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 March 31, 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)
410,933 SHARES AS OF APRIL 30, 2003
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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NATIONAL PROPERTIES CORPORATION
BALANCE SHEETS
ASSETS
March 31, December 31,
2003 2002
<s> <c> <c>
CURRENT ASSETS
Cash 374,520 347,083
Receivable - 13,729
Other 11,828 16,161
---------- ----------
Total current assets 386,348 376,973
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Land 5,402,932 5,402,931
Buildings and improvements 38,525,484 38,525,484
Furniture and equipment 118,088 117,332
---------- ----------
44,046,504 44,045,747
Less - accumulated depreciation 11,589,881 11,324,363
---------- ----------
Property and equipment - net 32,456,623 32,721,384
---------- ----------
OTHER ASSETS
Marketable securities 898,317 926,846
---------- ----------
33,741,288 34,025,203
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
<s> <c> <c>
CURRENT LIABILITIES
Accounts payable 22,074 2,598
Accrued liabilities 160,578 116,434
Advance rents 273,522 283,754
Federal and state income taxes 303,112 -
---------- ----------
Total current liabilities 759,286 402,786
---------- ----------
LONG-TERM DEBT 10,200,000 10,250,000
---------- ----------
DEFERRED INCOME TAXES 1,049,347 1,062,478
---------- ----------
STOCKHOLDERS' EQUITY
Common stock - $1 par value
Authorized - 5,000,000 shares
Issued
(2003-410,973 shares; 2002-411,223 shares) 410,973 411,223
Retained earnings 21,099,123 20,505,863
Accumulated other comprehensive income 222,559 271,254
---------- ----------
Total stockholders' equity 21,732,655 21,188,340
---------- ----------
33,741,288 34,025,203
========== ==========
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<caption>
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For Quarter Ended
March 31,
2003 2002
<s> <c> <c>
Income
Lease rental income 1,448,716 1,340,336
Dividend and interest income 6,721 10,574
Gain on sale of securities 10,175 21,424
Gain on sale of property 40,000 -
--------- ---------
Total income 1,505,612 1,372,334
--------- ---------
Expenses
Depreciation 265,518 247,998
Interest 93,391 96,991
Salaries and wages 69,888 63,407
Property, payroll and misc. taxes 38,539 24,259
Other expenses 75,243 73,409
--------- ---------
Total expenses 542,579 506,064
--------- ---------
Income before income taxes 963,033 866,270
Federal and State income taxes 358,248 320,520
--------- ---------
Net income 604,785 545,750
--------- ---------
Other comprehensive income (Losses):
Unrealized holding gains (losses) on
marketable securities arising
during the period (63,057) 7,937
Less reclassification adjustment for
gains included in net income 10,175 21,424
Less income tax benefit related
to unrealized holding losses 24,537 4,910
--------- ---------
Other comprehensive income (losses)
net of tax (48,695) (8,577)
--------- ---------
Comprehensive income 556,090 537,173
========= =========
Net income per share of common stock $1.47 $1.32
Weighted average shares
outstanding 411,098 412,948
Dividends per share None None
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NATIONAL PROPERTIES CORPORATION
STATEMENTS OF CASH FLOWS
For Quarter Ended
March 31,
2003 2002
<s> <c> <c>
CASH FLOW FROM OPERATING ACTIVITIES
Net income 604,785 545,750
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 265,518 247,998
Deferred income taxes 28,168 32,170
Gain on sale of securities (10,175) (21,424)
Gain on sale of property (40,000) -
Changes in assets and liabilities:
Accounts receivable 13,729 14,126
Prepaid expenses and deferred charges 4,333 4,168
Accounts payable and accrued expenses (15,346) 29,531
Federal and State income taxes 179,960 264,530
Advance rents 53,525 (49,112)
--------- ---------
Net cash provided by operations 1,084,497 1,067,737
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities (57,769) -
Purchase of property (757) -
Proceeds from sale of securities 23,241 46,187
Proceeds from sale of properties 40,000 -
Principal received on mortgage note - 10,941
--------- ---------
Net cash provided by investing activities 4,715 57,128
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on credit line borrowings (1,050,000) (1,150,000)
Purchase of treasury stock (11,775) (11,025)
--------- ---------
Net cash used in financing activities (1,061,775) (1,161,025)
--------- ---------
Net change in cash 27,437 (36,160)
Cash at beginning of period 347,083 340,793
--------- ---------
Cash at end of period 374,520 304,633
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest expense 65,303 63,710
Income tax payments 150,120 23,820
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NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
The balance sheet at March 31, 2003, and the statements of income and
comprehensive income and cash flows for the periods ended March 31, 2003,
and March 31, 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 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.
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 March 31, 2003, $10,200,000 ($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 March 31, 2003, the
outstanding balance accrued interest at 3.5%. 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 convenants at March 31, 2003. The line of credit is secured by first
mortgages on ten properties that had a net book value of approximately
$5,900,000 at March 31, 2003.
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. The Company
seeks to acquire or develop improved real estate properties suitable for
lease to commercial tenants.
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 annual increases
equal to the greater of 3% or subsequent changes in the Consumer Price
Index. The amended employment contract is included as Exhibit 10 to this
Form 10Q.
Operating Results
Lease revenues in the first quarter of 2003 were $1,449,000 compared to
$1,340,000 in the first quarter of 2002, an increase of $109,000. The
increase in lease revenues, relative to the first quarter of 2002, was
attributable to: (1) the acquisition of a sporting goods store property and
a restaurant property in 2002, which in the aggregate, added $116,000 to
lease revenues for the first quarter of 2003, (2) a decrease of $8,000 in
contingent rents based on sales overages, and (3) an increase in lease
revenues of $1,000 due to scheduled rent increases for several tenants.
The Company recorded gains from the sale of securities of $10,000 in the
first quarter of 2003 compared to $21,000 for the first quarter of 2003.
Other investment income also declined in the first quarter of 2002
primarily due to the early payoff on a mortgage note receivable in May
2002.
The Company recorded a net gain of $40,000 from the sale of an easement on
property adjacent to Company owned property in Arlington, Texas.
Operating expenses totaled $543,000 in the first quarter of 2003 compared
to $506,000 for the same period in 2002, an increase of $37,000 or 7.3%.
Depreciation expense increased a net $18,000 in the first quarter 2003 over
the first quarter of 2002 as the result of the Company's property
acquisitions in 2002 and other property becoming fully depreciated during
the first quarter.
Interest expense declined $4,000 in the first quarter from the same period
a year ago due to the decline in the interest rates. The average
outstanding debt in the first quarter, 2003 was $10,656,000 compared to
$9,668.000 in the first quarter of 2002. The average interest rate on
borrowings in the first quarter was 3.51% compared to 4.01% for the first
quarter of 2002.
Other general and administrative expenses increased $23,000 in the first
quarter of 2003 over the same quarter in 2002, and primarily reflected
increases in compensation costs, property taxes and state franchise taxes.
Earnings per share increased $0.15 to $1.47 per share in the first quarter
of 2003 over the $1.32 a share for 2002.
Liquidity and Capital Resources
Liquidity describes the ability of a 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 line of credit used to fund property
acquisitions, and income from its investment portfolio. Cash outflows
consist 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
investment, and repayment of borrowings on its bank credit line. The
Company's cash flow from operations was $1,084,000 for the first quarter of
2003 compared to $1,068,000, $1,059,000 and $768,000 for the first quarter
of 2002, 2001 and 2000 respectively.
As of March 31, 2003, the Company's main sources of liquidity consisted of
$375,000 cash, marketable securities having a market value of approximately
$898,000 and $4,800,000 remaining loan balance available on its revolving
credit facility with Wells Fargo Bank. In addition, the Company owns
unencumbered real estate having a aggregate book value of approximately
$26,800,000. Management believes that its cash flow from operations and
these other potential sources of cash will be sufficient to finance current
and projected operations.
Contractual Obligations
The Company's only contractual obligation at March 31, 2003, was under a
revolving credit facility with Wells Fargo Bank. At March 31, 2003, the
Company had outstanding borrowings of $10,200,000 under the facility 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.
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.
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 __5/9/03__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
Date __5/9/03__ 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 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 __5/9/03__ 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 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 __5/9/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer
EXHIBIT INDEX
Exhibit Page
10 Amendment No. 1 To Employment Contract
Dated November 20, 1998 11 & 12
99-1 Section 906 Certification by Raymond Di Paglia 13
99-2 Section 906 Certification by Kristine M. Fasano 14
EXHIBIT 10
AMENDMENT NO. 1
TO EMPLOYMENT CONTRACT DATED NOVEMBER 20, 1998
THIS AMENDMENT, dated as of November 15, 2002, is made to the
Employment Contract dated November 20, 1998, between NATIONAL PROPERTIES
CORPORATION (herein after called the "Employer") and RAYMOND DI PAGLIA,
(hereinafter called the "Employee"), and hereinafter called the
"Agreement".
WHEREAS, it is the desire of the parties to alter the provisions of
the Agreement with respect to the compensation to be received by the
Employee.
NOW, THEREFORE, the parties agree to the following amendment to the
Agreement:
1. Section 3 of the Agreement is amended by deleting Section 3 and
substituting a new Section 3 as follows:
3. Compensation. For all services rendered by Employee under
this Agreement, the Employer shall pay the Employee compensation as
follows:
(a) Prior to 2003. For all services rendered by the Employee
under this Agreement during the calendar year 1999, the Employer shall pay
the Employee "Basic Compensation" of $120,000. Commencing with the
calendar year 2000, the 1999 Basic Compensation shall be increased, but not
decreased, by the greater of 3 percent or any increase in the Cost of
Living in the same proportion as the All Urban Consumer Price Index ("CPI-
U") published by the U.S. Department of Labor shall increase during the
calendar year 1999. The aggregate compensation of the Employee paid or
accrued for the year 1999, including any increase which occurs by reason of
the foregoing provisions, shall become the Basic Compensation to be paid
during the year 2000, increased, but not decreased, by the greater of 3
percent or subsequent changes in the CPI-U during such year. Comparable
adjustments, made in like manner, shall be made in each ensuing year
thereafter through 2002.
(b) During and after 2003. For all services rendered by the
Employee under this Agreement during the calendar year 2003, the Employer
shall pay the Employee "Basic Compensation" of $145,000. Commencing with
the calendar year 2004, the 2003 Basic Compensation shall be increased, but
not decreased, by the greater of 3 percent or any increase in the Cost of
Living in the same proportion as the CPI-U shall increase during the
calendar year 2003. The aggregate compensation of the Employee paid or
accrued for the year 2003, including any increase which occurs by reason of
the foregoing provisions, shall become the Basic Compensation to be paid
during the year 2004, increased, but not decreased, by the greater of 3
percent or subsequent changes in the CPI-U during such year. Comparable
adjustments, made in like manner, shall be made in each ensuing year
thereafter during the term of this Agreement.
(c) Payments in Installments. All Basic Compensation under this
Agreement shall be payable in installments in accordance with past
practice.
(d) Lump Sum Payments. All increases in compensation attributed
to the greater of 3 percent or any increase in the CPI-U during any
calendar year shall be payable in a lump sum as soon as the amount is
determinable following the end of such calendar year.
2. In all other respects, the provisions of the November 20, 1998
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 on
the date first herein above set forth.
Date __5/9/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Secretary,
Date __5/9/03__ _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia
This November 15, 2002 Amendment to the November 20, 1998 Employment
Contract is acknowledged and approved this 15th day of November, 2002 by
the following members of the Board of Directors:
_____/S/__Kristine_M._Fasano________
Kristine M. Fasano
_____/S/__Robert_H._Jamerson________
Robert H. Jamerson
_____/S/__Tim_Lynch_________________
Tim Lynch
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 March 31, 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 Sarbones-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 __5/9/03__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
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 March 31, 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 Sarbones-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 __5/9/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer