SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549
FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1998
Commission file number: 0-305
Name of registrant: NATIONAL PROPERTIES CORPORATION
I.R.S. Employer Identification Number: 42-0860581
Address: 4500 Merle Hay Road, Des Moines, Iowa 50310
telephone number: (515) 278-1132
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $1.00 (Title of Class)
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 (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes __X__ No _____
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant. The aggregate market value shall be computed by the
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock as of a specified date within 60 days prior to
the date of filing.
$6,273,913 as of March 1, 1999
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 - March 1, 1999 - 418,616 Shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 1999 annual meeting of Stockholders See Part III
PART I
Item 1. Business
(a) General Development of Business. The Registrant, (also referred to
as the "the Company") organized under the Iowa Business Corporation Act, is
engaged principally in the development of commercial real estate for lease
to tenants under net lease arrangements. The Registrant also derives
revenues from its portfolio of investment securities.
On February 13, 1998, the Company completed the purchase of a convenience
store property in Woodstock, Georgia (Atlanta Suburb) for $1,480,000. Bank
funds were used for the purchase. Annual rentals from the property will be
$155,400.
On April 1, 1998, Sunbelt Nursery, a major tenant of three Company owned
stores located in Arizona and Texas, filed for bankruptcy. Sunbelt
immediately commenced store liquidation sales in all of their Texas and
Arizona stores, including those owned by the Company.
Effective June 1, 1998, the Company leased the three Sunbelt Nursery stores
that were in bankruptcy. The stores were leased at an annual rental of
$348,000 which is $107,000 less than the previous Sunbelt annual rental.
On October 13, 1998, the Company completed the sale of 21.5 acres of
unimproved land in Ankeny, Iowa for $2,885,000, net of selling expenses and
on December 1, 1998, a supermarket building was acquired in a qualified IRC
Section 1031 exchange for $5,572,000. The cash balance of $2,687,000 to
complete the exchange was drawn on the Registrant's credit lines. Annual
rentals from the property will be $473,610.
In December 1998, the Company executed a letter agreement with the existing
tenant to sell for $1,245,000 three convenience stores located in Des
Moines, Iowa with leases expiring within one to five years. The Company
has agreed to purchase and leaseback for twenty years a new convenience
store for $1,950,000 located in Olathe, Kansas, in a qualified IRC section
1031 exchange. The sale and purchase are expected to be completed in
August 1999.
During 1998 the Company began an effort to identify and address Year 2000
computer problems. Reference is made to Item 7 (Management's Discussion
and Analysis of Financial Condition and Results of Operations) of this
report for details.
(b) Financial Information About Industry Segments. The Registrant
operates in a single industry segment.
(c) Narrative Description of Business.
Real Estate Held For Investment
The Registrant seeks to acquire or develop improved real estate properties
suitable for lease to commercial tenants. It is the Registrant'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 Registrant 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
Registrant under a sale and leaseback arrangement. It is not the policy of
the Registrant to invest in multiple tenant office buildings or residential
facilities. Primary factors considered by the Registrant in developing a
property for lease are the use to be made of the property, its location,
the nature and credit standing of the tenant, the rental income to be
derived under the lease, and the ability of the Registrant to utilize the
property or dispose of it upon termination of the lease.
All of the investment properties now owned by the Registrant are located in
Arizona, Georgia, Iowa, Kansas, Missouri, Nebraska, Oklahoma, South Dakota,
and Texas. The Registrant has placed no limitations, however, on the
locations in which it is willing to develop properties in the future.
The commercial real estate acquired by the Registrant is normally purchased
with funds drawn on the Registrants lines of credit. In most cases, the
Registrant gives careful consideration to the rate of return which it will
receive from an investment based on the original cost thereof to the
Registrant without regard to possible mortgage financing. While the rate
of return varies, it has ranged generally from 8.5% to 13%.
Real estate investments acquired or developed by the Registrant are not
held for resale, but are held as long-term investments. The Registrant
may, however, dispose of properties depending upon the circumstances then
existing.
Virtually all of the Registrant's development activity is handled by its
President, including lease negotiations, site acquisitions, construction
activities, and financing.
The real estate investment activity engaged in by the Registrant is highly
competitive, with numerous investors seeking to develop properties for
lease to qualified tenants. These competitors include numerous major
national financial institutions with resources and abilities to attract
tenants which are far greater than those of the Registrant; as well as many
other types of full-time and part-time real estate investors.
At December 31, 1998, the Registrant owned 41 leased properties having an
aggregate cost of $31,593,450. The rental income for 1998 on these leased
properties amounted to $3,715,029. Seven of the properties are leased to
two restaurant operators and account for 17.9% of rental income; four
telephone service center buildings and one Goodyear Tire Service Center
building account for 9.9% of rental income; nineteen QuikTrip and one Kum &
Go Convenience stores account for 54.8% of rental income; three nurseries
(garden centers) account for 10.5%; four office buildings and a supermarket
account for 4.8%; other properties held for future development account for
2.1% of rental income.
As of December, 1998, the tenants of all 41 leased properties were in
compliance with the terms of their respective leases.
Other Investments
The Registrant has a portion of its assets invested in marketable
securities which had a market value of $2,279,982 as of December 31, 1998.
Employees
The Registrant currently employs 6 persons; 3 full-time employees and 3 part-
time employees.
Item 2
Properties (Dec. 31, 1998) Land Bldgs. & Accumulated Rental Lease Renewal
Mortgage Int.
Cost Improve. Depreciation Income 1997 Expires Options
Balance Rate
--------- ---------- ------------ ----------- ------- -------- ----
- ------ ------
A. RESTAURANT PROPERTIES
Perkins 'Cake & Steak Des Moines, Ia. 137,000 343,365 303,306 73,611 2001 1-5 Yr
- -
Perkins 'Cake & Steak Des Moines, Ia. 140,000 341,602 300,610 76,901 2002 1-5 Yr
- -
Perkins 'Cake & Steak Des Moines, Ia. 200,000 373,192 373,192 71,893 2002 1-5 Yr.
- -
Perkins 'Cake & Steak Newton, Ia. 112,500 485,181 460,922 92,491 1999 2-5 Yr.
- -
Perkins 'Cake & Steak Des Moines, Ia. 243,166 498,675 473,741 105,192 2000 2-5 Yr.
- -
Carl's Jr. Restaurant a Chandler, AZ. 168,000 772,000 617,600 114,778 2005 3-5 Yr.
- -
Carl's Jr. Restaurant a Tucson, AZ. 90,000 738,000 512,911 131,911 2005 6-5 Yr.
- -
--------- ---------- ------------ ----------- ----
- ------
Total 1,090,666 3,552,015 3,042,282 666,777
--------- ---------- ------------ ----------- ----
- ------
B. SERVICE CENTERS
Northwestern Bell Decorah, Ia. 20,000 191,102 137,593 22,965 1999 1-5 Yr.
- -
Northwestern Bell Cedar Rapids, Ia. 37,000 397,394 267,136 84,000 2001 1-5 Yr.
- -
Continental Tel. Co. Chariton, Ia. 8,364 541,755 408,122 70,641 2000 - )
- -
Continental Tel. Co. Fayette, Ia. 6,322 428,685 322,942 56,190 2000 - )
139,131 9.984
Goodyear Service Ctr. Wichita, KS. 100,000 978,725 296,485 132,000 2004 4-5 Yr.
- -
--------- ---------- ------------ ----------- ----
- ------
Total 171,686 2,537,661 1,432,278 365,796
139,131
--------- ---------- ------------ ----------- ----
- ------
C. CONVENIENCE STORES
QuikTrip a Des Moines, Ia. 144,664 691,878 274,849 110,964 2010 2-5 Yr.
- -
QuikTrip & Off. Bldg. Des Moines, Ia. 215,000 672,000 512,960 106,214 2004 1-5 Yr.
- -
QuikTrip Des Moines, Ia. 50,000 185,000 170,354 49,898 2000 2-5 Yr.
- -
QuikTrip Des Moines, Ia. 60,000 200,000 200,000 44,057 2002 1-5 Yr.
- -
QuikTrip Des Moines, Ia. 50,240 265,360 252,092 43,305 2004 2-5 Yr.
- -
QuikTrip Wichita, KS. 53,500 436,637 120,854 58,081 2009 4-5 Yr.
- -
QuikTrip Norcross, Ga. 99,558 765,000 201,258 102,858 2014 4-5 Yr.
- -
QuikTrip Wichita, KS. 60,000 514,000 139,392 67,445 2010 4-5 Yr.
- -
QuikTrip Tulsa, OK. 155,000 1,340,000 356,306 175,662 2010 4-5 Yr.
- -
QuikTrip a Des Moines, Ia. 84,500 557,500 141,220 75,435 2010 4-5 Yr.
- -
QuikTrip a Johnston, Ia. 48,502 476,160 97,637 73,574 2012 4-5 Yr.
- -
QuikTrip a St. Louis, Mo. 152,000 1,575,433 326,850 231,780 2017 4-5 Yr.
- -
QuikTrip a Des Moines, Ia. 183,095 900,000 151,209 110,016 2013 4-5 Yr.
- -
QuikTrip Norcross, Ga. 92,500 834,000 100,708 92,650 2009 4-5 Yr.
- -
QuikTrip Norcross, Ga. 95,500 858,000 103,603 95,350 2009 4-5 Yr.
- -
QuikTrip Clive, Ia. 325,605 393,814 35,770 124,570 2015 4-5 Yr
- -
QuikTrip Alpharetta, Ga 148,585 1,324,000 93,787 149,472 2016 4-5 Yr
- -
QuikTrip Gainesville, Ga. 122,927 1,227,923 49,458 157,500 2012 4-5 Yr.
- -
QuikTrip Woodstock, Ga. 151,800 1,328,200 38,739 136,312 2013 4-5 Yr.
- -
Kum & Go Omaha, NE. 44,110 128,574 128,581 30,840 2003 -
- -
--------- ---------- ------------ ----------- ----
- ------
Total 2,337,086 14,673,479 3,495,627 2,035,983
- -
--------- ---------- ------------ ----------- ----
- ------
D. SUPERMARKETS
Nash Finch Sioux Falls, SD. 211,888 2,632,970 2,817 39,468 2018 10-5 Yr.
--------- ---------- ------------ ----------- ----
- ------
E. OFFICE BUILDINGS
American Payday Loans Des Moines, Ia. 96,455 137,954 135,080 40,800 2004 1-7 Yr.
- -
Associates Financial
Serv. Des Moines, Ia. 61,692 55,812 42,835 15,600 2000 1-2 Yr.
- -
Corporate Headquarters b Des Moines, Ia. 25,000 418,222 349,156 40,281 1999 2-2 Yr.
- -
GTech Des Moines, Ia. 16,000 174,953 136,026 42,440 2001 1-2 Yr.
- -
--------- ---------- ------------ ----------- ----
- ------
Total 199,147 786,941 663,097 139,121
- -
--------- ---------- ------------ ----------- ----
- ------
F. GARDEN CENTERS
Metro Garden Center a Dallas, TX. 125,000 586,825 577,045 78,184 2003 1-5 Yr.
- -
Tip-Top Nursery a Glendale, AZ. 66,144 433,057 162,124 112,256 2003 1-5 Yr.
- -
Metro Garden Center a Arlington, TX. 200,000 1,700,000 308,108 197,951 2003 1-5 Yr.
- -
--------- ---------- ------------ ----------- ----
- ------
Total 391,144 2,719,882 1,047,277 388,391
- -
--------- ---------- ------------ ----------- ----
- ------
G. OTHER PROPERTIES 185,133 103,752 103,752 79,493
- -
--------- ---------- ------------ ----------- ----
- ------
Totals 4,586,750 27,006,700 9,787,130 3,715,029
139,131
========= ========== ============ ===========
==========
a Mortgaged to Lender - See Note 4 of Notes to Financial Statements.
b 50% Used by Registrant; 50% Leased
Other Properties
The following unencumbered properties are held for future development by
the Registrant.
(1) Real Estate, S. E. Delaware and Oralabor Road, Ankeny, Iowa.
This commercially zoned property is located in Ankeny, Iowa, at the
Industrial Exit of Interstate 35. It contains five approximately 1.5 acre
platted lots.
(2) Real Estate, Interstate 80 & Highway 14, Newton, Iowa.
This is a 4-acre undeveloped site adjoining the Perkins Restaurant and Days
Inn Motel.
(3) Real Estate, 4745 - 2nd Avenue, Des Moines, Iowa.
106,000 sq. ft. of land and a 3,200 sq. ft. building leased for $3,300 per
month, the lease expires December 31, 2001. 82,000 sq. ft. of unused land
is available for development.
(4) Real Estate, 845 Sixth Avenue, Des Moines, Iowa
This 6,000 square foot concrete block building situated on a lot of the
same size was purchased in 1974. This building is rented for $1,500 per
month, and the lease expires April 30, 1999.
Item 3. Legal Proceedings.
The Registrant is not engaged in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
NOT APPLICABLE
PART II
Item 5. Market for the Registrant's Common Stock and Related Security
Holder Matters
The Common Stock of the Registrant (symbol NAPE) is traded on the over-the-
counter bulletin board; a product of the National Association of Security
Dealers, Inc., sponsored by market makers. Quotations are inter-dealer
prices, without retail mark-up, or mark-down, or commission and may not
necessarily represent actual transactions. The prices shown below are by
calendar quarters for 1998 and 1997. N/A indicates prices were not
available.
Bid Asked
1998 High Low High Low
1st Quarter 29-1/2 28-5/8 N/A N/A
2nd Quarter 31 29-1/2 N/A N/A
3rd Quarter 36 31 N/A N/A
4th Quarter 34 32-3/4 N/A N/A
Bid Asked
1997 High Low High Low
1st Quarter 21-3/4 20-1/2 N/A N/A
2nd Quarter 24 22 N/A N/A
3rd Quarter 28 24 N/A N/A
4th Quarter 28-5/8 28 N/A N/A
No cash dividend was paid in 1998. Future dividend declarations will be
dependent upon the earnings of the Registrant, its financial condition, its
capital requirements and general business conditions.
There were approximately 700 stockholders of record as of March 1, 1999.
Item 6. Selected Financial Data. (In thousands except for per
share amounts)
Year ended December 31,
1998 1997 1996 1995 1994
Year ended December 31,
Lease rental income 3,715 3,492 3,262 3,140 3,016
Interest income 21 1 - 3 8
Dividend income 68 72 80 89 107
Gain on sale of
securities 80 24 59 103 104
Net income 1,271 1,143 1,039 903 905
At December 31,
Total assets 24,291 20,778 20,115 19,118 19,600
Long-term debt 5,221 5,264 6,031 5,148 6,758
Book value-properties &
equipment 21,833 18,495 18,102 17,394 17,682
Net Unrealized Gain
Marketable Securities 1,003 917 569 605 462
Stockholders' equity 14,903 13,922 12,899 12,070 11,142
Per Common Share
Net income* 3.00 2.62 2.30 1.97 1.96
Cash dividends 0.00 0.10 0.10 0.10 0.18
Book value 35.60 32.27 28.71 26.49 24.15
*Based on weighted average shares outstanding
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Liquidity and Capital Resources
At December 31, 1998, the Registrant's primary sources of liquidity were
$139,993 in cash; marketable securities with a market value of
approximately $2,280,000; and a $1,200,000 remaining loan balance available
on three lines of credit with a local bank. (See Note 4 of the Notes to
Financial Statements). In addition, the Registrant owns unencumbered real
estate having an aggregate depreciated cost of approximately $11,000,000.
Management believes that its cash flow from operations and other potential
sources of cash, will be sufficient to finance current and projected
operations.
Each year for many years the Registrant has reacquired a limited amount of
its common stock. During the three years ended December 31, 1998, 37,039
shares were repurchased in the open market and negotiated transactions.
The total cost of the reacquired shares amounted to $929,481; an average
per share cost of $25.09.
Results of Operations
1998 Compared to 1997
The Company recorded a net income in 1998 of $1,271,000, or $3.00 per share
compared with last year's income of $1,143,000 or $2.62 per share.
Lease revenues for the year ended December 31, 1998 were $3,715,000 up
$223,000 or 6.4% over the same period in 1997. The increase in rental
income was primarily due to the acquisition of three new properties and the
sale of one property in 1998 and 1997 that produced a net increase in
rental income of $284,000. The Company's three garden centers produced
$83,000 less rental income in 1998 than it did in 1997 resulting from
entering into less favorable leasing arrangements with new tenants after
the bankruptcy of Sunbelt Nursery (the former tenant). Contingent rentals
based on sales overages increased $22,000 in 1998.
The Company also realized gains of $79,800 from the sale of securities in
1998, up from $24,300 in 1997. In addition, the Company earned $21,000 in
interest income on proceeds from the sale of its Ankeny land while held in
escrow pending a qualified IRC 1031 exchange of property.
Total expenses increased $63,000 to $1,864,000 in 1998 as compared to
$1,801,000 in 1997. Interest and depreciation increased $119,000 or 9.2%
over 1997 due to the acquisition of new properties funded by drawing down
on the Company's three credit lines. In addition the Company recorded
$7,000 in additional real estate taxes during 1998 in connection with the
stores leased to Sunbelt Nursery. Remaining expenses led by personnel
cost, decreased by $63,000 or 14.1% for 1998 as compared to 1997.
The effective income tax rate was 37.1% in 1998 as compared to 36.1% in
1997. The increase was due to an increase in state income taxes in 1998.
Results of Operations
1997 Compared to 1996
The Company recorded a net income in 1997 of $1,143,000 or $2.62 per share
compared with a net income of $1,039,000 or $2.30 per share in 1996.
Lease revenues for the year ended December 31, 1997 were $3,492,000, up
$230,000 or 7.0% over the same period in 1996. The increase in rental
income was primarily due to the acquisition of two properties and the sale
of one property in 1997 and 1996 that produced a net increase in rental
income of $169,000. In addition, rent increases on nine properties totaled
approximately $46,000 in 1997. Contingent rentals based on sales overages
increased $15,000 in 1997. Total expenses increased approximately $36,000
in 1997 primarily due to increases in professional fees, payroll costs and
depreciation aggregating $49,000 offset by a decrease in interest costs of
$13,000.
The effective income tax rate was 36.1% in 1997 as compared to 36.6% in
1996.
Year 2000
During 1998 the Company began an effort to identify and address the problem
of the inability of some computer hardware and software to recognize and
correctly process information after December 31, 1999 (the "Year 2000
problem"). During 1999 the Company expects to complete work on the Year
2000 problem, which involves identification and assessment of such
problems, remediation and testing and the development of contingency plans.
The Company believes that the nature of its business, the nature of its
properties and the terms of the leases of its properties limit its direct
exposure to the Year 2000 problem to some extent. The Company does not
expect its business activities to create any material Year 2000 problem
liabilities.
The Company has not yet completed its assessment of the possible effects of
the Year 2000 problem on the Company. The Company has obtained clear
evidence of readiness, including written assurances from each of the
Vendors of the Company's principal computer system dealing with financial
information, that its principal computer system is Year 2000 compliant.
The Company has completed testing of the software used in its principal
computer system which showed such software to be Year 2000 compliant.
The Company is assessing the progress of material other parties (vendors,
suppliers and tenants) in their efforts to become Year 2000 compliant.
These other parties include, but are not limited to; the tenants of the
Company's properties, the U.S. Postal Service, financial institutions and
utilities. The Company has mailed questionnaires to material other parties
and is requesting copies of their Year 2000 plans and will monitor their
performance against these plans. Most of the material other parties have
responded to the Company's questionnaires.
Through December 31, 1998, the amount spent by the Company to address Year
2000 issues has not been material to the Company's operations. Total costs
to address Year 2000 issues are currently estimated not to involve an
amount that will be material to the Company's operations. Funds for these
costs are expected to be provided by the operating cash flows of the
Company.
The Company could be faced with adverse consequences if Year 2000 issues
are not identified and resolved in a timely manner by the Company and
material other parties. The most reasonably likely case scenario would
result in the short term interruption of revenue from leased properties
caused by unresolved Year 2000 issues of material other parties. This
would result in delayed or lost revenues; however, the amount would be
dependent on the length and nature of the disruption, which cannot be
predicted or estimated. In light of the possible consequences, the Company
is devoting the resources needed to address Year 2000 issues in a timely
manner. While management expects a successful resolution of these issues,
there can be no guarantee that material other parties, on which the Company
relies, will address all Year 2000 issues on a timely basis or that their
failure to successfully address all issues would not have an adverse effect
on the Company.
The Company expects to give consideration to the development of contingency
plans during the first half of 1999 as the results of the Company's
monitoring of the progress of material other parties become available.
Such contingency plans may include a determination to increase the
liquidity of the Company's assets to avoid any interruption in payment of
the Company's obligations in the event of a temporary disruption in the
flow of revenue to the Company. Contingency plans, to the extent
management considers them to be necessary, are expected to be completed by
September, 30, 1999.
The foregoing discussion of the Year 2000 problem contains certain forward-
looking statements that are subject to risks and uncertainties. These
statements are based on management's current knowledge and estimates of
factors affecting the Company's operations. Actual results may differ
materially from those currently anticipated. Factors which could adversely
affect future results include, but are not limited to, the effects of any
unexpected increase in the Company's costs to address the Year 2000 problem
and the effects of any unexpectedly severe or lengthy disruptions in the
business of material other parties.
Item 8. Financial Statements and Supplementary Data.
Financial statements filed herewith:
Balance Sheets as of December 31, 1998 and December 31, 1997.
Statements of Income and Comprehensive Income for the years ended
December 31, 1998, December 31, 1997 and December 31, 1996.
Statements of Stockholders' Equity for the years ended
December 31, 1998, December 31, 1997 and December 31, 1996
Statements of Cash Flows for the years ended
December 31, 1998, December 31, 1997 and December 31, 1996
Notes to Financial Statements.
Accountant's Report.
Item 9. Disagreements on Accounting and Financial Disclosures.
NONE
PART III
In answer to Items 10, 11, 12 and 13 of Part III, the Registrant
incorporates by reference the required information which is contained in
its definitive Proxy Statement. The Proxy Statement is for the 1999 annual
meeting of stockholders and will be filed with the Commission not later
than 120 days after December 31, 1998.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of this report.
1. All financial statements.
See Item 8 of Part II.
2. Financial statement schedules.
Schedule III as of December 31, 1998.
Note to schedule III as of December 31, 1998, 1997 and
1996.
All other Schedules are omitted because they are inapplicable or
not required.
(b) No report on Form 8-K was filed during the last quarter of 1998.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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___ (Registrant)
Date __3/19/99__ By _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and Chief
Executive Officer
Date __3/19/99__ By _____/S/__Kristine_M._Fasano__________
Kristine M. Fasano, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
DIRECTORS OF THE REGISTRANT
Date __3/19/99__ By _____/S/__William_D._Buzard________
William D. Buzard
Date __3/19/99__ By _____/S/__Raymond_Di_Paglia________
Raymond Di Paglia
Date __3/19/99__ By _____/S/__Kristine_M._Fasano_______
Kristine M. Fasano
Date __3/19/99__ By _____/S/__Robert_H._Jamerson_______
Robert H. Jamerson
NORTHUP, HAINES, KADUCE, SCHMID, MACKLIN, P.C.
Certified Public Accountants
Board of Directors and Stockholders
National Properties Corporation
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying balance sheets of National Properties
Corporation as of December 31, 1998 and 1997 and the related statements of
income and comprehensive income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1998. These
financial statements and the schedules referred to below are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of National Properties
Corporation as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in Item
14(a)(2) are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. These schedules have been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken
as a whole.
/S/ NORTHUP, HAINES, KADUCE, SCHMID, MACKLIN, P.C.
NORTHUP, HAINES, KADUCE, SCHMID, MACKLIN, P.C.
February 11, 1999
West Des Moines, Iowa
1025 Ashworth Road. Suite 500, West Des Moines, IA 50265-3500, Phone (515)
223-0221 Fax: (515) 223-1030
NATIONAL PROPERTIES CORPORATION BALANCE SHEETS
December 31,
1998 1997
ASSETS
CURRENT ASSETS
Cash 139,993 79,545
Accounts receivable - 12,451
Other 16,864 6,711
---------- ----------
Total current assets 156,857 98,707
---------- ----------
PROPERTY AND EQUIPMENT, AT COST - Notes 1 and 5
Land 4,586,750 4,380,815
Buildings and improvements 27,006,700 23,045,530
Furniture and equipment 97,088 63,677
---------- ----------
31,690,538 27,490,022
Less-accumulated depreciation 9,857,750 8,995,091
---------- ----------
Property and equipment-net 21,832,788 18,494,931
---------- ----------
OTHER ASSETS
Marketable securities, at market value-Note 3 2,279,982 2,148,283
Deferred charges and other assets 20,914 35,596
---------- ----------
Total other assets 2,300,896 2,183,879
---------- ----------
24,290,541 20,777,517
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 10,442 3,830
Notes payable - Note 4 2,400,000 -
Accrued liabilities 282,749 287,266
Current maturities of long-term debt 418,254 407,062
Federal and state income taxes 59,343 27,298
---------- ----------
Total current liabilities 3,170,788 725,456
---------- ----------
LONG-TERM DEBT - Notes 4 & 5 5,220,877 5,264,132
---------- ----------
DEFERRED INCOME TAXES 995,882 865,733
---------- ----------
STOCKHOLDERS' EQUITY
Common stock - $1 par value
Authorized - 5,000,000 shares
Issued - (1998-418,616 shares; 1997-431,456 shares) 418,616 431,456
Retained earnings 13,481,312 12,573,294
Accumulated other Comprehensive income 1,003,066 917,446
---------- ----------
Total stockholders' equity 14,902,994 13,922,196
---------- ----------
24,290,541 20,777,517
========== ==========
See Notes to Financial Statements
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF INCOME AND C0MPREHENSIVE INCOME
For the years ended December 31, 1998, 1997 and 1996
STATEMENTS OF INCOME 1998 1997 1996
REVENUES
Lease rental income 3,715,029 3,491,764 3,262,200
Dividend income 67,750 71,985 79,870
Interest income 21,441 703 235
Gain on sale of assets 79,798 24,336 61,819
---------- ---------- ----------
Total revenues 3,884,018 3,588,788 3,404,124
---------- ---------- ----------
EXPENSES
Depreciation 863,115 807,989 776,699
Interest 548,513 484,119 497,161
Salaries and wages 195,967 251,440 245,874
Property, payroll and misc. taxes 60,706 60,958 56,776
Other 196,002 196,605 188,560
---------- ---------- ----------
Total expenses 1,864,303 1,801,111 1,765,070
---------- ---------- ----------
Income before income taxes 2,019,715 1,787,677 1,639,054
INCOME TAXES-Note 2 748,602 644,595 599,951
---------- ---------- ----------
Net income 1,271,113 1,143,082 1,039,103
========== ========== ==========
Other comprehensive income:
Unrealized holding gains (losses)
marketable securities arising during
period 214,421 572,754 12,340
Less reclassification adjustment for
gains included in net income (79,798) (24,336) (59,144)
Less income taxes applicable to unrealized
holding gains and losses (49,003) (199,624) 10,450
---------- ---------- ----------
Other comprehensive income, net of tax 85,620 348,794 (36,354)
---------- ---------- ----------
Comprehensive income 1,356,733 1,491,876 1,002,749
========== ========== ==========
Net income per share 3.00 2.62 2.30
Weighted average common shares outstanding 423,854 435,761 451,876
See Notes to Financial Statements
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For the three years ended December 31, 1998
STATEMENTS OF STOCKHOLDER'S EQUITY
Accumulated
Other
Common Retained Comprehensive
Stock Earnings Income
---------- ---------- ----------
Balances December 31, 1995 455,655 11,009,782 605,006
Net income - 1996 - 1,039,103 -
Purchase and retirement of common stock (6,410) (121,950) -
Cash dividend - 10 cents per share - (45,379) -
Change in comprehensive income - - (36,354)
---------- ---------- ----------
Balances December 31, 1996 449,245 11,881,556 568,652
Net income - 1997 - 1,143,082 -
Purchase and retirement of common stock (17,789) (407,397) -
Cash dividend - 10 cents per share - (43,947) -
Change in comprehensive income - - 348,794
---------- ---------- ----------
Balances December 31, 1997 431,456 12,573,294 917,446
Net income - 1998 - 1,271,113 -
Purchase and retirement of common stock (12,840) (363,095) -
Change in comprehensive income - - 85,620
---------- ---------- ----------
Balances December 31, 1998 418,616 13,481,312 1,003,066
========== ========== ==========
See Notes to Financial Statements
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
Increase(Decrease) in Cash
1998 1997 1996
---------- ---------- ----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income 1,271,113 1,143,082 1,039,103
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 870,243 815,116 782,712
Deferred income taxes 81,146 73,471 267,183
Gain on sale of assets (79,798) (24,336) (61,819)
Changes in assets and liabilities:
Accounts receivable 12,451 3,125 2,158
Prepaid expenses and deferred charges (2,600) 13 (14,532)
Accounts payable and accrued expenses 2,095 20,745 75,266
Federal and state income taxes 32,045 271,765 (247,800)
---------- ---------- ----------
Net cash provided by operations 2,186,695 2,302,981 1,842,271
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES
Additions to property and equipment (4,200,973) (1,200,486)(1,484,811)
Payments received on mortgage notes - 718 2,586
Purchase of securities (29,035) (37,368) (148,736)
Proceeds - sale of assets 111,758 43,563 119,501
---------- ---------- ----------
Net cash used in
investing activities (4,118,250) (1,193,573)(1,511,460)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on credit lines 4,280,000 3,000,000 2,679,664
Repayments of credit line borrowings (1,805,000) (3,584,585)(2,275,079)
Principal payments on mortgage Notes (107,062) (96,929) (564,704)
Dividends paid - (43,947) (45,379)
Purchase of treasury stock (375,935) (425,186) (128,360)
---------- ---------- ----------
Net cash provided by (used) in
financing activities 1,992,003 (1,150,647) (333,858)
---------- ---------- ----------
Net increase (decrease) in cash 60,448 (41,239) (3,047)
Cash at beginning of year 79,545 120,784 123,831
---------- ---------- ----------
Cash at the end of year 139,993 79,545 120,784
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for:
Interest expense 547,354 523,320 503,527
Income tax payments 635,411 372,830 580,568
NON-CASH INVESTING TRANSACTIONS
Exchange of like kind real restate:
Basis of property received 2,844,858 1,350,850 -
Less cash paid 2,687,105 1,238,957 -
---------- ---------- ---------
Basis of property given up 157,753 111,893 -
========== ========== =========
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES
The Company: National Properties Corporation is lessor of commercial real
estate to tenants under net lease arrangements. The Company seeks to
acquire or develop real estate for lease to commercial tenants anywhere in
the United States. The Company currently owns property located in Arizona,
Georgia, Iowa, Kansas, Missouri, Nebraska, Oklahoma, South Dakota and
Texas.
Marketable Securities: Marketable securities are classified as available-
for-sale and reported at fair market value in accordance with the Statement
of Financial Accounting Standards (SFAS) No. 115. The Registrant's
investments are held for an indefinite period.
Property and Equipment: Property and equipment are recorded at cost and
depreciated on a straight-line basis over the estimated useful lives of 15
to 39 years for buildings and 5 to 7 years for equipment.
Long-Lived Assets: On January 1, 1996, the Registrant adopted SFAS 121
(SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS 121 requires that long-lived
assets and certain identifiable intangible assets to be held and used, or
disposed of, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. During 1998 and 1997, the Company determined that none of its
long-lived assets had been impaired, and therefore the Company did not
adjust the carrying amounts of such assets.
Net Earnings Per Common Share: Net earnings per share are based on the
weighted average number of shares outstanding 423,854 in 1998; 435,761 in
1997; and 451,876 in 1996.
Profit-Sharing Plan: The Registrant has a profit sharing plan adopted in
1965, for eligible employees, under which it contributes a portion of its
annual earnings. The plan and all of its amendments have been approved by
the Internal Revenue Service. The Registrant's contribution to the plan
was $29,344 in 1998; $35,662 in 1997; and $36,166 in 1996.
Lease Rentals - Commercial Real Estate: Lease rentals received on
commercial real estate are accounted for under the operating method;
rentals are included in income as earned over the term of the lease.
Estimates: The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from the
estimates that were used.
Fair Value of Financial Instruments: The Registrant's financial instruments
are valued at their carrying amounts which are reasonable estimates of fair
value.
Recent Accounting Pronouncement: 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
financial statements is to present in the statement of income, unrealized
gains on marketable securities net of income taxes, which in periods prior
to 1998 had been reported as annual adjustments directly to stockholders'
equity. All prior periods reported on have been restated to give effect to
FAS No. 130.
NOTE 1 - PROPERTIES UNDER LEASE
The Registrant is the lessor of commercial real estate under noncancelable
operating leases requiring fixed and contingent rentals through the year 2017.
Contingent rentals based on sales overages amounted to $76,903 in 1998;
$71,663 in 1997 and $56,294 in 1996. The following is a schedule of future
minimum rentals at December 31, 1998, not including renewal options and
contingent rentals.
Year ended December 31, Amount
1999 4,050,019
2000 3,708,373
2001 3,594,663
2002 3,367,565
2003 3,069,114
Subsequent years 24,859,197
----------
Aggregate future minimum rentals 42,648,931
==========
NOTE 2 - INCOME TAXES
Income tax expense for the years ended December 31, 1998, 1997 and 1996 is
comprised of the following:
1998 1997 1996
---------- ---------- ----------
Current
Federal 553,572 498,071 273,807
State 113,884 73,053 58,961
---------- ---------- ----------
Total current 667,456 571,124 332,768
Deferred 81,146 73,471 267,183
---------- ---------- ----------
748,602 644,595 599,951
========== ========== ==========
A reconciliation of the statutory federal income tax rate of 34 percent in
1998, 1997 and 1996 to the effective tax rate is as follows:
1998 1997 1996
---------- ---------- ----------
Statutory federal income tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 4.0 3.1 3.8
Tax savings on dividends (0.9) (1.0) (1.2)
---------- ---------- ----------
Total tax provision 37.1 36.1 36.6
========== ========== ==========
Temporary differences which give rise to deferred tax liabilities in 1998 and
1997 are as follows:
1998 1997
---------- ---------
Excess of tax over book depreciation 421,800 340,654
Unrealized gain on marketable securities 574,082 525,079
---------- ---------
Total tax provision 995,882 865,733
========== =========
Deferred income taxes result from the temporary differences in the
recognition of income and expenses for tax and financial statement
purposes. The source of the temporary difference was due to a change in
depreciation for income tax reporting in 1996. The Small Business Job
Protection Act of 1996 (The Act) amended the Internal Revenue Code
regarding depreciation of motor fuel retail outlets permitting the
Registrant to depreciate its qualifying convenience stores over a life of
20 years. The Act further provided that this change could be applied
retroactively to all such properties placed in service after 1986. The
retroactive change decreased the Registrant's federal and state income
taxes for 1996 by $267,183. This amount was recorded as a deferred tax
liability as of December 31, 1996. For financial statement purposes the
Registrant depreciates its convenience stores over an average useful life
of 30 years.
NOTE 3 - MARKETABLE SECURITIES
The Company's marketable securities consist of equity securities and were
carried at fair market value. At December 31, 1998, marketable securities
available-for-sale had an aggregate market value of $2,279,982 and a cost
of $702,833 resulting in a gross unrealized gain of $1,577,149. At
December 31, 1997, marketable securities had an aggregate market value of
$2,148,283 and a cost of $705,758 for a gross unrealized gain of
$1,442,525. The increase or decrease in unrealized holding gains each year
is shown as other comprehensive income in the statement of income and
comprehensive income.
The Company had gross realized gains of $79,798, $24,336 and $59,144 on the
sale of marketable securities during 1998, 1997 and 1996 respectively and
no realized losses. Gain or loss on sales was based on the cost of the
securities using the specific identification method.
NOTE 4 - NOTES PAYABLE - BANKS
As of December 31, 1998, the registrant had a $2,500,000 unsecured working
capital line of credit with Norwest Bank Iowa, N.A. The credit line which
has been in effect for the past several years was created to facilitate the
Registrant's real estate acquisitions.
Borrowings will bear interest at .25% less than the bank's base (Prime)
rate floating. No compensating balance is required but a non-usage fee of
1/8 of 1% is payable quarterly to the bank on the unused portion of the
line. As of December 31, 1998, there was a $2,400,000 outstanding balance
on this loan, as compared to $.0 at December 31, 1997.
As of December 31, 1998, the Registrant had a $6,000,000 10-year, revolving
credit line with Norwest Bank Iowa, N.A. The $6,000,000 loan commitment
reduces $600,000 beginning December 31, 1997, and each year thereafter
until final maturity on December 31, 2006. Borrowings secured by first
mortgages on various properties, bear interest at .25% less than the bank's
base (Prime) rate floating, and no compensating balance is required. As of
December 31, 1998, the outstanding balance on this loan was $3,700,000 as
compared to $3,325,000 as of December 31, 1997.
In November, 1994, the Registrant established a $3,000,000 10-year
revolving loan with Brenton Bank, N.A., Des Moines, Iowa. Effective June
4, 1998, this loan was assumed by Norwest Bank Iowa, N.A. The credit line
reduces $300,000 beginning December 31, 1995, and each year thereafter
until final maturity on December 31, 2004. Borrowings secured by first
mortgages on properties, bear interest at .25% less than the bank's base
(Prime) rate floating. At December 31, 1998, the outstanding balance on
this loan was $1,800,000 compared to $2,100,000 as of December 31, 1997.
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
Rate 1998 1997
---------- ---------- ----------
Real estate mortgage notes
Due 2000 9.984% 139,131 246,194
Norwest Bank Iowa, N.A.
Due 2006 - See Note 4 7.5% 3,700,000 3,325,000
Norwest Bank Iowa, N.A.
Due 2004 - See Note 4 7.5% 1,800,000 2,100,000
---------- ----------
5,639,131 5,671,194
Less-Current principal maturities 418,254 407,062
---------- ----------
5,220,877 5,264,132
========== ==========
Annual principal maturities over the next five years are as follows:
1999 2000 2001 2002 2003
------- ------- ------- ------- -------
Mortgage Note 118,254 20,878 - - -
Norwest Bank - - 100,000 600,000 600,000
Norwest Bank 300,000 300,000 300,000 300,000 300,000
NOTE 6 - REVENUE FROM MAJOR TENANTS
Lease rental revenue from three major tenants were $2,813,623, $2,612,833 and
$2,426,281 for the years ended December 31, 1998, 1997 and 1996 respectively,
representing 75% of total rental income for these years. Rents from these
major tenants were as follows:
1998 1997 1996
---- ---- ----
Industry Revenue % Revenue % Revenue %
Convenience stores 2,005,143 54.0 1,737,621 49.8 1,560,986 47.9
Garden centers 388,391 10.5 471,775 13.5 469,260 14.4
Restaurants 420,088 11.3 403,437 11.5 396,035 12.1
--------- ---- --------- ---- --------- ----
2,813,622 75.8 2,612,833 74.8 2,426,281 74.4
========= ==== ========= ==== ========= ====
NOTE 7 - QUARTERLY OPERATING DATA (UNAUDITED)
The following is a summary of unaudited quarterly results of operations:
Quarter
First Second Third Fourth
---------- ---------- ---------- ----------
1998
Revenues 1,032,111 942,310 939,312 970,285
Net Income 347,158 282,492 331,797 309,666
Per share 82 cents 67 cents 79 cents 72 cents
1997
Revenues 928,414 894,570 864,620 901,184
Net Income 293,631 280,895 276,107 292,449
Per share 66 cents 63 cents 63 cents 70 cents
NATIONAL PROPERTIES CORPORATION
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
Description Encum- Initial costs Cost capi- Gross
Accumulated Date ac- Life on
brances to company talized amount at
depreciation quired which de-
subsequent which car-
preciation
to acquis- ried at
in latest in-
tion close of
come state-
period
is
computed
<>c>
QuikTrip Stores
St. Louis, MO 1,381,946 1,454,000 121,433 1,575,433
326,850 02/28/92 31 1/2
Econofoods,
Sioux Falls, SD 2,632,970 -0- 2,632,970
2,817 12/01/98 39
Garden Center
Metro Garden Center
Arlington, TX 1,520,000 1,700,000 -0- 1,700,000
308,108 04/01/93 31 1/2
Other Properties 2,737,185 20,226,661 871,636 21,098,297
9,149,355 1976/1998 15/39
---------- ----------- ---------- ----------
- ----------
Totals $5,639,131 $26,013,631 $ 993,069 $27,006,700
$9,787,130
========== =========== ========== ===========
==========
<captions>
NOTE TO SCHEDULE III
Real Estate
1998 1997 1996
Balance, Beginning of period $23,045,531 $21,896,495 $20,572,495
additions 3,961,169 1,227,923 1,324,000
----------- ----------- -----------
27,006,700 23,124,418 21,896,495
Reductions -0- 78,887 -0-
----------- ----------- -----------
Balance, End of period $27,006,700 $23,045,531 $21,896,495
=========== =========== ===========
Accumulated Depreciation
Real Estate
1998 1997 1996
Balance, Beginning of period $ 8,935,995 $ 8,202,683 $ 7,432,040
additions 851,135 805,296 770,643
----------- ----------- -----------
9,787,130 9,007,979 8,202,683
Reductions -0- 71,984 -0-
----------- ----------- -----------
Balance, End of period $ 9,787,130 $ 8,935,995 $ 8,202,683
=========== =========== ===========