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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 or 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
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Shares, NLG .03 Par Value Per Share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No.[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[X]
As of March 14, 1997, the number of common shares of outstanding was
10,595,668. At that date, the aggregate market value of common shares held by
non-affiliates of the registrant was approximately $99,087,463.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT Part of 10-K
-------- ------------
1. Proxy statement to be filed
pursuant to Regulation 14A under
the Securities Exchange Act of
1934 with respect to the 1997
annual meeting of shareholders. PART III
================================================================================
CORE LABORATORIES N.V.
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business..................................... 1
Item 2. Properties................................... 7
Item 3. Legal Proceedings............................ 8
Item 4. Submission of Matters to a
Vote of Security Holders..................... 8
PART II
Item 5. Market for the Common
Shares and Related Shareholder Matters....... 8
Item 6. Selected Financial Data...................... 9
Item 7. Management's Discussion and
Analysis of Financial Condition and
Results of Operations........................ 10
Item 8. Financial Statements and
Supplementary Data........................... 14
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure................................... 14
PART III
Item 10. Directors and Executive
Officers of the Registrant................... 14
Item 11. Executive Compensation....................... 14
Item 12. Security Ownership of Certain
Beneficial Owners and Management............. 14
Item 13. Certain Relationships and
Related Transactions......................... 14
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K...................... 15
PART I
ITEM 1. BUSINESS
GENERAL
Core Laboratories N.V. ("Core Laboratories" or the "Company") through its
subsidiaries is one of the leading providers of petroleum reservoir description
and field management services. The Company's services include reservoir rock and
fluids laboratory analyses; field services to evaluate the effectiveness of well
completions, stimulations and enhanced oil recovery projects; and geological and
geophysical engineering. In addition, the Company manufactures and sells
petroleum reservoir rock and fluid analysis instrumentation and other integrated
systems. Core Laboratories currently operates 61 facilities in 16 countries and
has approximately 1,360 employees.
BACKGROUND
The Company was established in 1936 and operated as a division of Western
Atlas International, Inc. ("WAII") from 1987 to 1994. On September 30, 1994, a
group of investors, including 14 members of management, purchased the business
and substantially all of the assets of the Core Laboratories division from WAII
(the "Purchase"). In September 1995, the Company issued 2,800,000 shares at
$12.00 per share in an initial public offering (the "Offering"). The net
proceeds of approximately $30.0 million were used to repay $22.5 million of debt
and redeem $7.5 million of preferred loan stock primarily incurred in connection
with the Purchase. The 2,800,000 common shares issued in September 1995 are
traded on the Nasdaq Stock Market under the symbol of CRLBF.
RECENT DEVELOPMENTS
PROTECHNICS MERGER
On December 31, 1996, the Company issued approximately 1.1 million of its
common shares in exchange for substantially all of the outstanding stock of
ProTechnics Company. ProTechnics Company and subsidiaries ("ProTechnics") is
based in Houston, Texas, and is one of the leading providers of services that
measure the effectiveness of well stimulations and completions via their
proprietary ZeroWash(R) and SpectraScan(R) technologies. ProTechnics is also the
leader in determining the efficiencies of enhanced recovery projects through
field tracer surveys. ProTechnics revenues totaled $11,649,000, $7,530,000, and
$6,461,000 for fiscal 1996, 1995, and 1994, respectively.
As the ProTechnics merger was accounted for using the pooling of interests
method of accounting, the Company's consolidated financial statements have been
restated for all periods presented to include the financial position and results
of operations of ProTechnics. In 1996, ProTechnics changed its fiscal year from
March 31 to the Company's calendar year. Therefore, the Company's 1996 results
of operations includes ProTechnics results of operations for calendar 1996. In
order to restate 1995 and prior periods, the Company's calendar financial
statements were combined with the applicable ProTechnics March 31 consolidated
financial statements. Accordingly, the Company's 1996 results of operations
include a loss of $77,000 for the quarter ended March 31, 1996, which is also
included in the Company's results of operations for 1995. An adjustment has been
made in 1996 retained earnings to remove the duplication of this loss in the
Company's equity.
SCOTT PICKFORD ACQUISITION
On March 1, 1997, the Company acquired the control of a majority of the
outstanding stock of Scott Pickford plc, a United Kingdom-based company. The
Company is in the process of acquiring the remaining shares and expects that the
total consideration paid for Scott Pickford plc will total approximately
$14,000,000. Scott Pickford plc and its subsidiaries ("Scott Pickford") provide
1
petroleum reservoir management, geoscience services, and engineering products to
its customers. Scott Pickford's revenues totaled $13,223,000, $13,319,000, and
$7,545,000 for its fiscal years ended March 31, 1996, 1995, and 1994,
respectively. The acquisition, which is being financed through borrowings, will
be accounted for as a purchase; accordingly, Scott Pickford's results of
operations will be included with those of the Company beginning in March 1997.
SAYBOLT INTERNATIONAL B.V. MERGER
On January 17, 1997, the Company signed a non-binding letter of intent
pursuant to which the Company is negotiating the acquisition of Saybolt
International B.V. Saybolt International B.V. and its subsidiaries ("Saybolt")
provide laboratory and inspection services to characterize and test crude oil
and petroleum products to the oil industry. Saybolt operates in over 40
countries and has approximately 1,650 employees. Saybolt's revenues totaled
$97,803,000 and $90,258,000 in 1995 and 1994, respectively. The transaction is
subject to, among other things, the negotiation and execution of a definitive
acquisition agreement, due diligence to be performed by the Company and Saybolt,
and obtaining requisite approvals. There can be no assurance that the
transaction will be consummated.
BUSINESS STRATEGY
The Company believes it has potential opportunities for expansion of its
business through (i) continued development of high-margin, proprietary
technologies, services and products through client-driven research and
development, (ii) expanded international services and product lines offered
throughout the Company's global technology network, and (iii) acquisition of
parallel businesses that add key technologies or market presence and complement
existing products and services.
The Company's research and development strategy is designed to maintain and
enhance its market leadership position in its principal businesses by
emphasizing the development of technology, services and products to meet the
needs of its customers, who are continually seeking to lower their costs of
finding, developing, producing and refining hydrocarbons. The Company's strategy
reflects the trend towards increased utilization of advanced technologies to
enhance the efficiency of development drilling, reduce the costs associated with
production of known reserves, maximize the efficiency of secondary and tertiary
recovery techniques, and reduce finding costs for new reserves. While the
aggregate number of wells being drilled per year has remained relatively
constant in recent years, oil companies have increased expenditures on
high-technology services, including advanced reservoir rock and fluids analyses,
that assist in the development of more complete and comprehensive analyses of
reservoir characteristics and hydrocarbon fluids. The Company will continue to
concentrate on developing technologies related more to development and
production efficiencies, as opposed to the more volatile exploration sector of
the oil and gas industry.
Another component of the Company's business strategy is to broaden the
services offered to clients. The Company intends to expand the market served by
ProTechnics and Scott Pickford through its existing global network of
high-technology facilities, which use many common resources.
The Company continually reviews potential acquisition possibilities in
existing or related business areas to add key technologies, enhance market
presence or complement existing businesses. The Company's recent acquisitions of
ProTechnics and Scott Pickford reflects its desire to broaden the services
offered to clients.
The Company believes that these strategies have contributed to the
significant increase in income before interest expense, income tax and
extraordinary item to $12.8 million for the fiscal year ended December 31, 1996,
from $10.0 million for the fiscal year ended December 31, 1995.
2
OPERATIONS
The Company derives its revenues from services and sales to customers
primarily in one industry segment, the oil and gas industry, and conducts its
business through two closely related operations:
TECHNOLOGY SERVICES AND TECHNOLOGY PRODUCTS
TECHNOLOGY SERVICES. The Company provides reservoir rock and fluids
analyses; field services to evaluate the effectiveness of well completions,
stimulations and enhanced oil recovery projects; geological and geophysical
engineering; and analysis of water, soil and air samples for organic and
inorganic contaminants. Typically, rock and fluids samples are collected from
wells drilled into known or potential petroleum reservoirs and sent to the
Company for analyses. These analyses accurately measure the petrophysical
properties of the rocks and pressure-volume-temperature relationships of the
reservoir fluids to help determine the commercial viability of the hydrocarbon
accumulation, and to develop a production program that maximizes ultimate
hydrocarbon recovery. The data also are used to calibrate and validate wireline
logs that may be used to estimate certain properties of the reservoir. Without
measured calibration data, wireline log estimates can produce erroneous values,
which could lead to incorrect decisions regarding the development or abandonment
of hydrocarbon accumulations.
The data generated by the Company's analyses are used during all stages of
the well cycle from exploration to primary and secondary production and
decisions concerning the abandonment of a property. Recent advances in drilling
and coring technologies have significantly reduced the cost of retrieving core
samples from reservoirs, and the Company expects these developments to lead to
increased use of reservoir data obtained from rock core sample analyses. The
data generated by the Company's analyses also provides information that is used
to improve the processing and interpretation of 2-D and 3-D seismic programs and
management believes such data will be used as a component of reservoir
production management based on emerging 4-D seismic technologies. Oil companies
have been increasing expenditures for analytical services to reduce their risks
in developing and producing oil and gas reservoirs, and lower their costs of
finding, developing and producing oil and gas. This trend is reflected in the
Company's increase of more than 15% in core processed in 1996 compared to the
prior year.
The most basic rock properties analyses provided by the Company measure
porosity and permeability, which determine the storage and flow capacities of
potential reservoirs. In addition to basic measurements, which are made at
surface conditions, the Company is increasingly providing technologically
advanced analyses of reservoir rock and fluids involving the simulation of the
reservoir's actual subsurface conditions. The Company also performs advanced
analyses of reservoir fluids at varying pressure and temperature conditions to
determine their physical and chemical properties at various points during the
producing life of a field.
As a result of the ProTechnics merger, the Company provides field services
used to design and measure the effectiveness of well completion and stimulation
programs and to maximize the hydrocarbon yields of enhanced recovery projects.
The services offered by ProTechnics are field extensions of the laboratory
studies of reservoir rocks and fluids conducted by Core Laboratories. Together
with Scott Pickford the Company will be able to provide solutions from designing
the well completion, stimulation or enhanced recovery project to measuring the
performance in the field. Demand for these services has been increasing,
especially internationally, as oil and gas companies put more emphasis on
producing incremental amounts of hydrocarbons from established fields.
ProTechnics is one of the leading providers of services that measure the
effectiveness of well stimulations and completions via their proprietary
ZeroWash(R) and SpectraScan(R) technologies. The company is also the leader in
determining the efficiencies of enhanced recovery projects through field tracer
surveys. The company is currently developing electromagnetic wireless
communication tools that can be used to monitor various bottom-hole well
conditions during completion or
3
production operations, as well as measurement while drilling ("MWD") systems.
ProTechnics has won Special Meritorious Engineering Awards for its innovative
technologies in three of the past four years at the annual Offshore Technology
Conference ("OTC"). Core Laboratories will be able to employ these new
technologies to complement laboratory services associated with the prevention of
formation damage, phase behavior relationships of downhole reservoir fluids, and
better design of water or miscible floods for enhanced recovery projects.
The Company also provides analyses of water, soil and air samples for
organic and inorganic contaminants, and provides full-service hydrocarbon
analyses for petroleum and related industries, including octane and cetane
(diesel) testing. The Company began providing these services in response to
customer demand and to capitalize on its existing expertise and resources
offered in its worldwide laboratories. In addition to contaminant analysis
services, the Company also provides analytical testing of petroleum products,
including octane testing and the analysis of crude oil, natural gas, lubricants,
greases and other petroleum products and chemicals. The Company's Technology
Services operations serve a diverse customer base including oil and gas
exploration and production companies; petroleum refineries and processors; and
engineering and consulting firms.
The Company adheres to the strict quality standards that are demanded by
various in-house and proprietary procedures, as well as standards established by
the American Society of Testing and Materials ("ASTM"), which are used in a
variety of petroleum services analyses. Management believes the Company
demonstrates its commitment to quality by providing resources, money, time and
education to maintain its reputation as a high-quality provider of
high-technology analytical and consulting services. All of the Company's
laboratories participate in its internal quality improvement process, which is
designed to ensure that customer and regulatory requirements are met.
Ongoing research and development is an important part of the Company's
Technology Services operations. The Company has in the past committed
significant resources to research and development and anticipates that it will
continue to do so in the future. Over the years, Core Laboratories has made a
number of technological advances, including the development of key technologies
utilized in the Company's laboratories. Substantially all of the new
technologies have resulted from requests and guidance from our clients,
especially major oil companies.
Technology Services are offered worldwide through the Company's technology
network of 48 sales, service and laboratory facilities located in 14 countries.
Technology Services accounted for approximately 76%, 71% and 78% of the
Company's total revenues for the fiscal years ended December 31, 1996, 1995 and
1994, respectively.
TECHNOLOGY PRODUCTS. The Company's Technology Products operation
complements its Technology Services operation. The Company designs and
manufactures a wide range of laboratory instrumentation and equipment for
reservoir rock and fluids analyses, including a majority of the proprietary
equipment used in the Company's Technology Services facilities. The sale of the
Company's proprietary equipment to non-competing customers has generated
additional revenues for its Technology Services operation by maintaining and
enhancing customer relations and generating demand for complementary services.
The Company is the world's leading supplier of integrated octane measurement
systems, equipment and services for refineries and laboratories. The Company has
no significant competitor in this market. The full range of products and
services includes on-line process and laboratory equipment, engineering
services, and education programs to refineries throughout the world.
The Company also provides process analyzer systems that are used for the
measurement, analysis and monitoring of various process streams in the refining,
petrochemical and chemical industries. The Company's process analyzer systems
are provided on a turnkey basis, which includes engineering and design, material
procurement, assembly, piping/tubing, wiring, testing and documentation. On-site
field installation, startup/commissioning, and customer training are provided by
the Company's experienced technical representatives.
4
The Company currently offers its products worldwide through 12 sales and
service facilities, including 4 that perform manufacturing operations.
Technology Products revenue accounted for approximately 24%, 29% and 22% of the
Company's total revenues for the fiscal year ended December 31, 1996, 1995 and
1994, respectively.
The Technology Products backlog at December 31, 1996 was approximately $9.6
million, compared with $9.3 million at December 31, 1995.
MARKETING AND SALES
The Company markets and sells its services and products through a
combination of print advertising, technical seminars and trade shows, sales
personnel and representatives. Print advertising is placed on a regular basis in
trade and technical magazines targeted to the Company's customers. Direct sales
and marketing are carried out by the Company's sales force and operating
managers and enhanced by sales representatives and distributors in various
markets where the Company does not have offices.
RESEARCH AND DEVELOPMENT
The market for the Company's products and services is characterized by
changing technology. As a result, the Company's success is dependent upon its
ability to develop new products and services on a cost-effective basis and to
introduce them into the marketplace in a timely manner. Core Laboratories
intends to continue committing substantial financial resources and effort to the
development of new products and services.
PATENTS AND TRADEMARKS
The Company believes its patents, trademarks and other intellectual
property rights are an important factor in maintaining its technological
advantage. Typically, the Company will seek to protect its intellectual
technology in all jurisdictions where the Company believes the cost of such
protection is warranted.
INTERNATIONAL OPERATIONS
Core Laboratories operates facilities in 16 countries. The Company's
non-U.S. operations accounted for approximately 36%, 40% and 41% of the
Company's revenues during the fiscal years ended December 31, 1996, 1995 and
1994, respectively. The Company's business is subject to various risks beyond
its control, such as instability of foreign economies and governments, currency
fluctuations, overlap of different tax structures, and changes in laws and
policies affecting trade and investment. The Company attempts to limit its
exposure to foreign currency fluctuations by limiting the amount which its
foreign contracts are denominated in a currency other than U.S. dollars to an
amount generally equal to expenses expected to be incurred in such foreign
currency. The Company has not historically engaged in and does not currently
intend to engage in any significant hedging or currency trading transactions
designed to compensate for adverse currency fluctuations.
ENVIRONMENTAL REGULATION
The Company's operations use many chemicals and gases and the Company is
subject to a variety of federal, state, local and foreign laws and regulations
related to the use, storage, discharge and disposal of such chemicals and gases
and other emissions and wastes. Consistent with the Company's quality assurance
and control practices, the Company has established proactive environmental
policies with respect to the handling and disposal of such chemicals, gases,
emissions and waste materials from its operations. The Company has engaged
outside consultants to audit its environmental activities and has implemented
health and safety education and training programs. The Company has not suffered
material environmental claims in the past. Management believes that the
Company's operations are in substantial compliance with applicable environmental
laws and regulations and that continued compliance with existing requirements
will not have a material
5
adverse effect on the Company. However, public interest in the protection of the
environment has increased dramatically in recent years and the Company
anticipates that the trend of more expansive and stricter environmental laws and
regulations will continue, the occurrence of which may result in increased
capital expenditures or operating expenses by the Company.
COMPETITION
The businesses in which the Company engages are highly competitive. While
no one company competes with Core Laboratories in all of its product and service
lines, the Company faces significant competition, primarily from independent,
regional companies. The Company competes in different product and service lines
to various degrees on the basis of price, technical performance, availability,
quality, and technical support. The Company's ability to compete successfully
depends on elements both within and outside of its control, including successful
and timely development of new products and services, performance and quality,
customer service, pricing, industry trends, and general economic trends.
EMPLOYEES
As of December 31, 1996, the Company had approximately 1,200 employees. The
Company does not have any material collective bargaining agreements and
considers relations with its employees to be good.
6
ITEM 2. PROPERTIES
As of December 31, 1996, the Company's principal operations were conducted
at the following facilities:
OWNED/ FLOOR
LOCATION LEASED SPACE
- -------- --------- ----------
UNITED STATES: (SQUARE FEET)
California Anaheim Owned 10,080 Technology Services
Bakersfield Owned 15,000 Technology Services
Long Beach Owned 8,000 Technology Services, Technology Products
Colorado Aurora (Denver) Owned 16,000 Technology Services
Florida Tampa Leased 10,000 Technology Services
Indiana Indianapolis Leased 13,200 Technology Services
Valparaiso Leased 8,000 Technology Services
Kansas Liberal Leased 700 Technology Services
Louisiana Lafayette Leased 750 Technology Services
Lafayette Leased 2,400 Technology Services
New Orleans Leased 8,000 Technology Services
Sulfur Leased 8,664 Technology Services
New Jersey Edison Leased 26,500 Technology Services
Princeton Owned 10,000 Technology Products
New Mexico Albuquerque Leased 3,584 Technology Services
Oklahoma Oklahoma City Leased 15,000 Technology Services
Oklahoma City Leased 1,424 Technology Services
Texas Alice Leased 3,600 Technology Services
Carrollton (Dallas) Leased 51,500 Technology Services
Carrollton (Dallas) Leased 21,874 Technology Products
Corpus Christi Owned 11,700 Technology Services
Houston Leased 35,100 Technology Products
Houston Leased 18,062 Technology Services, Technology Products
Houston Owned 26,890 Technology Services, Administration
Houston Leased 18,000 Technology Services
Houston Leased 9,316 Technology Services, Administration
Kilgore Leased 4,080 Technology Services
Midland Owned 36,000 Technology Services
Midland Leased 1,800 Technology Services
San Antonio Leased 750 Technology Services
Utah Vernal Leased 1,800 Technology Services
Wyoming Casper Leased 15,400 Technology Services
Casper Leased 9,198 Technology Services
INTERNATIONAL:
Australia Perth Owned 3,631 Technology Services Technology Products
Canada Calgary Owned 50,000 Technology Services
Edmonton Owned 18,607 Technology Services
Estevan Owned 4,800 Technology Services
Grand Prairie Leased 1,500 Technology Services
Red Deer Leased 1,500 Technology Services
China Shekou Leased 10,100 Technology Services
Colombia Bogota Leased 16,100 Technology Services, Technology Products
Indonesia Jakarta Leased 36,000 Technology Services
Malaysia Kuala Lumpur Leased 36,000 Technology Services
Nigeria Port Harcourt Leased 3,500 Technology Services
Pakistan Karachi Leased 800 Technology Services
Saudi Arabia Dhahran Leased 1,000 Technology Products
Singapore Singapore Leased 2,500 Technology Services, Technology Products
Thailand Bangkok Leased 1,000 Technology Services
The Netherlands Amsterdam Leased 1,000 Administrative
Rotterdam Leased 2,500 Technology Products
U.A.E. Abu Dhabi Leased 15,000 Technology Services
U.K. Aberdeen Owned 31,000 Technology Services, Technology Products
Chester Leased 4,000 Technology Products
Venezuela Maracaibo Owned 25,295 Technology Services
Puerto La Cruz Leased 10,000 Technology Services
7
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE COMMON SHARES AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON SHARES
The Company's common shares trade and are quoted on the Nasdaq Stock Market
("Nasdaq") under the symbol CRLBF. The following table shows for the periods
indicated the high and low sales prices of the common shares as reported by
Nasdaq.
1996 HIGH LOW
---- ---- ----
First Quarter........................ 13 9 3/4
Second Quarter....................... 16 11 3/4
Third Quarter........................ 16 1/2 13 5/8
Fourth Quarter....................... 17 1/4 15 1/4
1995
----
Third Quarter (from initial public
offering date to
September 30, 1995)................ 13 3/4 11 3/8
Fourth Quarter....................... 12 5/8 9 1/2
On March 14, 1997 the closing price, as quoted by Nasdaq, was $18.50 per
share. As of March 14, 1997, there were 10,595,668 shares of common shares
outstanding held by approximately 72 record holders of the common stock and
approximately 1,300 beneficial holders.
DIVIDEND POLICY
Core Laboratories has never paid dividends on its common shares and does
not anticipate paying any cash dividends on its common shares in the foreseeable
future. The Company's ability to pay dividends is presently limited by the terms
of its credit agreement to 25% of cumulative net income, as defined. The
Company's future dividend policy will depend upon several factors, including
future earnings, capital requirements, the financial condition and prospects of
the Company and other factors the Board of Supervisory Directors may deem
relevant.
8
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the periods indicated. The selected historical consolidated financial
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the Company's
consolidated financial statements included elsewhere herein:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
SERVICES AND SALES................... $ 105,368 $ 87,593 $ 25,910 $ 5,441 $ 3,348
OPERATING EXPENSES:
Costs of services and sales..... 84,643 71,786 22,099 4,385 2,844
General and administrative
expenses...................... 3,559 2,719 666 390 285
Depreciation and amortization... 4,600 3,262 986 210 102
Transaction costs associated
with merger................... 355 -- -- -- --
Other income, net............... (603) (130) (81) (202) (160)
------------- ----------- ----------- --------- ---------
Income before interest
expense, income tax, and
extraordinary item......... 12,814 9,956 2,240 658 277
INTEREST EXPENSE..................... 1,418 3,000 1,066 101 59
------------- ----------- ----------- --------- ---------
Income before income tax and
extraordinary item............ 11,396 6,956 1,174 557 218
INCOME TAX EXPENSE................... 3,719 2,174 412 179 --
------------- ----------- ----------- --------- ---------
Income before extraordinary
item.......................... 7,677 4,782 762 378 218
EXTRAORDINARY ITEM................... -- (911) -- -- --
------------- ----------- ----------- --------- ---------
NET INCOME........................... 7,677 3,871 762 378 218
LESS -- Net income applicable to
preferred loan stock............... -- (334) (113) -- --
------------- ----------- ----------- --------- ---------
NET INCOME APPLICABLE TO COMMON
SHARES............................. $ 7,677 $ 3,537 $ 649 $ 378 $ 218
============= =========== =========== ========= =========
PER SHARE DATA:
Income before extraordinary item.. $ .72 $ .52 $ .24 $ .40 $ .23
Extraordinary item.............. -- (.11) -- -- --
------------- ----------- ----------- --------- ---------
Net income...................... $ .72 $ .41 $ .24 $ .40 $ .23
============= =========== =========== ========= =========
WEIGHTED AVERAGE SHARES
OUTSTANDING........................ 10,690,902 8,593,639 2,694,395 935,847 935,847
============= =========== =========== ========= =========
DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ----------- ----------- --------- ---------
BALANCE SHEET DATA:
Working capital...................... $ 25,205 $ 24,459 $ 15,325 $ 372 $ (233)
Total assets......................... 79,691 71,379 59,877 2,944 1,774
Long-term debt, including current
maturities......................... 16,024 16,269 31,865 219 335
Shareholders' equity................. 47,411 39,665 13,652 1,712 659
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
BUSINESS DEVELOPMENT
The Company was established in 1936 and operated as a division of Western
Atlas International, Inc. ("WAII") from 1987 to 1994. In 1994, the Company's
initial shareholders, including 14 members of management, invested in the
Company because of their belief in the potential opportunities for expansion of
the Core Laboratories business through (i) continued development of high-margin,
proprietary technologies, services and products through client-driven research
and development, (ii) expanded international services and product lines offered
throughout the Company's global technology network, and (iii) acquisition of
parallel businesses that add key technologies or market presence and complement
existing products and services. In September 1995, the Company issued 2,800,000
common shares at $12.00 per share in an initial public offering (the
"Offering"). The net proceeds from the Offering of approximately $30.0 million
was used to repay $22.5 million of debt and redeem $7.5 million of preferred
loan stock.
The Company is one of the leading providers of petroleum reservoir
description and field management services. The Company's services include
reservoir rock and fluids laboratory analyses; field services to evaluate the
effectiveness of well completions, stimulations, and enhanced oil recovery
projects; and geological and geophysical engineering. In addition, the Company
manufactures and sells petroleum reservoir rock and fluid analysis
instrumentation and other integrated systems.
Recent products developed through research and development are providing
additional opportunities for the introduction of advanced reservoir rock and
fluids analyses and consulting services through the Company's laboratories.
Furthermore, the expansion of certain additional services offered by the
Company's international laboratories has generated incremental revenues and
improved operating margins from the Jakarta, Kuala Lumpur and Maracaibo
operations. Management believes that the continued expansion of high-technology
Technology Services being offered by the Company will generate additional
increases in revenues and lead to additional margin improvement.
The Company's acquisition strategy is to continue to seek acquisitions in
existing or related business areas to add key technologies, enhance market
presence or complement the Company's existing businesses. In accordance with
this strategy, the Company acquired Pastech, Inc. ("Pastech") in July 1995 to
increase its market presence for integrated systems in North and South America.
In December 1995, the Company acquired substantially all of the assets of four
analytical testing laboratories from PACE, Incorporated ("PACE Labs"). The
laboratories are located in Indianapolis and Valparaiso, Indiana; Edison, New
Jersey; and Tampa, Florida. In January 1996, the Company acquired substantially
all of the assets of Houston based Gulf States Analytical, Inc. ("GSAI"). The
PACE Labs and GSAI acquisitions have broadened the services which the Company
offers to its clients.
On December 31, 1996, the Company issued approximately 1.1 million common
shares in exchange for substantially all of the outstanding stock of ProTechnics
Company and subsidiaries ("ProTechnics"). ProTechnics is one of the leading
providers of services that measure the effectiveness of well stimulations and
completions via their proprietary ZeroWash(R) and SpectraScan(R) technologies.
ProTechnics is also the leader in determining the efficiencies of enhanced
recovery projects through field tracer surveys. The merger with ProTechnics was
accounted for as a pooling of interests; accordingly, the Company's consolidated
financial statements have been restated to include the consolidated financial
statements of ProTechnics for all periods presented.
10
The Company has available to it (i) internally generated cash in excess of
working capital, capital expenditure, and debt service requirements, (ii)
borrowing capacity under its credit agreement, and (iii) the ability to issue
additional equity, which may be used to acquire other businesses.
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
Technology Services is dependent upon the Company's ability to continue to
develop 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
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.
RESULTS OF OPERATIONS
The following table sets forth certain percentage relationships based on
the Company's consolidated statements of operations for the periods indicated:
YEAR ENDED DECEMBER 31, % INCREASE (DECREASE)
--------------------------- ----------------------------
1996 1995 1994 1996 VS 1995 1995 VS 1994
----- ----- --------- ------------ ------------
Services............................. 76.4% 71.3% 77.9% 28.9 209.6
Sales................................ 23.6 28.7 22.1 (1.0) 338.5
----- ----- ---------
100.0 100.0 100.0 20.3 238.1
Operating expenses:
Cost of services................ 61.5 58.2 68.6 27.1 187.0
Cost of sales................... 18.8 23.7 16.7 (4.7) 380.7
General and administrative
expenses...................... 3.4 3.1 2.6 30.9 308.3
Depreciation and amortization... 4.4 3.7 3.8 41.0 230.8
Transaction costs associated
with merger................... .3 -- -- * *
Other income, net............... (.6) (.1) (.3) * *
----- ----- ---------
87.8 88.6 91.4 19.2 228.0
Income before interest expense,
income tax, and extraordinary
item............................... 12.2 11.4 8.6 28.7 344.5
Interest expense..................... 1.4 3.4 4.1 (52.7) 181.4
----- ----- ---------
Income before income tax and
extraordinary item................. 10.8 8.0 4.5 63.8 492.5
Income tax expense................... 3.5 2.5 1.6 71.1 427.7
----- ----- ---------
Income before extraordinary item..... 7.3% 5.5% 2.9% 60.5 527.6
===== ===== =========
- ------------
* Percentage not meaningful
YEARS ENDED DECEMBER 31, 1996 AND 1995
Total revenue for 1996 was $105.4 million, an increase of 20.3% from $87.6
million in the prior year. Revenue gains of 28.9% were realized by the Company'
s Technology Services operations for 1996 compared to 1995. Technology Services
revenue primarily increased as a result of (i) increased demand for reservoir
core and fluids analysis, (ii) increased demand for tracing and logging services
and (iii) additional revenue from the December 1995 acquisition of the PACE Labs
and the January 1996 acquisition of GSAI. Technology Products revenue for 1996
was comparable to 1995.
11
Cost of services and sales as a percentage of services and sales revenue
for 1996 improved slightly compared to a year ago due to improved cost savings
and efficiencies.
General and administrative expenses increased $0.8 million in 1996 to $3.6
million. The increase was primarily attributable to costs associated with being
a publicly traded company and increased personnel costs due to growth. The
Company's ongoing program to maintain tight controls over expenses has resulted
in maintaining general and administrative expenses as a percentage of sales
under 4%. As a percentage of net sales, general and administrative expenses were
3.4% and 3.1% for 1996 and 1995, respectively.
Depreciation and amortization expense for 1996 increased to $4.6 million
compared to $3.3 million in 1995 primarily due to capital expenditures for new
equipment and the acquisitions of Pastech, PACE Labs and GSAI.
Transaction costs totaling $0.4 million associated with the ProTechnics
merger, which was accounted for as a pooling of interests, were expensed in the
fourth quarter of 1996 and primarily consist of legal, accounting and investment
banking fees.
Other income for 1996 increased $0.5 million from 1995 due to remuneration
of $0.3 million from the State of California for property taken through rights
of eminent domain in connection with road construction and exchange gains on
transactions denominated in foreign currencies.
Interest expense decreased 52.7% to $1.4 million for the current year
compared to $3.0 million in 1995, due to a reduction in debt after the Offering
of 2.8 million common shares in September 1995.
The Company's effective income tax rate was 32.6% and 31.3% in 1996 and
1995, respectively. The Company's tax rate is less than the statutory rate of
35% in The Netherlands, primarily due to lower tax rates and export sales
benefits in countries where the Company operated through subsidiaries, and is
partially offset by state and provincial taxes.
YEARS ENDED DECEMBER 31, 1995 AND 1994
Total revenue for 1995 was $87.6 million, an increase of $61.7 million or
238.1% from $25.9 million in 1994. This increase in revenue was primarily due to
a full year of revenues in 1995 from the operations acquired from WAII on
September 30, 1994, which had only three months of revenues in 1994. Revenue
gains were realized by the Company's Technology Services operations where the
amount of core processed by the Company increased by 17% over the prior period.
The Company's Technology Products revenues also increased as the Company's
Pastech operation (acquired in July 1995) began to contribute to revenue growth.
Further, the Company's technology instrumentation and equipment and process
analyzer systems all recorded revenue gains over the prior year.
The Company recorded operating profits of $10.0 million for 1995 compared
to $2.2 million in 1994. This increase was primarily due to the full year of
revenue in 1995 from the operations acquired from WAII in September 1994 noted
above. The increases in operating expenses were a result of variable costs
associated with increased revenues offset by savings derived from the Company' s
cost reduction program.
Interest expense increased 181.4% to $3.0 million in 1995 compared to $1.0
million in 1994, due primarily to the full year effect of financing the purchase
of certain operations from WAII in September 1994.
The Company's effective income tax rate was 31.3% for 1995 which is lower
than the statutory rate of 35% in the Netherlands. The lower effective tax rate
was primarily attributable to lower tax rates and export sales benefits in
countries where the Company operates through subsidiaries, and was partially
offset by state and provincial taxes.
12
As a result of the Company's repayment of certain debt using proceeds from
the Offering in September 1995, the Company wrote-off related deferred debt
costs of $1.3 million. This write-off, net of related tax benefits, has been
reflected in the Company's results of operations as an extraordinary item.
LIQUIDITY AND CAPITAL RESOURCES
In September 1995, the Company used the proceeds of approximately $30.0
million from the Offering to repay $22.5 million of debt and redeem $7.5 million
of preferred loan stock. A substantial amount of the debt retired ($17.5
million) and all of the preferred loan stock redeemed had been incurred as a
result of the purchase of certain operations from WAII in September 1994.
In September 1995, the Company entered into its credit agreement with a
bank group. The credit agreement is a primary obligation of Core Laboratories,
Inc., a wholly-owned subsidiary of the Company, and is guaranteed by the
Company. The terms of the credit agreement require the Company to meet certain
financial covenants, including certain minimum equity and cash flow tests. The
credit agreement includes a $7.5 million revolving credit facility ($4.0 million
which is available for letters of credit) and a term loan facility for up to
$14.0 million ($9.4 million outstanding at December 31, 1996). Further, a $15.0
million guidance facility is available to the Company to finance acquisitions
when approved by its bank group upon meeting certain covenants ($5.4 million
outstanding as of December 31, 1996). Loans under the credit agreement generally
bear interest from LIBOR plus 0.75% up to a maximum rate of LIBOR plus 1.50%,
depending upon satisfaction of certain financial covenants. The term loan
facility requires payments of principal in equal quarterly installments
beginning December 31, 1995, with a final maturity of September 30, 2000. The
revolving credit facility has a final maturity of September 30, 2000. The
guidance facility requires payments of principal in equal quarterly installments
beginning March 31, 1996, with a final maturity of December 31, 2000.
ProTechnics has a $1.3 million revolving credit facility ($.4 million
outstanding as of December 31, 1996) and $.9 million term loan ($.7 million was
unpaid at December 31, 1996). ProTechnics revolving credit facility currently
bears interest at 8.75 percent and matures July 30, 1997, while its term loan
currently bears interest at 9% and is payable in monthly installments and
matures in March 2001. ProTechnics' revolving credit facility and term loan were
paid in full on January 31, 1997 and canceled.
The Company has generally funded its activities from cash flow from
operations, although the Company financed a substantial portion of the purchase
price for the acquisitions of PACE Labs and GSAI with its credit agreement. At
December 31, 1996, the Company had working capital of $25.2 million (of which
$2.9 million was cash and short-term investments) and a current ratio of 2.5 to
1.0 compared to working capital of $24.5 million (of which $4.9 million was cash
and short-term investments) and a current ratio of 2.6 to 1.0 at December 31,
1995. Core Laboratories N.V. is a holding company that conducts substantially
all of its operations through subsidiaries. Consequently, the Company's cash
flow is wholly dependent upon the ability of its subsidiaries to pay cash
dividends or otherwise distribute or advance funds to the Company.
The Company expects to fund any future acquisitions primarily through a
combination of working capital, cash flow from operations, bank borrowings, and
issuances of additional equity. Although the credit agreement contains 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
agreement.
The Company anticipates that its cash flow from operations will provide
cash in excess of the Company's normal working capital needs and planned capital
expenditures for property, plant and equipment. Capital expenditures for 1996
totaled $6.3 million. The Company used existing cash and borrowed approximately
$6.8 million under its guidance facility to fund (i) $2.8 million paid in
connection with the PACE Labs acquisition, (ii) $2.9 million paid in connection
with the GSAI
13
acquisition, and (iii) to retire about $1.4 million of GSAI indebtedness
outstanding at the date of its acquisition. The Company issued 1.1 million
shares of common stock in December 1996 to effect the ProTechnics merger.
Due to the relatively low levels of inflation experienced in 1996, 1995 and
1994, inflation has not had a significant effect on the Company's results of
operations in recent periods.
ITEM 8. FINANCIAL STATEMENTS
For the financial statements and supplementary data required by this Item
8, see index to consolidated financial statements and schedules at Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Part III (Items 10 through 13) is omitted because the Registrant expects to
file with the Securities and Exchange Commission within 120 days after the close
of the fiscal year ended December 31, 1996, a definitive proxy statement
pursuant to Regulation 14A under the Securities Exchange Act of 1934. If for any
reason such a statement is not filed within such a period, this Report will be
appropriately amended.
14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following reports, financial statements and schedules are filed
herewith on the pages indicated:
PAGE
-----
CORE LABORATORIES N.V. AND SUBSIDIARIES (THE "COMPANY"):
Reports of Independent Public Accountants.......... 18
Consolidated Balance Sheets as
of December 31, 1996 and 1995..................... 20
Consolidated Statements of
Operations for the Years Ended
December 31, 1996, 1995 and 1994.................. 21
Consolidated Statements of Shareholders'
Equity for the Years Ended December 31,
1996, 1995 and 1994............................... 22
Consolidated Statements of Cash
Flows for the Years Ended December 31,
1996, 1995 and 1994............................... 23
Notes to Consolidated Financial Statements......... 24
15
FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable, not
required under the instructions, or the information requested is set forth in
the consolidated financial statements or related notes hereto.
EXHIBITS
The following exhibits are incorporated by reference to the filing
indicated or are filed herewith.
INCORPORATED BY
REFERENCE FROM THE
EXHIBIT NO. EXHIBIT TITLE FOLLOWING DOCUMENTS
- --------------------- ------------------------------------------------------------ -----------------------------
3.1 -- Articles of Association of the Company, as amended Form F-1, September 20, 1995
(including English translation)
4.1 -- Form of certificate representing Common Shares Form F-1, September 20, 1995
10.1 -- Core Laboratories N.V. 1995 Long-Term Incentive Plan Form 10-Q, November 10, 1995
10.2 -- Core Laboratories N.V. 1995 Nonemployee Director Stock Form 10-Q, November 10, 1995
Option Plan
10.3 -- Form of Registration Rights Agreement to be entered into by Form 10-Q, November 10, 1995
the Company and certain of its shareholders, dated September
15, 1995.
10.4 -- Purchase and Sale Agreement between Core Holdings B.V. and Form F-1, September 20, 1995
Western Atlas International, Inc., Western Atlas
International, Nigeria Ltd., Western Atlas de Venezuela,
C.A., Western Atlas Canada Ltd. and Core Laboratories
Australia Pty. Ltd. dated as of September 30, 1994
10.5 -- Non-competition Agreement between Western Atlas Form F-1, September 20, 1995
International, Inc. and Core Holdings B.V. dated as of
September 30, 1994
10.6 -- Form of Indemnification Agreement to be entered into by the Form F-1, September 20, 1995
Company and certain of its directors and officers
10.7 -- Indemnification Agreements, each dated as of October 20, Form 10-Q, November 10, 1995
1995, between the Company and each of its directors and
executive officers
10.8 -- Credit Agreement among Core Laboratories, Inc. and Form 10-K, March 20, 1996
NationsBank of Texas, N.A., dated as of September 30, 1995
23.1 -- Consent of Arthur Andersen LLP Filed Herewith
23.2 -- Consent of Grant Thornton LLP Filed Herewith
16
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CORE LABORATORIES N.V.
BY: CORE LABORATORIES INTERNATIONAL B.V.
DATE: MARCH 24, 1997 BY: /s/ JACOBUS SCHOUTEN
JACOBUS SCHOUTEN
SUPERVISORY DIRECTOR
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES INDICATED, ON THE 24TH DAY OF MARCH, 1997.
SIGNATURE TITLE
--------- -----
/s/ DAVID M. DEMSHUR President, Chief Executive Officer
DAVID M. DEMSHUR and Supervisory Director (Principal
Executive Officer and Authorized
Representative in the United States)
/s/ JOSEPH R. PERNA Senior Vice President and
JOSEPH R. PERNA Supervisory Director
/s/ RICHARD L. BERGMARK Chief Financial Officer, Treasurer and
RICHARD L. BERGMARK Supervisory Director (Principal
Financial and Accounting Officer)
/s/ STEPHEN D. WEINROTH Supervisory Director
STEPHEN D. WEINROTH
/s/ JAMES A. READ Supervisory Director
JAMES A. READ
/s/ JACOBUS SCHOUTEN Supervisory Director
JACOBUS SCHOUTEN
/s/ TIMOTHY J. PROBERT Supervisory Director
TIMOTHY J. PROBERT
/s/ BOB G. AGNEW Supervisory Director
BOB G. AGNEW
17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Core Laboratories N.V.:
We have audited the accompanying consolidated balance sheets of Core
Laboratories N.V. (a Netherlands corporation and formerly named Core Holdings
B.V.) and subsidiaries (the Company) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1996 (as
restated -- see Note 3). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1995 and 1994
consolidated financial statements of ProTechnics Company and subsidiaries, a
company acquired during 1996 in a transaction accounted for as a pooling of
interests, as discussed in Note 3. Such statements are included in the 1995 and
1994 consolidated financial statements of Core Laboratories N.V. and reflect
total assets of 8 percent in 1995, and total revenues of 9 percent and 25
percent in 1995 and 1994, respectively, of the consolidated totals. The
financial statements of ProTechnics Company and subsidiaries were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to amounts included for ProTechnics Company and subsidiaries for 1995
and 1994, is based solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Core Laboratories N.V. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years ended December 31,
1996, in conformity with generally accepted accounting principles as applied in
the United States of America.
ARTHUR ANDERSEN LLP
Houston, Texas
February 25, 1997
18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
ProTechnics Company and Subsidiaries.:
We have audited the consolidated balance sheets of ProTechnics Company (a
Nevada corporation) and subsidiaries as of March 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended (not presented separately herein). These
financial statements are the responsibility of ProTechnics Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of ProTechnics
Company and Subsidiaries as of March 31, 1996 and 1995, and the consolidated
results of their operations and their consolidated cash flows for the years then
ended in conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Houston, Texas
July 19, 1996
19
CORE LABORATORIES N.V.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
1996 1995
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,935 $ 4,940
Accounts receivable, less
allowance for doubtful accounts
of $919 and $886 in 1996 and
1995, respectively............. 27,993 24,331
Inventories..................... 9,472 8,559
Prepaid expenses and other...... 1,223 1,454
Deferred tax assets............. 927 648
--------- ---------
Total current assets....... 42,550 39,932
PROPERTY, PLANT AND EQUIPMENT:
Land............................ 1,370 1,435
Buildings and leasehold
improvements................... 11,402 7,683
Machinery and equipment......... 19,853 15,001
Construction in process......... 3,189 1,703
--------- ---------
35,814 25,822
Less -- accumulated
depreciation................... (8,109) (3,972)
--------- ---------
27,705 21,850
INTANGIBLES AND GOODWILL, net of
accumulated amortization of $506
and $429 in 1996 and 1995,
respectively....................... 8,417 8,830
LONG-TERM INVESTMENT................. 250 400
NON-CURRENT DEFERRED TAX ASSET....... 245 --
OTHER LONG-TERM ASSETS............... 524 367
--------- ---------
Total assets............... $ 79,691 $ 71,379
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term
debt........................... $ 4,430 $ 2,728
Short-term debt................. -- 190
Accounts payable................ 5,909 6,442
Accrued payroll and related
costs.......................... 3,141 2,979
Accrued income taxes payable.... 1,008 632
Deferred tax liability.......... 604 --
Other accrued expenses.......... 2,253 2,502
--------- ---------
Total current
liabilities............. 17,345 15,473
LONG-TERM DEBT....................... 11,594 13,541
NON-CURRENT DEFERRED TAX LIABILITY... 1,970 835
MINORITY INTEREST.................... 212 96
OTHER LONG-TERM LIABILITIES.......... 1,159 1,769
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred loan stock............ -- --
Preference shares, NLG .03 par
value; 3,000,000 shares
authorized, none issued or
outstanding.................... -- --
Common stock, NLG .03 par value;
30,000,000 shares authorized,
10,592,638 and 10,578,732
issued and outstanding at 1996
and 1995, respectively......... 186 186
Additional paid-in capital...... 35,500 35,249
Retained earnings............... 11,725 4,230
--------- ---------
Total shareholders'
equity.................. 47,411 39,665
--------- ---------
Total liabilities and
shareholders'
equity............. $ 79,691 $ 71,379
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
20
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
1996 1995 1994
-------------- ------------- -------------
SERVICES............................. $ 80,503 $ 62,478 $ 20,183
SALES................................ 24,865 25,115 5,727
-------------- ------------- -------------
105,368 87,593 25,910
OPERATING EXPENSES:
Costs of services............... 64,853 51,018 17,779
Costs of sales.................. 19,790 20,768 4,320
General and administrative
expenses...................... 3,559 2,719 666
Depreciation and amortization... 4,600 3,262 986
Transaction costs associated
with merger................... 355 -- --
Other income, net............... (603) (130) (81)
-------------- ------------- -------------
INCOME BEFORE INTEREST EXPENSE,
INCOME TAX, AND EXTRAORDINARY
ITEM............................... 12,814 9,956 2,240
INTEREST EXPENSE..................... 1,418 3,000 1,066
-------------- ------------- -------------
INCOME BEFORE INCOME TAX AND
EXTRAORDINARY ITEM................. 11,396 6,956 1,174
INCOME TAX EXPENSE................... 3,719 2,174 412
-------------- ------------- -------------
INCOME BEFORE EXTRAORDINARY ITEM..... 7,677 4,782 762
EXTRAORDINARY ITEM,
net of tax benefit of $400......... -- (911) --
-------------- ------------- -------------
NET INCOME........................... 7,677 3,871 762
LESS -- Net income applicable to
preferred loan stock............... -- (334) (113)
-------------- ------------- -------------
NET INCOME APPLICABLE TO COMMON
SHARES............................. $ 7,677 $ 3,537 $ 649
============== ============= =============
PER SHARE DATA:
Income before extraordinary
item.......................... $ .72 $ .52 $ .24
Extraordinary item.............. -- (.11) --
-------------- ------------- -------------
Net income...................... $ .72 $ .41 $ .24
============== ============= =============
WEIGHTED AVERAGE SHARES OUTSTANDING 10,690,902 8,593,639 2,694,395
============== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
21
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(THOUSANDS OF DOLLARS, EXCEPT SHARE DATA)
COMMON SHARES
PREFERRED --------------------- ADDITIONAL
LOAN NUMBER OF PAID-IN RETAINED
STOCK SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------------- ------ ----------- --------- ---------
BALANCE, December 31, 1993 (as
previously reported)............... $ -- -- $ -- $ -- $ -- $ --
ADJUSTMENT FOR POOLING OF
INTERESTS.......................... -- 935,847 17 1,651 44 1,712
--------- ------------- ------ ----------- --------- ---------
ADJUSTED BALANCE, December 31,
1993............................... -- 935,847 17 1,651 44 1,712
--------- ------------- ------ ----------- --------- ---------
ISSUANCE OF COMMON STOCK............. -- 6,666,800 115 2,385 -- 2,500
ISSUANCE OF PREFERRED LOAN STOCK..... 7,500 -- -- -- -- 7,500
EQUITY TRANSACTIONS OF POOLED
COMPANY............................ -- 119,441 2 1,176 -- 1,178
NET INCOME........................... -- -- -- -- 762 762
--------- ------------- ------ ----------- --------- ---------
BALANCE, December 31, 1994........... 7,500 7,722,088 134 5,212 806 13,652
--------- ------------- ------ ----------- --------- ---------
ISSUANCE OF COMMON SHARES THROUGH
INITIAL PUBLIC OFFERING............ -- 2,800,000 51 29,975 -- 30,026
PREFERRED LOAN STOCK DIVIDEND........ -- -- -- -- (447) (447)
REDEMPTION OF PREFERRED LOAN STOCK... (7,500) -- -- -- -- (7,500)
EQUITY TRANSACTIONS OF POOLED
COMPANY............................ -- 56,644 1 62 -- 63
NET INCOME........................... -- -- -- -- 3,871 3,871
--------- ------------- ------ ----------- --------- ---------
BALANCE, December 31, 1995........... -- 10,578,732 186 35,249 4,230 39,665
--------- ------------- ------ ----------- --------- ---------
STOCK OPTIONS EXERCISED.............. -- 500 -- 6 -- 6
EQUITY TRANSACTIONS OF POOLED
COMPANY............................ -- 13,406 -- 245 (259) (14)
ADJUSTMENT FOR CHANGE IN FISCAL YEAR
OF POOLED COMPANY.................. -- -- -- -- 77 77
NET INCOME........................... -- -- -- -- 7,677 7,677
--------- ------------- ------ ----------- --------- ---------
BALANCE, December 31, 1996........... $ -- 10,592,638 $ 186 $35,500 $ 11,725 $ 47,411
========= ============= ====== =========== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
22
CORE LABORATORIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
(THOUSANDS OF DOLLARS)
1996 1995 1994
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 7,677 $ 3,871 $ 762
Adjustments to reconcile net
income to net cash provided by
operating activities --
Depreciation and
amortization............... 4,600 3,479 1,081
Adjustment for change in
fiscal year of pooled
company.................... 77 -- --
Extraordinary item, net of tax
benefit of $400............ -- 911 --
(Gain) loss on sale of fixed
assets..................... (9) 12 --
Changes in assets and
liabilities --
Increase in accounts
receivable.............. (2,107) (1,791) (3,714)
(Increase) decrease in
inventories............. (913) 943 1,061
(Increase) decrease in
prepaid expenses and
other 242 (283) 472
Increase (decrease) in
accounts payable........ (854) 2,391 250
Increase in accrued
payroll................. 42 504 987
Increase in accrued income
taxes payable........... 296 560 212
Increase (decrease) in
other accrued
expenses................ (700) (3,431) 797
Other...................... 482 (119) (78)
-------- -------- --------
Net cash provided by
operating
activities......... 8,833 7,047 1,830
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............ (6,283) (3,183) (1,381)
Proceeds from sale of fixed
assets........................ 28 1,597 --
Acquisition of GSAI............. (4,310) -- --
Return on investment in China
Corelab Ltd................... 150 -- --
Acquisition of Pastech, net..... -- (5,017) --
Acquisition of PACE Labs........ -- (2,830) --
Acquisition of Core Laboratories
division, net................. -- (1,778) (39,454)
Purchase of investment
securities.................... -- -- (499)
Proceeds from maturities of
investment securities......... -- 499 --
Other........................... -- 12 10
-------- -------- --------
Net cash used in investing
activities................. (10,415) (10,700) (41,324)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from initial public
offering...................... -- 30,026 --
Proceeds from common shares and
preferred loan stock
issuances..................... -- 63 11,178
Payments on long-term debt...... (10,145) (31,789) (115)
Borrowings under long-term
debt.......................... 9,900 15,740 31,434
Retirement of preferred loan
stock......................... -- (7,500) --
Prepayment penalty on long-term
debt.......................... -- (140) --
Decrease in short-term debt..... (190) (599) --
Dividends on preferred loan
stock......................... -- (447) --
Other........................... 12 (21) --
-------- -------- --------
Net cash provided by (used in)
financing activities....... (423) 5,333 42,497
-------- -------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS........................ (2,005) 1,680 3,003
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 4,940 3,260 257
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period............................. $ 2,935 $ 4,940 $ 3,260
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
23
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS
Core Laboratories N.V., and its wholly owned subsidiaries (the "Company")
derives its revenues from services and sales to customers primarily in one
industry segment, the oil and gas industry, and conducts its worldwide business
through two closely related operations: Technology Service and Technology
Products. Technology Services provides reservoir rock and fluids laboratory
analyses; field services to evaluate the effectiveness of well completions,
stimulations, and enhanced oil recovery projects; and geological and geophysical
engineering. Technology Products designs and manufactures a wide range of
technology instrumentation, integrated systems and packaged analyzer systems.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS
On December 31, 1996, Core Laboratories N.V. completed the acquisition of
ProTechnics Company ("ProTechnics"). The acquisition was accounted for as a
pooling of interests; accordingly, the accompanying consolidated financial
statements have been restated to include the results of ProTechnics for all
periods presented.
CONSOLIDATION AND ESTIMATES
The accompanying consolidated financial statements include the accounts of
the Company, and have been prepared in accordance with United States generally
accepted accounting principles. All significant intercompany transactions and
balances have been eliminated. A minority interest liability has been recorded
in the accompanying consolidated financial statements for investments in two
foreign subsidiaries that have 30 percent unrelated minority owners.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash includes all highly liquid debt instruments with an original maturity
of three months or less.
INVENTORIES
Inventories are primarily items used 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.
PROPERTY, PLANT AND EQUIPMENT
Investments in property, plant and equipment are stated at cost. Allowances
for depreciation and amortization are calculated using the straight-line method
based on the estimated useful lives of the related assets as follows:
Buildings............................ 40 years
Machinery and equipment.............. 3-5 years
24
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accelerated depreciation methods are used for tax purposes. Repairs and
maintenance are charged to expense as incurred and major renewals and
betterments are capitalized. Cost and accumulated depreciation applicable to
assets retired or sold are removed from the accounts, and any resulting gain or
loss is included in the statement of operations. The company incurred
$1,385,000, $1,596,000 and $682,000 of repair and maintenance expense for the
years ended December 31, 1996, 1995 and 1994, respectively.
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 the patents, trademarks, service marks and trade names. 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. Management believes that there have been no events or circumstances
that warrant revision to the remaining useful life or which affect the
recoverability of intangibles and goodwill.
DEFERRED COMPENSATION AND CASH SURRENDER VALUE OF LIFE INSURANCE
The Company has deferred compensation agreements with certain employees.
The Company has purchased life insurance policies with cash surrender value to
fund these deferred compensation arrangements which also provide life insurance
benefits for the employees.
LONG-TERM INVESTMENT
The long-term investment of $250,000 and $400,000 at December 31, 1996 and
1995, respectively, represents the Company's joint venture interest in China
Corelab Ltd., which is accounted for using the cost method of accounting because
the Company does not have the ability to exercise significant influence and
control over the operations of this joint venture. China Corelab Ltd.'s net
income for 1996 and 1995 was insignificant.
INCOME TAXES
Income tax expense includes The Netherlands, United States, other foreign
countries and local state and provincial income taxes. The Company accounts for
income taxes in accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes." This accounting standard requires
companies to recognize deferred tax assets or liabilities for the differences
between the financial statement carrying amount and tax basis of existing assets
and liabilities using presently enacted tax rates.
REVENUE RECOGNITION
Revenues are primarily recognized as services are completed and provided or
as products are shipped.
FOREIGN CURRENCIES
The Company's functional currency is the U.S. dollar. Accordingly, foreign
entities translate monetary assets and liabilities at year-end exchange rates,
while non-monetary items are translated at historical rates. Income and expense
accounts are translated at the average rates in effect during the year, except
for depreciation and cost of sales, which are translated at historical rates.
Gains and losses resulting from the translation of foreign financial statements
and from foreign currency transactions are included in other income and expense.
25
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to expense as incurred.
CONCENTRATIONS AND FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk are primarily trade accounts receivable. The
Company derives its worldwide revenues from services and sales to customers
primarily in the oil and gas industry. The Company maintains an allowance for
losses based upon the expected collectability of all trade accounts receivable.
The carrying values of cash, trade accounts receivable and accounts payable
approximate their fair market values due to the short-term maturities of these
instruments. Management believes that the carrying amount of long-term debt is
not materially different from its fair value using rates currently available for
debt of similar terms and maturity.
EARNINGS PER SHARE
Earnings per share is based upon the weighted average number of common
shares and common share equivalents outstanding during the periods presented.
Common share equivalents totaled 98,652, 53,014 and none for 1996, 1995 and
1994, respectively. For purposes of this calculation, dividends on the Company's
preferred loan stock of $334,000 and $113,000 were deducted from net income for
1995 and 1994, respectively. Fully diluted income per share is equal to primary
income per share in all periods presented.
3. ACQUISITIONS
ACQUISITION OF CORE LABORATORIES DIVISION
In December 1993, Western Atlas International, Inc. ("WAII"), a subsidiary
of Western Atlas Inc., announced its intent to dispose of its Core Laboratories
division. In 1994, an investment group formed Core Holdings B.V. and entered
into an agreement with WAII to purchase certain assets and assume certain
liabilities of WAII's Core Laboratories division (the "Purchase"). The
transaction closed on September 30, 1994, and was financed primarily through the
issuance of common shares and preferred loan stock totaling $10,000,000 (See
Note 8) and borrowings of long-term debt totaling $31,000,000.
The final purchase price, including transaction costs (transaction costs
included a $295,000 fee paid to a director and shareholder of the Company),
totaled $41,232,000 and was allocated to the underlying assets acquired and
liabilities assumed under the purchase method of accounting as follows (in
thousands):
Current assets............................... $ 21,877
Non-current assets........................... 22,275
Intangibles.................................. 5,917
Current liabilities.......................... (7,084)
Non-current liabilities...................... (1,753)
---------
Final purchase price......................... $ 41,232
=========
Paid in cash on September 30, 1994........... $ 39,454
Paid in 1995................................. 1,778
---------
$ 41,232
=========
26
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
This transaction was accounted for using the purchase method of accounting;
accordingly, the operating results of the business acquired from WAII are
included in the accompanying consolidated statements of operations beginning
October 1, 1994.
PASTECH ACQUISITION
On July 19, 1995, the Company acquired all of the outstanding stock of
Pastech, Inc. (formerly CAE America, Inc.), for approximately $5.3 million in
cash (the "Pastech Acquisition"). The Company borrowed $5.0 million under its
revolving credit facility to complete this acquisition. Subsequently, the
Company used a portion of the proceeds from its initial public offering (the
"Offering") (see Note 8) to repay this debt. The transaction was recorded using
the purchase method of accounting, which resulted in approximately $2.9 million
of goodwill which is being amortized over a 20-year period. Pastech reported
revenues of $15.8 million (unaudited) and $22.1 million for 1995 and 1994,
respectively.
PACE ACQUISITION
On December 22, 1995, the Company acquired substantially all the assets of
four analytical testing laboratories from PACE Incorporated (the "PACE
Acquisition") for approximately $2.8 million in cash. The transaction was
recorded using the purchase method of accounting. The Company borrowed $2.5
million under its credit agreement to complete the acquisition. PACE reported
unaudited revenues of $13.8 million and $13.2 million for 1995 and 1994,
respectively.
GULF STATES ACQUISITION
On January 5, 1996, the Company acquired substantially all of the assets of
Gulf States Analytical, Inc. (the "GSAI Acquisition") for approximately $4.3
million in cash. The transaction was recorded using the purchase method of
accounting. Financing for the transaction was provided through the Company's
credit agreement. Gulf States Analytical, Inc. reported unaudited revenues of
$5.6 million and $3.8 million for 1995 and 1994, respectively.
PROTECHNICS ACQUISITION
On December 31, 1996, the Company issued approximately 1.1 million common
shares in exchange for substantially all of the outstanding stock of
ProTechnics. In addition, outstanding employee stock options to purchase
ProTechnics common stock were converted into options to purchase approximately
87,000 shares of the Company's common stock (see Note 9). The acquisition has
been accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements have been restated to include the consolidated
financial statements of ProTechnics (which were adjusted to conform to the
Company's accounting policies) for all periods prior to the acquisition.
ProTechnics had a March 31 fiscal year end and, accordingly, the
ProTechnics statements of operations for the years ended March 31, 1996 and
1995, have been combined with the Company's statements of operations for the
calendar years ended December 31, 1995 and 1994, respectively. In order to
conform ProTechnics year end to the Company's calendar year end, the
consolidated statement of operations for fiscal 1996 includes three months for
ProTechnics which are also included in the consolidated statement of operations
for the fiscal year ended December 31, 1995. Accordingly, an adjustment has been
made in fiscal 1996 to retained earnings for the duplication of net loss of
$77,000 for such three month period. Other results of operations for such three
month period of ProTechnics include net sales of $2,104,000, loss before taxes
of $92,000, and income tax benefits of $15,000.
27
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate revenues, net income (loss) and related per share amounts of the
merged entities are presented in the following table. In addition, the table
includes unaudited pro forma net income and net income per share amounts which
reflect the elimination of the non-recurring transaction costs in 1996. All
amounts are in thousands, except per share data.
1996 1995
----------- ---------
(unaudited)
Revenue:
Core Laboratories N.V........... $ 93,719 $ 80,063
ProTechnics..................... 11,649 7,530
----------- ---------
Revenue, as reported....... $ 105,368 $ 87,593
=========== =========
Net Income (Loss):
Core Laboratories N.V........... $ 7,952 $ 4,195
ProTechnics..................... (41) (324)
----------- ---------
Pro forma net income............ 7,911 3,871
Transaction costs............... (234) --
----------- ---------
Net income, as reported.... $ 7,677 $ 3,871
=========== =========
Net Income Per Share:
Pro forma....................... $ .74 $ .41
=========== =========
As reported..................... $ .72 $ .41
=========== =========
ProTechnics' historical consolidated financial statements have been
adjusted to conform to the accounting policies and practices of the Company.
These adjustments primarily related to conforming ProTechnics' accounting
policies for the capitalization of inventory, property, plant and equipment, and
other assets to those of the Company. The effect of these conforming adjustments
increased ProTechnics' net loss by $177,000 and $27,000 in the years ended March
31, 1996 and 1995, respectively.
In connection with the acquisition, $0.4 million of transaction costs ($0.2
million after tax, or $0.02 per share) were incurred and have been charged to
expense in the fourth quarter of 1996. The cost and expenses consisted primarily
of legal, accounting and investment banking fees.
The following information presents the results of operations on a pro forma
basis as though the Purchase, the Offering, the Pastech Acquisition, the PACE
Acquisition, the GSAI Acquisition and the ProTechnics merger all occurred on
January 1, 1994. Information is presented for informational purposes only, and
may not be indicative of actual operating results that would have been achieved.
All amounts are in thousands, except per share data.
YEARS ENDED
DECEMBER 31,
------------------------
1995 1994
----------- -----------
(unaudited)
Net revenues......................... $114,700 $115,044
Income before extraordinary item..... $ 7,334 $ 2,948
Income per share before extraordinary
item................................. $ .69 $ .28
28
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUBSEQUENT EVENTS (UNAUDITED)
SCOTT PICKFORD ACQUISITION
On March 1, 1997, the Company acquired the control of a majority of the
outstanding shares of Scott Pickford plc. The Company is in the process of
acquiring the remaining shares and expects that the total consideration paid for
Scott Pickford plc will total approximately $14,000,000. Scott Pickford plc and
its subsidiaries ("Scott Pickford") provide petroleum reservoir management,
geoscience services, and engineering products to its customers. Scott Pickford's
revenues totaled $13,223,000 , $13,319,000, and $7,545,000 for its fiscal years
ended March 31, 1996, 1995, and 1994, respectively. The acquisition, which is
being financed through borrowings, will be accounted for as a purchase;
accordingly, Scott Pickford's results of operations will be included with those
of the Company beginning in March 1997.
SAYBOLT LETTER OF INTENT
On January 17, 1997, the Company signed a non-binding letter of intent
pursuant to which the Company is negotiating the acquisition of Saybolt
International B.V. Saybolt International B.V. and its subsidiaries ("Saybolt")
provides laboratory and inspection services to characterize and test crude oil
and petroleum products to the oil industry. Saybolt operates in over 40
countries and has approximately 1,650 employees. Saybolt's revenues totaled
$97,803,000 and $90,258,000 in 1995 and 1994, respectively. The transaction is
subject to, among other things, the negotiation and execution of a definitive
acquisition agreement, due diligence to be performed by the Company and Saybolt,
and obtaining requisite approvals. There can be no assurance that the
transaction will be consummated.
4. INVENTORIES
Inventories consisted of the following at December 31, 1996 and 1995 (in
thousands):
1996 1995
--------- ---------
Parts and materials.................. $ 4,011 $ 3,892
Work in process...................... 5,461 4,667
--------- ---------
Total...................... $ 9,472 $ 8,559
========= =========
Work in process inventory includes $2.3 million for customer contracts in
progress which represents $8.3 million in customer billings offset by $6.0
million in contract costs.
29
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995, is summarized in the
following table (in thousands):
1996 1995
--------- ---------
Unsecured Senior Credit Agreement with
a bank group:
$14,000 term loan facility...... $ 9,375 $ 11,875
$ 7,500 revolving credit
facility...................... -- 2,500
$15,000 guidance facility....... 5,440 --
$ 1,250 revolving credit facility.... 400 923
$ 850 term loan facility........... 722 850
Other notes payable.................. 87 121
--------- ---------
16,024 16,269
Less -- current maturities........... 4,430 2,728
--------- ---------
Total long-term
debt............... $ 11,594 $ 13,541
========= =========
The Company's Unsecured Senior Credit Agreement provides for a committed
$7.5 million revolving credit facility for working capital and letters of credit
(including $4.0 million available for letters of credit), a term loan facility
for up to $14.0 million to refinance existing indebtedness, and a guidance
facility for up to $15.0 million for financing acquisitions approved by the bank
group upon meeting certain covenants. At December 31, 1996, approximately $7.5
million was available for additional borrowing (including $1.2 million available
for letters of credit) under the revolving credit facility, and $9.6 million was
available to finance approved acquisitions under the guidance facility. The
revolving credit facility is payable on September 30, 2000. Quarterly principal
installments of $625,000 on the term loan facility are due beginning December
31, 1995, through September 30, 2000. The guidance loan requires payments of
principal in equal installments beginning March 31, 1996, with a final maturity
of December 31, 2000. Borrowings under the Unsecured Senior Credit Agreement
generally bear interest from LIBOR plus 0.75% up to a maximum rate of LIBOR plus
1.50%, depending upon satisfaction of certain financial covenants.
The Unsecured Senior Credit Agreement requires the Company to maintain
certain financial ratios and minimum levels of consolidated net worth, and to
comply with other customary provisions. Management believes that the Company is
in compliance with all such covenants contained in its credit agreements.
Scheduled maturities of long-term debt over the next five years are: 1997 --
$4,430,000, 1998 -- $4,030,000, 1999 -- $4,030,000, 2000 -- $3,405,000, and 2001
- -- $129,000. Total cash payments for interest was $1,343,400, $3,067,500, and
$490,700 for 1996, 1995, and 1994, respectively.
The $1.3 million revolving credit facility was entered into in March 1996
by ProTechnics and matures July 30, 1997. At December 31, 1996, approximately
$0.9 million was available for additional borrowing. Interest is payable monthly
at an 8.75% interest which could change to a base rate, as defined, plus 1/2%
floating. This facility was paid in full on January 31, 1997 and canceled.
ProTechnics also has a 5 year term loan of $850,000. Interest is calculated
at 9%, but could change to a base rate, as defined, plus 3/4% floating.
Principal is payable in monthly installments of $14,167 maturing March 2001.
This facility was paid in full on January 31, 1997 and canceled.
30
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. EXTRAORDINARY LOSS
In connection with the repayment of indebtedness with proceeds from the
Company's initial public offering (see Note 8), the Company incurred an
extraordinary loss of $1.3 million ($.9 million net of taxes) during the quarter
ended September 30, 1995, for the write-off of deferred debt costs and a
prepayment penalty incurred on the debt retired using proceeds from the initial
public offering.
7. INCOME TAXES
The components of income before income taxes and extraordinary item for
1996, 1995, and 1994 are as follows (in thousands):
1996 1995 1994
--------- --------- ---------
United States........................ $ 4,589 $ 3,246 $ 514
Other foreign countries.............. 6,807 3,710 660
--------- --------- ---------
Income before income taxes and
extraordinary item............ $ 11,396 $ 6,956 $ 1,174
========= ========= =========
The components of income tax expense (benefit) for 1996, 1995, and 1994,
are as follows (in thousands):
1996 1995 1994
--------- --------- ---------
Current --
United States federal........... $ 1,135 $ 1,155 $ 151
Other foreign countries......... 1,245 596 213
State and provincial............ 125 244 70
--------- --------- ---------
Total Current......... $ 2,505 $ 1,995 $ 434
========= ========= =========
Deferred --
United States federal........... $ 88 $ (58) $ (13)
Other foreign countries......... 1,126 237 (9)
--------- --------- ---------
Total deferred........ 1,214 179 (22)
--------- --------- ---------
Income tax expense.... $ 3,719 $ 2,174 $ 412
========= ========= =========
The difference between The Netherlands statutory income tax rate and the
Company's estimated tax rate as reported in the accompanying consolidated
statements of operations for 1996, 1995, and 1994 are as follows:
1996 1995 1994
---- ---- ----
The Netherlands income tax rate...... 35% 35% 35%
Subsidiary rates lower than The
Netherlands........................ (4) (4) (1)
Foreign sales corporation benefits... (2) (1) (3)
Research and development credits..... - (1) (2)
Change in valuation allowance........ 3 1 -
State and provincial income taxes.... 1 3 4
Other................................ - (2) 2
---- ---- ----
Effective tax rate................... 33% 31% 35%
==== ==== ====
31
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities result from various temporary
differences between the financial statement carrying amount and tax basis of
existing assets and liabilities. Deferred tax assets and liabilities as of
December 31, 1996 and 1995, respectively, are summarized as follows (in
thousands):
1996 1995
--------- ---------
Deferred tax assets --
Reserves and other
liabilities................... $ 610 $ 475
Carry forwards.................. 906 219
Allowance for receivables....... 146 111
Inventories..................... 58 94
Other........................... 147 251
--------- ---------
1,867 1,150
--------- ---------
Deferred tax liabilities --
Intangibles..................... (742) (493)
Property, plant and equipment... (1,118) (597)
Receivables..................... (638) --
Inventories..................... -- (170)
Other........................... (197) (24)
--------- ---------
(2,695) (1,284)
--------- ---------
Valuation allowance.................. (574) (53)
--------- ---------
Net deferred tax liability...... $ (1,402) $ (187)
========= =========
The valuation allowance increased due to the uncertainty of realization of
net operating loss carryforwards in certain foreign tax jurisdictions. The
Company's net deferred taxes are set forth in the consolidated balance sheet as
of December 31, 1996 and 1995, respectively, as follows (in thousands):
1996 1995
--------- ---------
Current deferred tax asset........... $ 927 $ 648
Non-current deferred tax asset....... 245 --
Current deferred tax liability....... (604) --
Non-current deferred tax liability... (1,970) (835)
--------- ---------
Net deferred tax liability...... $ (1,402) $ (187)
========= =========
Cash payments, net of refunds, for income taxes were $2,169,000 and
$1,462,000 in 1996 and 1995, respectively.
8. CAPITAL STOCK
PREFERRED LOAN STOCK
In September 1995, the Company redeemed in full its six percent nonvoting,
nonconvertible $7,500,000 preferred loan stock. The redemption was funded using
a portion of the proceeds from the Offering.
32
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REDEEMABLE CUMULATIVE PREFERENCE SHARES
In September 1995, the Company retired the authorized but unissued
redeemable cumulative preference shares with a par value of NLG .02 ($0.01) per
share.
PREFERENCE SHARES
In August 1995, the Company authorized 3,000,000 preference shares with a
par value of NLG .03 ($0.02) per share. No preference shares have been issued by
the Company.
COMMON SHARES
During August 1995, the Company converted its Netherlands corporation
status and accordingly, changed its name to Core Laboratories N.V., increased
its authorized common shares to 30,000,000, effected a 200-for-three stock
split, and reduced the par value of its common stock from NLG 2 ($1.15) per
share to NLG .03 ($0.02) per share. Accordingly, the accompanying consolidated
financial statements have been restated to reflect this stock split for all
periods presented.
In September 1995, the Company completed the Offering of 2,800,000 common
shares and received proceeds of approximately $30 million, net of expenses. The
Company used such proceeds to repay outstanding indebtedness and to redeem in
full its $7.5 million preferred loan stock outstanding.
On December 31, 1996, the Company issued approximately 1.1 million common
shares in exchange for substantially all of the outstanding stock of
ProTechnics.
9. STOCK OPTIONS
EMPLOYEE STOCK PLANS
The 1995 Long-Term Incentive Plan (the "Plan") authorized a maximum
aggregate of 650,000 common shares for grant to eligible employees. Options
granted pursuant to the Plan are exercisable for a period of 10 years and will
vest in equal installments over four years, so long as the option holder remains
an employee of the Company as of the date of exercise. The exercise price of
options granted under the Plan equals the market price of the common shares on
the date of grant.
1995 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
The 1995 Nonemployee Director Stock Option Plan (the "Nonemployee Director
Plan"), authorized a maximum aggregate of 50,000 common shares for grant to
eligible Directors of the Company. Pursuant to the Nonemployee Director Plan,
beginning in 1996, 1,000 options will be granted to each eligible Director on
the day after the annual general meeting. The options are exercisable for a
period of 10 years and will vest on the day before the next annual meeting
following the date of grant. The exercise price of options granted under the
Plan equals the market price of the common shares on the date of grant.
PROTECHNICS STOCK OPTION PLAN
In connection with the merger of ProTechnics, the outstanding employee
stock options to purchase ProTechnics common stock will be converted into
options to purchase 86,880 shares of the Company's common stock. Pursuant to the
ProTechnics stock option plans, the options became immediately exercisable on
the merger date, December 31, 1996, and remain exercisable for a period of
approximately 5 years from the grant date. Future grants to ProTechnics'
employees will be made under the Plan.
33
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information regarding the Company's stock option plans are summarized
below:
NONEMPLOYEE PROTECHNICS AVERAGE
DIRECTOR STOCK OPTION EXERCISE
OPTIONS: THE PLAN PLAN PLAN TOTAL PRICE
- ------------------------------------- -------- ----------- ------------ ------- --------
Outstanding at December 31, 1994..... -- -- 86,880 86,880 $ 4.27
Granted at $12.00 per share.......... 277,500 4,000 -- 281,500 12.00
-------- ----------- ------------ ------- --------
Outstanding at December 31, 1995..... 277,500 4,000 86,880 368,380 10.18
Granted at $12.50 per share.......... -- 4,000 -- 4,000 12.50
Granted at $12.00 per share.......... 4,000 -- -- 4,000 12.00
Granted at $15.75 per share.......... 4,000 -- -- 4,000 15.75
Less --
Exercised at $12.00 per share... 500 -- -- 500 12.00
Canceled........................ 25,000 -- -- 25,000 12.00
-------- ----------- ------------ ------- --------
Outstanding at December 31, 1996..... 260,000 8,000 86,880 354,880 $10.16
======== =========== ============ ======= ========
Exercisable at December 31, 1996..... 64,875 4,000 86,880 155,755
======== =========== ============ =======
Available for grant at December 31,
1996............................... 372,500 42,000 none 414,500
======== =========== ============ =======
The exercise prices of options outstanding at December 31, 1996 and 1995,
ranged from $2.55 to $12.00 per share and from $2.55 to $15.75 per share,
respectively. The weighted average contractual life remaining on outstanding
stock options was 7.6 years at December 31, 1996.
The Company applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
accounting for its stock-based compensation plans. APB Opinion 25 does not
require compensation costs to be recorded on options which have exercise prices
at least equal to the market price of the stock on the date of grant.
Accordingly, no compensation cost has been recognized for the Company's
stock-based plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income and net
income per share would have been reduced to the pro forma amounts indicated
below (in thousands, except per share data):
1996 1995
------ ------
Net income:
As reported..................... $7,677 $3,537
Pro forma....................... $7,268 $3,161
Net income per share:
As reported..................... $ .72 $ .41
Pro forma....................... $ .68 $ .33
The fair value of options granted in 1996 and 1995 of $8.00 and $8.43,
respectively, was estimated using the Black-Scholes option-pricing model with
the following assumptions: risk-free interest rates of 6.7% in 1996 and 6.3% in
1995, no dividends in 1996 and 1995; expected volatility of 35 percent in 1996
and 1995; and expected option lives of 10 years for the options granted in 1996
and 1995. Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that expected in future years.
34
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RETIREMENT PLANS
The Company has four retirement profit-sharing plans (the "Plans") which
are defined contribution plans for the benefit of all qualified employees
respectively in the United States, Canada and the United Kingdom. The Company
matches employee contributions up to specified limits and may contribute a
portion of the net profits of the Company annually in accordance with the Plans.
For the years ended 1996, 1995, and 1994, the Company expensed $1,430,000,
$1,190,000, and $293,000 respectively, for its matching and profit-sharing
contributions to the Plans.
11. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in various litigation
proceedings and claims arising in the ordinary course of its business. In the
opinion of management, the amount of the ultimate liability with respect to such
litigation and claims will not have a material adverse effect on the financial
position or results of operations of the Company. As security for bids and
performance on certain contracts, the Company was contingently liable at
December 31, 1996, in the amount of approximately $2.8 million under standby
letters of credit and bank guarantees.
12. LEASE COMMITMENTS
Minimum rental commitments under non-cancelable operating leases as of
December 31, 1996, consist of the following (in thousands):
Year ended December 31 --
1997............................ $ 3,016
1998............................ 2,546
1999............................ 1,951
2000............................ 1,352
2001............................ 157
Thereafter...................... 291
---------
$ 9,313
=========
Operating lease commitments relate principally to equipment and office
space. Rental expense for operating leases, including amounts for short-term
leases with nominal future rental commitments, was approximately $3,721,000,
$2,835,000 and $818,000 for 1996, 1995 and 1994, respectively.
35
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INDUSTRY SEGMENTS AND INTERNATIONAL OPERATIONS
The Company derives its revenues from services and sales to customers
primarily in one industry segment, the oil and gas industry. The following is a
summary of the Company's United States and other foreign operations for 1996,
1995, and 1994, (in thousands):
YEAR ENDED
---------------------------------
1996 1995 1994
----------- --------- ---------
Revenues --
United States................... $ 67,644 $ 52,521 $ 15,283
Other foreign................... 37,724 35,072 10,627
----------- --------- ---------
$ 105,368 $ 87,593 $ 25,910
=========== ========= =========
Operating income --
United States................... $ 5,024 $ 6,382 $ 1,454
Other foreign................... 7,187 3,444 705
----------- --------- ---------
$ 12,211 $ 9,826 $ 2,159
=========== ========= =========
Identifiable assets --
United States................... $ 46,140 $ 43,174 $ 27,947
Other foreign................... 33,551 28,205 31,930
----------- --------- ---------
$ 79,691 $ 71,379 $ 59,877
=========== ========= =========
Operating income includes sales and services, costs of sales and services,
general and administrative expenses, depreciation and amortization. United
States revenues include $11.9 million, $13.3 million and $2.0 million in 1996,
1995 and 1994 respectively, exported to various international markets.
No single customer accounts for 10 percent or more of consolidated revenues
for any of the periods presented.
36
CORE LABORATORIES N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. UNAUDITED SELECTED QUARTERLY RESULTS OF OPERATIONS
Summarized quarterly financial data for the four quarters ended December
31, 1996 and 1995 is as follows (in thousands, except share and per share data).
QUARTER ENDED
--------------------------------------------------------------
12/31/96 9/30/96 6/30/96 3/31/96
-------------- -------------- -------------- --------------
Service and sales revenue............ $ 28,485 $ 25,460 $ 25,944 $ 25,479
Operating expenses................... 25,116 21,940 22,772 22,726
Interest expense..................... 314 351 348 405
-------------- -------------- -------------- --------------
Income before income tax and
extraordinary item................. $ 3,055 $ 3,169 $ 2,824 $ 2,348
============== ============== ============== ==============
Net income applicable to common
shares............................. $ 2,056 $ 2,142 $ 1,897 $ 1,582
============== ============== ============== ==============
Net income per share................. $ .19 $ .20 $ .18 $ .15
============== ============== ============== ==============
Weighted average shares
outstanding........................ 10,724,035 10,700,547 10,674,567 10,632,737
============== ============== ============== ==============
QUARTER ENDED
--------------------------------------------------------------
12/31/95 9/30/95 6/30/95 3/31/95
-------------- -------------- -------------- --------------
Service and sales revenue............ $ 24,319 $ 23,497 $ 20,316 $ 19,461
Operating expenses................... 21,761 20,654 17,862 17,360
Interest expense..................... 186 1,045 925 844
-------------- -------------- -------------- --------------
Income before income tax and
extraordinary item................. $ 2,372 $ 1,798 $ 1,529 $ 1,257
============== ============== ============== ==============
Net income applicable to common
shares............................. $ 1,617 $ 266 $ 933 $ 721
============== ============== ============== ==============
Per share data:
Income before extraordinary
item.......................... $ .15 $ .14 $ .12 $ .09
Extraordinary item.............. -- (.11) -- --
-------------- -------------- -------------- --------------
Net income...................... $ .15 $ .03 $ .12 $ .09
============== ============== ============== ==============
Weighted average shares
outstanding........................ 10,631,746 8,169,042 7,722,088 7,722,088
============== ============== ============== ==============
37