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, 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 SEPTEMBER 30, 2004
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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,
2004 2003
<s> <c> <c>
CURRENT ASSETS
Cash 318,643 326,210
Receivable - 15,803
Other 81,649 14,490
---------- ----------
Total current assets 400,292 356,503
---------- ----------
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 12,463,272 11,604,926
---------- ----------
Property and equipment - net 34,977,577 35,628,704
---------- ----------
OTHER ASSETS
Marketable securities 1,263,716 1,302,844
---------- ----------
36,641,585 37,288,051
========== ==========
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LIABILITIES AND STOCKHOLDERS' EQUITY
<s> <c> <c>
CURRENT LIABILITIES
Accounts payable - 20,792
Accrued liabilities 147,020 146,982
Advance rents 253,012 280,504
Federal and state income taxes - 60,777
---------- ----------
Total current liabilities 400,032 509,055
---------- ----------
LONG-TERM DEBT 9,625,000 11,975,000
---------- ----------
DEFERRED INCOME TAXES 1,405,789 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 24,309,159 22,594,902
Accumulated other comprehensive income 492,472 498,234
---------- ----------
Total stockholders' equity 25,210,764 23,502,269
---------- ----------
36,641,585 37,288,051
========== ==========
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<caption>
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
<s> <c> <c> <c> <c>
Income
Lease rental income 1,473,307 1,352,908 4,451,525 4,169,888
Dividend and interest income 10,050 8,287 27,310 21,192
Gain on sale of securities - 9,707 21,293 31,247
Gain on sale of property - - - 40,000
--------- --------- --------- ---------
Total income 1,483,357 1,370,902 4,500,128 4,262,327
--------- --------- --------- ---------
Expenses
Depreciation 286,116 278,673 858,347 794,308
Interest 93,886 89,397 277,512 275,305
Salaries and wages 68,178 68,262 209,921 205,437
Property, payroll
and misc. taxes 21,734 9,569 80,817 70,267
Other expenses 56,882 68,702 217,459 204,147
--------- --------- --------- ---------
Total expenses 526,796 514,603 1,644,056 1,549,464
--------- --------- --------- ---------
Income before income taxes 956,561 856,299 2,856,072 2,712,863
Federal and State income taxes 357,743 318,543 1,068,171 1,009,185
--------- --------- --------- ---------
Net income 598,818 537,756 1,787,901 1,703,678
--------- --------- --------- ---------
Other comprehensive income (losses):
Unrealized holding gains (losses)
on marketable securities arising
during the period 11,085 47,834 (9,147) 179,446
Less income tax (benefit) related
to unrealized holding gains
(losses) 4,101 17,699 (3,385) 68,954
--------- --------- --------- ---------
Other comprehensive income (loss)
net of tax 6,984 30,135 (5,762) 110,492
--------- --------- --------- ---------
Comprehensive income 605,802 567,891 1,782,139 1,814,170
========= ========= ========= =========
Net income per share $1.46 $1.31 $4.37 $4.15
Weighted average shares
outstanding 409,133 410,593 409,133 410,458
Cash dividend paid per share $0.00 $0.00 $0.18 $0.17
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<caption>
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months
Ended
September 30,
2004
2003
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income 1,787,901
1,703,678
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 858,347
794,308
Deferred income taxes 107,447
87,164
Gain on sale of securities (21,293)
(31,247)
Gain on sale of property -
(40,000)
Changes in assets and liabilities:
Prepayments and deferred charges 12,596
12,414
Accounts payable and accrued liabilities (20,754)
3,799
Advance rents (27,492)
21,610
Receivable 15,803
13,729
Federal and State income taxes (140,532)
(85,115)
--------- --------
- -
Net cash provided by operations 2,572,023
2,480,340
--------- --------
- -
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (207,220)
(3,314,355)
Proceeds from sale of securities 51,274
77,366
Proceeds on sale of property -
40,000
Deposit on Walgreen purchase -
(100,000)
Purchase of securities -
(57,769)
--------- --------
- -
Net cash used in investing activities (155,946)
(3,354,758)
--------- --------
- -
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on credit line -
3,400,000
Payments on credit line borrowings (2,350,000)
(2,450,000)
Dividends paid (73,644)
(69,765)
Treasury stock purchased and retired -
(52,742)
--------- --------
- -
Net cash provided by (used in) financing activities (2,423,644)
827,493
--------- --------
- -
Net decrease in cash (7,567)
(46,925)
Cash at beginning of period 326,210
347,083
--------- --------
- -
Cash at end of period 318,643
300,158
=========
=========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest expense 245,086
240,730
Income tax payments 1,101,256
1,007,136
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NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
The balance sheet at September 30, 2004, and the statements of income and
comprehensive income and cash flows for the periods ended September 30,
2004, and September 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 September 30, 2004, $9,625,000 ($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 September
30, 2004, 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 Company was in
compliance with all covenants at September 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 September 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.
In September 2004, the Company entered into a sale-leaseback agreement with
NPC International (Pizza Hut), where the Company agreed to purchase for a
price of $600,000, a building constructed by Pizza Hut on the Company's one
remaining lot in Ankeny, Iowa. Pizza Hut is expected to complete the
building by April 1, 2005. Pizza Hut in turn will lease the property from
the Company for an initial term of twenty years with four (4) five year
option periods. The lease agreement provides for annual rental income of
$114,000 during the first five years of the lease and escalates each five-
year period to $162,300 in the last five years of the initial lease term.
Operating Results
Lease revenues increased $282,000 or 6.75% in the first nine months of 2004
over the same period in 2003. The increase in lease revenues relative to
the first nine 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 $395,000 to lease revenues in the first
nine 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
$24,000 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 $49,000 in the first nine months of 2004 compared
to $52,000 for the same period in 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 $95,000 or 6.1% in the first nine months of
2004 over the first nine months of 2003.
Depreciation expense increased a net $64,000 through September 30, 2004
over 2003 as a result of increases in depreciation for new property
acquisitions referred to above minus the loss of depreciation from the
disposition of two garden center properties in 2003, as well as other
properties becoming fully depreciated.
Interest expense increased slightly in the first nine months of 2004 from
the same period in 2003 due to a slightly higher average loan balance.
Average outstanding loan balance for the first nine months of 2004 was
$10,730,000 compared to $10,578,000 for the same period in 2003. The
interest rate on the Company's revolving line of credit rose in the third
quarter 2004 from 3.25% to 4.0% in response to hikes in the Federal Reserve
rate. The average interest rate on borrowings during the first nine months
of 2004 was 3.45% compared to 3.47% for the first nine months of 2003.
Other general and administrative expenses increased a net $28,000 in the
first nine months 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 $0.22 to $4.37 per share for the first nine
months of 2004 compared to $4.15 per share earned in the first nine months
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 $2,572,000 for the first nine months of 2004 compared
to $2,480,000 and $2,554,000 for the first nine months of 2003 and 2002,
respectively.
As of September 30, 2004, the Company's main sources of liquidity consisted
of $318,643 cash, marketable securities having a market value of
approximately $1,264,000 and $5,375,000 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 September 30, 2004, was under
a revolving credit facility with Wells Fargo Bank. At September 30, 2004,
the Company had outstanding borrowings of $9,625,000 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 nine month period
ended September 30, 2004, the Company recorded an unrealized holding loss,
net of income taxes of $5,762 compared to a net unrealized gain of $110,492
for the first nine 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 September 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 __11/5/04__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
Date __11/5/04__ 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 __11/5/04__ 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 __11/5/04__ 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 __11/5/04__ 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 __11/5/04__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary-Treasurer