SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
The Securities Exchange Act of 1934
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For Quarter Ended June 30, 1999 Commission file no. 0-10546
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LAWSON PRODUCTS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-22293040
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1666 East Touhy Avenue, Des Plaines, Illinois 60018
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(Address of principal executive offices) (Zip Code)
Registrant's telephone no., including area code: (847) 827-9666
Not applicable
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Former name, former address and former fiscal year, if changed since last
report.
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. 10,353,822 Shares,
$1 par value, as of July 16, 1999.
<PAGE>
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
(Amounts in thousands, except share data) 1999 1998
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 20,337 $ 13,872
Marketable securities 7,949 13,816
Accounts receivable, less allowance for doubtful accounts 35,966 35,255
Inventories (Note B) 47,518 46,670
Miscellaneous receivables and prepaid expenses 7,383 7,533
Deferred income taxes 1,302 1,256
---------------- ------------------
Total Current Assets 120,455 118,402
Marketable securities 2,781 11,020
Property, plant and equipment, less allowances for depreciation and
amortization 43,112 41,142
Investments in real estate 4,201 4,054
Deferred income taxes 7,880 6,747
Other assets 19,936 17,617
---------------- ------------------
Total Assets $ 198,365 $ 198,982
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities:
Accounts payable $ 5,910 $ 5,113
Accrued expenses and other liabilities 21,384 22,405
Income taxes 2,354 3,283
---------------- ------------------
Total Current Liabilities 29,648 30,801
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Accrued liability under security bonus plans 15,670 15,315
Other 10,264 9,931
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25,934 25,246
Stockholders' Equity:
Preferred Stock, $1 par value:
Authorized - 500,000 shares
Issued and outstanding - None --- ---
Common Stock, $1 par value:
Authorized - 35,000,000 shares
Issued and outstanding-(1999-10,353,822 shares; 1998-10,663,822
shares) 10,354 10,664
Capital in excess of par value 728 749
Retained earnings 132,921 132,209
Accumulated other comprehensive income (1,220) (687)
---------------- ------------------
Total Stockholders' Equity 142,783 142,935
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Total Liabilities and Stockholders' Equity $ 198,365 $ 198,982
================ ==================
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
<CAPTION>
For the For the
Three Months Ended Six Months Ended
June 30, June 30
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 78,247 $ 72,535 $ 152,395 $ 142,897
Cost of goods sold (Note B) 26,672 24,876 52,509 49,704
------------ ----------- ------------ ------------
Gross profit 51,575 47,659 99,886 93,193
Selling, general and administrative expenses 42,117 40,028 82,042 78,476
Non-recurring charge 2,053 --- 2,053 ---
------------ ----------- ------------ ------------
Operating income 7,405 7,631 15,791 14,717
Investment and other income 1,311 636 1,917 1,278
------------ ----------- ------------ ------------
Income before income taxes 8,716 8,267 17,708 15,995
Provision for income taxes 3,590 3,538 7,305 6,743
------------ ----------- ------------ ------------
Net income $ 5,126 $ 4,729 $ 10,403 $ 9,252
============ =========== ============ ============
Net income per share of common stock:
Basic $ 0.49 $ 0.42 $ 0.98 $ 0.83
============ =========== ============ ============
Diluted $ 0.49 $ 0.42 $ 0.98 $ 0.83
============ =========== ============ ============
Cash dividends declared per share of common stock $ 0.14 $ 0.14 $ 0.28 $ 0.28
============ =========== ============ ============
Weighted average shares outstanding:
Basic 10,490 11,135 10,563 11,135
============ =========== ============ ============
Diluted 10,495 11,161 10,564 11,167
============ =========== ============ ============
See notes to condensed consolidated financial statement.
</TABLE>
<PAGE>
<TABLE>
LAWSON PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)
<CAPTION>
For the
Six Months Ended
June 30,
1999 1998
----------------- -------------------
<S> <C> <C>
Operating activities:
Net income $ 10,403 $ 9,252
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 3,121 2,789
Changes in operating assets and liabilities (5,623) (7,568)
Other (702) (183)
----------------- -------------------
Net Cash Provided by Operating Activities 7,199 4,290
---------------- ------------------
Investing activities:
Additions to property, plant and equipment (4,890) (3,504)
Purchases of marketable securities (57,613) (102,548)
Proceeds from sale of marketable securities 71,560 109,201
Other 231 325
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Net Cash Provided by Investing Activities 9,288 3,474
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Financing activities:
Purchases of treasury stock (7,094) ---
Dividends paid (2,928) (3,118)
Other --- 11
---------------- ------------------
Net Cash Used in Financing Activities (10,022) (3,107)
----------------- -------------------
Increase in Cash and Cash Equivalents 6,465 4,657
Cash and Cash Equivalents at Beginning of Period 13,872 10,248
---------------- ------------------
Cash and Cash Equivalents at End of Period $ 20,337 $ 14,905
================ ==================
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
A) As contemplated by the Securities and Exchange Commission, the accompanying
consolidated financial statements and footnotes have been condensed and
therefore, do not contain all disclosures required by generally accepted
accounting principles. Reference should be made to the Company's Annual Report
on Form 10-K for the year ended December 31, 1998. The Condensed Consolidated
Balance Sheet as of June 30, 1999, the Condensed Consolidated Statements of
Income for the three and six month periods ended June 30, 1999 and 1998 and the
Condensed Consolidated Statements of Cash Flows for the six month periods ended
June 30, 1999 and 1998 are unaudited. In the opinion of the Company, all
adjustments (consisting only of normal recurring accruals) have been made, which
are necessary to present fairly the results of operations for the interim
periods. Operating results for the three and six month periods ended June 30,
1999 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
B) Inventories (consisting of primarily finished goods) at June 30, 1999 and
cost of goods sold for the three and six month periods ended June 30, 1999 and
1998 were determined through the use of estimated gross profit rates. The
difference between actual and estimated gross profit is adjusted in the fourth
quarter. In 1998, this adjustment increased net income by approximately
$1,146,000.
C) As of January 1, 1998, the Company adopted FASB Statement 130, "Reporting
Comprehensive Income," (SFAS 130). SFAS 130 establishes new rules for reporting
and display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or stockholders'
equity. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale marketable securities and foreign currency translation
adjustments to be included in other comprehensive income, which prior to
adoption were reported separately in stockholders' equity.
Total comprehensive income and its components, net of related tax, for the first
three and six months of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended
June 30
1999 1998
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<S> <C> <C>
Net income $ 5,125,521 $ 4,728,753
Unrealized gain(loss) on marketable securities (629,000) 18,000
Foreign currency translation adjustments 120,605 (217,917)
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Comprehensive income $ 4,617,126 $ 4,528,836
================== ==================
Six months ended
June 30
1999 1998
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Net income $ 10,402,555 $ 9,251,502
Unrealized gain(loss) on marketable securities (683,000) 166,000
Foreign currency translation adjustments 150,434 229,951
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Comprehensive income $ 9,869,989 $ 9,647,453
================== ==================
</TABLE>
The components of accumulated other comprehensive income, net of related tax, at
June 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
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<S> <C> <C>
Unrealized gain (loss) on marketable securities $ (15,000) $ 668,000
Foreign currency translation adjustments (1,204,637) (1,355,071)
------------------ ------------------
Accumulated other comprehensive income $ (1,219,637) $ (687,071)
==================- ==================-
</TABLE>
D) Earnings per Share
The calculation of dilutive weighted average shares outstanding for the three
and six months ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended
June 30
1999 1998
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<S> <C> <C>
Basic weighted average shares outstanding $ 10,489,572 $ 11,135,583
Dilutive impact of options outstanding 5,454 25,277
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Dilutive weighted average shares outstanding $ 10,495,026 $ 11,160,860
================== ==================
Six months ended
June 30
1999 1998
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Basic weighted average shares outstanding $ 10,562,822 $ 11,135,476
Dilutive impact of options outstanding 1,114 31,531
------------------ ------------------
Dilutive weighted average shares outstanding $ 10,563,936 $ 11,167,007
================== ==================
</TABLE>
E) In the second quarter of 1999, the Company recorded a non-recurring charge of
$1,237,000, net of income tax benefit of $816,000, for severance and early
retirement benefits in connection with previously announced management changes.
Additionally, in the second quarter of 1999, a gain of $554,000, net of income
taxes of $369,000, was recorded on the sale of marketable securities.
F) On July 1, 1999 the Company's newly created subsidiary, ACS/SIMCO, signed a
purchase agreement to acquire substantially all of the assets and assume
substantially all liabilities of SunSource Inventory Management Company, Inc.
and Hillman Industrial Division which comprised the original equipment fastener
business of SunSource Inc., for $10 million, with certain contingent purchase
price adjustment features based on future operating results. This all-cash
transaction will be accounted for as a purchase, and accordingly, the accounts
and transactions of these operations will be included in the consolidated
financial statements subsequent to the date of acquisition.
<PAGE>
Independent Accountants' Review Report
Board of Directors
Lawson Products, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of Lawson
Products, Inc. and subsidiaries as of June 30, 1999 and the related condensed
consolidated statements of income for the three month and six month periods
ended June 30, 1999 and 1998 and the condensed consolidated statements of cash
flows for the six month periods ended June 30, 1999 and 1998. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit in accordance with
generally accepted auditing standards, which will be performed for the full year
with the objective of expressing an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Lawson Products, Inc. as of
December 31, 1998, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the year then ended, not presented
herein, and in our report dated February 26, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 1998, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ERNST & YOUNG LLP
July 16, 1999
<PAGE>
This Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, contains
certain forward-looking statements pertaining to the Year 2000 Issue and other
matters. These statements are subject to uncertainties and other factors which
could cause actual events or results to vary materially from those anticipated.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Net sales for the three and six month periods ended June 30, 1999 advanced 7.9%
to $78,247,000 and 6.6% to $152,395,000 relative to the comparable periods of
1998. The sales gains reflect increased contribution from substantially all
Lawson operations.
Net income for the second quarter increased 8.4% to $5,126,000 ($.49 per diluted
share) from $4,729,000 ($.42 per diluted share) for the comparable period of
1998. Net income for the six months ended June 30, 1999 advanced 12.4% to
$10,403,000 ($.98 per diluted share) from $9,252,000 ($.83 per diluted share)
for the same period of 1998. These increases are primarily attributable to cost
containment efforts, slightly higher gross margins and the gains in net sales
noted above. Per share net income for 1999 and 1998 was positively impacted by
the Company's share repurchase program. In the second quarter of 1999, the
Company recorded a non-recurring charge of $1,237,000, net of income tax benefit
of $816,000, for severance and early retirement benefits in connection with
previously announced management changes. Additionally, in the second quarter of
1999, an after tax gain of $554,000 was recorded on the sale of marketable
securities. Excluding the effects of these items, net income in the second
quarter of 1999 was $5,809,000 ($.55 per diluted share), an increase of 22.8%.
For the six month period ended June 30, 1999, excluding the non-recurring charge
and gain on sale of securities, net income was $11,086,000 ($1.05 per diluted
share), an increase of 19.8%.
Cash flows provided by operations for the six months ended June 30, 1999
advanced to $7,199,000 from $4,290,000 in the comparable period of the prior
year. This increase was due primarily to a smaller decrease in operating
liabilities (principally accounts payable and accrued expenses) as compared to
the decrease in operating liabilities and the gain in net income for the same
period of 1998. Current investments and cash flows from operations are expected
to be sufficient to finance the Company's future growth, cash dividends and
capital expenditures.
Additions to property, plant and equipment were $4,890,000 and $3,504,000,
respectively, for the six months ended June 30, 1999 and 1998. Capital
expenditures during 1999 and 1998 primarily reflect costs incurred relative to
the construction of a new Lawson outbound facility in Atlanta, Georgia and
purchases of computer related equipment. The new facility, expected to be
completed during the fourth quarter of 1999 at a cost of approximately
$7,000,000, will be used in place of the Norcross, Georgia facility, which will
be sold.
During the first six months of 1999, the Company purchased 310,000 shares of its
own common stock for approximately $7,094,000. Of these purchases, 261,500
shares were acquired relative to the 1998 Board authorization of 500,000 shares
and 48,500 shares represented the remaining shares relative to a 1996 stock
repurchase authorization of 1,000,000 shares. All treasury shares purchased as
of June 30, 1999 have been retired.
Year 2000
The Company has developed a plan to modify its information technology to
recognize the Year 2000 Issue. The Year 2000 Issue involves computer programs
being written using two digits rather than four to define the applicable year.
Computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000, which could result in a system failure or miscalculations causing
disruptions in the processing of normal business transactions.
Based on the Company's assessment of the Year 2000 Issue, it has been determined
that it will be required to modify or replace portions of its software and
certain hardware to insure the proper recognition of dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
certain existing software and hardware, the Year 2000 Issue can be mitigated.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. The Company has
fully completed its assessment of all systems that could be significantly
impacted by the Year 2000 and is currently converting its critical data
processing systems.
Based on a review of its product line, the Company has determined that the
products it has sold and will continue to sell do not require remediation to be
Year 2000 compliant. Accordingly, the Company does not believe that the Year
2000 presents exposure as it relates to the Company's products.
The Company has contacted substantially all of its suppliers and has gathered
information about their Year 2000 compliance status. To date, the Company is not
aware of any supplier with a Year 2000 issue that would have a material impact
on the operations of the Company. However, the Company does not have the means
to ensure that third parties will be Year 2000 ready. The inability of third
parties to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by third parties is
not determinable.
The Company will utilize both internal and external resources to reprogram, or
replace, test, and implement the software and operating equipment for Year 2000
modifications. This project remains on schedule, including testing and
implementation. The Company presently believes all phases of the conversion will
be completed by the end of the third quarter of 1999 at a total cost of
approximately $550,000, of which $450,000 of expense has been incurred as of
June 30, 1999. These costs are primarily for modifying code and testing computer
software programs. This project is not expected to have a significant effect on
operations.
If the Company is unsuccessful in its remediation efforts or if the remediation
efforts of its key suppliers or customers are unsuccessful, there may be a
material adverse impact on the Company's results of operations and financial
position. If the Year 2000 Issue project is unsuccessful, the worst case
scenario is that the Company will be unable to distribute its products. As the
Company cannot predict the magnitude or time length of Year 2000 business
interruptions, the Company is unable to estimate the financial impact of Year
2000 issues. The Company does not currently have a contingency plan although one
is under development.
Although the project is not yet complete, the management of the Company believes
it has an effective program in place to resolve the Year 2000 Issue in a timely
manner. The Company is committed to providing the necessary resources, including
additional funding and manpower, as required, until such time that all phases of
the Year 2000 project are completed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in market risk at June 30, 1999 from that
reported in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
<PAGE>
Part II - OTHER INFORMATION
Items 1, 2, 3 and 5 are inapplicable and have been omitted from this report.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of stockholders of Lawson Products, Inc.
was held on May 11, 1999.
(b) Not applicable.
(c1) Set forth below is the tabulation of the votes on each nominee
for election as a director:
Withheld
For Authority
Ronald B. Port, M.D. 8,445,518 839,888
--------- -------
Robert G. Rettig 8,442,985 842,421
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Peter G. Smith 8,444,267 841,139
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(c2) Set forth below is the tabulation of the votes on the proposal
concerning the amendment to the Company's Incentive Stock
Plan:
For Against Abstain
8,518,064 582,905 184,437
--------- ------- -------
(c3) Set forth below is the tabulation of the votes on the
stockholder proposal concerning the sale or merger of the
Company:
For Against Abstain
647,884 7,949,562 36,309
------- --------- ------
(c4) Set forth below is the tabulation of the votes on the
stockholder proposal concerning the elimination of a
classified Board of Directors:
For Against Abstain
2,513,213 6,092,435 27,607
--------- --------- ------
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) 15 Letter from Ernst & Young LLP Regarding Unaudited
Interim Financial Information
27 Financial Data Schedule
(b) The registrant was not required to file a Current Report on
Form 8-K for the most recently completed quarter.
<PAGE>
SIGNATURES
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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.
LAWSON PRODUCTS, INC.
(Registrant)
Dated July 16, 1999 /s/ Bernard Kalish
-------------------- --------------------------------------------
Bernard Kalish
Chairman of the Board
Dated July 16, 1999 /s/ Joseph L. Pawlick
-------------------- --------------------------------------------
Joseph L. Pawlick
Vice President and Controller
(principal accounting officer)
Exhibit 15
July 16, 1999
Board of Directors
Lawson Products, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-17912 dated November 4, 1987) of Lawson Products, Inc. of our
report dated July 16, 1999 relating to the unaudited condensed consolidated
interim financial statements of Lawson Products, Inc. which are included in its
Form 10-Q for the quarter ended June 30, 1999.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not part of
the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 20,337
<SECURITIES> 10,730
<RECEIVABLES> 37,864
<ALLOWANCES> 1,898
<INVENTORY> 47,518
<CURRENT-ASSETS> 120,455
<PP&E> 78,485
<DEPRECIATION> 35,373
<TOTAL-ASSETS> 198,365
<CURRENT-LIABILITIES> 29,648
<BONDS> 0
0
0
<COMMON> 10,354
<OTHER-SE> 132,429
<TOTAL-LIABILITY-AND-EQUITY> 198,365
<SALES> 152,395
<TOTAL-REVENUES> 154,312
<CGS> 52,509
<TOTAL-COSTS> 52,509
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 542
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 17,708
<INCOME-TAX> 7,305
<INCOME-CONTINUING> 10,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,403
<EPS-BASIC> 0.98
<EPS-DILUTED> 0.98
</TABLE>
