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, 2002 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)
412,323 SHARES AS OF OCTOBER 18, 2002
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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,
2002 2001
<s> <c> <c>
CURRENT ASSETS
Cash 337,237 340,793
Mortgage receivable, current portion - 55,978
Receivable - 14,126
Other 46,040 49,835
---------- ----------
Total current assets 383,277 460,732
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Land 5,402,932 5,150,932
Buildings and improvements 37,479,292 34,231,292
Furniture and equipment 115,747 115,747
---------- ----------
42,997,971 39,497,971
Less - accumulated depreciation 11,062,353 10,277,759
---------- ----------
Property and equipment - net 31,935,618 29,220,212
---------- ----------
OTHER ASSETS
Marketable securities 865,176 1,438,706
Mortgage receivable, long term portion - 100,000
---------- ----------
Total other assets 865,176 1,538,706
---------- ----------
33,184,071 31,219,650
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
<s> <c> <c>
CURRENT LIABILITIES
Accounts payable 3,547 2,598
Accrued liabilities 220,120 116,434
Advance rents 238,257 283,754
Federal and state income taxes 74,518 -
---------- ----------
Total current liabilities 536,442 402,786
---------- ----------
LONG-TERM DEBT 11,050,000 10,250,000
---------- ----------
DEFERRED INCOME TAXES 964,824 1,062,478
---------- ---------
STOCKHOLDERS' EQUITY
Common stock - $1 par value
Authorized - 5,000,000 shares
Issued
(2002-412,323 shares; 2001-413,073 shares) 412,323 413,073
Retained earnings 20,036,206 18,569,367
Accumulated other comprehensive income 184,276 521,946
---------- ----------
Total stockholders' equity 20,632,805 19,504,386
---------- ----------
33,184,071 31,219,650
========== ==========
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<caption>
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
2002 2001 2002 2001
<s> <c> <c> <c> <c>
Income
Lease rental income 1,357,831 1,207,804 4,007,366 3,573,286
Dividend and interest income 11,069 14,988 36,771 56,918
Gain (loss) on sale of securities 10,513 (10,986) 44,861 54,628
--------- --------- --------- ---------
Total income 1,379,413 1,211,806 4,088,998 3,684,832
--------- --------- --------- ---------
Expenses
Depreciation 261,531 239,444 784,594 685,414
Interest 116,023 132,329 319,752 409,325
Salaries and wages 59,292 57,385 182,703 180,705
Property, payroll
and misc. taxes 75,813 25,145 118,857 60,513
Other expenses 58,473 50,541 196,391 171,364
--------- --------- --------- ---------
Total expenses 571,132 504,844 1,602,297 1,507,321
--------- --------- --------- ---------
Income before income taxes 808,281 706,962 2,486,701 2,177,511
Federal and State income taxes 299,064 261,597 920,079 805,700
--------- --------- --------- ---------
Net income 509,217 445,365 1,566,622 1,371,811
--------- --------- --------- ---------
Other comprehensive income (losses):
Unrealized holding losses
on marketable securities arising
during the period (343,764) (196,494) (530,928) (553,316)
Less income tax benefit related
to unrealized holding losses 125,130 71,524 193,258 201,407
--------- --------- --------- ---------
Other comprehensive income (loss)
net of tax (218,634) (124,970) (337,670) (351,909)
--------- --------- --------- ---------
Comprehensive income 290,583 320,395 1,228,952 1,019,902
========= ========= ========= =========
Net income per share $1.23 $1.08 $3.80 $3.32
Weighted average shares
outstanding 412,587 413,823 412,514 413,732
Cash dividend paid per share $0.00 $0.00 $0.16 $0.15
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<caption>
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2002 2001
<s> <c> <c>
CASH FLOW FROM OPERATING ACTIVITIES
Net income 1,566,622 1,371,811
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 784,594 685,414
Deferred income taxes 95,604 81,551
Gain on sale of securities (44,861)
(54,628)
Changes in assets and liabilities:
Prepayment and deferred charges (31,941) 22,287
Accounts payable and accrued liabilities 104,635 81,578
Advance rents (45,497)
(22,607)
Receivable 14,126 -
Federal and State income taxes 110,254
(30,053)
-------- --------
Net cash provided by operations 2,553,536 2,135,353
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Additions to property and equipment (3,500,000)
(5,846,085)
Proceeds from sale of securities 87,464 111,358
Payments received on note receivable 155,978 171,097
-------- --------
Net cash used in investing activities (3,256,558)
(5,563,630)
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on credit lines 3,425,000 5,700,000
Payments on credit line borrowings (2,625,000)
(2,150,000)
Dividends paid (65,988)
(62,055)
Purchase of treasury stock (34,546)
(29,663)
-------- --------
Net cash provided by financing activities 699,466 3,458,282
-------- --------
Net increase (decrease) in cash (3,556) 30,005
Cash at beginning of period 340,793 95,212
-------- --------
Cash at end of period 337,237 125,217
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest expense 281,627 365,116
Income tax payments 714,221 754,202
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NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
The balance sheets, statements of income and comprehensive income, and
statements of cash flows at September 30, 2002 and 2001 and for the periods
then ended 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 has adopted, effective January 1, 1998, the Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. The effect of FAS No. 130 on the Company's interim financial
statements is to present in the statement of income, unrealized gains and
losses on marketable securities net of income taxes.
Certain prior amounts have been reclassified to conform to the current
period presentation.
Mortgage Note Receivable
In July 2000, the Company sold real estate for $500,000 receiving $150,000
cash and a promissory note for $350,000. The note provides for interest at
10% and is secured by the real estate. Payments under the note are to be
received as follows: $150,000 on June 30, 2001; $100,000 on June 30, 2002;
and $100,000 on June 30, 2003. The mortgagor is making monthly payments of
$4,918 which includes interest at 10.0%, in addition to the principal
payments provided under the note. The note was paid in full in June, 2002.
Long Term Debt
The Company has a revolving credit agreement dated February 8, 2001 with
Wells Fargo Bank, N.A. The new credit facility permits the Company to
borrow up to $15,000,000 through April 30, 2004. At September 30, 2002,
$11,050,000 was outstanding under the agreement which was used to fund
property acquisitions. 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, 2002, the outstanding balance accrued interest at 4.00%. 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 line of credit is
secured by first mortgages on ten properties.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company, an Iowa corporation, is engaged principally in the development
of commercial real estate for lease to qualified tenants.
In May 2002, the Company completed the purchase of a property in College
Station, Texas at a cost of $3,500,000. The property is leased to Academy
LTD. (a Texas limited partnership), a full-line sporting goods retailer, on
a net lease basis for a term of twenty years that commenced May 15, 2002.
The lease provides for annual rents of $327,250 during the first ten years
and $359,975 during the last ten years of the lease term. Funds required
for the purchase were drawn on the Company's bank credit line.
At the Company's annual meeting of Stockholders held May 17, 2002, the
Company declared a $0.16 per share dividend to be paid July 31, 2002 to
stockholders of record on June 28, 2002. The dividend amounts to $65,988.
In August 2002, the company finalized a lease agreement with IHOP
Properties, Inc. (a California corporation) whereby the Company will
purchase from IHOP, a building constructed by IHOP on one of the Company's
three commercial lots in Ankeny, Iowa, for an estimated cost of $960,000.
Upon completion of the construction, IHOP will lease the property from the
Company for an initial term of twenty-five years. The lease agreement
provides for annual rental income of $135,000 during the first five years
and escalating each five year period to $164,850 in the last five years of
the lease term. Management expects construction of the IHOP building to be
completed by February 1, 2003. The lease agreement also provides that the
Company will pay a real estate commission of $83,100.
Operating Results
Lease revenues in the first nine months of 2002 were $4,007,000 compared to
$3,573,000 for the same period in 2001, an increase of $434,000 or 12.1%.
The increase in lease revenue in the current period relative to the first
nine months of 2001, was attributable to: (1) the acquisition of two
convenience store properties and a retail sporting goods property in 2001,
and a second retail sporting goods property in May, 2002, which added
$456,000 to lease revenue, (2) a decrease in lease revenue of $31,000
resulting from the sale of the GTech property in December, 2001, (3) a
decrease of $21,000 in contingent rents based on sales overages, and (4)
other scheduled rent increases of $30,000.
A decrease in interest income on the Company's mortgage note receivable was
the primary reason for the decline in investment income over the same period
in 2001. In addition, the Company realized capital gains of $45,000 from
the sale of securities in 2002 compared to $55,000 in 2001.
Operating expenses totaled $1,602,000 in the first nine months of 2002
compared to $1,507,000 for the same period in 2001, an increase of $95,000
or 6.3%.
Depreciation expense increased $99,000 in the first nine months of 2002 over
the same period in 2001 as a result of the property acquisitions in 2002 and
2001, referred to above.
Interest expense for the first nine months of 2002 was $320,000 compared to
$409,000 for the fist nine months of 2001, a decrease of $89,000. During
the first nine months of 2002, the Company borrowed $3,425,000 on its credit
line and repaid $2,625,000, resulting in a net increase in borrowing's on
the credit line of $800,000. The average outstanding debt in the first nine
months of 2002 was $10,493,000 compared to $7,688,000 in 2001. Offsetting
the higher average debt was a lower interest rate paid by the Company as
rates fell from 9% at the beginning of 2001 to 4% at December 31, 2001,
where it has remained through September 30, 2002. The average rate paid by
the Company in 2002 was 4.06% compared to 7.10% for the first nine months of
2001.
Real estate taxes increased $60,000 or 150% to $100,000 for the nine months
ended September 30, 2002, from $40,000 for the nine months ended September
30, 2001. The increase was primarily due to a higher assessed valuation of
the Company's three commercial lots in Ankeny, Iowa.
Other general and administrative expenses in the first nine months of 2002
increased $25,000 over the same period in 2001 due primarily to increases
in employee benefits, and professional fees.
As a result of the foregoing factors, net income increased $195,000 or 14.2%
to $1,567,000 for the nine months ended September 30, 2002 from $1,372,000
for the nine months ended September 30, 2001.
Liquidity
As of September 30, 2002, the Company's main sources of liquidity consisted
of $337,000 cash, marketable securities having a market value of
approximately $865,000 and $3,950,000 remaining loan balance available on
its revolving credit line with a local 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 potential sources of cash will be sufficient to finance current
and projected operations.
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 adequate. There
were no significant changes in internal controls or in other factors that
could significantly affect internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses,
subsequent to the date of the most recent evaluation by the undersigned
officers of the Company of the design and operation of internal controls
which could adversely affect the Company's ability to record, process,
summarize and report financial data.
PART II. OTHER INFORMATION.
No applicable items.
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 __11/1/02__ By _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
Date __11/1/02__ By _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer
SECTION 906 CERTIFICATION BY RAYMOND DI PAGLIA
Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of
2002, Raymond Di Paglia, hereby certifies that:
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 __11/1/02__ By _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
SECTION 906 CERTIFICATION BY KRISTINE M. FASANO
Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of
2002, Kristine M. Fasano hereby certifies that:
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 __11/1/02__ By _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer
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 entitles,
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 __11/1/02__ By _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
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 entitles,
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 __11/1/02__ By _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer