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 June 30, 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 JUNE 30, 2004
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
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NATIONAL PROPERTIES CORPORATION
BALANCE SHEETS
ASSETS
June 30, December 31,
2004 2003
<s> <c> <c>
CURRENT ASSETS
Cash 356,390 326,210
Receivable - 15,803
Other 62,225 14,490
---------- ----------
Total current assets 418,615 356,503
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Land 5,411,232 5,411,232
Buildings and improvements 41,893,502 41,698,008
Furniture and equipment 136,115 124,390
---------- ----------
47,440,849 47,233,630
Less - accumulated depreciation 12,177,157 11,604,926
---------- ----------
Property and equipment - net 35,263,692 35,628,704
---------- ----------
OTHER ASSETS
Marketable securities 1,252,631 1,302,844
---------- ----------
36,934,938 37,288,051
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
<s> <c> <c>
CURRENT LIABILITIES
Accounts payable 35,592 20,792
Accrued liabilities 144,671 146,982
Advance rents 260,197 280,504
Federal and state income taxes - 60,777
Dividends payable 73,644 -
---------- ----------
Total current liabilities 514,104 509,055
---------- ----------
LONG-TERM DEBT 10,450,000 11,975,000
---------- ----------
DEFERRED INCOME TAXES 1,365,872 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 23,710,341 22,594,902
Accumulated other comprehensive income 485,488 498,234
---------- ----------
Total stockholders' equity 24,604,962 23,502,269
---------- ----------
36,934,938 37,288,051
========== ==========
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NATIONAL PROPERTIES CORPORATION
STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
Three Months Ended Six Months
Ended
June 30, June 30,
2004 2003 2004 2003
<s> <c> <c> <c> <c>
Income
Lease rental income 1,467,533 1,368,264 2,978,218 2,816,980
Dividend and interest income 10,103 6,184 17,260 12,905
Gain on sale of securities 5,966 11,365 21,293 21,540
Gain on sale of property - - - 40,000
--------- --------- --------- ---------
Total income 1,483,602 1,385,813 3,016,771 2,891,425
--------- --------- --------- ---------
Expenses
Depreciation 287,023 250,117 572,231 515,635
Interest 89,069 92,517 183,626 185,908
Salaries and wages 69,245 67,287 141,743 137,175
Property, payroll
and misc. taxes 21,053 22,159 59,083 60,698
Other expenses 78,864 60,202 160,577 135,445
--------- --------- --------- ---------
Total expenses 545,254 492,282 1,117,260 1,034,861
--------- --------- --------- ---------
Income before income taxes 938,348 893,531 1,899,511 1,856,564
Federal and State income taxes 351,428 332,394 710,428 690,642
--------- --------- --------- ---------
Net income 586,920 561,137 1,189,083 1,165,922
--------- --------- --------- ---------
Other comprehensive income (losses):
Unrealized holding gains (losses)
on marketable securities arising
during the period 27,161 204,844 (20,232) 131,612
Less income tax (benefit)
related to unrealized holding
gains (losses) 10,050 75,792 (7,486) 51,255
--------- --------- --------- ---------
Other comprehensive income
(losses) net of tax 17,111 129,052 (12,746) 80,357
--------- --------- --------- ---------
Comprehensive income 604,031 690,189 1,176,337 1,246,279
========= ========= ========= =========
Net income per share $1.43 $1.37 $2.91 $2.84
Weighted average shares
outstanding 409,133 410,850 409,133 410,727
Cash Dividends declared per share $0.18 $0.17 $0.18 $0.17
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NATIONAL PROPERTIES CORPORATION
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2004 2003
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 1,189,083 1,165,922
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 572,231 515,635
Deferred income taxes 71,631 55,442
Gain on sale of securities (21,293) (21,540)
Gain on sale of property - (40,000)
Changes in assets and liabilities:
Accounts receivable 15,803 12,497
Prepaid expenses 8,397 7,945
Accounts payable and accrued liabilities 12,489 18,919
Federal and State income taxes (116,909) (80,961)
Advance rents (20,307) 22,667
--------- ---------
Net cash provided by operations 1,711,125 1,656,526
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Deposit on real estate purchase - (100,000)
Purchase of securities - (57,769)
Purchase of property (207,219) (1,386)
Proceeds from sale of securities 51,274 47,672
Proceeds from sale of property - 40,000
--------- ---------
Net cash used in investing activities (155,945) (71,483)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on credit line borrowings (1,525,000) (1,800,000)
Borrowings on credit lines - 200,000
Common stock purchased and retired - (40,277)
--------- ---------
Net cash used in financing activities (1,525,000) (1,640,277)
--------- ---------
Net change in cash 30,180 (55,234)
Cash at beginning of period 326,210 347,083
-------- --------
Cash at end of period 356,390 291,849
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest expense 153,901 156,077
Income tax payments 755,706 716,161
Noncash investing and financing transactions:
cash dividends declared 73,644 69,765
Real estate transactions:
Carrying value of property to be
exchanged for Walgreen property - 1,650,394
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NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
The balance sheet at June 30, 2004, and the statements of income and
comprehensive income and cash flows for the periods ended June 30, 2004,
and June 30, 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 June 30, 2004, $10,450,000 ($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 June 30, 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 June 30, 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 June 30, 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.
Board of Directors Approve Dividend Payment
At the Company's annual meeting of Stockholders held May 21, 2004, the
Company declared a $0.18 per share dividend to be paid July 30, 2004 to
stockholders of record on June 30, 2004. The dividend totals $73,644.
Operating Results
Lease revenues increased 5.7% or $161,000 in the first half of 2004 over
the same period in 2003. The increase in lease revenues relative to the
first six months of 2003, was attributable to: (1) the acquisition of a
restaurant property in August 2003 and a drug store property in November
2003, which in the aggregate added $282,000 to lease revenues in the first
six months of 2004, (2) a decrease in lease revenues of $118,000 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
$16,000 due to escalation clauses in the lease agreements of some tenants
and renegotiated leases with other tenants.
The Company recorded investment income, including gains from the sale of
marketable securities, of $38,000 in the first six months of 2004 compared
to $34,000 for the first half of 2003.
The Company recorded no property sales in 2004 compared to recording a gain
of $40,000 from the sale of an easement to Company owned property in
Arlington, Texas in 2003.
Operating expenses increased $82,000 or 7.9% in the first six months of
2004 over the same period in 2003, as a result of increases in
depreciation, professional fees, and compensation costs.
Depreciation expense increased a net $57,000 in the first half of 2004 over
the same period in 2003. Depreciation increased approximately $84,000 from
new property acquisitions in 2004 and 2003, and decreased approximately
$27,000 from the disposition of the Company's two garden centers in 2003.
Interest expense decreased slightly in the first half 2004 from the same
period in 2003 due to a lower borrowing cost on the Company's line of
credit. 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.
Average outstanding debt in the first six months of 2004 was $11,129,000
compared to $10,282,000 for the same period in 2003. The average interest
rate on borrowings during the first six months of 2004 was 3.30% compared
to 3.62% in the first six months of 2003.
Other general and administrative (G & A) expenses increased a net $28,000
in the first half of 2004 over the same period in 2003. The Company
recorded increases in salaries and benefits, legal and audit fees, and
state franchise taxes, and recorded decreases in property taxes, insurance
and travel expenses.
Earnings per share increased $0.07 to $2.91 per share in the first half of
2004 over the $2.84 per share earned in the first half of 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 $1,711,000 for the first six months of 2004 compared to
$1,657,000 and $1,559,000 for the first six months of 2003 and 2002,
respectively.
As of June 30, 2004, the Company's main sources of liquidity consisted of
$356,000 cash, marketable securities having a market value of approximately
$1,253,000 and $4,550,000 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
$27,800,000. 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 June 30, 2004, was under a
revolving credit facility with Wells Fargo Bank. At June 30, 2004, the
Company had outstanding borrowings of $10,450,000 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 six month period
ended June 30, 2004, the Company recorded an unrealized holding loss, net
of income taxes of $13,000 compared to a net unrealized gain of $80,357 for
the first six months of 2003.
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 President, Chief Executive Officer and Vice President,
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 June 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
PART II. OTHER INFORMATION.
No applicable items.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) A list of exhibits is set forth in the Exhibit Index which
immediately precedes the exhibits and which is incorporated by reference
herein.
(b) The Company filed no report on Form 8-K during the quarter
for which this report is filed.
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 __7/30/04__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
Date __7/30/04__ 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 __7/30/04__ 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 __7/30/04__ 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 __7/30/04__ 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 __7/30/04__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary-Treasurer