<PAGE> 1
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 April 21, 1996
Commission file number 0-18629
----------------------
O'Charley's Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1192475
- ------------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3038 Sidco Drive, Nashville, Tennessee 37204
- --------------------------------------- ------
(Address of principal executive offices) (Zip Code)
(615) 256-8500
----------------------------------------------------
(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 practical date.
<TABLE>
<CAPTION>
Class Outstanding as of May 30, 1996
----- -------------------------------
<S> <C>
Common Stock, no par value 7,787,944 shares
</TABLE>
<PAGE> 2
O'Charley's Inc.
Form 10-Q
For Quarter Ended April 21, 1996
Index
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I - Financial Information
Item 1. Financial statements:
Balance sheets as of April 21, 1996 and
December 31, 1995 3
Statements of earnings for the sixteen weeks
ended April 21, 1996 and April 16, 1995 4
Statements of cash flows for the sixteen weeks
ended April 21, 1996 and April 16, 1995 5
Notes to unaudited financial statements 6
Item 2. Management's discussion and analysis of
financial condition and results of operations 7-10
Part II - Other Information
Item 1. Legal proceedings 11
Item 4. Submission of matters to a vote of security holders 11
Item 6. Exhibits and reports on form 8-K 11
Signatures 12
</TABLE>
<PAGE> 3
O'Charley's Inc.
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
April 21, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash $ 634 $ 2,576
Accounts receivable 1,361 1,244
Due from related parties 84 108
Inventories 6,816 3,780
Preopening costs 1,081 1,045
Deferred income taxes 839 925
Other current assets 1,159 971
-------- -------
Total current assets 11,974 10,649
Property and Equipment, net 90,485 81,512
Other Assets 1,143 1,276
-------- -------
$103,602 $93,437
======== =======
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 4,288 $ 4,424
Accrued payroll and related expenses 3,166 3,435
Accrued expenses 3,809 4,650
Federal, state and local taxes 2,272 2,606
Current portion of long-term debt and capitalized
leases 2,796 2,793
-------- -------
Total current liabilities 16,331 17,908
Deferred Income Taxes 2,533 2,619
Long-Term Debt 21,783 11,990
Capitalized Lease Obligations 10,018 9,272
Shareholders' Equity:
Common stock - No par value;authorized, 50,000,000
shares; issued and outstanding, 7,773,264 in 1996
and 7,770,967 in 1995 29,539 29,819
Retained earnings 23,398 21,829
-------- -------
52,937 51,648
-------- -------
$103,602 $93,437
======== =======
</TABLE>
See notes to financial statements.
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<PAGE> 4
O'Charley's Inc.
Statements of Earnings
Sixteen Weeks Ended April 21, 1996 and April 16, 1995
<TABLE>
<CAPTION>
1996 1995
------- -------
(in thousands, except per share data)
<S> <C> <C>
Revenues:
Restaurant sales $46,380 $38,564
Commissary sales 690 3,285
Franchise revenue 9 9
------- -------
47,079 41,858
Costs and Expenses:
Cost of restaurant sales:
Cost of food, beverage and supplies 16,590 14,212
Payroll and benefits 14,309 11,503
Restaurant operating costs 7,167 5,840
Cost of commissary sales 654 3,132
Advertising, general and administrative expenses 2,703 3,432
Depreciation and amortization 2,398 1,619
------- -------
43,821 39,738
------- -------
Income from Operations 3,258 2,120
Other(Income)Expense:
Interest expense, net 699 595
Other, net 108 (386)
------- -------
807 209
------- -------
Earnings Before Income Taxes 2,451 1,911
Income Taxes 882 669
------- -------
Net Earnings $ 1,569 $ 1,242
======= =======
Earnings per Common Share $ 0.19 $ 0.15
======= =======
Weighted Average Common Shares Outstanding 8,423 8,213
======= =======
</TABLE>
See notes to financial statements.
-4-
<PAGE> 5
O'Charley's Inc.
Statements of Cash Flows
Sixteen Weeks Ended April 21, 1996 and April 16, 1995
<TABLE>
<CAPTION>
1996 1995
------- -------
(in thousands)
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 1,569 $ 1,242
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,753 1,376
Amortization of preopening costs 645 243
Provision for deferred income taxes 158
Gain of the sale of assets (171) -
Changes in assets and liabilities:
Accounts receivable (93) (285)
Inventories (3,036) (497)
Additions to preopening costs (681) (516)
Other current assets (188) 190
Accounts payable (136) 471
Accrued payroll and other accrued expenses (1,444) 163
------- -------
Net cash provided (used) by operating
activities (1,782) 2,545
Cash Flows from Investing Activities:
Additions to property and equipment (8,904) (7,555)
Proceeds from the sale of assets 171 -
Other, net 143 (82)
------- -------
Net cash used by investing activities (8,590) (7,637)
Cash Flows from Financing Activities:
Proceeds from long-term debt 11,100 4,800
Payments on long-term debt and capitalized
lease obligations (2,390) (826)
Distribution to Shoex, Inc. shareholders (315) (217)
Exercise of employee incentive stock options 35 78
------- -------
Net cash provided by financing activities 8,430 3,835
------- -------
Decrease in Cash (1,942) (1,257)
Cash at Beginning of the Period 2,576 1,727
------- -------
Cash at End of the Period $ 634 $ 470
======= =======
</TABLE>
See notes to financial statements.
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<PAGE> 6
O'Charley's Inc.
Notes To Unaudited Financial Statements
Sixteen Weeks Ended April 21, 1996 and April 16, 1995
A. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
reporting and in accordance with Rule 10-01 of Regulation S-X.
In the opinion of management, the unaudited interim financial statements
contained in this report reflect all adjustments, consisting of only normal
recurring accruals which are necessary for a fair presentation of the financial
position and the results of operations for the interim periods presented. The
results of operations for any interim period are not necessarily indicative of
results for the full year.
These financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
B. Commitments and Contingencies
On February 15, 1994, a purported class action suit was filed in the
United States Federal District Court against the Company and certain of the
Company's executive officers and directors. The suit alleges racially
discriminatory practices by the defendant parties in violation of federal law.
The Court has yet to determine whether the lawsuit will proceed as a class
action. The Company accrued an additional $800,000 during the first quarter of
1995 for estimated legal expenses in connection with this suit. At the time
the Company reserved these legal expenses, the trial was scheduled to proceed
in April 1995. Subsequently, the trial date has been stayed until the Court
determines whether the lawsuit will proceed as a class action and rules on
certain other motions pending before the Court. The Company has not made any
accrual for any settlement or adverse judgement in connection with this suit.
Management of the Company believes the suit is without merit and is defending
the litigation vigorously.
C. Business Acquisitions
On January 5, 1996, the shareholders of the Company approved an Agreement
and Plan of Merger, dated October 9, 1995, to merge with Shoex, Inc. (Shoex), a
franchisee of the Company which owned and operated six O'Charley's restaurants
in Alabama. The transaction was accounted for as a pooling of interests. The
Company exchanged 666,666 shares of company stock valued at approximately $9.5
million. The Company assumed approximately $1.9 million in net obligations of
Shoex, Inc. (defined as long-term debt, capitalized lease obligations and
working capital deficit). As a result of the merger, O'Charley's owns the six
restaurants and the rights to develop other O'Charley's restaurants in Alabama,
Mississippi and specific locations in Florida and Georgia. The accompanying
1996 financial statements include the transactions and balances of Shoex. Each
of the previously reported financial statements have been restated to reflect
the combined results of the Company and Shoex.
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<PAGE> 7
O'Charley's Inc.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Sixteen Weeks Ended April 21, 1996 and April 16, 1995
Results of Operations
The following table highlights the operating results for the first quarters
of 1996 and 1995 as a percentage of total revenue unless otherwise indicated.
Each of the quarters is comprised of 16 weeks.
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Revenues:
Restuarant sales 98.5% 92.1%
Commissary sales 1.5% 7.9%
----- -----
100.0% 100.0%
Costs and Expenses:
Cost of restaurant sales: (1)
Cost of food, beverage and supplies 35.8% 36.9%
Payroll and benefits 30.9% 29.8%
Restaurant operating costs 15.4% 15.1%
----- -----
82.1% 81.8%
Restaurant operating margin 17.9% 18.2%
Cost of commissary sales (2) 94.8% 95.3%
Advertising, general and
administrative expenses 5.7% 8.2%
Depreciation and amortization 5.1% 3.9%
Other(Income)Expense:
Interest expense, net 1.5% 1.4%
Other, net 0.2% -0.9%
Earnings Before Income Taxes 5.2% 4.6%
Net Earnings 3.3% 3.0%
===== =====
</TABLE>
- ---------------
(1) As a percentage of restaurant sales.
(2) As a percentage of commissary sales.
-7-
<PAGE> 8
TOTAL REVENUES increased $5,221,000 or 12.5% due to an increase in
restaurant sales of $7,816,000, or 20.3%, offset by a decrease in Commissary
sales of $2,595,000. The increase in restaurant sales was due to increased
sales from operating additional stores in 1996, offset by a decrease in same
store sales of .8%. The following table presents the number of restaurants in
operation for each of the respective first quarters:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Beginning number of Company restaurants 61 50
Newly opened during the quarter 5 3
-- --
Ending number of Company restaurants 66 53
== ==
</TABLE>
Management believes the decrease in same store sales was primarily the
result of lost operating days due to the impact of winter storms in the midwest
and southeast during January and February. The decrease in customer counts was
partially offset by a higher check average due to a 1.5% price increase taken
in the fourth quarter of 1995. Since mid-April 1996, the Company has
continued to experience a decrease in same store sales. While management
believes the decrease in same store sales in the first quarter was primarily
weather related, such sales decreases have continued into May and could
adversely affect the Company's results of operations during the second fiscal
quarter.
The decrease in Commissary sales is primarily the result of discontinuing
sales to Logan's Roadhouse Restaurants and to certain unaffiliated restaurants.
Following its initial public offering, Logan's ceased purchasing products from
the Commissary in October 1995.
RESTAURANT OPERATING MARGIN, defined as restaurant sales less cost of
restaurant sales, increased $1.3 million or 18.6% in the first quarter of 1996.
As a percentage of restaurant sales, the restaurant operating margin decreased
.3% in 1996 to 17.9% from 18.2%. This percentage decrease was due to a
percentage increase in payroll and benefits and restaurant operating cost
partially offset by a decrease in the percentage cost of food, beverage and
supplies.
COST OF FOOD, BEVERAGE AND SUPPLIES as a percentage of restaurant sales
decreased 1.1% in the first quarter of 1996. This decrease is primarily
attributable to a reduction in overall meat cost and to the increased
purchasing power and improved operating efficiencies of the Company's
Commissary.
PAYROLL AND BENEFITS as a percentage of restaurant sales increased 1.1% in
the first quarter of 1996. The Company is continuing to pay higher base
salaries and hourly wage rates in order to attract and retain management and
hourly co-workers. Additionally, employee benefit cost, particularly health
insurance, and bonus expense has increased in 1996. Payroll and benefit cost
were also affected as certain fixed labor and employee benefit costs were
compared to lower average restaurant sales which increased the percentage cost
of payroll and benefits. A decrease in workers compensation cost partially
offset the above mentioned increases. The United States Congress is currently
considering legislation to increase the federal minimum wage rate (minimum
wage) by $.45 on July 1, 1996 and an additional $.45 on July 1, 1997. Although
the Company generally pays higher than minimum wage to its hourly co-workers,
an increase in the minimum wage rate will increase the amount of wages paid to
directly tipped employees, primarily servers. The Company anticipates
increasing menu prices by approximately 1% to offset the impact of the July 1,
1996 proposed increase in the minimum wage.
RESTAURANT OPERATING COSTS include many expenses which are primarily fixed
and do not fluctuate greatly with changes in revenue. Therefore, as a
percentage of revenue, the .4% increase in restaurant operating cost primarily
reflects the relationship between fixed operating cost to the decrease in
average restaurant sales. Additionally, in 1996, the Company is purchasing all
of the required uniform shirts for its hourly co-workers, whereas these shirts
were previously purchased mostly by the employees in the first quarter 1995.
ADVERTISING, GENERAL AND ADMINISTRATIVE EXPENSES as a percentage of total
revenue decreased 2.5% in 1996. During the first quarter of 1995, the Company
expensed $1 million for legal fees expected to be incurred in defending a
purported class action alleging racial discrimination (see Liquidity and
Capital Resources). In addition, administrative cost decreased due to lower
executive officers' compensation, primarily due to a decrease in the amount of
bonus accrued as the bonuses for these individuals
-8-
<PAGE> 9
are based on a formula of increased profits. The above mentioned decreases
were partially offset by an increase in advertising expenditures in the first
quarter of 1996.
DEPRECIATION AND AMORTIZATION EXPENSE as a percentage of total revenues
increased 1.2% in 1996. This increase is attributable to three primary
factors. Pre-opening amortization expense has increased due to the increased
number of new stores opened for less than one year and to an increase in the
average amount of preopening cost capitalized per store due to the opening of a
number of new stores in new markets. Property and equipment and preopening
costs are depreciated and amortized over predetermined periods and these fixed
expenses, as a percentage of revenue, increased due to the lost revenue due to
the weather. Depreciation expense as a percentage of restaurant sales
increased as the Company increased the amount of building improvement costs due
to the remodeling of certain existing restaurants.
INTEREST EXPENSE, NET, increased $104,000 in 1996 or .1% of total revenue.
This increase in interest expense was primarily the result of increased
borrowings associated with the Company's expansion of new restaurants.
OTHER (INCOME) EXPENSE, NET was a net expense of $108,000 in 1996 and a net
income of $386,000 in 1995, a $494,000 increase in net expenses. During the
first quarter of 1995, the Company recorded its equity earnings of Logan's
Roadhouse Restaurants and net rental income and guarantee fees related to its
ownership of the five Logan's restaurant sites in other income, net. In July
1995, Logan's completed an initial public offering and the Company sold
substantially all of its interest in Logan's. Thus, the Company no longer
records any income from Logan's except that in the first quarter of 1996, the
Company sold its remaining 7,000 shares of Logan's common stock. On January 5,
1996, the shareholders of the Company approved an Agreement and Plan of Merger
to merge with Shoex, Inc., a franchisee of the Company which owned and operated
six O'Charley's restaurants in Alabama. During the first quarter of 1996, the
Company expensed approximately $290,000 in acquisition cost associated with
this merger.
INCOME TAXES as a percentage of pretax earnings were 36.0% and 35.0% in
1996 and 1995, respectively. This increase occurred due to an increase in the
Company's federal tax rate.
Liquidity and Capital Resources
During the first quarter of 1996, the Company expended approximately $10.7
million in capital expenditures for new stores and improvements to existing
facilities. Additionally, the Company capitalized approximately $681,000 in
preopening costs and made $2.4 million in principal reductions in its
capitalized lease obligations and long-term debt. These cash outlays were
funded primarily by borrowings of $11.1 million on the Company's line of credit
facility and borrowings under capitalized lease obligations of $1.8 million.
On April 21, 1994, the Company entered into a $30 million revolving line
of credit agreement with four banks for a three-year term. At April 21, 1996,
$21.6 million was outstanding under this facility compared with $10.5 million
at December 31, 1995. The credit facility requires quarterly interest payments
at the lower of the bank's prime rate or the LIBOR rate plus 1.5%. The credit
facility contains certain financial and other covenants, including restrictions
on the sale of certain assets and additional long-term debt facilities. The
Company is in compliance with each of these covenants. The facility has a term
expiring in April 1997, but includes an option to extend the maturity for an
additional two years upon conversion of the facility to a term loan with
principal payments required quarterly based on a seven-year amortization. At
April 21, 1996, the Company had available $8.4 million under this credit
facility. The Company anticipates having to increase the amount of its
available credit near the end of the fourth quarter of 1996. The Company is
currently discussing with its lenders increasing the amount and the terms of
the current credit facility.
The Company opened five restaurants in the first quarter of 1996. As of
April 21, 1996, the Company had five additional restaurants under construction,
of which three are expected to open in the second quarter of 1996. For fiscal
1996, the Company expects to open between 12 and 14 new Company-owned
restaurants. Management estimates that the Company will spend approximately
$32 million in capital expenditures in 1996. Actual capital expenditures in
1996 may increase based on a number of factors, including the timing of
additional purchases of future restaurant sites. The Company intends to
continue to finance the furniture, fixtures and equipment for its new stores
with capitalized lease obligations.
-9-
<PAGE> 10
On January 5, 1996, the shareholders of the Company approved an Agreement
and Plan of Merger, dated October 9, 1995, to merge with Shoex, Inc., a
franchisee of the Company which owned and operated six O'Charley's restaurants
in Alabama. The transaction was accounted for as a pooling of interests. The
Company exchanged 666,666 shares of Company stock valued at approximately $9.5
million. The Company assumed approximately $1.9 million in net obligations of
Shoex, Inc. (defined as long-term debt, capitalized lease obligations and
working capital deficit). Under the terms of the agreement, O'Charley's
acquired the six restaurants and regained the rights to develop other
O'Charley's restaurants in Alabama, Mississippi and specific locations in
Florida and Georgia. The accompanying financial statements reflect the
transactions and balances of Shoex.
On February 15, 1994, a purported class action lawsuit was filed against
the Company and certain of its executive officers and directors alleging
racially discriminatory job selection, termination and work environment
practices in violation of federal law. The lawsuit, which was originally set
for trial in April 1995, has been stayed pending the Court's ruling on several
pending motions, including those related to whether the lawsuit will proceed as
a class action. In the first quarter of fiscal 1995, the Company reserved $1.0
million for legal expenses expected to be incurred in defending this
litigation. The Company has not made any accrual for any settlement or adverse
judgement in connection with this suit. The Company believes the lawsuit is
without merit and is defending it vigorously.
-10-
<PAGE> 11
Part II - Other Information
Item 1. Legal Proceedings
On February 15, 1994, a purported class action suit was filed in the United
States District Court in the Western District of Tennessee against the
Company, Mr. Wachtel, Mr. Burns and Mr. McWhorter. The suit alleges
racially discriminatory job selection, termination and work environment
practices in violation of federal law. The suit seeks actual, compensatory
and punitive damages in an unspecified amount. The lawsuit was originally
set for trial in April 1995, however, on March 17, 1995 the Court continued
the trial until such time as the Court is able to resolve the motions
pending before it, including those relating to whether the litigation will
proceed as a class action. Anticipating an April trial, in the first
quarter of 1995, the Company reserved an additional $800,000 for legal and
other expenses expected to be incurred in defending this litigation. The
Company has made no accrual for any settlement or adverse judgement in
connection with this litigation. Management of the Company believes the suit
is without merit and intends to defend the litigation vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
On May 9, 1996, the Company held its Annual Meeting of Shareholders. The
Shareholders voted for each of the items submitted for vote. The items
voted upon at the meeting and the results of the votes are as follows:
1. The election of three Class III directors to hold office for a term
of three years and until their successors are elected and qualified;
<TABLE>
<CAPTION>
Director For Abstain
-------- --- -------
<S> <C> <C>
Shirley A. Zeitlin 4,372,201 282,321
Richard Reiss, Jr. 4,377,774 267,748
G. Nicholas Spiva 4,377,626 276,896
</TABLE>
In addition to the foregoing directors, the following table sets
forth the other members of the Board of Directors whose term of
office continued after the meeting and the year in which this term
expires:
<TABLE>
<CAPTION>
Name Term Expires
---- ------------
<S> <C>
Gregory L. Burns 1997
Charles F. McWhorter 1997
C. Warren Neel 1997
Samuel H. Howard 1998
John W. Stokes, Jr. 1998
H. Steve Tidwell 1998
</TABLE>
2. A proposal to approve an amendment to the Company's 1990 Employee
Stock Plan (1990 Plan) to increase the number of shares reserved for
issuance from 2,175,000 to 2,650,000 and to limit the number of
shares of common stock that may be issued to individual employees
under the 1990 Plan;
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
2,413,958 970,094 36,441
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
The Company filed a Current Report on Form 8-K, dated January 5,
1996, as amended on Form 8-K/A, dated March 19, 1996, to report the
merger of Shoex, Inc., a franchisee of the Company, with and into
the Company.
-11-
<PAGE> 12
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.
O'Charley's Inc.
(Registrant)
Date: May 31, 1996 By: /s/ Gregory L. Burns
---------------- ------------------------------
Gregory L. Burns
Chief Executive Officer and
Chief Financial Officer
Date: May 31, 1996 By: /s/ Charles F. McWhorter, Jr.
---------------- ------------------------------
Charles F. McWhorter, Jr.
President
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF O'CHARLEY'S INC. FOR THE 16-WEEK PERIOD ENDED APRIL 21,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> APR-21-1996
<CASH> 634
<SECURITIES> 0
<RECEIVABLES> 1,445
<ALLOWANCES> 0
<INVENTORY> 6,816
<CURRENT-ASSETS> 11,974
<PP&E> 90,485
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,602
<CURRENT-LIABILITIES> 16,331
<BONDS> 0
0
0
<COMMON> 29,539
<OTHER-SE> 23,398
<TOTAL-LIABILITY-AND-EQUITY> 103,602
<SALES> 46,380
<TOTAL-REVENUES> 47,079
<CGS> 38,066
<TOTAL-COSTS> 43,821
<OTHER-EXPENSES> 108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 699
<INCOME-PRETAX> 2,451
<INCOME-TAX> 882
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,569
<EPS-PRIMARY> .19
<EPS-DILUTED> 0
</TABLE>
