<PAGE> 1
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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.
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CORE LABORATORIES N.V.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
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<PAGE> 3
CORE LABORATORIES N.V.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
---------- ---------
ASSETS (UNAUDITED) (AUDITED)
<S> <C> <C>
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
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
1
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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
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
============= =============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
2
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12
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1998 1997
------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
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
============= =============
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
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CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
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
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 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
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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.
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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):
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30 DECEMBER 31,
1998 1997 1997
----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
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
</TABLE>
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):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Parts and materials..................................................... $ 14,202 $ 4,558
Work in process......................................................... 1,690 7,915
----------- ------------
Total ......................................................... $ 15,892 $ 12,473
=========== ============
</TABLE>
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
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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):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
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
=========== ============
</TABLE>
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
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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
<PAGE> 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUE TOTAL REVENUE
------------------------ -----------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
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
========== ========== ========== ==========
</TABLE>
* 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
INCORPORATED BY
REFERENCE FROM THE
EXHIBIT NO. EXHIBIT TITLE FOLLOWING DOCUMENTS
- ----------- ------------- -------------------
<S> <C> <C>
27.1 Financial Data Schedule Filed Herewith
</TABLE>
(b) Reports on Form 8-K.
None
14
<PAGE> 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
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C> <C>
27.1 Financial Data Schedule Filed Herewith
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 14,945
<SECURITIES> 0
<RECEIVABLES> 77,320
<ALLOWANCES> 7,101
<INVENTORY> 15,892
<CURRENT-ASSETS> 110,059
<PP&E> 80,995
<DEPRECIATION> 23,270
<TOTAL-ASSETS> 327,359
<CURRENT-LIABILITIES> 49,286
<BONDS> 0
0
0
<COMMON> 480
<OTHER-SE> 147,149
<TOTAL-LIABILITY-AND-EQUITY> 327,359
<SALES> 186,982
<TOTAL-REVENUES> 186,982
<CGS> 156,667
<TOTAL-COSTS> 168,884
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,460
<INCOME-PRETAX> 25,855
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
