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, 1998 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)
418,616 SHARES AS OF NOVEMBER 2, 1998
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
NATIONAL PROPERTIES CORPORATION
BALANCE SHEETS
ASSETS
September 30, December 31,
1998 1997
<S> <C> <C>
CURRENT ASSETS
Cash 78,024 79,545
Accounts receivable - 12,451
Other 1,793 6,711
---------- ----------
Total current assets 79,817 98,707
---------- ----------
PROPERTY AND EQUIPMENT, AT COST
Land 4,532,615 4,380,815
Buildings and improvements 24,373,730 23,045,530
Furniture and equipment 70,665 63,677
---------- ----------
28,977,010 27,490,022
Less - accumulated depreciation 9,636,549 8,995,091
---------- ----------
Property and equipment - net 19,340,461 18,494,931
---------- ----------
OTHER ASSETS
Marketable securities 2,110,219 2,148,283
Deferred charges and other assets 30,249 35,596
---------- ----------
Total other assets 2,140,468 2,183,879
---------- ----------
21,560,746 20,777,517
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable 1,202 3,830
Accrued expenses 150,455 287,266
Current maturities of long-term debt 415,351 407,062
Federal and state income taxes 26,150 27,298
---------- ----------
Total current liabilities 593,158 725,456
---------- ----------
LONG-TERM DEBT 5,551,552 5,264,132
---------- ----------
DEFERRED INCOME TAXES 921,203 865,733
---------- ----------
STOCKHOLDERS' EQUITY
Common stock - $1 par value
Authorized - 5,000,000 shares
Issued
(1998-418,616 shares; 1997-431,456 shares) 418,616 431,456
Retained earnings 13,171,646 12,573,294
Accumulated other comprehensive income 904,571 917,446
---------- ----------
Total stockholders' equity 14,494,833 13,922,196
---------- ----------
21,560,746 20,777,517
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
Sept 30, Sept 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Income
Lease rental income 924,286 847,265 2,782,346 2,608,207
Interest income 49 130 678 361
Dividend income 14,927 17,225 50,911 54,700
Gain on sale of securities, etc. - - 79,798 24,336
--------- --------- --------- ---------
Total income 939,312 864,620 2,913,733 2,687,604
--------- --------- --------- ---------
Expenses
Depreciation 216,751 200,104 641,458 600,314
Interest 134,164 112,603 417,553 359,806
Salaries and wages 48,252 60,896 145,419 195,195
Property, payroll
and misc. taxes (24,787) 12,689 51,979 46,126
Other expenses 41,535 42,825 140,777 144,469
--------- --------- --------- ---------
Total expenses 415,915 429,117 1,397,186 1,345,910
--------- --------- --------- ---------
Income before income taxes 523,397 435,503 1,516,547 1,341,694
Federal and State income taxes 191,600 159,396 555,100 491,061
--------- --------- --------- ---------
Net income 331,797 276,107 961,447 850,633
--------- --------- --------- ---------
Other comprehensive income (losses):
Unrealized holding gains (losses)
on marketable securities arising
during the period (193,563) 104,611 (20,242) 321,940
Less income tax expense related
to unrealized holding gains 70,456 38,287 7,367 119,618
--------- --------- --------- ---------
Other comprehensive income,
net of tax (123,107) 66,324 (12,875) 202,322
--------- --------- --------- ---------
Comprehensive income 208,690 342,431 948,572 1,052,955
========= ========= ========= =========
Net income per share $0.79 $0.63 $2.28 $1.94
Weighted average shares
outstanding 422,083 439,161 422,083 438,851
Cash dividend paid per share $0.00 $0.10 $0.00 $0.10
<FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NATIONAL PROPERTIES CORPORATION
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net income 961,447 850,633
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 646,804 605,660
Deferred income taxes 62,837 53,258
Gain on sale of assets (79,798) (24,336)
Changes in assets and liabilities:
Accounts receivable 12,451 (2,219)
Prepaid expenses and deferred charges 4,918 5,775
Accounts payable and accrued expenses (139,439) 7,655
Federal and State income taxes (1,148) 277,419
-------- --------
Net cash provided by operations 1,468,072 1,773,845
-------- --------
CASH FLOW FROM INVESTING ACTIVITIES
Additions to property and equipment (1,486,987) (861)
Payments received on mortgage notes - 718
Purchase of securities (14,138) (37,368)
Proceeds from sale of securities 111,758 78,386
-------- --------
Net cash provided by (used in) investing activities (1,389,367) 40,875
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings on credit lines 1,630,000 500,049
Payments on credit line borrowings (1,255,000) (1,759,634)
Principal payments on mortgage notes (79,291) (71,786)
Dividends paid - (43,947)
Purchase of treasury stock (375,935) (378,520)
-------- --------
Net cash used in financing activities (80,226) (1,753,838)
-------- --------
Net increase (decrease) in cash (1,521) 60,882
Cash at beginning of period 79,545 120,784
-------- --------
Cash at end of period 78,024 181,666
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for
Interest expense 376,487 262,700
Income tax payments 493,411 277,950
</TABLE>
<PAGE>
NATIONAL PROPERTIES CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
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 on marketable securities
net of income taxes, which in periods prior to 1998 had been reported as
annual adjustments directly to stockholders' equity. All prior periods
reported on have been restated to give effect to FAS No. 130.
The balance sheets, statements of income and comprehensive income and
statements of cash flows at June 30, 1998 and 1997 and 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.
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 February 1998, the Company completed the purchase of a convenience store
property in Woodstock, Georgia (Atlanta suburb) for $1,480,000. Bank funds
were used for the purchase. Annual rentals from the property will be
$155,400.
On April 1, 1998 Sunbelt Nursery, a major tenant of three company owned
stores located in Arizona and Texas, filed for bankruptcy. Sunbelt
immediately commenced store liquidation sales in all of their Texas and
Arizona stores, including those owned by the Company.
Effective June 1, the Company leased the three Sunbelt Nursery stores that
were in bankruptcy. The stores were leased at an annual rental of $348,000
which is $107,000 less than the previous Sunbelt annual rental.
On October 13, 1998, the Company completed the sale of 21.5 acres of
unimproved land in Ankeny, Iowa. The net sale proceeds of $2,884,000 are
being held in escrow pending designation and purchase of a 1031 exchange
property.
Operating Results
Lease revenues for the first nine months were $2,782,000, up $174,000 or 6.6%
over the same period in 1997. The increase was primarily due to the addition
of two convenience stores, one located in Gainsville, Georgia purchased in
October 1997 and the other located in Woodstock, Georgia purchased February
1998, which added $215,000 to rental income in the first nine months of 1998.
However, due to the bankruptcy of Sunbelt Nursery, the Company realized a
decrease in rentals of $40,000 from its three nursery garden stores during
the six months ended September 30, 1998.
The Company also realized gains of $79,800 from the sale of marketable
securities during the first nine months of 1998, up from $24,000 in the same
period in 1997.
Total expenses for the first nine months of 1998 increased $51,000 or 3.8%
over the same period in 1997. Depreciation and interest cost increased by
approximately $99,000 over the same period in 1997 and was related to the
acquisition of two new convenience stores referred to above. In addition,
the Company recorded $9,000 in additional real estate taxes during the nine
month period ended September 30, 1998, in connection with the stores leased
to Sunbelt Nursery.
Remaining expenses led by personnel cost, decreased approximately $57,000
from the same nine month period in 1997.
Net income increased $111,000 over the same nine month period in 1997 after
deducting income taxes at the effective rate of 36.6%.
Liquidity
As of September 30, 1998 the Company's main source of liquidity consisted of
$78,000 in cash, marketable securities having a market value of approximately
$2,110,000 and a $4,200,000 remaining loan balance available on three lines
of credit with a local bank. In addition, the Company owns unencumbered real
estate having an aggregate depreciated cost of approximately $12,000,000.
Year 2000 Problem
The Year 2000 (or Y2K) problem, common to most companies, is related to
existing computer programs that use only the last two digits to refer to a
year. These programs may not properly recognize date sensitive information
after 1999. The result could be that these programs will fail and/or create
erroneous results on or after January 1, 2000. This problem could affect
both information systems (software and hardware) and other equipment that
relies on microprocessors. The following disclosures concerning the Year
2000 problem are intended to comply with the Statement of the Commission
Regarding Disclosure of Year 2000 Issues and Consequences by Public
Companies, Investment Advisers, Investment Companies, and Municipal
Securities Issuers that was issued by the Securities and Exchange Commission
on July 29, 1998.
The Company believes that the nature of the Company's business, its
properties and the terms of its leases with tenants of its properties limit
its direct exposure to the 2000 problem to some extent. The Company does not
produce, manufacture or market any product that must be proven to be Year
2000 compliant. Therefore, the Company believes that it will have no
material potential liability to other parties arising from its business
activities causing any other business with which it has dealings to fail to
be Year 2000 compliant.
The Company has not yet completed its assessment of the possible effects of
the Year 2000 problem on the Company. The Company has obtained clear
evidence of readiness, including written assurances from each of the Vendors
of the Company's principal computer system dealing with financial
information, that its principal computer system is Year 2000 compliant. The
Company has completed testing of the software used in its principal computer
system which showed such software to be Year 2000 compliant.
Before the end of 1998, the Company intends to begin the process of
monitoring the progress of material other parties (vendors, suppliers and
tenants) in their efforts to become Year 2000 compliant. These other parties
include, but are not limited to; the tenants of the Company's properties, the
U.S. Postal Service, financial institutions and utilities. The Company
intends to request copies of the Year 2000 plans of these material other
parties and to monitor their performance against these plans.
Through September 30, 1998, the amount spent by the Company to address Year
2000 issues has not been material to the Company's operations. Total costs
to address Year 2000 issues are currently estimated not to involve an amount
that will be material to the Company's operations. Funds for these costs are
expected to be provided by the operating cash flows of the Company.
The Company could be faced with adverse consequences if Year 2000 issues are
not identified and resolved in a timely manner by the Company and material
other parties. A worst-case scenario would result in the short term
interruption of revenue from leased properties caused by unresolved Year 2000
issues of material other parties. This would result in lost revenues;
however, the amount would be dependent on the length and nature of the
disruption, which cannot be predicted or estimated. In light of the possible
consequences, the Company is devoting the resources needed to address Year
2000 issues in a timely manner. While management expects a successful
resolution of these issues, there can be no guarantee that material other
parties, on which the Company relies, will address all Year 2000 issues on a
timely basis or that their failure to successfully address all issues would
not have an adverse effect on the Company.
The Company has not yet developed contingency plans in case business
interruptions do occur. The Company expects to give consideration to the
development of contingency plans during the first half of 1999 as the results
of the Company's monitoring of the progress of material other parties become
available. Such contingency plans may include a determination to increase
the liquidity of the Company's assets to avoid any interruption in payment of
the Company's obligations in the event of a temporary disruption in the flow
of revenue to the company. Contingency plans, to the extent management
considers them to be necessary, are expected to be completed by September,
30, 1999.
The foregoing discussion of the Year 2000 problem contains certain forward-
looking statements that are subject to risks and uncertainties. These
statements are based on management's current knowledge and estimates of
factors affecting the Company's operations. Actual results may differ
materially from those currently anticipated. Factors which could adversely
affect future results include, but are not limited to, the effects of any
unexpected increase in the Company's costs to address Year 2000 issues and
the effects of any unexpectedly severe or lengthy disruptions in the business
of material other parties.
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 __11/6/98__ By _____/S/__Raymond_Di_Paglia_________
Raymond Di Paglia, President and
Chief Executive Officer
Date __11/6/98__ By _____/S/__Kristine_M._Fasano________
Kristine M. Fasano, Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<CASH> 78,024
<SECURITIES> 2,110,219
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 79,817
<PP&E> 28,977,010
<DEPRECIATION> 9,636,549
<TOTAL-ASSETS> 21,560,746
<CURRENT-LIABILITIES> 593,158
<BONDS> 0
<COMMON> 418,616
0
0
<OTHER-SE> 14,076,217
<TOTAL-LIABILITY-AND-EQUITY> 21,560,746
<SALES> 0
<TOTAL-REVENUES> 2,913,733
<CGS> 0
<TOTAL-COSTS> 1,397,186
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 417,553
<INCOME-PRETAX> 1,516,547
<INCOME-TAX> 555,100
<INCOME-CONTINUING> 961,447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 961,447
<EPS-PRIMARY> 2.28
<EPS-DILUTED> 2.28
</TABLE>
