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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001.
[ ] 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)
<Table>
DELAWARE 72-1100013
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</Table>
6565 MACARTHUR BOULEVARD
SUITE 1050
IRVING, TEXAS 75039
(Address of principal executive offices)
(972) 401-0090
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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, 2002, as reported on the New York Stock Exchange, was approximately
$213,173,953. 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, 2002, Registrant had outstanding 15,034,000 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Registrant's Annual Meeting of
Shareholders to be held April 9, 2002 are incorporated by reference in Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
CARBO Ceramics Inc. ("the Company") was formed in 1987 to acquire the
assets of Standard Oil Proppants Company, LP, a joint venture between two
ceramics proppant manufacturers. Since its founding in 1987, CARBO Ceramics has
become the world's largest producer and supplier of ceramic proppants for use in
the hydraulic fracturing of natural gas and oil wells. Demand for ceramic
proppants depends primarily upon the demand for natural gas and oil and on the
number of natural gas and oil wells drilled, completed or recompleted worldwide.
More specifically, the demand for ceramic proppants is dependent on the number
of oil and gas wells that are hydraulically fractured to stimulate production.
Hydraulic fracturing is the most widely used method of increasing
production from oil and gas wells. The hydraulic fracturing process consists of
pumping fluids down a natural gas or oil well at pressures sufficient to create
fractures in the hydrocarbon-bearing rock formation. A granular material, called
a proppant, is suspended and transported in the fluid and fills the fracture,
"propping" it open once high-pressure pumping stops. The proppant-filled
fracture creates a permeable channel through which the hydrocarbons can flow
more freely from the formation to the well and then to the surface.
There are three primary types of proppant that can be utilized in the
hydraulic fracturing process: sand, resin-coated sand and ceramic. Sand is the
least expensive proppant, resin-coated sand is more expensive and ceramic
proppants are typically the highest cost. The higher initial cost of ceramic
proppants is justified by the fact that the use of these proppants in certain
well conditions results in increased production of oil and gas and increased
cash flow for the operators of oil and gas wells. The increased production rates
are primarily attributable to the higher strength and more uniform size and
shape of ceramic proppants versus alternative materials.
Based on the Company's internally generated market information and
information contained in the United States Geological Survey Minerals Yearbook,
the Company estimates that it supplies approximately 60% of the ceramic
proppants and 9% of all proppants used worldwide. During the year ended December
31, 2001, the Company generated approximately 73% of its revenues in the U.S.
and 27% in international markets.
PRODUCTS
The Company manufactures four distinct ceramic proppants. CARBOHSP(TM)2000
and CARBOPROP(R) are premium priced, high strength proppants designed primarily
for use in deep gas wells. CARBOHSP(TM)2000 was introduced in January 2000 and
is an improved version of CARBOHSP(TM), which was introduced in 1979 as the
original ceramic proppant. CARBOHSP(TM)2000 has the highest strength of the
ceramic proppants manufactured by CARBO Ceramics and is used primarily in the
fracturing of deep gas wells. CARBOPROP(R), which was introduced by the Company
in 1982, is slightly lower in weight and strength than CARBOHSP(TM)2000 and was
developed for use in deep gas wells that do not require the strength of
CARBOHSP(TM)2000.
The CARBOLITE(R) and CARBOECONOPROP(R) products are lightweight,
intermediate strength proppants designed for use in gas wells of moderate depth
and shallower oil wells. CARBOLITE(R), introduced in 1984, is used in medium
depth oil and gas wells, where the additional strength of ceramic proppants may
not be essential, but where higher production rates can be achieved due to the
product's roundness and uniform grain size.
CARBOECONOPROP(R), introduced in 1992 to compete directly with sand-based
proppants, has been the Company's lowest priced and fastest growing product. The
introduction of CARBOECONOPROP(R) has resulted in ceramic proppants being used
by operators of oil and gas wells that had not previously used ceramics. The
Company believes that many of the users of CARBOECONOPROP(R) had previously used
sand or resin-coated sand.
1
COMPETITION AND MARKET SHARE
The Company's chief worldwide competitor is Norton Proppants ("Norton").
Norton is owned by Compagnie de Saint-Gobain, a large French glass and materials
company. Norton 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. The Company is aware of a
manufacturer of ceramic proppants located in Russia but has limited information
about that company. To date, the Russian manufacturer has sold products solely
within Russia. The Company believes the Russian manufacturer has not expanded
its sales efforts outside of Russia and is unlikely to do so in light of patents
held by the Company and Norton.
Competition for CARBOHSP(TM)2000 and CARBOPROP(R) principally includes
ceramic proppants manufactured by Norton and Curimbaba. The Company's
CARBOLITE(R) and CARBOECONOPROP(R) products compete with ceramic proppants
produced by Norton 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. Between 1993 and 1999,
the Company expanded capacity at each of its locations and plans to continue its
strategy of adding capacity to meet anticipated future increases in sales
demand.
The Company continually conducts testing and development activities with
respect to alternative raw materials to be used in the Company's existing
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, the "know-how" and trade secrets necessary to
manufacture a competitive product and the capital costs involved in building
production facilities of sufficient size to be operated efficiently.
CUSTOMERS AND MARKETING
The Company's largest customers are, in alphabetical order, BJ Services
Company, Halliburton Company and Schlumberger, the three largest participants in
the worldwide petroleum pressure pumping industry. These companies collectively
accounted for approximately 78 percent of the Company's 2001 revenues and
approximately 78 percent of the Company's 2000 revenues. However, the end users
of the Company's products are the operators of natural gas and oil wells that
hire the pressure pumping service companies to hydraulically fracture wells. The
Company works both with the pressure pumping service companies and directly with
the operators of natural gas and oil wells to present the technical and economic
advantages of using ceramic proppants. The Company generally supplies its
customers with products on a just-in-time basis, with transactions governed by
individual purchase orders. Continuing sales of product depend on the Company's
direct customers and the well operators being satisfied with both product
quality and delivery performance.
The Company recognizes the importance of a technical marketing program when
selling a product that offers financial benefits over time but is initially more
costly than alternative products. The Company must market its products both to
its direct customers and to owners and operators of natural gas and oil wells.
The
2
Company's sales and marketing staff regularly calls on and keeps close contact
with the people who are influential in the proppant purchasing decision:
production companies, regional offices of oilfield service companies that offer
pressure pumping services, and various completion engineering consultants.
Beginning in 1999, the Company increased its marketing efforts to production
companies. The Company expanded its technical sales force in recent years and
plans to continue to increase its efforts to educate end users on the benefits
of using ceramic proppants. While the Company's products have historically been
used in very deep wells that require high-strength proppants, the Company
believes that there is economic benefit to well operators of using ceramic
proppants in shallower wells that do not necessarily require a high-strength
proppant. The Company believes that its educational-based technical marketing
efforts will allow it to capture a greater portion of the large market for
sand-based proppants over time. The Company currently provides a variety of
technical support services and has developed computer software that models the
return on investment achievable by using the Company's ceramic proppants versus
that of other proppants in the hydraulic fracturing of a natural gas or oil
well.
The Company's worldwide sales and marketing activities are coordinated by
its North American and International Marketing Managers. The Company's export
marketing efforts in 2001 were conducted through its sales office in Aberdeen,
Scotland and through commissioned sales agents located in South America, China
and Australia.
The Company's ceramic proppants are used worldwide by U.S. customers
operating abroad and by foreign customers. Sales outside the United States
accounted for 27%, 37% and 39% of the Company's sales for 2001, 2000 and 1999,
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:
<Table>
<Caption>
LOCATION 2001 2000 1999
- -------- ------ ----- -----
($ IN MILLIONS)
United States............................................... $100.4 $58.9 $42.3
International............................................... 36.8 34.4 27.4
------ ----- -----
Total............................................. $137.2 $93.3 $69.7
====== ===== =====
</Table>
DISTRIBUTION
The Company maintains finished goods inventories at its plants in New
Iberia, Louisiana, Eufaula, Alabama, and McIntyre, Georgia, and at eight remote
stocking facilities located in Rock Springs, Wyoming; Oklahoma City, Oklahoma;
San Antonio, Texas; Fairbanks, Alaska; Edmonton, Alberta, Canada; Grand Prairie,
Alberta, Canada; Rotterdam, The Netherlands; and Shanghai, China. The North
American remote stocking facilities consist of bulk storage silos with truck
trailer loading facilities. The Company owns the facilities in San Antonio, Rock
Springs, Edmonton and Grand Prairie and subcontracts the operation of the
facilities and transportation to a local trucking company in each location. The
remaining stocking facilities are owned and operated by local trucking companies
under contract with the Company. The North American sites are supplied by rail,
and the sites in the Netherlands and China are supplied by container ship. In
total, the Company leases 148 rail cars for use in the distribution of its
products. The price of the Company's products sold for delivery in the lower 48
United States and Canada includes just-in-time delivery of proppants to the
operator's well site, which eliminates the need for customers to maintain an
inventory of ceramic proppants.
RAW MATERIALS
Ceramic proppants are made from alumina-bearing ores (commonly referred to
as bauxite, bauxitic clay or kaolin, depending on the alumina content), that are
readily available on the world market. Bauxite is largely used in the production
of aluminum metal, refractory material and abrasives. The main deposits of
alumina-bearing ores in the United States are in Arkansas, Alabama and Georgia;
other economically mineable deposits are located in Australia, China, Jamaica,
Russia and Surinam.
For the production of CARBOHSP(TM)2000, the Company uses calcined,
abrasive-grade bauxite imported from Australia, and typically purchases its
annual requirements at the seller's current prices. The Company
3
has entered into an agreement with a supplier to supply its anticipated need for
this ore in 2002. For the production of CARBOPROP(R), the Company uses a variety
of materials that meet specific chemical and mineralogical requirements. Raw
material for the production of CARBOPROP(R) may be either as-mined bauxitic
clays or a blend of bauxite and kaolin, either of which are readily available to
the Company at sellers' current prices or through long-term contracts.
The Company's Eufaula facility exclusively employs locally mined uncalcined
kaolin for the production of CARBOLITE(R) and CARBOECONOPROP(R). The Company has
entered into a contract that requires a supplier to sell to the Company up to
200,000 net tons of kaolin per year and the Company to purchase from the
supplier 80% of the Eufaula facility's annual kaolin requirements, each through
2003. This agreement stipulates a fixed price, subject to annual adjustment.
The Company's production facility in McIntyre, Georgia uses locally mined
uncalcined kaolin for the production of CARBOLITE(R) and CARBOECONOPROP(R). The
Company has entered into a long-term supply agreement for kaolin that stipulates
a fixed price subject to annual adjustment. The agreement requires the Company
to purchase at least 80% of the McIntyre facility's annual kaolin requirement
from the supplier. The supply contract, entered into in 1998, provides for a
twenty-year supply of raw materials. In 2001, the Company acquired an option to
acquire fee-simple or leasehold interest in land near its McIntyre, Georgia
facility, which the Company believes contains significant deposits of kaolin.
The Company is currently conducting an exploratory drilling program on this land
and may exercise its option to acquire a fee-simple or leasehold interest during
2002.
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(LOGO)F to 3,000(LOGO)F in a rotary kiln.
The Company uses two different methods to produce ceramic proppants. The
Company's plants in New Iberia, Louisiana, and McIntyre, Georgia, use a dry
process (the "Dry Process") which starts with bauxite, bauxitic clay or kaolin
that has been dried to remove both free water and water which was chemically
bound within the ore. This drying process is referred to as calcining. For the
production of CARBOHSP(TM)2000 and CARBOPROP(R), calcined ores are received at
the plant and ground into a dry powder. For the production of CARBOLITE(R) and
CARBOECONOPROP(R) at the McIntyre plant, ores are calcined at the plant before
being ground into a powder. Pellets are formed by combining the powder with
water and binders and introducing the mixture into high-shear mixers. The
process is completed once the green pellets are sintered in a rotary kiln. The
Company's competitors also use the Dry Process to produce ceramic proppants.
The Company's plant in Eufaula, Alabama, uses a wet process (the "Wet
Process"), which starts with moist, uncalcined kaolin from local mines. The
kaolin is dispersed with chemicals in a water slurry. With an atomizer, the
slurry is sprayed into a dryer that causes the slurry to harden into green
pellets. These green pellets are then sintered in rotary kilns. The Company
believes that the Wet Process is unique to its plant in Eufaula, Alabama.
PATENT PROTECTION
The Company makes ceramic proppants by processes and techniques that
involve a high degree of proprietary technology, some of which are protected by
patents.
The Company owns nine U.S. patents and twelve foreign patents. Three of
these U.S. patents and three of these foreign patents relate to the CARBOPROP(R)
product made by the Dry Process. Three of these U.S. patents and nine of these
foreign patents relate to the CARBOLITE(R) and CARBOECONOPROP(R) products made
by the Wet Process.
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
4
patents. The Company may be involved from time to time in the future, as it has
been in the past, in litigation to determine the enforceability, scope and
validity of its patent rights. Past disputes with its main competitor have been
resolved in settlements that permit the Company to continue to benefit fully
from its patent rights. The Company and this competitor have cross-licensed
certain of their respective patents relating to intermediate and low density
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
has not granted any licenses to third parties relating to the use of the Wet
Process. As a result of these cross licensing arrangements, the Company is able
to produce a broad range of ceramic proppants while third parties are unlikely
to be able to produce certain of these ceramic proppants without infringing on
the patent rights held by the Company, its main competitor or both.
PRODUCTION CAPACITY
The Company believes that constructing adequate capacity ahead of demand
while incorporating new technology to reduce manufacturing costs are important
competitive strategies to increase its overall share of the market for
proppants. Prior to 1993, the Company's production capacity was substantially in
excess of its sales requirements. Since that time, however, the Company has been
expanding its capacity in order to meet the generally increasing demand for its
products. In October 1993, the Company increased the capacity of the Eufaula
facility from 90 million pounds per year to 170 million pounds per year, in
response to the increasing demand for the Company's CARBOLITE(R) and
CARBOECONOPROP(R) products. In May 1995, the Company completed a 40
million-pound per year capacity expansion at the New Iberia facility, intended
to meet increasing demand for CARBOHSP(TM) and CARBOPROP(R). In February 1996,
the Company commenced operation of its second 80 million-pound per year
expansion of the Eufaula plant. Total annual capacity is currently 100 million
pounds at the New Iberia facility and 250 million pounds at the Eufaula
facility.
In June 1999, the Company substantially completed construction of a new
manufacturing facility in McIntyre, Georgia. Design capacity of the plant is 200
million pounds per year and the total cost of the plant was approximately $60
million. The plant consists of two distinct production lines housed in a single
building. Initial production was generated from the first production line in
June 1999 and full design throughput was achieved on that line in November 1999.
Initial production from the second production line began in December 1999 and
the plant operated at approximately 61 percent of its design capacity in 2000
and 88 percent in 2001. The plant is capable of producing all of the Company's
product lines and has been designed to be expandable to a capacity of 400
million pounds per year.
The Company currently has a manufacturing facility under construction in
Luoyang, China. The plant is expected to be complete in the fourth quarter of
2002. Total investment in the plant is projected to be approximately $10 million
and the plant is expected to have annual production capacity of 40 million
pounds.
The Company has also committed to expand its production facilities in
McIntyre, Georgia and New Iberia, Louisiana in 2002. The McIntyre project is
expected to have a total cost of $18 million and will add approximately 75
million pounds of annual capacity to the facility. The New Iberia plant will add
approximately 20 million pounds of annual capacity at a cost of $1.5 million.
5
The following table sets forth the date of construction and capacity of
each of the Company's existing manufacturing facilities:
<Table>
<Caption>
YEAR OF ANNUAL
LOCATION COMPLETION CAPACITY PRODUCTS
- -------- ---------- ------------ --------
(MILLIONS OF
POUNDS)
New Iberia, Louisiana
CARBOHSP(TM) 2000 and
Plant 1.............. 1979 20 CARBOPROP(R)
CARBOHSP(TM) 2000 and
Plant 2.............. 1981 40 CARBOPROP(R)
CARBOHSP(TM) 2000 and
1995 Expansion..... 1995 40 CARBOPROP(R)
---
Total......... 100
===
Eufaula, Alabama
CARBOLITE(R) and
1983 90 CARBOECONOPROP(R)
CARBOLITE(R) and
1993 Expansion....... 1993 80 CARBOECONOPROP(R)
CARBOLITE(R) and
1996 Expansion....... 1996 80 CARBOECONOPROP(R)
---
Total......... 250
===
McIntyre, Georgia
1999 200 CARBOLITE(R), CARBOECONOPROP(R)
===
CARBOHSP(TM) 2000 and
CARBOPROP(R)
</Table>
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, 2001, the Company had 196 full-time employees. In addition
to the services of its employees, the Company employs the services of
consultants as required. The Company's employees are not represented by labor
unions. There have been no work stoppages or strikes during the last three years
that have resulted in the loss of production or production delays. The Company
believes its relations with its employees are satisfactory.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-K, the Company's Annual
Report to Shareholders, any Form 10-Q or any Form 8-K of the Company or any
other written or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from such statements. This document contains
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 concerning, among other things, the Company's
prospects, developments and business strategies for its operations, all of which
are subject to certain risks, uncertainties and assumptions. These risks and
uncertainties include, but are not limited to, changes in the demand for oil and
natural gas, the development of alternative stimulation techniques and the
development of alternative proppants for use in hydraulic fracturing. The words
"believe", "expect", "anticipate", "project" and similar expressions identify
forward-looking statements. Readers are
6
cautioned not to place undue reliance on these forward-looking statements, each
of which speaks only as of the date the statement was made. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters (approximately 5,000
square feet of leased office space) in Irving, Texas, owns its manufacturing
facilities, land and substantially all of the related production equipment in
New Iberia, Louisiana, and Eufaula, Alabama, and leases its McIntyre, Georgia,
facility through 2009 at which time title will be conveyed to the Company.
The facility in New Iberia, Louisiana, located on 24 acres of land owned by
the Company, consists of two production units (approximately 85,000 square
feet), a laboratory (approximately 4,000 square feet) and an office building
(approximately 3,000 square feet). The Company also owns an 80,000 square foot
warehouse on the plant grounds in New Iberia, Louisiana.
The facility in Eufaula, Alabama, located on 14 acres of land owned by the
Company, consists of one production unit (approximately 111,000 square feet), a
laboratory (approximately 2,000 square feet) and an office (approximately 1,700
square feet).
The facility in McIntyre, Georgia includes real property, consisting of
approximately 36 acres, plant and equipment that are leased by the Company from
the Development Authority of Wilkinson County. The term of the lease commenced
on September 1, 1997 and terminates on January 1, 2009. Under the terms of the
lease, the Company was responsible for all costs incurred in connection with the
premises, including costs of construction of the plant and equipment. As an
inducement to locate the facility in Wilkinson County, Georgia, the Company
received certain ad-valorem property taxes incentives. The "net" lease provides
for annual lease payments in lieu of ad-valorem property taxes. The total of all
lease payments is immaterial in relation to the cost of the facility borne by
the Company. At the termination of the lease, title to all of the real property,
plant and equipment will be conveyed to the Company in exchange for nominal
consideration. The Company has the right to purchase the property, plant and
equipment at any time during the term of the lease for a nominal price.
The Company's customer service and distribution operations are located at
the New Iberia facility, while its quality control, testing and development
functions operate at the New Iberia, Eufaula and McIntyre facilities. The
Company owns distribution facilities in San Antonio, Texas, Rock Springs,
Wyoming, Edmonton and Grand Prairie, Alberta, Canada.
ITEM 3. LEGAL PROCEEDINGS
On April 26, 1999, the Company was served with a U.S. federal grand jury
subpoena requesting the production of documents in connection with an
investigation by the Antitrust Division of the U.S. Department of Justice of
possible anti-competitive activity in the proppants industry. The Company has
complied with this request. It is not possible at this time to predict how this
investigation will proceed or the effect, if any, of its ultimate outcome on the
Company.
From time to time, the Company is the subject of legal proceedings arising
in the ordinary course of business. The Company does not believe that any of
these proceedings will have a material adverse effect on its business or its
results of operations.
7
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 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
Dr. C. Mark Pearson (age 46) has served as President and Chief Executive
Officer since April 2001. 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 43) has been the Senior Vice President of Finance and
Administration and Chief Financial Officer since January 2000. Prior to serving
in his current capacity, Mr. Vitek served as Vice President of Finance from
February 1996 and has served as Treasurer and Secretary of the Company since
1988.
All officers are elected at the Annual Meeting of the Board of Directors
for one-year terms or until their successors are duly elected. There are no
arrangements between any officer and any other person pursuant to which he was
selected as an officer. There is no family relationship between any of the named
executive officers or between any of them and the Company's directors.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Common Stock Market Prices and Dividends
The Company's Common Stock is traded on the New York Stock Exchange (ticker
symbol CRR). The approximate number of holders, including both record holders
and individual participants in security position listings, of the Company's
Common Stock at February 15, 2002 was 2,415.
High and low stock prices and dividends for the last two fiscal years were:
<Table>
<Caption>
2001 2000
----------------------------- -----------------------------
SALES PRICE CASH SALES PRICE CASH
----------------- DIVIDENDS ----------------- DIVIDENDS
QUARTER ENDED HIGH LOW DECLARED HIGH LOW DECLARED
- ------------- ------- ------- --------- ------- ------- ---------
March 31................... $44.300 $30.750 $0.075 $29.500 $20.000 $0.075
June 30.................... 44.900 31.270 0.090 36.250 25.625 0.075
September 30............... 37.290 25.500 0.090 38.250 25.000 0.075
December 31................ 40.250 26.680 0.090 37.875 25.000 0.075
</Table>
The Company currently expects to continue its policy of paying quarterly
cash dividends at the rate of $0.09 per share, although there can be no
assurance as to future dividends because they depend on future earnings, capital
requirements and financial condition.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
consolidated financial statements of the Company. The data should be read in
conjunction with Management's Discussion and Analysis of Financial
8
Condition and Results of Operations and the financial statements and notes
thereto included elsewhere in this Report.
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of Income Data:
Revenues................................ $137,226 $ 93,324 $ 69,738 $84,095 $85,122
Cost of goods sold...................... 78,975 57,763 41,718 41,665 42,186
-------- -------- -------- ------- -------
Gross profit............................ 58,251 35,561 28,020 42,430 42,936
Selling, general and administrative
expenses(1).......................... 18,676 12,404 11,761 9,977 8,915
-------- -------- -------- ------- -------
Operating profit........................ 39,575 23,157 16,259 32,453 34,021
Other, net.............................. 1,106 268 (288) 974 1,004
-------- -------- -------- ------- -------
Income before income taxes.............. 40,681 23,425 15,971 33,427 35,025
Income taxes............................ 14,483 8,595 5,459 12,719 12,936
-------- -------- -------- ------- -------
Net income.............................. 26,198 $ 14,830 $ 10,512 $20,708 $22,089
======== ======== ======== ======= =======
Earnings per share
Basic................................ $ 1.76 $ 1.01 $ 0.72 $ 1.42 $ 1.51
======== ======== ======== ======= =======
Diluted.............................. $ 1.74 $ 1.00 $ 0.71 $ 1.40 $ 1.50
======== ======== ======== ======= =======
Balance Sheet Data:
Current assets.......................... $ 76,502 $ 47,415 $ 23,809 $23,783 $46,861
Current liabilities excluding bank
borrowings........................... 11,127 9,415 5,648 8,638 7,616
Bank borrowings -- current.............. -- -- 1,809 -- --
Property, plant and equipment, net...... 82,527 78,007 83,171 75,644 34,093
Total assets............................ 159,029 125,422 106,980 99,427 80,954
Total shareholders' equity.............. 136,942 106,140 93,400 87,269 70,942
Cash dividends per share................ $ 0.345 $ 0.30 $ 0.30 $ 0.30 $ 0.30
</Table>
- ---------------
(1) Selling, general and administrative (SG&A) expenses for 2001, 2000, 1999 and
1998 include costs of start-up activities of $35,000, $27,000, $1,464,000
and $451,000, respectively. Start-up costs for 2001 consist of
organizational and administrative costs associated with the construction
phase of the Company's plant in China. Start-up costs prior to 2001 consist
of labor, materials and utilities expended in bringing installed equipment
to normal operating conditions at the Company's plant in McIntyre, Georgia.
SG&A expenses in 2001 also include a nonrecurring, non-cash charge of $3.5
million due to the modification in 2001 of the expiration date of a stock
option award originally granted to its former president in 1996.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL BUSINESS CONDITIONS
CARBO Ceramics Inc. manufactures and sells ceramic proppants for use in the
hydraulic fracturing of oil and natural gas wells. Hydraulic fracturing is the
most common technique used to stimulate production from hydrocarbon bearing
formations. The process involves pumping fluids into an oil or gas well at very
high pressure in order to fracture the rock formation that contains the
hydrocarbons. As the fracture is created, the fluids are blended with granular
materials, or proppants, which fill the fracture and prop it open after the
pressure pumping ceases. The proppant filled fracture creates a highly permeable
channel that enables the oil or gas to flow more freely from the formation,
thereby increasing production from the well.
Ceramic proppants are premium products that are sold at higher prices than
sand or resin-coated sand, the two primary alternative proppants. The principal
advantage of ceramic proppants is that they are stronger than sand-based
proppants. The higher strength of ceramic proppants results in higher production
rates in deep wells where sand or resin-coated sand may be crushed under high
closure stress. Consequently, the level of deep drilling activity (generally
defined as wells deeper than 7,500 feet) influences the Company's business.
9
Ceramic proppants are also more uniform in size and shape than sand-based
proppants. This uniformity can result in higher production rates than sand-based
proppants when used in wells that do not otherwise require ceramics for their
higher strength.
As deep drilling, particularly in North America, is typically focused on
the production of natural gas, the Company's business is significantly impacted
by the number of natural gas wells drilled in North America. In markets outside
North America, sales of the Company's products are less dependent on natural gas
markets but are influenced by the overall level of drilling activity.
Furthermore, because the decision to use ceramic proppants is based on the
present value economics of comparing the higher cost of ceramic proppants to the
future value derived from increased production rates, the Company's business is
influenced by the price of natural gas and oil.
For much of 1999, oil and gas prices were depressed and worldwide drilling
activity was weak. In 1999, the worldwide rig count averaged 1,442, a decline of
22 percent from 1998 and 33 percent from 1997. The Company's financial results
for 1999 were adversely affected by a decrease in its average selling price due
to competitive pressures associated with depressed industry conditions and by
additional fixed costs incurred in connection with the start-up of its new
production facility in McIntyre, Georgia, which came on-line late in the year.
The price of oil and natural gas and drilling activity improved
significantly in 2000. The recovery was particularly evident in the North
American natural gas activity that is a key driver of the Company's business. As
a result, sales volume, average selling prices, revenues and profitability all
increased versus the previous year. The increase in profitability was tempered
by the impact of high natural gas prices on the Company's manufacturing costs
and the continued impact of start-up operations at the McIntyre, Georgia
facility early in the year.
The North American natural gas market remained very strong through the
first half of 2001. In addition, the Company began to see significant benefit
from the success of its technical marketing program that promotes the economic
benefit of using ceramic proppant in shallower wells. As a result of the strong
market conditions in North America, the Company's marketing success and the
increased capacity available from its McIntyre, Georgia production facility, the
Company established new annual records for sales volume, average selling price,
revenues and net income in 2001 despite a downturn in North American natural gas
drilling activity in the second half of the year.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S., which require the Company
to make estimates and assumptions (see Note 1 to the consolidated financial
statements). The Company believes that of its significant accounting policies,
the following may involve a higher degree of judgment and complexity.
Revenue is recognized when title passes to the customer upon delivery. The
Company generates a significant portion of its revenues and corresponding
accounts receivable from sales to the petroleum pressure pumping industry. In
addition, the Company generates a significant portion of its revenues and
corresponding accounts receivable from sales to three major customers, all of
which are in the petroleum pressure pumping industry. As of December 31, 2001,
approximately 70 percent of the balance in accounts receivable was attributable
to those three customers. As stated in Note 1 to the consolidated financial
statements, credit losses historically have been insignificant. Therefore,
except in circumstances in which management is aware of a specific customer's
inability to meet its financial obligations (e.g. bankruptcy filings), the
Company generally does not record a reserve for bad debts. If a prolonged
economic downturn in the petroleum pressure pumping industry were to occur or,
for some other reason, any of our primary customers were to experience
significant adverse conditions, our estimates of the recoverability of accounts
receivable could be reduced by a material amount.
Inventory is stated at the lower of cost or market. Obsolete or
unmarketable inventory historically has been insignificant and generally written
off when identified. Assessing the ultimate realization of inventories
10
requires judgements about future demand and market conditions, and management
believes that current inventories are properly valued at cost. Accordingly, no
reserve to write-down inventories has been recorded. If actual market conditions
are less favorable than those projected by management, inventory write-downs may
be required.
The Company is subject to legal proceedings, claims and litigation arising
in the ordinary course of business. Management does not believe the Company is
party to any legal proceedings that will have a material adverse effect on its
consolidated financial position. It is possible, however, that future results of
operations for any particular quarterly or annual period could be materially
affected by changes in assumptions related to those proceedings.
NET INCOME
<Table>
<Caption>
PERCENT PERCENT
2001 CHANGE 2000 CHANGE 1999
------- ------- ------- ------- -------
($ IN THOUSANDS)
Net Income.............................. $26,198 77% $14,830 41% $10,512
</Table>
The Company's net income for 2001 was 77 percent higher than the previous
year. 2001 results include a non-recurring, non-cash administrative charge of
$3.5 million ($2.2 million, net of tax) resulting from the modification of the
expiration date of fully vested stock options of the Company's former President
in connection with his retirement in 2001. Excluding this non-recurring charge,
net income for 2001 increased by 92% over 2000. A very strong North American
natural gas market was the driving force behind a significant increase in net
income for the year. The number of rigs drilling for natural gas in the U.S.
reached record levels in mid-year before declining significantly during the
second half. Despite this decrease in activity, demand for the Company's
products remained strong resulting in improved manufacturing efficiency from
operating manufacturing facilities at or near capacity throughout the year.
The Company reported net income for 2000 that was 41% higher than the
previous year. A significant increase in oil and gas drilling activity (and in
oil and natural gas prices) began during the second quarter of 2000 and
continued through the remainder of the year. The domestic rig count throughout
2000 was 47 percent higher than 1999, while the average price of natural gas
increased by 93 percent over the previous year. Decreased costs at the New
Iberia facility (due to higher production rates resulting from an increase in
screening capacity) and the start-up of the second line at McIntyre contributed
to net income improvement, with increased SG&A costs off-setting some of these
gains.
Individual components of net income are discussed below.
REVENUES
<Table>
<Caption>
PERCENT PERCENT
2001 CHANGE 2000 CHANGE 1999
-------- ------- ------- ------- -------
($ IN THOUSANDS)
Revenues............................... $137,226 47% $93,324 34% $69,738
</Table>
The Company's revenues of $137.2 million were 47 percent higher than 2000.
Total sales volume increased 31 percent, with domestic volume up 49 percent and
export volume down 4 percent compared to 2000. The Company believes that this
increase was due to both strong natural gas drilling activity in North America
and the success of its technical marketing program designed to increase the use
of ceramic proppants in wells that have traditionally used sand-based proppants.
In both the U.S. and Canada, the Company's sales volume increased by a larger
percentage than industry activity as measured by the number of rigs actively
drilling for oil or gas. The export sales decline was attributable to increased
competition, particularly in Russia, and the Company's decision to supply
domestic markets in a capacity constrained environment during much of the year.
The average selling price for the year was $0.271 per pound, an increase of 12
percent over the year 2000. Contributing to this was a January price increase of
approximately 9 percent and a slight shift in the product mix toward higher
strength products.
11
Carbo Ceramics Inc.'s 2000 revenues of $93.3 million were 34 percent higher
than 1999 revenues. Total sales volume increased by 34 percent, with domestic
volume up 39 percent and export volume up by 25 percent. The increased domestic
volume was driven by a 70 percent increase in the South Texas market, while
increased export sales were led by improved sales into Australia, China, Russia
and Canada. Revenues were also positively impacted by a June 2000 price increase
on our CARBOECONOPROP(R) product. The average selling price for the year was
$0.241 per pound. While this was unchanged versus the previous year, the average
selling price improved in each quarter during 2000 due to a change in the
product mix and a price increase on CARBOECONOPROP(R) that went into effect at
mid-year.
GROSS PROFIT
<Table>
<Caption>
PERCENT PERCENT
2001 CHANGE 2000 CHANGE 1999
------- ------- ------- ------- -------
($ IN THOUSANDS)
Gross Profit............................ $58,251 64% $35,561 27% $28,020
Gross Profit %.......................... 42% 38% 40%
</Table>
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. Certain handling costs related to
maintaining finished goods inventory and operating the Company's remote stocking
facilities are charged to selling, general and administrative expenses. Those
costs amounted to $3.6 million, $3.2 million and $2.6 million in 2001, 2000 and
1999, respectively.
Gross profit increased by 64 percent from 2000 to 2001. Gross profit as a
percentage of sales was 42 percent for 2001, compared to 38 percent for 2000.
The improvement in gross profit was the result of both the significant increase
in sales volume and improved pricing. Improved operating efficiency in
manufacturing facilities contributed to increased gross profit margins with
manufacturing facilities running at 95 percent of capacity in 2001 versus 73
percent of capacity in 2000. Partially offsetting this was the effect of higher
natural gas costs in our manufacturing operations and increased freight costs
due to lower than desired inventory levels at remote storage locations.
Gross profit increased by 27 percent from 1999 to 2000. Gross profit as a
percentage of sales was 38 percent for 2000, compared to 40 percent for 1999.
The increase in gross profit was driven primarily by the significant increase in
sales volume. The major contributor to reduced gross profit margins was the
significant increase in the cost of natural gas at all three manufacturing
facilities. Natural gas costs represent approximately 19 percent of the
Company's total manufacturing costs in 2000 compared to 12 percent in 1999. The
negative effects of the gas price increases were mitigated somewhat by increased
production rates at the New Iberia and McIntyre facilities which resulted in
lower costs per pound. At the McIntyre facility, throughput rates have improved
due to increased familiarity with new equipment and processes.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES AND START-UP COSTS
<Table>
<Caption>
PERCENT PERCENT
2001 CHANGE 2000 CHANGE 1999
------- ------- ------- ------- -------
($ IN THOUSANDS)
SG&A.................................... $18,676 51% $12,404 5% $11,761
SG&A as a % of Revenues................. 14% 13% 17%
</Table>
Selling, general and administrative expenses and start-up costs increased
by $6.3 million in 2001 over 2000. SG&A expenses as a percentage of sales
increased from 13 percent in 2000 to 14 percent in 2001. Included in 2001 is a
$3.5 million non-recurring, non-cash stock-based compensation charge related to
the modification of the expiration date of fully vested stock options in
connection with the 2001 retirement of the Company's former President. Excluding
this non-recurring charge, SG&A expenses increased by $2.8 million in 2001 over
2000. On this basis, SG&A expenses as a percentage of sales actually decreased
from 13 percent
12
in 2000 to 11 percent in 2001. Increased costs in 2001 are those that relate
directly to higher activity levels -- distribution, marketing and management
incentive expenses; increased personnel costs for additions in some
administrative functions; as well as increased legal expenses.
Selling, general and administrative expenses and start-up costs increased
by $643,000 in 2000 over 1999. However, SG&A expenses decreased as a percentage
of sales to 13 percent in 2000 from 17 percent in 1999. The single largest item
was a drop in start-up costs related to the new manufacturing facility in
McIntyre, Georgia from $1.5 million in 1999 to $27,000 in 2000. Excluding the
start-up costs, SG&A expenses increased by $2.1 million (or 20%) from 1999 to
2000. Increased costs in 2000 are those that relate directly to higher activity
levels -- distribution, marketing, and management incentive expense, as well as
distribution and marketing expenses related to the development of the China
market, New York Stock Exchange listing fees, and increased legal expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of December 31, 2001 were $31.5 million
compared to $14.8 million at the beginning of the year. The Company generated
cash from operations of $33.8 million and realized proceeds of $4.3 million from
the issuance of Common Stock for exercises of employee stock options. Total
capital expenditures for the year were $11.3 million, cash dividends paid
totaled $5.1 million, and net purchases of investment securities was $5.0
million. Major capital spending items during 2001 include spending on a new
manufacturing facility in China, improvements and additions to remote inventory
storage locations, and engineering studies related to debottlenecking and
expansion opportunities at the company's McIntyre, Georgia 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
December 31, 2001, there was no outstanding debt under the credit agreement. The
Company anticipates that cash provided by operating activities and funds
available under its line of credit will be sufficient to meet planned operating
expenses, tax obligations and capital expenditures through 2002. In addition,
the Company has $6.0 million in short-term marketable securities. Also, based on
the strength of its balance sheet, the Company believes that it could acquire
additional debt financing. Based on these assumptions, the Company believes that
its fixed costs could be met even with a moderate decrease in demand for the
Company's products.
See "Forward-Looking Information" under Item 1 hereof.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have operations subject to material risk of foreign
currency fluctuations, nor does it use derivative financial instruments in its
operations or investment portfolio. The Company has a $10.0 million line of
credit with its primary commercial bank. Under the terms of the revolving credit
agreement, the Company may elect to pay interest at either a fluctuating base
rate established by the bank from time to time or at a rate based on the rate
established in the London inter-bank market. The Company does not believe that
it has any material exposure to market risk associated with interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in pages F-1 through
F-15 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
13
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-15 of this Report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 2001 and 2000
Consolidated Statements of Income for each of the three years ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Shareholders' Equity for each of the three years
ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2001, 2000, and 1999
(b) Reports on Form 8-K:
On October 11, 2001, the company filed a report on Form 8-K concerning its
press release announcing third quarter 2001 earnings and ground-breaking on its
China plant.
(c) Exhibits:
The exhibits listed on the accompanying Exhibit Index are filed as part of,
or incorporated by reference into, this Report.
(d) Financial Statement Schedules:
All schedules have been omitted since they are either not required or not
applicable.
14
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/ C. MARK PEARSON
----------------------------------
C. Mark Pearson
President and Chief Executive
Officer
By: /s/ PAUL G. VITEK
----------------------------------
Paul G. Vitek
Sr. Vice President, Finance and
Chief Financial Officer
Dated: March 11, 2002
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints C. Mark Pearson 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.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM C. MORRIS Chairman of the Board March 11, 2002
- -----------------------------------------------------
William C. Morris
/s/ C. MARK PEARSON President, Chief Executive March 11, 2002
- ----------------------------------------------------- Officer and Director
C. Mark Pearson (Principal Executive Officer)
/s/ PAUL G. VITEK Sr. Vice President, Finance and March 11, 2002
- ----------------------------------------------------- Chief Financial Officer
Paul G. Vitek (Principal Financial and
Accounting Officer)
/s/ CLAUDE E. COOKE, JR. Director March 11, 2002
- -----------------------------------------------------
Claude E. Cooke, Jr.
/s/ JOHN J. MURPHY Director March 11, 2002
- -----------------------------------------------------
John J. Murphy
/s/ ROBERT S. RUBIN Director March 11, 2002
- -----------------------------------------------------
Robert S. Rubin
/s/ JESSE P. ORSINI Director March 11, 2002
- -----------------------------------------------------
Jesse P. Orsini
</Table>
15
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, 2001 and 2000, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CARBO Ceramics
Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
New Orleans, Louisiana
February 1, 2002
F-1
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<Table>
<Caption>
DECEMBER 31,
-------------------
2001 2000
-------- --------
($ IN THOUSANDS)
Current assets:
Cash and cash equivalents................................. $ 31,547 $ 14,757
Investment securities..................................... 6,000 1,000
Trade accounts receivable................................. 22,157 17,783
Inventories:
Finished goods......................................... 9,465 8,407
Raw materials and supplies............................. 5,944 4,067
-------- --------
Total inventories................................. 15,409 12,474
Prepaid expenses and other current assets................. 514 570
Deferred income taxes..................................... 875 831
-------- --------
Total current assets.............................. 76,502 47,415
Property, plant and equipment:
Land and land improvements................................ 944 944
Buildings................................................. 7,488 7,442
Machinery and equipment................................... 92,522 92,201
Construction in progress.................................. 11,657 728
-------- --------
Total............................................. 112,611 101,315
Less accumulated depreciation............................... 30,084 23,308
-------- --------
Net property, plant and equipment...................... 82,527 78,007
-------- --------
Total assets...................................... $159,029 $125,422
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,572 $ 1,293
Accrued payroll and benefits.............................. 2,491 1,945
Accrued freight........................................... 1,139 1,816
Accrued utilities......................................... 848 937
Accrued income taxes...................................... 2,304 2,581
Other accrued expenses.................................... 773 843
-------- --------
Total current liabilities......................... 11,127 9,415
Deferred income taxes....................................... 10,960 9,867
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: 14,949,600 and 14,699,500 shares issued and
outstanding at December 31, 2001 and 2000,
respectively........................................... 149 147
Additional paid-in capital................................ 54,967 45,225
Retained earnings......................................... 81,834 60,768
Accumulated other comprehensive income (loss)............. (8) --
-------- --------
Total shareholders' equity........................ 136,942 106,140
-------- --------
Total liabilities and shareholders' equity........ $159,029 $125,422
======== ========
</Table>
The accompanying notes are an integral part of these statements.
F-2
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
----------- ---------- ----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues................................................... $137,226 $93,324 $69,738
Cost of goods sold......................................... 78,975 57,763 41,718
-------- ------- -------
Gross profit............................................... 58,251 35,561 28,020
Selling, general and administrative expenses............... 18,641 12,377 10,297
Start-up costs............................................. 35 27 1,464
-------- ------- -------
Operating profit........................................... 39,575 23,157 16,259
Other income (expense):
Interest income.......................................... 891 302 5
Interest expense......................................... (1) (38) (297)
Other, net............................................... 216 4 4
-------- ------- -------
1,106 268 (288)
-------- ------- -------
Income before income taxes................................. 40,681 23,425 15,971
Income taxes............................................... 14,483 8,595 5,459
-------- ------- -------
Net income................................................. $ 26,198 $14,830 $10,512
======== ======= =======
Earnings per share:
Basic.................................................... $ 1.76 $ 1.01 $ 0.72
======== ======= =======
Diluted.................................................. $ 1.74 $ 1.00 $ 0.71
======== ======= =======
</Table>
The accompanying notes are an integral part of these statements.
F-3
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS INCOME (LOSS) TOTAL
------ ---------- -------- ------------- --------
($ IN THOUSANDS)
Balances at January 1, 1999............. $146 $42,919 $44,204 $-- $ 87,269
Net income............................ -- -- 10,512 -- 10,512
Cash dividends ($0.30 per share)...... -- -- (4,381) -- (4,381)
---- ------- ------- --- --------
Balances at December 31, 1999........... 146 42,919 50,335 -- 93,400
Net income............................ -- -- 14,830 -- 14,830
Exercise of stock options............. 1 1,663 -- -- 1,664
Income tax benefit from exercise of
stock options...................... -- 643 -- -- 643
Cash dividends ($0.30 per share)...... -- -- (4,397) -- (4,397)
---- ------- ------- --- --------
Balances at December 31, 2000........... 147 45,225 60,768 -- 106,140
Net income............................ -- -- 26,198 -- 26,198
Foreign currency translation
adjustment......................... -- -- -- (8) (8)
--------
Comprehensive income.................. 26,190
Exercise of stock options............. 2 4,333 -- -- 4,335
Income tax benefit from exercise of
stock options...................... -- 1,905 -- -- 1,905
Modification of fixed stock option
award.............................. -- 3,504 -- -- 3,504
Cash dividends ($0.345 per share)..... -- -- (5,132) -- (5,132)
---- ------- ------- --- --------
Balances at December 31, 2001........... $149 $54,967 $81,834 $(8) $136,942
==== ======= ======= === ========
</Table>
The accompanying notes are an integral part of these statements.
F-4
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
-------- ------- --------
($ IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................. $ 26,198 $14,830 $ 10,512
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 6,776 6,767 4,632
Deferred income taxes..................................... 1,049 3,600 2,936
Gain on sale of equipment................................. (7) -- --
Non-cash stock option expense............................. 3,504 -- --
Changes in operating assets and liabilities:
Trade accounts receivable.............................. (4,374) (6,900) 417
Inventories............................................ (2,935) (1,197) (1,050)
Prepaid expenses and other current assets.............. 56 (89) 133
Accounts payable....................................... 2,279 (184) (289)
Accrued payroll and benefits........................... 546 (9) (655)
Accrued freight........................................ (677) 271 753
Accrued utilities...................................... (89) 486 101
Income taxes........................................... 1,628 3,512 (554)
Other accrued expenses................................. (70) 622 (766)
-------- ------- --------
Net cash provided by operating activities................... 33,884 21,709 16,170
INVESTING ACTIVITIES
Maturities of investment securities......................... 1,000 -- --
Purchases of investment securities.......................... (6,000) (1,000) --
Purchases of property, plant and equipment.................. (11,296) (1,603) (14,027)
Sale of equipment........................................... 7 -- --
-------- ------- --------
Net cash used in investing activities....................... (16,289) (2,603) (14,027)
FINANCING ACTIVITIES
Proceeds from bank borrowings............................... -- 5,273 18,059
Repayments on bank borrowings............................... -- (7,082) (16,250)
Proceeds from exercise of stock options..................... 4,335 1,664 --
Dividends paid.............................................. (5,132) (4,397) (4,381)
-------- ------- --------
Net cash used in financing activities....................... (797) (4,542) (2,572)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents........ 16,798 14,564 (429)
Effect of exchange rate changes on cash..................... (8) -- --
Cash and cash equivalents at beginning of year.............. 14,757 193 622
-------- ------- --------
Cash and cash equivalents at end of year.................... $ 31,547 $14,757 $ 193
======== ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid............................................... $ 1 $ 38 $ 297
======== ======= ========
Income taxes paid........................................... $ 11,806 $ 1,483 $ 3,077
======== ======= ========
</Table>
The accompanying notes are an integral part of these statements.
F-5
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
CARBO Ceramics Inc. (the "Company") was formed in 1987 and is a
manufacturer of ceramic proppants. The Company has production plants operating
in New Iberia, Louisiana, Eufaula, Alabama and McIntyre, Georgia. The Company
predominantly markets its proppant products through pumping service companies
that perform hydraulic fracturing for major oil and gas companies. Finished
goods inventories are stored at the three plant sites and eight remote
distribution facilities located in: Rock Springs, Wyoming; Oklahoma City,
Oklahoma; San Antonio, Texas; Fairbanks, Alaska; Edmonton and Grande Prairie,
Alberta, Canada; Rotterdam, The Netherlands; and Shanghai, China.
Principles of Consolidation
The consolidated financial statements include the accounts of CARBO
Ceramics Inc. and its wholly owned subsidiaries: CARBO Ceramics Sales
Corporation, CARBO Ceramics (UK) Limited and CARBO Ceramics (Mauritius) Inc. The
accounts of CARBO Ceramics (Mauritius) Inc. include its wholly owned subsidiary,
CARBO Ceramics (China) Company 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. CARBO Ceramics
(Mauritius) Inc. was formed on May 14, 2001 under the laws of Mauritius. CARBO
Ceramics (China) Company Limited was formed on May 8, 2001 under the laws of the
People's Republic of China. 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,
2001 and 2000, investment securities consisted of auction-rate preferred stock,
which were classified as held-to-maturity. The fair value of the investments
approximated the carrying value at December 31, 2001 and 2000.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Finished goods inventories include costs of materials, plant labor and
overhead incurred in the production of the Company's products.
F-6
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Repair and maintenance
costs are expensed as incurred. Depreciation is computed on the straight-line
method for financial reporting purposes using the following estimated useful
lives:
<Table>
Buildings and improvements........................... 15 to 30 years
Machinery and equipment.............................. 3 to 30 years
</Table>
Revenue Recognition
Revenue is recognized when title passes to the customer. Title passes to
the customer upon delivery.
Shipping and Handling Costs
Shipping costs, which consist of transportation costs associated with the
delivery of the Company's products to customers, are classified as cost of goods
sold. Handling costs are charged to selling, general and administrative expenses
and include labor and overhead costs related to maintaining finished goods
inventory and operating the Company's remote distribution facilities. Handling
costs incurred in 2001, 2000 and 1999 were $3,555,000, $3,175,000 and
$2,616,000, respectively.
Cost of Start-Up Activities
Start-up activities, including organization costs, are expensed as
incurred. Start-up costs for 2001 consist of organizational and administrative
costs associated with the construction phase of the Company's plant in China.
Start-up costs for 2000 and 1999 represent labor, materials and utilities
expended in bringing installed equipment to normal operating conditions at the
Company's production facility in McIntyre, Georgia.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Research and Development Costs
Research and development costs are charged to operations when incurred and
are included in selling, general and administrative expenses. The amounts
incurred in 2001, 2000 and 1999 were $784,000, $676,000 and $703,000,
respectively.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, generally no compensation expense
is recognized because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant. However,
certain transactions involving modifications to fixed stock option awards may
result in the recognition of compensation expense under APB 25.
F-7
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign Subsidiaries
Financial statements of the Company's foreign subsidiaries are translated
using current exchange rates for assets and liabilities; average exchange rates
for the period for revenues, expenses, gains and losses; and historical exchange
rates for paid-in capital accounts. Resulting translation adjustments are
included in accumulated other comprehensive income.
2. BANK BORROWINGS
Under the terms of an unsecured revolving credit agreement with a bank,
dated December 31, 2000, the Company may borrow up to $10.0 million through
December 31, 2003, with the option of choosing either the bank's fluctuating
Base Rate or LIBOR Fixed Rate (as defined in the credit agreement). At December
31, 2001 the unused portion of the credit facility was $10.0 million. The credit
agreement requires the Company to maintain certain financial ratios. The terms
of the credit agreement further provide for certain affirmative and negative
covenants, including a restriction on capital expenditures. The Company was in
compliance with these covenants at December 31, 2001. Commitment fees are
payable quarterly at the annual rate of three-eighths of one percent of the
unused line of credit. Commitment fees included in selling, general and
administrative expenses were $38,000, $39,000 and $14,000 in 2001, 2000 and
1999, respectively.
3. LEASES
The Company leases certain property, plant and equipment under operating
leases, primarily consisting of railroad equipment leases. Minimum future rental
payments due under non-cancelable operating leases with remaining terms in
excess of one year as of December 31, 2001 are as follows ($ in thousands):
<Table>
2002....................................................... $ 476
2003....................................................... 393
2004....................................................... 360
2005....................................................... 77
2006....................................................... 25
------
Total............................................ $1,331
======
</Table>
Leases of railroad equipment generally provide for renewal options for
periods from one to five years at their fair rental value at the time of
renewal. In the normal course of business, operating leases for railroad
equipment are generally renewed or replaced by other leases. Rent expense for
all operating leases was $1,723,000 in 2001, $1,560,000 in 2000, and $1,168,000
in 1999.
F-8
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31 are as
follows:
<Table>
<Caption>
2001 2000
------- ------
($ IN THOUSANDS)
Deferred tax assets:
Employee benefits........................................... $ 224 $ 152
Stock-based compensation.................................... 1,195 --
Inventories................................................. 580 523
Other....................................................... 71 156
------- ------
Total deferred tax assets......................... 2,070 831
------- ------
Deferred tax liabilities:
Depreciation................................................ 12,027 9,749
Other....................................................... 128 118
------- ------
Total deferred tax liabilities.................... 12,155 9,867
------- ------
Net deferred tax liabilities...................... $10,085 $9,036
======= ======
</Table>
Significant components of the provision for income taxes are as follows:
<Table>
<Caption>
2001 2000 1999
------- ------ ------
($ IN THOUSANDS)
Current:
Federal................................................. $12,302 $4,450 $2,285
State................................................... 1,132 545 238
------- ------ ------
Total current................................... 13,434 4,995 2,523
------- ------ ------
Deferred:
Federal................................................. 961 3,208 2,695
State................................................... 88 392 241
------- ------ ------
Total deferred.................................. 1,049 3,600 2,936
------- ------ ------
$14,483 $8,595 $5,459
======= ====== ======
</Table>
The reconciliation of income taxes computed at the U.S. statutory tax rate
to the Company's income tax expense is as follows:
<Table>
<Caption>
2001 2000 1999
----------------- ---------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------ ------- ------ -------
($ IN THOUSANDS)
U.S. statutory rate............... $14,238 35.0% $8,199 35.0% $5,592 35.0%
State income taxes, net of federal
tax benefit..................... 1,220 3.0 937 4.0 479 3.0
Extraterritorial Income Exclusion
and other....................... (975) (2.4) (541) (2.3) (612) (3.8)
------- ---- ------ ---- ------ ----
$14,483 35.6% $8,595 36.7% $5,459 34.2%
======= ==== ====== ==== ====== ====
</Table>
F-9
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, the holders of Common Stock are entitled
to receive ratably such dividends, if any, as may be declared from time to time
by the Board of Directors out of funds legally available for that purpose. In
the event of liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share ratably in all assets remaining after payment
of liabilities, subject to prior distribution rights of any Preferred Stock then
outstanding. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable.
On January 9, 2002, the Board of Directors declared a cash dividend of
$0.09 per share. The dividend is payable on February 15, 2002 to shareholders of
record on January 31, 2002.
Preferred Stock
The Company's charter authorizes 5,000 shares of Preferred Stock. The Board
of Directors has the authority to issue Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or the designation of such series, without further vote
or action by the Company's shareholders. In connection with adoption of a
shareholder rights plan on February 13, 2002, the Company created the Series A
Preferred Stock and authorized 2,000 shares of the Series A Preferred Stock.
Shareholder Rights Plan
On February 13, 2002, the Company adopted a shareholder rights plan and
declared a dividend of one right for each outstanding share of Common Stock to
shareholders of record on February 25, 2002. With certain exceptions, the rights
become exercisable if a tender offer for the Company is announced or any person
or group acquires beneficial ownership of at least 15 percent of the Company's
Common Stock. If exercisable, each right entitles the holder to purchase one
ten-thousandth of a share of Series A Preferred Stock at an exercise price of
$200 and, if any person or group acquires beneficial ownership of at least 15
percent of the Company's Common Stock, to acquire a number of shares of Common
Stock having a market value of two times the $200 exercise price. The Company
may redeem the rights for $0.01 per right at any time before any person or group
acquires beneficial ownership of at least 15 percent of the Common Stock. The
rights expire on February 13, 2012.
6. STOCK OPTION PLAN
The Company has a fixed employee stock-based compensation plan under which
it may grant options to purchase an aggregate of 1,250,000 shares of Common
Stock to certain officers and key employees of the Company. The Company
determines conditions relating to vesting and exercise for each option. Options
granted under the plan are "non-statutory" (do not afford income tax benefits to
recipients, but may provide tax deductions for the Company upon exercise). The
exercise price of each option is equal to the market price of the Company's
stock on the date of grant. No individual employee may be granted options to
purchase more than an aggregate of 500,000 shares of Common Stock. The options
have ten-year terms and vest annually over a four-year period.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, and has been determined as if the Company
had accounted for its employee stock options under the
F-10
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2001, 2000 and 1999,
respectively: risk-free interest rates of 4.45%, 5.00% and 6.40%; a dividend
yield of 1.0%; volatility factors of the expected market price of the Company's
Common Stock of .507, .509 and .464; and a weighted-average expected life of the
option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options (net of related expected tax benefits) is amortized to expense over the
options' vesting period. The Company's pro forma information follows:
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income:
As reported......................................... $26,198 $14,830 $10,512
======= ======= =======
Pro forma including the effect of options........... $25,821 $14,133 $ 9,498
======= ======= =======
Basic earnings per share:
As reported......................................... $ 1.76 $ 1.01 $ 0.72
======= ======= =======
Pro forma including the effect of options........... $ 1.73 $ 0.96 $ 0.65
======= ======= =======
Diluted earnings per share:
As reported......................................... $ 1.74 $ 1.00 $ 0.71
======= ======= =======
Pro forma including the effect of options........... $ 1.72 $ 0.95 $ 0.65
======= ======= =======
</Table>
A summary of stock option activity and related information for the years
ended December 31 follows:
<Table>
<Caption>
2001 2000 1999
-------------------------- -------------------------- --------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
Outstanding -- beginning
of year................. 818 $21 925 $20 895 $20
Granted................... 209 34 20 23 30 24
Exercised................. 250 17 97 17 --
Forfeited................. 20 35 30 29 --
------ ------ ------
Outstanding -- end of
year.................... 757 $25 818 $21 925 $20
====== ====== ======
Exercisable at end of
year.................... 534 $22 704 $20 579 $19
Weighted-average fair
value of options granted
during the year......... $15.55 $10.63 $10.93
</Table>
F-11
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the status of fixed options outstanding at
December 31, 2001:
<Table>
<Caption>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
- ------------------------------------------------------ -------------------------
EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
PRICE NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE (000) CONTRACTUAL LIFE PRICE (000) PRICE
- -------- ------ ---------------- ---------------- ------ ----------------
$17-24 421 4 years $18 393 $18
32-35 336 8 years 33 141 32
--- ---
757 25 534 22
=== ===
</Table>
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings per
share:
Net income................................ $ 26,198 $ 14,830 $ 10,512
Denominator:
Denominator for basic earnings per
share -- weighted average shares....... 14,897,175 14,655,679 14,602,000
Effect of dilutive securities:
Employee stock options (See Note 6).... 144,903 170,624 109,865
----------- ----------- -----------
Dilutive potential common shares.......... 144,903 170,624 109,865
----------- ----------- -----------
Denominator for diluted earnings per
share -- adjusted weighted-average
shares................................. 15,042,078 14,826,303 14,711,865
=========== =========== ===========
Basic earnings per share.................... $ 1.76 $ 1.01 $ 0.72
=========== =========== ===========
Diluted earnings per share.................. $ 1.74 $ 1.00 $ 0.71
=========== =========== ===========
</Table>
F-12
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. QUARTERLY OPERATING RESULTS -- (UNAUDITED)
Quarterly results of operations for the years ended December 31, 2001 and
2000 were as follows:
<Table>
<Caption>
THREE MONTHS ENDED,
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
2001
Revenues................................. $34,174 $35,304 $36,627 $31,121
Gross profit............................. 13,046 15,440 16,437 13,328
Net income............................... 6,180 5,437 8,255 6,326
Earnings per share:
Basic.................................. $ 0.42 $ 0.36 $ 0.55 $ 0.42
Diluted................................ $ 0.41 $ 0.36 $ 0.55 $ 0.42
2000
Revenues................................. $22,101 $21,998 $25,269 $23,956
Gross profit............................. 6,747 9,080 10,302 9,432
Net income............................... 2,462 3,825 4,355 4,188
Earnings per share:
Basic.................................. $ 0.17 $ 0.26 $ 0.30 $ 0.28
Diluted................................ $ 0.17 $ 0.26 $ 0.29 $ 0.28
</Table>
Quarterly data may not sum to full year data reported in the consolidated
financial statements due to rounding.
9. SALES TO CUSTOMERS
The following schedule presents the percentages of total revenues related
to the Company's three major customers for the three-year period ended December
31, 2001:
<Table>
<Caption>
MAJOR CUSTOMERS
------------------
A B C OTHERS TOTAL
---- ---- ---- ------ -----
2001............................................... 33.8% 22.8% 21.5% 21.9% 100%
2000............................................... 35.4% 22.4% 20.2% 22.0% 100%
1999............................................... 38.7% 30.0% 16.4% 14.9% 100%
</Table>
10. GEOGRAPHIC INFORMATION
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 27%, 37% and 39% of the Company's revenues for 2001, 2000, and
1999, respectively. Long-lived assets, consisting of net property, plant and
F-13
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equipment, as of December 31 and revenues for the years ended December 31 in the
United States and other countries are as follows:
<Table>
<Caption>
2001 2000 1999
------ ----- -----
($ IN MILLIONS)
Long-lived assets:
United States............................................. $ 76.5 $76.5 $81.8
International............................................. 6.0 1.5 1.4
------ ----- -----
Total............................................. $ 82.5 $78.0 $83.2
====== ===== =====
Revenues:
United States............................................. $100.4 $58.9 $42.3
International............................................. 36.8 34.4 27.4
------ ----- -----
Total............................................. $137.2 $93.3 $69.7
====== ===== =====
</Table>
11. BENEFIT PLANS
The Company has a defined contribution savings and profit sharing plan
pursuant to Section 401(k) of the Internal Revenue Code. Employees are eligible
to participate at the beginning of the calendar quarter following their date of
hire and may contribute up to 15% of their monthly compensation.
For employee contributions up to 5% of monthly compensation, the Company
matches the employee contribution at a rate of 50%. Additional contributions by
the Company are discretionary and are determined annually by the Board of
Directors. These discretionary contributions to the plan are allocated to the
participants pro rata based on their respective salary levels.
Benefit costs recognized as expense under this plan consisted of the
following:
<Table>
<Caption>
2001 2000 1999
---- ---- ----
($ IN THOUSANDS)
Contributions:
Profit sharing............................................ $500 $325 $275
Savings................................................... 201 191 151
---- ---- ----
$701 $516 $426
==== ==== ====
</Table>
12. COMMITMENTS
In 1995, the Company entered into an agreement with a supplier to purchase
options to purchase 200,000 tons of green ore at a specified contract price for
its New Iberia, Louisiana plant. The agreement required all green ore purchased
by the Company pursuant to the options to be processed by the supplier at a
specified price. The agreement further required the Company to purchase from the
supplier at least 80% of its estimated annual requirements for processed ore
used to manufacture certain products until all green ore purchased pursuant to
the options had been processed. The Company fulfilled its obligation under the
agreement in 2001 and is currently evaluating alternative sources of supply, but
believes that suitable material is readily available at sellers' current prices
or through long-term contracts. For the years ended December 31, 2001, 2000 and
1999, the Company purchased from the supplier $1.7 million, $1.3 million and
$1.7 million, respectively, of processed ore.
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. For the years ended
F-14
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2001, 2000 and 1999, the Company purchased from the supplier $3.7
million, $2.7 million and $2.3 million, respectively, of kaolin under the
agreement.
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. For the years ended December 31, 2001, 2000 and 1999, the
Company purchased from the supplier $514,000, $383,000 and $39,000,
respectively, of kaolin under the agreement.
Construction in progress of $11.7 million at December 31, 2001 includes
$3.9 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. Construction
in progress at December 31, 2001 also includes $0.9 million related to McIntyre
debottlenecking and expansion projects. The remaining $6.9 million in
construction in progress is spread over various projects company-wide.
The Company was in compliance with the terms of all agreements through
December 31, 2001.
13. EMPLOYMENT AGREEMENTS
The Company has an employment agreement with its President, Dr. C. Mark
Pearson, which became effective with his appointment as President on April 10,
2001. The agreement, which expires December 31, 2002, provides for an annual
base salary and incentive bonus. If Dr. Pearson is terminated without cause
prior to December 31, 2002, the Company will be obligated to pay two years base
salary and a prorated incentive bonus, and all non-vested stock options granted
to Dr. Pearson will vest immediately and become exercisable. The agreement also
contains a two-year non-competition covenant that would become effective upon
termination for any reason.
The Company's employment agreement with its former President, Mr. Jesse P.
Orsini, terminated upon his retirement on April 10, 2001. At that time, Mr.
Orsini held fully vested options to purchase 200,000 shares of Common Stock,
which were awarded on April 26, 1996 and would have expired on April 26, 2006 if
he had remained employed by the Company. The original terms of the agreement
required Mr. Orsini to exercise these options within 30 days after cessation of
employment. Prior to Mr. Orsini's retirement, the Board of Directors agreed to
allow the options to remain exercisable for a 3-year period following his
retirement instead of the original 30-day period. Mr. Orsini was not granted
additional options; however, the modification of the term of the original
agreement triggered a provision under Accounting Principles Board Opinion No. 25
(See Note 1) that required the Company to apply accounting rules as if new
options were granted. The result was recognition of non-cash compensation cost
of $3.5 million ($2.2 million, net of income taxes) charged to operations in
2001. The Company has no further obligations under the employment agreement.
14. LEGAL PROCEEDINGS
The Company is subject to legal proceedings, claims and litigation arising
in the ordinary course of business. While the outcome of these matters is
currently not determinable, management does not expect that the ultimate costs
to resolve these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.
F-15
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Certificate of Incorporation of CARBO Ceramics Inc.
(incorporated by reference to exhibit 3.1 to the
registrant's Form S-1 Registration Statement No.
333-1884)
3.2 -- Bylaws of CARBO Ceramics Inc. (incorporated by reference
to exhibit 3.2 to the registrant's Form S-1 Registration
Statement No. 333-1884)
4.1 -- Form of Common Stock Certificate of CARBO Ceramics Inc.
(incorporated by reference to exhibit 4.1 to the
registrant's Form S-1 Registration Statement No.
333-1884)
10.1 -- Second Amended and Restated Credit Agreement dated as of
December 31, 2000, between Brown Brothers Harriman & Co.
and CARBO Ceramics Inc. (incorporated by reference to
exhibit 10.1 to the registrant's Form 10-K Annual Report
for the year ended December 31, 2000)
10.2 -- Form of Tax Indemnification Agreement between CARBO
Ceramics Inc. and William C. Morris, Robert S. Rubin,
Lewis C. Glucksman, George A. Wiegers, William A.
Griffin, and Jesse P. Orsini (incorporated by reference
to exhibit 10.2 to the registrant's Form S-1 Registration
Statement No. 333-1884)
10.3 -- Form of Employment Agreement between CARBO Ceramics Inc.
and Jesse P. Orsini (incorporated by reference to exhibit
10.4 to the registrant's Form S-1 Registration Statement
No. 333-1884)
10.4 -- Purchase and Sale Agreement dated as of March 31, 1995,
between CARBO Ceramics Inc. and GEO Specialty Chemicals,
Inc., as amended (incorporated by reference to exhibit
10.5 to the registrant's Form S-1 Registration Statement
No. 333-1884)
10.5 -- Raw Material Requirements Agreement dated as of November
21, 1995, between CARBO Ceramics Inc. and C-E Minerals
Inc. (incorporated by reference to exhibit 10.6 to the
registrant's Form S-1 Registration Statement No.
333-1884)
10.6 -- Incentive Compensation Plan (incorporated by reference to
exhibit 10.8 to the registrant's Form S-1 Registration
Statement No. 333-1884)
10.7 -- CARBO Ceramics Inc. 1996 Stock Option Plan for Key
Employees (incorporated by reference to exhibit 10.9 to
the registrant's Form S-1 Registration Statement No.
333-1884)
10.8 -- Form of Stock Option Award Agreement (incorporated by
reference to exhibit 10.10 to the registrant's Form S-1
Registration Statement No. 333-1884)
10.9 -- Raw Material Supply Agreement dated as of November 18,
1997 between CARBO Ceramics Inc. and Arcilla Mining and
Land Co. (incorporated by reference to exhibit 10.9 to
the registrant's Form 10-K Annual Report for the year
ended December 31, 1997)
10.10 -- Amendment to Employment Agreement between CARBO Ceramics
Inc. and Jesse P. Orsini (incorporated by reference to
exhibit 10.10 to the registrant's Form 10-K Annual Report
for the year ended December 31, 1999)
10.11 -- Form of Employment Agreement between CARBO Ceramics Inc.
and C. Mark Pearson (incorporated by reference to exhibit
10.11 to the registrant's Form 10-K Annual Report for the
year ended December 31, 2000)
23.1 -- Consent of Ernst & Young LLP
</Table>