10-Q 1 np10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended September 30, 2002 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) 412,323 SHARES AS OF OCTOBER 18, 2002 PART I. FINANCIAL INFORMATION Item 1. Financial Statements

NATIONAL PROPERTIES CORPORATION BALANCE SHEETS ASSETS ~~June~~September 30, December 31, 2002 2001 CURRENT ASSETS Cash ~~139~~337,~~624~~237 340,793 Mortgage receivable, current portion - 55,978 Receivable - 14,126 Other 546,~~902~~040 49,835 ---------- ---------- Total current assets ~~145~~383,~~526~~277 460,732 ---------- ---------- PROPERTY AND EQUIPMENT, AT COST Land 5,402,932 5,150,932 Buildings and improvements 37,479,292 34,231,292 Furniture and equipment 115,747 115,747 ---------- ---------- 42,997,971 39,497,971 Less - accumulated depreciation 1011,~~800~~062,~~822~~353 10,277,759 ---------- ---------- Property and equipment - net 3231,~~197~~935,~~149~~618 29,220,212 ---------- ---------- OTHER ASSETS Marketable securities 1865,~~222,005~~176 1,438,706 Mortgage receivable, long term portion - 100,000 ---------- ---------- Total other assets 1865,~~222,005~~176 1,538,706 ---------- ---------- 33,~~564~~184,~~680~~071 31,219,650 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable 63,~~174~~547 2,598 Accrued liabilities ~~244~~220,~~044~~120 116,434 Advance rents 61238,~~302~~257 283,754 Federal and state income taxes 4874,~~003~~518 - ---------- ---------- Total current liabilities ~~359~~536,~~523~~442 402,786 ---------- ---------- LONG-TERM DEBT 11,~~800~~050,000 10,250,000 ---------- ---------- DEFERRED INCOME TAXES 1964,~~058,180~~824 1,062,478 ---------- ---------- STOCKHOLDERS' EQUITY Common stock - $1 par value Authorized - 5,000,000 shares Issued (2002-412,~~423~~323 shares; 2001-413,073 shares) 412,~~423~~323 413,073 Retained earnings 1920,~~531~~036,~~644~~206 18,569,367 Accumulated other comprehensive income ~~402~~184,~~910~~276 521,946 ---------- ---------- Total stockholders' equity 20,~~346~~632,~~977~~805 19,504,386 ---------- ---------- 33,~~564~~184,~~680~~071 31,219,650 ========== ==========

NATIONAL PROPERTIES CORPORATION STATEMENTS OF INCOME ~~AND COMPREHENSIVE INCOME~~ Three Months Ended ~~Six~~Nine Months Ended ~~June~~Sept 30, ~~June~~Sept 30, 2002 2001 2002 2001 Income Lease rental income 1,~~309~~357,~~199~~831 1,~~175~~207,~~233~~804 24,~~649~~007,~~535~~366 23,~~365~~573,~~482~~286 Dividend and interest income 1511,~~128~~069 2214,~~351~~988 2536,~~702~~771 4156,~~930~~918 Gain (loss) on sale of securities 1210,~~924~~513 65(10,~~614~~986) 3444,~~348~~861 6554,~~614~~628 --------- --------- --------- --------- Total income 1,~~337~~379,~~251~~413 1,~~263~~211,~~198~~806 24,~~709~~088,~~585~~998 23,~~473~~684,~~026~~832 --------- --------- --------- --------- Expenses Depreciation ~~275~~261,~~065~~531 ~~223~~239,~~848~~444 ~~523~~784,~~063~~594 ~~445~~685,~~970~~414 Interest ~~106~~116,~~738~~023 ~~144~~132,~~473~~329 ~~203~~319,~~729~~752 ~~276~~409,~~996~~325 Salaries and wages 6059,~~004~~292 5857,~~690~~385 ~~123~~182,~~411~~703 ~~123~~180,~~320~~705 Property, payroll and misc. taxes 1875,~~785~~813 1425,~~379~~145 43118,~~044~~857 3560,~~368~~513 Other expenses 6458,~~509~~473 4550,~~678~~541 ~~137~~196,~~918~~391 ~~120~~171,~~823~~364 --------- --------- --------- --------- Total expenses ~~525~~571,~~101~~132 ~~487~~504,~~068~~844 1,~~031~~602,~~165~~297 1,~~002~~507,~~477~~321 --------- --------- --------- --------- Income before income taxes ~~812~~808,~~150~~281 ~~776~~706,~~130~~962 12,~~678~~486,~~420~~701 12,~~470~~177,~~549~~511 Federal and State income taxes ~~300~~299,~~495~~064 ~~287~~261,~~203~~597 ~~621~~920,~~015~~079 ~~544~~805,~~103~~700 --------- --------- --------- --------- Net income ~~511~~509,~~655~~217 ~~488~~445,~~927~~365 1,~~057~~566,~~405~~622 ~~926~~1,~~446~~371,811 --------- --------- --------- --------- Other comprehensive income (losses): Unrealized holding losses on marketable securities arising during the period (~~173~~343,~~677~~764) (~~108~~196,~~426~~494) (~~187~~530,~~164~~928) (~~356~~553,~~822~~316) Less income tax benefit related to unrealized holding losses 63125,~~218~~130 3971,~~513~~524 68193,~~128~~258 ~~129~~201,~~883~~407 --------- --------- --------- --------- Other comprehensive ~~losses~~income (loss) net of tax (~~110~~218,~~459~~634) (68124,~~913~~970) (~~119~~337,~~036~~670) (~~226~~351,~~939~~909) --------- --------- --------- --------- Comprehensive income ~~401~~290,~~196~~583 ~~420~~320,~~014~~395 ~~938~~1,~~369~~228,952 ~~699~~1,~~507~~019,902 ========= ========= ========= ========= Net income per share $1.2423 $1.1808 $23.5680 $23.2432 Weighted average shares outstanding 412,~~804~~587 413,~~915~~823 412,~~661~~514 413,~~915~~732 Cash ~~Dividends~~dividend ~~declared~~paid per share $0.1600 $0.1500 $0.16 $0.15

NATIONAL PROPERTIES CORPORATION STATEMENTS OF CASH FLOWS ~~Six~~Nine Months Ended ~~June~~September 30, 2002 2001 CASH FLOW FROM OPERATING ACTIVITIES Net income 1,~~057~~566,~~405~~622 ~~926~~1,~~446~~371,811 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ~~523~~784,~~063~~594 ~~445~~685,~~970~~414 Deferred income taxes 6395,~~830~~604 5381,~~059~~551 Gain on sale of securities (3444,~~348~~861) (6554,~~614~~628) Changes in assets and liabilities: ~~Accounts~~Prepayment ~~receivable~~and ~~14,126~~deferred -charges ~~Prepaid expenses 8~~(31,~~198~~941) 1922,~~430~~287 Accounts payable and accrued liabilities 65104,~~198~~635 81,578 Advance rents (45,~~781~~497) (22,607) Receivable 14,126 - Federal and State income taxes 83110,~~739~~254 (2530,~~318~~053) ~~Advance rents (222,452) 157,029~~ --------- -------- - Net cash provided by operations 12,~~558~~553,~~759~~536 12,~~556~~135,~~783~~353 --------- -------- - CASH FLOW FROM INVESTING ACTIVITIES Additions to property and equipment (3,500,000) (45,~~211~~846,~~565~~085) Proceeds from sale of securities 6387,~~885~~464 83111,~~839~~358 ~~Principal~~Payments received on ~~mortgage~~ note receivable 155,978 ~~164~~171,~~128~~097 --------- -------- - Net cash used in investing activities (3,~~280~~256,~~137~~558) (35,~~963~~563,~~598~~630) --------- -------- - CASH FLOW FROM FINANCING ACTIVITIES Borrowings on credit lines 3,425,000 45,~~100~~700,000 ~~Repayments~~Payments -on credit line borrowings (12,~~875~~625,000) (12,~~350~~150,000) Dividends paid (65,988) (62,055) Purchase of treasury stock (2934,~~791~~546) (2429,~~938~~663) --------- -------- - Net cash provided by financing activities 1699,~~520,209~~466 23,~~725~~458,~~062~~282 --------- -------- - Net increase (decrease) in cash (~~201~~3,~~169~~556) ~~318~~30,~~247~~005 Cash at beginning of period 340,793 95,212 -------- ------- - Cash at end of period ~~139~~337,~~624~~237 ~~413~~125,~~459~~217 ========= ========= SUPPLEMENTAL ~~DISCLOSURES OF~~ CASH FLOW INFORMATION Cash paid during the period for: Interest expense ~~162~~281,~~949~~627 ~~276~~365,~~996~~116 Income tax payments ~~473~~714,~~446~~221 ~~516~~754,~~362 Noncash investing and financing transactions: cash dividends declared 65,988 62,055~~202

NATIONAL PROPERTIES CORPORATION NOTES TO THE FINANCIAL STATEMENTS The balance sheets, statements of income and comprehensive income, and statements of cash flows at September 30, 2002 and 2001 and for the periods then ended 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 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 interim financial statements is to present in the statement of income, unrealized gains and losses on marketable securities net of income taxes. Certain prior amounts have been reclassified to conform to the current period presentation. Mortgage Note Receivable In July 2000, the Company sold real estate for $500,000 receiving $150,000 cash and a promissory note for $350,000. The note provides for interest at 10% and is secured by the real estate. Payments under the note are to be received as follows: $150,000 on June 30, 2001; $100,000 on June 30, 2002; and $100,000 on June 30, 2003. The mortgagor is making monthly payments of $4,918 which includes interest at 10.0%, in addition to the principal payments provided under the note. The note was paid in full in June, 2002. Long Term Debt The Company has a revolving credit agreement dated February 8, 2001 with Wells Fargo Bank, N.A. The new credit facility permits the Company to borrow up to $15,000,000 through April 30, 2004. At September 30, 2002, $11,050,000 was outstanding under the agreement which was used to fund property acquisitions. The revolving period of the agreement provides for annual extensions each April 30th at the mutual agreement of the bank and the Company. It is the Company's intention to request an extension of the revolving period, as provided by the agreement. Advances under the credit facility bear interest at 0.75% below the bank's base rate. At September 30, 2002, the outstanding balance accrued interest at 4.00%. In addition, the agreement requires the Company to pay an annual commitment fee of 1/8 of 1% (payable quarterly) on the unused portion of the line of credit commitment. The credit agreement contains various covenants, including limitations on additional borrowings and maintaining a minimum free cash flow, as defined in the agreement, of $1,800,000 per year measured as of the end of each fiscal quarter on an annualized basis. The line of credit is secured by first mortgages on ten properties. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company, an Iowa corporation, is engaged principally in the development of commercial real estate for lease to qualified tenants. 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 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 finalized a lease agreement with IHOP Properties, Inc. (a California corporation) whereby the Company will purchase from IHOP, a building constructed by IHOP on one of the Company's three commercial lots in Ankeny, Iowa, for an estimated cost of $960,000. Upon completion of the construction, IHOP will lease 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 and escalating each five year period to $164,850 in the last five years of the lease term. Management expects construction of the IHOP building to be completed by February 1, 2003. The lease agreement also provides that the Company will pay a real estate commission of $83,100. Operating Results Lease revenues in the first nine months of 2002 were $4,007,000 compared to $3,573,000 for the same period in 2001, an increase of $434,000 or 12.1%. The increase in lease revenue in the current period relative to the first nine months of 2001, was attributable to: (1) the acquisition of two convenience store properties and a retail sporting goods property in 2001, and a second retail sporting goods property in May, 2002, which added $456,000 to lease revenue, (2) a decrease in lease revenue of $31,000 resulting from the sale of the GTech property in December, 2001, (3) a decrease of $21,000 in contingent rents based on sales overages, and (4) other scheduled rent increases of $30,000. A decrease in interest income on the Company's mortgage note receivable was the primary reason for the decline in investment income over the same period in 2001. In addition, the Company realized capital gains of $45,000 from the sale of securities in 2002 compared to $55,000 in 2001. Operating expenses totaled $1,602,000 in the first nine months of 2002 compared to $1,507,000 for the same period in 2001, an increase of $95,000 or 6.3%. Depreciation expense increased $99,000 in the first nine months of 2002 over the same period in 2001 as a result of the property acquisitions in 2002 and 2001, referred to above. Interest expense for the first nine months of 2002 was $320,000 compared to $409,000 for the fist nine months of 2001, a decrease of $89,000. During the first nine months of 2002, the Company borrowed $3,425,000 on its credit line and repaid $2,625,000, resulting in a net increase in borrowing's on the credit line of $800,000. The average outstanding debt in the first nine months of 2002 was $10,493,000 compared to $7,688,000 in 2001. Offsetting the higher average debt was a lower interest rate paid by the Company as rates fell from 9% at the beginning of 2001 to 4% at December 31, 2001, where it has remained through September 30, 2002. The average rate paid by the Company in 2002 was 4.06% compared to 7.10% for the first nine months of 2001. Real estate taxes increased $60,000 or 150% to $100,000 for the nine months ended September 30, 2002, from $40,000 for the nine months ended September 30, 2001. The increase was primarily due to a higher assessed valuation of the Company's three commercial lots in Ankeny, Iowa. Other general and administrative expenses in the first nine months of 2002 increased $25,000 over the same period in 2001 due primarily to increases in employee benefits, and professional fees. As a result of the foregoing factors, net income increased $195,000 or 14.2% to $1,567,000 for the nine months ended September 30, 2002 from $1,372,000 for the nine months ended September 30, 2001. Liquidity As of September 30, 2002, the Company's main sources of liquidity consisted of $337,000 cash, marketable securities having a market value of approximately $865,000 and $3,950,000 remaining loan balance available on its revolving credit line with a local bank. In addition, the Company owns unencumbered real estate having an aggregate book value of approximately $26,000,000. Management believes that its cash flow from operations and these other potential sources of cash will be sufficient to finance current and projected operations. 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 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. PART II. OTHER INFORMATION. No applicable items. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NATIONAL PROPERTIES CORPORATION Date __11/1/02__ By _____/S/__Raymond_Di_Paglia_________ Raymond Di Paglia, President and Chief Executive Officer Date __11/1/02__ By _____/S/__Kristine_M._Fasano________ Kristine M. Fasano, Vice President, Secretary, and Treasurer SECTION 906 CERTIFICATION BY RAYMOND DI PAGLIA Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, Raymond Di Paglia, hereby certifies that: 1. this report fully complies with the requirements of Sections 13(a) or 15(d) of the 1934 Act, and 2. the information contained in this report fairly presents, in all material respects, the registrant's financial condition and results of operations of the registrant. Date __11/1/02__ By _____/S/__Raymond_Di_Paglia_________ Raymond Di Paglia, President and Chief Executive Officer SECTION 906 CERTIFICATION BY KRISTINE M. FASANO Pursuant to the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, Kristine M. Fasano hereby certifies that: 1. this report fully complies with the requirements of Sections 13(a) or 15(d) of the 1934 Act, and 2. the information contained in this report fairly presents, in all material respects, the registrant's financial condition and results of operations of the registrant. Date __11/1/02__ 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 entitles, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date __11/1/02__ 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 entitles, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date __11/1/02__ By _____/S/__Kristine_M._Fasano________ Kristine M. Fasano, Vice President, Secretary, and Treasurer

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