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, 2004 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 by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).
Yes _____ No __X__
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 APRIL 30, 2004
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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,
2004 2003
<s> <c> <c>
CURRENT ASSETS
Cash 324,011 326,210
Receivable - 15,803
Other 10,291 14,490
---------- ----------
Total current assets 334,302 356,503
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Land 5,411,232 5,411,232
Buildings and improvements 41,872,128 41,698,008
Furniture and equipment 136,115 124,390
---------- ----------
47,419,475 47,233,630
Less - accumulated depreciation 11,890,134 11,604,926
---------- ----------
Property and equipment - net 35,529,341 35,628,704
---------- ----------
OTHER ASSETS
Marketable securities 1,235,463 1,302,844
---------- ----------
37,099,106 37,288,051
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
<s> <c> <c>
CURRENT LIABILITIES
Accounts payable 39,764 20,792
Accrued liabilities 112,702 146,982
Advance rents 259,414 280,504
Federal and state income taxes 323,788 60,777
---------- ----------
Total current liabilities 735,668 509,055
---------- ----------
LONG-TERM DEBT 10,975,000 11,975,000
---------- ----------
DEFERRED INCOME TAXES 1,313,864 1,301,727
---------- ----------
STOCKHOLDERS' EQUITY
Common stock - $1 par value
Authorized - 5,000,000 shares
Issued - 409,133 shares 409,133 409,133
Retained earnings 23,197,065 22,594,902
Accumulated other comprehensive income 468,376 498,234
---------- ----------
Total stockholders' equity 24,074,574 23,502,269
---------- ----------
37,099,106 37,288,051
========== ==========
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<caption>
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For Quarter Ended
March 31,
2004 2003
<s> <c> <c>
Income
Lease rental income 1,510,685 1,448,716
Dividend and interest income 7,157 6,721
Gain on sale of securities 15,327 10,175
Gain on sale of property - 40,000
--------- ---------
Total income 1,533,169 1,505,612
--------- ---------
Expenses
Depreciation 285,208 265,518
Interest 94,557 93,391
Salaries and wages 72,498 69,888
Property, payroll and misc. taxes 38,030 38,539
Other expenses 81,713 75,243
--------- ---------
Total expenses 572,006 542,579
--------- ---------
Income before income taxes 961,163 963,033
Federal and State income taxes 359,000 358,248
--------- ---------
Net income 602,163 604,785
--------- ---------
Other comprehensive Losses:
Unrealized holding losses on
marketable securities arising
during the period (32,067) (63,057)
Less reclassification adjustment for
gains included in net income 15,327 10,175
Less income tax (benefit) related
to unrealized holding losses (17,536) (24,537)
--------- ---------
Other comprehensive losses
net of tax (29,858) (48,695)
--------- ---------
Comprehensive income 572,305 556,090
========= =========
Net income per share of common stock $1.47 $1.47
Weighted average shares
outstanding 409,133 411,098
Dividends per share None None
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NATIONAL PROPERTIES CORPORATION
STATEMENTS OF CASH FLOWS
For Quarter Ended
March 31,
2004 2003
<s> <c> <c>
CASH FLOW FROM OPERATING ACTIVITIES
Net income 602,163 604,785
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 285,208 265,518
Deferred income taxes 29,673 28,168
Gain on sale of securities (15,327) (10,175)
Gain on sale of property - (40,000)
Changes in assets and liabilities:
Accounts receivable 15,803 13,729
Prepaid expenses 4,199 4,333
Accounts payable and accrued expenses (15,308) (15,346)
Federal and State income taxes 263,011 179,960
Advance rents (21,090) 53,525
--------- ---------
Net cash provided by operations 1,148,332 1,084,497
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of securities - (57,769)
Purchase of property (185,845) (757)
Proceeds from sale of securities 35,314 23,241
Proceeds from sale of properties - 40,000
--------- ---------
Net cash provided by (used in)
investing activities (150,531) 4,715
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES
Payments on credit line borrowings (1,000,000) (1,050,000)
Purchase of treasury stock - (11,775)
--------- ---------
Net cash used in financing activities (1,000,000) (1,061,775)
--------- ---------
Net change in cash (2,199) 27,437
Cash at beginning of period 326,210 347,083
--------- ---------
Cash at end of period 324,011 374,520
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest expense 62,544 65,303
Income tax payments 66,316 150,120
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NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
The balance sheet at March 31, 2004, and the statements of income
and comprehensive income and cash flows for the periods ended March
31, 2004, and March 31, 2003, 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. Realized
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.
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, 2004,
$10,975,000 ($11,975,000 at December 31, 2003) was outstanding
under the agreement which matures on April 30, 2006. 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, 2004, 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 March 31, 2004. The line of
credit is secured by first mortgages on nine properties that had a
net book value of approximately $7,400,000 at March 31, 2004.
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. It is the
Company's policy to invest in properties that are fully leased to a
single tenant which is responsible for payment of real estate
taxes, insurance, utilities and repairs. Under such circumstances,
the Company has limited management responsibilities for such
properties once they are constructed and leased. In most cases,
properties are constructed by the tenant and conveyed to the
Company under a sale and leaseback arrangement. It is not the
policy of the Company to invest in multiple tenant office buildings
or residential facilities. The Company currently owns property
located in Arizona, Colorado, Georgia, Iowa, Kansas, Missouri,
Nebraska, North Carolina, Oklahoma, South Dakota, Tennessee, and
Texas.
Operating Results
During the first quarter 2004, lease revenues increased $62,000 or
4.3% over the same period in 2003. The increase in lease revenues
for the first quarter of 2004 relative to the first quarter of
2003, was attributed to: (1) the acquisition of a restaurant
property in August 2003 and a drug store property in November 2003,
which in the aggregate, added $141,000 to lease revenue in the
first quarter of 2004, (2) a decrease in lease revenue of $68,000
due to the disposition of two garden center properties in 2003, (3)
a decrease of $19,000 in contingent rents, and (4) an increase in
lease revenues of $8,000 due to escalation clauses in the leases of
some tenants.
The Company recorded investment income, including gains from the
sale of marketable securities of $22,000 in the first quarter of
2004 compared to $17,000 for the first quarter of 2003. The
Company recorded no property sales in 2004 compared to recording a
gain of $40,000 from a property sale in 2003.
Operating expenses increased $29,000 or 5.4% in the first quarter
of 2004 over the same period in 2003, as a result of increases in
depreciation, interest, and compensation costs.
Depreciation expense increased $20,000 in the first quarter of 2004
over the first quarter of 2003, as a result of property
acquisitions in 2003.
Interest expense increased only slightly in the first quarter 2004
over the same period in 2003 due to a higher average outstanding
loan balance and a slightly lower borrowing cost on the Company's
line of credit. Average outstanding debt in the first quarter 2004
was $11,488,000 compared to $10,656,000 for the first quarter of
2003. The interest rate on the Company's revolving line of credit
declined from 3.5% to 3.25% effective July 1, 2003, where it has
remained. The average interest rate on borrowings in the first
quarter 2004 was 3.30% compared to 3.51% for the first quarter
2003.
Other general and administrative (G & A) expenses increased a net
$9,000 in the first quarter 2004 over the same period in 2003. The
Company recorded increases in salaries and salary related expenses,
legal and audit fees, and state franchise taxes, and recorded
decreases in property taxes and other G & A expense.
Earnings per share remained flat in the first quarter 2004 at $1.47
per share, the same as reported for the first quarter 2003.
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 $1,148,000 for the first quarter of
2004 compared to $1,084,000 and $1,068,000 for the first quarter of
2003 and 2002 respectively.
As of March 31, 2004, the Company's main sources of liquidity
consisted of $324,000 cash, marketable securities having a market
value of approximately $1,235,000 and $4,025,000 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 $28,100,000.
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, 2004, was
under a revolving credit facility with Wells Fargo Bank. At March
31, 2004, the Company had outstanding borrowings of $10,975,000
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,
2006.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES AND MARKET RISK
The Company is exposed to price fluctuations on its available for
sale marketable equity securities portfolio. These investments are
generally in companies with large capitalizations. The Company
does not attempt to reduce or eliminate the market exposure on
these securities. The Company reports the results of price
fluctuations on its marketable equity securities portfolio as
unrealized holding gains and losses in its statement of income and
comprehensive income. For the three month period ended March 31,
2004 and 2003, the Company recorded an unrealized holding loss, net
of income taxes and realized gains and losses, of $30,000 and
$49,000 respectively.
Item 4. CONTROLS AND PROCEDURES
(a) The President, Chief Executive Officer and the Vice President,
Secretary-Treasurer of the Company have evaluated the effectiveness
of the design and operation of the Company's disclosure controls
and procedures pursuant to Securities Exchange Act Rule 13a-15 as
of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Secretary-Treasurer
have concluded that these disclosure controls and procedures are
effective.
(b) There were no changes in our internal control over financial
reporting during the quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
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 __5/6/04__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
Date __5/6/04__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary-Treasurer
EXHIBIT INDEX
Exhibit Page
31.1 Certification of President, Chief Executive 11
Officer pursuant to Section 302 of The Sarbanes-
Oxley Act.
31.2 Certification of Vice President, Secretary- 13
Treasurer pursuant to Section 302 of The Sarbanes-
Oxley Act.
32.1 Certification of President, Chief Executive 15
Officer and Vice President, Secretary-Treasurer
pursuant to Section 906 Certification of the
Sarbanes-Oxley Act.
Exhibit 31.1
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 __5/6/04__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
Exhibit 31.2
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 __5/6/04__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary-Treasurer
EXHIBIT 32.1
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 __5/6/04__ 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 __5/6/04__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary-Treasurer