-----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, NCNXsJC0eTTOUfNJkRMOtWzUEmqubPq13A5cAiw3FV7+kfZ1K5qXoLnSiAHdzzBd 7TXkYzWhvQmbIuCNOQAkPQ== 0001009672-99-000002.txt : 19990315 0001009672-99-000002.hdr.sgml : 19990315 ACCESSION NUMBER: 0001009672-99-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990312 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARBO CERAMICS INC CENTRAL INDEX KEY: 0001009672 STANDARD INDUSTRIAL CLASSIFICATION: ABRASIVE ASBESTOS & MISC NONMETALLIC MINERAL PRODUCTS [3290] IRS NUMBER: 721100013 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-28178 FILM NUMBER: 99564358 BUSINESS ADDRESS: STREET 1: 600 EAST LAS COLINAS BLVD STREET 2: STE 1520 CITY: IRVING STATE: TX ZIP: 75039 BUSINESS PHONE: 2144010090 MAIL ADDRESS: STREET 1: 600 E LAS COLINAS BLVD STREET 2: STE 1520 CITY: IRVING STATE: TX ZIP: 75039 10-K405 1 FORM 10-K DECEMBER 31, 1998 1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934. COMMISSION FILE NO. 0-28178 -------------------- CARBO CERAMICS INC. (Exact name of registrant as specified in its charter) DELAWARE 72-1100013 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 600 E. LAS COLINAS BOULEVARD SUITE 1520 IRVING, TEXAS 75039 (Address of principal executive offices) (972) 401-0090 (Registrant's telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 1, 1999, as reported on the Nasdaq National Market, was approximately $59,053,450. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 1, 1999, Registrant had outstanding 14,602,000 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant's Annual Meeting of Shareholders to be held April 13, 1999 are incorporated by reference in Part III. =============================================================================== 2 PART I ITEM 1. BUSINESS GENERAL CARBO Ceramics Inc. is the world's largest producer and supplier of ceramic proppants for use in the hydraulic fracturing of natural gas and oil wells. Demand for ceramic proppants depends generally upon the demand for natural gas and oil and on the number of natural gas and oil wells drilled, completed or recompleted worldwide. More specifically, the demand for ceramic proppants is dependent on the number of oil and gas wells that are hydraulically fractured to stimulate production. The hydraulic fracturing process consists of pumping fluids down a natural gas or oil well at pressures and flow rates sufficient to split the hydrocarbon bearing formation and create fractures in the formation. A granular material, such as ceramic proppant or sand-based proppant, is suspended in the fluid and packs the newly created fracture, keeping the fracture open once high-pressure pumping stops. The proppant-filled fracture creates a permeable channel through which the hydrocarbons can flow more freely from the formation to the well and then to the surface. CARBO Ceramics was formed in 1987 for the purpose of purchasing the assets of Standard Oil Proppants Company Ltd. (SOPCO). SOPCO was a joint venture formed to operate the combined proppant businesses of the Carborundum Company and Dresser Industries. These proppants businesses were started in 1978 and 1984 respectively. While the Carborundum Company and Dresser Industries had primarily manufactured high strength, premium priced proppants for use in very deep wells, CARBO Ceramics has pursued a strategy of introducing new, lower- priced, lightweight, intermediate strength ceramic proppants to capture a greater portion of the large market for sand-based proppants. The Company estimates that it supplies 60% of the ceramic proppants and 5% of all proppants used worldwide. During the year ended December 31, 1998, the Company generated approximately 65% of its revenues in the U.S. and 35% in international markets. PRODUCTS The Company manufactures four distinct ceramic proppants. CARBOHSP-TM- and CARBOPROP-Registered Trademark- are premium priced, high strength proppants designed primarily for use in deep gas wells. CARBOHSP-TM-, which was introduced in 1979, is the original ceramic proppant, formerly marketed as "Sintered Bauxite". CARBOHSP-TM- offers the highest level of strength and conductivity for use primarily in deep gas wells. CARBOPROP-Registered Trademark-, which was introduced by the Company in 1982, is slightly lower in weight and strength than CARBOHSP-TM- and was developed for use in deep gas wells that do not require the strength of CARBOHSP-TM-. The CARBOLITE-Registered Trademark- and CARBOECONOPROP-Registered Trademark- products are lightweight, intermediate strength proppants designed for use in gas wells of moderate depth and shallower oil wells. The products are manufactured and sold to compete directly with sand-based proppants. CARBOLITE-Registered Trademark-, introduced in 1984, is used in medium depth oil and gas wells, where the additional strength of ceramic proppants may not be essential, but where higher production rates can be achieved due to the products' roundness and uniform grain size. CARBOECONOPROP-Registered Trademark-, introduced in 1992 to compete directly with sand-based proppants, is the Company's lowest priced and fastest growing product. The introduction of CARBOECONOPROP-Registered Trademark- has resulted in ceramics being used in many new markets by end users that had not previously used ceramic proppants. The Company believes that many of the users of CARBOECONOPROP-Registered Trademark- had previously used sand or resin-coated sand. The Company further believes that its ability to continue to penetrate the market for sand-based proppants in 1997 and 1998 was limited by its production capacity for lightweight ceramic proppants. 1 3 CUSTOMERS AND MARKETING The Company's largest customers are, in alphabetical order, BJ Services Company, Dowell and Halliburton Company, the three largest participants in the worldwide petroleum pressure pumping industry. These companies collectively accounted for approximately 88% of the Company's 1998 revenues and approximately 84% of the Company's 1997 revenues. The Company's other customers include primarily foreign pumping service companies that compete in the worldwide fracturing business. The end users of the Company's products, however, are the operators of natural gas and oil wells that engage pumping service companies to hydraulically fracture wells to improve the recovery of natural gas or oil wells, thereby enhancing the rate of return on the investment made in such wells. The Company works with the pressure pumping service companies to present the advantages of using ceramic proppants to the operators of natural gas and oil wells. The Company generally supplies its customers with products on a just-in-time basis, with transactions governed by individual purchase orders. Continuing sales of product depend on the Company's direct customers and the well operators being satisfied with both product and delivery performance. The Company recognizes the importance of aggressive marketing when introducing a technically advanced and performance enhancing, but intrinsically more costly, product. The Company must market its products both to its direct customers and to owners and operators of the natural gas and oil wells. The Company's sales and marketing staff regularly calls on and keeps close contact with the people who are influential in the proppant purchasing decision: production companies, regional offices of well service companies that offer pressure pumping services, and various completion engineering consultants. The Company provides a variety of technical support services and has developed computer software that models the return on investment achievable by using the Company's ceramic proppants versus that of other proppants in the hydraulic fracturing of a natural gas or oil well. The Company's Vice President of Marketing and Technology coordinates worldwide sales and marketing activities. The Company's export marketing efforts were conducted in 1998 through its sales office in Aberdeen, Scotland and through two commissioned sales agents located in South America and Australia. The Company's ceramic proppants are used worldwide by U.S. customers operating abroad and by foreign customers. Sales outside the United States accounted for 35%, 37% and 31% of the Company's sales for 1998, 1997 and 1996, respectively. The distribution of the Company's export and domestic revenues is shown below, based upon the region in which the customer used the proppants:
1998 1997 1996 ----- ----- ----- (IN MILLIONS) LOCATION United States.......... $54.3 $53.3 $45.3 International.......... 29.8 31.8 19.9 ----- ----- ----- Total.......... $84.1 $85.1 $65.2 ===== ===== =====
COMPETITION AND MARKET SHARE The Company's chief worldwide competitor is Norton-Alcoa Proppants ("Norton-Alcoa"). Norton-Alcoa is a joint venture of Compagnie de Saint-Gobain, a French glass and materials company, and Aluminum Company of America. Norton-Alcoa manufactures ceramic proppants that directly compete with each of the Company's products. In addition, Mineraco Curimbaba ("Curimbaba"), based in Brazil, manufactures a sintered bauxite product similar to the Company's CARBOHSP-TM-, which is marketed in the United States under the name "Sinterball". The Company believes that Curimbaba has not expanded its U.S. product line to include a full range of ceramic proppants and is unlikely to do so in light of patents held by the Company and Norton-Alcoa. The Company believes that it supplies approximately 60% of the ceramic proppants and approximately 5% of all proppants used by the oilfield services companies that perform fracturing services worldwide. 2 4 Competition for CARBOHSP-TM- and CARBOPROP-Registered Trademark- includes ceramic proppants manufactured by Norton-Alcoa and Curimbaba. The Company's CARBOLITE-Registered Trademark- and CARBOECONOPROP-Registered Trademark- products compete with ceramic proppants produced by Norton-Alcoa and with sand- based proppants for use in the hydraulic fracturing of medium depth natural gas and oil wells. The leading suppliers of mined sand are Unimin Corp., Badger Mining Corp., Fairmount Minerals Limited, Inc. and Ogelbay-Norton Company. The leading suppliers of resin-coated sand are Borden Proppants Corp. and Santrol, a subsidiary of Fairmount Minerals. The Company believes that the most significant factors that influence a customer's decision to purchase the Company's products are: (i) price/performance ratio, (ii) on-time delivery performance, (iii) technical support and (iv) proppant availability. The Company believes that its products are competitively priced and that its delivery performance is excellent. The Company also believes that its superior technical support has enabled it to persuade customers to use ceramic proppants in an increasingly broad range of applications and thus increased the overall market for the Company's products. Prior to 1997, the Company had generally maintained sufficient inventory to satisfy demand for its products. However, beginning in 1997 and continuing through the first half of 1998, it became obvious to the management of the Company that previous capacity additions were insufficient to satisfy demand in an improving market. The Company has addressed this issue through the construction of a new manufacturing facility in McIntyre, Georgia, which is scheduled for completion in the second quarter of 1999. The Company continually conducts testing and development activities with respect to alternative raw materials to be used in the Company's existing production methods and alternative production methods. The Company is not aware of the development of alternative products for use as proppants in the hydraulic fracturing process. The Company believes that the main barriers to entry for additional competitors are the patent rights held by the Company and certain of its current competitors and the capital costs involved in building production facilities of sufficient size to be operated efficiently. DISTRIBUTION The Company maintains finished goods inventories at its plants in New Iberia, Louisiana, and Eufaula, Alabama, and at six remote stocking facilities located in: Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas; Fairbanks, Alaska; Edmonton, Alberta, Canada; and Rotterdam, The Netherlands. The remote stocking facilities consist of bulk storage silos with truck trailer loading facilities. The Company owns the facilities in San Antonio, Rock Springs and Edmonton and subcontracts the operation of the facilities and transportation to a local trucking company. The remaining stocking facilities are owned and operated by local trucking companies under contract with the Company. The North American sites are supplied by rail, and the site in the Netherlands is supplied by container ship. In total, the Company leases 99 rail cars for use in the distribution of its products. The price of the Company's products sold for delivery in the lower 48 United States and Canada includes just-in-time delivery of proppants to the operator's well site, which eliminates the need for customers to maintain an inventory of ceramic proppants. RAW MATERIALS Ceramic proppants are made from alumina-bearing ores (commonly referred to as bauxite, bauxitic clay or kaolin, depending on the alumina content), which are readily available on the world market. Bauxite is largely used in the production of aluminum metal, refractory material and abrasives. The main deposits of alumina-bearing ores in the United States are in Arkansas, Alabama and Georgia; other economically mineable deposits are located in Australia, China, Jamaica, Russia and Surinam. The Company's New Iberia facility currently uses bauxite imported from Australia and bauxitic clay mined in Arkansas. The Company has decreased its dependence on imported bauxite and bauxitic clay as it has entered into a contract for the processing and supply of Arkansas bauxite and bauxitic clay for use at the New Iberia facility. The Company believes that this agreement, which stipulates a fixed price, subject to annual upward adjustments in accordance with a producer price index, will provide a sufficient supply of bauxite and bauxitic clay to meet the majority of the requirements of the New Iberia facility through the year 3 5 2000. The Company is actively searching for additional deposits of bauxite and bauxitic clay to supply the New Iberia plant beyond 2000. The Company's Eufaula facility exclusively employs locally mined uncalcined kaolin, and the Company has entered into a contract requiring the supplier to sell to the Company up to 200,000 net tons of kaolin per year and the Company to purchase from the supplier 80% of the Eufaula facility's annual kaolin requirements, each through 2003. This agreement stipulates a fixed price, subject to annual adjustment in accordance with fluctuations (within an 8% annual limit) in the producer price index. Raw material costs for the Eufaula facility are substantially below those for the New Iberia plant, due to the Eufaula facility's proximity to raw material reserves and use of uncalcined raw materials. The new production facility in McIntyre, Georgia will also utilize primarily locally mined uncalcined kaolin. The Company has entered into a long-term supply agreement for these raw materials which stipulates a fixed price subject to annual adjustments for changes in the producer price index and fuel costs. The supply contract provides for a twenty-year supply of raw materials. PRODUCTION PROCESS Ceramic proppants are made by grinding or dispersing ore to a fine powder, combining the powder into small, green (i.e., unfired) pellets and sintering the pellets at 2,500 DEG. F to 3,000 DEG. F in a rotary kiln. The Company uses two different methods to produce ceramic proppants. The Company's plant in New Iberia, Louisiana, uses a dry process (the "Dry Process") which starts with bauxite or bauxitic clay which has been dried to remove both free water and water which was chemically bound within the ore. This drying process is referred to as calcining. The calcined ores are received at the plant and ground into a dry powder. Pellets are formed by combining the powder with water and binders and introducing the mixture into a high-shear mixer. The process is completed once the green pellets are sintered in a rotary kiln. The Company's competitors also use the Dry Process to produce ceramic proppants. The Company's plant in Eufaula, Alabama, uses a wet process (the "Wet Process"), which starts with moist, uncalcined kaolin from local mines. The kaolin is dispersed with chemicals in a water slurry. With an atomizer, the slurry is sprayed like a mist into a dryer that causes the slurry to harden into green pellets. Finally, these green pellets are sintered in rotary kilns. The Company believes that the Wet Process is unique to its plant in Eufaula, Alabama. The Company's plant in McIntrye, Georgia will use the Dry Process. However, the Company expects to maintain lower production costs at this facility by purchasing locally mined ore and performing the calcining process itself. PATENT PROTECTION The Company's ceramic proppants are made by processes and techniques that involve a high degree of proprietary technology, some of which are protected by patents. The Company owns outright six issued U.S. patents and seven issued foreign patents; three of these U.S. patents and four of these foreign patents relate to the CARBOPROP-Registered Trademark- product produced by the Dry Process. The Company jointly owns with A/S NIRO Atomizer ("NIRO"), the Danish designer and manufacturer of the spray atomizer device used in the Wet Process, three issued U.S. patents and 17 issued foreign patents. The patents owned jointly with NIRO generally relate to the Wet Process, and the products produced thereby (CARBOLITE-Registered Trademark- and CARBOECONOPROP-Registered Trademark-). The current versions of the Company's six most important U.S. patents expire at various times in the years 2002 through 2009 with its two key product patents expiring in 2006 and 2009. The Company believes that these patents have been and will continue to be important in enabling the Company to compete in the market to supply proppants to the natural gas and oil industry. The Company intends to enforce and has in the past vigorously enforced its patents. The Company may be involved from time to time in the future, as it 4 6 has been in the past, in litigation to determine the enforceability, scope and validity of its patent rights. Past disputes with its main competitor have been resolved in ways that permit the Company to continue to benefit fully from its patent rights. The Company and this competitor have cross-licensed certain of their respective patents relating to intermediate and low density proppants on both a royalty-free and royalty-bearing basis. (Royalties under these licenses are not material to the Company's financial results.) The Company and NIRO have not granted any licenses to third parties relating to the use of the Wet Process. As a result of these cross licensing arrangements, both the Company and its main competitor are able to produce a broad range of ceramic proppants, while third parties are unlikely to be able to enter the ceramic proppants market without infringing on the patent rights held by the Company, its main competitor or both. PRODUCTION CAPACITY The Company believes that constructing adequate capacity ahead of demand while incorporating new technology to reduce manufacturing costs are important competitive strategies to increase its overall share of the market for proppants. Prior to 1993, the Company's production capacity was substantially in excess of its sales requirements. Since that time, however, the Company has been expanding its capacity in order to meet the generally increasing demand for its products. In October 1993, the Company increased the capacity of the Eufaula facility from 90 million pounds per year to 170 million pounds per year, in response to the increasing demand for the Company's CARBOLITE - -Registered Trademark- and CARBOECONOPROP-Registered Trademark- products. In May 1995, the Company completed a 40 million-pound per year capacity expansion at the New Iberia facility, intended to meet increasing demand for CARBOHSP-TM- and CARBOPROP-Registered Trademark-. In February 1996, the Company commenced operations of its second 80 million-pound per year expansion of the Eufaula plant. Total annual capacity is currently 100 million pounds at the New Iberia facility and is 250 million pounds at the Eufaula facility. In July 1997, the Company began construction of a new manufacturing facility in McIntyre, Georgia. The plant is expected to cost $56 million, be completed in the second quarter of 1999 and have initial capacity of 200 million pounds per year. Initial cost estimates for the plant were $40 million. However, the size and complexity of the plant increased during the completion of engineering, causing completion costs to increase. The plant will be capable of producing all of the Company's product lines and has been designed to be expandable to a capacity of 400 million pounds per year. The following table sets forth the date of construction of and recent expansion of the Company's manufacturing facilities:
YEAR OF ANNUAL LOCATION COMPLETION CAPACITY PRODUCTS -------- ---------- --------- -------- (MILLIONS OF POUNDS) NEW IBERIA, LOUISIANA Unit 1.................... 1979 20 CARBOHSP-TM- and CARBOPROP-Registered Trademark- Unit 2.................... 1981 40 CARBOHSP-TM- and CARBOPROP-Registered Trademark- 1995 Expansion............ 1995 40 CARBOHSP-TM- and CARBOPROP-Registered Trademark- --- Total.................. 100 === EUFAULA, ALABAMA Unit 3.................... 1983 90 CARBOLITE-Registered Trademark- and CARBOECONOPROP-Registered Trademark- 1993 Expansion............ 1993 80 CARBOLITE-Registered Trademark- and CARBOECONOPROP-Registered Trademark- 1996 Expansion............ 1996 80 CARBOLITE-Registered Trademark- and CARBOECONOPROP-Registered Trademark- --- Total.................. 250 === MCINTYRE, GEORGIA (1) Units 1 and 2............. 1999 200 CARBOLITE-Registered Trademark-, CARBOECONOPROP-Registered Trademark- CARBOHSP-TM- and CARBOPROP-Registered Trademark-
- ------------ (1) The McIntyre, Georgia plant is expected to be completed in the second quarter 1999, and is expected to have an initial installed capacity of 200 million pounds per year. 5 7 ORDER BACKLOG The Company generally supplies its customers with products on a just-in- time basis and operates without any material backlog. ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS The Company believes that its operations are in substantial compliance with applicable federal, state and local environmental and safety laws and regulations. The Company does not anticipate any significant expenditures in order to continue to comply with such laws and regulations. EMPLOYEES At December 31, 1998, the Company had 161 full-time employees. In addition to the services of its employees, the Company employs the services of consultants as required. The Company's employees are not represented by labor unions. There have been no work stoppages or strikes during the last three years that have resulted in the loss of production or production delays. The Company believes its relations with its employees are satisfactory. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-K, the Company's Annual Report to Shareholders, any Form 10-Q or any Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from such statements. This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the Company's prospects, developments and business strategies for its operations, all of which are subject to certain risks, uncertainties and assumptions. These risks and uncertainties include but are not limited to, changes in the demand for oil and natural gas, the development of alternative stimulation techniques and the development of alternative proppants for use in hydraulic fracturing. The words "believe", "expect", "anticipate", "project" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, each of which speaks only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. ITEM 2. PROPERTIES The Company maintains its corporate headquarters (approximately 2,700 square feet of leased office space) in Irving, Texas, and owns its manufacturing facilities, land and substantially all of the related production equipment in New Iberia, Louisiana, and Eufaula, Alabama. The facility in New Iberia, Louisiana, located on 24 acres of land owned by the Company, consists of two production units (approximately 85,000 square feet), a laboratory (approximately 4,000 square feet) and an office building (approximately 3,000 square feet). The Company also owns an 80,000 square foot warehouse on the plant grounds in New Iberia, Louisiana. The facility in Eufaula, Alabama, located on 14 acres of land owned by the Company, consists of one production unit (approximately 111,000 square feet), a laboratory (approximately 2,000 square feet) and an office (approximately 1,700 square feet). The facility in McIntyre, Georgia includes real property, consisting of approximately 36 acres, plant and equipment that will be leased from the Development Authority of Wilkinson County. The term of the lease commenced on September 1, 1997 and terminates on January 1, 2009. At the termination of the lease, title to all of the real property, plant and equipment will be conveyed to the Company in exchange for nominal 6 8 consideration. The Company has the right to purchase the property, plant and equipment at any time during the term of the lease for an agreed upon price. The Company's customer service and distribution operations are located at the New Iberia facility, while its quality control, testing and development functions operate out of both the New Iberia and Eufaula facilities. The Company owns distribution facilities in San Antonio, Texas, Rock Springs, Wyoming and Edmonton, Alberta, Canada. ITEM 3. LEGAL PROCEEDINGS The Company is not currently engaged in any material pending legal proceedings and is not currently aware of any claims that are likely to give rise to such proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 1998. EXECUTIVE OFFICERS OF THE REGISTRANT Jesse P. Orsini (age, 58): Mr. Orsini, President and Chief Executive Officer, has served as President, Chief Executive Officer and a Director of the Company since its organization in 1987. Terry P. Keefe (age, 50): Mr. Keefe has been Vice President of Manufacturing since July 1997. Prior to being elected Vice President of Manufacturing, Mr. Keefe was Plant Manager of the Company's Eufaula, Alabama plant since the organization of the Company in 1987. Dr. C. Mark Pearson (age, 42): Dr. Pearson joined the Company as Vice President of Marketing and Technology in March 1997. Prior to joining the Company, Dr. Pearson served as Associate Professor of Petroleum Engineering at the Colorado School of Mines from December 1995 and held various engineering and management positions with Arco Petroleum Company from 1984 through December 1995. Paul G. Vitek (age, 40): Mr. Vitek has been the Vice President of Finance since February 1996 and has served as Treasurer and Secretary of the Company since 1988. All officers are elected at the Annual Meeting of the Board of Directors for one-year terms or until their successors are duly elected. There are no arrangements between any officer and any other person pursuant to which he was selected as an officer. There is no family relationship between any of the named executive officers or between any of them and the Company's directors. 7 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS (a) Market Information The Company's Common Stock began trading on the NASDAQ National Market under the symbol CRBO upon completion of the Company's initial public offering on April 23, 1996. Per share stock prices for the quarterly periods during 1998 and 1997 as reported by NASDAQ were as follows:
Low High ------- ------- 1998 First quarter............. $26.625 $39 Second quarter............ 32.5 38 Third quarter............. 16.25 36 Fourth quarter............ 16.688 29.25 1997 First quarter............. $18.375 $21.75 Second quarter............ 18.5 28.5 Third quarter............. 26 33.5 Fourth quarter............ 32 38.5
(b) Holders As of March 1, 1999, there were 14,602,000 shares of Common Stock outstanding held by 24 holders of record and approximately 560 beneficial holders. (c) Dividends The Company paid quarterly cash dividends of $0.075 per share on its Common Stock in 1998 and 1997. The Company's current intention, subject to its financial condition, the amount of funds generated from operations and the level of capital expenditures, is to continue to pay quarterly dividends to shareholders of its Common Stock at the rate of $0.075 per share. 8 10 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data are derived from the audited financial statements of the Company. The data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included elsewhere in this Report.
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Revenues.................................. $84,095 $85,122 $65,151 $58,001 $53,310 Cost of goods sold........................ 41,665 42,186 34,517 29,297 26,630 ------- ------- ------- ------- ------- Gross profit.............................. 42,430 42,936 30,634 28,704 26,680 Selling, general and administrative expenses (1)............................ 9,977 8,915 8,126 7,148 6,194 ------- ------- ------- ------- ------- Operating profit.......................... 32,453 34,021 22,508 21,556 20,486 Other income, net......................... 974 1,004 175 157 291 ------- ------- ------- ------- ------- Income before income taxes................ 33,427 35,025 22,683 21,713 20,777 Income taxes.............................. 12,719 12,936 5,883 - - ------- ------- ------- ------- ------- Net income................................ $20,708 $22,089 $16,800 $21,713 $20,777 ======= ======= ======= ======= ======= Earnings per share Basic................................... $ 1.42 $ 1.51 ======= ======= Diluted................................. $ 1.40 $ 1.50 ======= ======= PRO FORMA DATA (UNAUDITED) (2): Income before income taxes................ $22,683 Pro forma income taxes.................... 8,393 ------- Pro forma net income...................... $14,290 ======= Pro forma earnings per share (3) Basic................................... $ 0.98 ======= Diluted................................. $ 0.97 =======
DECEMBER 31, ----------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Current assets............................ $23,783 $46,861 $38,158 $17,085 $18,301 Current liabilities excluding bank borrowings.............................. 8,638 7,616 5,204 4,928 3,788 Bank borrowings-current................... - - - 2,780 - Property, plant and equipment, net........ 75,644 34,093 22,247 22,004 10,854 Total assets.............................. 99,427 80,954 60,405 39,089 29,154 Total shareholders' equity................ 87,269 70,942 53,234 31,381 25,366 Cash dividends per share (4).............. $ 0.30 $ 0.30 $ 0.15
- ------------ (1) Selling, general and administrative expenses for the year ended December 31, 1996 include an incremental charge of $877,225 relating to the accelerated recognition of compensation expense for the vesting of restricted stock in connection with the Company's initial public offering. (2) Pro forma data reflects the effects on historical income statement data for the year ended December 31, 1996 as if the Company had been treated as a C Corporation for the entire year for income tax purposes, with an estimated effective income tax rate of 37%. The Company terminated its S Corporation election on April 23, 1996 prior to its initial public offering. (3) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." For further discussion of earnings per share and the impact of Statement No. 128, see the notes to the consolidated financial statements beginning on page F-6. (4) Cash dividends per share for 1996 is based on cash dividends declared subsequent to the Company's initial public offering and does not include S Corporation distributions paid prior to and in conjunction with the initial public offering. 9 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL BUSINESS CONDITIONS CARBO Ceramics Inc. manufactures and sells ceramic proppants for use in the hydraulic fracturing of oil and natural gas wells. Hydraulic fracturing is the most common technique used to stimulate production from hydrocarbon bearing formations. The process involves pumping fluids into an oil or gas well at very high pressure in order to fracture the rock formation that contains the hydrocarbons. As the fracture is created, the fluids are blended with granular materials, or proppants, which fill the fracture and prop it open after the pressure pumping ceases. The proppant filled fracture creates a highly permeable channel that enables the oil or gas to flow more freely from the formation, thereby increasing production from the well. Ceramic proppants are premium products that are sold at higher prices than sand or resin-coated sand, the two primary alternative proppants. The principal advantage of ceramic proppants is that they are stronger than sand- based proppants. The higher strength of ceramic proppants results in higher production rates in deep wells where sand or resin-coated sand may crush under high closure stress. Consequently, the level of deep drilling activity (generally defined as wells deeper than 7,500 feet) influences the Company's business. Ceramic proppants are also more uniform in size and shape than sand- based proppants. This uniformity can result in higher production rates than sand-based proppants when used in wells that do not otherwise need ceramics for their higher strength. As deep drilling, particularly in North America, is typically focused on the production of natural gas, the Company's business is significantly impacted by the number of natural gas wells drilled in North America. In markets outside North America, sales of the Company's products are less dependent on natural gas markets but are influenced by the overall level of drilling activity. Furthermore, because the decision to use ceramic proppants is based on the present value economics of comparing the higher cost of ceramic proppants to the future value derived from increased production rates, the Company's business is secondarily influenced by the price of natural gas and oil. From 1986 through 1996, the ceramic proppant industry had productive capacity in excess of demand. The competitive pressure brought on by this excess capacity made it difficult for the Company to raise prices on its products. However, the Company continued to grow its revenues through the introduction of new ceramic proppants aimed at increasing the use of ceramic proppants in the fracturing of medium depth wells, which had previously been fractured with sand-based proppants. CARBOLITE-Registered Trademark- was introduced in 1986 and is the Company's most popular product in the oil- dominated export market. CARBOECONOPROP-Registered Trademark-, which was introduced in 1992, has been widely accepted in the industry and has been the Company's fastest growing product line over the past five years. The Company expects that CARBOECONOPROP-Registered Trademark- will continue to be the fastest growing product line in the foreseeable future and, as a result, gross profit margins will decline slightly. In the latter half of 1996, the industry began to operate near full capacity and product availability on certain product lines was limited. In 1997, demand for ceramic proppants continued to increase and availability of all products was limited. In light of this fact, the Company raised prices on its products by an average of 5%, effective in the first quarter 1997. This price increase was the first across-the-board price increase that the Company had implemented since 1991. With sustained strong drilling activity, the increasing demand for ceramic proppants continued through the first half of 1998, with the Company realizing record results for the first three quarters of the year. The Company again raised prices on its products by an average of 5%, effective in the first quarter of 1998. However, in the second half of 1998, a rapid decline in oil prices resulted in a significant reduction in the number of oil and gas wells drilled and completed. The Company felt the effects of this decline in the fourth quarter of 1998 as revenues decreased by 29 percent versus the previous quarter and 33 percent from the fourth quarter of 1997. Future growth in the Company's revenues and net income are dependent on the future demand for natural gas and oil worldwide and in the Company's ability to continue to penetrate the market for sand-based proppants. Management believes that the worldwide demand for natural gas will continue to increase due to the abundance, relatively low cost and environmental benefits of natural gas as a source of energy. With this in 10 12 mind, the Company initiated construction of a new manufacturing facility in McIntyre, Georgia in July 1997. The plant will cost approximately $56 million to construct and is expected to be completed in the second quarter of 1999. Initial capacity of the plant is expected to be 200 million pounds per year, an increase of approximately 60% over current manufacturing capacity. NET INCOME
Percent Percent 1998 Change 1997 Change 1996 (pro forma) ------- ------- ------- ------- ---------------- ($ IN THOUSANDS) Net Income................................ $20,708 (6%) $22,089 55% $14,290
Although the Company reported record net income through the first nine months of 1998, a dramatic reduction in oil prices and related drilling activity resulted in a significant decline in the Company's sales volume in the fourth quarter of 1998. As a result, net income for 1998 declined by 6 percent from 1997. Net income for 1997 increased by 55 percent versus pro forma net income for 1996. The significant improvement versus 1996 was largely attributable to high oil prices and increasing demand for natural gas in the North American market. Individual components of net income are discussed below. REVENUES
Percent Percent 1998 Change 1997 Change 1996 ------- ------- ------- ------- ------- ($ IN THOUSANDS) Revenues.................................. $84,095 (1%) $85,122 31% $65,151
CARBO Ceramics Inc's 1998 revenues of $84.1 million were 1% lower than revenues in 1997. Sales volume decreased 3% from 1997, but the effect of this was offset by an increase in the average selling price that was the result of a price increase of approximately 5% which became effective in January 1998. Domestic sales volumes increased 1% from 1997, while export volumes decreased 10%. The most substantial volume decline occurred in Russia where the Company experienced a 76% decrease from 1997 to 1998. Despite the overall slow down in drilling activity in 1998, the volume of CARBOECONOPROP-Registered Trademark- products sold increased by 20% over 1997. The largest part of this increase was represented by sales into Mexico. Revenues were 85.1 million for the year ended December 31, 1997, an increase of 31% over 1996 revenues of $65.2 million. While sales volume increased 24% from 1996, revenues grew at a faster pace due to an increase in the average selling price that was the result of a price increase of approximately 5% which became effective in January 1997. Domestic volumes increased 13% from 1996 as strong demand for natural gas resulted in a 30% increase in drilling activity. Export volumes increased 51% as the Company's products become more widely accepted in the international oil markets. The fastest growing product during 1997 was CARBOLITE-Registered Trademark-, which increased 47% from 1996. The largest part of this increase was in export sales, to Russia, Australia and the North Sea. GROSS PROFIT
Percent Percent 1998 Change 1997 Change 1996 ------- ------- ------- ------- ------- ($ IN THOUSANDS) Gross Profit.............................. $42,430 (1)% $42,936 40% $30,634 Gross Profit %............................ 50% 50% 47%
The Company's cost of goods sold consists of manufacturing costs and packaging and transportation expenses associated with the delivery of the Company's products to its customers. Variable manufacturing expenses include raw materials, labor, utilities and repair and maintenance supplies. Fixed manufacturing expenses include depreciation, property taxes on production facilities, insurance and factory overhead. 11 13 Gross profit for 1998 decreased by $506,000 from 1997. Gross profit as a percentage of sales remained unchanged at 50% for 1998 as compared to 1997. The positive effects of the price increase in January 1998 and lower manufacturing costs at the New Iberia manufacturing facility were offset by an increase in the percentage of lower-priced CARBOECONOPROP-Registered Trademark- sales (52% of 1998 volume compared to 42% of 1997 volume) and an increase in freight costs incurred in transferring material from the Eufaula, Alabama manufacturing facility to the remote storage facility in San Antonio, Texas. The increased freight costs were the result of rail service problems, including delays in delivery and misrouting of rail cars following the merger of the Union Pacific and Southern Pacific railway systems. While this situation persisted through most of 1998, service has improved significantly over the past few months, and we anticipate a reduction of these costs in 1999.The lower production costs achieved at New Iberia were the result of improved efficiency due to increased production and lower maintenance spending as compared to 1997. Gross profit for 1997 increased $12.3 million or 40% from 1996. Gross profit as a percentage of revenues increased from 47% to 50% due to the higher average selling price resulting from the 5% price increase which became effective in January 1997 and lower manufacturing costs in the New Iberia manufacturing facility. The lower costs achieved in New Iberia were primarily the result of improved efficiency due to increased production at the plant versus the previous year. Production volumes also increased at the Eufaula manufacturing facility due to a mid-year capacity expansion project but this was offset by higher raw material prices resulting from a consolidation of suppliers in the Eufaula area. SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Percent Percent 1998 Change 1997 Change 1996 ------- ------- ------- ------- ------- ($ IN THOUSANDS) SG&A...................................... $ 9,977 12% $ 8,915 10% $ 8,126 SG&A as a % of Revenues................... 11.9% 10.5% 12.5%
Selling, general and administrative expenses increased by $1,062,000 in 1998 over 1997. SG&A expenses also increased as a percentage of sales to 11.9% in 1998 from 10.5% in 1997. The largest increases were in marketing expenses. Additional sales personnel were employed in anticipation of additional manufacturing capacity and to explore new markets for our products outside the oilfield. In addition, the Company has contracted with an outside consultant to provide assistance to our marketing department in developing technical sales presentations. An increase in depreciation expense resulted from expansions at the Company's Edmonton, Canada and Rock Springs, Wyoming remote storage facilities both of which were completed during the first half of 1998.. The Company also incurred $450,000 of start-up expenses during 1998 related to the construction of the new manufacturing facility in McIntyre, Georgia. Selling, general and administrative expenses increased by $789,000 in 1997 over 1996. While SG&A expenses decreased as a percentage of revenues, there was a substantial change in the composition of these expenses from 1996 to 1997. In connection with the initial public offering of the Company's Common Stock in 1996, the vesting of restricted stock previously granted to the Company's President and Chief Executive Officer was accelerated. This resulted in non-cash compensation expense of $1,316,000 in 1996, where none was present in 1997. These reductions in 1997 were partially offset by new costs incurred in connection with regulatory filing costs, listing expenses and shareholder communication costs associated with being a publicly traded company. Other SG&A components that increased were those that vary with sales volume or profitability including warehouse and shipping expenses, commissions expense and incentive compensation. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents as of December 31, 1998 were $0.6 million compared to $8.9 million at the beginning of the year. The Company generated cash from operations of $24 million. Cash used in investing and financing activities, excluding proceeds from the maturities of investment securities, totaled $46.2 million. As of December 31, 1998 the Company had no investment securities expected to be held until maturity. These investments, which all matured in 1998, totaled $13.9 million at December 31,1997. 12 14 Total capital expenditures for property, plant and equipment during 1998 were $41.8 million. Spending on the new Georgia manufacturing facility, scheduled to be completed by the second quarter of 1999, was $40.2 million. The balance of $1.6 million was spent on the expansion of distribution facilities, the upgrading of computer hardware and software and the normal replacement of capital equipment. The Company paid $4.4 million in cash dividends during 1998. The Company plans to spend approximately $8 million for the completion of its new manufacturing facility in McIntyre, Georgia in 1999, with funding expected to be provided by a combination of cash generated from operations and some borrowing against our line of credit. The Company's current intention, subject to its financial condition, the amount of funds generated from operations and the level of capital expenditures, is to continue to pay quarterly dividends to shareholders of its Common Stock at the rate of $0.075 per share. The Company maintains an unsecured line of credit in the amount of $10.0 million. As of December 31, 1998, there were no borrowings outstanding under the credit agreement. As of Febraury 28, 1999 the Company had an outstanding balance of $5.2 million under this line of credit. The Company anticipates that cash provided by operating activities and funds available under its line of credit will be sufficient to meet planned operating expenses, tax obligations and capital expenditures through 1999. See "Forward-Looking Information" under Item 1 hereof. IMPACT OF YEAR 2000 Many currently installed computer systems and software products are coded to accept, store or report only two digit entries in date code fields. Beginning in the Year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. This is the "Year 2000 Issue". As a result, computer systems and software used by many companies will need to be upgraded to comply with Year 2000 requirements. The Company could be impacted by year 2000 Issues occurring in its own infrastructure or faced by its major suppliers, customers, vendors and financial service organizations. Such Year 2000 Issues could include information errors, significant information system failures, or failures of equipment, vendors, suppliers or customers. Any disruption in the Company's operations as a result of Year 2000 Issues, whether by the Company or a third party, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company has determined that it will be required to modify or replace some of its software and certain hardware so that the Company's systems will properly recognize dates beyond December 31, 1999. The Company presently believes that with modifications or replacement of existing software and certain hardware, the Year 2000 Issue can be mitigated but that if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company will utilize both internal and external resources to test and reprogram, replace, or upgrade its software and operating equipment for the Year 2000 modifications. The total cost of the Year 2000 project is estimated at $106,000 and is expected to be funded through operating cash flows. To date, the Company has incurred approximately $18,000 of these anticipated expenses, all of which were for new hardware and software systems, which were capitalized. The remaining project costs are attributable to the purchase of new software and operating equipment that will be capitalized. The Company's plan to resolve the Year 2000 Issue involves the following four phases: assessment, remediation, testing, and implementation. To date, the Company has fully completed its assessment of all systems that could be significantly affected by the Year 2000. The completed assessment indicated that some of the Company's significant information technology systems could be affected. However, the major administrative systems (including the general ledger, billing, and inventory systems) have already been replaced by a Year 2000 compliant system. The assessment also indicated that software and hardware (embedded chips) used in production and manufacturing systems (hereafter also referred to as operating equipment) could also be at risk. 13 15 Based on a review of its product line, the Company has determined that all of the products it has sold and will continue to sell are inert and do not require remediation to be Year 2000 compliant. Accordingly, the Company does not believe that the Year 2000 presents a material exposure as it relates to the Company's products. The Company is gathering information about the Year 2000 compliance status of its significant suppliers and subcontractors and will continue to monitor their compliance. To date, the Company has completed approximately 78 percent of the remediation phase for its information technology systems and expects to complete software replacement during the first quarter of 1999. The Company has completed 72 percent of its testing and has implemented 70 percent of its Year 2000 compliant systems. Completion of the testing phase for all significant systems is expected by March 31, 1999, with all remediated systems expected to be fully tested and implemented by June 30, 1999. The remediation of operating equipment is significantly less difficult than the remediation of the information technology systems because there are minimal automated systems in the manufacturing process. The Company is 20 percent complete in the remediation phase of its operating equipment and expects to complete its testing and implementation efforts by March 31, 1999. Currently, the Company has no direct interfaces with third parties. The Company has surveyed its significant suppliers and subcontractors (external agents). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely fashion could materially impact the Company, although the effect of non-compliance by external agents is not determinable. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete any additional phases, the Company could be unable to manufacture some products. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds, increasing inventories, and adjusting staffing strategies. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not have operations subject to material risk of foreign currency fluctuations, nor does it use derivative financial instruments in its operations or investment portfolio. The Company has a $10.0 million line of credit with its primary commercial bank. Under the terms of the revolving credit agreement, the Company may elect to pay interest at either a fluctuating base rate established by the bank from time to time or at a rate based on the rate established in the London interbank market. The Company does not believe that it has any material exposure to market risk associated with interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is contained in pages F-1 through F-14 of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 14 16 PART III Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning the Company's directors required by this Item is incorporated by reference to the Company's Proxy Statement. Information concerning executive officers is set forth in Part I of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Consolidated Financial Statements: The consolidated financial statements of CARBO Ceramics Inc. listed below are contained in pages F-1 through F-14 of this Report: Report of Independent Auditors Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Income for each of the three years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1998, 1997 and 1996 (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1998. (c) Exhibits The exhibits listed on the accompanying Exhibit Index are filed as part of, or incorporated by reference into, this Report. (d) Financial Statement Schedules: All schedules have been omitted since they are either not required or not applicable. 15 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. CARBO CERAMICS INC. By: /s/ JESSE P. ORSINI ------------------------------------- Jesse P. Orsini President and Chief Executive Officer By: /s/ PAUL G. VITEK ------------------------------------- Paul G. Vitek Vice President, Finance Dated: March 12, 1999 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jesse P. Orsini and Paul G. Vitek, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ WILLIAM C. MORRIS Chairman of the Board March 12, 1999 - ------------------------------------------------------ William C. Morris /s/ JESSE P. ORSINI President, Chief Executive Officer March 12, 1999 - ------------------------------------------------------ and Director (Principal Jesse P. Orsini Executive Officer) /s/ PAUL G. VITEK Vice President, Finance (Principal March 12, 1999 - ------------------------------------------------------ Financial and Accounting Paul G. Vitek Officer) /s/ CLAUDE E. COOKE, JR. Director March 12, 1999 - ------------------------------------------------------ Claude E. Cooke, Jr. /s/ WILLIAM A. GRIFFIN, JR. Director March 12, 1999 - ------------------------------------------------------ William A. Griffin, Jr. /s/ JOHN J. MURPHY Director March 12, 1999 - ------------------------------------------------------ John J. Murphy /s/ ROBERT S. RUBIN Director March 12, 1999 - ------------------------------------------------------ Robert S. Rubin
16 18 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders CARBO Ceramics Inc. We have audited the accompanying consolidated balance sheets of CARBO Ceramics Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CARBO Ceramics Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP New Orleans, Louisiana January 22, 1999 F-1 19 CARBO CERAMICS INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, 1998 1997 ------- ------- ($ IN THOUSANDS) Current assets: Cash and cash equivalents.................................. $ 622 $ 8,899 Investment securities...................................... - 13,905 Trade accounts receivable.................................. 11,300 14,243 Inventories: Finished goods........................................... 5,795 4,347 Raw materials and supplies............................... 4,432 4,034 ------- ------- Total inventories.................................... 10,227 8,381 Prepaid expenses and other current assets.................. 614 661 Deferred income taxes...................................... 1,020 772 ------- ------- Total current assets................................. 23,783 46,861 Property, plant and equipment: Land and land improvements................................. 459 214 Buildings.................................................. 4,613 4,536 Machinery and equipment.................................... 30,772 27,773 Construction in progress................................... 51,709 11,382 ------- ------- Total................................................ 87,553 43,905 Less accumulated depreciation.............................. 11,909 9,812 ------- ------- Net property, plant and equipment.................... 75,644 34,093 ------- ------- Total assets......................................... $99,427 $80,954 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable........................................... $ 3,634 $ 2,131 Accrued payroll and benefits............................... 2,609 2,448 Accrued freight............................................ 792 851 Accrued utilities.......................................... 350 422 Accrued income taxes....................................... 266 1,018 Other accrued expenses..................................... 987 746 ------- ------- Total current liabilities............................ 8,638 7,616 Deferred income taxes........................................ 3,520 2,396 Shareholders' equity: Preferred stock, par value $0.01 per share, 5,000 shares authorized: none outstanding............................ - - Common stock, par value $0.01 per share, 40,000,000 shares authorized: 14,602,000 shares issued and outstanding.... 146 146 Additional paid-in capital................................. 42,919 42,919 Retained earnings.......................................... 44,204 27,877 ------- ------- Total shareholders' equity........................... 87,269 70,942 ------- ------- Total liabilities and shareholders' equity........... $99,427 $80,954 ======= =======
The accompanying notes are an integral part of these statements. F-2 20 CARBO CERAMICS INC. CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ----------------------------------------- 1998 1997 1996 --------- --------- --------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues..................................................... $84,095 $85,122 $65,151 Cost of goods sold........................................... 41,665 42,186 34,517 ------- ------- ------- Gross profit................................................. 42,430 42,936 30,634 Selling, general and administrative expenses................. 9,977 8,915 8,126 ------- ------- ------- Operating profit............................................. 32,453 34,021 22,508 Other income (expense): Interest, net.............................................. 800 969 240 Other, net................................................. 174 35 (65) ------- ------- ------- 974 1,004 175 ------- ------- ------- Income before income taxes................................... 33,427 35,025 22,683 Income taxes................................................. 12,719 12,936 5,883 ------- ------- ------- Net income................................................... $20,708 $22,089 $16,800 ======= ======= ======= Pro forma data: Income before income taxes................................. $22,683 Income taxes............................................... 8,393 ------- Net income................................................. $14,290 ======= Earnings per share (pro forma for 1996): Basic...................................................... $ 1.42 $ 1.51 $ 0.98 ======= ======= ======= Diluted.................................................... $ 1.40 $ 1.50 $ 0.97 ======= ======= =======
The accompanying notes are an integral part of these statements. F-3 21 CARBO CERAMICS INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS B ADDITIONAL COMMON COMMON PAID-IN UNEARNED RETAINED STOCK STOCK CAPITAL COMPENSATION EARNINGS TOTAL ------ ------- ---------- ------------ -------- -------- ($ IN THOUSANDS) Balances at January 1, 1996........... $120 $ 3 $ 6,626 $(1,316) $ 25,948 $ 31,381 Net income.......................... - - - - 16,800 16,800 Amortization of unearned compensation..................... - - - 1,316 - 1,316 Distributions to shareholders paid prior to and in connection with initial public offering ($2.67 per share)....................... - - (2,455) - (30,389) (32,844) Conversion of Class B Common Stock to Common Stock............ 3 (3) - - - - Deferred tax asset related to vesting of restricted stock...... - - 3,486 - - 3,486 Net proceeds from initial public offering.................. 23 - 35,262 - - 35,285 Cash dividends ($0.15 per share).... - - - - (2,190) (2,190) ---- ---- ------- ------- -------- -------- Balances at December 31, 1996......... 146 - 42,919 - 10,169 53,234 Net income.......................... - - - - 22,089 22,089 Cash dividends ($0.30 per share).... - - - - (4,381) (4,381) ---- ---- ------- ------- -------- -------- Balances at December 31, 1997......... 146 - 42,919 - 27,877 70,942 Net income.......................... - - - - 20,708 20,708 Cash dividends ($0.30 per share).... - - - - (4,381) (4,381) ---- ---- ------- ------- -------- -------- Balances at December 31, 1998......... $146 $ - $42,919 $ - $ 44,204 $ 87,269 ==== ==== ======= ======= ======== ========
The accompanying notes are an integral part of these statements. F-4 22 CARBO CERAMICS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ 1998 1997 1996 -------- -------- -------- ($ IN THOUSANDS) OPERATING ACTIVITIES Net income.................................................. $ 20,708 $ 22,089 $ 16,800 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.............................................. 2,154 1,953 1,901 Amortization.............................................. - - 1,316 Deferred income taxes..................................... 876 506 4,604 Changes in operating assets and liabilities: Trade accounts receivable.............................. 2,943 (3,341) (2,119) Inventories............................................ (1,846) 4 (554) Prepaid expenses and other current assets.............. 47 (53) (338) Accounts payable....................................... (365) 708 205 Accrued payroll and benefits........................... 161 611 271 Accrued freight........................................ (59) 192 53 Accrued utilities...................................... (72) 96 44 Accrued income taxes................................... (752) 409 609 Other accrued expenses................................. 241 396 (40) -------- -------- -------- Net cash provided by operating activities................... 24,036 23,570 22,752 INVESTING ACTIVITIES Maturities of investment securities......................... 13,905 - - Purchases of investment securities.......................... - (13,905) - Purchases of property, plant and equipment.................. (41,837) (13,799) (3,010) -------- -------- -------- Net cash used in investing activities....................... (27,932) (27,704) (3,010) FINANCING ACTIVITIES Proceeds from bank borrowings............................... - - 7,180 Repayments on bank borrowings............................... - - (9,960) Net proceeds from initial public offering................... - - 35,285 Distributions paid to shareholders.......................... - - (32,844) Dividends paid.............................................. (4,381) (4,381) (2,190) -------- -------- -------- Net cash used in financing activities....................... (4,381) (4,381) (2,529) -------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (8,277) (8,515) 17,213 Cash and cash equivalents at beginning of year.............. 8,899 17,414 201 -------- -------- -------- Cash and cash equivalents at end of year.................... $ 622 $ 8,899 $ 17,414 ======== ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid............................................... $ - $ - $ 92 ======== ======== ======== Income taxes paid........................................... $ 12,595 $ 12,021 $ 669 ======== ======== ======== Purchases of property, plant and equipment through accounts payable.......................................... $ 1,868 $ - $ - ======== ======== ========
The accompanying notes are an integral part of these statements. F-5 23 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS CARBO Ceramics Inc. (the "Company") was formed in 1987 and is a manufacturer of ceramic proppants. The Company has production plants operating in New Iberia, Louisiana and Eufaula, Alabama, with a third plant located in McIntyre, Georgia expected to be completed and begin operating in the second quarter of 1999. The Company predominantly markets its proppant products through pumping service companies that perform hydraulic fracturing for major oil and gas companies. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its wholly owned subsidiaries, CARBO Ceramics Sales Corporation and CARBO Ceramics (UK) Limited. CARBO Ceramics Sales Corporation was formed on July 31, 1996 under the laws of Barbados. CARBO Ceramics (UK) Limited was formed on December 19, 1997 under the laws of Scotland. All significant intercompany transactions have been eliminated. CONCENTRATION OF CREDIT RISK The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 days. The majority of the Company's receivables are from customers in the petroleum pressure pumping industry. Credit losses historically have been insignificant. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheet for cash equivalents approximate fair value. INVESTMENT SECURITIES Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has both the positive intent and ability to hold the securities to maturity. Held- to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. At December 31, 1997, all investment securities were classified as held-to-maturity. The fair value of the investments approximated the carrying value at December 31, 1997. The Company held no investment securities at December 31, 1998. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out method) or market. Finished goods inventories include costs of materials, plant labor and overhead incurred in the production of the Company's products. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation is computed on the straight-line method for financial reporting purposes using the following estimated useful lives: Buildings and improvements....................... 15 years Machinery and equipment.......................... 3 to 15 years
F-6 24 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) REVENUE RECOGNITION Revenue is recognized when title passes to the customer. INCOME TAXES Income taxes have been provided using the liability method in accordance with FASB Statement No. 109, "Accounting for Income Taxes". Prior to April 24, 1996, the shareholders of the Company had elected S Corporation status under the Internal Revenue Code and certain comparable state tax laws. As a result, the Company's taxable income for federal and certain state jurisdictions where the Company had significant operations was reported on the tax returns of its shareholders. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement No. 128 requirements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. BANK BORROWINGS The Company has a Secured Revolving Credit Agreement (the "Credit Agreement") with a bank under which it may borrow up to $10.0 million optionally at either the bank's Base Rate or LIBOR Fixed Rate (as defined in the Credit Agreement) through December 31, 2000. The weighted-average interest rate on borrowings against the Credit Agreement was 8.62% for 1998. There were no borrowings in 1997. Under the terms of the Credit Agreement, the Company is required to maintain certain bank accounts with the lender, with balances equal to transactional and investment-related charges. The terms of the Credit Agreement further provide for certain affirmative and negative covenants, including a restriction on capital expenditures. 3. LEASES The Company leases railroad equipment under operating leases. Minimum future rental payments due under non-cancelable operating leases with remaining terms in excess of one year as of December 31, 1998 are as follows ($ in thousands): 1999................................................ $345 2000................................................ 174 2001................................................ 108 2002................................................ 108 2003................................................ 108 ---- $843 ====
Leases generally provide for renewal options for periods from one to five years at their fair rental value at the time of renewal. In the normal course of business, operating leases are generally renewed or replaced by F-7 25 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) other leases. Rent expense for all operating leases was $800,000 in 1998, $920,000 in 1997, and $740,000 in 1996. 4. INCOME TAXES Since its formation through April 24, 1996, the Company elected to be treated for federal and certain state income tax purposes as an S Corporation. As a result, earnings of the Company were taxed directly to the shareholders of the Company rather than to the Company. Prior to the completion of its initial public offering, the Company terminated its S Corporation election and, accordingly, became subject to federal and state income taxes. The deferred tax effects of the change in tax status increased net income for 1996 by $884,000. The Company also recorded a deferred tax asset of $3.5 million with a corresponding increase in additional paid-in capital in 1996 related to the vesting of 800,000 restricted shares of Common Stock held by the Company's Chief Executive Officer upon the occurrence of the initial public offering. The Company realized the full benefit of this deferred tax asset during 1996. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
1998 1997 ------ ------ ($ IN THOUSANDS) DEFERRED TAX ASSETS: Employee benefits............................... $ 436 $ 271 Inventories..................................... 356 377 Other........................................... 228 124 ------ ------ Total deferred tax assets................. 1,020 772 ------ ------ DEFERRED TAX LIABILITIES: Depreciation.................................... 3,359 2,356 Other........................................... 161 40 ------ ------ Total deferred tax liabilities............ 3,520 2,396 ------ ------ Net deferred tax liabilities.............. $2,500 $1,624 ====== ======
Significant components of the provision for income taxes are as follows:
1998 1997 1996 ------- ------- ------- ($ IN THOUSANDS) Current: Federal.............................. $10,596 $11,082 $ 764 State................................ 1,247 1,348 515 ------- ------- ------- Total current.................. 11,843 12,430 1,279 ------- ------- ------- Deferred: Federal.............................. 784 451 4,481 State................................ 92 55 123 ------- ------- ------- Total deferred................. 876 506 4,604 ------- ------- ------- $12,719 $12,936 $ 5,883 ======= ======= =======
F-8 26 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The reconciliation of income taxes computed at the U.S. federal statutory tax rate to the Company's income tax expense for 1998 and 1997 and pro forma income tax expense for 1996 is as follows:
1998 1997 1996 ------------------ ------------------ ------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------- ------- ------- ------- ------- ------- ($ IN THOUSANDS) U.S. statutory rate............. $11,715 35.0% $12,259 35.0% $ 7,712 34.0% State income taxes, net of federal tax benefit........... 1,339 4.0 1,403 4.0 907 4.0 Foreign sales corporation benefit and other............. (335) (1.0) (726) (2.1) (226) (1.0) ------- ---- ------- ---- ------- ---- $12,719 38.0% $12,936 36.9% $ 8,393 37.0% ======= ==== ======= ==== ======= ====
5. SHAREHOLDERS' EQUITY COMMON STOCK Holders of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders and do not have cumulative voting rights. Subject to preferences of any Preferred Stock that may be issued in the future, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable. Prior to 1996, the Company issued to its President and Chief Executive Officer shares of Common Stock, pursuant to restricted stock agreements, as compensation for future services. These shares had dividend rights; however, sale of the shares was restricted prior to vesting which was subject to the occurrence of certain events, including the initial public offering of the Company's Common Stock. The restricted stock vested upon the occurrence of the initial public offering on April 26, 1996 and the remaining balance of unearned compensation was recorded as compensation expense. Compensation expense totaled $1.3 million in 1996. Prior to April 17, 1996, the Company's authorized capital stock consisted of 20,000 shares of Common Stock, of which 6,001 shares were issued and outstanding, and 2,000 shares of Class B Common Stock, of which 150 shares were issued and outstanding. On April 17, 1996, the Company (i) caused the conversion of all issued and outstanding shares of its Class B Common Stock into shares of Common Stock, and (ii) effected a 2,000 for 1 split of the Common Stock. All capital amounts, share and per share data in the accompanying financial statements have been retroactively restated, where appropriate, to reflect the stock split. On January 13, 1999, the Board of Directors declared a cash dividend of $0.075 per share. The dividend is payable on February 15, 1999 to shareholders of record on January 29, 1999. PREFERRED STOCK The Company's charter authorizes the issuance of 5,000 shares of Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the Company's shareholders. No shares of F-9 27 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Preferred Stock are currently outstanding, and the Company has no present plans to issue any shares of Preferred Stock. 6. STOCK OPTION PLAN The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company's 1996 Stock Option Plan for Key Employees (the "Option Plan") has authorized the grant of options to purchase an aggregate of 1,000,000 shares of the Company's Common Stock to certain officers and key employees of the Company chosen by a committee appointed by the Board of Directors (the "Compensation Committee") to administer such plan. Under the Option Plan, all options granted have 10-year terms, and conditions relating to the vesting and exercise of options are determined by the Compensation Committee for each option. Options granted under the Option Plan are "non-statutory options" (options which do not afford income tax benefits to recipients, but the exercise of which may provide tax deductions for the Company). Each option will have an exercise price per share equal to the fair market value of a share of Common Stock on the date of grant and no individual employee may be granted options to purchase more than an aggregate of 500,000 shares of Common Stock. The options vest annually over a four-year period. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 4.44%, 5.34% and 6.19%; dividend yields of 1.0%, 1.0% and 1.5%; volatility factors of the expected market price of the Company's Common Stock of .452, .337 and .300; and a weighted average expected life of the option of 5 years. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. F-10 28 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) For purposes of pro forma disclosures, the estimated fair value of the options (net of related expected tax benefits) is amortized to expense over the options' vesting period. Since the Company's options generally vest over a four-year period, the pro forma disclosures are not indicative of future amounts until Statement 123 is applied to all outstanding, nonvested options. The Company's pro forma information follows:
1998 1997 1996 --------- --------- --------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Net income: As reported (pro forma in 1996)............................ $20,708 $22,089 $14,290 ======= ======= ======= Pro forma including the effect of options.................. $19,793 $21,539 $13,870 ======= ======= ======= Basic earnings per share: As reported (pro forma in 1996)............................ $ 1.42 $ 1.51 $ 0.98 ======= ======= ======= Pro forma including the effect of options.................. $ 1.36 $ 1.48 $ 0.95 ======= ======= ======= Diluted earnings per share: As reported (pro forma in 1996)............................ $ 1.40 $ 1.50 $ 0.97 ======= ======= ======= Pro forma including the effect of options.................. $ 1.34 $ 1.46 $ 0.95 ======= ======= =======
A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
1998 1997 1996 -------------------------- -------------------------- -------------------------- OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE (000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE ------- ---------------- ------- ---------------- ------- ---------------- Outstanding-beginning of year... 850 $20 700 $17 - Granted......................... 45 $26 260 $27 700 $17 Exercised....................... - - - Forfeited....................... - (110) $17 - --- ---- --- Outstanding-end of year......... 895 $20 850 $20 700 $17 === ==== === Exercisable at end of year...... 355 $19 148 $17 - - Weighted-average fair value of options granted during the year...................... $10.96 $9.38 $5.51
Exercise prices for options outstanding as of December 31, 1998 ranged from $17.00 to $34.63. The weighted-average remaining contractual life of those options is 7.8 years. F-11 29 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
1998 1997 1996 ----------- ----------- ----------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) Numerator for basic and diluted earnings per share: Net income (pro forma for 1996).............. $ 20,708 $ 22,089 $ 14,290 Denominator: Denominator for basic earnings per share -- weighted-average shares (pro forma for 1996)................................. 14,602,000 14,602,000 14,602,000 Effect of dilutive securities: Employee stock options (See Note 6)....... 168,709 169,102 71,368 ---------- ---------- ---------- Dilutive potential common shares............. 168,709 169,102 71,368 ---------- ---------- ---------- Denominator for diluted earnings per share -- adjusted weighted-average shares. 14,770,709 14,771,102 14,673,368 ========== ========== ========== Basic earnings per share....................... $ 1.42 $ 1.51 $ 0.98 ========== ========== ========== Diluted earnings per share..................... $ 1.40 $ 1.50 $ 0.97 ========== ========== ==========
For 1996, pro forma weighted-average shares is based on 12,302,000 shares of Common Stock outstanding during the year increased by the assumed issuance of 2,300,000 shares of Common Stock to pay S Corporation distributions of $29.1 million. 8. QUARTERLY OPERATING RESULTS--(UNAUDITED) Quarterly results of operations for the years ended December 31, 1998 and 1997 were as follows:
THREE MONTHS ENDED, ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- ($ IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 Revenues............................... $22,617 $23,764 $22,013 $15,701 Gross profit........................... 11,517 11,879 11,238 7,796 Net income............................. 5,792 6,182 5,366 3,368 Earnings per share Basic................................ $ 0.40 $ 0.42 $ 0.37 $ 0.23 Diluted.............................. $ 0.39 $ 0.42 $ 0.36 $ 0.23 1997 Revenues............................... $17,840 $20,893 $23,062 $23,327 Gross profit........................... 8,993 10,347 11,469 12,127 Net income............................. 4,586 5,449 5,939 6,115 Earnings per share: Basic................................ $ 0.31 $ 0.37 $ 0.41 $ 0.42 Diluted.............................. $ 0.31 $ 0.37 $ 0.40 $ 0.41
Quarterly data may not sum to the full year data reported in the Company's consolidated financial statements due to rounding. F-12 30 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. PRO FORMA NET INCOME Pro forma net income for 1996 reflects a provision for income taxes at an effective rate of approximately 37% to illustrate how historical net income might have been affected if the Company had not been an S Corporation for income tax purposes. The Company elected to be treated as an S Corporation pursuant to the Internal Revenue Code from June 23, 1987 through April 23, 1996, immediately after which it terminated its S Corporation election in conjunction with the initial public offering. As a result, the Company was not subject to federal income taxes during this period. By election of the shareholders, S Corporation status was also applicable to the state jurisdictions where the Company had significant operations. 10. SALES TO CUSTOMERS The following schedule presents the percentages of total revenues related to the Company's three major customers for the three-year period ended December 31, 1998:
MAJOR CUSTOMERS ----------------------- A B C OTHERS TOTAL ----- ----- ----- ------ ----- 1998........................................ 43.4% 26.1% 18.2% 12.3% 100% 1997........................................ 35.4% 27.8% 20.5% 16.3% 100% 1996........................................ 34.1% 28.6% 21.7% 15.6% 100%
11. INTERNATIONAL SALES The Company's ceramic proppants are used worldwide by U.S. customers operating abroad and by foreign customers. Sales outside the United States accounted for 35%, 37% and 31% of the Company's revenues for 1998, 1997, and 1996, respectively.
1998 1997 1996 ----- ----- ----- Location ($ IN MILLIONS) United States.................................................. $54.3 $53.3 $45.3 International.................................................. 29.8 31.8 19.9 ----- ----- ----- Total.................................................. $84.1 $85.1 $65.2 ===== ===== =====
12. BENEFIT PLANS The Company has a defined contribution savings and profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. Employees who have completed one year of service are eligible to participate. Employees may contribute up to 15% of their monthly compensation. For employee contributions up to 5% of monthly compensation, the Company matches the employee contribution at a rate of 50%. Additional contributions by the Company are discretionary and are determined annually by the Board of Directors. These discretionary contributions to the plan are allocated to the participants pro rata based on their respective salary levels. F-13 31 CARBO CERAMICS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Benefit costs recognized as expense under this plan consisted of the following:
1998 1997 1996 ---- ---- ---- ($ IN THOUSANDS) Contributions: Profit sharing.................................................... $207 $209 $189 Savings........................................................... 145 116 107 ---- ---- ---- $352 $325 $296 ==== ==== ====
13. COMMITMENTS In 1995, the Company entered into an agreement with a supplier to purchase options to purchase 200,000 tons of green ore for its New Iberia, Louisiana plant at a specified contract price. All of the green ore purchased by the Company pursuant to the options will be processed by the supplier at a specified price. The Company is required to purchase at least 80% of its estimated annual requirements of processed ore from the supplier until all green ore purchased pursuant to the options has been processed. In 1995, the Company entered into an agreement with a supplier to purchase kaolin for its Eufaula, Alabama plant at a specified contract price. The term of the agreement is eight years commencing January 1, 1996. Beginning January 1, 1997, the agreement requires the Company to purchase from the supplier at least 80% of the Company's estimated annual requirements of kaolin for its Eufaula plant. In 1997, the Company entered into an agreement with a supplier to purchase kaolin for its McIntyre, Georgia plant at a specified contract price. The term of the agreement is twenty years commencing on January 1, 1998. The Company has the right to purchase up to 2.5 million tons of kaolin during the term of the agreement. The agreement requires the Company to purchase from the supplier at least 80% of the Company's estimated annual requirements of kaolin for its McIntyre plant. The Company was in compliance with the terms of all agreements through December 31, 1998. The Company is in the final stages of construction of a new manufacturing facility in McIntyre, Georgia that began in 1997. The total estimated cost of construction is $56 million. Construction in progress of $51.7 million at December 31, 1998 includes $49.9 million related to the new facility. The new facility is scheduled to be fully operational in the second quarter of 1999. 14. EMPLOYMENT AGREEMENT The Company has an employment agreement with its President, which expires June 30, 2000. The agreement provides for an annual base salary and an incentive bonus as defined in the agreement. In the event the President is terminated without cause prior to June 30, 2000, the Company will be obligated to pay the President two years base salary and a prorated incentive bonus. In addition, all nonvested stock options granted to the President will vest immediately and become exercisable. The agreement also contains a five-year non-competition covenant that would become effective upon termination for any reason. F-14 32 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT ------- ------- 3.1 --Certificate of Incorporation of CARBO Ceramics Inc. (incorporated by reference to exhibit 3.1 to the registrant's Form S-1 Registration Statement No. 333-1884) 3.2 --Bylaws of CARBO Ceramics Inc. (incorporated by reference to exhibit 3.2 to the registrant's Form S-1 Registration Statement No. 333-1884) 4.1 --Form of Common Stock Certificate of CARBO Ceramics Inc. (incorporated by reference to exhibit to the registrant's Form S-1 Registration Statement No. 333- 1884) 10.1 --First Amended and Restated Credit Agreement dated as of February 12, 1998, between Brown Brothers Harriman & Co. and CARBO Ceramics Inc. (incorporated by reference to exhibit 10.1 to the registrant's Form 10-K Annual Report for the year ended December 31, 1997) 10.2 --Form of Tax Indemnification Agreement between CARBO Ceramics Inc. and William C. Morris, Robert S. Rubin, Lewis C. Glucksman, George A. Wiegers, William A. Griffin, and Jesse P. Orsini (incorporated by reference to exhibit 10.2 to the registrant's Form S-1 Registration Statement No. 333-1884) 10.3 --Form of Employment Agreement between CARBO Ceramics Inc. and Jesse P. Orsini (incorporated by reference to exhibit 10.4 to the registrant's Form S-1 Registration Statement No. 333-1884) 10.4 --Purchase and Sale Agreement dated as of March 31, 1995, between CARBO Ceramics Inc. and GEO Specialty Chemicals, Inc., as amended (incorporated by reference to exhibit 10.5 to the registrant's Form S-1 Registration Statement No. 333-1884) 10.5 --Raw Material Requirements Agreement dated as of November 21, 1995, between CARBO Ceramics Inc. and C-E Minerals Inc. (incorporated by reference to exhibit 10.6 to the registrant's Form S-1 Registration Statement No. 333-1884) 10.6 --Incentive Compensation Plan (incorporated by reference to exhibit 10.8 to the registrant's Form S-1 Registration Statement No. 333-1884) 10.7 --CARBO Ceramics Inc. 1996 Stock Option Plan for Key Employees (incorporated by reference to exhibit 10.9 to the registrant's Form S-1 Registration Statement No. 333-1884) 10.8 --Form of Stock Option Award Agreement (incorporated by reference to exhibit 10.10 to the registrant's Form S-1 Registration Statement No. 333-1884) 10.9 --Raw Material Supply Agreement dated as of November 18, 1997 between CARBO Ceramics Inc. and Arcilla Mining and Land Co. (incorporated by reference to exhibit 10.9 to the registrant's Form 10-K Annual Report for the year ended December 31, 1997) 23.1 --Consent of Ernst & Young LLP 27.1 --Financial Data Schedule
F-15 EX-23 2 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No.33-25845) pertaining to the CARBO Ceramics Inc. 1996 Stock Option Plan for Key Employees of our report dated January 22, 1999 with respect to the consolidated financial statements of CARBO Ceramics Inc. included in the Annual Report on Form 10-K for the year ended December 31, 1998. ERNST & YOUNG LLP New Orleans, Louisiana March 12, 1999 EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1998 DEC-31-1998 622 0 11,300 0 10,227 23,783 87,553 11,909 99,427 8,638 0 0 0 146 87,123 99,427 84,095 84,095 41,665 41,665 0 0 0 33,427 12,719 20,708 0 0 0 20,708 1.42 1.40
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