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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OR 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 1-11748
EASTERN AMERICAN NATURAL GAS TRUST
(Exact name of registrant as specified in its charter)
DELAWARE 36-7034603
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
BANK OF MONTREAL TRUST COMPANY
c/o HARRIS TRUST AND SAVINGS BANK
311 W. MONROE STREET, 12TH FLOOR
CHICAGO, ILLINOIS 60606
(Address of principal executive offices)
(Zip Code)
(312) 461-4662
(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 |_|
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENTS OF DISTRIBUTABLE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Royalty Income ......................... $ 8,817,202 $ 8,980,861 $ 2,761,041 $ 3,121,207
Operating Expenses:
Taxes on production and property .... 600,752 616,062 186,603 214,051
Operating cost charges .............. 340,987 337,730 112,167 112,167
----------- ----------- ----------- -----------
Total Operating Expenses ..... 941,739 953,792 298,770 326,218
----------- ----------- ----------- -----------
Net Proceeds to the Trust .............. 7,875,463 8,027,069 2,462,271 2,794,989
General and Administrative Expenses .... (357,175) (367,192) (84,998) (117,546)
Interest Income ........................ 6,365 5,221 1,983 1,903
Cash Proceeds on Sale of Net
Profit Interests .................... 177,843 0 177,843 0
----------- ----------- ----------- -----------
Distributable Income ......... $ 7,702,496 $ 7,665,098 $ 2,557,099 $ 2,679,346
=========== =========== =========== ===========
Distributable Income Per Unit (5,900,000
units authorized and outstanding):
Distributable Income Per Unit .......... $ 1.3055 $ 1.2992 $ 0.4334 $ 0.4541
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENTS OF ASSETS, LIABILITIES AND TRUST CORPUS
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
(Unaudited)
Assets:
Cash .................................... $ 1,983 $ 1,511
Net Proceeds Receivable ................. 2,640,114 2,795,254
Net Profits Interests in Gas Properties . 93,162,180 93,162,180
Accumulated Amortization ................ (27,644,979) (23,145,237)
------------ ------------
Total Assets ......................... $ 68,159,298 $ 72,813,708
============ ============
Liabilities and Trust Corpus:
Trust General and Administrative
Expenses Payable ..................... $ 84,998 $ 74,427
Distributions Payable ................... 2,557,099 2,722,338
Trust Corpus (5,900,000 Trust Units
authorized and outstanding) .......... 65,517,201 70,016,943
------------ ------------
Total Liabilities and Trust Corpus ... $ 68,159,298 $ 72,813,708
============ ============
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
EASTERN AMERICAN NATURAL GAS TRUST
STATEMENTS OF CHANGES IN TRUST CORPUS
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTMBER 30, 1996
------------------ -----------------
Trust Corpus, Beginning of Period ........ $ 70,016,943 $ 75,854,100
Distributable Income ..................... 7,702,496 7,665,098
Distributions Declared to Unitholders .... (7,702,496) (7,665,098)
Amortization of Net Profits Interests
in Gas Properties ..................... (4,499,742) (4,340,347)
------------ ------------
Trust Corpus, End of Period ............. $ 65,517,201 $ 71,513,753
============ ============
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
EASTERN AMERICAN NATURAL GAS TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1. Organization of the Trust
The Eastern American Natural Gas Trust (the "Trust") was formed under the
Delaware Business Trust Act pursuant to a Trust Agreement (the "Trust
Agreement") among Eastern American Energy Corporation ("Eastern American"), as
grantor, Bank of Montreal Trust Company, as Trustee ("Trustee"), and Wilmington
Trust Company, as Delaware Trustee (the "Delaware Trustee"). The Trust was
formed to acquire and hold net profits interests (the "Net Profits Interests")
created from the working interests owned by Eastern American in 650 producing
gas wells and 65 proved development well locations in West Virginia and
Pennsylvania (the "Underlying Properties"). The Net Profits Interests consist of
a royalty interest in 322 wells and a term interest in the remaining wells and
locations. Prior to or on May 15, 2013, the Trustee is required to sell the
royalty interests and liquidate the Trust.
On March 15, 1993, 5,900,000 Depositary Units were issued in a public
offering at an initial public offering price of $20.50 per Depositary Unit. Each
Depositary Unit consists of beneficial ownership of one unit of beneficial
interest ("Trust Unit") in the Trust and a $20 face amount beneficial ownership
interest in a $1,000 face amount zero coupon United States Treasury Obligation
("Treasury Obligation") maturing on May 15, 2013.
The Net Profits Interests are passive in nature, and neither the Trustee nor
the Delaware Trustee has management control or authority over, nor any
responsibility relating to, the operation of the properties subject to the Net
Profits Interests. The Trust Agreement provides, among other things, that: the
Trust shall not engage in any business or commercial activity or acquire any
asset other than the Net Profits Interests initially conveyed to the Trust; the
Trustee may establish a reserve for payment of any liability which is
contingent, uncertain in amount or that is not currently due and payable; the
Trustee is authorized to borrow funds required to pay liabilities of the Trust,
provided that such borrowings are repaid in full prior to further distributions
to Unitholders; and the Trustee will make quarterly cash distributions to
Unitholders from funds of the Trust.
NOTE 2. Basis of Presentation
The information furnished is based upon certain estimates of production for
the periods presented and is therefore subject to adjustment in future periods
to reflect actual production for the periods presented. The information
furnished reflects all adjustments which are, in the opinion of the Trustee,
necessary for a fair presentation of the results for the interim periods
presented. The accompanying financial statements are unaudited interim financial
statements, and should be read in conjunction with the audited financial
statements and notes thereto included in the Trust's Annual Report on Form 10-K
for the year ended December 31, 1996.
5
<PAGE>
EASTERN AMERICAN NATURAL GAS TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3. Trust Accounting Policies
The Trust serves as a pass-through entity, with items of depletion, interest
income and expense, and income tax attributes being based upon the status and
elections of Unitholders. Thus, the Statements of Distributable Income shows
Distributable Income, defined as Trust income available for distribution to
Unitholders before application of those Unitholders' additional expenses, if
any, for depletion, interest income and expense, and income taxes. The Trust
uses the accrual basis to recognize revenue, with Royalty Income recorded as
income as reserves are extracted from properties and sold. Expenses are also
presented on an accrual basis. Actual cash receipts will vary from the accrual
of revenues and expenses due to, among other reasons, the payment provisions of
the gas purchase contract between the Trust and Eastern Marketing Corporation (a
subsidiary of Eastern American), which requires payment with respect to gas
production for a calendar quarter to be made to the Trust on or before the tenth
day of the third month following such quarter.
Net Profits Interests in Gas Properties are periodically assessed to
determine whether their net capitalized cost has been impaired. The Trust will
provide a write-down to its investment in the Net Profits Interests in Gas
Properties to the extent that total capitalized costs, less accumulated
amortization, exceed undiscounted future net revenues attributable to proved gas
reserves of the Underlying Properties. Any such write-down would not reduce
Distributable Income, but would reduce Trust Corpus.
Amortization of the Net Profits Interests in Gas Properties is calculated on
a units-of-production basis, whereby the Trust's cost basis in the properties is
divided by total Trust reserves to derive an amortization rate per reserve unit.
Such amortization does not reduce distributable income, but does reduce Trust
Corpus.
NOTE 4. Income Taxes
The Trust is a grantor trust and is not required to pay federal or state
income taxes. Accordingly, no provision for federal or state income taxes has
been made. All income is taxed to the Unitholders of the Trust.
6
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Trust does not conduct any operations or activities. The Trust's purpose
is, in general, to hold the Net Profits Interests, to distribute to Unitholders
cash which the Trust receives in respect of the Net Profits Interests (net of
Trust expenses), and to perform certain administrative functions in respect of
the Net Profits Interests and the Depositary Units. Accordingly, the Trust
derives substantially all of its income and cash flows from the Net Profits
Interests. The Trust has no source of liquidity or capital resources other than
the cash flows from the Net Profits Interests.
The Net Profits Interests were created pursuant to conveyances (the
"Conveyances") from Eastern American to the Trust. In connection therewith,
Eastern American assigned its rights under a gas purchase contract (the "Gas
Purchase Contract") which obligates Eastern Marketing Corporation, a subsidiary
of Eastern American, to purchase all of the natural gas produced from the
Underlying Properties which is attributable to the Net Profits Interests.
The Conveyances and the Gas Purchase Contract entitle the Trust to receive an
amount of cash for each calendar quarter equal to the Net Proceeds for such
quarter. "Net Proceeds" for any calendar quarter generally means an amount of
cash equal to (a) 90% of a volume of gas equal to (i) the volume of gas produced
during such quarter attributable to the Underlying Properties less (ii) a volume
of gas equal to Chargeable Costs for such quarter, multiplied by (b) the
applicable price for such quarter under the Gas Purchase Contract. "Chargeable
Costs" is that volume of gas which equates in value, determined by reference to
the relevant sales price under the Gas Purchase Contract or the Conveyances, as
applicable, to the sum of the Operating Cost Charge, Capital Costs and Taxes.
The "Operating Cost Charge" for 1996 was based on an annual rate of $456,391,
and for 1997 this annual rate is $465,519. In subsequent years, the Operating
Cost Charge will escalate, based on increases in the index of average weekly
earnings of Crude Petroleum and Gas Production Workers (published by the United
States Department of Labor, Bureau of Labor Statistics), but not more than 5%
per year. The Operating Cost Charge will not be increased as Development Wells
are completed but will be reduced for each well that is sold (free of the Net
Profits Interests) or plugged and abandoned. "Capital Costs" means Eastern
American's working interest share of capital costs for operations on the
Underlying Properties, but only for items having a useful life of at least three
years, and not including any capital costs incurred in drilling the Development
Wells. "Taxes" means ad valorem taxes, production and severance taxes, and other
taxes imposed on the Trust's interest in the Underlying Properties, or
production therefrom.
Pursuant to the Gas Purchase Contract, Eastern Marketing Corporation will be
obligated to purchase such gas production, on a quarterly basis, at a purchase
price per Mcf, subject to certain adjustments, equal to the greater of the Index
Price and the Floor Price for gas produced during the seven-year period ending
December 31, 1999 (the "Primary Term") and at a purchase price per Mcf equal to
the Index Price thereafter. The Floor Price was $2.36 per Mcf for 1996 and shall
be $2.57 per Mcf for 1997, $2.84 per Mcf for 1998 and $3.09 per Mcf for 1999, in
each case subject to
7
<PAGE>
adjustment under certain circumstances. The Index Price for any quarter during
the Primary Term will be a weighted average price determined by reference to the
fixed price ("Fixed Price") component, which will be given a 66 2/3% weight, and
a variable price ("Variable Price") component, which will be given a 33 1/3%
weight. Following the Primary Term, the Index Price will be determined solely by
reference to the Variable Price. The Fixed Price was equal to $3.08 per Mcf for
the 1996 calendar year, and escalates at 5% for each year thereafter. The fixed
price for the 1997 calendar year is $3.23 per Mcf. The Variable Price is equal
to the Henry Hub Average Spot Price (as defined) plus $.30 per MMBtu, multiplied
by 110% to effect a fixed adjustment for Btu content. The Henry Hub Average Spot
Price for any quarter is a price per MMBtu based on a 12-month average
settlement price of the gas futures contracts for gas delivered to the Henry Hub
(Henry, Louisiana).
Two wells in which the Trust owns a Net Profits Interest (identified as the
Berwind No. 21 and Berwind No. 24) were required to be plugged and abandoned by
the coal lessee of the property upon which the wells were drilled since the
wells interfered with proposed mining operations. The coal lessee could cause
these wells to be plugged and abandoned pursuant to an agreement entered into
prior to the formation of the Trust. This prior agreement is a Permitted
Encumbrance under the Conveyances and the Trust accepted its Net Profits
Interest subject to this prior agreement. Pursuant to this prior agreement the
coal lessee is required to pay for the wells it causes to be plugged and
abandoned. Eastern American recently resolved an issue with the coal lessee
regarding the value of these wells and Eastern American received $39,177 for the
Berwind No. 21 and $105,538 for the Berwind No. 24 for a total of $144,715.
Ninety percent (90%) of this amount or $130,243.50 has been allocated to the
Trust during this period.
Pursuant to the Trust Agreement, Eastern American may, without the consent of
the Unitholders, require the Trust to release or convey the Net Profits Interest
associated with a well if such well accounts for no more than .25% of the total
production from the Underlying Properties for the prior twelve (12) months.
During the first quarter of the fiscal year Eastern American sold a group of
wells to Fola Land Company, Inc. ("FOLA") who is the fee owner of the property
upon which these wells are situate. Fola advised Eastern American that it was
interested in acquiring these wells since it had plans for an aggressive coal
mining program on the property. One of the wells included in this sale was the
Bethlehem Steel No. 24 well in which the Trust owns a Net Profits Interest. The
Trust's proportionate share of the sales price allocated to this well is
$47,600. On a performance basis the production from the Bethlehem Steel No. 24
well represented .11% of the total production from the Underlying Properties.
These proceeds totaling $177,843 are included on the September 30, 1997
Statements of Distributable Income under Cash Proceeds on Sale of Net Profits
Interests.
Pursuant to the Conveyances Eastern American is obligated to drill the 65
Development Wells and bear the costs of drilling and completing the same. As of
December 31, 1996, Eastern American had drilled 56 Development Wells. Eastern
American was obliged to drill three additional Development Wells by March 31,
1997 and six more during the remainder of 1997. As disclosed previously certain
third parties have drilled wells in close proximity to the drill sites for four
of the Development Wells
8
<PAGE>
that had not been drilled. Since the wells drilled by the third parties were
within 1,000 feet of these Development Wells Eastern American had a disagreement
with the Trust over Eastern American's obligation to drill these closely offset
wells. The Trust has agreed that in lieu of drilling these closely offset wells
that Eastern American will provide the Trust, on an annual basis commencing on
April 1, 1997, and over the remaining life of the Trust, a volume of gas which
is equal to the projected volumes of the wells as if they had been drilled.
These volumes have been estimated by Ryder Scott Company. Based on those
estimates, 10,565 Mcf's was delivered to the Trust for the quarter ending
September 30, 1997.
Eastern has drilled two additional Development Wells this fiscal year and
will drill on additional Development Well before year end. The two remaining
Development Wells will not be drilled because Eastern American is unable to cure
various title defects associated with these wells. Eastern American advises that
it has made a diligent effort to cure title but has been unsuccessful. In West
Virginia an oil and gas well cannot be drilled unless a full and complete 100%
leasehold interest is first obtained. Drilling an oil and gas well without
obtaining the entire leasehold estate would expose the oil and gas operator and
the Trust to a possible suit for trespass. Pursuant to the Term NPI Conveyance
if the state of title to the drill site to any Development Well renders such
property undrillable in the good faith opinion of Eastern American under the
Reasonably Prudent Operator Standard then such drill site(s) shall be construed
as a Development Well(s). Upon completion of the one (1) additional Development
Well mentioned above Eastern American will fulfill its commitment to the Trust
to drill 65 Development Wells.
COMPARISON OF RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 1997
AND THREE MONTHS ENDED SEPTEMBER 30, 1996
Trust's distributable income was $2,557,099 for the three months ended
September 30, 1997 as compared to $2,679,346 for the three months ended
September 30, 1996. This decrease was due to a decrease in production of gas
attributable to the Net Profits Interests for the three months ended September
30, 1997 (895 Mmcf) and as compared to the three months ended September 30, 1996
(1,025 Mmcf) and was partially offset by an increase in the price payable to the
Trust under the Gas Purchase Contract ($3.093 per Mcf for the three months ended
September 30, 1997; $3.046 per Mcf for the three months ended September 30,
1996). The distributable income also includes Cash Proceeds on Sale of Net
Profits Interests of $177,843 in the quarter ending September 30, 1997, while
no such sales were recognized in the corresponding prior quarter.
The price payable to the Trust for gas production attributable to the Net
Profits Interests was $3.093 per Mcf for the three months ended September 30,
1997 and $3.046 per Mcf for the three months ended September 30, 1996. The price
per Mcf was higher for the three months ended September 30, 1997 than for the
corresponding three month period ending September 30, 1996 due to a higher Fixed
Price component ($3.23 per MCF for the three months ended September 30, 1997;
$3.08 per MCF for the three months ended September 30, 1996) and was partially
offset by a lower Variable Price component of the Index Price under the Gas
Purchase Contract ($2.813 per Mcf for the three months ended September 30, 1997;
$2.988 per Mcf for the three months ended September 30,
9
<PAGE>
1996). Such lower Variable Price is directly attributable to a decrease in the
average futures spot market prices for gas delivered at the Henry Hub near
Henry, Louisiana for the three months ended September 30, 1997 ($2.257 per Dth)
as compared to the prior period ($2.416 per Dth).
COMPARISON OF RESULTS OF OPERATIONS FOR NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996.
The Trust's distributable income was $7,702,496 for the nine months ended
September 30, 1997 as compared to $7,665,098 for the nine months ended September
30, 1996. This increase was due to an increase in the price payable to the Trust
under the Gas Purchase Contract ($3.151 per Mcf for the nine months ended
September 30, 1997; $3.006 per Mcf for the nine months ended September 30, 1996)
and was partially offset by a decrease in production of gas attributable to the
Net Profits Interests for the nine months ended September 30, 1997 (2,798 MMcf)
as compared to the nine months ended September 30, 1996 (2,984 MMcf). The
production decreases were attributable to normal production declines associated
with the Underlying Properties. The distributable income also includes Cash
Proceeds on Sale of Net Profits Interests of $177,843 in the nine months ending
September 30, 1997, while no such sales were recognized in the corresponding
prior period.
The price payable to the Trust for gas production attributable to the Net
Profits Interests was $3.151 per Mcf for the nine months ended September 30,
1997 and $3.006 per Mcf for the nine months ended September 30, 1996. The price
per Mcf was higher for the nine months ended September 30, 1997 than for the
corresponding nine month period ending September 30, 1996 due to a higher Fixed
Priced component ($3.23 per Mcf for the nine months ended September 30, 1997;
$3.08 per Mcf for the nine months ended September 30, 1996) and due to a higher
Variable Price component of the Index Price under the Gas Purchase Contract
($2.717 per Mcf for the nine months ended September 30, 1997; $2.608 per Mcf for
the nine months ended September 30, 1996). Such higher Variable Price is
directly attributable to an increase in the average futures spot market prices
for gas delivered at the Henry Hub near Henry, Louisiana for the nine months
ended September 30, 1997 ($2.417 per Mcf) as compared to the prior period
($2.308 per Mcf).
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
Eastern American has advised that it has recently settled a lawsuit
filed by Columbia Gas Transmission Corporation that alleged that some
of Eastern American's wells were producing storage gas from a Columbia
storage field in West Virginia. A portion of the wells which were the
subject matter of the complaint are wells in which the Trust owns a Net
Profit Interest. The Trust was not named as a party to this action and
Eastern American and the Trust's Counsel are presently investigating
how this settlement will, if in any manner, affect the volumes
attributable to the Net Profit Interest.
ITEM 2. Changes in Securities.
NONE.
ITEM 3. Defaults Upon Senior Securities.
NONE.
ITEM 4. Submission of Matters to a Vote of Security Holders.
NONE.
ITEM 5. Other Information.
FOR THE CALENDAR QUARTER ENDED SEPTEMBER 30 1997, THE HIGH AND LOW CLOSING
PRICES OF THE TREASURY OBLIGATIONS (WHICH HAVE $1,000 FACE PRINCIPAL AMOUNT), AS
QUOTED IN THE OVER-THE-COUNTER MARKET FOR UNITED STATES TREASURY OBLIGATIONS,
WERE $370.59 AND $340.66 RESPECTIVELY. ON SEPTEMBER 30, 1997 THE CLOSING PRICE
OF THE TREASURY OBLIGATIONS, AS QUOTED ON SUCH MARKET, WAS $365.31.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
NONE
(b) Reports on Form 8-K
NONE
11
<PAGE>
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.
EASTERN AMERICAN NATURAL GAS TRUST
By: Bank of Montreal Trust Company, Trustee
Name: E. Kay Liederman
Title: Vice President
Date: November 13, 1997
THE REGISTRANT, EASTERN AMERICAN NATURAL GAS TRUST, HAS NO PRINCIPAL
EXECUTIVE OFFICER, PRINCIPAL FINANCIAL OFFICER, BOARD OF DIRECTORS OR PERSONS
PERFORMING SIMILAR FUNCTIONS. ACCORDINGLY NO ADDITIONAL SIGNATURES ARE AVAILABLE
AND NONE HAVE BEEN PROVIDED.
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,983
<SECURITIES> 0
<RECEIVABLES> 2,640,114
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,642,097
<PP&E> 93,162,180
<DEPRECIATION> 27,664,979
<TOTAL-ASSETS> 68,159,298
<CURRENT-LIABILITIES> 2,642,097
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 68,159,298
<TOTAL-LIABILITY-AND-EQUITY> 68,159,298
<SALES> 2,761,041
<TOTAL-REVENUES> 2,761,041
<CGS> 0
<TOTAL-COSTS> 298,770
<OTHER-EXPENSES> 84,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,557,099
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,379,256
<DISCONTINUED> 0
<EXTRAORDINARY> 177,843
<CHANGES> 0
<NET-INCOME> 2,557,099
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
