SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 0-28178
CARBO CERAMICS INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 72-1100013 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
6565 MacArthur Boulevard
Suite 1050
Irving, Texas 75039
(Address of principal executive offices)
(972) 401-0090
(Registrant's telephone number)
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
As of July 31, 2002, 15,361,336 shares of the registrant's Common Stock, par value $.01 per share, were outstanding.
CARBO CERAMICS INC.
Index to Quarterly Report on Form 10-Q
PART I. FINANCIAL INFORMATION | PAGE |
Item 1. Financial Statements | |
Consolidated Balance Sheets - | 3 |
June 30, 2002 (Unaudited) and December 31, 2001 | |
Consolidated Statements of Income (Unaudited) - | 4 |
Three and six months ended June 30, 2002 and 2001 | |
Consolidated Statements of Cash Flows (Unaudited) - | 5 |
Six months ended June 30, 2002 and 2001 | |
Notes to Consolidated Financial Statements (Unaudited) | 6 |
Item 2. Management's Discussion and Analysis of Financial | 9 |
Condition and Results of Operations | |
PART II. OTHER INFORMATION | |
Item 1. Legal proceedings | 11 |
Item 2. Changes in securities | 11 |
Item 3. Defaults upon senior securities | 11 |
Item 4. Submission of matters to a vote of security-holders | 11 |
Item 5. Other information | 11 |
Item 6. Exhibits and reports on Form 8-K | 11 |
Signatures | 13 |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS | ||
June 30, | December 31, | |
2002 | 2001 | |
(Unaudited) | ||
($ in thousands) | ||
Current assets: | ||
Cash and cash equivalents | $ 21,765 | $ 31,547 |
Investment securities | 6,000 | 6,000 |
Trade accounts receivable | 21,296 | 22,157 |
Inventories: | ||
Finished goods | 9,803 | 9,465 |
Raw materials and supplies | 6,100 | 5,944 |
Total inventories | 15,903 | 15,409 |
Prepaid expenses and other current assets | 1,109 | 514 |
Deferred income taxes | 924 | 875 |
Total current assets | 66,997 | 76,502 |
Property, plant and equipment: | ||
Land and land improvements | 1,285 | 944 |
Buildings | 7,996 | 7,488 |
Machinery and equipment | 97,880 | 92,522 |
Construction in progress | 18,762 | 11,657 |
Total | 125,923 | 112,611 |
Less accumulated depreciation | 33,674 | 30,084 |
Net property, plant and equipment | 92,249 | 82,527 |
Goodwill | 19,561 | - |
Intangible assets, net | 3,402 | - |
Total assets | $ 182,209 | $ 159,029 |
LIABILITIES AND SHAREHOLDERS' EQUITY | ||
Current liabilities: | ||
Accounts payable | $ 2,666 | $ 3,572 |
Accrued payroll and benefits | 2,562 | 2,491 |
Accrued freight | 1,171 | 1,139 |
Accrued utilities | 747 | 848 |
Accrued income taxes | 2,672 | 2,304 |
Other accrued expenses | 1,216 | 773 |
Total current liabilities | 11,034 | 11,127 |
Deferred income taxes | 12,152 | 10,960 |
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: | ||
15,351,336 and 14,949,600 shares issued and outstanding at June 30, | ||
2002 and December 31, 2001, respectively | 154 | 149 |
Additional paid-in capital | 70,500 | 54,967 |
Unearned stock compensation | (756) | - |
Retained earnings | 89,137 | 81,834 |
Accumulated other comprehensive income (loss) | (12) | (8) |
Total shareholders' equity | 159,023 | 136,942 |
Total liabilities and shareholders' equity | $ 182,209 | $ 159,029 |
The accompanying notes are an integral part of these statements.
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CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
(Unaudited)
Three months ended | Six months ended | |||
June 30, | June 30, | |||
2002 | 2001 | 2002 | 2001 | |
Revenues | $ 29,651 | $ 35,304 | $ 58,962 | $ 69,478 |
Cost of sales | 17,681 | 19,864 | 35,314 | 40,992 |
Gross profit | 11,970 | 15,440 | 23,648 | 28,486 |
Selling, general and administrative expenses | 4,257 | 7,131 | 8,104 | 10,816 |
Start-up costs | 68 | - | 111 | - |
Operating profit | 7,645 | 8,309 | 15,433 | 17,670 |
Other income (expense): | ||||
Interest income | 146 | 270 | 302 | 488 |
Interest expense | (10) | (1) | (10) | (1) |
Other, net | 76 | (5) | 88 | 22 |
212 | 264 | 380 | 509 | |
Income before income taxes | 7,857 | 8,573 | 15,813 | 18,179 |
Income taxes | 2,881 | 3,136 | 5,808 | 6,562 |
Net income | $ 4,976 | $ 5,437 | $ 10,005 | $ 11,617 |
Earnings per share: | ||||
Basic | $ 0.33 | $ 0.36 | $ 0.66 | $ 0.78 |
Diluted | $ 0.33 | $ 0.36 | $ 0.66 | $ 0.77 |
Other information: | ||||
Dividends declared per common share | $ 0.09 | $ 0.09 | $ 0.18 | $ 0.165 |
The accompanying notes are an integral part of these statements.
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CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
(Unaudited)
Six months ended | ||
June 30, | ||
2002 | 2001 | |
Operating activities | ||
Net income | $ 10,005 | $ 11,617 |
Adjustments to reconcile net income to net cash | ||
provided by operating activities: | ||
Depreciation and amortization | 3,622 | 3,364 |
Deferred income taxes | 1,143 | (346) |
Non-cash stock option expense | 33 | 3,504 |
Changes in operating assets and liabilities: | ||
Trade accounts receivable | 2,322 | (5,661) |
Inventories | (494) | 662 |
Prepaid expenses and other current assets | (417) | (209) |
Accounts payable | (2,275) | 285 |
Accrued payroll and benefits | (260) | (495) |
Accrued freight | 32 | (963) |
Accrued utilities | (101) | 52 |
Accrued income taxes | 629 | 2,733 |
Other accrued expenses | 208 | (159) |
Net cash provided by operating activities | 14,447 | 14,384 |
Investing activities | ||
Purchases of property, plant and equipment, net | (9,369) | (943) |
Purchase of Pinnacle Technologies, Inc. | (12,134) | - |
Net cash used in investing activities | (21,503) | (943) |
Financing activities | ||
Repayments on bank borrowings | (2,198) | - |
Proceeds from exercise of stock options | 2,178 | 4,055 |
Dividends paid | (2,702) | (2,451) |
Net cash provided by (used in) financing activities | (2,722) | 1,604 |
Net increase (decrease) in cash and cash equivalents | (9,778) | 15,045 |
Effect of exchange rate changes on cash | (4) | - |
Cash and cash equivalents at beginning of period | 31,547 | 14,757 |
Cash and cash equivalents at end of period | $ 21,765 | $ 29,802 |
Supplemental cash flow information | ||
Interest paid | $ 10 | $ 1 |
Income taxes paid | $ 4,036 | $ 4,175 |
The accompanying notes are an integral part of these statements.
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CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of CARBO Ceramics Inc. have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2001 in cluded in the Company's Form 10-K Annual Report for the year ended December 31, 2001.
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its wholly owned subsidiaries: CARBO Ceramics Sales Corporation, CARBO Ceramics (UK) Limited, CARBO Ceramics (Mauritius) Inc. and Pinnacle Technologies, Inc. The accounts of CARBO Ceramics (Mauritius) Inc. include its wholly owned subsidiary, CARBO Ceramics (China) Company Limited. All significant intercompany transactions and balances have been eliminated in consolidation.
Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation.
2. Acquisition
On May 31, 2002, the Company purchased 100 percent of the outstanding shares of Pinnacle Technologies, Inc. Results of operations for Pinnacle are included in the consolidated financial statements since that date. Pinnacle provides fracture diagnostic and mapping services, sells fracture simulation software and provides fracture design services to oil and gas companies worldwide. The acquisition was made for the purpose of expanding our ability to provide production-enhancing solutions to exploration and production companies worldwide and providing a catalyst for accelerating the growth of ceramic proppant sales in the future.
The aggregate cost of the acquisition was $26.8 million including $12.4 million cash, 324,226 shares of common stock valued at $11.2 million, 158,300 stock options valued at $2.6 million granted in exchange for 79,150 outstanding Pinnacle options and $0.6 million direct costs of the acquisition. Goodwill arises from the transaction because the aggregate cost exceeded the fair value of the assets acquired of $9.0 million and liabilities assumed of $4.1 million. The value of the common shares was determined based on the closing market price of the Company's common stock on the date of acquisition. The value of stock options was determined using the Black-Scholes option valuation model based on the closing market price of the Company's common stock on the date of acquisition. The fair value of options granted was reduced by $0.8 million allocated to unearned stock compensation, which represents the intrinsic value of options exchanged for unvested Pinnacle options. Unearned stock compensation will be recognized as compensation expense over the remaining vesting period. Under the terms of the acquisition agreement, the Company withheld $2.3 million of the aggregate purchase price in the form of $0.8 million cash and 43,640 common shares valued at $1.5 million using the closing market price on the date of acquisition. Subject to the Company's rights of indemnity under the agreement, consideration withheld will be paid on the first anniversary of closing and recognized as additional goodwill at that time.
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Following are pro forma amounts assuming the acquisition was made on January 1, 2001 ($ in thousands):
Three months ended | Six months ended | |||
June 30, | June 30, | |||
2002 | 2001 | 2002 | 2001 | |
Pro forma revenue | $ 31,827 | $ 37,840 | $ 63,396 | $ 73,676 |
Pro forma net income | $ 4,821 | $ 5,568 | $ 9,714 | $ 11,782 |
Pro forma earnings per share: | ||||
Basic | $ 0.31 | $ 0.37 | $ 0.63 | $ 0.78 |
Diluted | $ 0.31 | $ 0.36 | $ 0.63 | $ 0.76 |
3. Dividends Paid
On April 9, 2002, the Board of Directors declared a cash dividend of $0.09 per common share payable to shareholders of record on April 30, 2002. The dividend was paid on May 15, 2002.
4. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share ($ in thousands, except per share data):
Three months ended | Six months ended | |||
June 30, | June 30, | |||
2002 | 2001 | 2002 | 2001 | |
Numerator for basic and diluted earnings per share: | ||||
Net income | $ 4,976 | $ 5,437 | $ 10,005 | $ 11,617 |
Denominator: | ||||
Denominator for basic earnings per share-- | ||||
Weighted-average shares | 15,162,395 | 14,917,306 | 15,074,129 | 14,858,872 |
Effect of dilutive securities: | ||||
Employee stock options | 128,700 | 169,997 | 120,703 | 168,140 |
Contingent stock-acquisition | 14,866 | - | 7,474 | - |
Dilutive potential common shares | 143,566 | 169,997 | 128,177 | 168,140 |
Denominator for diluted earnings per share-- | ||||
adjusted weighted-average shares | 15,305,961 | 15,087,303 | 15,202,306 | 15,027,012 |
Basic earnings per share | $ 0.33 | $ 0.36 | $ 0.66 | $ 0.78 |
Diluted earnings per share | $ 0.33 | $ 0.36 | $ 0.66 | $ 0.77 |
During the six months ended June 30, 2002, employees exercised stock options to acquire 121,150 common shares at a weighted-average exercise price of $17.97 per share. The Company recognized a related income tax benefit of $261,000, which was credited directly to shareholders' equity.
5. Intangible Assets
Following is a summary of intangible assets:
June 30, | December 31, | |
2002 | 2001 | |
Intangibles subject to amortization: | ($ in thousands) | |
Patents and licenses, net of accumulated amortization of $22 | $ 2,504 | $ - |
Hardware designs, net of accumulated amortization of $10 | 532 | - |
Other intangibles not subject to amortization | 366 | - |
$ 3,402 | $ - |
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6. Comprehensive Income
Comprehensive income was as follows ($ in thousands):
Three months ended | Six months ended | |||
June 30, | June 30, | |||
2002 | 2001 | 2002 | 2001 | |
Net income | $ 4,976 | $ 5,437 | $ 10,005 | $ 11,617 |
Foreign currency translation adjustment | (2) | - | (4) | - |
Comprehensive income | $ 4,974 | $ 5,437 | $ 10,001 | $ 11,617 |
7. Stock Option Compensation Expense
Selling, general and administrative expenses for the second quarter 2001 include $3.5 million non-cash compensation expense recognized for stock options that were fully-vested but remained unexercised by the Company's former President, Mr. Jesse P. Orsini, at the time of his retirement in April 2001. The Company granted 250,000 options to Mr. Orsini in April 1996 that vested completely by April 2000. The options would have expired the earlier of April 2006 or 30 days after separation of employment, but the Company agreed to extend the term from 30 days to three years following retirement, not to exceed the ten year maximum contractual term. Accordingly, the Company recorded compensation expense for 200,000 unexercised options whose term was extended by Mr. Orsini's retirement. The Company also recognized a related income tax benefit of $2.2 million.
8. Commitments
Construction in progress of $18.8 million at June 30, 2002 includes $7.7 million related to construction of the Company's new manufacturing facility in Luoyang, China. The new facility is scheduled to be fully operational in the fourth quarter of 2002 at a total estimated cost of $9.5 million.
Under the agreement to acquire Pinnacle Technologies, Inc., a portion of the aggregate purchase price was withheld from former Pinnacle shareholders. Subject to the Company's rights of indemnity under the agreement, the final installment valued at $2.3 million in cash and common stock will be paid on May 31, 2003 (see Note 2).
9. Legal Proceedings
The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not expect that the ultimate cost to resolve these matters will have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Critical Accounting Policies
Our acquisition of Pinnacle Technologies, Inc. resulted in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that we will incur. In assessing the recoverability of our goodwill and other intangibles we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. We are required to analyze goodwill for impairment at least annually.
Results of Operations
Three Months Ended June 30, 2002
Revenues. Revenues of $29.7 million for the quarter ended June 30, 2002 decreased 16 percent from the same period a year earlier. A decline in North American drilling activity was largely responsible for a 20 percent reduction in the sales volume of ceramic proppants versus the same period a year earlier. The U.S. natural gas rig count for the second quarter was 33 percent lower than the last year's second quarter and the Canadian rig count was down 42 percent compared to the same period. Domestic sales volume declined by 22 percent from the second quarter of 2001 while export sales dropped 16 percent.
Gross Profit. Gross profit for the quarter was $12.0 million, or 40 percent of sales, compared to $15.4 million, or 44 percent of sales, for the second quarter of 2001. Manufacturing facilities operated at approximately 80 percent of capacity during the second quarter 2002 in order to balance inventories with sales demand. With manufacturing facilities operating at less than full capacity and in anticipation of increased demand in the second half of the year, preventive maintenance was increased on idle equipment. The combination of lower production rates and higher maintenance costs was the single largest contributor to the decline in gross profit margins compared with last year's second quarter.
Selling, General and Administrative Expenses (SG&A) and Start-up Costs. Selling, general and administrative expenses and start-up costs totaled $4.3 million for the second quarter of 2002, a 39 percent decrease versus $7.1 million for the second quarter of 2001. Second quarter 2001 SG&A expenses included a non-recurring stock compensation charge of $3.5 million related to the modification of the expiration date of fully-vested stock options in connection with the April 10, 2001 retirement of the Company's former President. Excluding that charge, SG&A expenses actually increased by 17 percent. The increase in expenses was due to additional marketing and development activities associated with expanding our technical marketing program, engineering activity related to manufacturing capacity expansion under consideration, costs related to start-up and management activities at our plant under construction in China, and the effect of consolidating June results of newly acqu ired Pinnacle Technologies, Inc. Increases in those expenses more than offset reductions in legal expense and variable expenses driven by sales activity such as warehousing costs.
Six Months Ended June 30, 2002
Revenues. Revenues of $59.0 million for the six-month period ended June 30, 2002 trailed revenues of $69.5 million for the same period in 2001 by 15 percent. The decline was driven primarily by a 29 percent reduction in the U.S. natural gas rig count. Sales volume for ceramic proppants fell 19 percent, with domestic sales volume down 22 percent and export sales volume down 11 percent.
Gross Profit. Gross profit for the six months ended June 30, 2002 was $23.6 million, or 40 percent of revenues, compared to $28.5 million, or 41 percent of revenues, for the same period in 2001. The positive effect of lower natural gas costs in our manufacturing operations in 2002 vs. 2001 was offset by lower production rates and higher maintenance costs in the first half of 2002.
Selling, General and Administrative Expenses (SG&A) and Start-up Costs. Selling, general and administrative expenses and start-up costs totaled $8.2 million for the six months ended June 30, 2002 compared to $10.8 million for the six months ended June 30, 2001. Included in SG&A expenses in the first half of 2001 is a $3.5 million non-recurring stock compensation charge related to the modification of the expiration date of fully-vested stock options in connection with the April 10, 2001 retirement of the Company's former President. Excluding the non-recurring charge, SG&A expenses increased by 11 percent over 2001. The increase is due to enhanced marketing and engineering activity, start-up and management activities in China, and the effect of consolidating June results of Pinnacle Technologies, Inc.
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Liquidity and Capital Resources
Cash and cash equivalents totaled $21.8 million as of June 30, 2002, a decrease of $9.8 million from December 31, 2001. The Company generated cash from operations of $14.4 million and realized proceeds from the exercise of employee stock options of $2.2 million. Uses of cash included $12.1 million for the purchase of Pinnacle Technologies, Inc., $2.2 million repayments of Pinnacle bank borrowings, $2.7 million cash dividends and capital spending of $9.4 million. Major capital spending includes $3.8 million on the China manufacturing facility and $3.5 million on debottlenecking and capacity expansion projects at the McIntyre, Georgia manufacturing facility.
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 $0.09 per share.
The Company maintains an unsecured line of credit of $10.0 million. As of June 30, 2002, there was no outstanding debt under the credit agreement. The Company anticipates that cash on hand, cash provided by operating activities and funds available under its line of credit will be sufficient to meet planned operating expenses, tax obligations and capital expenditures through 2002. The Company also believes that it could acquire additional debt financing, if needed. Based on these assumptions, we believe that the Company's fixed costs could be met even with a moderate decrease in demand for the Company's products.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-Q, the Company's Form 10-K and Annual Report to Shareholders, any other 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 dema nd 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Annual Meeting of Shareholders of Carbo Ceramics Inc. was held on April 9, 2002.
b. The following matters were submitted to a vote at the meeting:
(1) the election of the following nominees as directors of Carbo Ceramics Inc. The vote with respect to each nominee was as follows:
Nominee | For | Withheld |
Claude E. Cooke | 14,510,898 | 9,360 |
William C. Morris | 14,515,568 | 4,690 |
John J. Murphy | 14,510,898 | 9,360 |
Jesse P. Orsini | 13,900,299 | 619,959 |
C. Mark Pearson | 13,899,209 | 621,049 |
Robert S. Rubin | 14,511,098 | 9,160 |
(2) the ratification of the appointment of Ernst & Young LLP as independent accountants to audit the consolidated financial statements of Carbo Ceramics Inc. for the year 2002. Results of the vote were as follows: 14,343,034 for, 170,954 against and 6,270 abstained.
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
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b. Reports on Form 8-K
On May 22, 2002, the company filed a report on Form 8-K concerning the May 21, 2002 signing of a definitive merger agreement to acquire Pinnacle Technologies, Inc.
On May 31, 2002, the company filed a report on Form 8-K concerning the completion of its acquisition of Pinnacle Technologies, Inc.
On July 19, 2002, the company filed a report on Form 8-K concerning its press release announcing second quarter 2002 results.
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SIGNATURES
Pursuant to the requirements 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.
/s/ C. MARK PEARSON
C. Mark Pearson
President and Chief Executive Officer
/s/ PAUL G. VITEK
Paul G. Vitek
Sr. Vice President, Finance and
Chief Financial Officer
Date: August 13, 2002