NATIONAL PROPERTIES CORP - 10-Q Quarterly Report

Back to GetFilings.com

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For quarter ended June 30, 2003 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 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)
410,383 SHARES AS OF JUNE 30, 2003

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS

The balance sheet at June 30, 2003, and the statements of income and
comprehensive income and cash flows for the periods ended June 30, 2003 and
June 30, 2002 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 had 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 interim financial statements is to
present in the statement of income, unrealized gains and losses on marketable
securities net of income taxes.

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. Therefore, no gain or
loss is recognized on the disposed property.

Property Held For Exchange

At June 30, 2003, the Company had entered into an agreement to engage in a
multiple property tax-free exchange, pursuant to which it will make a cash
payment and surrender three properties in exchange for a new Walgreen store
property being built in Tulsa, Oklahoma. The Company expects that the
aggregate exchange value of these three properties will be approximately
$3,790,000. Closing on the exchange is expected upon completion of the
construction of the Walgreen store on October 31, 2003. The Company will
record the cost of the new Walgreen store property at the carrying value of
the three properties surrendered ($1,650,394) plus cash expected to be paid
at closing of $595,000 less an earnest money deposit of $100,000.

Long Term Debt

The Company has a revolving credit agreement dated February 8, 2001, with
Wells Fargo Bank, N.A. The credit facility permits the Company to borrow up
to $15,000,000. At June 30, 2003, $9,650,000 ($11,250,000 at December 31,
2002) was outstanding under the agreement which matures on April 30, 2005.
The revolving period of the agreement provides for annual extensions each
April 30th at the mutual agreement of the bank and the Company. It is the
Company's intention to request an extension of the revolving period, as
provided by the agreement. Advances under the credit facility bear interest
at 0.75% below the bank's base rate. At June 30, 2003, the outstanding
balance accrued interest at 3.25%. In addition, the agreement requires the
Company to pay an annual commitment fee of 1/8 of 1% (payable quarterly) on
the unused portion of the line of credit commitment. The credit agreement
contains various covenants, including limitations on additional borrowings
and maintaining a minimum free cash flow, as defined in the agreement, of
$1,800,000 per year measured as of the end of each fiscal quarter on an
annualized basis. The Company was in compliance with all covenants at June
30, 2003. The line of credit is secured by first mortgages on ten properties
that had a net book value of approximately $5,800,000 at June 30, 2003.

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. 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.

Amendment of Chief Executive Officer's Employment Contract

The Company amended the 1998 employment contract it has with its chief
executive officer effective January 1, 2003. The amended agreement
establishes a basic compensation of $145,000 for 2003, with an annual
increase equal to the greater of 3% or subsequent changes in the Consumer
Price Index.

Board of Directors Approve Dividend Payment

At the Company's annual meeting of Stockholders held May 16, 2003, the
Company declared a $0.17 per share dividend to be paid July 31, 2003 to
stockholders of record on June 30, 2003. The dividend totals $69,765.

Property Held For Exchange

On or about June 30, 2003, the Company entered into an agreement to engage in
a multiple property tax-free exchange, pursuant to which it will make a cash
payment and surrender three properties in exchange for a new Walgreen store
property being built in Tulsa, Oklahoma. The Company's three properties
being surrendered in the exchange include: (1) a garden center property
located in Arlington, Texas which has an exchange value of $2,100,000; (2) a
nursery property located in Glendale, Arizona which has an exchange value of
$790,000; and (3) 2.8 acres of land held for development in Ankeny, Iowa
which has an exchange value of $900,000. The three properties to be
exchanged have been or in the immediate future will be transferred to a
qualified intermediary handling the exchange for the Company so as to qualify
as a tax-free exchange under Internal Revenue Code Section 1031. Proceeds
from the Arlington, Texas and Glendale, Arizona properties are being held by
the intermediary, and the proceeds from the Ankeny, Iowa property will be
deposited with the intermediary when closing on this property occurs (closing
expected August 13, 2003). Closing on the exchange is expected to be October
31, 2003, upon completion of the construction of the Walgreen store. The
additional funds required to be paid by the Company under the terms of the
tax-free exchange for the purchase of the Walgreen property of approximately
$595,000 less a $100,000 non-refundable earnest deposit, will be drawn on the
Company's line of credit. Upon closing on the purchase of the Walgreen
store, the Company will assume an assignment of the existing lease for the
property now held by the developer. The lease is a triple net lease
providing for annual rents of $310,000 for a period of twenty-five years.

Operating Results

Lease revenues in the first half of 2003 were $2,817,000 compared to
$2,650,000 for the same period in 2002, an increase of $167,000 or 6.3%. The
increase in lease revenues relative to the first six months of 2002, was
attributable to: (1) the acquisition of a sporting goods store property in
May 2002, and a restaurant property in December 2002, which in the aggregate
added $189,000 to lease revenues for the first six months of 2003, (2) a
decrease in lease revenues from Mikes Garden Center and Tip Top Nursery
properties of $16,000 for reasons noted above in "Management's Discussion and
Analysis", (3) a decrease in contingent rents of $8,000 and, (4) an increase
in lease revenues of $2,000 due to scheduled rent increases for several
tenants.

The Company recorded gains from the sale of securities of $22,000 in the
first half of 2003 compared to $34,000 in the first half of 2002. Other
investment income also declined in 2003 primarily due to the early payoff on
a mortgage note receivable in May 2002 and also the loss of dividend income
on securities sold.

The Company recorded a net gain of $40,000 in the first quarter of 2003 from
the sale of an easement on property adjacent to Company owned property in
Arlington, Texas.

Operating expense increased $4,000 in the first six months of 2003 over the
same period in 2002, to a total of $1,035,000.

Depreciation expense declined $7,000 in the first half of 2003 from the same
period in 2002 as a result of the loss of depreciation on certain properties
becoming fully depreciated or exchanged during the period which was greater
than the depreciation provided by the two properties acquired in 2002.

Interest expense declined $18,000 in the first six months of 2003 from the
same period a year ago due to the continuing decline in interest rates. As
the Federal Reserve again lowered the discount rate by 0.25% in June, the
Company saw the interest rate on its Wells Fargo Bank line of credit decline
to 3.25% effective June 30, 2003. The average amount borrowed against the
line of credit in the first six month of 2003 was $10,282,000 compared to
$10,186,000 for the first six months of 2002. The average interest rate paid
on these borrowings was 3.62% for 2003 compared to 4.00% for 2002.

Other general and administrative expenses increased a net $29,000 in the
first six months of 2003 from the same period in 2002, and primarily
reflected increases in compensation costs, property taxes and state franchise
taxes and decreases primarily in legal and accounting fees and repairs.

Earnings per share increased $0.28 to $2.84 per share in the first half of
2003 over the $2.56 a share for 2002.

Liquidity and Capital Resources

Liquidity describes the ability of the 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 bank line of credit used to fund property
acquisitions, and income from its investment portfolio. Cash outflows
consists 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 investments, and
repayment of borrowings on its bank credit line. The Company's cash flow
from operations has been consistently positive and was $1,657,000 for the
first six months of 2003 compared to $1,559,000, $1,557,000 and $984,000 for
the first six months of 2002, 2001, and 2000 respectively.

As of June 30, 2003, the Company's main sources of liquidity consisted of
$292,000 cash, marketable securities having a market value of approximately
$1,090,000 and $5,350,000 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
$26,400,000. Management believes that its cash flow from operations and
these other sources of cash will be sufficient to finance current and
projected operations.

Contractual Obligations

The Company was obligated under a revolving credit facility with Wells Fargo
Bank. At June 30, 2003, the Company had outstanding borrowings under the
facility of $9,650,000 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, 2005.

At June 30, the Company had entered into a multiple property exchange
agreement in which it will surrender three properties it owns having an
approximate value of $3,790,000, in exchange for a Walgreen property under
construction in Tulsa, Oklahoma, which it has agreed to purchase for
$4,320,000. The balance of the funds required at closing (closing expected
on October, 31, 2003), including closing costs, is estimated to be $603,000
and will be drawn on the Company's revolving credit facility.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Item 4. 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 quarterly report, the undersigned officers of the Company have
concluded that such disclosure controls and procedures are effective. There
were no significant changes in its internal controls or in other factors that
could significantly affect these controls subsequent to the date of their
evaluation including any corrective actions with regard to significant
deficiencies and material weaknesses.

PART II. OTHER INFORMATION.

No applicable items.

Item 6. EXHIBITS

(a) A list of exhibits is set forth in the Exhibit Index which
immediately precedes the exhibits and which is incorporated by reference
herein.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

NATIONAL PROPERTIES CORPORATION

Date __8/8/03__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer

Date __8/8/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer

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 __8/8/03__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer

I, Kristine M. Fasano, certify that:

1. I have reviewed this 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 __8/8/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer

EXHIBIT INDEX

Exhibit Page

99-1 Section 906 Certification by Raymond Di Paglia 12

99-2 Section 906 Certification by Kristine M. Fasano 13

EXHIBIT 99-1

SECTION 906 CERTIFICATION BY RAYMOND DI PAGLIA

In connection with the Quarterly Report of National Properties Corporation
(the "Company") on Form 10-Q for the period ending June 30, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Raymond Di Paglia, president of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley act of 2002, that to my knowledge:

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 __8/8/03__ By: _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer

EXHIBIT 99-2

SECTION 906 CERTIFICATION BY KRISTINE M. FASANO

In connection with the Quarterly Report of National Properties Corporation
(the "Company") on Form 10-Q for the period ending June 30, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the
"Report"), I, Kristine M. Fasano, secretary and treasurer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley act of 2002, that to my knowledge:

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 __8/8/03__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary, and Treasurer