-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WGLmhJAegC203/Ru9CJ4pJS0ml1DEe6q942gWfFLtZaaUFU7+PAJC7tpdNJ8Pocf Rx6LI+u4VGQFqwOafG4wBw== 0000950129-98-004708.txt : 19981118 0000950129-98-004708.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950129-98-004708 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CORE LABORATORIES N V CENTRAL INDEX KEY: 0001000229 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TESTING LABORATORIES [8734] IRS NUMBER: 000000000 STATE OF INCORPORATION: P7 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14273 FILM NUMBER: 98749972 BUSINESS ADDRESS: STREET 1: 1017 BZ AMSTERDAM STREET 2: HERENGRACHT 424 CITY: THE NETHERLANDS STATE: P7 BUSINESS PHONE: 3124203191 MAIL ADDRESS: STREET 1: HERENGRACHT 424 STREET 2: 1017 BZ AMSTERDAM CITY: THE NETHERLANDS STATE: P7 10-Q 1 CORE LABORATORIES N.V. - DATED 09/30/1998 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------- -------------- Commission File Number 0-26710 CORE LABORATORIES N.V. (Exact name of registrant as specified in its charter) THE NETHERLANDS NOT APPLICABLE (State of other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) HERENGRACHT 424 1017 BZ AMSTERDAM THE NETHERLANDS NOT APPLICABLE (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (31-20) 420-3191 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 ------ ------ The number of common shares of the Registrant, par value NLG .03 per share, outstanding at November 7, 1998 was 28,362,502. ================================================================================ 2 CORE LABORATORIES N.V. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 INDEX
PAGE ---- Part I -- Financial Information Item 1 -- Financial Statements Consolidated Balance Sheets at September 30, 1998 and December 31, 1997 ................... 1 Consolidated Statements of Operations for the Three Months Ended September 30, 1998 and 1997............................................................ 2 Consolidated Statements of Operations for the Nine Months Ended September 30, 1998 and 1997............................................................ 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and 1997............................................................ 4 Notes to Consolidated Financial Statements ................................................ 5 Item 2-- Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................................ 9 Part II -- Other Information Item 1-- Legal Proceedings...................................................................... 12 Item 2-- Changes in Securities.................................................................. 12 Item 3-- Defaults Upon Senior Securities........................................................ 12 Item 4-- Submission of Matters to a Vote of Security Holders ................................... 12 Item 5-- Other Information...................................................................... 12 Item 6-- Exhibits and Reports on Form 8-K....................................................... 14 Signature ....................................................................................... 15
ii 3 CORE LABORATORIES N.V. CONSOLIDATED BALANCE SHEETS (THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31, 1998 1997 ---------- --------- ASSETS (UNAUDITED) (AUDITED) CURRENT ASSETS: Cash and cash equivalents................................................... $ 14,945 $ 10,510 Accounts receivable, net.................................................... 70,219 67,537 Inventories ................................................................ 15,892 12,473 Prepaid expenses ......................................................... 7,876 5,771 Deferred income tax asset ................................................. 1,127 1,380 ---------- --------- Total current assets ........................................................... 110,059 97,671 PROPERTY, PLANT AND EQUIPMENT.................................................... 80,995 69,684 Less-- accumulated depreciation............................................. (23,270) (16,130) ---------- --------- 57,725 53,554 INTANGIBLES AND GOODWILL, net.................................................... 153,301 82,809 LONG-TERM INVESTMENT ............................................................ 1,191 1,188 OTHER LONG-TERM ASSETS........................................................... 5,083 2,794 ---------- ---------- Total assets .......................................................... $ 327,359 $ 238,016 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt ....................................... $ 9,427 $ 3,077 Short-term debt............................................................. 191 427 Accounts payable ........................................................... 13,896 14,152 Unearned revenue ........................................................... 173 2,257 Other accrued expenses .................................................... 25,599 22,185 ---------- ---------- Total current liabilities ...................................................... 49,286 42,098 LONG-TERM DEBT .................................................................. 73,365 70,621 MINORITY INTEREST................................................................ 851 1,212 OTHER LONG-TERM LIABILITIES .................................................... 14,857 9,972 SHAREHOLDERS' EQUITY: Preference shares, NLG .03 par value; 3,000,000 shares authorized, no shares issued or outstanding......................................... -- -- Common shares, NLG .03 par value; 100,000,000 shares authorized, 28,265,297 and 24,703,621 issued and outstanding at September 30, 1998 and December 31, 1997, respectively............... 480 426 Additional paid-in capital.................................................. 147,149 86,823 Retained earnings........................................................... 41,371 26,864 ---------- ---------- Total shareholders' equity.............................................. 189,000 114,113 ---------- ---------- Total liabilities and shareholders' equity....................................... $ 327,359 $ 238,016 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 1 4 CORE LABORATORIES N.V. CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 ------------- ------------ (UNAUDITED) (UNAUDITED) SERVICES ........................................................................ $ 67,408 $ 55,976 SALES............................................................................ 3,070 4,934 ------------- ------------ 70,478 60,910 OPERATING EXPENSES: Costs of services .......................................................... 47,888 43,037 Costs of sales.............................................................. 2,642 4,355 General and administrative expenses ........................................ 2,305 1,903 Depreciation and amortization............................................... 4,502 3,175 Other (income) expense, net................................................. 725 (246) ------------- ------------- 58,062 52,224 INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE AND INCOME TAX EXPENSE.............................................. 12,416 8,686 INTEREST EXPENSE ................................................................ 1,654 2,403 ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE................................................................ 10,762 6,283 INCOME TAX EXPENSE .............................................................. 3,229 1,857 ------------- ------------- INCOME FROM CONTINUING OPERATIONS................................................ 7,533 4,426 LOSS FROM DISCONTINUED OPERATIONS, net of tax benefit of $3...................... -- (5) ------------- ------------- NET INCOME....................................................................... $ 7,533 $ 4,421 ============= ============= PER SHARE DATA: Income from continuing operations .......................................... $ 0.27 $ 0.20 Loss from discontinued operations........................................... -- -- ------------- ------------- BASIC EARNINGS PER SHARE ................................................... $ 0.27 $ 0.20 ============= ============= WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING........................................................... 27,665,746 21,719,046 ============= ============= Income from continuing operations .......................................... $ 0.27 $ 0.20 Loss from discontinued operations........................................... -- -- ------------- ------------- DILUTED EARNINGS PER SHARE ................................................. $ 0.27 $ 0.20 ============= ============= WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING........................................................... 28,424,504 22,467,989 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 2 5 12 CORE LABORATORIES N.V. CONSOLIDATED STATEMENTS OF OPERATIONS (THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1998 1997 ------------- ------------ (UNAUDITED) (UNAUDITED) SERVICES ........................................................................ $ 176,219 $ 125,252 SALES............................................................................ 10,763 12,985 ------------- ------------ 186,982 138,237 OPERATING EXPENSES: Costs of services .......................................................... 129,883 97,597 Costs of sales.............................................................. 9,321 11,007 General and administrative expenses ........................................ 6,197 4,359 Depreciation and amortization............................................... 11,013 7,069 Other (income) expense, net................................................. 253 (210) ------------- ------------- 156,667 119,822 INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE AND INCOME TAX EXPENSE.............................................. 30,315 18,415 INTEREST EXPENSE ................................................................ 4,460 4,158 ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE................................................................ 25,855 14,257 INCOME TAX EXPENSE .............................................................. 7,757 4,168 ------------- ------------- INCOME FROM CONTINUING OPERATIONS................................................ 18,098 10,089 LOSS FROM DISCONTINUED OPERATIONS, net of tax benefit of $93 and $114 in 1998 and 1997, respectively.............................................. (217) (264) LOSS ON DISPOSITION OF DISCONTINUED OPERATIONS, net of tax benefit of $1,446........................................................... (3,374) -- -------------- ------------- NET INCOME....................................................................... $ 14,507 $ 9,825 ============= ============= PER SHARE DATA: Income from continuing operations .......................................... $ 0.70 $ 0.46 Loss from discontinued operations........................................... (0.01) (0.01) Loss on disposition of discontinued operations ............................. (0.13) -- -------------- ------------- BASIC EARNINGS PER SHARE ................................................... $ 0.56 $ 0.45 ============= ============= WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING........................................................... 25,773,374 21,700,640 ============= ============= Income from continuing operations .......................................... $ 0.68 $ 0.45 Loss from discontinued operations........................................... (0.01) (0.01) Loss on disposition of discontinued operations ............................. (0.13) -- -------------- ------------- DILUTED EARNINGS PER SHARE ................................................. $ 0.54 $ 0.44 ============= ============= WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING........................................................... 26,626,688 22,264,078 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 3 6 CORE LABORATORIES N.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (THOUSANDS OF DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1998 1997 ----------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................. $ 14,507 $ 9,825 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Loss on sale of discontinued operations................................. 4,820 -- Depreciation and amortization........................................... 11,013 7,295 Gain on sale of fixed assets............................................ (391) (40) Changes in assets and liabilities: Decrease (increase) in accounts receivable.............................. 6,702 (8,850) Increase in inventories................................................. (3,216) (1,826) Decrease (increase) in prepaid expenses................................. (1,028) 2,297 Decrease in accounts payable............................................ (5,287) (9,582) Increase (decrease) in other accrued expenses........................... (4,304) 1,285 Decrease in other long-term liabilities................................. (15,773) (377) Other .................................................................. (1,383) 3,347 ----------- ----------- Net cash provided by operating activities ......................... 5,660 3,374 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................................................ (12,162) (10,434) Proceeds from sale of fixed assets.......................................... 4,226 286 Acquisition of Owen Oil Tools, Inc., net of cash............................ (44,003) -- Acquisition of PETRAK GROUP S.A., net of cash............................... (4,225) -- Acquisition of Jaex S.A. de C.V, net of cash................................ (10,016) -- Sale of discontinued operations............................................. 4,114 -- Acquisition of Scott Pickford plc, net of cash.............................. -- (15,023) Acquisition of Saybolt International B.V., net of cash...................... -- (62,987) ----------- ----------- Net cash used in investing activities................................... (62,066) (88,158) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt ................................................. (12,268) (18,578) Borrowings under long-term debt ............................................ 13,026 110,637 Payments on short-term debt................................................. (318) -- Issuance of stock for Owen Oil Tools, Inc................................... 44,010 -- Issuance of stock for PETRAK GROUP S.A...................................... 4,400 -- Issuance of stock for Jaex S.A. de C.V...................................... 10,400 -- Exercise of stock options................................................... 1,569 185 Other....................................................................... 22 (1,632) ----------- ----------- Net cash provided by financing activities............................... 60,841 90,612 ----------- ----------- NET INCREASE IN CASH............................................................. 4,435 5,828 CASH, beginning of period........................................................ 10,510 2,935 ----------- ----------- CASH, end of period.............................................................. $ 14,945 $ 8,763 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 7 CORE LABORATORIES N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION AND ESTIMATES The accompanying unaudited consolidated financial statements include the accounts of Core Laboratories N.V. and its subsidiaries (the "Company"), and have been prepared in accordance with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. Balance sheet information as of December 31, 1997, has been taken from the 1997 annual audited financial statements. Certain 1997 items have been reclassified to conform with the 1998 presentation. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 31, 1998. NEW ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The statement requires (a) classification of items of other comprehensive income by their nature in the financial statement and (b) display of the accumulated balance of other comprehensive income separate from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. Based on current circumstances, the statement is not expected to have a material effect on the Company's financial condition and results of operations. In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which establishes standards for reporting information about operating segments in annual financial statements and requires that selected information be reported about the operating segments in interim financial reports issued to the shareholders. It also establishes standards for related disclosure about products and services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997; however, this statement does not require that segment information be reported in financial statements for interim periods in the initial year of application. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The SFAS establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The SFAS requires that changes in the derivative's fair value be recognized currently in 5 8 earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires a company to formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999 and early adoption is permitted. Based on current circumstances, the statement is not expected to have a material effect on the Company's financial condition and results of operations. 2. ACQUISITIONS OWEN ACQUISITION On June 30, 1998, the Company acquired all of the outstanding stock of Owen Oil Tools, Inc. ("Owen") in a stock-for-stock transaction, which has been accounted for as a purchase. The transaction resulted in an allocation of approximately $44.0 million of goodwill, which will be amortized over a 40-year period. The Company issued approximately 2,277,000 shares of its common stock for the privately held Fort Worth, Texas based company. Owen and its subsidiaries provide well completion and stimulation technologies to the petroleum industry. PETRAK ACQUISITION On July 31, 1998, the Company acquired all of the outstanding shares of PETRAK Group S.A., ("Petrak"), a privately held company based in Zug, Switzerland. The Company issued approximately 263,000 shares in exchange for all of the shares of Petrak and has accounted for the transaction using the purchase method of accounting. The transaction resulted in an allocation of approximately $4.0 million of goodwill, which will be amortized over a 40-year period. Petrak specializes in characterizing crude oil and providing related services. JAEX ACQUISITION On August 31, 1998, the Company acquired all of the remaining shares of Jaex S.A. de C.V. ("Jaex") that it did not already own through its acquisition of Owen. Core previously owned 50.00098 percent of Jaex, a Mexico based provider of well completion and stimulation technologies to the petroleum industry. The Company issued approximately 765,000 shares in exchange for the remaining interest of Jaex and has accounted for the acquisition using the purchase method of accounting. The transaction resulted in an allocation of approximately $8.6 million of goodwill, which will be amortized over a 40-year period. The purchase price allocations of Owen, Petrak and Jaex have been completed on a preliminary basis, thus, as additional information concerning the value of the assets acquired and liabilities assumed becomes known, additional adjustments will be made to the purchase price allocations included in the accompanying financial statements. 3. DISPOSITION OF DISCONTINUED OPERATIONS On April 8, 1998, the Company sold the assets of its two packaged analyzer units for $4.1 million. The Company recorded a loss on disposition of $3.4 million net of tax in the second quarter of 1998. 6 9 Accordingly, the results of operations for the units are segregated from continuing operations and prior period operating results have been restated to reflect discontinued operations. Revenues for the discontinued operations were $1.4 and $8.2 million for the nine month period ended September 30, 1998 and the corresponding period in the prior year, respectively. In the three month period ending September 30, 1998, and the corresponding period in the prior year, revenues were nil and $2.6 million, respectively. 4. PRO FORMA INFORMATION Unaudited pro forma revenues, income from continuing operations and income from continuing operations per share, assuming that the acquisition of Owen had been consummated at January 1, 1997, are summarized as follows (in thousands, except per share data):
NINE MONTHS NINE MONTHS YEAR ENDED SEPTEMBER 30, SEPTEMBER 30 DECEMBER 31, 1998 1997 1997 ----------- ----------- ------------ (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenues ............................................ $ 214,016 $ 169,062 $ 222,257 Income from continuing operations.................... $ 19,402 $ 11,136 $ 15,960 Basic income per share from continuing operations ... $ 0.75 $ 0.51 $ 0.63 Diluted income per share from continuing operations.. $ 0.73 $ 0.50 $ 0.61
5. INVENTORIES Inventories are primarily items held for sales or services provided to customers. Inventories are stated at the lower of average cost (includes direct material, labor and overhead) or estimated realizable value. A summary of inventories is as follows (in thousands):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ----------- ------------ (UNAUDITED) (UNAUDITED) Parts and materials..................................................... $ 14,202 $ 4,558 Work in process......................................................... 1,690 7,915 ----------- ------------ Total ......................................................... $ 15,892 $ 12,473 =========== ============
6. INTANGIBLES AND GOODWILL Intangibles and goodwill are amortized using the straight-line method over their estimated useful lives, which range from 5 to 40 years. Intangibles include patents, trademarks, service marks and trade names. Goodwill represents the excess purchase price over the fair market value of net assets acquired for acquisitions accounted for as purchases. The Company continually evaluates whether subsequent events or circumstances have occurred that indicate the remaining useful life of intangibles and goodwill may warrant revision or that the remaining balance of intangibles and goodwill may not be recoverable by determining whether the carrying amount of the intangible assets can be recovered through projected undiscounted future cash flows over the remaining amortization period. In 7 10 conjunction with the second quarter 1998 sale of discontinued operations, the Company included a write-off of goodwill as part of the loss to those operations. 7. LONG-TERM DEBT Long-term debt at September 30, 1998 and December 31, 1997 is summarized in the following table (in thousands):
SEPTEMBER 30, DECEMBER 31, 1998 1997 ----------- ------------ (UNAUDITED) (AUDITED) Credit Facility with a bank group: $70,000 term loan facility.............................................. $ 70,467 $ 70,000 $55,000 revolving debt facility......................................... 11,000 -- Loan Notes ............................................................... 1,122 1,165 Other indebtedness.......................................................... 203 2,533 ----------- ------------ Total debt ........................................................ 82,792 73,698 Less-- current maturities............................................... 9,427 3,077 ----------- ------------ Total long-term debt........................................... $ 73,365 $ 70,621 =========== ============
In May 1997, the Company entered into a Credit Facility which provides for (i) a term loan of $55 million, (ii) a term loan denominated in British pounds having a U.S. dollar equivalency of $15 million, (iii) a committed revolving debt facility of $50 million, and (iv) a Netherlands guilder denominated revolving debt facility with U.S. dollar equivalency of $5 million. At September 30, 1998, approximately $44.0 million was available for borrowing under the revolving credit facility. Loans under the Credit Facility generally bear interest from LIBOR plus 0.75% to a maximum of LIBOR plus 1.75%. The term loans require quarterly principal payments beginning March 31, 1999, with the final payment due June 30, 2002. The revolving debt facilities require interest payments only, until maturity on June 30, 2002. The terms of the Credit Facility require the Company to meet certain financial covenants, including certain minimum equity and cash flow tests. Management believes that the Company is in compliance with all such covenants contained in its credit agreements. As part of the purchase of Scott Pickford plc in March 1997, the Company issued unsecured loan notes as an alternative to the cash consideration paid for the outstanding shares of Scott Pickford plc. The loan notes bear interest payable semi-annually, at the rate of LIBOR less 1.0% per annum. Holders of the loan notes have the right to redeem the loan notes at par on each interest payment date. Unless previously redeemed or purchased, the loan notes will be redeemed at par on June 30, 2002. 8. SUBSEQUENT EVENTS INTEGRA ACQUISITION On October 28, 1998, the Company acquired all of the outstanding shares of Integra Geoservices, Inc. ("Integra"), a privately held Calgary, Alberta company. The transaction will be accounted for using the purchase method of accounting. Core issued approximately 86,000 shares in exchange for all of the outstanding shares of Integra. Intergra provides geophysical seismic processing used to characterize and describe petroleum reservoirs. 8 11 CORE LABORATORIES N.V. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain matters discussed herein may contain forward-looking statements that are subject to risks and uncertainties. Such risks and uncertainties include, but are not limited to, the following: the continued expansion of services is dependent upon the Company's ability to continue to develop or acquire new and useful technology; the improvement of margins is subject to the risk that anticipated synergies of existing and recently acquired businesses and future acquisitions will not be realized; the Company's dependence on one industry segment, oil and gas; the risks and uncertainties attendant to adverse industry, economic, and financial market conditions, including stock prices, interest rates and credit availability; and competition in the Company's markets. Should one or more of these risks or uncertainties materialize and should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated. GENERAL Core Laboratories N.V. ("Core Laboratories" or the "Company") was established in 1936 and is one of the world's leading providers of proprietary and patented reservoir description, production enhancement, and reservoir management and reservoir monitoring services for optimizing reservoir performance and maximizing hydrocarbon recovery from new and existing fields. The Company's customers include major, national, and independent oil and gas producers. In addition, the Company manufactures and sells petroleum reservoir rock and fluid analysis instrumentation, which complement its services operations. Core Laboratories currently operates over 70 facilities in over 50 countries and has approximately 3,900 employees. RECENT DEVELOPMENTS DISPOSITION OF DISCONTINUED OPERATIONS On April 8, 1998, the Company sold the assets of its two packaged analyzer units for $4.1 million. The Company recorded a loss on disposition of $3.4 million net of tax in the second quarter of 1998. Accordingly, the results of operations for the units are segregated from continuing operations and prior period operating results have been restated to reflect discontinued operations. Revenues for the discontinued operations were $1.4 and $8.2 for million for the nine month period ended September 30, 1998 and the corresponding period in the prior year, respectively. In the three month period ending September 30, 1998 and the corresponding period in the prior year revenues were nil and $2.6 million, respectively. OWEN ACQUISITION On June 30, 1998, the Company acquired all of the outstanding stock of Owen Oil Tools, Inc. ("Owen") in a stock-for-stock transaction, which has been accounted for as a purchase. The transaction resulted in an allocation of approximately $44.0 million of goodwill, which will be amortized over a 40-year period. The Company issued approximately 2,277,000 shares of its common stock for the privately held Fort Worth, Texas based company. Owen and its subsidiaries provide well completion and stimulation technologies to the petroleum industry. PETRAK ACQUISITION On July 31, 1998, the Company acquired all of the outstanding shares of PETRAK Group S.A., ("Petrak"), a privately held company based in Zug, Switzerland. The Company issued approximately 263,000 shares in exchange for all of the shares of Petrak and has accounted for the transaction using the purchase method of accounting. The transaction resulted in an allocation of approximately $4.0 million of goodwill, which will be amortized over a 40-year period. Petrak specializes in characterizing crude oil and providing related services. 9 12 JAEX ACQUISITION On August 31, 1998, the Company acquired all of the remaining shares of Jaex S.A. de C.V. ("Jaex") that it did not already own through its acquisition of Owen. Core previously owned 50.00098 percent of Jaex, a Mexico based provider of well completion and stimulation technologies to the petroleum industry. The Company issued approximately 765,000 shares in exchange for the remaining interest of Jaex and has accounted for the acquisition using the purchase method of accounting. The transaction resulted in an allocation of approximately $8.6 million of goodwill, which will be amortized over a 40-year period. The purchase price allocations of Owen, Petrak and Jaex have been completed on a preliminary basis, thus, as additional information concerning the value of the assets acquired and liabilities assumed becomes known, additional adjustments will be made to the purchase price allocations included in the accompanying financial statements. RESULTS OF OPERATIONS The following table sets forth certain percentage relationships based on the Company's consolidated income statements for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- PERCENTAGE OF PERCENTAGE OF TOTAL REVENUE TOTAL REVENUE ------------------------ ----------------------- 1998 1997 1998 1997 ---------- ---------- ---------- --------- Services ............................................ 95.6 91.9 94.2 90.6 Sales .............................................. 4.4 8.1 5.8 9.4 ---------- ---------- ---------- ---------- 100.0 100.0 100.0 100.0 Operating expenses: Cost of services ............................... 71.0 * 76.9 * 73.7 * 77.9 * Cost of sales ................................. 86.0 * 88.3 * 86.6 * 84.8 * General and administrative expenses............. 3.3 3.1 3.3 3.2 Depreciation and amortization................... 6.4 5.2 5.9 5.1 Other (income) expense, net..................... 1.0 -- -- -- ---------- ---------- ---------- ---------- 82.4 85.7 83.8 86.7 Income from continuing operations before interest expense and income tax expense........... 17.6 14.3 16.2 13.3 Interest expense..................................... 2.3 4.0 2.4 3.0 ---------- ---------- ---------- ---------- Income from continuing operations before income tax expense................................ 15.3 10.3 13.8 10.3 Income tax expense................................... 4.6 3.0 4.1 3.0 ---------- ---------- ---------- ---------- Income from continuing operations.................... 10.7 7.3 9.7 7.3 ========== ========== ========== ==========
* Percentage based on applicable segment revenue, and not total revenue. Total revenue for the nine months ended September 30, 1998 was up 35% to $187 million. Total revenue from continuing operations for the third quarter 1998 was $70 million, an increase of $10 million from the same period last year. Increased demand for the Company's production related services and its recent acquisitions accounted for the increases. 10 13 Cost of services as a percentage of service revenue for the three and nine months ended September 30, 1998 decreased compared to the corresponding periods in 1997 primarily due to improved operating efficiencies. Cost of sales as a percentage of sales revenue for three and nine months ended September 30, 1998 increased compared to the corresponding periods in 1997 due to the sale of lower margin products. General and administrative expenses for the quarter and nine months ended September 30, 1998 increased $0.4 million and $1.8 million respectively, as compared to the corresponding periods in 1997. The increases were primarily a result of increased personnel costs attributable to the Company's growth. However, as a percentage of sales, general and administrative expenses calculate to 3.3% as a result of the Company's ongoing program to maintain tight control over expenses. Depreciation and amortization expense for the three and nine month periods ended September 30, 1998 increased $1.3 and $3.9 million, respectively, as compared to a year ago, primarily due to the inclusion of depreciation and amortization from acquisitions in 1997, as well as from its acquisitions in the current year. Interest expense for the three months ended September 30, 1998 decreased $0.8 million as compared to 1997. For the nine months ended September 30, 1998, interest expense increased $0.3 million as compared to 1997. This increase is primarily due to additional borrowings used to finance the aforementioned acquisitions. The Company's effective income tax rate was approximately 30.0% for the three months and nine months ended September 30, 1998 as compared to 29.6% and 29.2% for three months and nine months ended September 30, 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital requirements are for working capital, capital expenditures and acquisitions. For the nine month period ended September 30, 1998 the Company had operating cash flow of $5.7 million as compared to $3.4 million for the corresponding period in 1997. Management believes the Company's internal and external sources of cash will provide the necessary funds with which to meet its expected obligations. The Company expects to fund future acquisitions primarily through a combination of working capital, cash flow from operations, bank borrowings (including the Credit Facility), and issuances of additional equity. Although the Credit Facility imposes certain limitations on the incurrence of additional indebtedness, in general the Company will be permitted to assume, among other things, indebtedness of acquired businesses, subject to compliance with the financial covenants of the Credit Facility. 11 14 CORE LABORATORIES N.V. PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company may from time to time be subject to legal proceedings and claims which arise in the ordinary course of its business. Management believes that the outcome of these legal actions will not have a material adverse effect upon the consolidated financial position or future results of operations of the Company. On August 18, 1998, Saybolt, Inc. agreed to plead guilty in federal court to violations of the federal Clean Air Act and the Foreign Corrupt Practices Act which occurred prior to the Company's acquisition of Saybolt. Under the plea agreement reached among Saybolt, the U.S. Department of Justice and the United States Attorneys for the districts of Massachusetts, New Jersey, and Connecticut, Saybolt will pay $4.9 million in fines and be placed on probation for five years. The fines are being paid out of funds specifically set aside in escrow for contingencies from Saybolt stockholders at the time of the acquisition. Core Laboratories acquired Saybolt's Dutch parent in May of 1997. The violations occurred between October 1994 and December of 1996. Saybolt believes that these penalties will have no material adverse effect on its operations and that all of its material licenses will remain in full force and effect. ITEM 2. CHANGES IN SECURITIES. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. To address the Year 2000 issues Core Laboratories, through its Year 2000 Committee, has enacted a plan of readiness to ensure that its internal computer system, software and equipment, as well as third party systems will be Year 2000 compliant. The committee has identified five phases to achieve its state of readiness. They include: (i) identification, (ii) education, (iii) remediation, (iv) implementation and testing and, (v) reassessment. 12 15 The identification phase involves a company wide assessment of the software applications and hardware used. The majority of all applications and hardware are already compliant. The few that are not will be remediated. The Company believes that the majority of this phase has been completed. However, the Company realizes that identification is a continual process and must be reassessed at various intervals throughout. The education phase includes communicating a formal policy to all employees and ensuring that they are reaching out to all third parties whose operations are material to the company. This phase has been implemented and will be reassessed throughout the life of the project. The remediation phase includes the modification of those applications and hardware that are not compliant. The Company has purchased the latest release of its financial application software at a cost of $2.5 million including implementation. Although the decision to use the new software was not Year 2000 driven, the timing will enable the identified field offices, which are currently noncompliant, to migrate to the new software by the first quarter of 1999. Certain field offices relying on a variety of internal software have also been instructed to convert to Year 2000 compliant software. The software has been identified and is in the process of being purchased. This software is expected to cost $1.0 million. The remediation phase also involves converting relationships with third parties that are noncompliant to those who are compliant. Due to the dynamics of the Year 2000 issues, the Company's Year 2000 project is in a continual state of reassessment. The goal of the Year 2000 project is to ensure that all critical functions of the Company remain functional; however, the Company acknowledges that a lapse in inter-connected third party functions or a lapse within its own internal assessment could pose risks in its operational as well as financial abilities. These functions include but are not limited to revenue collection and cash disbursement, as well as banking transactions. To remedy this, the Company has a contingency plan, which involves off-site storage and a hot site for business recovery. The Company is currently assessing any other Year 2000 compliance failures that may occur and how they may be incorporated into the contingency plan. While the total cost of the Year 2000 Project is still being considered, the Company does not anticipate that future costs associated with potential Year 2000 compliance issues will have a material adverse impact on its consolidated financial position or results of operations. However, at this time, the Company cannot conclude definitively that a failure of the either the Company or of a third party to achieve Year 2000 compliance will not adversely affect the Company. The Company relies on internally generated funds to execute the Year 2000 Project. 13 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
INCORPORATED BY REFERENCE FROM THE EXHIBIT NO. EXHIBIT TITLE FOLLOWING DOCUMENTS - ----------- ------------- ------------------- 27.1 Financial Data Schedule Filed Herewith
(b) Reports on Form 8-K. None 14 17 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, Core Laboratories N.V., has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CORE LABORATORIES N.V. by: Core Laboratories International B.V. Dated: November 13, 1998 By: /s/ Richard L. Bergmark ---------------------------------------- Richard L. Bergmark Chief Financial Officer and Treasurer (Principal Financial Officer and Chief Accounting Officer) 15 18 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- ----------- 27.1 Financial Data Schedule Filed Herewith
EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS DEC-31-1998 SEP-30-1998 14,945 0 77,320 7,101 15,892 110,059 80,995 23,270 327,359 49,286 0 0 0 480 147,149 327,359 186,982 186,982 156,667 168,884 0 0 4,460 25,855 0 0 0 0 0 0 0 0
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