NATIONAL PROPERTIES CORP - 10-K Annual Report

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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, 2002

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.

$8,876,527 as of March 1, 2003

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, 2003 - 410,973 Shares

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 2003 annual meeting of Stockholders See Part III

PART I

Item 1. Business

(a) General Development of Business. The Registrant, (also referred to as
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.

In May, 2002, the Company completed the purchase of a property in College
Station, Texas at a cost of $3,500,000. The property is leased to Academy
LTD. (a Texas limited partnership), a full-line sporting goods retailer, on a
net lease basis for a term of twenty years that commenced May 15, 2002. The
lease provides for annual rents of $327,250 during the first ten years and
$359,975 during the last ten years of the initial lease term. Funds required
for the purchase were drawn on the Company's bank credit line.

At the Company's annual meeting of Stockholders held May 17, 2002, the Company
declared a $0.16 per share dividend to be paid July 31, 2002, to stockholders
of record on June 28, 2002. The dividend amounts to $65,988.

In August, 2002, the Company entered into a lease agreement with IHOP
Properties, Inc. (a California corporation) whereby the Company agreed to
purchase from IHOP, a building constructed by IHOP on one of the Company's
three commercial lots in Ankeny, Iowa. IHOP completed construction on
December 15, 2002, and the Company purchased the building for a cost of
$1,046,192, including real estate commissions of $83,100 paid in connection
with obtaining the lease. IHOP (International House of Pancakes) in turn,
leased the property from the Company for an initial term of twenty-five years.
The lease agreement provides for annual rental income of $135,000 during the
first five years of the lease and escalates each five year period to $164,850
in the last five years of the initial lease term.

(b) Financial Information About Industry Segments. The Company operates in
a single industry segment.

(c) Narrative Description of Business.

Real Estate Held For Investment

The Company seeks to acquire or develop improved real estate properties
suitable for lease to commercial tenants. 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. Primary factors considered by the Company 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 Company to utilize the property or
dispose of it upon termination of the lease.

All of the investment properties now owned by the Company are located in
Arizona, Colorado, Georgia, Iowa, Kansas, Missouri, Nebraska, North Carolina,
Oklahoma, South Dakota, Tennessee and Texas. The Company 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 Company is normally purchased with
funds drawn on the Company's lines of credit. In most cases, the Company
gives careful consideration to the rate of return which it will receive from
an investment based on the original cost thereof to the Company 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 Company are not held for
resale, but are held as productive assets. The Company may, however, dispose
of properties depending upon the circumstances then existing.

Virtually all of the Company'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 Company 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 Company; as well as many other types of
full-time and part-time real estate investors.

At December 31, 2002, the Company owned 41 leased properties having an
aggregate cost of $43,928,415. The rental income for 2002 on these leased
properties amounted to $5,364,141. Nine of the properties are leased to four
restaurant operators and account for 17.5% of rental income; eighteen
QuikTrip, two Gate Petroleum and one Kum & Go convenience store properties
account for 49.5% of rental income; three office buildings: two retail sports
buildings and a supermarket building account for 21.1% of rental income; two
telephone service center buildings and one Goodyear Tire Center building
account for 4.7% of rental income; two nurseries (garden centers) account for
5.0% of rental income, and other properties held for future development
account for 2.2% of rental income.

As of December, 2002, the tenants of all 41 leased properties were in
compliance with the terms of their respective leases.

Leases of real property to QuikTrip Corporation represent, in the aggregate, a
significant portion of the Company's business in terms of revenues and real
estate portfolio. The Company has done business with QuikTrip Corporation
since 1980, during which time QuikTrip Corporation has made all of its lease
payments to the Company on a timely basis. QuikTrip Corporation is a private
company which operates convenience stores in seven southern and midwestern
states. For its fiscal year ending April 28, 2002, QuikTrip Corporation
reported revenues of $3,050,000,000.

Other Investments

The Company has a portion of its assets invested in marketable securities
which had a market value of $926,846 as of December 31, 2002.

Employees

The Company currently employs 6 persons; 3 full-time employees and 3 part-time
employees.

a Mortgaged to Lender - See Note 5 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
Company .

(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 two platted lots totaling 4 acres.

(2) Real Estate, 4745 - 2nd Avenue, Des Moines, Iowa.

106,000 sq. ft. of land and a 3,200 sq. ft. building leased for $4,500 per
month, the lease expires July 1, 2005. 56,000 sq. ft. of unused land is
available for development.

(3) Real Estate, 845 Sixth Avenue, Des Moines, Iowa.

6,000 square foot concrete block building and lot. This building is rented
for $1,500 per month, and the lease expires April 30, 2003.

Item 3. Legal Proceedings.

The Company 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 Company's Common Stock and Related Security Holder
Matters.

The Common Stock of the Company (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 2002 and 2001. N/A indicates prices were not available.

There was a cash dividend of sixteen cents a share paid in 2002. Future
dividend declarations will be dependent upon the earnings of the Company, its
financial condition, its capital requirements and general business conditions.

There were approximately 575 stockholders of record as of March 1, 2003.

*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, 2002, the Company's primary sources of liquidity were $347,000
in cash; marketable securities with a market value of approximately $927,000;
and a $3,750,000 remaining loan balance available on a $15,000,000 revolving
line of credit with a local bank. (See Note 5 of the Notes to Financial
Statements). In addition, the Company owns unencumbered real estate having an
aggregate depreciated cost of approximately $27,000,000. Management believes
that its cash flow from operations which was $3,397,000, $2,770,000 and
$1,919,000 for 2002, 2001 and 2000, respectively and these other potential
sources of cash will be sufficient to finance current and projected
operations.

Each year, for many years, the Company has reacquired a limited amount of its
common stock. During 2002, the Company reacquired 1,850 shares of its
outstanding common stock at an average cost of $46.95. During the three years
ended December 31, 2002, 5,130 shares were repurchased in the open market and
negotiated transactions. The total cost of the reacquired shares amounted to
$210,229, an average per share cost of $40.98.

Leases of real property to QuikTrip Corporation represent, in the aggregate, a
significant portion of the Company's business in terms of revenues and real
estate portfolio. Each lease pertains to an individual convenience store.
Rent payments to be made by QuikTrip Corporation under the leases are payable
irrespective of the performance of the convenience store location under lease,
except that a few of the leases provide for additional rent based on a
percentage of merchandise sales at that location in excess of a fixed amount.
The terms of the leases are triple-net. The leases have expiration dates and
renewal options as shown in the table included as part of Item 2. QuikTrip
Corporation is a private company which operates convenience stores in seven
southern and midwestern states. For its fiscal year ending April 28, 2002,
QuikTrip Corporation reported revenues of $3,050,000,000. The percentage of
the Company's business conducted with QuikTrip Corporation has materially
increased in recent years. Management considers this increased concentration
of the Company's business with QuikTrip Corporation to be a favorable
development and does not believe it represents an unacceptable risk.
Management considers QuikTrip Corporation to be a highly desirable commercial
tenant. During the course of the Company's dealings with QuikTrip Corporation
over more than 20 years, QuikTrip Corporation has made all of its lease
payments to the Company on a timely basis. Management has concluded,
following its review of the current audited financial statements of the
QuikTrip Corporation, that the financial position, operating results and cash
flows of QuikTrip Corporation continue to justify confidence in its ability to
meet all of its obligations under its leases with the Company.

Results of Operations
2002 Compared to 2001

Net income in 2002 totaled $2,087,000 or $5.06 per share compared with
$2,100,000, or $5.08 per share in 2001.

Revenues

Lease revenues in 2002 were $5,364,000 up $568,000 or 11.9% over 2001. The
increase in lease revenues, relative to 2001, was attributable to: (1) the
acquisition of a sporting goods store property and a restaurant property in
2002, and a sporting goods store property and two convenience store properties
in 2001, which when combined added $584,000 to lease revenue in 2002; (2) a
decrease in lease revenues of $31,000 due to the disposition of an office
building in 2001; (3) a decrease of $21,000 in contingent rents based on sales
overages, and (4) an increase in lease revenues of $36,000 due to scheduled
rent increases for several tenants in 2002.

The Company recorded gains on the sale of securities of $36,000 in 2002,
compared to $122,000 in 2001, while other portfolio income decreased $25,000
from the prior year resulting from the sale of securities and the early payoff
on a mortgage note receivable.

The Company recorded a gain of $490,000 from the sale of its GTech office
building in 2001, but had no property sales in 2002.

Operating Expenses

Operating expenses totaled $2,116,000 in 2002 compared to $2,266,000 in 2001.

Depreciation expenses increased $127,000 in 2002 over 2001 as a result of the
Company spending $4.3 million for new buildings during 2002 and $7.2 million
in 2001.

Interest expense decreased $91,000 in 2002 primarily due to a lower average
borrowing rate. The Company borrowed $4.4 million on its credit line and
repaid $3.4 million during 2002 resulting in a $1 million increase in
outstanding debt over 2001. The average outstanding borrowings in 2002 was
$10,550,000 compared to $7,988,000 in 2001. Partially offsetting the higher
average debt in 2002 was declining interest rates as rates fell from 9% at the
beginning of 2001 to 3.5% at December 31, 2002. The average interest rate
paid by the Company in 2002 was 3.995% compared to 6.4% in 2001.

Other general and administrative expenses (G & A) include personnel cost, real
estate taxes, repairs and cost of corporate functions including legal,
accounting, directors, and corporate donations. G & A expenses, excluding
donations, increased approximately $84,000 in 2002 over 2001, and primarily
reflects increases in compensation cost, property taxes on the Company's
Ankeny, Iowa property, and professional fees.

There were no donations in 2002 compared to $270,000 in 2001.

Results of Operations
2001 Compared to 2000

Net income in 2001 totaled $2,100,000 or $5.08 per share compared with
$1,679,000, or $4.05 per share in 2000.

Revenues

Lease revenues in 2001 were $4,796,000 up $443,000 or 10.2% over 2000. The
increase in lease revenues, relative to 2000, was attributable to: (1) the
acquisition of a sporting goods store property and two convenience store
properties in 2001 and a restaurant property added in September, 2000, which
when combined added $558,000 to lease revenue in 2001; (2) a decrease in lease
revenues of $81,000 due to the disposition of an office building in the
current year and two telephone buildings and a garden center in 2000; (3) a
decreased on $51,000 in contingent rents based on sales overages, and (4) an
increase in lease revenues of $17,000 due to scheduled rent increases for
several tenants in 2001.

The Company recorded gains on the sale of securities of $122,000 in 2001, as
compared to $10,000 in 2000, while other portfolio income decreased $10,000
from the prior year as a result of the sale of marketable securities.

The Company also recorded a gain of $490,000 from the disposition if its GTech
office building in 2001. See discussion in Item 1 above. The sale of two
telephone buildings in 2000 resulted in gains totaling $300,000.

Operating Expenses

Operating expenses were $2,226,000 in 2001, up $194,000 or 9.4% from a total
of $2,072,000 in 2000. The increase was primarily the result of higher
depreciation and interest expense resulting from the acquisition of $7.7
million in new property during 2001 and $1.8 million in new property in
September of 2000. Depreciation expense increased $125,000 in 2001 over 2000
as a result of these acquisitions.

Interest expenses increased $45,000 to $512,000 in 2001 due to funding new
property acquisitions. The Company borrowed $7.5 million on its credit line
and repaid $2.85 million during 2001 resulting in an increase of $4.65 million
in debt at December 31, 2001. The average outstanding debt in 2001 was
$7,988,000 compared to $5,249,000 in 2000. Partially offsetting the higher
average debt was lower interest rates paid by the Company as rates fell from
9% at the beginning of 2001 to 4% at December 31, 2001. The average interest
rate paid by the Company in 2001 was 6.4% compared to 8.9% in 2000.

Other general and administrative expenses (G & A) include personnel cost, real
estate taxes, repairs and cost of corporate functions including legal,
accounting, directors ad corporate donations. G & A expenses, excluding
donations, increased approximately $59,000 in 2001 over 2000, and primarily
reflected increases in compensation cost, property taxes on the Company's
Ankeny, Iowa property, repairs, and professional fees.

Donations of $270,000 in connection with the exchange of an office building in
2001, noted above, decreased by $35,000 from the prior year.

Provision for Income taxes

The Company's effective income tax rate was 34.6% in 2001, compared to 37.1%
in 2000. The lower effective rate for 2001 is the result of reporting the
Company's 2001 tax-free exchange of real estate differently for financial and
income tax purposes. As noted above, the Company acquired a convenience store
property in Concord, North Carolina in this tax-free exchange by paying some
cash and giving up its GTech office building located in Des Moines, Iowa.
Excluding the effects of the 2001 tax-free exchange, the effective tax rate
for 2001 would have been 37.4% compared to 37.1% in 2000 and 37.0% in 1999.
The Company follows the accounting policy of not recognizing gain on exchanges
but recording the investment in the property acquired in the exchange at the
basis of the property given up. The 2001 tax-free exchange of the GTech
property involved a gift. Statement of Financial Accounting Standards No. 116
requires that such a gift be recorded at fair market value. Therefore the
Company was forced to treat this transaction as an exception to its accounting
policy of not recognizing gain on an exchange and recorded a gain on the
transactions for financial statement purposes.

Item 8. Financial Statements and Supplementary Data.

Financial statements filed herewith:

Balance Sheets as of December 31, 2002 and December 31, 2001.

Statements of Income and Comprehensive Income for the years ended
December 31, 2002, December 31, 2001 and December 31, 2000.

Statements of Stockholders' Equity for the years ended December 31,
2002, December 31, 2001 and December 31, 2000.

Statements of Cash Flows for the years ended December 31, 2002,
December 31, 2001 and December 31, 2000.

Notes to Financial Statements.

Report of Independent Auditors.

Item 9. Disagreements on Accounting and Financial Disclosures.

NONE

PART III

In answer to Items 10, 11, 12 and 13 of Part III, the Company incorporates by
reference the required information which is contained in its definitive Proxy
Statement. The Proxy Statement is for the 2003 annual meeting of stockholders
and will be filed with the Commission not later than 120 days after December
31, 2002.

PART IV

Item 14. Controls and Procedures.

Based on their evaluation of the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date
of this annual report, the undersigned officers of the Company have concluded
that such disclosure controls and procedures are adequate. There were no
significant changes in internal controls or in other factors that could
significantly affect internal controls, including any corrective actions with
regard to significant deficiencies and material weaknesses, subsequent to the
date of the most recent evaluation by the undersigned officers of the Company
of the design and operation of internal controls which could adversely affect
the Company's ability to record, process, summarize and report financial data.

Item 15. 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, 2002.
Note to Schedule III as of December 31, 2002 and 2001.
All other Schedules are omitted because they are inapplicable or not
required.
(b) The Company filed no report on Form 8-K during the last quarter of
2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

___NATIONAL PROPERTIES CORPORATION___ (Registrant)

Date __3/21/03__ By _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and Chief
Executive Officer

Date __3/21/03__ By _____/S/__Kristine_M._Fasano__________
Kristine M. Fasano, Vice President,
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 Company and in the capacities and on the
dates indicated.

DIRECTORS OF THE COMPANY

Date __3/21/03__ By _____/S/__Raymond_Di_Paglia________
Raymond Di Paglia

Date __3/21/03__ By _____/S/__Kristine_M._Fasano_______
Kristine M. Fasano

Date __3/21/03__ By _____/S/__Robert_H._Jamerson_______
Robert H. Jamerson

Date __3/21/03__ By _____/S/__Tim Lynch________
Tim Lynch

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 __3/21/03__ 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 coition and results of
operations of the registrant.

Date __3/21/03__ By _____/S/__Kristine_M._Fasano__________
Kristine M. Fasano, Vice President,
Secretary and Treasurer

CERTIFICATION

I, Raymond Di Paglia, certify that:

1. I have reviewed this annual report on Form 10-K of National Properties
Corporation;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and

c) presented in this annual 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
annual report whether 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 __3/21/03__ By _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and Chief
Executive Officer

I, Kristine M. Fasano, certify that:

1. I have reviewed this annual report on Form 10-K of National Properties
Corporation;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report ( (the "Evaluation Date"); and

c) presented in this annual 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
annual report whether 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 __3/21/03__ By _____/S/__Kristine_M._Fasano__________
Kristine M. Fasano, Vice President,
Secretary and Treasurer

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, 2002 and 2001 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, 2002. 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 auditing standards generally
accepted in the United States of America. 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, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.

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 15(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 6, 2003
West Des Moines, Iowa

1501 - 42nd Street, Suite 130, West Des Moines, IA 50266-1005, Phone (515)
223-0221 Fax: (515) 223-1030

See Notes to Financial Statements

See Notes to Financial Statements

See Notes to Financial Statements

See Notes to Financial Statements

NOTES TO FINANCIAL STATEMENTS
SUMMARY OF ACCOUNTING POLICIES

The Company: National Properties Corporation is a 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, Colorado,
Georgia, Iowa, Kansas, Missouri, Nebraska, North Carolina, Oklahoma, South
Dakota, Tennessee, and Texas.

Marketable Securities: 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. Gains or losses on securities sold are based on the
specific identification method.

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.

Exchange of Nonmonetary Assets: 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 Principal Boards
Opinion #29 "Accounting for Nonmonetary Transactions", by recording the
property received in the exchange at the recorded amount of the property
surrendered. Therefore, no gain or loss is recognized on the disposed
property.

Impairment of Long-Lived Assets: The Company evaluates its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. During 2002 and 2001, 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 of 412,250 in 2002; 413,560 in
2001 and 414,743 in 2000.

Profit-Sharing Plan: The Company 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 Company's contribution to the plan was $61,382
in 2002, $35,547 in 2001 and $33,508 in 2000.

Lease Rentals - 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 Company's financial instruments are
valued at their carrying amounts which are reasonable estimates of fair value.

Recently Adopted Accounting Pronouncements: Effective January 1, 2002,
the Company adopted Financial Accounting Standards Board Statement SFAS
No. 144. "Accounting for the Impairment or Disposal of Long-Lived
Assets", which supersedes previous guidance on financial accounting and
reporting for the impairment or disposal of long-lived assets and for
segments of a business to be disposed of. Whereas the adoption of SFAS
144 did not effect the Company's financial position or results of
operations for 2002, future impairment reviews may result in charges
against earnings to write down the value of long-lived assets.

New Accounting Standards: In July, 2002, The Financial Accounting
Standards Board issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146), which addresses financial
accounting and reporting associated with exit or disposal activities.
Under SFAS 146, the Company will measure costs associated with an exit
or disposal activity at fair value and recognize the costs in the period
in which the liability is incurred rather than at the date of a
commitment to an exit or disposal plan. Management believes there will
be no material effect on the Company's financial position, results of
operations or shareholders' equity at the time of adoption. The Company
is required to adopt SFAS 146 for all exit and disposal activities
initiated after December 31, 2002.

NOTE 1 - MORTGAGE RECEIVABLE

The Company holds a mortgage note dated June 15, 2000 in the original amount
of $350,000 from Mike's Garden Centers, Inc., a Texas corporation. The
mortgage is payable to the Company as follows: June 30, 2001 - $150,000, June
30, 2002 - $100,000 and June 30, 2003 - $100,000. Accrued interest on the
note is due and payable monthly at 10%. The mortgage is collateralized by
commercial real estate located in Dallas, Texas. The mortgagor is making
monthly payments of $4,918 which includes interest at 10%, in addition to the
principal payments required under the note. The mortgage note was paid off in
2002.

NOTE 2 - PROPERTIES UNDER LEASE

The Company is the lessor of commercial real estate under noncancelable
operating leases requiring fixed and contingent rentals through the year 2027.
Contingent rentals based on sales overages amounted to $71,870 in 2002;
$92,618 in 2001; and $143,864 in 2000. The following is a schedule of future
minimum rentals at December 31, 2002, not including renewal options and
contingent rentals.

NOTE 3 - INCOME TAXES

Income tax expense for the years ended December 31, 2002, 2001 and 2000 is
comprised of the following:

NOTE 4 - MARKETABLE SECURITIES

The Company's marketable securities consist of equity securities and were
carried at fair market value. At December 31, 2002, marketable securities
available-for-sale had an aggregate market value of $926,846 and a cost of
$500,346 resulting in an unrealized gain of $426,500. At December 31, 2001,
marketable securities had an aggregate market value of $1,438,706 and a cost
of $618,036 for an unrealized gain of $820,670. 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 $52,712 and gross realized losses of
$16,678 on the sale of marketable securities in 2002. In 2001 and 2000, the
Company had gross realized gains of $121,701 and $9,931 respectively and no
realized losses. Gains on sales were based on the cost of the securities
using the specific identification method.

NOTE 5 - 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 December 31, 2002, $11,250,000 ($10,250,000 at December
31, 2001) was outstanding under the agreement and matures on April 30, 2004.
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 December 31, 2002, the outstanding
balance accrued interest at 3.5%. In addition, the agreement requires the
Company to pay an annual commitment fee of 1/8 of 1% (payable quarterly) on
the unused portion of the line of credit commitment. The credit agreement
contains various covenants, including limitations on additional borrowings and
maintaining a minimum free cash flow as defined in the agreement of $1,800,000
per year measured as of the end of each fiscal quarter on an annualized basis.
The Company was in compliance with all covenants at December 31, 2002. The
line of credit is secured by first mortgages on ten properties that had a net
book value of $5,900,000 at December 31, 2002.

NOTE 6 - CONCENTRATIONS

The following tenants accounted for 10% or more of the Company's lease
revenues:

NOTE 7 - QUARTERLY OPERATING DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations:

Quarter
First Second Third Fourth
---------- ---------- ---------- ----------

2002
Revenues 1,340,336 1,337,251 1,379,413 1,386,721
Net Income 545,750 511,655 509,217 520,862
Per share $1.32 $1.24 $1.23 $1.27

2001
Revenues 1,209,828 1,263,198 1,211,806 1,791,167
Net Income 437,519 488,927 445,365 728,345
Per share $1.06 $1.18 $1.08 $1.76

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
ment is

computed

Academy Sports
College Stn, TX $ - $ 3,248,000 - $ 3,248,000 $
52,130 05/15/02 39
Academy Sports
Nashville, TN - 3,749,612 - 3,749,612
172,734 03/15/01 39
Econofoods
Sioux Falls, SD - 2,632,970 - 2,632,970
272,854 12/01/98 39
Other Properties 11,250,000 27,901,833 $ 993,069 28,894,902
10,738,385 1976/2002 15/39
---------- ----------- ---------- ----------
- ----------
Totals $11,250,000 $37,532,415 $ 993,069 $38,525,484
$11,236,103
========== =========== ========== ===========
==========
(1)

NOTE TO SCHEDULE III
Real Estate
Buildings and Improvements
2002 2001 2000

Balance, Beginning of period $34,231,292 $27,200,718 $27,013,359
additions 4,294,192 7,205,527 1,744,624
----------- ----------- -----------
38,525,484 34,406,245 28,757,983
Reductions - 174,953 1,557,265
----------- ----------- -----------
Balance, End of period $38,525,484 $34,231,292 $27,200,718
=========== =========== ===========

Accumulated Depreciation
Buildings and Improvements
2002 2001 2000
Balance, Beginning of period $10,196,236 $ 9,435,182 $10,014,348
additions 1,039,867 912,170 787,622
----------- ----------- -----------
11,236,103 10,347,352 10,801,970
Reductions - 151,116 1,366,788
----------- ----------- -----------
Balance, End of period $11,236,103 $10,196,236 $ 9,435,182
=========== =========== ===========

(1) Land costs totaling $5,402,931 not included.