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, 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) 409,133 SHARES AS OF OCTOBER 15, 2003 PART I. FINANCIAL INFORMATION Item 1. Financial Statements

NATIONAL PROPERTIES CORPORATION NOTES TO THE FINANCIAL STATEMENTS The balance sheet at September 30, 2003, and the statements of income and comprehensive income and cash flows for the periods ended September 30, 2003 and September 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 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. 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 plus any additional amount paid. Therefore, no gain or loss is recognized on the disposed property. Property Held For Exchange At September 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 November 21, 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. 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 September 30, 2003, $12,200,000 ($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 September 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 September 30, 2003. The line of credit is secured by first mortgages on nine properties that had a net book value of approximately $7,500,000 at September 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 in which the tenant exercised an option under the lease to purchase the property on June 2, 2003 for $2,100,000; (2) a vacant garden center property located in Glendale, Arizona in which the tenant had been subleasing for the past year until its lease expired on May 31, 2003, which had 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 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 amount realized on these properties were being held by the intermediary at September 30, 2003, pending closing on the exchange set for November 21, 2003. 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 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. Property Acquisition On August 22, 2003, the Company completed the purchase and leaseback of a Jack in the Box property in Plano, Texas for $3,275,000. The property is a new concept Quick Stuff combination convenience store, fuel station and restaurant. The property is leased to Jack in the Box, Inc. under a net lease arrangement at an annual rent, during the initial term of the 18 year lease, of $253,812, subject to adjustment of Consumer Price Index increases limited to 8% at the end of the first five (5) years and each five (5) year interval thereafter. The lease provides for four (4), five (5) year renewal options. Funds required for the purchase were drawn on the Company's bank credit line. Operating Results Lease revenues in the first nine months of 2003 were $4,170,000 compared to $4,007,000 for the same period in 2002, an increase of $163,000 or 4.1%. The increase in lease revenues relative to the first nine months of 2002, was attributable to: (1) the acquisition of a sporting goods store property in May 2002, a restaurant property in December 2002, and a convenience store property in August, 2003, which in the aggregate added $251,000 to lease revenues for the first nine months of 2003; (2) a decrease in lease revenues from Mikes Garden Center and Tip Top Nursery properties of $84,000 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 $4,000 due to scheduled rent increases for several tenants. The Company recorded gains from the sale of securities of $31,000 in the first nine months of 2003 compared to $45,000 in the first nine months 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 decreased $53,000 in the first nine months of 2003 over the same period in 2002, to a total of $1,549,000. Depreciation expense increased $10,000 in the first nine months of 2003 from the same period in 2002 as a result of increases in depreciation for new property acquisitions referred to above minus the loss of depreciation on certain properties becoming fully depreciated or exchanged during the period. Interest expense declined $45,000 in the first nine 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%, 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 nine months of 2003 was $10,578,000 compared to $10,495,000 for the first nine months of 2002. The average interest rate paid on these borrowings was 3.46% for 2003 compared to 4.10% for 2002. Other general and administrative expenses decreased a net $18,000 in the first nine months of 2003 from the same period in 2002, and primarily reflected increases in compensation costs and state franchise taxes and decreases in property taxes and professional fees. Earnings per share increased $0.35 to $4.15 per share in the first nine months of 2003 over the $3.80 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 $2,480,000 for the first nine months of 2003 compared to $2,554,000, and $2,135,000 for the first nine months of 2002, and 2001 respectively. As of September 30, 2003, the Company's main sources of liquidity consisted of $300,000 cash, marketable securities having a market value of approximately $1,118,000 and $2,800,000 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 $26,000,000. 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 September 30, 2003, the Company had outstanding borrowings under the facility of $12,200,000 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 September 30, 2003 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 November, 21, 2003), including closing costs and a $100,000 earnest money deposit, is estimated to be $595,000 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 __11/4/03__ By: _____/S/__Raymond_Di_Paglia_________ Raymond Di Paglia, President and Chief Executive Officer Date __11/4/03__ 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 __11/4/03__ 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 __11/4/03__ 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 September 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 __11/4/03__ 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 September 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 __11/4/03__ By: _____/S/__Kristine_M._Fasano________ Kristine M. Fasano, Vice President, Secretary, and Treasurer

NATIONAL PROPERTIES CORP 10-Q