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, 1999 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 0.03 per share, outstanding at November 10, 1999 was 30,089,559. ================================================================================ 2 CORE LABORATORIES N.V. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 INDEX PAGE ---- Part I -- Financial Information Item 1 -- Financial Statements Consolidated Balance Sheets at September 30, 1999 and December 31, 1998.................... 1 Consolidated Statements of Operations for the Three Months Ended September 30, 1999 and 1998............................................................ 2 Consolidated Statements of Operations for the Nine Months Ended September 30, 1999 and 1998............................................................ 3 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998............................................................ 4 Notes to Consolidated Financial Statements ................................................ 5 Item 2-- Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................................ 10 Item 3-- Quantitative & Qualitative Disclosures of Market Risk.................................. 16 Part II -- Other Information Item 1-- Legal Proceedings...................................................................... 17 Item 2-- Changes in Securities.................................................................. 17 Item 3-- Defaults Upon Senior Securities........................................................ 17 Item 4-- Submission of Matters to a Vote of Security Holders ................................... 17 Item 5-- Other Information...................................................................... 17 Item 6-- Exhibits and Reports on Form 8-K....................................................... 17 Signature ....................................................................................... 18 ii 3 CORE LABORATORIES N.V. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30, DECEMBER 31, 1999 1998 ---------- ---------- ASSETS (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents .......................................... $ 17,280 $ 8,166 Accounts receivable, net ........................................... 98,103 86,578 Inventories ........................................................ 25,345 18,967 Prepaid expenses ................................................... 9,178 10,052 Deferred income tax asset .......................................... 5,730 6,129 ---------- ---------- Total current assets .................................. 155,636 129,892 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT ........................................... 86,832 92,599 Less-- accumulated depreciation .................................... (23,307) (22,357) ---------- ---------- 63,525 70,242 INTANGIBLES AND GOODWILL, net ........................................... 151,354 150,859 OTHER LONG-TERM ASSETS .................................................. 5,239 4,540 ---------- ---------- Total assets ................................................... $ 375,754 $ 355,533 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt ............................... $ 1,376 $ 18,892 Accounts payable ................................................... 15,754 19,859 Other current liabilities .......................................... 28,788 24,749 ---------- ---------- Total current liabilities ...................................... 45,918 63,500 LONG-TERM DEBT .......................................................... 104,273 69,327 MINORITY INTEREST ....................................................... 1,061 1,170 LONG-TERM LEASE OBLIGATIONS ............................................. 1,038 1,231 OTHER LONG-TERM LIABILITIES ............................................. 20,093 20,970 SHAREHOLDERS' EQUITY: Preference shares, NLG 0.03 par value; 100,000,000 shares authorized, no shares issued or outstanding .................... -- -- Common shares, NLG 0.03 par value; 30,000,000 shares authorized, 30,059,559 and 29,603,999 issued and outstanding at September 30, 1999 and December 31, 1998, respectively ...... 507 500 Additional paid-in capital ......................................... 159,980 155,547 Retained earnings .................................................. 42,884 43,288 ---------- ---------- Total shareholders' equity ..................................... 203,371 199,335 ---------- ---------- Total liabilities and shareholders' equity ......................... $ 375,754 $ 355,533 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 1 4 CORE LABORATORIES N.V. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 ------------- ------------- (UNAUDITED) SERVICES ............................................. $ 62,550 $ 64,447 SALES ................................................ 15,326 15,938 ------------- ------------- 77,876 80,385 OPERATING EXPENSES: Costs of services ............................... 48,455 49,613 Costs of sales .................................. 11,898 9,259 General and administrative expenses ............. 2,980 2,305 Depreciation and amortization ................... 4,927 4,949 Other (income) expense, net ..................... (353) 200 ------------- ------------- 67,907 66,326 INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE AND INCOME TAX EXPENSE .................. 9,969 14,059 INTEREST EXPENSE ..................................... 2,253 1,759 ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE .................................... 7,716 12,300 INCOME TAX EXPENSE ................................... 2,546 3,690 ------------- ------------- NET INCOME ........................................... $ 5,170 $ 8,610 ============= ============= PER SHARE DATA: BASIC EARNINGS PER SHARE ........................ $ 0.17 $ 0.29 ============= ============= WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING ............................... 29,892,094 29,334,845 ============= ============= DILUTED EARNINGS PER SHARE ...................... $ 0.17 $ 0.29 ============= ============= WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING ............................... 30,694,476 29,640,425 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 2 5 CORE LABORATORIES N.V. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) NINE MONTHS ENDED SEPTEMBER 30, -------------------------------- 1999 1998 ------------- ------------- (UNAUDITED) SERVICES ................................................... $ 177,166 $ 194,263 SALES ...................................................... 41,100 24,701 ------------- ------------- 218,266 218,964 OPERATING EXPENSES: Costs of services ..................................... 148,135 153,632 Costs of sales ........................................ 31,552 15,324 General and administrative expenses ................... 8,691 6,197 Depreciation and amortization ......................... 14,326 12,554 Non-recurring charges (Note 7) ........................ 10,670 -- Other (income) expense, net ........................... (2,024) 497 ------------- ------------- 211,350 188,204 INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE AND INCOME TAX EXPENSE ........................ 6,916 30,760 INTEREST EXPENSE ........................................... 5,794 4,690 ------------- ------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE .......................................... 1,122 26,070 INCOME TAX EXPENSE ......................................... 370 7,821 ------------- ------------- INCOME FROM CONTINUING OPERATIONS .......................... 752 18,249 LOSS FROM DISCONTINUED OPERATIONS, net of tax benefit of $93 in 1998 ............................................... -- (217) LOSS ON DISPOSITION OF DISCONTINUED OPERATIONS, net of tax benefit of $1,446 ..................................... -- (3,374) ------------- ------------- NET INCOME ................................................. $ 752 $ 14,658 ============= ============= PER SHARE DATA: Income from continuing operations ..................... $ 0.03 $ 0.66 Loss from discontinued operations ..................... -- (0.01) Loss on disposition of discontinued operations ........ -- (0.12) ------------- ------------- BASIC EARNINGS PER SHARE .............................. $ 0.03 $ 0.53 ============= ============= WEIGHTED AVERAGE BASIC COMMON SHARES OUTSTANDING ...... 29,758,253 27,537,029 ============= ============= Income from continuing operations ..................... $ 0.02 $ 0.66 Loss from discontinued operations ..................... -- (0.01) Loss on disposition of discontinued operations ........ -- (0.12) ------------- ------------- DILUTED EARNINGS PER SHARE ............................ $ 0.02 $ 0.53 ============= ============= WEIGHTED AVERAGE DILUTED COMMON SHARES OUTSTANDING ..................................... 30,508,500 27,842,609 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 3 6 CORE LABORATORIES N.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, -------------------------- 1999 1998 ---------- ---------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ........................................... $ 752 $ 14,658 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 ........................... 14,326 12,554 (Gain) loss on sale of fixed assets ..................... (209) (609) Changes in assets and liabilities: Decrease (increase) in accounts receivable .............. 436 904 Increase in inventories ................................. (4,530) (4,435) Decrease (increase) in prepaid expenses ................. 2,012 (1,130) Decrease in accounts payable ............................ (3,665) (7,625) Increase (decrease) in other accrued expenses ........... 669 2,416 Increase (decrease) in other long-term liabilities ...... 102 (9,437) Other ................................................... (7,144) (2,152) ---------- ---------- Net cash used in operating activities .............. 2,749 9,964 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ........................................ (15,629) (17,916) Proceeds from sale of fixed assets .......................... -- 4,226 Acquisitions, net of cash ................................... 3,945 -- Sale of discontinued operations ............................. -- 4,114 Other ....................................................... (473) -- ---------- ---------- Net cash used in investing activities ................... (12,157) (9,576) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt .................................. (84,343) (12,419) Borrowings under long-term debt ............................. 102,406 14,137 Exercise of stock options ................................... 955 1,569 Other ....................................................... (496) (1,080) ---------- ---------- Net cash provided by financing activities ............... 18,522 2,207 ---------- ---------- NET CHANGE IN CASH ............................................... 9,114 2,595 CASH, beginning of period ........................................ 8,166 12,889 ---------- ---------- CASH, end of period .............................................. $ 17,280 $ 15,484 ========== ========== 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 PRINCIPLES OF CONSOLIDATION 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 using 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, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Balance sheet information as of December 31, 1998, was derived from the 1998 annual audited financial statements. Certain 1998 items have been reclassified to conform with the current year 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, 1999. RECENT PRONOUNCEMENTS The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosure About Segments of an Enterprise and Related Information" in 1998, which changes the way the Company reports information about its operating segments. See Footnote 8 for additional information. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued. SFAS No. 133 was subsequently amended by SFAS No. 137, which delayed its effective date. As a result, SFAS No. 133 and SFAS No. 137 will be effective for fiscal years beginning after June 15, 2000, and establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts). Adoption of SFAS Nos. 133 and 137 are not expected to have a material effect on the Company's financial position or operational results. 2. ACQUISITIONS COHERENCE TECHNOLOGY COMPANY ACQUISITION Effective July 1, 1999, the Company acquired all of the outstanding shares of Coherence Technology Company, Inc. ("CTC"), a private company with executive offices in Houston. CTC provides specialized seismic data processing and interpretation services and is exclusively licensed by BP Amoco to provide its patented coherency seismic data processing technology to the worldwide 5 8 petroleum industry. The Company issued approximately 194,000 shares in the transaction which was accounted for as a pooling-of-interests. As part of the transaction, the Company assumed approximately $1 million in CTC bank debt and issued approximately 140,000 shares to a lender as debt repayment. The Company's consolidated financial statements have been restated for all prior periods presented to include the financial position and results of CTC. RESERVOIRS, INC. ACQUISITION Effective August 2, 1999, the Company acquired all of the outstanding shares of Reservoirs, Inc. ("Reservoirs"), a private company based in Houston, Texas. Reservoirs provides reservoir description services to the oil industry and is a recognized leader in the geology and petrophysics of deepwater reservoirs. The Company issued approximately 300,000 shares in a transaction that was accounted for using the purchase method of accounting. The transaction resulted in an allocation of approximately $4.0 million in goodwill which is being amortized over a 20-year period. 3. DISPOSITION OF ASSETS The Company sold substantially all of its U.S. environmental testing and certain other assets to Severn Trent Laboratories, Inc., a Delaware corporation, with an effective date of September 30, 1999. Consideration on the sale was approximately $19 million, which is included in accounts receivable, and no gain or loss was recognized. 4. INVENTORIES Inventories consist primarily of items held for sale and services provided to customers. Inventories are stated at the lower of cost (includes direct material, labor and overhead) or estimated realizable value. A summary of inventories is as follows (in thousands): SEPTEMBER 30, DECEMBER 31, 1999 1998 -------- -------- (UNAUDITED) Parts and materials .... $ 8,931 $ 6,524 Work-in-process ........ 1,070 1,873 Finished Goods ......... 15,344 10,570 -------- -------- Total ......... $ 25,345 $ 18,967 ======== ======== 5. 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. 6 9 6. LONG-TERM DEBT Long-term debt at September 30, 1999 and December 31, 1998 is summarized in the following table (in thousands): SEPTEMBER 30, DECEMBER 31, 1999 1998 -------- --------- (UNAUDITED) Credit Facility with a bank group: $70,154 term loan facility .......... $ -- $ 70,154 $100,000 revolving debt facility .... 29,119 15,000 Senior Notes ............................ 75,000 -- Loan Notes .............................. 991 1,073 Other indebtedness ...................... 539 1,992 -------- --------- Total debt ..................... 105,649 88,219 Less -- current maturities .......... 1,376 18,892 -------- --------- Total long-term debt ....... $104,273 $ 69,327 ======== ========= In July 1999, the Company entered into a Credit Facility which provides for (i) a committed revolving debt facility of $95 million and (ii) a Netherlands guilder denominated revolving debt facility with U.S. dollar equivalency of $5 million. At September 30, 1999, approximately $71 million was available for borrowing under the revolving debt facility. Loans under the Credit Facility generally bear interest from LIBOR plus 1.25% to a maximum of LIBOR plus 1.75%. The revolving debt facilities require interest payments only, until maturity in June 2004. In July 1999 the Company issued $75 million in Senior Notes which bear an average interest rate of 8.16% and require annual principal payments beginning in July 2005 and continuing through July 2011. The terms of the Credit Facility and Senior Notes will 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. All of the Company's material subsidiaries are guarantors or co-borrowers under both 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. 7. NON-RECURRING CHARGES In the first quarter of 1999, the Company recorded certain non-recurring charges of approximately $3.7 million relating to the termination of the proposed GeoScience Corp. transaction. The Company also recorded non-recurring charges related to asset write-downs, expenses for personnel reductions, facility-related expenses and other charges, totaling approximately $6.9 million. These charges are included in "Non-recurring charges" in the accompanying consolidated financial statements of operations. 7 10 8. SEGMENT REPORTING The Company's business units have been aggregated into three reportable segments which provide products and services used for optimizing reservoir performance and maximizing hydrocarbon recovery from new and existing fields. o Reservoir Description: Encompasses the petrophysical characterization of petroleum reservoir rock and the phase behavior relationships of reservoir fluids and gases. o Production Enhancement: Includes field applications of proprietary technologies to maximize the efficiency and effectiveness of well completions, perforations, stimulations, and production. o Reservoir Management: Combines and integrates data sets from reservoir description and production enhancement services to maximize daily hydrocarbon production and recovery from a well or field. SEGMENT EARNINGS The Company's operations are managed primarily in three separate segments due to the different technologies and marketing strategies each segment utilizes and requires. Results of these segments are presented below following the same accounting policies as used to prepare the Consolidated Balance Sheets and Statements of Operations. The Company evaluates performance based on income or loss from operations before income tax, interest, and other non-operating income (expense). Summarized financial information concerning the Company's segments is shown in the following table. Items included in "Corporate and Other" represent those items that are individually insignificant or that are not directly related to a particular segment, but benefit the Company as a whole. INCOME BEFORE REVENUES TAXES AND INTEREST THREE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30, -------------------------------- -------------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (In thousands) Reservoir Description ...... $ 49,564 $ 48,081 $ 7,301 $ 4,670 Production Enhancement ..... 17,186 17,777 2,419 6,345 Reservoir Management ....... 11,126 14,527 24 2,977 ---------- ---------- ---------- ---------- Total Business Segments .... 77,876 80,385 9,744 13,992 Corporate and Other ........ -- -- 225 67 ---------- ---------- ---------- ---------- Consolidated ............... $ 77,876 $ 80,385 $ 9,969 $ 14,059 ========== ========== ========== ========== 8 11 INCOME (LOSS) BEFORE REVENUES TAXES AND INTEREST NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- ------------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (In thousands) Reservoir Description ...... $ 138,741 $ 140,843 $ 7,832 $ 20,006 Production Enhancement ..... 46,882 30,495 6,583 9,586 Reservoir Management ....... 32,643 47,626 (2,930) 1,118 ---------- ---------- ---------- ---------- Total Business Segments .... 218,266 218,964 11,485 30,710 Corporate and Other ........ -- -- (4,569) 50 ---------- ---------- ---------- ---------- Consolidated ............... $ 218,266 $ 218,964 $ 6,916 $ 30,760 ========== ========== ========== ========== 9. SUBSEQUENT EVENT PROPOSED TOMOSEIS CORPORATION ACQUISITION On November 2, 1999, the Company signed a letter of intent to merge with TomoSeis Corporation ("TomoSeis"), a private company with offices in Houston, Texas. TomoSeis provides highly detailed reservoir imaging technologies that are the critical component for successful 4D seismic and reservoir monitoring programs. The Company will issue approximately 585,000 shares in a transaction which is expected to be accounted for as a pooling of interests. 9 12 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 technologies; 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. YEAR 2000 READINESS The Company has numerous technology systems that are managed on a decentralized basis. The Company's Year 2000 readiness efforts are therefore being undertaken on a company wide basis but with centralized oversight. Each facility is responsible for developing and implementing a plan to minimize the risk of a significant negative impact on its operations. The Company has identified four phases to achieve a state of readiness: (i) identification, (ii) remediation, (iii) implementation and testing, and, (iv) reassessment. As of December 31, 1998, the identification phase of assessing all systems that could be affected by Year 2000 date sensitive software or embedded technology was substantially complete. Reassessment will continue constantly throughout the process. The Company has relationships with various third parties who must also be Year 2000 ready. These third parties provide (or receive) resources and services to (or from) the Company and include organizations with which the Company exchanges information. Third parties include vendors of hardware, software and information services; providers of infrastructure services such as voice and data communications; investors, customers; manufacturing suppliers; distribution channels; non-consolidated entities; and joint venture partners. Third parties differ from internal systems in that the company exercises less, or no, control over Year 2000 readiness. The Company has developed a plan to assess and attempt to mitigate the risks associated with the potential failure of third parties to achieve Year 2000 readiness. This plan includes the following activities: (i) identify and clarify third party dependencies; (ii) research and analyze Year 2000 readiness for critical third parties; and (iii) test critical hardware and software products and electronic interfaces. As of December 31, 1998, all phases of this process were substantially complete, however, due to the various stages of third parties Year 2000 readiness, the Company's testing activities will extend into 1999. 10 13 The Company has commenced contingency planning to reduce the risk of Year 2000 related business failures. The contingency plans, which address both internal systems and third party relationships, include the following activities: (i) evaluate the consequences of failure of business processes with significant exposure to Year 2000 risk; (ii) determine the probability of a Year 2000 related failure for those processes that have a high consequence of failure; (iii) develop an action plan to complete contingency plans for those processes that rank high in both consequence and probability of failure; and (iv) complete the applicable action plans. The Company has substantially completed evaluation activities and is proceeding with the subsequent activities. The Company expects to substantially complete all contingency-planning activities in the fourth quarter of 1999. Based on its plans to make internal systems ready for Year 2000, to deal with third party relationships, and to develop contingency actions, the Company believes that it will experience, at most, isolated and minor disruptions of business processes following the turn of the century. Such disruptions are not expected to have a material effect on the Company's future results of operations, liquidity, or financial condition. However, due to the magnitude and complexity of this project, risks and uncertainties exist and the Company is not able to predict a reasonable worst case scenario. If conversion of the Company's internal systems is not completed on a timely basis (due to non-performance by significant third-party vendors, lack of qualified personnel to perform the Year 2000 work, or other unforeseen circumstances in completing the Company's plans), or if critical third parties fail to achieve Year 2000 readiness on a timely basis, the Year 2000 issues could have a material adverse impact on the Company's operations following the turn of the century. GENERAL Core Laboratories N.V. was established in 1936 and is one of the world's leading providers of proprietary and patented reservoir description, production enhancement and reservoir management 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 and other integrated systems which complement its services operations. Core Laboratories currently operates over 70 facilities in over 50 countries and has approximately 3,500 employees. RECENT DEVELOPMENTS NON-RECURRING CHARGE In the first quarter of 1999, the Company recorded certain non-recurring charges of approximately $3.7 million relating to the termination of the proposed GeoScience Corp. transaction. The Company also recorded non-recurring charges related to asset write-downs, expenses for personnel reductions, facility-related expenses and other charges, totaling approximately $6.9 million. These charges are included in "Non-recurring charges" in the accompanying consolidated financial statements of operations. 11 14 COHERENCE TECHNOLOGY COMPANY ACQUISITION Effective July 1, 1999, the Company acquired all of the outstanding shares of Coherence Technology Company, Inc. ("CTC"), a private company with executive offices in Houston. CTC provides specialized seismic data processing and interpretation services and is exclusively licensed by BP Amoco to provide its patented coherency seismic data processing technology to the worldwide petroleum industry. The Company issued approximately 194,000 shares in the transaction which was accounted for as a pooling-of-interests. As part of the transaction, the Company assumed approximately $1 million in CTC bank debt and issued approximately 140,000 shares to a lender as debt repayment. The Company's consolidated financial statements have been restated for all periods presented to include the financial position and results of CTC. RESERVOIRS, INC. ACQUISITION Effective August 2, 1999, the Company acquired all of the outstanding shares of Reservoirs, Inc. ("Reservoirs"), a private company based in Houston, Texas. Reservoirs provides reservoir description services to the oil industry and is a recognized leader in the geology and petrophysics of deepwater reservoirs. The Company issued approximately 300,000 shares in a transaction that was accounted for using the purchase method of accounting. The transaction resulted in an allocation of approximately $4.0 million in goodwill which is being amortized over a 20-year period. DISPOSITION OF ASSETS The Company sold substantially all of its U.S. environmental testing and certain other assets to Severn Trent Laboratories, Inc., a Delaware corporation, with an effective date of September 30, 1999. Consideration on the sale was approximately $19 million, which is included in accounts receivable, and no gain or loss was recognized. PROPOSED TOMOSEIS CORPORATION ACQUISITION On November 2, 1999, the Company signed a letter of intent to merge with TomoSeis Corporation ("TomoSeis"), a privately held company with offices in Houston, Texas. TomoSeis provides highly detailed reservoir imaging technologies that are the critical component for successful 4D seismic and reservoir monitoring programs. The Company will issue approximately 585,000 shares in a transaction which is expected to be accounted for as a pooling of interests. 12 15 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 --------------------- --------------------- 1999 1998 1999 1998 ------ ------ ------ ------ Services .................................... 80.3% 80.2% 81.2% 88.7% Sales ....................................... 19.7 19.8 18.8 11.3 ------ ------ ------ ------ 100.0 100.0 100.0 100.0 Operating expenses: Cost of services ....................... 77.5* 77.0* 83.6* 79.1 Cost of sales .......................... 77.6* 58.1* 76.8* 62.0* General and administrative expenses .... 3.8 2.9 4.0 2.8 Depreciation and amortization .......... 6.3 6.2 6.6 5.7 Non-recurring charges .................. -- -- 4.9 -- Other (income) expense, net ............ (0.5) 0.2 (0.9) 0.2 Income from continuing operations before interest expense and income tax expense ... 12.8 17.5 3.2 14.0 Interest expense ............................ 2.9 2.2 2.7 2.1 ------ ------ ------ ------ Income from continuing operations before income tax expense ....................... 9.9 15.3 0.5 11.9 Income tax expense .......................... 3.3 4.6 0.2 3.6 ------ ------ ------ ------ Income from continuing operations ........... 6.6% 10.7% 0.3% 8.3% ====== ====== ====== ====== * Percentage based on applicable segment revenue, and not total revenue. Total revenue for the third quarter 1999 was $77.9 million, a decrease from $80.4 million in the same period last year. Total revenue for the nine months ended September 30, 1999 was reasonably in line with the prior nine month period. Cost of services as a percentage of service revenue for the three and nine months ended September 30, 1999 increased compared to the corresponding periods in 1998. The increase is due to fixed costs being higher than required to address the capital expenditures of the Company's clients. Cost of sales as a percentage of sales revenue for three and nine months ended September 30, 1999 increased compared to the corresponding periods in 1998 due to an increase in lower margin product sales. 13 16 General and administrative expenses for the three and nine months ended September 30, 1999 increased $0.7 million and $2.5 million respectively, as compared to the corresponding periods in 1998. The increases were primarily a result of increased personnel costs attributable to the Company's growth. Depreciation and amortization expense for the three months ended September 30, 1999 remained constant as compared to a year ago. Depreciation and amortization expense for the nine months ended September 30, 1999 increased $1.8 million as compared to the corresponding period in 1998 primarily due to the inclusion of depreciation and amortization from the Company's recent acquisitions. Non-recurring charges of $10.7 million were expensed in the nine months ended September 30, 1999. The expenses were related to asset write-downs, personnel reductions, and other expenses including those related to the termination of the GeoScience Corp. transaction. Interest expense for the three months ended September 30, 1999 increased approximately $0.5 million as compared to 1998. For the nine months ended September 30, 1999, interest expense increased $1.1 million as compared to 1998. These increases were primarily due to additional borrowings used to refinance a portion of the debt of the recent acquisitions and increased borrowings relating to the Senior Notes. The Company's effective income tax rate was approximately 33% for the three months and nine months ended September 30, 1999 as compared to 30% for three months and nine months ended September 30, 1998. The increase was principally due to the higher effective tax rates of the jurisdictions in which recent acquisitions operate. 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, 1999, the Company had operating cash flow of $2.7 million as compared to $10.0 million for the corresponding period in 1998. Management believes the Company's internal and external sources of cash will provide the necessary funds with which to meet its expected obligations. In July 1999, the Company amended its term loan and revolving credit facility and issued $75 million in Senior Notes. The Company's revolving credit facility is with a group of banks and provides for up to $100 million of unsecured revolving credit borrowings. As of September 30, 1999, the Company had approximately $71 million available on the credit facility. The interest rate applicable to the outstanding credit facility is generally LIBOR plus 1.25% to a maximum of LIBOR plus 1.75%. The proceeds from the Senior Notes were used to pay off term loans of $70 million. The Senior Notes are due 2011 and have an average interest rate of 8.16%. Principal payments are due beginning July 2005 and continuing through July 2011. 14 17 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. 15 18 CORE LABORATORIES N.V. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK There has been no material change in the Company's position regarding quantitative and qualitative disclosures of market risk from that disclosed in the Company's 1998 form 10-K. 16 19 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 that 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. 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. None 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 17 20 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 15, 1999 By: /s/ Randall D. Keys ------------------------------------- Randall D. Keys Chief Financial Officer 18 21 EXHIBIT INDEX INCORPORATED BY REFERENCE FROM THE EXHIBIT NO. EXHIBIT TITLE FOLLOWING DOCUMENTS ----------- ------------- ------------------- 27.1 Financial Data Schedule Filed Herewith