<PAGE>
- --------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of The Securities Exchange Act of 1934
for the Quarterly Period Ended
June 30, 1998
-----------------------
Commission File Number 0-16379
Clean Harbors, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2997780
(State of Incorporation) (IRS Employer Identification No.)
1501 Washington Street, Braintree, MA 02185-0327
(Address of Principal Executive Offices) (Zip Code)
(781) 849-1800 ext. 4454
(Registrant's Telephone Number, Including Area Code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.01 par value 10,353,644
- ------------------------------------- --------------------------------
(Class) (Outstanding at August 7, 1998)
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<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1: FINANCIAL STATEMENTS Pages
------
<S> <C>
Consolidated Statements of Operations 1
Consolidated Statements of Comprehensive Income (Loss) 2
Consolidated Balance Sheets 3-4
Consolidated Statements of Cash Flows 5-6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Financial Statements 8-12
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 13-20
PART II: OTHER INFORMATION
Items No. 1 through 6 21-22
Signatures 23
</TABLE>
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(in thousands except for earnings per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $53,591 $47,363 $93,967 $87,737
Cost of revenues 38,975 34,885 70,319 66,373
Selling, general and administrative
expenses 9,180 8,631 17,077 16,830
Depreciation and amortization 2,252 2,346 4,536 4,709
------- ------- ------- -------
Income (loss) from operations 3,184 1,501 2,035 (175)
Other income, net -- -- -- 800
Interest expense, net 2,318 2,314 4,658 4,573
------- ------- ------- -------
Income (loss) before provision for
income taxes 866 (813) (2,623) (3,948)
Provision for (benefit from) income
taxes 90 70 180 (1,082)
------- ------- ------- -------
Net income (loss) $ 776 $ (883) $(2,803) $(2,866)
------- ------- ------- -------
------- ------- ------- -------
Basic and fully diluted income (loss)
per share $ .06 $ (.10) $ (.30) $ (.31)
------- ------- ------- -------
------- ------- ------- -------
Weighted average common
shares outstanding 10,274 9,911 10,229 9,866
------- ------- ------- -------
------- ------- ------- -------
Weighted average common
shares plus potentially dilutive
common shares 10,385 9,911 10,229 9,866
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $ 776 $ (883) $(2,803) $(2,866)
Other comprehensive income, net
of tax:
Unrealized gains (losses) on
securities:
Unrealized holding gains (losses)
arising during period (19) 31 2 (11)
Reclassification adjustment
for gains included in net loss 23 14 4 16
------- ------- ------- -------
Comprehensive income (loss) $ 780 $ (838) $(2,797) $(2,861)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,115 $ 3,935
Restricted investments 1,747 1,088
Accounts receivable, net of
allowance for doubtful accounts 46,273 37,836
Prepaid expenses 1,756 1,518
Supplies inventories 3,135 2,811
Income tax receivable 1,237 1,669
Deferred tax asset 1,581 1,581
---------- ---------
Total current assets 60,844 50,438
---------- ---------
Property, plant and equipment:
Land 8,182 8,182
Buildings and improvements 38,040 37,890
Vehicles and equipment 78,145 77,281
Furniture and fixtures 2,190 2,190
Construction in progress 4,543 2,756
---------- ---------
131,100 128,299
Less - Accumulated depreciation
and amortization 70,111 66,392
---------- ---------
Net property, plant and equipment 60,989 61,907
---------- ---------
Other assets:
Goodwill, net 20,393 20,755
Permits, net 11,240 11,695
Deferred taxes non-current 5,627 5,627
Other 4,491 4,523
---------- ---------
Total other assets 41,751 42,600
---------- ---------
Total assets $163,584 $154,945
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term
obligations $ 4,034 $ 4,037
Accounts payable 19,110 13,760
Accrued disposal costs 6,508 7,100
Other accrued expenses 14,549 13,548
Income tax payable 46 10
Deferred tax liability 224 224
----------- ------------
Total current liabilities 44,471 38,679
----------- ------------
Long-term obligations, less current maturities 73,828 68,020
Deferred taxes, long-term 6,871 6,871
Other 1,122 1,351
----------- ------------
Total other liabilities 81,821 76,242
----------- ------------
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred Stock, $.01 par value:
Series A Convertible;
Authorized-2,000,000 shares; Issued and
outstanding - none -- --
Series B Convertible;
Authorized-156,416 shares; Issued and
outstanding 112,000 (liquidation
preference of $5,600,000) 1 1
Common Stock, $.01 par value
Authorized-20,000,000 shares;
Issued and outstanding-10,277,487 and
10,101,490 shares, respectively 102 101
Additional paid-in capital 60,375 60,087
Accumulated other comprehensive loss (6) (12)
Accumulated deficit (23,180) (20,153)
----------- ------------
Total stockholders' equity 37,292 40,024
----------- ------------
Total liabilities and stockholders' equity $ 163,584 $ 154,945
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,803) $(2,866)
Adjustments to reconcile net loss to net cash
provided by (used) in operating activities:
Depreciation and amortization 4,536 4,709
Deferred income taxes -- (1,808)
Allowance for doubtful accounts 342 330
Amortization of deferred financing costs 317 357
Gain on sale of fixed assets -- 79
Changes in assets and liabilities:
Accounts receivable (8,779) 2,268
Refundable income taxes 432 (102)
Prepaid expenses (238) (20)
Supplies inventories (324) (33)
Deferred tax asset -- 640
Other assets 32 (213)
Accounts payable 5,350 (5,594)
Accrued disposal costs (592) (514)
Other accrued expenses 1,001 (1,752)
Taxes payable 36 (162)
Other liabilities (229) 286
-------- --------
Net cash used in operating activities (919) (4,395)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (2,801) (1,735)
Proceeds from sale and maturities of
restricted investments 64 7,307
Purchase of restricted investments (717) --
Proceeds from sale of fixed assets -- 1,482
-------- --------
Net cash provided by (used) in investing
activities ($3,454) $7,054
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Unaudited
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under
long-term revolver $ 7,005 $ (594)
Payments on long-term obligations (1,503) (2,801)
Additions to deferred financing cost (14) (9)
Proceeds from employee stock purchase plan 65 80
--------- --------
Net cash provided by (used) in financing activities 5,553 (3,324)
--------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,180 (665)
Cash and cash equivalents, beginning of year 3,935 1,366
--------- --------
Cash and cash equivalents, end of period $ 5,115 $ 701
--------- --------
--------- --------
Supplemental information:
Non cash investing and financing activities:
Stock dividend on preferred stock $ 224 $ 224
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unaudited
(in thousands)
<TABLE>
<CAPTION>
SERIES B
PREFERRED STOCK COMMON STOCK
--------------------- --------------------- ADDITIONAL
NUMBER OF $0.01 PAR NUMBER OF $0.01 PAR PAID-IN COMPREHENSIVE
SHARES VALUE SHARES VALUE CAPITAL INCOME (LOSS)
--------- --------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 112 $ 1 10,101 $ 101 $60,087 --
Comprehensive loss
Net loss -- -- -- -- -- $(2,803)
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) -- -- -- -- -- 6
-------------
Comprehensive income -- -- -- -- -- $(2,797)
-------------
-------------
Preferred stock dividends:
Series B -- -- 129 1 223 --
Employee stock purchase plan -- -- 47 -- 65 --
--- --------- --------- --------- ----------
Balance at June 30, 1998 112 $ 1 10,277 $ 102 $60,375 --
--- --------- --------- --------- ----------
--- --------- --------- --------- ----------
Disclosure of reclassification amount:
Unrealized holding gains arising in the period $ 2
Reclassification adjustment for gains included
in net loss 4
-------------
Net unrealized gains on securities $ 6
-------------
-------------
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
INCOME (LOSS) DEFICIT EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1997 $(12) $(20,153) $ 40,024
Comprehensive loss
Net loss -- (2,803) (2,803)
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment (see disclosure) 6 -- 6
Comprehensive income -- -- --
Preferred stock dividends:
Series B -- (224) --
Employee stock purchase plan -- -- 65
--- ----------- -------------
Balance at June 30, 1998 $ (6) $(23,180) $ 37,292
--- ----------- -------------
--- ----------- -------------
Disclosure of reclassification amount:
Unrealized holding gains arising in the period
Reclassification adjustment for gains included
in net loss
Net unrealized gains on securities
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 Basis of Presentation
The consolidated interim financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the
Securities and Exchange Commission, and include, in the opinion of management,
all adjustments (consisting of only normal recurring accruals) necessary for
the fair presentation of interim period results. The operating results for
the three months and six months ended June 30, 1998 are not necessarily
indicative of those to be expected for the full fiscal year. Reference is made
to the audited consolidated financial statements and notes thereto included in
the Company's Report on Form 10-K for the year ended December 31, 1997 as
filed with the Securities and Exchange Commission.
NOTE 2 Significant Accounting Policies
Earnings Per Share
In 1997 the Company implemented Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). Under SFAS 128, basic
EPS is calculated by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period.
Diluted EPS gives effect to all potential dilutive common shares that were
outstanding during the period. The earnings per share for the Company under
SFAS 128 were the same as under the prior accounting standard for the periods
presented in the financial statements.
Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal periods beginning
after December 15, 1997, and the Company adopted its provisions for the
quarter ended March 31, 1998. Reclassification of earlier periods is required
for comparative purposes. Management determined that the statement had no
material impact on its financial position or results of operations.
NOTE 3 Financing Arrangements
As amended, the Company has a $35,000,000 Loan Agreement with a financial
institution. The Loan Agreement provided for a $24,500,00 revolving credit
portion (the "Revolver") and a $10,500,000 term promissory note. The Revolver
allows the Company to borrow cash and letters of credit based on a formula of
eligible accounts receivable. At June 30, 1998, the Revolver balance was
$12,563,000, letters of credit outstanding were $5,852,000 and funds available
to borrow were approximately $4,765,000. In June 1998, the term of the
Revolver was extended from May 8, 1999 to May 8, 2000 under substantially the
same terms and conditions.
8
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 Income Taxes
SFAS 109, "Accounting for Income Taxes," requires that a valuation
allowance be established when, based on an evaluation of objective verifiable
evidence, there is a likelihood that some portion or all of the deferred tax
assets will not be realized. The Company continually reviews the adequacy of
the valuation allowance for deferred tax assets, and, in 1997, based upon this
review, the valuation allowance was increased to reduce the carrying value of
deferred tax assets to the amount that is likely to be realized. Accordingly,
no tax benefit has been recorded in the quarter and six months ended June 30,
1998, while a tax benefit for the loss in the six months ended June 30, 1997 was
recorded. The actual realization of the net operating loss carryforwards and
other tax assets depend on having future taxable income of the appropriate
character prior to their expiration.
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments.
The Company has received a notice of intent to assess state income taxes from
one of the states in which it operates. The case is currently undergoing
administrative appeal. If the Company loses the administrative appeal, the
Company may be required to make a payment of approximately $3,000,000 to the
state. The Company believes that it has properly reported its state income
and intends to contest the assessment vigorously. While the Company believes
that the final outcome of the dispute will not have a material adverse effect
on the Company's financial condition or results of operations, no assurance
can be given as to the final outcome of the dispute, the amount of any final
adjustments or the potential impact of such adjustments on the Company's
financial condition or results of operations.
9
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 Earnings Per Share
The following is a reconciliation of basic and diluted loss per share
computations (in thousands except for per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
----------- ------------- ---------
<S> <C> <C> <C>
Net income $766
Less preferred dividend 112
----- ------ ---
Basic and diluted EPS (income available to shareholders) 654 10,274 .06
Effect of dilutive securities
Options -- 111 --
----- ------ ---
Diluted EPS
Income available to common stockholders plus assumed conversions $654 10,385 $.06
----- ------ ---
----- ------ ---
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1997
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
----------- ------------- ---------
<S> <C> <C> <C>
Net loss $(883)
Less preferred dividends 112
----- ------ ---------
Basic and diluted EPS (loss available to shareholders) $(995) 9,911 $(.10)
----- ------ ---------
----- ------ ---------
</TABLE>
10
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 Earnings Per Share (continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
----------- ------------- ---------
<S> <C> <C> <C>
Net loss ($2,803)
Less preferred dividends 224
----------- ------ ---------
Basic and diluted EPS (loss available to shareholders) ($3,027) 10,229 $(.30)
----------- ------ ---------
----------- ------ ---------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) LOSS
----------- ------------- ---------
<S> <C> <C> <C>
Net loss ($2,866)
Less preferred dividends 224
----------- ------ ---------
Basic and diluted EPS (loss available to shareholders) ($3,090) 9,866 $(.31)
----------- ------ ---------
----------- ------ ---------
</TABLE>
The Company has issued options, warrants and convertible preferred stock
which are potentially dilutive to earnings. For the three months ended
June 30, 1998, some of the options outstanding but none of the warrants or
convertible preferred stock are dilutive to earnings. Only those options where
the options' exercise price was less than the average market price of the
common shares are included in the above calculation for this period. For the
other periods presented, the options, warrants and convertible stock
outstanding have not been included in the above calculations, since their
inclusion would have been antidilutive for the periods.
11
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 Other Income
During the first quarter of 1997, the Company recorded a $950,000
receivable in connection with the settlement of a lawsuit and incurred
approximately $150,000 in costs related to the litigation during the first
quarter. The Company recognized a pre-tax gain, net of related legal fees, of
$800,000 resulting from the settlement, which is included in other income,
net, in the consolidated statement of income. The $950,000 was received April,
1997.
12
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain
operating data associated with the Company's results of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
------------------------------
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- --------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues:
Disposal costs paid to third parties 14.8 13.3 14.0 13.1
Other costs 57.9 60.4 60.8 62.5
------ ------ ------ ------
Total cost of revenues 72.7 73.7 74.8 75.6
Selling, general and administrative expenses 17.2 18.2 18.2 19.2
Depreciation and amortization of intangible assets 4.2 5.0 4.8 5.4
------ ------ ------ ------
Income (loss) from operations 5.9% 3.1% 2.2% (0.2)%
------ ------ ------ ------
------ ------ ------ ------
Other Data:
Earnings before interest, taxes, depreciation and amortization
(EBITDA) (in thousands) $5,436 $3,847 $6,571 5,334
</TABLE>
REVENUES
Revenues for the quarter ended June 30, 1998 were $53,591,000
compared to revenues of $47,363,000 for the quarter ended June 30, 1997, an
increase of $6,228,000 or 13.1%. Revenues increased by 14.0% due to higher
volumes of waste processed and field service hours worked in the quarter ended
June 30, 1998 as compared to the same quarter of the prior year. This increase
in revenues due to volume was partially offset by a 6.5% decrease in revenues
due to pricing.
13
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
REVENUES (continued)
Revenues for the six months ended June 30, 1998 were $93,967,000 compared
to revenues of $87,737,000 for the six months ended June 30, 1997, an increase
of $6,230,000 or 7.1%. Revenues increased by 15.0% due to higher volumes of
waste processed, field service hours worked and remediation projects performed
in the six months ended June 30, 1998 as compared to the same period of the
prior year. These increases in revenues were partially offset by a 7.7%
decrease in revenues due to pricing.
Revenues for the quarter and six months ended June 30, 1998 when compared
to the same periods of the prior year continued to be adversely impacted by
declining sales prices due to industry-wide pricing pressures. However, sales
prices have remained steady for the Company since the quarter ended
December 31, 1997. Management can not predict if this recent stability in
pricing will continue.
There were no major spills or other events that significantly impacted
revenues for the periods presented.
There are many factors which have impacted, and continue to impact, the
Company's revenues. These factors include: competitive industry pricing;
continued efforts by generators of hazardous waste to reduce the amount of
hazardous waste they produce; significant consolidation among treatment and
disposal companies; industry-wide over capacity; and direct shipment by
generators of waste to the ultimate treatment or disposal location.
COST OF REVENUES
Cost of revenues were $38,975,000 for the quarter ended June 30, 1998
compared to $34,885,000 for the quarter ended June 30, 1997, an increase of
$4,090,000. One of the largest components of cost of revenues is the cost of
sending waste to other companies for disposal. As a percentage of revenues,
disposal costs paid to third parties increased from 13.3% for the quarter
ended June 30, 1997 to 14.8% for the quarter ended June 30, 1998. This
increase in disposal expense is due to a 20.0% increase in the volume of
wastes processed through the Company's plants and an increase in wastes sent
directly to outside disposal vendors from customer sites, which were partly
offset by reductions achieved in the unit cost of disposing of waste.
14
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
COST OF REVENUES (continued)
Cost of revenues were $70,319,000 for the six months ended June 30, 1998
compared to $66,373,000 for the six months ended June 30, 1997, an increase
of $3,946,000. As a percentage of revenues, disposal costs paid to third
parties increased from 13.1% for the six months ended June 30, 1997 to 14.0%
for the six months ended June 30, 1998. This increase in disposal expense is
similarly due to a 20.7% increase in the volume of wastes processed through
the Company's plants and an increase in wastes sent directly to outside
disposal vendors from customers' sites, which were partly offset by
reductions achieved in the unit cost of disposing of waste and the
internalization of waste.
Other costs decreased to 57.9% of revenue for the quarter ended June 30
1998, as compared to 60.4% for the same period of the prior year, and they
decreased to 60.8% for the six months ended June 30, 1998, as compared to
62.5% for the same period of the prior year. These decreases were achieved
even while the volume of waste processed through the Company's plants
increased due to improvements in efficiencies in the plants and cost
reductions.
The Company believes that its ability to manage operating costs is an
important factor in its ability to remain price competitive. During the first
half of 1998, the Company continued its process of consolidating common
functions to reduce redundant costs and improve the Company's ability to
deliver its services. No assurance can be given that the Company's efforts to
manage future operating expenses will be successful.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased 6.4% to
$9,180,000 for the three months ended June 30, 1998 as compared to $8,631,000
for the same period of 1997. Selling, general and administrative expenses
increased 1.5% to $17,077,000 for the six months ended June 30, 1998 as
compared to $16,830,000 for the same period of 1997. Compensation expense
for the periods was flat. Savings realized from reductions in administrative
staff were offset by increased headcount in the sales staff and merit
increases. The Company does not anticipate any significant increases in
selling, general and administrative expenses for the last half of 1998 as
compared to the first half.
15
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTEREST EXPENSE, NET
Interest expense, net of $2,318,000 for the quarter ended June 30, 1998
was flat as compared to $2,314,000 for same quarter of the prior year.
Interest expense, net was $4,658,000 for the first six months of 1998 as
compared to $4,573,000 for the same period of the prior year. The increase in
interest expense, net for the first six months of 1998 when compared to the
same period of 1997 is primarily due to a decrease in interest income
associated with a reduction in the average balance of restricted cash.
INCOME TAXES
For the quarter ended June 30, 1998, income tax expense of $90,000 was
recorded on a pre-tax profit of $866,000 for an effective tax rate of 10.4%,
as compared to income tax expense of $70,000 that was recorded on a pre-tax
loss of $813,000 for an effective tax rate of (8.6)%. For the quarter ended
June 30, 1997, the rate fluctuated significantly due to the amount of income
before taxes, as compared to the fixed amount of goodwill amortization, other
non-deductible items and changes in estimates.
For the six months ended June 30, 1998, income tax expense of $180,000
was recorded on a pre-tax loss of $2,623,000 for an effective tax rate of
(6.9%), as compared to a tax benefit of $1,082,000 that was recorded on a
pre-tax loss of $3,948,000 for an effective tax rate of 27.4%. SFAS 109,
"Accounting for Income Taxes," requires that a valuation allowance be
established when, based on an evaluation of objective verifiable evidence,
there is a likelihood that some portion or all of the deferred tax assets
will not be realized. The Company continually reviews the adequacy of its
valuation allowance for deferred tax assets, and, in the fourth quarter of
1997, based on this review, the valuation allowance was increased to cover
almost all of the net deferred tax assets. Accordingly, the Company recorded
no benefit on its books for the future potential value of net operating loss
carryforwards generated during the six months ended June 30, 1998, while
these tax benefits were recorded for the net operating loss carryforwards
generated during the same period of the prior year.
The actual realization of the net operating loss carryforwards and
other tax assets depend on having future taxable income of the appropriate
character prior to their expiration under the tax laws. If the Company
reports taxable earnings in the future, and depending on the level of these
earnings, some portion or all of the valuation allowance would be reversed,
which would increase net income reported in future periods.
16
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INCOME TAXES (continued)
During the ordinary course of its business, the Company is audited by
federal and state tax authorities which may result in proposed assessments.
The Company has received a notice of intent to assess state income taxes from
one of the states in which it operates. The case is currently undergoing
administrative appeal. If the Company loses the administrative appeal, the
Company may be required to make a payment of approximately $3,000,000 to the
state. The Company believes that it has properly reported its state income
and intends to contest the assessment vigorously. While the Company believes
that the final outcome of the dispute will not have a material adverse effect
on the Company's financial condition or results of operations, no assurance
can be given as to the final outcome of the dispute, the amount of any final
adjustments or the potential impact of such adjustments on the Company's
financial condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the Company and employees acting on behalf of the
Company make forward-looking statements concerning the expected revenues,
results of operations, capital expenditures, capital structure, plans and
objectives of management for future operations, and future economic
performance. This report contains forward-looking statements. There are many
factors which could cause actual results to differ materially from those
projected in a forward-looking statement, and there can be no assurance that
such expectations will be realized.
The Company's future operating results may be affected by a number of
factors, including the Company's ability to: continue to implement the
treatment and disposal reengineering program; utilize its facilities and
workforce profitably in the face of intense price competition; increase market
share in an industry which appears to be downsizing and consolidating; realize
benefits from cost reduction programs; generate incremental volumes of waste
to be handled through its facilities from existing sales offices and service
centers; obtain sufficient volumes of waste at prices which produce revenue
sufficient to offset the operating costs of the facilities; minimize downtime
and disruptions of operations; and compete successfully against other
incinerators which have an established share of the incineration market.
17
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE RESULTS (continued)
The Company's operations may be affected by the commencement and
completion of major site remediation projects; cleanup of major spills or
other events; seasonal fluctuations due to weather and budgetary cycles
influencing the timing of customers' spending for remedial activities; the
timing of regulatory decisions relating to hazardous waste management
projects; changes in regulations governing the management of hazardous waste;
secular changes in the waste processing industry towards waste minimization
and the propensity for delays in the remedial market; suspension of
governmental permits; and fines and penalties for noncompliance with the
myriad of regulations governing the Company's diverse operations. As a result
of these factors, the Company's revenue and income could vary significantly
from quarter to quarter, and past financial performance should not be
considered a reliable indicator of future performance.
Typically during the first quarter of each calendar year there is less
demand for environmental remediation due to the cold weather, particularly in
the Northeast and Midwest regions, and increased possibility of unplanned
weather related plant shutdowns.
FINANCIAL CONDITION AND LIQUIDITY
For the six months ended June 30, 1998, the Company's operations
consumed $919,000 of cash primarily to finance higher levels of accounts
receivable of $8,779,000 due to increased sales and to cover the net loss of
$2,803,000 for the period. Partially offsetting these uses of cash were cash
provided by increases in accounts payable $5,350,000 and other accrued
expenses of $1,001,000, both of which were caused by higher volumes of
activity, and the non-cash depreciation and amortization expenses of
$4,536,000. The Company obtained $5,553,000 from financing activities,
which consisted primarily of additional net borrowings, and the Company used
these funds primarily to purchase property, plant and equipment of
$2,801,000, to make payments into a debt service reserve fund of $717,000 and
to increase the amount of cash on hand by $1,180,000.
Federal and state regulations require liability insurance coverage for
all facilities that treat, store, or dispose of hazardous waste, and financial
assurance that funds will be available for closure of these facilities, should
a facility cease operation, and post closure coverage where required by law.
In 1989, the Company established a wholly-owned captive insurance company
pursuant to the Federal Risk Retention Act of 1986. This company qualifies as
a licensed insurance company and is authorized to write closure, professional
liability, and pollution liability insurance for the Company and its operating
subsidiaries. Investments are held by the captive insurance company as assets
against its insured liabilities and restricted for future payment of insurance
claims. In the six months of 1997, the Company replaced a portion of the
closure insurance issued by its captive insurance company with bonds issued by
a bonding company. This allowed the captive insurance company to remit funds
previously classified as
18
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (continued)
restricted cash to the Company. In addition, on December 31, 1996, the
Company had on deposit collateral of $5,650,000 with a commercial insurance
company to provide for closure and post-closure of its incinerator and
landfill. During 1996, the Company renegotiated its agreement with the
insurance company to replace collateral with a letter of credit. The cash
from this transaction was released to the Company in 1997. As a result of
these two transactions, the Company obtained $7,307,000 in the six months
ending June 30, 1997. The Company used these funds, as well as proceeds from
the sale of fixed assets of $1,482,000 and $665,000 in cash on hand, primarily
to reduce debt by $3,395,000 to purchase equipment and improve properties in
the amount of $1,735,000 and to cover cash consumed in operations of
$4,395,000. The deficit from operations was largely the result of a decrease
in accounts payable of $5,594,000 and other accrued expenses of $1,752,000
offset by decreases in accounts receivable of $2,268,000. Accounts payable
decreased due to the Company paying vendors in a more timely basis, which
allowed for smoother operations. Accounts receivable decreased in proportion
to the decrease in selling prices.
The Company expects 1998 capital additions to be in the range of
$4,300,000. The 1998 capital spending budget has been revised upward from
$3,000,000, due to the improved results of operations.
The Company's $35,000,000 Loan Agreement with a financial institution
provides for certain covenants the most restrictive of which require the
maintenance of a minimum level of working capital of $6,000,000 and adjusted
net worth of not less than $33,000,000. At June 30, 1998, working capital
was $16,373,000 and adjusted net worth was $39,272,000. In addition, the
Indenture under which the Company has outstanding $10,000,000 of industrial
revenue bonds the ("Bonds") contain certain covenants the most restrictive of
which require that the Company maintain a rolling four quarter ratio of
earnings before interest, income taxes, depreciation and amortization
(EBITDA) to total debt service of 1.25 to 1. On December 31, 1997 and June
30, 1998 the Company was in violation of this covenant. On June 30, 1998,
the debt service coverage ratio was 1.16 to 1. Under the terms of the
Indenture, the deficiency in the debt coverage ratio will not result in a
default, but the Company is required to pay in six equal monthly installments
into a debt service reserve fund held by the Trustee for the Bonds a total
amount equal to one year's interest on the Bonds. Through June 30, 1998, the
Company had paid $717,000 into this fund, as required.
19
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION AND LIQUIDITY (continued)
On June 30, 1998, funds available to borrow under the Revolver were
$4,765,000. Management believes that sufficient resources will be available to
meet the Company's cash requirements for the foreseeable future. The Company
has $50,000,000 of Senior Notes which mature in 2001. Some portion or all of
the borrowings under the Senior Notes will need to be refinanced by the
maturity date. The ability of the Company to refinance the Senior Notes at
reasonable interest rates is dependent upon improving results from operations
and is contingent on a favorable interest rate environment when the Company
attempts to refinance the borrowings.
Dividends on the Company's Series B Convertible Preferred Stock are
payable on the 15th day of January, April, July and October, at the rate of
$1.00 per share, per quarter; 112,000 shares are outstanding. Under the terms
of the preferred stock, the Company can elect to pay dividends in cash or in
common stock with a market value equal to the amount of the dividend payable.
The Company elected to pay the January 15 and April 15, 1998 dividends in
common stock. Accordingly, the Company issued 58,642 and 128,644 shares of
common stock to the holders of the preferred stock in the three month and six
month periods ended June 30, 1998, respectively. The Company anticipates that
the preferred stock dividends payable through 1998 will be paid in common
stock.
The Company is in the process of reviewing computer systems and hardware
control devices for compliance with the year 2000. The work required to make
the systems and control devices year 2000 compliant is ongoing. The Company
is using its best efforts to make all systems and control devices year 2000
compliant prior to the end of 1998; however, no assurance can be given that
this effort will be successful. The Company does not believe that the costs to
be incurred to make the systems and control devices year 2000 compliant will
be material to results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Internal Use Software," which
provides guidance on the accounting for the costs of software developed or
obtained for internal use. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. Management does not expect the statement to have a
material impact on its financial position or results of operations.
20
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
As disclosed in the Form 10-K for the year ended December 31, 1997, the
Company joined an ongoing lawsuit against the City of Chicago challenging the
imposition of a waste charge by the City of Chicago on every gallon of waste
received at the Company's Chicago facility. Since 1990, the Company has paid
approximately $3,000,000 to the City pursuant to this charge.
The lawsuit challenges the legal authority of the City of Chicago to
impose the charge. The Company contends the charge is, among other things, an
unlawful tax on service occupations in violation of the Illinois Constitution.
The Company was seeking: (1) a declaration by the Circuit Court of Cook County
that the challenged charge is unconstitutional or otherwise unlawful; (2) an
injunction against the City's continued assessment and collection of the
charge and; (3) a refund of all charges paid plus interest.
On July 21, 1998, the Judge in the case issued a Final Order declaring
the City of Chicago waste fee to be unconstitutional under Illinois law. The
City has the right to appeal this decision and on August 7, 1998 the City
filed a motion with the Court to reconsider its Final Order. The Court has
taken the motion under advisement and will rule on it by September 11, 1998.
The Company cannot predict the outcome of these proceedings, accordingly, no
account receivable has been recorded on the books of the Company relating to
this lawsuit.
Item 2 - Changes in Securities
None
Item 3 - Defaults Upon Senior Debt
None
Item 4 - Submission of Matters to a Vote of Security Holders
The Company's 1998 Annual Meeting of the Stockholders was held on June
17, 1998. At the meeting, the Stockholders elected Christy W. Bell and Daniel
J. McCarthy to serve as directors of the Company for a three-year term,
until the 2001 Annual Meeting of Stockholders. Other directors whose term of
office as director continued after the meeting were: Alan S. McKim, John F.
Kaslow, John T. Preston and Lorne R. Waxlax.
21
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION LOCATION
- -------- -------------------------------------------------------------------------------- --------------
<S> <C> <C>
4.12 Sixth Amendment to Financing Agreements dated June 23, 1998 by and between
Congress Financial Corporation (New England), the Company's Subsidiaries as
Borrowers, and Clean Harbors, Inc. as Guarantor................................. Filed herewith
</TABLE>
Exhibit 27 - Financial Data Schedule.
Reports on Form 8-K
None
22
<PAGE>
CLEAN HARBORS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements 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.
Clean Harbors, Inc.
-------------------------
Registrant
ated: August 13, 1998 By: /s/ Alan S. McKim
--------------------------------------
Alan S. McKim
President and
Chief Executive Officer
Dated: August 13, 1998 By: /s/ Roger A. Koenecke
-------------------------------------
Roger A. Koenecke
Senior Vice President and
Chief Financial Officer
23
<PAGE>
Exhibit 4.12
June 23, 1998
CLEAN HARBORS ENVIRONMENTAL
SERVICES, INC.
CLEAN HARBORS TECHNOLOGY
CORPORATION
CLEAN HARBORS KINGSTON FACILITY
CORPORATION
CLEAN HARBORS OF BRAINTREE, INC.
CLEAN HARBORS SERVICES, INC.
CLEAN HARBORS OF NATICK, INC.
CLEAN HARBORS OF CONNECTICUT, INC.
MURPHY'S WASTE OIL SERVICE, INC.
CLEAN HARBORS OF CLEVELAND, INC.
MR. FRANK, INC.
SPRING GROVE RESOURCE RECOVERY, INC.
Re: Sixth Amendment to Financing Agreements ("Sixth Amendment")
Gentlemen:
Reference is made to the Loan and Security Agreement dated May 8, 1995,
as amended, between you and the undersigned (the "Loan Agreement"). All
capitalized terms not otherwise defined herein shall have the meanings given
such terms in the Loan Agreement.
Borrowers have requested an extension of the term of the Financing
Agreements to May 8, 2000. Subject to the terms and conditions hereof, the
Lender agrees with the Borrowers as follows:
(1) The first sentence of Section 12.1(a) of the Loan Agreement is
deleted and replaced with the following sentence:
"This Agreement and the other Financing Agreements shall become
effective as of the date set forth on the first page hereof and shall
continue in full force and effect for a term ending on the
<PAGE>
June 24, 1998
Page 2
date five (5) years from the date hereof (the "Renewal Date"), and from
year to year thereafter, unless sooner terminated pursuant to the terms
hereof; provided, that, Lender may, at its option, extend the Renewal
Date to the date six (6) years from the date hereof by giving Borrower
notice at least one hundred twenty (120) days prior to the fifth
anniversary of this Agreement."
(2) Section 12.1(c) of the Loan Agreement is deleted in its entirety
and replaced with the following:
"If for any reason this Agreement is terminated prior to the end of the
then current term or renewal term of this Agreement, in view of the
impracticality and extreme difficulty of ascertaining actual damages and
by mutual agreement of the parties as to a reasonable calculation of
Lender's lost profits as a result thereof, Borrower agrees to pay to
Lender, upon the effective date of such termination, an early
termination fee in the amount of 1/2% of the Revolving Credit Limit if
such termination is effective in the period May 9, 1998 to and including
May 8, 2000. Such early termination fee shall be presumed to be the
amount of damages sustained by Lender as a result of such early
termination and Borrower agrees that it is reasonable under the
circumstances currently existing. The refinancing and repayment of the
Term Loan through the issuance of pollution control authority industrial
revenue bonds shall not trigger the payment of the early termination
fee. The early termination fee provided for in this Section 12.1 shall
be deemed included in the Obligations."
(3) This Sixth Amendment and the Lender's obligations hereunder shall
not be effective until each of the following conditions are satisfied:
(a) all requisite corporate action and proceedings of the
Borrowers in connection with this Sixth Amendment shall be satisfactory in
form and substance to Lender and Lender shall receive certified copies of
such corporate action and proceedings as Lender may request;
(b) no material adverse change shall have occurred in the assets,
business or prospects of any Borrower since the date of the most recent
financial statements furnished to Lender pursuant to the Loan Agreement and
no change or event shall have occurred which would impair the ability of any
Borrower or any Obligor to perform its obligations under the Loan Agreement
or any of the other Financing Agreements or of Lender to enforce the
Obligations or to realize upon the Collateral; and
(c) Borrowers shall pay to Lender, and directs Lender to debit its
loan account for, an additional facility fee equal to $50,000.00, which fee
shall be fully earned and non-refundable on the date hereof.
2
<PAGE>
July 24, 1998
Page 3
(4) Each Borrower confirms and agrees that (a) all representations and
warranties contained in the Loan Agreement and in the other Financing
Agreements are on the date hereof true and correct in all material respects
(except for changes that have occurred as permitted by the covenants in
Section 9 of the Loan Agreement), and (b) it is unconditionally and jointly
and severally liable for the punctual and full payment of all Obligations,
including, without limitation, all charges, fees, expenses and costs
(including attorneys' fees and expenses) under the Financing Agreements, and
that no Borrower has any defenses, counterclaims or setoffs with respect to
full, complete and timely payment of all Obligations.
(5) Each Guarantor, for value received, hereby assents to the
Borrowers' execution and delivery of this Amendment, and to the performance
by the Borrowers of their respective agreements and obligations hereunder.
This Amendment and the performance or consummation of any transaction or
matter contemplated under this Amendment, shall not limit, restrict,
extinguish or otherwise impair any of the Guarantor's liability to Lender
with respect to the payment and other performance obligations of the
Guarantors pursuant to the Guarantees, dated May 8, 1995 executed for the
benefit of Lender. Each Guarantor acknowledges that it is unconditionally
liable to Lender for the full and complete payment of all Obligations
including, without limitation, all charges, fees, expenses and costs
(including attorney's fees and expenses) under the Financing Agreements and
that such Guarantor has no defenses, counterclaims or setoffs with respect to
full, complete and timely payment of any and all Obligations.
(6) Borrowers hereby agree to pay to Lender all reasonable attorney's
fees and costs which have been incurred or may in the future be incurred by
Lender in connection with the negotiation and preparation of this Amendment
and any other documents and agreements prepared in connection with this
Amendment. The undersigned confirm that the Financing Agreements remain in
full force and effect without amendment or modification of any kind, except
for the amendments explicitly set forth herein. The undersigned further
confirm that no Event of Default or events which with notice or the passage
of time or both would constitute an Event of Default have occurred and are
continuing. The execution and delivery of this Amendment by Lender shall not
be construed as a waiver by Lender of any Event of Default under the
Financing Agreements. This Amendment shall be deemed to be a Financing
Agreement and, together with the other Financing Agreements, constitute the
entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior dealings, correspondence, conversations or
communications between the parties with respect to the subject matter hereof.
3
<PAGE>
June 24, 1998
Page 4
If you accept and agree to the foregoing please sign and return the
enclosed copy of this letter. Thank you.
Very truly yours,
CONGRESS FINANCIAL CORPORATION
(NEW ENGLAND)
By: /s/ KATHLEEN J. MERRITT
----------------------------
Name: Kathleen J. Merritt
Title: Vice President
AGREED:
- -------
CLEAN HARBORS ENVIRONMENTAL
SERVICES, INC.
CLEAN HARBORS TECHNOLOGY
CORPORATION
CLEAN HARBORS KINGSTON FACILITY
CORPORATION
CLEAN HARBORS OF BRAINTREE, INC.
CLEAN HARBORS SERVICES, INC.
CLEAN HARBORS OF NATICK, INC.
CLEAN HARBORS OF CONNECTICUT, INC.
MURPHY'S WASTE OIL SERVICE, INC.
CLEAN HARBORS OF CLEVELAND, INC.
MR. FRANK, INC.
SPRING GROVE RESOURCE RECOVERY, INC.
By: /s/ STEPHEN MOYNIHAN
----------------------------
Name: Stephen Moynihan
Title: Senior Vice President
GUARANTORS:
CLEAN HARBORS, INC.
By: /s/ STEPHEN MOYNIHAN
----------------------------
Name: Stephen Moynihan
Title: Senior Vice President
4
<PAGE>
June 24, 1998
Page 5
CLEAN HARBORS OF BALTIMORE, INC.
By: /s/ STEPHEN MOYNIHAN
----------------------------
Name: Stephen Moynihan
Title: Senior Vice President
5
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<PAGE>
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<NAME> CLEAN HARBORS
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,115
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<TOTAL-LIABILITY-AND-EQUITY> 163,584
<SALES> 93,967
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<INCOME-PRETAX> (2,623)
<INCOME-TAX> 180
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