ITEM 1. BUSINESS
GENERAL
CARBO Ceramics Inc. is the world's largest producer and supplier of ceramic proppants for use in the hydraulic fracturing of natural gas and oil wells. Demand for ceramic proppants depends generally upon the demand for natural gas and oil and on the number of natural gas and oil wells drilled, completed or recompleted worldwide. More specifically, the demand for ceramic proppants is dependent on the number of oil and gas wells that are hydraulically fractured to stimulate production.
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, such as ceramic proppant or sand-based proppant, is suspended in the fluid and packs the newly created fracture, keeping the fracture open once high-pressure pumping stops. The proppant-filled fracture creates a permeable channel through which the hydrocarbons can flow more freely from the formation to the well and then to the surface.
CARBO Ceramics was formed in 1987 for the purpose of purchasing the assets of Standard Oil Proppants Company Ltd. (SOPCO). SOPCO was a joint venture formed to operate the combined proppant businesses of the Carborundum Company and Dresser Industries. These proppant businesses were started in 1978 and 1984 respectively. While the Carborundum Company and Dresser Industries had primarily manufactured high strength, premium priced proppants for use in very deep wells, CARBO Ceramics has pursued a strategy of introducing new, lower-priced, lightweight, intermediate strength ceramic proppants to capture a greater portion of the large market for sand-based proppants.
Based on the Company's internally generated market information and information contained in the United States Geological Survey Minerals Yearbook, the Company estimates that it supplies 60% of the ceramic proppants and 8% of all proppants used worldwide. During the year ended December 31, 1999, the Company generated approximately 61% of its revenues in the U.S. and 39% in international markets.
PRODUCTS
The Company manufactures four distinct ceramic proppants. CARBOHSP(TM) 2000 and CARBOPROP(R) are premium priced, high strength proppants designed primarily for use in deep gas wells. CARBOHSP(TM) 2000 was introduced in January 2000 and is an improved version of CARBOHSP(TM), which was introduced in 1979 as the original ceramic proppant. CARBOHSP(TM) 2000 has the highest strength of the ceramic proppants manufactured by CARBO Ceramics and is used primarily in the fracturing of deep gas wells. CARBOPROP(R), which was introduced by the Company in 1982, is slightly lower in weight and strength than CARBOHSP(TM) 2000 and was developed for use in deep gas wells that do not require the strength of CARBOHSP(TM) 2000.
The CARBOLITE(R) and CARBOECONOPROP(R) products are lightweight, intermediate strength proppants designed for use in gas wells of moderate depth and shallower oil wells. The products are manufactured and sold to compete directly with sand-based proppants. CARBOLITE(R), introduced in 1984, is used in medium depth oil and gas wells, where the additional strength of ceramic proppants may not be essential, but where higher production rates can be achieved due to the product's roundness and uniform grain size.
CARBOECONOPROP(R), introduced in 1992 to compete directly with sand-based proppants, is the Company's lowest priced and fastest growing product. The introduction of CARBOECONOPROP(R) has resulted in ceramics being used in many new markets by end users that had not previously used ceramic proppants. The Company believes that many of the users of CARBOECONOPROP(R) had previously used sand or resin-coated sand.
CUSTOMERS AND MARKETING
The Company's largest customers are, in alphabetical order, BJ Services Company, Dowell and Halliburton Company, the three largest participants in the worldwide petroleum pressure pumping industry. These companies collectively accounted for approximately 85% of the Company's 1999 revenues and approximately 88% of the Company's 1998 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 has historically worked with the pressure pumping service companies to present the advantages of using ceramic proppants to the operators of natural gas and oil wells. The Company generally supplies its customers with products on a just-in-time basis, with transactions governed by individual purchase orders. Continuing sales of product depend on the Company's direct customers and the well operators being satisfied with both product quality and delivery performance.
The Company recognizes the importance of a technical marketing program when selling a product that offers financial benefits over time but is initially more costly than alternative products. The Company must market its products both to its direct customers and to owners and operators of natural gas and oil wells. The Company's sales and marketing staff regularly calls on and keeps close contact with the people who are influential in the proppant purchasing decision: production companies, regional offices of well 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 intends to expand its technical sales force in 2000 and continue to increase its efforts to educate end users on the benefits of using ceramic proppants. 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 Vice President of Marketing and Technology coordinates worldwide sales and marketing activities. The Company's export marketing efforts in 1999 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 39%, 35% and 37% of the Company's sales for 1999, 1998 and 1997, 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:
COMPETITION AND MARKET SHARE
The Company's chief worldwide competitor is Norton-Alcoa Proppants ("Norton-Alcoa"). Norton-Alcoa is a joint venture of Compagnie de Saint-Gobain, a French glass and materials company, and Aluminum Company of America. Norton-Alcoa manufactures ceramic proppants that directly compete with each of the Company's products. In addition, Mineraco Curimbaba ("Curimbaba"), based in Brazil, manufactures a sintered bauxite product similar to the Company's CARBOHSP(TM), which is marketed in the United States under the name "Sinterball". The Company believes that Curimbaba has not expanded its U.S. product line to include a full range of ceramic proppants and is unlikely to do so in light of patents held by the Company and Norton-Alcoa. The Company believes that it supplies approximately 60% of the ceramic proppants and approximately 8% of all proppants used by the oilfield services companies that perform fracturing services worldwide.
Competition for CARBOHSP(TM) 2000 and CARBOPROP(R) includes ceramic proppants manufactured by Norton-Alcoa and Curimbaba. The Company's CARBOLITE(R) and CARBOECONOPROP(R) products compete with ceramic proppants produced by Norton-Alcoa and with sand-based proppants for use in the hydraulic fracturing of medium depth natural gas and oil wells. The leading suppliers of mined sand are Unimin Corp., Badger Mining Corp., Fairmount Minerals Limited, Inc. and Ogelbay-Norton Company. The leading suppliers of resin-coated sand are Borden Proppants Corp. and Santrol, a subsidiary of Fairmount Minerals.
The Company believes that the most significant factors that influence a customer's decision to purchase the Company's products are (i) price/performance ratio, (ii) on-time delivery performance, (iii) technical support and (iv) proppant availability. The Company believes that its products are competitively priced and that its delivery performance is excellent. The Company also believes that its superior technical support has enabled it to persuade customers to use ceramic proppants in an increasingly broad range of applications and thus increased the overall market for the Company's products.
Prior to 1997, the Company had generally maintained sufficient inventory to satisfy demand for its products. However, beginning in 1997 and continuing through the first half of 1998, it became obvious to the management of the Company that previous capacity additions were insufficient to satisfy demand in an improving market. The Company addressed this issue through the construction of a new manufacturing facility in McIntyre, Georgia, which was completed and began limited production in June 1999. When fully operational, the McIntyre facility will increase the manufacturing capacity of the Company by approximately 60 percent or 200 million pounds per year.
The Company continually conducts testing and development activities with respect to alternative raw materials to be used in the Company's existing production methods and alternative production methods. The Company is not aware of the development of alternative products for use as proppants in the hydraulic fracturing process. The Company believes that the main barriers to entry for additional competitors are the patent rights held by the Company and certain of its current competitors and the capital costs involved in building production facilities of sufficient size to be operated efficiently.
DISTRIBUTION
The Company maintains finished goods inventories at its plants in New Iberia, Louisiana, Eufaula, Alabama, and McIntyre, Georgia, and at seven remote stocking facilities located in: Rock Springs, Wyoming; Oklahoma City, Oklahoma; San Antonio, Texas; Fairbanks, Alaska; Edmonton, Alberta, Canada; Rotterdam, The Netherlands; and Tianjin, China. The North American remote stocking facilities consist of bulk storage silos with truck trailer loading facilities. The Company owns the facilities in San Antonio, Rock Springs and Edmonton and subcontracts the operation of the facilities and transportation to a local trucking company in each location. The remaining stocking facilities are owned and operated by local trucking companies under contract with the Company. The North American sites are supplied by rail, and the sites in the Netherlands and China are supplied by container ship. In total, the Company leases 123 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. The Company has entered into an agreement with a sole supplier to supply its anticipated need for this ore in 2000. For the production of CARBOPROP(R), the Company uses bauxitic clay mined in
Arkansas. The Company has entered into a contract for the processing and supply of Arkansas bauxitic clay. The Company believes that this agreement, which stipulates a fixed price for the ore, subject to annual upward adjustments in accordance with a producer price index, will provide a sufficient supply of bauxite and bauxitic clay to meet its anticipated requirement through 2001.
The Company's Eufaula facility exclusively employs locally mined uncalcined kaolin for the production of CARBOLITE(R) and CARBOECONOPROP(R). The Company has entered into a contract that requires a supplier to sell to the Company up to 200,000 net tons of kaolin per year and the Company to purchase from the supplier 80% of the Eufaula facility's annual kaolin requirements, each through 2003. This agreement stipulates a fixed price, subject to annual adjustment in accordance with fluctuations (within an 8% annual limit) in the producer price index.
The new production facility in McIntyre, Georgia, uses the imported calcined bauxite and domestic bauxitic clays discussed above for the production of CARBOHSP(TM) 2000 and CARBOPROP(R) and uses locally mined uncalcined kaolin for the production of CARBOLITE(R) and CARBOECONOPROP(R). The Company has entered into a long-term supply agreement for kaolin that stipulates a fixed price subject to annual adjustments for changes in the producer price index and fuel costs. The agreement requires the Company to purchase at least 80% of the McIntyre facility's annual kaolin requirement from the supplier. The supply contract provides for a twenty-year supply of raw materials.
PRODUCTION PROCESS
Ceramic proppants are made by grinding or dispersing ore to a fine powder, combining the powder into small, green (i.e., unfired) pellets and sintering the pellets at 2,500 degreesF to 3,000 degreesF in a rotary kiln.
The Company uses two different methods to produce ceramic proppants. The Company's plants in New Iberia, Louisiana, and McIntyre, Georgia, use a dry process (the "Dry Process") which starts with bauxite, bauxitic clay or kaolin that has been dried to remove both free water and water which was chemically bound within the ore. This drying process is referred to as calcining. For the production of CARBOHSP(TM) 2000 and CARBOPROP(R), calcined ores are received at the plant and ground into a dry powder. For the production of CARBOLITE(R) and CARBOECONOPROP(R) at the McIntyre plant, ores are calcined at the plant before being ground into a powder. Pellets are formed by combining the powder with water and binders and introducing the mixture into high-shear mixers. The process is completed once the green pellets are sintered in a rotary kiln. The Company's competitors also use the Dry Process to produce ceramic proppants.
The Company's plant in Eufaula, Alabama, uses a wet process (the "Wet Process"), which starts with moist, uncalcined kaolin from local mines. The kaolin is dispersed with chemicals in a water slurry. With an atomizer, the slurry is sprayed into a dryer that causes the slurry to harden into green pellets. These green pellets are then sintered in rotary kilns. The Company believes that the Wet Process is unique to its plant in Eufaula, Alabama.
PATENT PROTECTION
The Company's ceramic proppants are made by processes and techniques that involve a high degree of proprietary technology, some of which are protected by patents.
The Company owns outright six issued U.S. patents and seven issued foreign patents; three of these U.S. patents and four of these foreign patents relate to the CARBOPROP(R) product produced by the Dry Process.
The Company jointly owns with A/S NIRO Atomizer ("NIRO"), the Danish designer and manufacturer of the spray atomizer device used in the Wet Process, three issued U.S. patents and 17 issued foreign patents. The patents owned jointly with NIRO generally relate to the Wet Process, and the products produced thereby (CARBOLITE(R) and CARBOECONOPROP(R)).
The Company's six most important U.S. patents expire at various times in the years 2002 through 2009 with its two key product patents expiring in 2006 and 2009. The Company believes that these patents have
been and will continue to be important in enabling the Company to compete in the market to supply proppants to the natural gas and oil industry. The Company intends to enforce and has in the past vigorously enforced its patents. The Company may be involved from time to time in the future, as it has been in the past, in litigation to determine the enforceability, scope and validity of its patent rights. Past disputes with its main competitor have been resolved in ways that permit the Company to continue to benefit fully from its patent rights. The Company and this competitor have cross-licensed certain of their respective patents relating to intermediate and low density proppants on both a royalty-free and royalty-bearing basis. (Royalties under these licenses are not material to the Company's financial results.) The Company and NIRO have not granted any licenses to third parties relating to the use of the Wet Process. As a result of these cross licensing arrangements, both the Company and its main competitor are able to produce a broad range of ceramic proppants, while third parties are unlikely to be able to enter the ceramic proppants market without infringing on the patent rights held by the Company, its main competitor or both.
PRODUCTION CAPACITY
The Company believes that constructing adequate capacity ahead of demand while incorporating new technology to reduce manufacturing costs are important competitive strategies to increase its overall share of the market for proppants. Prior to 1993, the Company's production capacity was substantially in excess of its sales requirements. Since that time, however, the Company has been expanding its capacity in order to meet the generally increasing demand for its products. In October 1993, the Company increased the capacity of the Eufaula facility from 90 million pounds per year to 170 million pounds per year, in response to the increasing demand for the Company's CARBOLITE(R) and CARBOECONOPROP(R) products. In May 1995, the Company completed a 40 million-pound per year capacity expansion at the New Iberia facility, intended to meet increasing demand for CARBOHSP(TM) and CARBOPROP(R). In February 1996, the Company commenced operation of its second 80 million-pound per year expansion of the Eufaula plant. Total annual capacity is currently 100 million pounds at the New Iberia facility and 250 million pounds at the Eufaula facility.
In June 1999, the Company substantially completed construction of a new manufacturing facility in McIntyre, Georgia. Design capacity of the plant is 200 million pounds per year and the total cost of the plant was approximately $60 million. Initial cost estimates for the plant were approximately $40 million. However, the size and complexity of the plant increased during the completion of engineering, causing completion costs to increase. 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 that plant is expected to be capable of operating at full capacity in early 2000. The plant will be capable of producing all of the Company's product lines and has been designed to be expandable to a capacity of 400 million pounds per year.
The following table sets forth the date of construction of and recent expansion of the Company's manufacturing facilities:
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, 1999, the Company had 159 full-time employees. In addition to the services of its employees, the Company employs the services of consultants as required. The Company's employees are not represented by labor unions. There have been no work stoppages or strikes during the last three years that have resulted in the loss of production or production delays. The Company believes its relations with its employees are satisfactory.
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Form 10-K, the Company's Annual Report to Shareholders, any Form 10-Q or any Form 8-K of the Company or any other written or oral statements made by or on behalf of the Company may include forward-looking statements which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from such statements. This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the Company's prospects, developments and business strategies for its operations, all of which are subject to certain risks, uncertainties and assumptions. These risks and uncertainties include, but are not limited to, changes in the demand for oil and natural gas, the development of alternative stimulation techniques and the development of alternative proppants for use in hydraulic fracturing. The words "believe", "expect", "anticipate", "project" and similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, each of which speaks only as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 2.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters (approximately 2,700 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 is leased by the Company from the Development Authority of Wilkinson County. The term of the lease commenced on September 1, 1997 and terminates on January 1, 2009. At the termination of the lease, title to all of the real property, plant and equipment will be conveyed to the Company in exchange for nominal consideration. The Company has the right to purchase the property, plant and equipment at any time during the term of the lease for an agreed upon price.
The Company's customer service and distribution operations are located at the New Iberia facility, while its quality control, testing and development functions operate at the New Iberia, Eufaula and McIntyre facilities. The Company owns distribution facilities in San Antonio, Texas, Rock Springs, Wyoming and Edmonton, Alberta, Canada.
ITEM 3.
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.
ITEM 4.
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 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
Jesse P. Orsini (age, 59): Mr. Orsini, President and Chief Executive Officer, has served as President, Chief Executive Officer and a Director of the Company since its organization in 1987.
Terry P. Keefe (age, 51): Mr. Keefe has been Vice President of Manufacturing since July 1997. Prior to being elected Vice President of Manufacturing, Mr. Keefe was Plant Manager of the Company's Eufaula, Alabama plant since the organization of the Company in 1987.
Dr. C. Mark Pearson (age, 43): Dr. Pearson joined the Company as Vice President of Marketing and Technology in March 1997. Prior to joining the Company, Dr. Pearson served as Associate Professor of Petroleum Engineering at the Colorado School of Mines from December 1995 and held various engineering and management positions with Arco Petroleum Company from 1984 through December 1995.
Paul G. Vitek (age, 41): Mr. Vitek has been the Vice President of Finance since February 1996 and has served as Treasurer and Secretary of the Company since 1988.
All officers are elected at the Annual Meeting of the Board of Directors for one-year terms or until their successors are duly elected. There are no arrangements between any officer and any other person pursuant to which he was selected as an officer. There is no family relationship between any of the named executive officers or between any of them and the Company's directors.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Market Information
The Company's Common Stock began trading on the NASDAQ National Market under the symbol CRBO upon completion of the Company's initial public offering on April 23, 1996. Per share stock prices for the quarterly periods during 1999 and 1998 as reported by NASDAQ were as follows:
(b) Holders
As of February 17, 2000, there were 14,602,000 shares of common stock outstanding held by 31 holders of record and approximately 465 beneficial holders.
(c) Dividends
The Company paid quarterly cash dividends of $0.075 per share on its Common Stock in 1999 and 1998. The Company's current intention, subject to its financial condition, the amount of funds generated from operations and the level of capital expenditures, is to continue to pay quarterly dividends to shareholders of its Common Stock at the rate of $0.075 per share.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited consolidated financial statements of the Company. The data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included elsewhere in this Report.
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(1) Selling, general and administrative (SG&A) expenses for 1999 and 1998 include plant start-up costs of $1,464,000 and $451,000, respectively. In 1996, SG&A expenses include an incremental charge of $877,225 relating to the accelerated recognition of compensation expense for the vesting of restricted stock in connection with the Company's initial public offering.
(2) Pro forma data reflects the effects on historical income statement data for the years ended December 31, 1996 and 1995 as if the Company had been treated as a C Corporation for the entire year for income tax purposes, with an estimated effective income tax rate of 37%. The Company terminated its S Corporation election on April 23, 1996 prior to its initial public offering.
(3) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share.
(4) Cash dividends per share for 1996 is based on cash dividends declared subsequent to the Company's initial public offering and does not include S Corporation distributions paid prior to and in conjunction with the initial public offering.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL BUSINESS CONDITIONS
CARBO Ceramics Inc. manufactures and sells ceramic proppants for use in the hydraulic fracturing of oil and natural gas wells. Hydraulic fracturing is the most common technique used to stimulate production from hydrocarbon bearing formations. The process involves pumping fluids into an oil or gas well at very high pressure in order to fracture the rock formation that contains the hydrocarbons. As the fracture is created, the fluids are blended with granular materials, or proppants, which fill the fracture and prop it open after the pressure pumping ceases. The proppant filled fracture creates a highly permeable channel that enables the oil or gas to flow more freely from the formation, thereby increasing production from the well.
Ceramic proppants are premium products that are sold at higher prices than sand or resin-coated sand, the two primary alternative proppants. The principal advantage of ceramic proppants is that they are stronger than sand-based proppants. The higher strength of ceramic proppants results in higher production rates in deep wells where sand or resin-coated sand may be crushed under high closure stress. Consequently, the level of deep drilling activity (generally defined as wells deeper than 7,500 feet) influences the Company's business. Ceramic proppants are also more uniform in size and shape than sand-based proppants. This uniformity can result in higher production rates than sand-based proppants when used in wells that do not otherwise require ceramics for their higher strength.
As deep drilling, particularly in North America, is typically focused on the production of natural gas, the Company's business is significantly impacted by the number of natural gas wells drilled in North America. In markets outside North America, sales of the Company's products are less dependent on natural gas markets but are influenced by the overall level of drilling activity. Furthermore, because the decision to use ceramic proppants is based on the present value economics of comparing the higher cost of ceramic proppants to the future value derived from increased production rates, the Company's business is secondarily influenced by the price of natural gas and oil.
From 1986 through 1996, the ceramic proppant industry had productive capacity in excess of demand. The competitive pressure brought on by this excess capacity made it difficult for the Company to raise prices on its products. However, the Company continued to grow its revenues through the introduction of new ceramic proppants aimed at increasing the use of ceramic proppants in the fracturing of medium depth wells, which had previously been fractured with sand-based proppants. CARBOLITE(R) was introduced in 1986 and is the Company's most popular product in the oil-dominated export market. CARBOECONOPROP(R), which was introduced in 1992, has been widely accepted in the industry and has been the Company's fastest growing product line over the past five years. The Company expects that CARBOECONOPROP(R) will continue to be the fastest growing product line in the foreseeable future.
In the latter half of 1996, the industry began to operate near full capacity and product availability on certain product lines was limited. In 1997, demand for ceramic proppants continued to increase and the availability of all ceramic products was limited. Based on the strong market demand, the Company raised prices on its products by an average of 5%, effective in the first quarter 1997. Drilling activity and the demand for ceramic proppants remained strong throughout 1997 and the Company generated record earnings for the year. The Company raised prices on its products by an average of 5%, effective in the first quarter of 1998. Strong demand for ceramic proppants continued through the first half of 1998, with the Company realizing record financial results for the first three quarters of the year. However, in the second half of 1998, a rapid decline in oil prices resulted in a significant reduction in the number of oil and gas wells drilled and completed. The Company felt the effects of this decline in the fourth quarter of 1998 as revenues decreased by 29 percent versus the previous quarter and 33 percent from the fourth quarter of 1997.
Oil prices remained depressed through much of the first half of 1999 and worldwide drilling activity decreased dramatically. In 1999, the worldwide rig count averaged 1,442, a decline of 22 percent from 1998 and 33 percent from 1997. Future growth in the Company's revenues and net income are dependent on the future demand for ceramic proppants that is generated from the demand for natural gas and oil worldwide and on the Company's ability to continue to penetrate the market for sand-based proppants. Management believes
that the worldwide demand for natural gas will continue to increase due to the abundance, relatively low cost and environmental benefits of natural gas as a source of energy. With this in mind, the Company initiated construction of its new manufacturing facility in McIntyre, Georgia in July 1997. When fully complete, the plant will cost approximately $60 million. Initial capacity of the plant is expected to be 200 million pounds per year, an increase of approximately 60% over current manufacturing capacity. The first line of the new facility was started up in June 1999, and was running at 100% of design capacity for portions of the fourth quarter of 1999. The Company expects to complete the start-up of the second line in early 2000.
NET INCOME
The Company reported net income for 1999 that was 49 percent below the previous year. A significant reduction in oil and gas drilling activity, combined with higher than expected costs at the Company's manufacturing facilities, start-up costs at the Company's new facility in McIntyre, Georgia, and price pressure on the high strength products in the South Texas market were the primary causes of the decline.
Although the Company reported record net income through the first nine months of 1998, a dramatic reduction in oil prices and related drilling activity resulted in a significant decline in the Company's sales volume in the fourth quarter of 1998. As a result, net income for 1998 declined by 6 percent from 1997.
Individual components of net income are discussed below.
REVENUES
CARBO Ceramics Inc.'s 1999 revenues of $69.7 million were 17 percent lower than 1998 revenues. Total sales volumes decreased by 12 percent, with domestic volumes down 15 percent and export volumes down 7 percent from 1998. The decline in domestic volumes was due in large part to a significant decline in sales of CARBOECONOPROP(R) into the south Texas market -- the result of a dramatic drop in rig activity in that area of the country, and a significant decrease in Alaskan activity -- the direct result of lower oil prices. Revenues were also negatively impacted by price pressure on high strength products in the South Texas market. The decline in export volume was due primarily to a decrease in sales into the Pacific Rim region.
The Company's 1998 revenues of $84.1 million were 1% lower than revenues in 1997. Sales volume decreased 3% from 1997, but the effect of this was offset by an increase in the average selling price that was the result of a price increase of approximately 5% which became effective in January 1998. Domestic sales volumes increased 1% from 1997, while export volumes decreased 10%. The most substantial volume decline occurred in Russia where the Company experienced a 76% decrease from 1997 to 1998. Despite the overall slow down in drilling activity in 1998, the volume of CARBOECONOPROP(R) products sold increased by 20% over 1997. The largest part of this increase was represented by sales into Mexico.
GROSS PROFIT
The Company's cost of goods sold consists of manufacturing costs and packaging and transportation expenses associated with the delivery of the Company's products to its customers. Variable manufacturing expenses include raw materials, labor, utilities and repair and maintenance supplies. Fixed manufacturing expenses include depreciation, property taxes on production facilities, insurance and factory overhead.
Gross profit for 1999 was $14,410,000 lower than 1998. Gross profit as a percentage of sales was 40 percent for 1999, compared to 50 percent for 1998. The significant decrease in gross profit was the result of the decrease in revenues discussed above and an increase in production expenses. The increase is production expenses was the direct result of management's decision to start-up the new production facility in McIntyre, Georgia despite the weak demand experienced through much of 1999. This decision was made to position the Company for a recovering market in 2000 but resulted in all three of the Company's manufacturing facilities operating at less than full capacity. In addition, costs at the New Iberia facility were adversely affected by a six-week maintenance shutdown in May/June to install a new kiln shell and replace the rotation system. These increases in cost were partially offset by lower freight costs experienced in transferring finished goods from the Eufaula manufacturing facility to the remote storage facility in San Antonio, Texas. High freight costs were incurred in 1998 due to rail service problems related to the merger of the Union Pacific and Southern Pacific railway systems.
Gross profit for 1998 decreased by $506,000 from 1997. Gross profit as a percentage of sales remained unchanged at 50% for 1998 as compared to 1997. The positive effects of the price increase in January 1998 and lower manufacturing costs at the New Iberia manufacturing facility were offset by an increase in the percentage of lower-priced CARBOECONOPROP(R) sales (52% of 1998 volume compared to 42% of 1997 volume) and an increase in freight costs incurred in transferring material from the Eufaula, Alabama manufacturing facility to the remote storage facility in San Antonio, Texas. The increased freight costs were the result of rail service problems, including delays in delivery and improper routing of rail cars following the merger of the Union Pacific and Southern Pacific railway systems. The lower production costs achieved at New Iberia were the result of improved efficiency due to increased production and lower maintenance spending as compared to 1997.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES AND PLANT START-UP EXPENSES
Selling, general and administrative expenses increased by $1,784,000 in 1999 over 1998. SG&A expenses also increased as a percentage of sales to 16.9 percent in 1999 from 11.9 percent in 1998. The single largest contributor to these increased costs was start-up expenses related to the new manufacturing facility in McIntyre, Georgia. These expenses totaled $1,464,000 in 1999, compared to $451,000 during 1998. Other significant items include expenses related to exploring the marketing and manufacturing potentials in China, New Iberia plant trials to develop products for non-oilfield applications (charged to research and development), legal fees related to a Department of Justice inquiry, and a write-off of most of the receivables of one of our customers. This customer has subsequently been acquired by one of our three major customers.
Selling, general and administrative expenses increased by $1,062,000 in 1998 over 1997. SG&A expenses also increased as a percentage of sales to 11.9% in 1998 from 10.5% in 1997. The largest increases were in marketing expenses. Additional sales personnel were employed in anticipation of additional manufacturing capacity and to explore new markets for our products outside the oilfield. In addition, the Company has contracted with an outside consultant to provide assistance to our marketing department in developing technical sales presentations. An increase in depreciation expense resulted from expansions at the Company's Edmonton, Canada and Rock Springs, Wyoming remote storage facilities, both of which were completed during the first half of 1998. The Company also incurred $451,000 of start-up expenses during 1998 related to the construction of the new manufacturing facility in McIntyre, Georgia.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents as of December 31, 1999 were $0.2 million compared to $0.6 million at the beginning of the year. The Company generated cash from operations of $16.2 million. Total capital expenditures for the year were $14.0 million, cash dividends paid totaled $4.4 million and net proceeds from bank borrowings during the year totaled $1.8 million.
Capital spending on the new Georgia manufacturing facility, scheduled to be 100% completed by early 2000, was $11.8 million. The balance of $2.2 million was spent on the normal replacement of capital equipment.
The Company plans to spend approximately $0.2 million for the completion of its new manufacturing facility in McIntyre, Georgia in 2000, with funding expected to be provided by cash generated from operations. The Company's current intention, subject to its financial condition, the amount of funds generated from operations and the level of capital expenditures, is to continue to pay quarterly dividends to shareholders of its Common Stock at the rate of $0.075 per share.
The Company maintains an unsecured line of credit in the amount of $10.0 million. As of December 31, 1999, there was $1.8 million outstanding under the credit agreement. As of February 28, 2000 the Company had an outstanding balance of $0.9 million under this line of credit. The Company anticipates that cash provided by operating activities and funds available under its line of credit will be sufficient to meet planned operating expenses, tax obligations and capital expenditures through 2000. The Company is currently engaged in discussions to extend or renew its line of credit beyond 2000.
See "Forward-Looking Information" under Item 1 hereof.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to become Year 2000 ready. During 1999, the company completed its remediation and testing of systems. As a result of those planning and implementation efforts, the Company experienced no significant disruptions in critical information technology and non-information technology systems and believes those systems successfully responded to the Year 2000 date change. The Company expensed approximately $49,000 during 1999 in connection with remediating its systems. The Company is not aware of any material problems resulting from Year 2000 issues, either with its products, its internal systems, or the products and services of third parties. The Company will continue to monitor its critical computer applications and those of its suppliers and vendors throughout 2000 to ensure that any latent Year 2000 matters that may arise are promptly addressed.
ITEM 7A.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in pages through of this Report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the Registrant will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference. Such incorporation does not include the Compensation Committee Report or the Performance Graph included in the Proxy Statement.
ITEM 10.
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.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Company's Proxy Statement.
ITEM 12.
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.
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.
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 through of this Report:
Report of Independent Auditors Consolidated Balance Sheets at December 31, 1999 and 1998 Consolidated Statements of Income for each of the three years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Equity for each of the three years ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for each of the three years ended December 31, 1999, 1998 and 1997
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of 1999.
(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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
CARBO CERAMICS INC.
By: /s/ JESSE P. ORSINI ---------------------------------- Jesse P. Orsini President and Chief Executive Officer
By: /s/ PAUL G. VITEK ---------------------------------- Paul G. Vitek Vice President, Finance
Dated: March 3, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Jesse P. Orsini and Paul G. Vitek, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
New Orleans, Louisiana January 28, 2000
CARBO CERAMICS INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
The accompanying notes are an integral part of these statements.
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these statements.
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these statements.
CARBO CERAMICS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these statements.
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.
Principles of Consolidation
The consolidated financial statements include the accounts of CARBO Ceramics Inc. and its wholly owned subsidiaries, CARBO Ceramics Sales Corporation and CARBO Ceramics (UK) Limited. CARBO Ceramics Sales Corporation was formed on July 31, 1996 under the laws of Barbados. CARBO Ceramics (UK) Limited was formed on December 19, 1997 under the laws of Scotland. All significant intercompany transactions have been eliminated.
Concentration of Credit Risk
The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Receivables are generally due within 30 days. The majority of the Company's receivables are from customers in the petroleum pressure pumping industry. Credit losses historically have been insignificant.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amounts reported in the balance sheet for cash equivalents approximate fair value.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market. Finished goods inventories include costs of materials, plant labor and overhead incurred in the production of the Company's products.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed on the straight-line method for financial reporting purposes using the following estimated useful lives:
Revenue Recognition
Revenue is recognized when title passes to the customer.
Cost of Start-Up Activities
Effective January 1, 1999, the Company adopted Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," issued by the American Institute of Certified Public Accountants. This Statement requires that costs related to start-up activities, including organization costs, be expensed as incurred. The Company's policy has always been to expense the costs of start-up operations. Start-up costs for 1999 and
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1998 represent labor, materials and utilities expended in bringing installed equipment to normal operating conditions at the Company's new production facility in McIntyre, Georgia.
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 charged in 1999, 1998 and 1997 were $703,000, $81,000 and $168,000, respectively.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been reclassified to conform to the 1999 presentation.
2. BANK BORROWINGS
The Company has a Secured Revolving Credit Agreement (the "Credit Agreement"), as amended, with a bank under which it may borrow up to $10.0 million optionally at either the bank's Base Rate or LIBOR Fixed Rate (as defined in the Credit Agreement) through December 31, 2000. The weighted-average interest rate on borrowings against the Credit Agreement was 8.11% for 1999 and 8.62% for 1998. Outstanding borrowings under the Credit Agreement at December 31, 1999 amount to $1,809,000. The Credit Agreement requires that the Company maintain certain financial ratios and keep certain bank accounts with the lender, with balances equal to transactional and investment-related charges. The terms of the Credit Agreement further provide for certain affirmative and negative covenants, including a restriction on capital expenditures. The Company was in compliance with these covenants at December 31, 1999.
3. LEASES
The Company leases railroad equipment under operating leases. Minimum future rental payments due under non-cancelable operating leases with remaining terms in excess of one year as of December 31, 1999 are as follows ($ in thousands):
Leases generally provide for renewal options for periods from one to five years at their fair rental value at the time of renewal. In the normal course of business, operating leases are generally renewed or replaced by other leases. Rent expense for all operating leases was $1,168,000 in 1999, $800,000 in 1998, and $920,000 in 1997.
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:
Significant components of the provision for income taxes are as follows:
The reconciliation of income taxes computed at the U.S. statutory tax rate to the Company's income tax expense is as follows:
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 that may be issued in the future, the holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable.
On January 11, 2000, the Board of Directors declared a cash dividend of $0.075 per share. The dividend is payable on February 15, 2000 to shareholders of record on January 31, 2000.
Preferred Stock
The Company's charter authorizes the issuance of 5,000 shares of Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the Company's shareholders. No shares of Preferred Stock are currently outstanding, and the Company has no present plans to issue any shares of Preferred Stock.
6. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123), requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The Company's 1996 Stock Option Plan for Key Employees (the "Option Plan") has authorized the grant of options to purchase an aggregate of 1,000,000 shares of the Company's Common Stock to certain officers and key employees of the Company chosen by a committee appointed by the Board of Directors (the "Compensation Committee") to administer such plan. Under the Option Plan, all options granted have 10-year terms, and conditions relating to the vesting and exercise of options are determined by the Compensation Committee for each option. Options granted under the Option Plan are "non-statutory options" (options which do not afford income tax benefits to recipients, but the exercise of which may provide tax deductions for the Company). Each option will have an exercise price per share equal to the fair market value of a share of Common Stock on the date of grant and no individual employee may be granted options to purchase more than an aggregate of 500,000 shares of Common Stock. The options vest annually over a four-year period.
Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively:
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
risk-free interest rates of 6.40%, 4.44% and 5.34%; a dividend yield of 1.0%; volatility factors of the expected market price of the Company's Common Stock of .464, .452 and .337; 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:
A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
Exercise prices for options outstanding as of December 31, 1999 ranged from $17.00 to $34.63. The weighted-average remaining contractual life of those options is 8.1 years.
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share:
8. QUARTERLY OPERATING RESULTS -- (UNAUDITED)
Quarterly results of operations for the years ended December 31, 1999 and 1998 were as follows:
Quarterly data may not sum to the full year data reported in the Company's consolidated financial statements due to rounding.
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999:
10. INTERNATIONAL SALES
The Company's ceramic proppants are used worldwide by U.S. customers operating abroad and by foreign customers. Sales outside the United States accounted for 39%, 35% and 37% of the Company's revenues for 1999, 1998, and 1997, respectively.
11. BENEFIT PLANS
The Company has a defined contribution savings and profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code. Employees who have completed one year of service are eligible to participate. Employees may contribute up to 15% of their monthly compensation.
For employee contributions up to 5% of monthly compensation, the Company matches the employee contribution at a rate of 50%. Additional contributions by the Company are discretionary and are determined annually by the Board of Directors. These discretionary contributions to the plan are allocated to the participants pro rata based on their respective salary levels.
Benefit costs recognized as expense under this plan consisted of the following:
12. COMMITMENTS
In 1995, the Company entered into an agreement with a supplier to purchase options to purchase 200,000 tons of green ore for its New Iberia, Louisiana plant at a specified contract price. All of the green ore purchased by the Company pursuant to the options will be processed by the supplier at a specified price. The Company is required to purchase at least 80% of its estimated annual requirements of processed ore from the supplier until all green ore purchased pursuant to the options has been processed.
CARBO CERAMICS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1995, the Company entered into an agreement with a supplier to purchase kaolin for its Eufaula, Alabama plant at a specified contract price. The term of the agreement is eight years commencing January 1, 1996. Beginning January 1, 1997, the agreement requires the Company to purchase from the supplier at least 80% of the Company's estimated annual requirements of kaolin for its Eufaula plant.
In 1997, the Company entered into an agreement with a supplier to purchase kaolin for its McIntyre, Georgia plant at a specified contract price. The term of the agreement is twenty years commencing on January 1, 1998. The Company has the right to purchase up to 2.5 million tons of kaolin during the term of the agreement. The agreement requires the Company to purchase from the supplier at least 80% of the Company's estimated annual requirements of kaolin for its McIntyre plant.
The Company was in compliance with the terms of all agreements through December 31, 1999.
13. EMPLOYMENT AGREEMENT
The Company has an employment agreement with its President, which expires June 30, 2001, as amended. The agreement provides for an annual base salary and an incentive bonus as defined in the agreement. In the event the President is terminated without cause prior to June 30, 2001, the Company will be obligated to pay the President two years base salary and a prorated incentive bonus. In addition, all nonvested stock options granted to the President will vest immediately and become exercisable. The agreement also contains a five-year non-competition covenant that would become effective upon termination for any reason.
EXHIBIT INDEX