FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 2003 Commission file number 0-305
NATIONAL PROPERTIES CORPORATION
(Exact name of registrant as specified in its charter)
Iowa 42-0860581
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4500 Merle Hay Road, Des Moines, Iowa 50310
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (515) 278-1132
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, and (2) has been subject to such filing
requirement 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 (PAR VALUE $1.00)
409,133 SHARES AS OF OCTOBER 15, 2003
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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NATIONAL PROPERTIES CORPORATION
BALANCE SHEETS
ASSETS
September 30, December 31,
2003 2002
<s> <c> <c>
CURRENT ASSETS
Cash 300,158 347,083
Receivable - 13,729
Other 3,747 16,161
---------- ----------
Total current assets 303,905 376,973
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Land 5,291,232 5,402,931
Buildings and improvements 39,510,687 38,525,484
Property held for exchange 1,650,394 -
Furniture and equipment 119,490 117,332
---------- ----------
46,571,803 44,045,747
Less - accumulated depreciation 11,330,372 11,324,363
---------- ----------
Property and equipment - net 35,241,431 32,721,384
---------- ----------
OTHER ASSETS
Marketable securities 1,117,942 926,846
Deposit on Walgreen property 100,000 -
---------- ----------
Total other assets 1,217,942 926,846
---------- ----------
36,763,278 34,025,203
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
<s> <c> <c>
CURRENT LIABILITIES
Accounts payable 1,585 2,538
Accrued liabilities 200,212 195,460
Advance rents 241,607 219,997
Federal and state income taxes 38,037 123,152
---------- ----------
Total current liabilities 481,441 541,147
---------- ----------
LONG-TERM DEBT 12,200,000 11,250,000
---------- ----------
DEFERRED INCOME TAXES 1,201,834 1,045,716
---------- ---------
STOCKHOLDERS' EQUITY
Common stock - $1 par value
Authorized - 5,000,000 shares
Issued
(2003-410,133 shares; 2002-411,223 shares) 410,133 411,223
Retained earnings 22,088,124 20,505,863
Accumulated other comprehensive income 381,746 271,254
---------- ----------
Total stockholders' equity 22,880,003 21,188,340
---------- ----------
36,763,278 34,025,203
========== ==========
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NATIONAL PROPERTIES CORPORATION
STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
2003 2002 2003 2002
<s> <c> <c> <c> <c>
Income
Lease rental income 1,352,908 1,357,831 4,169,888 4,007,366
Dividend and interest income 8,287 11,069 21,192 36,771
Gain on sale of securities 9,707 10,513 31,247 44,861
Gain on sale of property - - 40,000 -
--------- --------- --------- ---------
Total income 1,370,902 1,379,413 4,262,327 4,088,998
--------- --------- --------- ---------
Expenses
Depreciation 278,673 261,531 794,308 784,594
Interest 89,397 116,023 275,305 319,752
Salaries and wages 68,262 59,292 205,437 182,703
Property, payroll
and misc. taxes 9,569 75,813 70,267 118,857
Other expenses 68,702 58,473 204,147 196,391
--------- --------- --------- ---------
Total expenses 514,603 571,132 1,549,464 1,602,297
--------- --------- --------- ---------
Income before income taxes 856,299 808,281 2,712,863 2,486,701
Federal and State income taxes 318,543 299,064 1,009,185 920,079
--------- --------- --------- ---------
Net income 537,756 509,217 1,703,678 1,566,622
--------- --------- --------- ---------
Other comprehensive income (losses):
Unrealized holding gains (losses)
on marketable securities arising
during the period 47,834 (343,764) 179,446 (530,928)
Less income tax (benefit) related
to unrealized holding gains
(losses) 17,699 (125,130) 68,954 (193,258)
--------- --------- --------- ---------
Other comprehensive income (loss)
net of tax 30,135 (218,634) 110,492 (337,670)
--------- --------- --------- ---------
Comprehensive income 567,891 290,583 1,814,170 1,228,952
========= ========= ========= =========
Net income per share $1.31 $1.23 $4.15 $3.80
Weighted average shares
outstanding 410,593 412,587 410,458 412,514
Cash dividend paid per share $0.00 $0.00 $0.17 $0.16
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NATIONAL PROPERTIES CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2003 2002
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 1,703,678 1,566,622
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 794,308 784,594
Deferred income taxes 87,164 95,604
Gain on sale of securities (31,247 (44,861)
Gain on sale of property (40,000) -
Changes in assets and liabilities:
Prepayments and deferred charges 12,414 (31,941)
Accounts payable and accrued liabilities 3,799 104,635
Advance rents 21,610 (45,497)
Receivable 13,729 14,126
Federal and State income taxes (85,115) 110,254
-------- --------
Net cash provided by operations 2,480,340 2,553,536
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (3,314,355) (3,500,000)
Proceeds from sale of securities 77,366 87,464
Proceeds on sale of property 40,000 -
Deposit on Walgreen purchase (100,000) -
Purchase of securities (57,769) -
Principal received on mortgage note - 155,978
-------- --------
Net cash used in investing activities (3,354,758) (3,256,558)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on credit line 3,400,000 3,425,000
Payments on credit line borrowings (2,450,000) (2,625,000)
Dividends paid (69,765) (65,988)
Treasury stock purchased and retired (52,742) (34,546)
-------- --------
Net cash provided by financing activities 827,493 699,466
-------- --------
Net decrease in cash (46,925) (3,556)
Cash at beginning of period 347,083 340,793
-------- --------
Cash at end of period 300,158 337,237
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest expense 240,730 281,627
Income tax payments 1,007,136 714,221
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NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
The balance sheet at September 30, 2003, and the statements of income and
comprehensive income and cash flows for the periods ended September 30, 2003
and September 30, 2002 are not audited but reflect all adjustments which are
of a normal recurring nature and are, in the opinion of management, necessary
to a fair statement of the results of the periods shown.
The Company classifies its existing marketable equity securities as available-
for-sale in accordance with the provisions of Statement of Financial Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
These securities are carried at fair market value, with the increase or
decrease in unrealized gains and losses reported as other comprehensive income
or losses in the statement of income and comprehensive income. Gains or
losses on securities sold are based on the specific identification method.
Real estate investments acquired or developed by the Company are not held for
resale, but are held as productive assets. When the Company disposes of a
property, it will generally exchange that property for another productive
property. The Company accounts for these nonmonetary transactions in
accordance with Accounting Principles Board Opinion No. 29 "Accounting for
Nonmonetary Transactions", by recording the property received in the exchange
at the recorded amount of the property surrendered plus any additional amount
paid. Therefore, no gain or loss is recognized on the disposed property.
Property Held For Exchange
At September 30, 2003, the Company had entered into an agreement to engage in
a multiple property tax-free exchange, pursuant to which it will make a cash
payment and surrender three properties in exchange for a new Walgreen store
property being built in Tulsa, Oklahoma. The Company expects that the
aggregate exchange value of these three properties will be approximately
$3,790,000. Closing on the exchange is expected upon completion of the
construction of the Walgreen store on November 21, 2003. The Company will
record the cost of the new Walgreen store property at the carrying value of
the three properties surrendered ($1,650,394) plus cash expected to be paid at
closing.
Long Term Debt
The Company has a revolving credit agreement dated February 8, 2001, with
Wells Fargo Bank, N.A. The credit facility permits the Company to borrow up to
$15,000,000. At September 30, 2003, $12,200,000 ($11,250,000 at December 31,
2002) was outstanding under the agreement which matures on April 30, 2005. The
revolving period of the agreement provides for annual extensions each April
30th at the mutual agreement of the bank and the Company. It is the Company's
intention to request an extension of the revolving period, as provided by the
agreement. Advances under the credit facility bear interest at 0.75% below the
bank's base rate. At September 30, 2003, the outstanding balance accrued
interest at 3.25%. In addition, the agreement requires the Company to pay an
annual commitment fee of 1/8 of 1% (payable quarterly) on the unused portion
of the line of credit commitment. The credit agreement contains various
covenants, including limitations on additional borrowings and maintaining a
minimum free cash flow, as defined in the agreement, of $1,800,000 per year
measured as of the end of each fiscal quarter on an annualized basis. The
Company was in compliance with all covenants at September 30, 2003. The line
of credit is secured by first mortgages on nine properties that had a net book
value of approximately $7,500,000 at September 30, 2003.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company, an Iowa Corporation, is a lessor of commercial real estate to
tenants, under net lease arrangements. The Company seeks to acquire or develop
real estate for lease to commercial tenants anywhere in the United States. The
Company currently owns property located in Arizona, Colorado, Georgia, Iowa,
Kansas, Missouri, Nebraska, North Carolina, Oklahoma, South Dakota, Tennessee,
and Texas.
Amendment of Chief Executive Officer's Employment Contract
The Company amended the 1998 employment contract it has with its chief
executive officer effective January 1, 2003. The amended agreement establishes
a basic compensation of $145,000 for 2003, with an annual increase equal to
the greater of 3% or subsequent changes in the Consumer Price Index.
Board of Directors Approve Dividend Payment
At the Company's annual meeting of Stockholders held May 16, 2003, the Company
declared a $0.17 per share dividend to be paid July 31, 2003 to stockholders
of record on June 30, 2003. The dividend totals $69,765.
Property Held For Exchange
On or about June 30, 2003, the Company entered into an agreement to engage in
a multiple property tax-free exchange, pursuant to which it will make a cash
payment and surrender three properties in exchange for a new Walgreen store
property being built in Tulsa, Oklahoma. The Company's three properties being
surrendered in the exchange include: (1) a garden center property located in
Arlington, Texas in which the tenant exercised an option under the lease to
purchase the property on June 2, 2003 for $2,100,000; (2) a vacant garden
center property located in Glendale, Arizona in which the tenant had been
subleasing for the past year until its lease expired on May 31, 2003, which
had an exchange value of $790,000; and (3) 2.8 acres of land held for
development in Ankeny, Iowa which has an exchange value of $900,000. The
three properties to be exchanged have been transferred to a qualified
intermediary handling the exchange for the Company so as to qualify as a tax-
free exchange under Internal Revenue Code Section 1031. Proceeds from the
amount realized on these properties were being held by the intermediary at
September 30, 2003, pending closing on the exchange set for November 21, 2003.
The additional funds required to be paid by the Company, under the terms of
the tax-free exchange for the purchase of the Walgreen property, of
approximately $595,000 less a $100,000 earnest deposit, will be drawn on the
Company's line of credit. Upon closing on the purchase of the Walgreen store,
the Company will assume an assignment of the existing lease for the property
now held by the developer. The lease is a triple net lease providing for
annual rents of $310,000 for a period of twenty-five years.
Property Acquisition
On August 22, 2003, the Company completed the purchase and leaseback of a Jack
in the Box property in Plano, Texas for $3,275,000. The property is a new
concept Quick Stuff combination convenience store, fuel station and
restaurant. The property is leased to Jack in the Box, Inc. under a net lease
arrangement at an annual rent, during the initial term of the 18 year lease,
of $253,812, subject to adjustment of Consumer Price Index increases limited
to 8% at the end of the first five (5) years and each five (5) year interval
thereafter. The lease provides for four (4), five (5) year renewal options.
Funds required for the purchase were drawn on the Company's bank credit line.
Operating Results
Lease revenues in the first nine months of 2003 were $4,170,000 compared to
$4,007,000 for the same period in 2002, an increase of $163,000 or 4.1%. The
increase in lease revenues relative to the first nine months of 2002, was
attributable to: (1) the acquisition of a sporting goods store property in May
2002, a restaurant property in December 2002, and a convenience store property
in August, 2003, which in the aggregate added $251,000 to lease revenues for
the first nine months of 2003; (2) a decrease in lease revenues from Mikes
Garden Center and Tip Top Nursery properties of $84,000 for reasons noted
above in "Management's Discussion and Analysis"; (3) a decrease in contingent
rents of $8,000 and; (4) an increase in lease revenues of $4,000 due to
scheduled rent increases for several tenants.
The Company recorded gains from the sale of securities of $31,000 in the first
nine months of 2003 compared to $45,000 in the first nine months of 2002.
Other investment income also declined in 2003 primarily due to the early
payoff on a mortgage note receivable in May 2002 and also the loss of dividend
income on securities sold.
The Company recorded a net gain of $40,000 in the first quarter of 2003 from
the sale of an easement on property adjacent to Company owned property in
Arlington, Texas.
Operating expense decreased $53,000 in the first nine months of 2003 over the
same period in 2002, to a total of $1,549,000.
Depreciation expense increased $10,000 in the first nine months of 2003 from
the same period in 2002 as a result of increases in depreciation for new
property acquisitions referred to above minus the loss of depreciation on
certain properties becoming fully depreciated or exchanged during the period.
Interest expense declined $45,000 in the first nine months of 2003 from the
same period a year ago due to the continuing decline in interest rates. As the
Federal Reserve again lowered the discount rate by 0.25%, the Company saw the
interest rate on its Wells Fargo Bank line of credit decline to 3.25%
effective June 30, 2003. The average amount borrowed against the line of
credit in the first nine months of 2003 was $10,578,000 compared to
$10,495,000 for the first nine months of 2002. The average interest rate paid
on these borrowings was 3.46% for 2003 compared to 4.10% for 2002.
Other general and administrative expenses decreased a net $18,000 in the first
nine months of 2003 from the same period in 2002, and primarily reflected
increases in compensation costs and state franchise taxes and decreases in
property taxes and professional fees.
Earnings per share increased $0.35 to $4.15 per share in the first nine months
of 2003 over the $3.80 a share for 2002.
Liquidity and Capital Resources
Liquidity describes the ability of the Company to generate sufficient cash
flows to meet the cash requirements of business operations. The Company's
main source of liquidity is lease rentals from commercial tenants, borrowings
on its long term revolving bank line of credit used to fund property
acquisitions, and income from its investment portfolio. Cash outflows
consists of payments for operating expenses, interest expense, income taxes,
dividends to stockholders, payments in connection with the repurchase of
Company stock, payments to acquire equity securities for investments, and
repayment of borrowings on its bank credit line. The Company's cash flow from
operations has been consistently positive and was $2,480,000 for the first
nine months of 2003 compared to $2,554,000, and $2,135,000 for the first nine
months of 2002, and 2001 respectively.
As of September 30, 2003, the Company's main sources of liquidity consisted of
$300,000 cash, marketable securities having a market value of approximately
$1,118,000 and $2,800,000 remaining loan balance available on its revolving
credit facility with Wells Fargo Bank. In addition, the Company owns
unencumbered real estate having an aggregate book value of approximately
$26,000,000. Management believes that its cash flow from operations and these
other sources of cash will be sufficient to finance current and projected
operations.
Contractual Obligations
The Company was obligated under a revolving credit facility with Wells Fargo
Bank. At September 30, 2003, the Company had outstanding borrowings under the
facility of $12,200,000 and a commitment to pay a user fee of 1/8 of 1%
(payable quarterly) on the unused portion of the $15,000,000 credit line. The
credit facility has been extended to mature April 30, 2005.
At September 30, 2003 the Company had entered into a multiple property
exchange agreement in which it will surrender three properties it owns having
an approximate value of $3,790,000, in exchange for a Walgreen property under
construction in Tulsa, Oklahoma, which it has agreed to purchase for
$4,320,000. The balance of the funds required at closing (closing expected on
November, 21, 2003), including closing costs and a $100,000 earnest money
deposit, is estimated to be $595,000 and will be drawn on the Company's
revolving credit facility.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Item 4. CONTROLS AND PROCEDURES
Based on their evaluation of the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this quarterly report, the undersigned officers of the Company have
concluded that such disclosure controls and procedures are effective. There
were no significant changes in its internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION.
No applicable items.
Item 6. EXHIBITS
(a) A list of exhibits is set forth in the Exhibit Index which
immediately precedes the exhibits and which is incorporated by reference
herein.
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.
NATIONAL PROPERTIES CORPORATION
Date __11/4/03__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
Date __11/4/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer
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CERTIFICATIONS
I, Raymond Di Paglia, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National
Properties Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date __11/4/03__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
<page>
I, Kristine M. Fasano, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National
Properties Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date __11/4/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer
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EXHIBIT INDEX
Exhibit Page
99-1 Section 906 Certification by Raymond Di Paglia 12
99-2 Section 906 Certification by Kristine M. Fasano 13
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EXHIBIT 99-1
SECTION 906 CERTIFICATION BY RAYMOND DI PAGLIA
In connection with the Quarterly Report of National Properties Corporation
(the "Company") on Form 10-Q for the period ending September 30, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Raymond Di Paglia, president of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley act of 2002, that to my knowledge:
1. this Report fully complies with the requirements of Sections 13(a) or
15(d) of the 1934 Act, and
2. the information contained in this Report fairly presents, in all material
respects, the registrant's financial condition and results of operations of
the registrant.
Date __11/4/03__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
<page>
EXHIBIT 99-2
SECTION 906 CERTIFICATION BY KRISTINE M. FASANO
In connection with the Quarterly Report of National Properties Corporation
(the "Company") on Form 10-Q for the period ending September 30, 2003, as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Kristine M. Fasano, secretary and treasurer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley act of 2002, that to my knowledge:
1. this Report fully complies with the requirements of Sections 13(a) or
15(d) of the 1934 Act, and
2. the information contained in this Report fairly presents, in all material
respects, the registrant's financial condition and results of operations of
the registrant.
Date __11/4/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer