barnett Shale formation in North Central Texas and other unconventional natural gas formations.


19

 

Proppant segment revenues of $201.0 million for 2004 were 29% higher than 2003 revenues of $155.8 million. Proppant sales volume increased 26% compared to 2003, driven by a 65% increase in international sales. Domestic shipments remained strong in 2004 with a 4% increase over 2003, but were limited by manufacturing capacity and inventory levels. Worldwide proppant sales volume of 725.7 million pounds in 2004 surpassed 2003 volume of 577.6 million pounds. International sales growth for 2004 included increases of 77% in overseas shipments, 45% in Canada and 50% in Mexico. The increase in overseas sales in 2004 was mostly driven by increased demand for the Company’s products in Russia. Sales in overseas markets in 2004 were aided by the mid-year addition of a second production line at the Company’s Luoyang, China plant. International shipments accounted for 46% of sales volume in 2004 compared to 35% in 2003. The 2004 average selling price of $0.277 per pound of ceramic proppant increased 3% compared to $0.270 in 2003. The higher average unit price was due to the impact of a price increase in July 2004 and a shift in the mix of products sold toward higher-priced proppants.
 
Fracture and Reservoir Diagnostics segment revenues of $22.0 million for 2004 increased 55% compared to $14.2 million for 2003. The increase in revenues from the prior year was primarily due to a 60% increase in mapping services in North America and a 57% increase in international engineering services.
 
Gross Profit
 
                                         
          Percent
 		          Percent
 		       
    2005     Change     2004     Change     2003  
    ($ in thousands)  
 
Consolidated gross profit
  $ 98,732       8 %   $ 91,406       38 %   $ 66,167  
Consolidated gross profit %
    39 %             41 %             39 %
Gross profit by operating segment:
                                       
Proppant
  $ 88,488       9 %   $ 81,548       36 %   $ 60,039  
Proppant %
    39 %             41 %             39 %
Fracture and Reservoir Diagnostics
  $ 10,244       4 %   $ 9,858       61 %   $ 6,128  
Fracture and Reservoir Diagnostics %
    38 %             45 %             43 %
 
The Company’s Proppant segment cost of sales consists of manufacturing costs, packaging and transportation expenses associated with the delivery of the Company’s products to its customers and handling costs related to maintaining finished goods inventory and operating the Company’s remote stocking facilities. Variable manufacturing costs include raw materials, labor, utilities and repair and maintenance supplies. Fixed manufacturing costs include depreciation, property taxes on production facilities, insurance and factory overhead. Cost of sales for the Company’s Fracture and Reservoir Diagnostics segment consists of both variable and fixed components. Variable costs include labor costs, subcontracting, travel and other variable expenses associated with the delivery of the mapping and reservoir monitoring services. Fixed costs include the depreciation and amortization expenses relating to revenue producing capital equipment. For a discussion regarding the reclassification in 2004 and 2003 of depreciation and amortization for certain Fracture and Reservoir Diagnostics segment assets from selling, general and administrative expenses to cost of sales, see Note 1 to the Notes to Consolidated Financial Statements.
 
Proppant segment gross profit of $88.5 million for 2005 increased by 9% compared to gross profit of $81.5 million for 2004, primarily due to the increase in sales volume. Gross profit margin declined from 41% in 2004 to 39% in 2005. The decline in gross profit margin was primarily the result of increased energy costs, including the cost of natural gas consumed in manufacturing proppant and fuel surcharges for raw material and finished product delivery. While much of these increased costs were passed on to customers in the form of an increased selling price for ceramic proppants, passing these costs through without a markup results in a lower gross profit percentage. In the fourth quarter of 2005, forward contracts covering the purchase of natural gas requirements for the Company’s domestic manufacturing facilities expired and the Company began paying current market rates for all of its domestic gas. This resulted in a 65% increase in the delivered price paid by the Company for its gas requirements in the fourth quarter of 2005 compared to the previous three quarters. The delivered cost of natural gas used in the Company’s domestic manufacturing facilities for the full year 2005 increased 27% compared the full year 2004. For most of 2005, the Company experienced an increase in the cost of shipping its product due to rising fuel prices and an increase in volume of expedited sales to meet U.S. customer demand. The Company’s conventional distribution method in North America is to ship product by rail from manufacturing facilities to


20

 

one of its eight North American stocking locations, then ship by truck from stocking location to customer. However, following a draw down of inventory levels during record sales volume quarters in the fourth quarter of 2004 and the first quarter of 2005, strong demand for the remainder of 2005 regularly required the Company to bypass its conventional distribution method and expedite shipments by more expensive truck hauls from manufacturing facilities directly to customers.
 
Fracture and Reservoir Diagnostics segment gross profit of $10.2 million for 2005 increased by 4% compared to gross profit of $9.9 million for 2004 primarily due to the increase in revenue for this segment. Gross profit margin for this segment declined from 45% in 2004 to 38% in 2005 due to increased labor and equipment costs in preparation for anticipated geographic and service offering growth and increased subcontractor costs due to a change in the mix of service offerings.
 
Proppant segment gross profit of $81.5 million for 2004 was 36% higher than 2003 gross profit of $60.0 million due to a significant increase in sales volume. Gross profit margin improved to 41% in 2004 compared to 39% in 2003. Improvement in gross profit margin was primarily due to a slight increase in the average sales price of proppant and higher throughput at the Company’s manufacturing facilities. Manufacturing facilities operated at 99% of capacity in 2004 compared to 90% of capacity in 2003. The factors contributing to improvement in the gross profit margin were partially offset by an increase in proppant manufacturing cost caused by higher fuel prices.
 
Fracture and Reservoir Diagnostics segment gross profit of $9.9 million for 2004 was 61% higher than 2003 gross profit of $6.1 million. Gross profit margin improved to 45% in 2004 compared to 43% in 2003 due to higher utilization rates for equipment and personnel.
 
Selling, General & Administrative (SG&A) and Other Operating Expenses
 
                                         
          Percent
 		          Percent
 		       
    2005     Change     2004     Change     2003  
    ($ in thousands)  
 
Consolidated SG&A and other
  $ 28,432       9 %   $ 26,008       36 %   $ 19,153  
As a % of revenues
    11 %             12 %             11 %
SG&A and other by operating segment:
                                       
Proppant
  $ 20,922       7 %   $ 19,480       31 %   $ 14,850  
Proppant %
    9 %             10 %             10 %
Fracture and Reservoir Diagnostics
  $ 7,510       15 %   $ 6,528       52 %   $ 4,303  
Fracture and Reservoir Diagnostics %
    28 %             30 %             30 %
 
Proppant segment SG&A and other operating expenses of $20.9 million for 2005 increased by 7% compared to $19.5 million for 2004. The $1.4 million increase in expenses was primarily due to increases in SG&A expenses associated with the Company’s growth, including international expansion, and professional fees incurred to comply with accounting, internal control and other corporate governance requirements of the Sarbanes-Oxley Act of 2002, partially offset by reduced legal expense, and an increase in other operating expenses. Other operating expenses in 2005 included $1.1 million primarily related to start-up activities associated with the new manufacturing facility in Toomsboro, Georgia, compared to other operating expenses in 2004 of $0.9 million resulting primarily from a write-off of equipment replaced at the Company’s McIntyre, Georgia facility. As a percentage of revenue, SG&A and other operating expenses declined to 9% in 2005 compared to 10% in 2004.
 
Fracture and Reservoir Diagnostics segment SG&A and other operating expenses of $7.5 million for 2005 increased by 15% compared to $6.5 million for 2004. The $1.0 million increase in expenses was due to increased sales and marketing activity and increased technical development spending.
 
Proppant segment SG&A and other operating expenses of $19.5 million for 2004 increased by 31% compared to $14.9 million for 2003. The $4.6 million increase in expenses was due to increased sales and marketing activity; increased activity related to the Company’s global business development efforts; legal expenses related to patent activity, including litigation in defense of existing patents; increases in other administrative expenses associated with the Company’s growth; and an increase in other operating expenses. Other operating expenses totaled


21

 

$0.9 million in 2004, resulting primarily from a write-off of the remaining book value of equipment replaced at the Company’s McIntyre, Georgia, production facility.
 
Fracture and Reservoir Diagnostics segment SG&A and other operating expenses of $6.5 million for 2004 increased by 52% compared to $4.3 million for 2003. The $2.2 million increase in expenses was due to increased sales and marketing activity to support revenue growth, increased technical development spending and non-recurring expenses relating to impairment of a software asset and the creation of an allowance for doubtful accounts.
 
Income Tax Expense
 
                                         
          Percent
 		          Percent
 		       
    2005     Change     2004     Change     2003  
                ($ in thousands)        
 
Income Tax Expense
  $ 25,463       4 %   $ 24,549       40 %   $ 17,518  
Effective Income Tax Rate
    35.3 %             37.1 %             37.2 %
 
Income tax expense is not allocated between the two operating segments. Consolidated income tax expense of $25.5 million for the year ended December 31, 2005 increased 4% compared to the same period a year ago primarily due to the increase in taxable income resulting from the Company’s improved performance. The 2005 effective income tax rate of 35.3% of pretax income decreased from 37.1% in 2004 due to a new permanent deduction for domestic manufacturing activities enacted as part of the American Jobs Creation Act of 2004, an increase in the Company’s tax exempt interest income and a reduction in estimated state income taxes in the U.S. resulting from a decrease in the amount of income apportioned to the states in which the Company does business.
 
Consolidated income tax expense of $24.5 million for the year ended December 31, 2004 increased 40% over the year ended December 31, 2003 due to the increase in taxable income resulting from the Company’s improved performance. The 2004 effective income tax rate of 37.1% of pretax income decreased slightly from 37.2% in 2003 primarily due to an increase in tax exempt interest income.
 
Liquidity and Capital Resources
 
At December 31, 2005, the Company had cash and cash equivalents of $19.7 million and short-term investments of $42.0 million compared to cash and cash equivalents of $34.0 million and short-term investments of $46.1 million at December 31, 2004. The Company generated $52.7 million cash from operations and received $6.1 million proceeds from employee exercises of stock options and $4.1 million for net purchases and sales of short-term investments. Uses of cash included $67.8 million of capital spending, $8.8 million of cash dividends and $0.6 million investment in a joint venture. Major capital spending included $41.7 million on the new proppant manufacturing facility in Toomsboro, Georgia, $13.7 million on the new manufacturing facility in the Russian Federation and $2.2 million on microseismic equipment for use in providing fracture mapping and reservoir diagnostics services. For a discussion regarding the reclassification of auction rate securities from cash and cash equivalents to short-term investments at December 31, 2004, see Note 1 to the Notes to the Consolidated Financial Statements.
 
The Company believes that the relatively high prices for oil and natural gas in the current spot and futures markets will continue to spur drilling and fracturing activity worldwide. Consequently, the Company expects demand for its products to remain strong. The Company intends to continue operating all of its manufacturing facilities near full capacity for the remainder of the year. In the short term, the Company believes it will continue to be adversely impacted by the high price of natural gas. Natural gas is a large component of the Company’s manufacturing costs, accounting for more than 25% of direct manufacturing costs in U.S. manufacturing facilities and over 10% of the Company’s total cost of sales. The Company should see improvement in pricing during the first quarter of 2006 as it gets the full benefit of price increases announced in the fourth quarter of 2005. The increase in pricing should help counterbalance the impact of the high cost of natural gas.
 
Subject to its financial condition, the amount of funds generated from operations and the level of capital expenditures, the Company’s current intention is to continue to pay quarterly dividends to holders of its Common Stock. On July 19, 2005, the Board of Directors declared a three-for-two stock split of its Common Stock, which was effected via a stock dividend on August 19, 2005, to the stockholders of record at the close of business on


22

 

August 5, 2005. On January 17, 2006, the Company’s Board of Directors approved the payment of a quarterly cash dividend of $0.10 per share to shareholders of the Company’s Common Stock on January 31, 2006. The Company has total projected capital expenditures of approximately $50.0 million in 2006, including final spending on its manufacturing facility in Toomsboro, Georgia, spending to complete its manufacturing facility in the Russian Federation, expansion of distribution facilities and acquisition or construction of additional fracture mapping tools. However, if the Company decides to move forward with adding a second production line to the Toomsboro facility, capital expenditures in 2006 could increase by $25 million. The Russian plant, which is on schedule to be completed in the fourth quarter of 2006 at an expected total cost of $32.0 million, is designed to have an annual production capacity of 100 million pounds. The Company’s new plant in Toomsboro, Georgia was substantially complete at the end of 2005. That plant is designed to have initial annual production capacity of 250 million pounds and is expected to produce between 150 million pounds and 200 million pounds in 2006, with initial production available for sale in the first quarter of 2006.
 
The Company maintains an unsecured line of credit of $10.0 million. As of December 31, 2005, there was no outstanding debt under the credit agreement. The Company anticipates that cash on hand, 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 for the next 12 months. The Company also believes that it could acquire additional debt financing, if needed. Based on these assumptions, the Company believes that its fixed costs could be met even with a moderate decrease in demand for the Company’s products.
 
Off-Balance Sheet Arrangements
 
The Company had no off-balance sheet arrangements as of December 31, 2005.
 
Contractual Obligations
 
The following table summarizes the Company’s contractual obligations as of December 31, 2005:
 
                                         
    Payments Due in Period  
          Less Than
 		    1-3
 		    4-5
 		    More Than
 		 
    Total     1 Year     Years     Years     5 Years  
    ($ in thousands)  
 
Long-term debt
  $ —     $ —     $ —     $ —     $ —  
Capital lease obligations
    —       —       —       —       —  
Operating lease obligations:
                                       
— Primarily railroad equipment
    14,515       2,752       4,056       2,321       5,386  
Purchase obligations:
                                       
— Natural gas contracts
    21,177       20,455       722       —       —  
— Raw materials contracts
    16,020       7,920       8,100       —       —  
— Equipment purchases
    15,848       15,848       —       —       —  
— Other purchase obligations
    3,367       1,116       2,251       —       —  
Other long-term obligations
    —       —       —       —       —  
                                         
Total contractual obligations
  $ 70,927     $ 48,091     $ 15,129     $ 2,321     $ 5,386  
                                         
 
Operating lease obligations relate primarily to railroad equipment leases and include leases of other property, plant and equipment. See Note 4 and Note 12 to the Notes to the Consolidated Financial Statements.
 
The Company uses natural gas to power its domestic manufacturing plants. From time to time the Company enters into contracts to purchase a portion of the anticipated natural gas requirements. The contracts are at specified prices and are typically short-term in duration. As of December 31, 2005, the last contract was due to expire in February 2007.
 
The Company has entered into contracts to supply raw materials, primarily kaolin and bauxite, to each of its manufacturing plants. Each of the contracts is described in Note 12 to the Notes to the Consolidated Financial Statements. Four of the contracts do not require the Company to purchase minimum annual quantities, but do


23

 

require the purchase of minimum annual percentages, ranging from 70% to 100% of the respective plants’ requirements for the specified raw materials. One contract requires the Company to purchase a minimum annual quantity of material, which is included in the above table.
 
The Company committed to purchase $15.8 million in equipment related to constructing the manufacturing plant in the Russian Federation and adding a second line to the new manufacturing facility in Toomsboro, Georgia. In the event of cancellation, some of the commitments have cancellation clauses that would require the Company to pay expenses incurred by manufacturers to date and/or a penalty fee.
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
The Company’s major market risk exposure is to foreign currency fluctuations that could impact its investments in China and Russia. When necessary, the Company may enter into forward foreign exchange contracts to hedge the impact of foreign currency fluctuations. There were no such foreign exchange contracts outstanding at December 31, 2005.
 
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. There were no borrowings outstanding under this agreement at December 31, 2005. 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-3 through F-22 of this Report.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
Not applicable.
 
Item 9A.   Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
As of December 31, 2005, management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon and as of the date of that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
 
(b) Management’s Report on Internal Controls
 
For Management’s Report on Internal Control over Financial Reporting, see page F-1 of this Report.
 
(c) Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
 
For the Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting, see page F-2 of this Report.


24

 

(d) Changes in Internal Controls
 
There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2005, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
Item 9B.  Other Information
 
Not applicable.
 
PART III
 
Certain information required by Part III is omitted from this Report. The Company 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 executive officers under Item 401 of Regulation S-K is set forth in Part I of this Form 10-K. The other information required by this Item is incorporated by reference to the Company’s Proxy Statement.
 
Item 11.   Executive Compensation
 
The information required by this Item is incorporated by reference to the Company’s Proxy Statement.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management
 
The information required by this Item is incorporated by reference to the Company’s Proxy Statement.
 
Item 13.   Certain Relationships and Related Transactions
 
The information required by this Item is incorporated by reference to the Company’s Proxy Statement.
 
Item 14.   Principal Accounting Fees and Services
 
The information required by this Item is incorporated by reference to the Company’s Proxy Statement.


25

 

PART IV
 
Item 15.   Exhibits and Financial Statement Schedules
 
(a) Exhibits, Financial Statements and Financial Statement Schedules:
 
1. Consolidated Financial Statements
 
The Consolidated Financial Statements of CARBO Ceramics Inc. listed below are contained in pages F-3 through F-22 of this Report:
 
Report of Independent Registered Public Accounting Firm
 
Consolidated Balance Sheets at December 31, 2005, and 2004
 
Consolidated Statements of Income for each of the three years ended December 31, 2005, 2004 and 2003
 
Consolidated Statements of Shareholders’ Equity for each of the three years ended December 31, 2005, 2004 and 2003
 
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2005, 2004 and 2003
 
2. Consolidated Financial Statement Schedules
 
Schedule II — Consolidated Valuation and Qualifying Accounts is contained in page S-1 of this Report. All other schedules have been omitted since they are either not required or not applicable.
 
3. Exhibits
 
The exhibits listed on the accompanying Exhibit Index are filed as part of, or incorporated by reference into, this Report.


26

 

 
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, 2006
 
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

William C. Morris 		  Chairman of the Board   March 7, 2006
         
/s/  JESSE P. ORSINI

Jesse P. Orsini 		  President, Chief Executive Officer and Director (Principal Executive Officer)   March 7, 2006
         
/s/  PAUL G. VITEK

Paul G. Vitek 		  Sr. Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer) 		  March 7, 2006
         
/s/  CLAUDE E. COOKE, JR.

Claude E. Cooke, Jr. 		  Director   March 7, 2006
         
/s/  CHAD C. DEATON

Chad C. Deaton 		  Director   March 7, 2006


27

 

             
Signature
 
Title
 
Date
 
         
/s/  H.E. LENTZ, JR.

H.E. Lentz, Jr. 		  Director   March 7, 2006
         
/s/  JOHN J. MURPHY

John J. Murphy 		  Director   March 7, 2006
         
/s/  ROBERT S. RUBIN

Robert S. Rubin 		  Director   March 7, 2006

28

 

 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Management, including our Chief Executive Officer and our Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework. Based on its assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2005.
 
The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on management’s assessment of the Company’s internal control over financial reporting. That report is included herein.


F-1

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
 
The Board of Directors and Shareholders
CARBO Ceramics Inc.
 
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that CARBO Ceramics Inc. maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). CARBO Ceramics Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, management’s assessment that CARBO Ceramics Inc. maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, CARBO Ceramics Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CARBO Ceramics Inc. as of December 31, 2005, and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005, and our report dated March 6, 2006 expressed an unqualified opinion thereon.
 
ERNST & YOUNG LLP
 
New Orleans, Louisiana
March 6, 2006


F-2

 

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
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, 2005 and 2004, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of CARBO Ceramics Inc.’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 6, 2006, expressed an unqualified opinion thereon.
 
ERNST & YOUNG LLP
 
New Orleans, Louisiana
March 6, 2006


F-3

 

CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
 
                 
    December 31,  
    2005     2004  
    ($ in thousands)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 19,695     $ 33,990  
Short-term investments
    41,975       46,125  
Trade accounts receivable, net
    53,918       41,191  
Inventories:
               
Finished goods
    17,981       12,878  
Raw materials and supplies
    8,490       8,314  
                 
Total inventories
    26,471       21,192  
Prepaid expenses and other current assets
    2,433       1,232  
Deferred income taxes
    3,795       2,552  
                 
Total current assets
    148,287       146,282  
Property, plant and equipment:
               
Land and land improvements
    2,812       1,958  
Land-use and mineral rights
    5,271       5,248  
Buildings
    15,051       14,604  
Machinery and equipment
    154,785       145,043  
Construction in progress
    72,074       16,278  
                 
Total
    249,993       183,131  
Less accumulated depreciation
    70,493       57,746  
                 
Net property, plant and equipment
    179,500       125,385  
Goodwill
    21,840       21,840  
Intangible and other assets, net
    6,169       4,010  
                 
Total assets
  $ 355,796     $ 297,517  
                 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 11,277     $ 10,454  
Accrued payroll and benefits
    6,941       6,182  
Accrued freight
    1,356       1,378  
Accrued utilities
    3,389       2,065  
Accrued income taxes
    9,998       5,595  
Retainage related to construction in progress
    337       456  
Other accrued expenses
    3,011       3,062  
                 
Total current liabilities
    36,309       29,192  
Deferred income taxes
    26,121       23,958  
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; 24,286,388 and 23,973,814 shares issued and outstanding at December 31, 2005 and 2004, respectively
    243       240  
Additional paid-in capital
    102,536       90,766  
Unearned stock compensation
    (2,135 )     (943 )
Retained earnings
    192,196       154,335  
Accumulated other comprehensive income (loss)
    526       (31 )
                 
Total shareholders’ equity
    293,366       244,367  
                 
Total liabilities and shareholders’ equity
  $ 355,796     $ 297,517  
                 
 
See accompanying notes to consolidated financial statements.


F-4

 

CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
 
                         
    Years Ended December 31,  
    2005     2004     2003  
    ($ in thousands, except per share data)  
 
Revenues
  $ 252,673     $ 223,054     $ 169,936  
Cost of sales
    153,941       131,648       103,769  
                         
Gross profit
    98,732       91,406       66,167  
Selling, general and administrative expenses
    27,245       24,864       18,374  
Start-up costs
    1,092       —       80  
Provision for legal judgment
    —       —       (18 )
Loss on disposal or impairment of assets
    95       1,144       717  
                         
Operating profit
    70,300       65,398       47,014  
Other income (expense):
                       
Interest income
    1,765       580       204  
Interest expense
    (9 )     (10 )     (13 )
Earnings in equity-method investee
    208       —       —  
Other, net
    (181 )     254       (118 )
                         
      1,783       824       73  
                         
Income before income taxes
    72,083       66,222       47,087  
Income taxes
    25,463       24,549       17,518  
                         
Net income
  $ 46,620     $ 41,673     $ 29,569  
                         
Earnings per share:
                       
Basic
  $ 1.94     $ 1.75     $ 1.27  
                         
Diluted
  $ 1.93     $ 1.73     $ 1.26  
                         
 
See accompanying notes to consolidated financial statements.


F-5

 

CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
                                                 
                Unearned
 		          Accumulated
 		       
          Additional
 		    Stock
 		          Other
 		       
    Common
 		    Paid-In
 		    Compen-
 		    Retained
 		    Comprehensive
 		       
    Stock     Capital     sation     Earnings     Income (Loss)     Total  
    ($ in thousands, except per share data)  
 
Balances at January 1, 2003
  $ 233     $ 72,925     $ (557 )   $ 96,000     $ (16 )   $ 168,585  
Net income
    —       —       —       29,569       —       29,569  
Foreign currency translation adjustment
    —       —       —       —       (26 )     (26 )
                                                 
Comprehensive income
                                            29,543  
Exercise of stock options
    3       4,796       —       (1 )     —       4,798  
Tax benefit from exercise of options
    —       1,308       —       —       —       1,308  
Shares issued in acquisition
    —       1,505       —       —       —       1,505  
Amortization of unearned compensation
    —       —       304       —       —       304  
Cash dividends ($0.25 per share)
    —       —       —       (5,904 )     —       (5,904 )
                                                 
Balances at December 31, 2003
    236       80,534       (253 )     119,664       (42 )     200,139  
Net income
    —       —       —       41,673       —       41,673  
Foreign currency translation adjustment
    —       —       —       —       11       11  
                                                 
Comprehensive income
                                            41,684  
Exercise of stock options
    4       6,128       —       (1 )     —       6,131  
Tax benefit from exercise of options
    —       2,981       —       —       —       2,981  
Stock granted under restricted stock plan, net
    —       1,123       (1,123 )     —       —       —  
Amortization of unearned compensation
    —       —       433       —       —       433  
Cash dividends ($0.29 per share)
    —       —       —       (7,001 )     —       (7,001 )
                                                 
Balances at December 31, 2004
    240       90,766       (943 )     154,335       (31 )     244,367  
Net income
    —       —       —       46,620       —       46,620  
Foreign currency translation adjustment
    —       —       —       —       557       557  
                                                 
Comprehensive income
                                            47,177  
Exercise of stock options
    3       6,050       —       —       —       6,053  
Tax benefit from exercise of options
    —       3,712       —       —       —       3,712  
Stock granted under restricted stock plan, net
    —       2,008       (2,008 )     —       —       —  
Amortization of unearned compensation
    —       —       816       —       —       816  
Cash dividends ($0.36 per share)
    —       —       —       (8,759 )     —       (8,759 )
                                                 
Balances at December 31, 2005
  $ 243     $ 102,536     $ (2,135 )   $ 192,196     $ 526     $ 293,366  
                                                 
 
See accompanying notes to consolidated financial statements.


F-6

 

CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                         
    Years Ended December 31,  
    2005     2004     2003  
    ($ in thousands)  
 
Operating activities
                       
Net income
  $ 46,620     $ 41,673     $ 29,569  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    12,949       11,762       9,921  
Amortization
    675       415       472  
Provision for doubtful accounts
    682       666       160  
Deferred income taxes
    920       4,930       4,414  
Loss on disposal or impairment of assets
    95       1,144       717  
Foreign currency transaction loss
    147       —       —  
Non-cash stock compensation expense
    816       433       304  
Earnings in equity-method investee
    (208 )     —       —  
Changes in operating assets and liabilities:
                       
Trade accounts receivable
    (13,347 )     (11,462 )     (7,588 )
Inventories
    (5,203 )     (755 )     (4,607 )
Prepaid expenses and other current assets
    (1,199 )     (146 )     (486 )
Long-term prepaid expenses
    (1,107 )     —       —  
Accounts payable
    794       4,855       1,880  
Accrued payroll and benefits
    753       1,502       1,699  
Accrued freight
    (23 )     302       322  
Accrued utilities
    1,323       420       584  
Accrued income taxes
    8,116       8,538       (194 )
Payment of legal judgment
    —       (975 )     (18 )
Other accrued expenses
    (55 )     908       1,134  
                         
Net cash provided by operating activities
    52,748       64,210       38,283  
Investing activities
                       
Capital expenditures, net
    (67,811 )     (21,950 )     (21,975 )
Purchase of Pinnacle Technologies, Inc. 
    —       —       (909 )
Investment in equity-method investee
    (611 )     —       —  
Purchases of short-term investments
    (72,175 )     (70,125 )     —  
Proceeds from maturities of short-term investments
    76,325       24,000       —  
                         
Net cash used in investing activities
    (64,272 )     (68,075 )     (22,884 )
Financing activities
                       
Proceeds from exercise of stock options
    6,053       6,131       4,798  
Dividends paid
    (8,759 )     (7,001 )     (5,904 )
                         
Net cash used in financing activities
    (2,706 )     (870 )     (1,106 )
                         
Net increase (decrease) in cash and cash equivalents
    (14,230 )     (4,735 )     14,293  
Effect of exchange rate changes on cash
    (65 )     11       (26 )
Cash and cash equivalents at beginning of year
    33,990       38,714       24,447  
                         
Cash and cash equivalents at end of year
  $ 19,695     $ 33,990     $ 38,714  
                         
Supplemental cash flow information
                       
Interest paid
  $ 9     $ 10     $ 13  
                         
Income taxes paid
  $ 16,427     $ 11,081     $ 13,298  
                         
 
See accompanying notes to consolidated financial statements.


F-7

 

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 four production plants operating in New Iberia, Louisiana; Eufaula, Alabama; McIntyre, Georgia; and Luoyang, China, and is substantially complete with construction of a fifth plant in Toomsboro, Georgia. The Company is currently constructing a new proppant manufacturing facility in the city of Kopeysk, Chelyabinsk Oblast of the Russian Federation. 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 plant sites and eleven remote distribution facilities located in: Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas; Edmonton, Alberta, Canada; Grande Prairie, Alberta, Canada; Rotterdam, The Netherlands; Tianjin, China; Surgut, Russia; Adelaide, Australia; Singapore; and Jebel Ali, United Arab Emirates. The Company also provides fracture diagnostic and mapping services, sells fracture simulation software and provides fracture design services to oil and gas companies worldwide through its wholly-owned subsidiary, Pinnacle Technologies, Inc., which is headquartered in San Francisco, California.
 
Principles of Consolidation
 
The Consolidated Financial Statements include the accounts of CARBO Ceramics Inc. and its operating subsidiaries. The significant operating subsidiaries include: CARBO Ceramics (China) Company Limited, CARBO Ceramics (Eurasia) LLC, and Pinnacle Technologies, Inc. The Consolidated Financial Statements also include a 49% interest in a fracture-related services company in Canada that was acquired April 2005 and is reported under the equity method of accounting. All significant intercompany transactions have been eliminated.
 
Concentration of Credit Risk and Accounts Receivable
 
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. The Company establishes an allowance for doubtful accounts based on a percentage of sales and periodically evaluates the balance in the allowance based on a review of trade accounts receivable. Trade accounts receivable are periodically reviewed for collectibility based on customers’ past credit history and current financial condition, and the allowance is adjusted if necessary. Credit losses historically have been insignificant. The allowance for doubtful accounts at December 31, 2005 and 2004 was $1,335,000 and $665,000, respectively.
 
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.
 
Short-Term Investments
 
Management determines the appropriate classification of investments in debt-securities at the time of purchase and reevaluates such designation at the end of each fiscal quarter. Short-term investments owned by the Company consist of auction rate securities with auction reset periods of twelve months or less, which are classified as available-for-sale securities and carried at cost, which approximates fair value.
 
Inventories
 
Inventories are stated at the lower of cost (first-in, first-out method) or market. Finished goods inventories include costs of materials, plant labor and overhead incurred in the production of the Company’s products.


F-8

 

 
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
Land-use rights
  30 years
 
Land-use rights represent capitalized costs to acquire rights to the land for the Company’s China plant site. The Company’s rights to use of the property are for a 50-year period expiring in 2051. In 2003, the Company decided it was more appropriate to recover the cost of the land-use rights over the 30-year life of its business license in China, which expires in 2031. The effect of the change in estimated useful life did not have a material impact on 2003 net income or related per share amounts.
 
During 2003, the Company completed the acquisition of approximately 1,500 acres of land and leasehold interests in Wilkinson County, Georgia, near its plants in McIntyre and Toomsboro, Georgia. The Company estimates the land has 12 million tons of kaolin reserves for use as raw material in production of its lightweight ceramic proppant. The capitalized costs of land and mineral rights as well as costs incurred to develop such property are amortized using the units-of-production method based on estimated total tons of kaolin reserves.
 
Impairment of Long-Lived Assets and Intangible Assets
 
Long-lived assets to be held and used or intangible assets that are subject to amortization are reviewed for impairment whenever events or circumstances indicate their carrying amounts might not be recoverable. Recoverability is assessed by comparing the undiscounted expected future cash flows from the assets with their carrying amount. If the carrying amount exceeds the sum of the undiscounted future cash flows an impairment loss is recorded. The impairment loss is measured by comparing the fair value of the assets with their carrying amounts. Intangible assets that are not subject to amortization are tested for impairment at least annually by comparing their fair value with the carrying amount and recording an impairment loss for any excess of carrying amount over fair value. Fair values are determined based on discounted expected future cash flows or appraised values, as appropriate. Long-lived assets that are held for disposal are reported at the lower of the assets’ carrying amount or fair value less costs related to the assets’ disposition. During 2005, the Company recognized a $95,000 loss on disposal of kiln turning parts at the New Iberia plant. During 2004, the Company recognized a $1,144,000 loss on disposal or impairment of assets, of which $960,000 is attributed primarily to a prematurely failing calciner at the McIntyre plant and $184,000 resulted from impairment of certain software. During 2003, the Company recognized a $717,000 loss on the disposal of certain equipment during expansion of the McIntyre plant. The losses related to equipment removed from service and software impairment are included in the income statement line item “Loss on disposal or impairment of assets.”
 
Capitalized Software Costs
 
The Company capitalizes certain software costs, after technological feasibility has been established, which are amortized utilizing the straight-line method over the economic lives of the related products, not to exceed five years.
 
Goodwill
 
Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the date of acquisition. Realization of goodwill is assessed periodically by management based on the expected future profitability and undiscounted future cash flows of acquired entities and their contribution to the overall operations of the Company. The Company has performed a goodwill impairment review at the reporting unit level based on a


F-9

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

fair value concept. Should a review indicate that the carrying value was not recoverable, the excess of the carrying value over the undiscounted cash flow would be recognized as an impairment loss.
 
Stock Split
 
On July 19, 2005, the Board of Directors declared a three-for-two stock split of the Company’s Common Stock, which was effected via a stock dividend on August 19, 2005, to the stockholders of record at the close of business on August 5, 2005. As a result of the split, the Company issued 8,025,134 additional shares, for which retained earnings decreased by $80,251 and Common Stock increased by $80,251. Accordingly, all share and per share data for all periods presented have been adjusted to reflect the effects of the stock split.
 
Revenue Recognition
 
Revenue from proppant sales is recognized when title passes to the customer, generally upon delivery. Revenue from fracture diagnostic and mapping services and fracture design services is recognized at the time service is performed. Revenue from the sale of fracture simulation software is recognized when title passes to the customer at time of shipment.
 
Shipping and Handling Costs
 
Shipping and handling costs are classified as cost of sales. Shipping costs consist of transportation costs to deliver products to customers. Handling costs include labor and overhead to maintain finished goods inventory and operate distribution facilities.
 
Reclassifications
 
Beginning January 1, 2005, the Company has included in cost of sales the depreciation and amortization of certain equipment and intangibles used by Pinnacle Technologies, Inc. Depreciation and amortization relating to these assets were charged to selling, general and administrative expenses prior to January 1, 2005. Depreciation and amortization expense for these assets included in the 2004 and 2003 financial statements have been reclassified as cost of sales to conform to the 2005 presentation. The reclassification had no effect on net income. Depreciation and amortization for these assets totaled $2,790,000, $1,947,000 and $1,453,000 for 2005, 2004, and 2003, respectively.
 
During the second quarter of 2004, the Company began investing in auction rate securities, which are debt instruments with long-term maturities and periodic interest rate reset dates. Through December 31, 2004, the Company included these investments in cash and cash equivalents. As a result of Securities and Exchange Commission (“SEC”) guidance in early 2005 on this type of security, the Company determined that these investments were more appropriately classified as short-term investments. Accordingly, auction rate securities included in cash and cash equivalents in the 2004 financial statements have been reclassified as short-term investments to conform to the 2005 presentation. Gross purchases and sales of these investments are reflected in the investing activities section of the Consolidated Statements of Cash Flows. The reclassification had no effect on total current assets or net income.
 
Cost of Start-Up Activities
 
Start-up activities, including organization costs, are expensed as incurred. Start-up costs for 2005 are related primarily to the new proppant manufacturing facility in Toomsboro, Georgia. Start-up costs include organizational and administrative costs associated with the facility as well as labor, materials, and utilities to bring installed equipment to operating condition. Start-up costs for 2003 are related to expansion of the McIntyre and New Iberia facilities and initial operation of the China facility.


F-10

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
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 2005, 2004 and 2003 were $3,750,000, $3,418,000 and $2,578,000, respectively.
 
Stock-Based Compensation
 
The Company has three stock-based compensation plans: one in which shares of Common Stock may be granted in the form of restricted stock awards and two fixed stock option plans.
 
The Company accounts for its employee stock plans using the intrinsic value method under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. Under the intrinsic value method, compensation expense is recognized to the extent the exercise price of the award is less than the market value of the underlying common stock. In general, restricted stock awards have no exercise price while stock options granted under the option plans have an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation expense of $87,000, $165,000, and $304,000 was charged to operations for 2005, 2004, and 2003, respectively, for amortization of unearned stock compensation relating to unvested stock options assumed in a business acquisition in 2002. Compensation expense for awards of restricted stock is measured by the fair value of the Company’s stock on the date of grant and amortized over the three-year vesting period. Compensation expense of $729,000 and $268,000 was charged to operations in 2005 and 2004, respectively, for amortization of unearned compensation related to restricted stock. Unamortized deferred compensation with respect to stock options and restricted stock grants amounted to $2,135,000 and $943,000 at December 31, 2005 and December 31, 2004, respectively.
 
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 (as described below under “New Accounting Pronouncements”) to stock-based employee compensation for the years ended December 31:
 
                         
    2005     2004     2003  
    ($ in thousands, except per share data)  
 
Net income, as reported
  $ 46,620     $ 41,673     $ 29,569  
Add: stock-based employee compensation expense included in reported net income, net of related tax effects
    514       273       191  
Deduct: total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects
    (1,157 )     (1,255 )     (1,145 )
                         
Pro forma net income
  $ 45,977     $ 40,691     $ 28,615  
                         
Earnings per share:
                       
Basic — as reported
  $ 1.94     $ 1.75     $ 1.27  
                         
Basic — pro forma
  $ 1.92     $ 1.70     $ 1.23  
                         
Diluted — as reported
  $ 1.93     $ 1.73     $ 1.26  
                         
Diluted — pro forma
  $ 1.90     $ 1.69     $ 1.22  
                         


F-11

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Foreign Subsidiaries
 
Financial statements of the Company’s foreign subsidiaries are translated using current exchange rates for assets and liabilities; average exchange rates for the period for revenues, expenses, gains and losses; and historical exchange rates for equity accounts. Resulting translation adjustments are included in, and the only component of, accumulated other comprehensive income (loss).
 
New Accounting Pronouncements
 
In May 2005, the FASB issued SFAS No. 154 (“SFAS 154”), Accounting Changes and Error Corrections.  This is a replacement of APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. Under SFAS 154, all voluntary changes in accounting principles as well as changes pursuant to accounting pronouncements that do not include specific transition requirements, must be applied retrospectively to prior periods’ financial statements. Retrospective application requires the cumulative effect of each change to be reflected in the carrying value of assets and liabilities as of the first period presented and the offsetting adjustments are recorded to retained earnings for the first period presented. Also, under the new statement, a change in an accounting estimate continues to be accounted for in the period of the change and in future periods if necessary. Under SFAS 154, corrections of errors should continue to be reported by restating prior period financial statements as of the beginning of the first period presented, if material. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December  15, 2005. The Company will adopt SFAS 154 on January 1, 2006. Adoption will not have a material impact on the Company’s financial position and results of operations, since SFAS 154 is not required to be applied retrospectively for fiscal years prior to fiscal years beginning after December 15, 2005.
 
In November 2004, the FASB issued SFAS No. 151, Inventory Costs (“SFAS 151”). SFAS 151 amends ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 requires those items to be recognized as current period expenses and requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005. The Company does not expect it to have a material impact on its financial condition or results of operations.
 
In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123-Revised 2004 (“SFAS 123(R)”), Share-Based Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS 123(R) supersedes APB No. 25, Accounting for Stock Issued to Employees (“APB 25”) and amends SFAS No. 95, Statement of Cash Flows. SFAS 123(R) is effective for fiscal years beginning after June 15, 2005. The Company will adopt SFAS 123(R) on January 1, 2006 using the modified prospective method. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on the grant date fair value (with limited exceptions). Pro forma disclosure is no longer an alternative. As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB 25’s intrinsic value method and, as such, recognizes compensation cost for restricted stock awards but generally does not recognize compensation cost for employee stock options. The Company will also be required to estimate forfeitures and reduce compensation expense accordingly. Compensation cost, net of estimated forfeitures, will be recognized over the period during which an employee is required to provide service in exchange for the award (usually the vesting period). The fair value for stock options will be estimated using an option pricing model and the fair value of restricted stock will be determined based on the market price of the Company’s Common Stock on the date of grant. Adoption of SFAS 123(R) is not expected to have a significant impact on the Company’s results of operations or overall financial position. The impact of SFAS 123(R) cannot be predicted because it will depend on the levels and types of share-based payments granted in the future. Had the Company adopted SFAS 123(R) in prior periods, the application of that standard would have resulted in results of operations approximately the same as those under SFAS 123 as described in the above disclosure of pro


F-12

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

forma net income and earnings per share. Also, the Company’s use of restricted stock in lieu of stock options in recent years has reduced the chance of a significant impact in the future since the accounting treatment under SFAS 123(R) differs more from current literature for stock options than for restricted stock. As of December 31, 2005, only 52,650 shares remained eligible for grant under the Company’s stock option plans, and therefore, it is not anticipated that grants under these plans will be a significant element of compensation in the future. See Note 7 to the consolidated financial statements for more information regarding the number, status and weighted-average fair value of outstanding options as of December 31, 2005. SFAS 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While the Company cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $3,712,000, $2,981,000, and $1,308,000 in 2005, 2004 and 2003, respectively.
 
2.   Intangible and Other Assets
 
Following is a summary of intangible assets as of December 31:
 
                                 
    2005     2004  
    Gross
 		    Accumulated
 		    Gross
 		    Accumulated
 		 
    Amount     Amortization     Amount     Amortization  
    ($ in thousands)  
 
Intangibles subject to amortization:
                               
Patents and licenses
  $ 2,676     $ 934     $ 2,526     $ 672  
Hardware designs
    818       488       758       331  
Software
    2,494       364       1,836       107  
                                 
    $ 5,988     $ 1,786     $ 5,120     $ 1,110  
                                 
 
During 2004, the Company determined that certain internally developed software previously considered to have an indefinite life is now considered to have a finite life due to development of new versions of the software. The Company performed an impairment test and determined that the carrying amount of the original software exceeded its fair value by $184,000. Accordingly, an impairment loss of that amount was recognized and the software is now being amortized over its remaining estimated useful life.
 
Amortization expense for 2005, 2004 and 2003 was $675,000, $415,000 and $472,000, respectively. Estimated amortization expense for each of the ensuing years through December 31, 2010 is, respectively, $755,000, $802,000, $763,000, $591,000, and $338,000.
 
Other assets totaling $1,967,000 at December 31, 2005, consisted of a 49% equity interest in a fracture-related services company in Canada and the long-term portion of a prepayment for the purchase of ceramic proppant from a manufacturer.
 
3.   Bank Borrowings
 
Under the terms of an unsecured revolving credit agreement with a bank, dated December 31, 2000, and amended December 23, 2003 and December 10, 2004, the Company may borrow up to $10.0 million through December 31, 2006, 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, 2005 the unused portion of the credit facility was $10.0 million. The terms of the credit agreement provide for certain affirmative and negative covenants and require the Company to maintain certain financial ratios. Commitment fees are payable quarterly at the annual rate of 0.375% of the unused line of credit. Commitment fees were $38,000 in each of the years 2005, 2004, and 2003.


F-13

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
4.   Leases
 
The Company leases certain property, plant and equipment under operating leases, primarily consisting of railroad equipment leases. Minimum future rental payments due under non-cancelable operating leases with remaining terms in excess of one year as of December 31, 2005 are as follows ($ in thousands):
 
         
2006
  $ 2,752  
2007
    2,273  
2008
    1,783  
2009
    1,369  
2010
    952  
Thereafter
    5,386  
         
Total
  $ 14,515  
         
 
Leases of railroad equipment 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 for railroad equipment are generally renewed or replaced by other leases. Rent expense for all operating leases was $3,496,000 in 2005, $3,393,000 in 2004, and $2,625,000 in 2003.
 
5.   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:
 
                 
    2005     2004  
    ($ in thousands)  
 
Deferred tax assets:
               
Employee benefits
  $ 1,375     $ 933  
Inventories
    718       803  
Foreign tax credits
    868       283  
Other
    834       533  
                 
Total deferred tax assets
    3,795       2,552  
                 
Deferred tax liabilities:
               
Depreciation
    22,181       22,100  
Goodwill
    1,583       1,139  
Foreign earnings and other
    2,357       719  
                 
Total deferred tax liabilities
    26,121       23,958  
                 
Net deferred tax liabilities
  $ 22,326     $ 21,406  
                 


F-14

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Significant components of the provision for income taxes for the years ended December 31 are as follows:
 
                         
    2005     2004     2003  
    ($ in thousands)  
 
Current:
                       
Federal
  $ 21,815     $ 16,803     $ 11,211  
State
    2,728       2,816       1,893  
                         
Total current
    24,543       19,619       13,104  
                         
Deferred:
                       
Federal
    702       4,237       3,829  
State
    218       693       585  
                         
Total deferred
    920       4,930       4,414  
                         
    $ 25,463     $ 24,549     $ 17,518  
                         
 
The reconciliation of income taxes computed at the U.S. statutory tax rate to the Company’s income tax expense for the years ended December 31 is as follows:
 
                                                 
    2005     2004     2003  
    Amount     Percent     Amount     Percent     Amount     Percent  
    ($ in thousands)  
 
U.S. statutory rate
  $ 25,229       35.0 %   $ 23,178       35.0 %   $ 16,480       35.0 %
State income taxes, net of federal tax benefit
    1,950       2.7       2,281       3.4       1,611       3.4  
Extraterritorial Income Exclusion and other
    (1,716 )     (2.4 )     (910 )     (1.3 )     (573 )     (1.2 )
                                                 
    $ 25,463       35.3 %   $ 24,549       37.1 %   $ 17,518       37.2 %
                                                 
 
6.   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, 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, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of any Preferred Stock 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 non-assessable.
 
On July 19, 2005, the Board of Directors declared a three-for-two stock split of the Company’s Common Stock, which was effected via a stock dividend on August 19, 2005, to the stockholders of record at the close of business on August 5, 2005. As a result of the split, the Company issued 8,025,134 additional shares, for which retained earnings decreased by $80,251 and Common Stock increased by $80,251. Accordingly, all share and per share data for all periods presented have been adjusted to reflect the effects of the stock split.
 
On January 17, 2006, the Board of Directors declared a cash dividend of $0.10 per share. The dividend is payable on February 15, 2006 to shareholders of record on January 31, 2006.


F-15

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
Preferred Stock
 
The Company’s charter authorizes 5,000 shares of Preferred Stock. The Board of Directors has the authority to issue 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. In connection with adoption of a shareholder rights plan on February 13, 2002, the Company created the Series A Preferred Stock and authorized 2,000 shares of the Series A Preferred Stock.
 
Shareholder Rights Plan
 
On February 13, 2002, the Company adopted a shareholder rights plan and declared a dividend of one right for each outstanding share of Common Stock to shareholders of record on February 25, 2002. With certain exceptions, the rights become exercisable if a tender offer for the Company is announced or any person or group acquires beneficial ownership of at least 15 percent of the Company’s Common Stock. If exercisable, each right entitles the holder to purchase one fifteen-thousandth of a share of Series A Preferred Stock at an exercise price of $133 and, if any person or group acquires beneficial ownership of at least 15 percent of the Company’s Common Stock, to acquire a number of shares of Common Stock having a market value of two times the $133 exercise price. The Company may redeem the rights for $0.01 per right at any time before any person or group acquires beneficial ownership of at least 15 percent of the Common Stock. The rights expire on February 13, 2012.
 
7.   Stock-Based Compensation
 
The Company has two fixed stock-based compensation plans: 1996 Stock Option Plan for Key Employees (CARBO Plan) and 1996 Stock Option Plan of Pinnacle Technologies, Inc. as Amended and Restated May 31, 2002 (Pinnacle Plan). The plans provide for granting options to purchase shares of the Company’s Common Stock primarily to key employees, officers and directors. Under the CARBO Plan, the Company may grant options for up to 1,875,000 shares of Common Stock. The exercise price of each option is equal to the market price of the Company’s Common Stock on the date of grant, no individual employee may be granted options to purchase more than an aggregate of 750,000 shares of Common Stock, options have maximum terms of ten years and vest annually over four years. Under the Pinnacle Plan, the Company may grant options for up to 300,000 shares of Common Stock. The exercise price of each option may not be less than 85 percent of the market price of the Company’s Common Stock on the date of grant, options have maximum terms of ten years and vesting is determined for each grant (generally 3 to 5 years). As of December 31, 2005, only 47,250 shares of Common Stock remained available to be granted under the 1996 Option Plan and 5,400 shares remained available under the Pinnacle Option Plan. It is, therefore, not anticipated that grants under these plans will be a significant element of compensation in the future.
 
Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123 (see Note 1), 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 2004 and 2003, respectively: risk-free interest rates of 3.55% and 3.15%; dividend yields of 0.6% and 1.0%; volatility factors of the expected market price of the Company’s Common Stock of .455 and .458; and a weighted-average expected life of the option of 5 years. The Company did not grant any stock options in 2005.


F-16

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
A summary of stock option activity and related information for the years ended December 31 follows:
 
                                                 
    2005     2004     2003  
    Options
 		    Weighted-Average
 		    Options
 		    Weighted-Average
 		    Options
 		    Weighted-Average
 		 
    (000)     Exercise Price     (000)     Exercise Price     (000)     Exercise Price  
 
Outstanding-beginning of year
    570     $ 22       889     $ 20       1,167     $ 19  
Granted
    —       —       36       37       51       23  
Exercised
    272       22       348       17       311       15  
Forfeited
    7       26       7       24       18       17  
                                                 
Outstanding-end of year
    291     $ 22       570     $ 22       889     $ 20  
                                                 
Exercisable at end of year
    197     $ 20       318     $ 20       511     $ 18  
Weighted-average fair value of options granted during the year
  $ —             $ 15.74             $ 9.33          
 
Following is a summary of the status of fixed options outstanding at December 31, 2005:
 
                                         
    Outstanding Options              
          Weighted
 		          Exercisable Options  
          Average
 		    Weighted
 		          Weighted
 		 
Exercise
 		        Remaining
 		    Average
 		          Average
 		 
Price
 		  Number
 		    Contractual
 		    Exercise
 		    Number
 		    Exercise
 		 
Range
  (000)     Life     Price     (000)     Price  
 
$ 5 - 16
    41       3 years     $ 10       41     $ 10  
 20 - 28
    222       6 years       23       153       22  
 34 - 41
    28       8 years       38       3       40  
                                         
      291               22       197       20  
                                         
 
On April 13, 2004, the shareholders approved the 2004 CARBO Ceramics Inc. Long-Term Incentive Plan (the “2004 Plan”). Under the 2004 Plan, shares of Common Stock may be granted in the form of restricted stock awards to employees of the Company. The Company may issue up to 375,000 shares, plus (i) the number of shares that are forfeited, and (ii) the number of shares that are withheld from the participants to satisfy tax withholding obligations. No more than 75,000 shares may be granted to any single employee. Transfer and forfeiture restrictions on one-third of the shares subject to award lapse on each of the first three anniversaries of the grant date. No awards can be granted under the 2004 Plan after the fifth anniversary date. Unearned stock compensation cost of restricted stock is amortized to expense over the vesting period of three years. Restricted stock grants to employees are summarized as follows:
 
                                                 
          Grant
 		                         
          Date per
 		          As of December 31, 2005  
          Share
 		                      Unrecognized
 		 
    Number of Shares
 		    Fair
 		    Recognition
 		    Shares
 		    Shares
 		    Compensation
 		 
Grant Date
  Granted     Value     Period     Forfeited     Vested     ($ in thousands)  
 
April 2004
    27,645     $ 41.39       3 years       3,887       9,021     $ 421  
January 2005
    30,167     $ 45.80       3 years       4,920       —     $ 789  
October 2005
    18,650     $ 53.15       3 years       —       —     $ 924  


F-17

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
8.   Earnings Per Share
 
The following table sets forth the computation of basic and diluted earnings per share:
 
                         
    2005     2004     2003  
    ($ in thousands, except per share data)  
 
Numerator for basic and diluted earnings per share:
                       
Net income
  $ 46,620     $ 41,673     $ 29,569  
                         
Denominator:
                       
Denominator for basic earnings per share  —  weighted-average shares
    24,004,563       23,868,138       23,339,677  
Effect of dilutive securities:
                       
Employee stock options (See Note 7)
    166,141       189,487       167,295  
Nonvested stock awards (See Note 7)
    6,660       7,023       —  
Contingent stock acquisition
    —       —       27,069  
                         
Dilutive potential common shares
    172,801       196,510       194,364  
                         
Denominator for diluted earnings per share  —  adjusted weighted-average shares
    24,177,364       24,064,648       23,534,041  
                         
Basic earnings per share
  $ 1.94     $ 1.75     $ 1.27  
                         
Diluted earnings per share
  $ 1.93     $ 1.73     $ 1.26  
                         
 
9.   Quarterly Operating Results — (Unaudited)
 
Quarterly results of operations for the years ended December 31, 2005 and 2004 were as follows:
 
                                 
    Three Months Ended,  
    March 31     June 30     September 30     December 31  
    ($ in thousands, except per share data)  
 
2005
                               
Revenues
  $ 61,168     $ 63,834     $ 64,104     $ 63,567  
Gross profit
    24,821       25,632       24,949       23,330  
Net income
    11,594       12,177       12,452       10,397  
Earnings per share:
                               
Basic
  $ 0.48     $ 0.51     $ 0.52     $ 0.43  
Diluted
  $ 0.48     $ 0.50     $ 0.51     $ 0.43  
2004
                               
Revenues
  $ 50,011     $ 52,350     $ 58,482     $ 62,211  
Gross profit
    20,344       21,461       24,858       24,743  
Net income
    9,568       9,857       11,497       10,751  
Earnings per share:
                               
Basic
  $ 0.40     $ 0.41     $ 0.48     $ 0.45  
Diluted
  $ 0.40     $ 0.41     $ 0.48     $ 0.45  
 
Quarterly data may not sum to full year data reported in the Consolidated Financial Statements due to rounding.


F-18

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
10.   Segment Information
 
The Company has two operating segments: 1) Proppant and 2) Fracture and Reservoir Diagnostics. Discrete financial information is available for each operating segment. Management of each operating segment reports to the chief operating decision maker, who regularly evaluates financial results to determine how to allocate resources and assess performance. The accounting policies of each segment are the same as those described in the summary of significant accounting policies in Note 1. During the quarter ended June 30, 2005, the Company concluded that the Fracture and Reservoir Diagnostics operating segment met the disclosure requirements defined by FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, and that operating segment became a reportable segment.
 
The Company’s Proppant segment manufactures and sells ceramic proppants worldwide for use primarily in the hydraulic fracturing of natural gas and oil wells. All of the Company’s ceramic proppant products have similar production processes and economic characteristics and are marketed predominantly to pumping service companies that perform hydraulic fracturing for major oil and gas companies.
 
The Company’s Fracture and Reservoir Diagnostics segment provides fracture mapping and reservoir diagnostic services, sells fracture simulation software and provides engineering services to oil and gas companies worldwide. These services and software are provided through the Company’s wholly-owned subsidiary Pinnacle Technologies, Inc. (“Pinnacle”).
 
Goodwill totaling $21,840,000 arising from the Company’s acquisition of Pinnacle is not assigned to an operating segment because that information is not used by the Company’s chief operating decision maker in allocating resources. An inter-segment note receivable totaling $13,416,000, $10,025,000, and $7,573,000 at December 31, 2005, 2004, and 2003, respectively, and the costs of the Company’s corporate offices are reported in the Proppant segment. Intersegment sales are not material.
 
Summarized financial information for the Company’s reportable segments for the three-year period ended December 31, 2005 is shown in the following tables:
 
                         
          Fracture and
 		       
          Reservoir
 		       
    Proppant     Diagnostics     Total  
    ($ in thousands)  
 
2005
                       
Revenue from external customers
  $ 225,751     $ 26,922     $ 252,673  
Income before income taxes
    69,415       2,668       72,083  
Total assets
    319,573       27,799       347,372  
Capital expenditures, net
    60,983       6,828       67,811  
Depreciation and amortization
    10,520       3,104       13,624  
2004
                       
Revenue
  $ 201,039     $ 22,015     $ 223,054  
Income before income taxes
    62,984       3,238       66,222  
Total assets
    264,342       21,360       285,702  
Capital expenditures, net
    17,386       4,564       21,950  
Depreciation and amortization
    9,986       2,191       12,177  
2003
                       
Revenue
  $ 155,760     $ 14,176     $ 169,936  
Income before income taxes
    45,422       1,665       47,087  
Total assets
    204,711       16,146       220,857  
Capital expenditures, net
    18,589       3,386       21,975  
Depreciation and amortization
    8,670       1,723       10,393  


F-19

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
  Geographic Information
 
Long-lived assets, consisting of net property, plant and equipment and goodwill, as of December 31 in the United States and other countries are as follows:
 
                         
    2005     2004     2003  
    ($ in thousands)  
 
Long-lived assets:
                       
United States
  $ 173,917     $ 134,250     $ 128,059  
International (primarily China and Russia)
    31,625       16,985       14,356  
                         
Total
  $ 205,542     $ 151,235     $ 142,415  
                         
 
Revenues outside the United States accounted for 40%, 47% and 36% of the Company’s revenues for 2005, 2004 and 2003, respectively. Revenues for the years ended December 31 in the United States, Canada, Russia and other countries are as follows:
 
                         
    2005     2004     2003  
    ($ in thousands)  
 
Revenues:
                       
United States
  $ 152,595     $ 118,665     $ 107,992  
Canada
    38,775       28,236       18,085  
Russia
    17,465       35,214       9,799  
Other international
    43,838       40,939       34,060  
                         
Total
  $ 252,673     $ 223,054     $ 169,936  
                         
 
  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, 2005:
 
                                         
    Major Customers              
    A     B     C     Others     Total  
 
2005
    30.5%       17.3%       16.9%       35.3%       100%  
2004
    28.3%       13.5%       23.6%       34.6%       100%  
2003
    30.1%       16.5%       24.3%       29.1%       100%  
 
11.   Benefit Plans
 
The Company has defined contribution savings and profit sharing plans pursuant to Section 401(k) of the Internal Revenue Code. The increase in savings contributions is due to additional employment related to expansions. Benefit costs recognized as expense under these plans consisted of the following for the years ended December 31:
 
                         
    2005     2004     2003  
    ($ in thousands)  
 
Contributions:
                       
Profit sharing
  $ 941     $ 990     $ 719  
Savings
    606       525       431  
                         
    $ 1,547     $ 1,515     $ 1,150  
                         


F-20

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 
All contribution to the plans are 100% participant directed. Participants are allowed to invest up to 20% of contributions in the Company’s Common Stock.
 
12.   Commitments
 
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 was eight years commencing January 1, 1996. Beginning January  1, 1997, the agreement required the Company to purchase from the supplier at least 80 percent of the Company’s estimated annual requirements of kaolin for its Eufaula plant. For the year ended December 31, 2003, the Company purchased from the supplier $2.6 million of kaolin under the agreement. In June 2003, the Company entered into a new agreement with the supplier. The new agreement supersedes and replaces the 1995 agreement. The term of the agreement is seven years commencing January 1, 2004 and requires the Company to purchase from the supplier at least 70 percent of its annual kaolin requirements for its Eufaula, Alabama, plant at specified contract prices. For the years ended December 31, 2005, and 2004, the Company purchased from the supplier $3.3 and $2.9 million, respectively, of kaolin under the agreement.
 
In January 2003, the Company entered into a mining agreement with a contractor to provide kaolin for the Company’s McIntyre plant at specified contract prices, from lands owned or leased by either the Company or the contractor. The term of the agreement is twenty years commencing on January 1, 2003, and requires the Company to accept delivery from the contractor of at least 80 percent of the McIntyre plant’s annual kaolin requirements. Under the agreement, the contractor bears responsibility for reclaiming property owned by the Company and indemnifies the Company from all claims. For the years ended December 31, 2005, 2004 and 2003, the Company purchased $1.1 million, $0.6 million and $0.5 million, respectively, of kaolin under the agreement.
 
In January 2003, the Company entered into an agreement with a supplier to purchase bauxite for production at its plants in New Iberia, Louisiana, and McIntyre, Georgia. The term of the agreement is three years commencing January  1, 2003, and requires the Company to purchase 60,000 metric tons of material annually at specified contract prices. The contract also has provisions to allow the Company to commit to purchase up to an additional 45,000 metric tons in any contract year. For the years ended December 31, 2005, 2004 and 2003, the Company purchased $9.5 million, $9.0 million and $7.5 million, respectively, of bauxite under the agreement. The Company entered into a new agreement with the supplier, effective January 1, 2006, under substantially similar terms.
 
In 2002, the Company entered into a five-year agreement and a ten-year agreement with two different suppliers to purchase bauxite and hard clays for its China plant at specified contract prices. The five-year agreement requires the Company to purchase a minimum of 10,000 metric tons of material annually, or 100 percent of its annual requirements for bauxite if less than 10,000 metric tons. The ten-year agreement requires the Company to accept delivery from the supplier at least 80 percent of the plant’s annual requirements. For the years ended December 31, 2005, 2004 and 2003, the Company purchased approximately $1.4 million, $0.9 million and $0.4 million, respectively, of material under the agreements.
 
The Company has entered into a lease agreement with the Development Authority of Wilkinson County (the “Development Authority”) in the State of Georgia. Pursuant to this agreement, the Development Authority holds the title to the real and personal property of the Company’s McIntyre and Toomsboro manufacturing facilities and leases the facilities to the Company for an annual rental fee of $35,000 per year through the year 2016. At any time prior to the scheduled termination of the lease, the Company has the option to terminate the lease and purchase the property for a nominal fee plus the payment of any rent payable through the balance of the lease term. Furthermore, the Company has a security interest in the title held by the Development Authority. The Company has also entered into a Memorandum of Understanding (the “MOU”) with the Development Authority and other local agencies, under which the Company receives tax incentives in exchange for its commitment to invest in the county and increase employment. The Company is required to achieve certain employment levels in order to retain its tax incentive. In the event the Company does not meet the agreed-upon employment targets or the MOU is otherwise terminated, the Company would be subjected to additional property taxes annually. The property subject to the lease


F-21

 

 
CARBO CERAMICS INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

agreement is included in Property, Plant and Equipment (net book value of $113.2 million at December 31, 2005) in the accompanying financial statements.
 
In September 2005, the Company entered into an agreement with a China manufacturer to purchase manufactured proppant at a specified contract price. The term of the agreement is three years commencing September 2005 and requires the Company to purchase at least 2,000 metric tons per calendar quarter. For the year ended December 31, 2005, the Company has prepaid $1.8 million for a portion of the commitment to be delivered throughout the term of the contract. Additional quantities will be purchased, as needed, to fulfill minimum purchase requirements.
 
The Company was in compliance with the terms of all the above listed agreements at December 31, 2005.
 
13.   Employment Agreements
 
The Company has an employment agreement effective December 2, 2005, with its President and Chief Executive Officer. The agreement provides that the Company will pay a salary of $75,000 per month (payable in accordance with the Company’s normal payroll practices) and expects such payments to continue for a minimum of six months (unless the President is unwilling to continue serving as President and Chief Executive Officer). At the end of six months, the employment term will be extended automatically for successive one-month periods, at the rate of $75,000 per month, unless one month’s notice is given by either party.
 
The Company has an employment agreement with the President of Pinnacle Technologies, Inc., through May 31, 2007. The agreement provides for an annual base salary and incentive bonus. The term of the agreement may be terminated by the Company or the President of Pinnacle Technologies, Inc. for any reason. The agreement contains a non-competition covenant that is effective for one year beyond the term of the agreement.
 
14.   Legal Proceedings and Judgment
 
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.
 
15.   Subsequent Event
 
On January 17, 2006, the Company awarded 23,010 shares of restricted stock to certain employees and recorded unearned stock compensation costs totaling $1,425,000.


F-22

 

CARBO Ceramics Inc.
Schedule II — Consolidated Valuation and Qualifying Accounts
For the Years Ended December 31, 2005, 2004 and 2003
 
                                 
    Balance at
 		    Charged to
 		          Balance at
 		 
    Beginning of
 		    Costs and
 		          End of
 		 
Year Ended
  Year     Expenses     Write-offs     Year  
    ($ in thousands)  
 
Allowance for doubtful accounts:
                               
December 31, 2005
  $ 665     $ 682     $ 12     $ 1,335  
December 31, 2004
  $ 20     $ 666     $ 21     $ 665  
December 31, 2003
  $ —     $ 160     $ 140     $ 20  


S-1

 

 
Exhibit Index
 
         
  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 and exhibit 99.2 to the Company’s form 8-K Current Report filed July 20, 2005)
  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)
  4 .2   Certificate of Designations of Series A Preferred Stock (incorporated by reference to exhibit 2 to registrant’s Form 8-A Registration Statement No. 001-15903)
  10 .1   Second Amended and Restated Credit Agreement dated as of December 31, 2000, as amended December 23, 2003 and as further amended December 10, 2004, between Brown Brothers Harriman & Co. and CARBO Ceramics Inc. (incorporated by reference to exhibit 10.1 to the registrant’s Form 10-K Annual Report for the year ended December 31, 2000)
  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   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 .4   Raw Material Requirements Agreement dated as of June 1, 2003, between CARBO Ceramics Inc. and C-E Minerals Inc. (incorporated by reference to exhibit 10.4 the registrant’s Form 10-K Annual Report for the year ended December 31, 2003)
  *10 .5   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 .6   Amendment No. 1 to the CARBO Ceramics Inc. 1996 Stock Option Plan for Key Employees (incorporated by reference to exhibit 4.5 to the registrant’s Form S-8 Registration Statement No. 333-88100)
  *10 .7   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 .8   Mining Agreement dated as of January 1, 2003 between CARBO Ceramics Inc. and Arcilla Mining and Land Co. (incorporated by reference to exhibit 10.8 to the registrant’s Form 10-K Annual Report for the year ended December 31, 2002)
  *10 .9   Employment Agreement between CARBO Ceramics Inc. and C. Mark Pearson (incorporated by reference to exhibit 10.9 to the registrant’s Form 10-K Annual Report for the year ended December 31, 2003)
  *10 .10   Employment Agreement between CARBO Ceramics Inc. and Christopher A. Wright (incorporated by reference to the registrant’s Form 10-K Annual Report for the year ended December 31, 2002)
  *10 .11   1996 Stock Option Plan of Pinnacle Technologies, Inc., as amended and restated May 31, 2002 (incorporated by reference to exhibit 4.1 to registrant’s Form S-8 Registration Statement No. 333-91252)
  10 .12   Lease Agreement dated as of November 1, 2003, between the Development Authority of Wilkinson Count and CARBO Ceramics Inc. (incorporated by reference to exhibit 10.12 the registrant’s Form 10-K Annual Report for the year ended December 31, 2003)
  *10 .13   CARBO Ceramics Inc. Incentive Compensation Plan (incorporated by reference to exhibit 99.1 of the registrant’s Form 8-K Current Report filed January 24, 2005)
  *10 .14   2004 CARBO Ceramics Inc. Long-Term Incentive Plan (incorporated by reference to exhibit 99.2 of the registrant’s Form 8-K Current Report filed January 24, 2005)
  *10 .15   Form of Officer Restricted Stock Award Agreement (incorporated by reference to exhibit 99.3 of the registrant’s Form 8-K Current Report filed January 24, 2005)
  *10 .16   CARBO Ceramics Inc. Director Deferred Fee Plan (incorporated by reference to exhibit 99.1 of the registrant’s Form 8-K Current Report filed December 19, 2005)
  *10 .17   Separation Agreement dated as of December 2, 2005 between CARBO Ceramics Inc. and C. Mark Pearson

 

         
  *10 .18   Letter Agreement dated December 2, 2005 between CARBO Ceramics Inc. and Jesse P. Orsini
  14     Code of Ethics (incorporated by reference to exhibit 14 to the registrant’s Form 10-K Annual Report for the year ended December 31, 2003)
  21     Subsidiaries
  23 .1   Consent of Independent Registered Public Accounting Firm
  31 .1   Rule 13a-14(a)/15d-14(a) Certification by Jesse P. Orsini
  31 .2   Rule 13a-14(a)/15d-14(a) Certification by Paul G. Vitek
  32     Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
* Management contract or compensatory plan or arrangement filed as an exhibit pursuant to Item 15(b) of the requirements for an Annual Report on Form 10-K.

EX-10.17 2 d33288exv10w17.htm SEPARATION AGREEMENT exv10w17
 

Exhibit 10.17
EXECUTION COPY
SEPARATION AGREEMENT
     This Separation Agreement (this “Agreement”) is made as of December 2, 2005, by and between C. Mark Pearson (the “Executive”) and CARBO Ceramics Inc., a Delaware corporation (the “Company”).
     WHEREAS, the Company engaged the Executive to be the President and Chief Executive Officer of the Company pursuant to an Employment Agreement dated November 25, 2002 (the “Employment Agreement”);
     WHEREAS, the Executive and the Company mutually desire to terminate their employment relationship and Executive desires to resign his position as President and Chief Executive Officer of the Company, as a director of the Company and all other director, officer and employee positions, if any, held by Executive in the Company or any of its subsidiaries or affiliates effective as of December 2, 2005 (the “Termination Date”); and
     WHEREAS, the parties desire to set forth their respective rights and obligations in respect of the termination of the Executive’s employment relationship with the Company in this Agreement and, in connection therewith, agree that this Agreement is intended to supersede, in its entirety, the Employment Agreement (including, without limitation, the termination of employment provisions thereof) and that such Employment Agreement shall be null and void and all obligations of the parties thereunder shall terminate as of the Termination Date.
     NOW, THEREFORE, in consideration of the mutual covenants and conditions set forth herein and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties, intending to be legally bound hereby, agree as follows:
     1. Termination of Employment. The parties hereto hereby agree that the Executive’s employment with the Company and its subsidiaries and affiliates shall terminate as of the Termination Date. The Executive hereby resigns, effective as of the Termination Date, his position as President and Chief Executive Officer of the Company, as a director of the Company, and all other director, officer and employee positions, if any, held by the Executive in the Company or any of its subsidiaries or affiliates and agrees to execute all additional documents and take such further steps as may be required to effectuate such resignation(s).
     2. Certain Payments and Benefits.

 

 

     (a) Accrued Obligations. Within thirty (30) days following the Termination Date, the Company shall pay to the Executive (i) all base salary earned but unpaid as of the Termination Date, (ii) an amount in respect of all vacation earned but not used prior to the Termination Date, and (iii) an amount representing reimbursement of all reasonable, ordinary and necessary expenses incurred by the Executive prior to the Termination Date in the performance of the Executive’s duties under the Employment Agreement; provided that the Executive accounted to the Company for such expenses in a manner reasonably prescribed by the Company.
     (b) Incentive Bonus Payment. As soon as practicable and in any event within thirty (30) days after the completion of the audited financial statements and determinations of the Company’s earnings before interest income and expenses and taxes (“EBIT”) for the 2005 fiscal year, the Company agrees to pay the Executive an amount (the “Incentive Bonus Payment”) equal to the 2005 Incentive Bonus (as defined below) multiplied by a fraction, the numerator of which is the number of days in the period commencing on January 1, 2005 and ending on the Termination Date (inclusive) and the denominator of which is 365. For purposes of this Agreement, the 2005 Incentive Bonus shall mean an incentive bonus with respect to the 2005 fiscal year equal to the sum of (i) 0.5% of the Company’s EBIT for the 2005 fiscal year up to $20,000,000, plus (ii) 1.0% of EBIT for the 2005 fiscal year in excess of $20,000,000.
     (c) Equity Awards.
     (i) Stock Options. All options to purchase stock of the Company granted to the Executive pursuant to the CARBO Ceramics Inc. 1996 Stock Option Plan for Key Employees, as amended, and outstanding immediately prior to the Termination Date shall remain exercisable until the expiration of thirty (30) days after the Termination Date, on which date they shall expire; provided, however, that no such stock option shall be exercisable prior to the Effective Date (as hereafter defined) or after the expiration of ten (10) years after the date such stock option was granted to the Executive.
     (ii) Restricted Stock. All unvested awards of restricted stock of the Company granted to the Executive pursuant to the 2004 CARBO Ceramics Inc. Long-Term Incentive Plan and outstanding immediately prior to the Termination Date shall be immediately forfeited and cancelled effective as of the Termination Date.
     (d) No Other Payments or Benefits. The Executive acknowledges that, except for the payments and benefits provided for in Section 2 of this Agreement, the Executive is not entitled to any payment or benefits in the nature of severance or termination pay from the Company or its affiliates.
     3. Consulting Services. From the Termination Date through June 30, 2006 (the “Consulting Period”), the Executive agrees to render to the Company such consulting services as the Company may from time to time reasonably request. Such services shall include, without limitation, assistance in connection with the transition of the duties and responsibilities of the Executive’s former position with the Company to other individuals.

 

 

In addition, the Executive agrees to reasonably cooperate (including attending meetings) with respect to any claim, arbitral hearing, lawsuit, action or governmental or internal investigation relating to the business of the Company or its affiliates prior to the Termination Date. The Executive agrees to provide full and complete disclosure in response to any inquiry in connection with any such matters. In consideration for the Executive’s consulting services (including, without limitation, his cooperation with respect to matters set forth above in this Section 3), the Company shall pay to the Executive a fee of $325.00 per hour for each hour during the Consulting Period the Executive provides consulting services to the Company, as determined by the Company in its sole discretion.
     4. Other Agreements.
     (a) Press Release. In connection with the termination of the Executive’s employment with the Company, the Executive hereby agrees to the Company’s issuance of the press release substantially in the form attached hereto as Attachment A.
     (b) Outstanding Liabilities. Any liabilities the Executive may have to the Company or its affiliates, including, without limitation, any liabilities in respect of outstanding loans or advances by the Company and any liabilities to reimburse the Company for any personal expenses that the Executive has charged to the Company, must be paid in full before payment of any amounts will be made to the Executive under this Agreement or the Company may, at its option, deduct any such amounts from any payment to be made to the Executive under this Agreement, to the extent permitted by applicable law.
     5. General Release and Waiver
     (a) In consideration of the payments and other consideration provided for in this Agreement, that being good and valuable consideration, the receipt, adequacy and sufficiency of which are acknowledged by the Executive, the Executive, on his own behalf and on behalf of his agents, administrators, representatives, executors, successors, heirs, devisees and assigns (collectively, the “Releasing Parties”) hereby fully releases, remises, acquits and forever discharges the Company and all of its affiliates, and each of their respective past, present and future officers, directors, shareholders, members, partners, agents, employees, consultants, independent contractors, attorneys, advisers, successors and assigns (collectively, the “Released Parties”), jointly and severally, from any and all claims, rights, demands, debts, obligations, losses, causes of action, suits, controversies, setoffs, affirmative defenses, counterclaims, third party actions, damages, penalties, costs, expenses, attorneys’ fees, liabilities and indemnities of any kind or nature whatsoever (collectively, the “Claims”), whether known or unknown, suspected or unsuspected, accrued or unaccrued, whether at law, equity, administrative, statutory or otherwise, and whether for injunctive relief, back pay, fringe benefits, reinstatement, reemployment, or compensatory, punitive or any other kind of damages, which any of the Releasing Parties ever have had in the past or presently have against the Released Parties, and each of them, arising from or relating to the Executive’s employment with the Company or its affiliates or the termination of that employment or any circumstances related thereto, or any other matter, cause or thing whatsoever, including without limitation all claims arising under or relating to employment, employment contracts

 

 

(including the Employment Agreement), employee benefits or purported employment discrimination or violations of civil rights of whatever kind or nature, including without limitation all claims arising under the Age Discrimination in Employment Act (“ADEA”), the Americans with Disabilities Act of 1990, the Family and Medical Leave Act of 1993, the Equal Pay Act of 1963, the Rehabilitation Act of 1973, Title VII of the United States Civil Rights Act of 1964, 42 U.S.C. § 1981, the Civil Rights Act of 1991, the Civil Rights Acts of 1866 and/or 1871, the Texas Commission on Human Rights Act, the Texas Payday Law, the Texas Labor Code or any other applicable federal, state or local employment discrimination statute, law or ordinance, including, without limitation, any workers’ compensation or disability claims under any such laws. The Executive further agrees that the Executive will not file or permit to be filed on the Executive’s behalf any such claim. Notwithstanding the preceding sentence or any other provision of this Agreement, this release is not intended to interfere with the Executive’s right to file a charge with the Equal Employment Opportunity Commission (the “EEOC”) in connection with any claim he believes he may have against the Company or its affiliates. However, by executing this Agreement, the Executive hereby waives the right to recover in any proceeding the Executive may bring before the EEOC or any state human rights commission or in any proceeding brought by the EEOC or any state human rights commission on the Executive’s behalf. In addition, this release is not intended to interfere with the Executive’s right to challenge that his waiver of any and all ADEA claims pursuant to this Agreement is a knowing and voluntary waiver, notwithstanding the Executive’s specific representation that he has entered into this Agreement knowingly and voluntarily. This release shall not apply to any obligation of the Company or its affiliates pursuant to this Agreement, or any vested benefit to which the Executive is entitled under any tax qualified pension plan of the Company or its affiliates, COBRA continuation coverage benefits or any other similar benefits required to be provided by statute.
     (b) The Executive acknowledges that certain of the payments and benefits provided for in Section 2 of this Agreement are in addition to anything of value to which the Executive already is entitled from the Company and its affiliates and constitute good and valuable consideration for the release contained in this Section 5.
     6. Restrictive Covenants.
     (a) Confidential Information. The Executive agrees that all information pertaining to the prior, current or contemplated business of the Company and its 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 from and after the Termination Date he shall (A) hold all such information in trust and confidence for the Company and its 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. Executive agrees that he has returned or will return within seven (7) days all equipment and/or property, including all confidential information, computer software, computer access codes, company credit cards, keys, and all original and copies of notes, documents, files or programs stored electronically or otherwise that relate or refer to the business, customers, financial statements, business contacts or sales of the Company or its affiliates; provided, however that the Executive shall not be required to return his cell phone to the Company. Executive also agrees to return promptly to the Company any such equipment and/or property subsequently discovered by the Executive.
     (b) Non-Competition. For the period commencing on the Termination Date and ending on the two-year anniversary of the Termination Date, 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 BJ Services Company, Dowell Schlumberger Limited and Halliburton Company (but only to the extent that the Executive does not engage in activities for these entities related to the exploration, research, development, production or procurement of production of Proppants) or (ii) the business of production of Proppants.
     (c) Non-Solicitation. For the period commencing on the Termination Date and ending on the one-year anniversary of the Termination Date, 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 affiliates to leave their employment with the Company or its 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 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 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) Disclosure of Agreement. Notwithstanding anything in this Agreement to the contrary, prior to agreeing to, or commencing to, act as an employee, officer, director, trustee, principal, agent or other representative of any type of business during the period in which the non-competition agreement, as described in Section 6(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 as an employee, officer, director, trustee, principal, agent or other representative, the existence of this Agreement, including, in particular, the non-disclosure agreement contained in Section 6(a), and the non-solicitation agreement contained in Section 6(c).
     (e) Non-Disparagement. The Executive shall not make any statements, encourage others to make statements or release information that would or is reasonably expected to disparage or defame the Company, any of its affiliates or any of their respective directors or officers. Notwithstanding the foregoing, nothing in this Section

 

 

6(e) shall prohibit the Executive from making truthful statements when required by order of a court or other body having jurisdiction or as required by law.
     (f) Acknowledgements Respecting Restrictive Covenants. With respect to the restrictive covenants set forth in this Section 6, 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.
     (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 affiliates shall be entitled to an injunction restraining the Executive from violating such restrictive covenants. If the Company or any of its 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 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 affiliates has an adequate remedy at law. The foregoing shall not prejudice the Company’s or its affiliates’ right to require the Executive to account for and pay over to the Company or its 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.
     (iv) (A) Each of the restrictive covenants contained in this Section 6 shall be construed as a separate covenant with respect to each activity to which it applies, (B) if, in any judicial proceeding or arbitration, a court or arbitrator shall deem any of the restrictive covenants invalid, illegal or unenforceable because its scope is considered excessive, such restrictive covenant shall be modified so that the scope of the restrictive covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable, and (C) if any restrictive covenant (or portion thereof) is deemed invalid, illegal or unenforceable in any jurisdiction, as to that jurisdiction such restrictive covenant (or portion thereof) shall be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining restrictive covenants (or portion thereof) in such jurisdiction or rendering that or any other restrictive covenant (or portion thereof) invalid, illegal, or unenforceable in any other jurisdiction.
     (v) The restrictive covenants provided in this Section 6 shall be in addition to any restrictions imposed on the Executive by statute or at common law.
     7. Certain Forfeitures in Event of Breach. The Executive acknowledges and agrees that, notwithstanding any other provision of this Agreement, in the event the Executive materially breaches any of his obligations under this Agreement or any provision of this Agreement is ruled unenforceable, void or subject to reduction or

 

 

modification, the Executive will forfeit his right to receive the payments and benefits described in Section 2 of this Agreement to the extent not theretofore paid to him as of the date of such breach or ruling and, if already made as of the time of such breach or ruling, the Executive agrees that he will reimburse the Company, immediately, for the amount of such payments and benefits. The Executive also agrees to reimburse the Company for all attorneys’ fees and expenses incurred in connection with the Company’s successful defense of the Agreement, successful prosecution of a breach of this Agreement, and/or the seeking of recovery of any amounts forfeited by the Executive hereunder.
     8. 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 8, the Company shall be entitled to institute a court action or proceeding for injunctive relief as provided in Section 6 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.
     (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 in this Agreement to the contrary, the arbitration provisions set forth in this Section 8 shall be governed exclusively by the Federal Arbitration Act, Title 9, United States Code.
     9. General Provisions
     (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
2210 Cedar Springs Road, #1906
Dallas, Texas 75201
With copies sent to:
Lawrence B. Mentzer
Miller Mentzer, P.C.
100 N. Main Street
P.O. Box 130
Palmer, Texas 75152
Notices to the Company should be sent as follows:
CARBO Ceramics Inc.

 

 

6565 MacArthur Boulevard, Suite 1050
Irving, Texas 75039
Attn: Secretary
With copies sent to:
Cleary Gottlieb Steen & Hamilton LLP
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 9(b).
     (c) The Company may withhold from any payments made under this Agreement, or require the Executive to pay to the Company, all applicable federal, state and local taxes, including but not limited to income, employment and social insurance taxes, as shall be required by law, as determined by the Company in its sole discretion.
     (d) 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 provisions in accordance with the terms of this Agreement.
     (e) This Agreement contains the entire agreement between the parties with respect to the Executive’s employment with the Company and the termination thereof effective as of the Termination Date and supersedes any and all prior understandings, agreements or correspondence between the parties regarding the Executive’s employment with the Company and the termination thereof, including, without limitation, the Employment Agreement (including all of the obligations of the parties thereunder) which shall be null and void and shall terminate as of the Termination Date.
     (f) 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.
     (g) This Agreement shall be governed by, and interpreted in accordance with, the laws of Delaware, without reference to its principles of conflicts of laws.

 

 

     (h) This Agreement is binding on and is for the benefit of the parties hereto and their respective successors, assigns, heirs, executors, administrators and other legal representatives. 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.
     (i) 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.
     (j) 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. Knowing and Voluntary Waiver. The Executive, by the Executive’s free and voluntary act of signing below, (i) acknowledges that he has been given a period of twenty-one (21) days to consider whether to agree to the terms contained herein, (ii) acknowledges that he has been advised to consult with an attorney prior to executing this Agreement, (iii) acknowledges that he understands that this Agreement specifically releases and waives all rights and claims he may have under the Age Discrimination in Employment Act, as amended (“ADEA”) prior to the date on which he signs this Agreement, and (iv) agrees to all of the terms of this Agreement and intends to be legally bound thereby. Furthermore, the Executive acknowledges that the payments and benefits provided for in Section 2 of this Agreement will be delayed until this Agreement becomes effective, enforceable and irrevocable.
     This Agreement will become effective, enforceable and irrevocable on the eighth day after the date on which it is executed by the Executive (the “Effective Date”). During the seven-day period prior to the Effective Date, the Executive may revoke his agreement to accept the terms hereof by indicating in writing to the Company his intention to revoke. If the Executive exercises his right to revoke hereunder, he shall forfeit his right to receive any of the payments or benefits provided for herein, and to the extent such payments or benefits have already been made, the Executive agrees that he will immediately reimburse the Company for the amounts of such payments and benefits.
     IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by its duly authorized representative and the Executive has signed this Agreement as of the day and year first above written.
     
 
  CARBO CERAMICS INC.
 
    
 
    
 
    
 
   /s/ William C. Morris
 
  By: William C. Morris
 
  Title: Chairman of the Board

 

 

     
 
    
 
   /s/  C. Mark Pearson
 
  C. Mark Pearson

 

 

Acknowledgment
             
 
  STATE OF                                           )    
 
          SS:
 
  COUNTY OF                                           )    
On the                                          day of                                                               before me personally came C. Mark Pearson who, being by me duly sworn, did depose and say that he resides at                                          and did acknowledge and represent that he has had an opportunity to consult with attorneys and other advisers of his choosing regarding the Separation Agreement attached hereto, that he has reviewed all of the terms of the Separation Agreement and that he fully understands all of its provisions, including, without limitation, the general release and waiver set forth therein.
         
 
 
     
Notary Public    
 
        
Date:
        
 
       

 

EX-10.18 3 d33288exv10w18.htm LETTER AGREEMENT exv10w18
 

Exhibit 10.18
December 2, 2005
Mr. Jesse P. Orsini
305 Tampico Street
Irving, Texas 75062
Dear Jesse:
     Thank you again for agreeing to serve as interim President and Chief Executive Officer of CARBO Ceramics Inc. while the Company conducts a search for a permanent successor. At this critical time, the Company needs you, and your presence there provides me personally with great comfort and confidence. I am sure that the staff and other shareholders share this view.
     As we have discussed, your appointment will be effective on December 2, 2005, and you will have such duties and responsibilities as are consistent with your positions. You perhaps know what they are better than we do. The Board has also elected you a Director, and they anticipate that you will serve in that role during your employment.
     As compensation for your services, the Company will pay you $75,000 per month, in accordance with its normal payroll practices. I know that your undertaking this job will entail disruptions and inconveniences to you and your family, so the Company expects to pay you for a minimum of six months (unless you are unwilling to continue serving). At the end of six months, your employment will be extended automatically for successive one-month periods, at the rate of $75,000 per month, unless one month’s notice otherwise is given by either of us.
     
 
  With great respect and thanks,
 
    
 
  William C. Morris
 
  Chairman of the Board
 
  For CARBO Ceramics Inc.
Agreed to and accepted:
     
 
/s/  Jesse P. Orsini
    
Jesse P. Orsini
    

EX-21 4 d33288exv21.htm SUBSIDIARIES exv21
 

Exhibit 21
CARBO CERAMICS INC.
SUBSIDIARIES
         
    JURISDICTION OF   PERCENTAGE
NAME OF ENTITY   ORGANIZATION   OWNED
CARBO Ceramics (UK) Limited
   Scotland   100%
CARBO Ceramics Mauritius, Inc.
   Mauritius   100%
CARBO Ceramics LLC
   Delaware, USA   100%
CARBO Ceramics (China) Company Ltd.
   China   100%
CARBO Ceramics Cyprus Ltd.
   Cyprus   100%
CARBO Ceramics (Eurasia) LLC
   Russia   100%
Pinnacle Technologies, Inc.
   California, USA   100%
Pinnacle Technologies, (Delft) Inc.
   Netherlands   100%
Pinnacle Technologies, (Canada) Inc.
   Canada   100%
Enertech, Ltd.
   Canada      49%

EX-23.1 5 d33288exv23w1.htm CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM exv23w1
 

EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements of our reports dated March 6, 2006, with respect to the consolidated financial statements and schedule of CARBO Ceramics Inc., CARBO Ceramics Inc. management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of CARBO Ceramics Inc., included in this Annual Report (Form 10-K) for the year ended December 31, 2005.
°   Form S-8 No. 33-25845 (the CARBO Ceramics Inc. 1996 Stock Option Plan for Key Employees)
 
°   Form S-8 No. 333-88100 (the CARBO Ceramics Inc. 1996 Stock Option Plan for Key Employees, As Amended)
 
°   Form S-8 No. 333-91252 (the 1996 Stock Option Plan of Pinnacle Technologies, Inc., As Amended and Restated)
 
°   Form S-8 No. 333-113688 (the Carbo Ceramics Inc. Savings and Profit Sharing Plan)
Ernst & Young LLP                 
New Orleans, Louisiana
March 6, 2006

EX-31.1 6 d33288exv31w1.htm RULE 13A-14(A)/15D-14(A) CERTIFICATION exv31w1
 

Exhibit 31.1
Annual Certification
As required by Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934
I, Jesse P. Orsini, certify that:
1. I have reviewed this annual report on Form 10-K of Carbo Ceramics Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:      March 7, 2006     
     
     /s/ Jesse P. Orsini
 
Jesse P. Orsini
   
President & CEO
    

EX-31.2 7 d33288exv31w2.htm RULE 13A-14(A)/15D-14(A) CERTIFICATION exv31w2
 

Exhibit 31.2
Annual Certification
As required by Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934
I, Paul G. Vitek, certify that:
1. I have reviewed this annual report on Form 10-K of Carbo Ceramics Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide a reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date:      March 7, 2006     
     
     /s/ Paul G. Vitek
 
Paul G. Vitek
Chief Financial Officer
   

EX-32 8 d33288exv32.htm CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 exv32
 

Exhibit 32
Certification Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Carbo Ceramics Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the year ended December 31, 2005 of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated:      March 7, 2006     
     
     /s/ Jesse P. Orsini
 
Name: Jesse P. Orsini
Title: Chief Executive Officer
   
Dated:      March 7, 2006     
     
     /s/ Paul G. Vitek
 
Name: Paul G. Vitek
Title: Chief Financial Officer
   

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