NATIONAL PROPERTIES CORP - 10-Q Quarterly Report

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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 March 31, 2005 Commission file number 0-305

NATIONAL PROPERTIES CORPORATION
(Exact name of registrant as specified in its charter)

Iowa 42-0860581
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

4500 Merle Hay Road, Des Moines, Iowa 50310
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (515) 278-1132

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months,
and (2) has been subject to such filing requirement for the past
90 days.

Yes __X__ No _____

Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act).

Yes _____ No __X__

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

COMMON STOCK (PAR VALUE $1.00)
409,133 SHARES AS OF APRIL 30, 2005

PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS

NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS

The accompanying condensed financial statements are not audited
but reflect all adjustments which are of a normal recurring nature
and are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented.
Amounts shown in the balance sheet as of December 31, 2004 have
been derived from the audited financial statements as of that
date. These condensed financial statements should be read in
conjunction with the financial statements and notes thereto
included in the Form 10-K of National Properties Corporation for
the year ended December 31, 2004.

The Company classifies its existing marketable equity securities
as available-for-sale in accordance with the provisions of
Statement of Financial Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." These securities are
carried at fair market value, with the increase or decrease in
unrealized gains and losses reported as other comprehensive income
or losses in the statement of income and comprehensive income.
Realized gains or losses on securities sold are based on the
specific identification method.

Lease rentals received on commercial real estate are accounted for
under the operating method, under which rentals, including
contingent rents, are included in income as earned over the term
of the lease. When scheduled rentals vary during the lease term,
income is recognized on a straight-line basis so as to produce a
constant periodic rent over the term of the lease. Accrued rental
income is the aggregate difference between the scheduled rents
which vary during the lease term and the income recognized on a
straight-line basis.

In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) Statement No.
153, Exchanges of Nonmonetary Assets-an amendment to APB Opinion
29. SFAS No. 153 eliminates the exception in APB 29 that permits
the exchange of productive assets not held for sale in the
ordinary course of business to be accounted for based on the
recorded amount of the nonmonetary asset relinquished rather than
fair value. Therefore, under APB 29, gain or loss was generally
not recognized on the exchange of productive assets. Real estate
investments acquired 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 and historically had accounted for such
exchanges in accordance with APB 29. The Company has adopted SFAS
Statement No. 153 and will apply its effect prospectively.

Cash

The Company's cash balance on March 31, 2005 includes proceeds of
$1,244,000 from the December 28, 2004 sale of a convenience store
and office building properties. These funds are being held in
escrow with a qualified intermediary pending the purchase of
replacement property in an Internal Revenue Code Section 1031 tax-
free exchange.

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 March 31, 2005,
$7,800,000 ($8,800,000 at December 31, 2004) was outstanding under
the agreement which matures on April 30, 2006. The revolving
period of the agreement provides for annual extensions each April
30th at the mutual agreement of the bank and the Company. Advances
under the credit facility bear interest at 0.75% below the bank's
base rate. At March 31, 2005, the outstanding balance accrued
interest at 5.00%. In addition, the agreement requires the
Company to pay an annual commitment fee of 1/8 of 1% (payable
quarterly) on the unused portion of the line of credit commitment.
The credit agreement contains various covenants, including
limitations on additional borrowings and maintaining a minimum
free cash flow, as defined in the agreement, of $1,800,000 per
year measured as of the end of each fiscal quarter on an
annualized basis. The Company was in compliance with all
covenants at March 31, 2005. The line of credit is secured by
first mortgages on nine properties that had a net book value of
approximately $7,300,000 at March 31, 2005.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

General

The Company, an Iowa corporation, is a lessor of commercial real
estate to tenants under net lease arrangements. It is the
Company's policy to invest in properties that are fully leased to
a single tenant which is responsible for payment of real estate
taxes, insurance, utilities and repairs. Under such
circumstances, the Company has limited management responsibilities
for such properties once they are constructed and leased. In most
cases, properties are constructed by the tenant and conveyed to
the Company under a sale and leaseback arrangement. It is not the
policy of the Company to invest in multiple tenant office
buildings or residential facilities. The Company currently owns
property located in Arizona, Colorado, Georgia, Iowa, Kansas,
Missouri, Nebraska, North Carolina, Oklahoma, South Dakota,
Tennessee, and Texas.

Merger

On January 14, 2005, the Company's board of directors approved and
adopted a definitive agreement and plan of merger (the "Merger
Agreement") for the Company to merge with and into a wholly owned
subsidiary of Commercial Net Lease Realty Inc. (Commercial).
Commercial invests in high quality, single-tenant retail and
office properties subject to long term, net leases with
established tenants. As of March 31, 2005, Commercial owned 379
investment properties in 38 states which were leased to 155
corporations in 58 industry classifications. The Merger Agreement
provides for shareholders of the Company to receive four shares of
Commercial common stock for each share of Company stock they own.
Further, as a condition to Commercial's obligation to close the
merger, the Company must pay a dividend to its shareholders of
$20.8 million, or approximately $50.84 per share. This special
dividend will be paid out prior to closing only if all other
conditions to the merger have been satisfied or waived prior to
the closing of the merger. Completion of the merger is subject to
customary closing conditions, including the approval of the
holders of a majority of the Company's outstanding common stock.
Company shareholders holding approximately 53% of the Company's
outstanding common stock have entered into a shareholder agreement
with Commercial to vote in favor of the merger. However,
Commercial may terminate the Merger Agreement if a majority of the
Company's shareholders who are not bound by the shareholder
agreement do not approve the merger. The Merger Agreement is
expected to be voted upon at a special meeting of the Company's
shareholders on June 13, 2005. If the merger is approved by the
Company's shareholders as required by the Merger Agreement, the
Company anticipates that the merger will be completed not later
than the second quarter of 2005.

Operating Results

Lease revenues for the first quarter 2005, were $1,510,000,
compared to $1,511,000 for the same period in 2004. The decrease
in lease revenues relative to the first quarter of 2004 was
attributed to the net negative effect of the following factors:
(1) a decrease in lease revenues of $20,000 due to the sale of a
Git-N-Go convenience store property and a QuikTrip office building
in December 2004; (2) a net increase in lease revenues of $3,000
due to escalation clauses in lease agreements, lease renewals, and
expirations of lease agreements, and (3) an increase of $16,000 in
accrued rental income.

The Company recorded investment income of $11,000 for the first
quarter of 2005 compared to $7,000 for the same period in 2004.
The increase was due to interest earned of $4,000 on a deposit
held in an escrow account by a qualified intermediary pending an
Internal Revenue Code Section 1031 exchange. The Company recorded
no sales of marketable securities in the first quarter of 2005
compared to $15,000 in gains from the sale of securities in the
first quarter of 2004.

The Company recorded a gain of $56,000 in the first quarter of
2005 from the sale of approximately 10% of its land in Chandler,
Arizona to the City of Chandler for right-of-way use. The Company
had no property sales in the first quarter of 2004.

Operating expenses increased $6,000 or 1.1% in the first quarter
of 2005 over the same period in 2004.

Depreciation expense decreased $14,000 in the first quarter of
2005 from the first quarter of 2004 due to certain properties
reaching the end of their economic lives for depreciation
purposes.

Interest expense increased $5,000 in the first quarter 2005 over
the same period in 2004 due to a combination of higher borrowing
costs and lower average outstanding debt. Average outstanding
debt in the first quarter 2005 was $8,363,000 compared to
$11,488,000 for the first quarter of 2004. The interest rate on
the Company's revolving line of credit increased from 3.25% to
5.00% in the twelve months ended March 31, 2005 in response to
hikes in the prime rate related to interest rate increases by the
Federal Reserve Board. The average interest rate on borrowings in
the first quarter 2005 was 4.75% compared to 3.30% for the first
quarter 2004.

Other general and administrative (G & A) expenses increased a net
$15,000 in the first quarter 2005 and primarily reflected
increases over the first quarter of 2004 in compensation costs,
legal and accounting fees, repairs and corporate fees.

Earnings per share increased $0.06 in the first quarter 2005 to
$1.53 as compared to the $1.47 earned in the first quarter of
2004.

Liquidity and Capital Resources

Liquidity describes the ability of a company to generate
sufficient cash flows to meet the cash requirements of business
operations. The Company's main sources of liquidity are lease
rentals from commercial tenants, borrowings on its long term
revolving line of credit used to fund property acquisitions, and
income from its investment portfolio. Cash outflows primarily
consist of payments for operating expenses, interest expense,
income taxes, dividends to stockholders, payments to acquire
equity securities for investment, and repayment of borrowings on
its bank credit line. The Company's cash flow from operations was
$1,167,000 for the first quarter of 2005 compared to $1,148,000
and $1,084,000 for the first quarter of 2004 and 2003,
respectively.

As of March 31, 2005, the Company's main sources of liquidity
consisted of $1,605,000 in cash, marketable securities having a
market value of approximately $1,281,000 and the $7,200,000
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
$26,900,000. Management believes that its cash flow from
operations and these other potential sources of cash will be
sufficient to finance current and projected operations.

Contractual Obligations

If the shareholders approve of the merger at their meeting on June
13, 2005 (see Part I, Item 2 - Merger), the Merger Agreement
requires the Company to pay a $20.8 million cash dividend to the
Company's shareholders. The Company intends to liquidate its
marketable securities and obtain bank financing in order to fund
such dividend.

At March 31, 2005, the Company also had a contractual obligation
under a revolving credit facility with Wells Fargo Bank. At March
31, 2005, the Company had outstanding borrowings of $7,800,000
under the facility and a commitment to pay a user fee of 1/8 of 1%
(payable quarterly) on the unused portion of the $15,000,000
credit line. The credit facility has been extended to mature
April 30, 2006.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES AND MARKET RISK

The Company is exposed to price fluctuations on its available for
sale marketable equity securities portfolio. These investments
are generally in companies with large capitalizations. The
Company does not attempt to reduce or eliminate the market
exposure on these securities. The Company reports the results of
price fluctuations on its marketable equity securities portfolio
as unrealized holding gains and losses in its statement of income
and comprehensive income. For the three-month period ended March
31, 2005 and 2004, the Company recorded an unrealized holding
loss, net of income taxes of $4,000 and $30,000 respectively.

Item 4. CONTROLS AND PROCEDURES

a. The President, Chief Executive Officer and the Vice
President, Secretary-Treasurer of the Company have evaluated the
effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities Exchange
Act Rule 13a-15 as of the end of the period covered by this
report. Based on that evaluation, the President, Chief Executive
Officer and Vice President, Secretary-Treasurer have concluded
that these disclosure controls and procedures are effective.

b. There were no changes in our internal control over
financial reporting during the quarter ended March 31, 2005 that
have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION.

Item 1. LEGAL PROCEEDINGS

None

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS

None

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None

Item 5. OTHER INFORMATION

None

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.

b. Current report on Form 8-K filed January 18, 2005 pursuant
to Item I (Entry into a Material Definitive Agreement), and Item 9
(Regulation FD disclosure).

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 __5/11/05__ By: ___/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer

Date __5/11/05__ By: ___/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary-Treasurer

EXHIBIT INDEX

Exhibit Page

31.1 Certification of President, Chief Executive 13
Officer pursuant to Section 302 of The Sarbanes-
Oxley Act.

31.2 Certification of Vice President, Secretary- 15
Treasurer pursuant to Section 302 of The Sarbanes-
Oxley Act.

32.1 Certification of President, Chief Executive 17
Officer and Vice President, Secretary-Treasurer
pursuant to Section 906 Certification of the
Sarbanes-Oxley Act.

Exhibit 31.1
CERTIFICATIONS

I, Raymond Di Paglia, certify that:

1. I have reviewed this Form 10-Q of National Properties
Corporation:

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:

a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, 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 report is being
prepared;

b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and

d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonable likely to materially affect,
the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):

a. All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and

b. Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.

Date __5/11/05__ By: ___/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer

Exhibit 31.2

I, Kristine M. Fasano, certify that:

1. I have reviewed this Form 10-Q of National Properties
Corporation:

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other
financial information included in this 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 report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the
registrant and have:

a. Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, 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 report is being
prepared;

b. Designed such internal control over financial reporting,
or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and

d. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonable likely to materially affect,
the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):

a. All significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and

b. Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal control over financial reporting.

Date __5/11/05__ By: _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Vice President,
Secretary-Treasurer

Exhibit 32.1
CERTIFICATION

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of National Properties
Corporation (the "Company") on Form 10-Q for the three months
ended March 31, 2005 as filed with the Securities and Exchange
Commission on May 11, 2005 (the "Form 10-Q"), we, the undersigned
officers 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:

1. The Quarterly Report on Form 10-Q fully complies with the
requirements of Section 13(a) or 15 (d) of the Securities Exchange
Act of 1934 (15 U.S.C. 78m or 78o(d)); and

2. The information contained in the Quarterly Report on Form
10-Q fairly presents, in all material respects, the financial
condition and results of operations of the Company.

Date 5/11/05

By ____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer

and

By____/S/__Kristine_M._Fasano__________
Kristine M. Fasano, Vice President,
Secretary and Treasurer