U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 June 30, 2003
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ______ to ______
Commission file number 001-12127
EMPIRE RESOURCES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-3136782
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
One Parker Plaza
Fort Lee, NJ 07024
(Address of Principal Executive Offices)
201 944-2200
(Registrant's Telephone Number, Including Area Code)
Check whether the Registrant: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 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 by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 9,432,251 shares of common
stock outstanding as of August 14, 2003.
EMPIRE RESOURCES, INC.
FORM 10-Q FOR THE QUARTER ENDED June 30, 2003
INDEX
PART I FINANCIAL INFORMATION
Item 1 Financial Statements Page
Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited)
and December 31, 2002..................................................................................4
Condensed Consolidated Statements of Income for the Three Months and Six
Months Ended June 30, 2003 and 2002 (unaudited)........................................................5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 (unaudited).....................................................................6
Notes to Condensed Consolidated Financial Statements (unaudited).......................................7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................................................9
Item 3 Quantitative and Qualitative Disclosure of Market Risk.................................................12
Item 4 Controls and Procedures................................................................................12
PART II OTHER INFORMATION......................................................................................13
Item 1 Legal Proceedings......................................................................................13
Item 2 Changes in Securities and Use of Proceeds..............................................................13
Item 3 Defaults Upon Senior Securities........................................................................13
Item 4 Submission of Matters to a Vote of Security Holders....................................................13
Item 5 Other Information......................................................................................14
Item 6 Exhibits and Reports on Form 8-K.......................................................................14
Signatures.............................................................................................15
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Introduction
The condensed consolidated interim financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission with respect to Form 10-Q.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulations. In the opinion of management, such financial statements reflect all
adjustments necessary for a fair presentation of the results for the interim
periods presented and to make such financial statements not misleading. The
results of operations of the Company for the three and six months ended June 30,
2003 are not necessarily indicative of the results to be expected for the full
year. It is suggested that these interim financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's Form 10-K for the year ended December 31, 2002.
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Condensed Consolidated Balance Sheets
In thousands, except shares and per share amounts
June 30, December 31,
-----------------------------
2003 2002
-----------------------------
(Unaudited)
ASSETS
Current assets:
Cash $ 1,873 $ 1,072
Trade accounts receivable (net) 29,591 24,255
Inventories 32,052 27,832
Other current assets 238 1,259
------- -------
Total current assets 63,754 54,418
Furniture and equipment (less accumulated depreciation of $354 and $347) 101 24
Deferred financing costs, net - 27
------- -------
$63,855 $54,469
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable - banks $30,600 $25,600
Trade accounts payable 15,966 13,036
Accrued expenses 2,894 2,911
------- -------
Total current liabilities 49,460 41,547
------- -------
Commitments and contingencies
Stockholders' equity:
Common stock $.01 par value, 20,000,000 shares authorized; 117 117
11,749,651 shares issued
Additional paid-in capital 10,727 10,727
Retained earnings 6,307 4,824
Accumulated other comprehensive income-- 25 21
cumulative translation adjustment
Treasury stock (2,317,400 shares and 2,307,400 shares) (2,781) (2,767)
------- -------
Total stockholders' equity 14,395 12,922
------- -------
$63,855 $54,469
======= =======
See notes to condensed consolidated financial statements
4
Condensed Consolidated Statements of Income (Unaudited)
In thousands, except per share amounts
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
--------------------------- -------------------------
Net sales $46,873 $37,838 $91,810 $78,255
Cost of goods sold 43,556 35,160 85,297 72,739
------- ------ ------- -------
Gross profit 3,317 2,678 6,513 5,516
Selling, general and administrative expenses 1,489 1,389 3,011 2,767
------- ------ ------- -------
Operating income 1,828 1,289 3,502 2,749
Interest expense 249 260 475 527
------- ------ ------- -------
Income before income taxes 1,579 1,029 3,027 2,222
Income taxes 589 392 1,167 851
------- ------- ------- -------
Net income $ 990 $ 637 $ 1,860 $ 1,371
======= ======= ======= =======
Weighted average shares outstanding:
Basic 9,432 10,564 9,433 10,564
======= ======= ======= =======
Diluted 9,587 10,699 9,564 10,697
======= ======= ======= =======
Earnings per share:
Basic $ 0.10 $0.06 $ 0.20 $ 0.13
======= ======= ======= =======
Diluted $ 0.10 $0.06 $ 0.19 $ 0.13
======= ======= ======= =======
See notes to condensed consolidated financial statements
5
Condensed Consolidated Statements of Cash Flows (Unaudited)
In thousands
Six Months Ended
June 30,
-------------------
2003 2002
-------------------
Cash flows from operating activities:
Net income $ 1,860 $ 1,371
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 34 42
Translation adjustment 4 1
Transfer of restricted shares to key employee 0 30
Changes in:
Trade accounts receivable (5,336) (3,950)
Inventories (4,220) 9,397
Other current assets 1,021 (4,631)
Trade accounts payable 2,930 (2,440)
Accrued expenses (394) 1,147
------- -------
Net cash (used in) provided by operating activities (4,101) 967
------- -------
Cash flows used in investing activities:
Additions to fixed assets (84) (4)
------- -------
Cash flows from financing activities:
Proceeds from (repayments of) notes payable--banks 5,000 (200)
Purchase of treasury stock (14) (57)
------- -------
Net cash provided by (used in) financing activities 4,986 (257)
------- -------
Net increase in cash 801 706
Cash at beginning of period 1,072 1,147
------- -------
Cash at end of period $ 1,873 $ 1,853
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 568 $ 449
Income taxes $ 982 $ 673
Dividends Payable $ 377 $ -
See notes to condensed consolidated financial statements
6
Notes to Condensed Consolidated Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. The Company
Empire Resources, Inc. (the "Company" or "Empire") is engaged principally in the
purchase, sale and distribution of value added semi finished aluminum products
to a diverse customer base located throughout North America and Australia. The
Company sells its products through its own marketing and sales personnel and
through its independent sales agents located in the U.S. who receive commissions
on sales. The Company purchases from several suppliers located throughout the
world; however, one supplier presently accounts for more than 56% of the
Company's purchases.
The condensed consolidated financial statements include the accounts of Empire
Resources, Inc. and its wholly-owned subsidiary, Empire Resources Pacific Ltd.,
which acts as a sales agent for the Company in Australia. All significant
intercompany transactions and accounts have been eliminated in consolidation.
2. Use of Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of income and expenses during
the reported period. The principal assumptions made involve the allowance for
doubtful accounts and claims relating to defective materials. Actual results
could differ from these estimates.
3. Concentrations
While the Company maintains long-term supply relationships with several foreign
mills, one such supplier presently accounts for approximately 56% of the
Company's purchases. The loss of this supplier could have a material adverse
effect on the Company.
4. Stock Options
The Company accounts for stock-based employee compensation under the
recognitions and measurement principles of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. No stock-based employee compensation cost is reflected in net
income as all options granted under the Plan had an exercise price equal to the
market value of the underlying common stock on the date of grant. The Company
has adopted the disclosure-only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." The
following table illustrates the effect on net income and earnings per share if
the fair value based method had been applied to all awards.
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For the Three Months Ended For the Six Months Ended
June 30, June 30,
(In thousands, except per (In thousands, except per
share amounts) share amounts)
------------------------- --------------------------
2003 2002 2003 2002
------ ------ ------ ------
Reported net income $990 $637 $1,860 $1,371
Stock-based employee compensation determined
under the fair value based method (19) (12) (19) (12)
Pro forma net income $971 $625 $1,841 $1,359
==== ==== ====== ======
Earnings per share:
As reported
Basic $.10 $.06 $ .20 $ .13
Diluted $.10 $.06 $ .19 $ .13
Pro-forma
Basic $.10 $.06 $ .20 $ .13
Diluted $.10 $.06 $ .19 $ .13
5. Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the
specific identification method. Inventory consists primarily of semi-finished
aluminum products.
6. Notes Payable--Banks
On June 19, 2003 the Company amended its revolving line of credit. The Company
had operated under a $60 million line of credit, including a commitment to issue
letters of credit with three commercial banks. This facility was scheduled to
expire on June 30, 2003. The amendment provided for the extension of the line
through June 30, 2006. The Company's improved asset management allowed for the
reduction in the facility to $50 million yielding savings in the cost of the
facility. Borrowings by the Company under this line of credit are collateralized
by security interests in substantially all assets of the Company. Under the
agreement, Empire is required to maintain certain working capital and net worth
ratios, as defined by the loan agreement.
7. Earnings Per Share
Three months ended, Six months ended,
2003 2002 2003 2002
---- ---- ---- ----
Weighted average shares outstanding-basic 9,432,251 10,563,763 9,433,466 10,563,763
Dilutive effect of stock options and warrants 155,022 135,545 130,899 133,375
--------- ---------- --------- ----------
Weighted average shares outstanding-diluted 9,587,273 10,699,308 9,564,365 10,697,138
========= ========== ========= ==========
Basic earnings per share are based upon the Company's weighted average number of
common shares outstanding during each period. Diluted earnings per share are
based upon the weighted average number of common shares outstanding during each
period, assuming
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the issuance of common shares for all dilutive potential common shares
outstanding during the period.
8. Dividends
On June 19, 2003, the Company declared a cash dividend of $0.04 per share to
stockholders of record at the close of business on June 30, 2003. The dividend
totaling $377,000 is included in accrued expenses at June 30, 2003 and was paid
on July 16, 2003.
9. Commitments and Contingencies
Empire has contingent liabilities in the form of letters of credit to
certain of its suppliers, which at June 30, 2003 amounted to approximately $7
million.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward Looking Statements
The discussions set forth below and elsewhere herein contain certain
statements that may be considered forward-looking statements under the Private
Securities Litigation Reform Act of 1995. The Company may make written or oral
forward-looking statements in other documents we file with the SEC, in our
annual reports to stockholders, in press releases and other written materials,
and in oral statements made by our officers, directors or employees.
You can identify forward-looking statements by the use of the words
"believe," "expect," "anticipate," "intend," estimate," "assume," "will,"
"should," and other expressions which predict or indicate future events or
trends and which do not relate to historical matters. You should not rely on
forward-looking statements, because they involve known and unknown risks,
uncertainties and other factors, some of which are beyond the control of the
Company. These risks, uncertainties and other factors may cause the actual
results, performance or achievements of the Company to be materially different
from the anticipated future results, performance or achievements expressed or
implied by the forward-looking statements.
Some of the factors that might cause these differences include the
following: changes in general, national or regional economic conditions; an act
of war or terrorism that disrupts international shipping; changes in laws,
regulations and tariffs; changes in the size and nature of the Company's
competition; changes in interest rates, foreign currencies or spot prices of
aluminum; loss of one or more foreign suppliers or key executives; increased
credit risk from customers; failure of the Company to grow internally or by
acquisition and to integrate acquired businesses; failure to improve operating
margins and efficiencies; and changes in the assumptions used in making such
forward-looking statements. You should carefully review all of these factors,
and you should be aware that there may be other factors that could cause these
differences, including, among others, the factors listed under "Risk Factors,"
beginning on page 14 of our Annual Report on Form 10-K for the year ended
December 31, 2002. Readers should carefully review the factors described under
"Risk Factors" and should not place undue reliance on our forward-looking
statements.
These forward-looking statements were based on information, plans and
estimates at the date of this report, and we do not promise to update any
forward-looking statements to
9
reflect changes in underlying assumptions or factors, new information, future
events or other changes.
General
Empire is a distributor of value added, semi-finished aluminum
products. Consequently, Empire's sales volume has been, and will continue to be,
a function of its ongoing ability to secure quality aluminum products from its
suppliers. While the Company maintains long-term supply relationships with
several foreign mills, one such supplier presently accounts for more than 56% of
the Company's purchases.
Results of Operations (in thousands)
Net sales increased $9,035, or 24%, from $37,838 in the second quarter
of 2002 to $46,873 in the second quarter of 2003 and increased $13,555, or 17%,
for the six month period. The increase in sales is due primarily to backlog
shipments and additional availability from the Company's suppliers. The increase
in sales represents the primary reason for the increase in net income for the
three and six month periods.
Gross profit increased $639, or 24%, from the second quarter of 2002 to
the second quarter of 2003 and increased $997, or 18%, in the six month period.
For the three and six month periods, gross profit as a percentage of sales
remained stable.
Selling, general and administrative expenses increased by $100 for the
three month period and $244 for the six month period. These increases were
primarily attributable to annual increases in salaries.
Interest expense decreased $11, or 4%, from $260 during the second
quarter of 2002 to $249 during the second quarter of 2003. The six month period
interest expense decreased $52, or 10%. Interest expense decreased as a result
of reductions in the floating interest rate on our credit facility.
The Company reported net income of $990 for the second quarter of 2003
compared to net income of $637 for the second quarter of 2002, or an increase of
$353 from the same period in 2002. For the six month period, the Company
reported net income of $1,860 compared to $1,371 for the prior year, or an
increase of $489.
Liquidity and Capital Resources (in thousands)
The Company's cash balance increased $801, from $1,072 to $1,873, in
the six month period ended June 30, 2003. Net cash of $4,101 was used in
operating activities, offset by $4,986 of net cash provided by financing
activities. Net cash used in operating activities was primarily the result of an
increase in accounts receivable and inventories offset somewhat by an increase
in trade payables. The increase in notes payable to banks allowed the Company to
reduce its trade accounts payable. The Company's cash balance fluctuates
primarily as a result of its levels of receivables and inventory.
On June 19, 2003 the Company amended its revolving line of credit. The
Company had operated under a $60 million line of credit, including a commitment
to issue letters of credit with three commercial banks. This facility was
scheduled to expire on June 30, 2003. The
10
amendment provided for the extension of the line through June 30, 2006. The
Company's improved asset management allowed for the reduction in the facility to
$50 million yielding savings in the cost of the facility. Borrowings by the
Company under this line of credit are collateralized by security interests in
substantially all assets of the Company. Under the agreement, Empire is required
to maintain certain working capital and net worth ratios, as defined by the loan
agreement.
On June 19, 2003 Empire Resources, Inc. announced that its Board of
Directors declared a cash dividend of $0.04 per share. The dividend totaling
$377 was payable on July 16, 2003 to stockholders of record at the close of
business on June 30, 2003. The Board of Directors will review its dividend
policy on a quarterly basis and a determination by the Board of Directors will
be made subject to profitability and free cash flow and the other requirements
of the business.
Management believes that cash from operations, together with funds
available under its credit facility, will be sufficient to fund the cash
requirements relating to the Company's existing operations for the next twelve
months. Empire may require additional debt or equity financing in connection
with the future expansion of its operations.
Application of Critical Accounting Policies
The Company's condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Certain accounting policies have a significant impact
on amounts reported in the financial statements. A summary of those significant
accounting policies can be found in Note B to the Company's financial statements
included in the Company's 2002 Annual Report on Form 10-K. The Company has not
adopted any significant new accounting policies during the six months ended June
30, 2003.
Among the significant judgments made by management in the preparation
of the Company's financial statements are the determination of the allowance for
doubtful accounts and accruals for inventory claims. These adjustments are made
each quarter in the ordinary course of accounting.
As of June 30, 2003 the Company had $29.8 million in trade receivables.
Additionally, the Company had recorded an allowance for doubtful accounts of
$191,000. The allowance for doubtful accounts was not changed during the
quarter. The Company reports accounts receivable, net of an allowance for
doubtful accounts, to represent its estimate of the amount that ultimately will
be realized in cash. The Company reviews the adequacy of its allowance for
doubtful accounts on an ongoing basis, using historical collection trends, aging
of receivables, as well as review of specific accounts, and makes adjustments in
the allowance as it believes necessary. The Company maintains a credit insurance
policy on the majority of its customers. This policy has a 10% co-insurance.
Changes in economic conditions could have an impact on the collection of
existing receivable balances or future allowance considerations.
Generally, the Company's exposure on claims for defective material is
small as the company refers all claims on defects back to the mill supplying the
material. In the event that the Company does not believe the mill will honor a
claim, the Company will record an allowance for inventory adjustments.
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Commitments and Contingencies
Empire has contingent liabilities in the form of letters of credit
totaling $7 million to certain of its suppliers. There have been no material
changes to the Company's commitments and contingencies from that disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2002.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
The Company uses financial instruments designated as fair value hedges
to manage its exposure to commodity price risk and foreign currency exchange
risk inherent in its operations. It is the Company's policy to hedge such risks,
to the extent practicable. The Company enters into high-grade aluminum futures
contracts to limit its gross margin exposure by hedging the metals content
element of firmly committed purchase and sales commitments. The Company also
enters into foreign exchange forward contracts to hedge its exposure related to
commitments to purchase or sell non-ferrous metals denominated in international
currencies. The Company records "mark-to-market" adjustments on these futures
and forward positions, and on the underlying firm purchase and sales commitments
which they hedge, and reflects the net gains and losses currently in earnings.
There have been no material changes to the Company's market risk from
that disclosed in our Annual Report on Form 10-K for the year ended December 31,
2002.
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), the Company's management conducted an evaluation with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, regarding the effectiveness of the Company's disclosure controls and
procedures, as of the end of the last fiscal quarter. In designing and
evaluating the Company's disclosure controls and procedures, the Company and its
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only a reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating and implementing possible controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that they believe the Company's disclosure controls and procedures are
reasonably effective to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. We intend to continue to
review and document our disclosure controls and procedures, including our
internal controls and procedures for financial reporting, and we may from time
to time make changes to the disclosure controls and procedures to enhance their
effectiveness and to ensure that our systems evolve with our business.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is party from time to time to litigation incidental to its business.
The Company does not presently believe that any such litigation would have a
material adverse effect on its results of operation or financial condition.
Item 2. Changes in Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The Company held its annual meeting of stockholders on June 12, 2003.
(b) All of the current directors, being William Spier, Nathan Kahn, Sandra Kahn,
Harvey Wrubel, Jack Bendheim, Barry L. Eisenberg, Peter J. Howard, Nathan
Mazurek and Morris J. Smith, were re-elected as directors at the annual meeting.
(c) At the annual meeting, two matters were voted upon by shareholders. The
results were as follows:
Proposal 1 -- Election of Directors
WILLIAM SPIER
NATHAN KAHN
SANDRA KAHN
For all of the above: 8,392,527
Against all of the above: 272,500
HARVEY WRUBEL
JACK BENDHEIM
BARRY L. EISENBERG
PETER J. HOWARD
NATHAN MAZUREK
MORRIS J. SMITH
For all of the above: 8,354,495
Against all of the above: 272,500
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Proposal 2 - Ratification of Eisner, LLP as independent accountants:
For: 8,345,127
Against: 292,900
Abstentions: 27,000
Item 5. Other Information.
On June 19, 2003, the Company issued a press release to announce a
dividend for the second quarter and the expansion of its stock repurchase
program. As of the date of this filing, the Company has repurchased a total of
2,317,400 shares at an average cost per share of $1.20.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit No. Description
10.21 Amendment No. 3 to Credit Agreement dated June 19, 2003*
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934*
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934)*
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002*
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002*
- -------------------------
* Filed herewith
(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated May 14, 2003 disclosing the
certifications of its Chief Executive Officer and Chief Financial Officer
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EMPIRE RESOURCES, INC.
By: /s/ Sandra Kahn
-----------------------------
Sandra Kahn
Chief Financial Officer
(signing both on behalf of the registrant and in her capacity as Principal
Financial and Principal Accounting Officer)
Dated: August 14, 2003
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