UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from -------------------- to ----------------------
Commission File Number 0-9380
CAPITAL PROPERTIES, INC.
(Name of small business issuer in its charter)
RHODE ISLAND 05-0386287
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 DEXTER ROAD
EAST PROVIDENCE, RHODE ISLAND 02914
(Address of principal executive offices) (Zip Code)
(401) 435-7171
(Small business issuer's telephone number, including area code)
Check whether the small business issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the small business issuer was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
As of August 9, 2004, the Issuer had 3,000,000 shares of Class A Common Stock
and 299,956 shares of Class B Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I
ITEM 1. FINANCIAL STATEMENTS
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 2004
(UNAUDITED)
ASSETS
Properties and equipment (net of accumulated depreciation)............... $ 15,340,000
Cash and cash equivalents................................................ 3,972,000
Receivables, tenant and other............................................ 182,000
Accrued rental income.................................................... 367,000
Prepaid and other........................................................ 159,000
------------
$ 20,020,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses:
Property taxes..................................................... $ 744,000
Other.............................................................. 349,000
Income taxes:
Current............................................................ 113,000
Deferred, net...................................................... 4,292,000
------------
5,498,000
------------
Commitment (Note 5)
Shareholders' equity:
Class A common stock, $.01 par; authorized 6,000,000 shares;
issued and outstanding 3,000,000 shares............................ 30,000
Class B common stock, $.01 par; authorized 300,000 shares;
issued and outstanding 299,956 shares.............................. 3,000
Excess stock, $.01 par; authorized 1,000,000 shares; none issued
and outstanding.................................................... --
Capital in excess of par.............................................. 11,795,000
Retained earnings..................................................... 2,694,000
------------
14,522,000
------------
$ 20,020,000
============
See notes to consolidated financial statements.
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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Income:
Revenues:
Leasing, including attorneys fees
judgment of $258,000 in the six
months ended June 30, 2004 .... $ 814,000 $ 896,000 $ 1,858,000 $ 1,606,000
Petroleum storage facilities .... 502,000 478,000 1,067,000 1,110,000
----------- ----------- ----------- -----------
1,316,000 1,374,000 2,925,000 2,716,000
Condemnation proceeds, permanent
including interest of $244,000 .. -- -- 1,622,000 --
Interest ........................... 4,000 1,000 7,000 3,000
----------- ----------- ----------- -----------
1,320,000 1,375,000 4,554,000 2,719,000
----------- ----------- ----------- -----------
Expenses:
Expenses applicable to:
Leasing ......................... 378,000 582,000 860,000 1,127,000
Petroleum storage facilities .... 429,000 588,000 861,000 1,111,000
General and administrative ......... 254,000 253,000 520,000 521,000
----------- ----------- ----------- -----------
1,061,000 1,423,000 2,241,000 2,759,000
----------- ----------- ----------- -----------
Income (loss) before income taxes ..... 259,000 (48,000) 2,313,000 (40,000)
----------- ----------- ----------- -----------
Income tax expense (benefit):
Current ............................ 88,000 (8,000) 289,000 2,000
Deferred ........................... 17,000 (22,000) 625,000 (26,000)
----------- ----------- ----------- -----------
105,000 (30,000) 914,000 (24,000)
----------- ----------- ----------- -----------
Net income (loss) ..................... $ 154,000 $ (18,000) $ 1,399,000 $ (16,000)
=========== =========== =========== ===========
Basic income per common share ......... $ .04 $ -- $ .42 $ --
=========== =========== =========== ===========
Dividends on common stock ............. $ .03 $ -- $ .06 $ --
=========== =========== =========== ===========
See notes to consolidated financial statements.
-3-
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
Cash flows from operating activities:
Net income (loss) ............................................ $ 1,399,000 $ (16,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Condemnation proceeds, permanent ........................ (1,622,000) --
Depreciation ............................................ 196,000 209,000
Deferred income taxes ................................... 625,000 (26,000)
Other, principally net changes in receivables,
prepaids, accounts payable, income taxes and
accrued expenses ..................................... (195,000) 403,000
----------- -----------
Net cash provided by operating activities .................... 403,000 570,000
----------- -----------
Cash used in investing activities:
Condemnation proceeds, permanent ............................. 1,622,000 --
Payments for properties and equipment ........................ (496,000) (115,000)
----------- -----------
Net cash provided by (used in) investing activities .......... 1,126,000 (115,000)
----------- -----------
Cash used in financing activities, payment of dividends ......... (198,000) --
----------- -----------
Increase in cash and cash equivalents ........................... 1,331,000 455,000
Cash and cash equivalents, beginning ............................ 2,641,000 1,633,000
----------- -----------
Cash and cash equivalents, ending ............................... $ 3,972,000 $ 2,088,000
=========== ===========
Supplemental disclosures, cash paid or received for income taxes:
Cash paid ................................................. $ 271,000 $ 9,000
=========== ===========
Refunds received .......................................... $ -- $ 381,000
=========== ===========
See notes to consolidated financial statements.
-4-
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared by
the Company. Certain information and note disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted.
These statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Form
10-KSB for the year ended December 31, 2003. In the opinion of management,
the accompanying consolidated financial statements contain all adjustments
necessary to present fairly the financial position as of June 30, 2004 and
the results of operations for the three and six months ended June 30, 2004
and 2003, and the cash flows for the six months ended June 30, 2004 and
2003.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
2. USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Estimates also affect the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.
3. CITY OF PROVIDENCE PROPERTY TAX DISPUTE:
In each year since 1995 (with the exception of the year 2000), the Company
appealed the real estate taxes assessed against one or more of the parcels
of land owned by it in the City of Providence (the City). With respect to
certain years, the appeals were heard by the Providence Board of
Assessment Review and in each case denied. The Company appealed each such
denial to the Rhode Island Superior Court. With respect to the remaining
years, the Providence Board of Assessment Review never scheduled a hearing
on the appeals.
In August 2003 the Company and the City engaged in mediation in an effort
to resolve all property tax disputes. In September 2003, the Company and
the City agreed to an omnibus settlement pursuant to which the City paid
the Company $1,700,000 in settlement of all litigation resulting from tax
appeals. The omnibus settlement also set the assessed values for two
parcels in the Capital Center Area.
In March 2004, the Company received notices from the City of the proposed
2004 assessment for each of its parcels in downtown Providence. The
proposed assessments for the two parcels in the Capital Center Area (for
which the assessed values had been set by the omnibus settlement) did not
reflect the agreed-upon values and were assessed at approximately the same
assessment value in effect prior to the omnibus settlement with the City.
The proposed assessments on the remaining parcels were similarly assessed
at values
-5-
slightly higher than the assessment value in 2000. The Company is pursuing
the matter with the City.
For the three and six months ended June 30, 2004, the Company is reporting
property tax expense on the accompanying consolidated financial statements
based upon its settlement agreement with the City as to assessed values
and an estimated tax rate for 2004. The Company is unable to determine
what additional property tax expense it may incur in the event the Company
does not prevail in having its assessments lowered since the City has not
yet set the 2004 tax rate. However, using the tax rate in effect for 2003,
the additional property tax expense for the three and six months ended
June 30, 2004 would be approximately $90,000 and $180,000 respectively.
4. LITIGATION JUDGMENTS:
Dispute with Amtrak:
During the 1980's, the Company, the State of Rhode Island, the City of
Providence and the National Railroad Passenger Corporation (Amtrak) each
conveyed parcels of land in Capital Center so that each party had the land
it needed for its designated functions within Capital Center. As part of
this arrangement, the Company was conveyed approximately 1.9 acres of air
rights over Amtrak's Northeast Corridor, which rights began 19.3 feet
above the top of rail.
In 1998, as part of Amtrak's electrification of the Northeast Corridor,
Amtrak erected towers and a signal bridge within the air rights (the tops
of which vary in height between 27 and 42 feet above the top of rail).
In 1999, Amtrak condemned a three-year temporary easement of all the air
rights owned by the Company retroactive to August 1998 for which the
Company received from Amtrak $335,000, the sum estimated by Amtrak to be
just compensation for the property taken. In 2001, Amtrak permanently
condemned the air rights and a parcel of land adjacent to the air rights
(with a carrying value of $625,000) for which the Company received from
Amtrak $925,000, the amount estimated by Amtrak to be just compensation
for the air rights and property taken. The Company believed that the
condemnation amounts paid by Amtrak were inadequate and accordingly
brought suit in the U.S. District Court against Amtrak seeking additional
compensation.
In November 2002, the condemnation case was tried in the U.S. District
Court and the Company was awarded additional damages resulting from the
aforementioned condemnations of $1,378,000 plus interest. In February
2003, Amtrak appealed the decision to the U.S. Court of Appeals for the
First Circuit. In January 2004, the First Circuit affirmed the judgment of
the U.S. District Court, and in February 2004 the Company received a
payment of $1,622,000.
Claim against City of Providence for attorneys fees:
In 1997, the City revalued certain of the Company's properties within the
Capital Center area in downtown Providence, Rhode Island, and reached back
six years to assess over $13,000,000 in back taxes, interest and penalties
on the properties based upon a retroactive
-6-
increase in the assessed values. These increases were not a part of a
city-wide revaluation. The Company contended that this action by the City
was both unprecedented and illegal.
In another action, the City claimed that the Company was not the owner of
a certain parcel of land in the Capital Center (Disputed Parcel), which
the Company purchased in 1989 from the State of Rhode Island subsequent to
the State's acquiring the parcel from the City. Moreover, the City
attempted to condemn the Disputed Parcel. The Company contested both the
City's claim of ownership and the City's attempt to condemn the Disputed
Parcel.
In 1999, the Rhode Island Superior Court (Superior Court) ruled in favor
of the Company and found (1) that both the City's new tax assessments and
back taxes were illegal and void, and (2) that the Company is the rightful
owner of the Disputed Parcel and that the City had no right to condemn
same. The City appealed the judgments to the Rhode Island Supreme Court
(Supreme Court), which denied and dismissed the City's appeal in 1999.
After prevailing on the merits, the Company made claim against the City
for attorneys fees.
In 2000, the City filed a motion to vacate the Superior Court and Supreme
Court judgments entered in favor of the Company which motion the Superior
Court denied and awarded the Company attorneys fees of $258,000. The City
filed an appeal in the Supreme Court. In January 2004, the Supreme Court
affirmed the judgment against the City, and the Company received the
payment from the City in March 2004. No interest was awarded on the
judgment.
5. PROPERTIES AND EQUIPMENT:
Properties on lease or held for lease:
Land and land improvements ............... $ 3,951,000
Parking garage ........................... 2,500,000
-----------
6,451,000
-----------
Petroleum storage facilities:
Land and land improvements .............. 5,126,000
Buildings and structures ................ 922,000
Tanks and equipment ..................... 9,280,000
-----------
15,328,000
-----------
Office equipment ........................... 97,000
-----------
21,876,000
-----------
Less accumulated depreciation:
Properties on lease or held for lease.... 1,023,000
Petroleum storage facilities ............ 5,432,000
Office equipment ........................ 81,000
-----------
6,536,000
-----------
$15,340,000
===========
The Company has obtained all the necessary approvals from the City of East
Providence and State of Rhode Island to construct three additional 152,000
barrel tanks at the petroleum storage facilities. In February 2004, the
Company entered into a contract to construct one additional 152,000 barrel
tank at an estimated total cost of $1,300,000. Construction commenced in
June 2004 and the Company has incurred costs of $215,000 through June 30,
-7-
2004. The Company anticipates that the tank will be completed in the fall
of 2004. The Company expects to pay for the tank with available cash.
6. DESCRIPTION OF LEASING ARRANGEMENTS:
At June 30, 2004, the Company had entered into three long-term land leases
for three separate parcels upon which improvements have been built
(developed parcels). The Company has entered into three additional
long-term land leases (undeveloped parcels), one of which commenced April
1, 2004, and two of which will not commence until construction begins.
The Company also leases various parcels of land for outdoor advertising
purposes for the remaining term of 27 years and for public parking
purposes under short-term cancellable leases.
For those leases with presently known scheduled rent increases, the
cumulative excess of straight-line over contractual rentals (considering
scheduled rent increases over the 30 to 149 year terms of the leases)
amounted to $16,486,000 through June 30, 2004. Management has concluded
that a portion of the excess of straight-line over contractual rentals
($367,000 at June 30, 2004) is realizable when payable over the terms of
the leases.
The four leases which have commenced provide that the tenants pay the City
of Providence real property taxes, which amounts are excluded from leasing
revenues and expenses applicable to leasing on the accompanying
consolidated statements of income (loss). The real property taxes
attributable to the Company's land under these leases are as follows: for
the three months ended June 30, 2004 and 2003, $154,000 and $92,000
respectively; for the six months ended June 30, 2004 and 2003, $242,000
and $178,000, respectively.
7. PETROLEUM STORAGE FACILITIES:
Current operations:
The Company and a petroleum distribution company (Petroleum Company) are
parties to an agreement whereby the Company operates the entire Petroleum
Facilities for the Petroleum Company. The Company is responsible for
labor, insurance, property taxes and other operating expenses, as well as
capital improvements. Through April 30, 2003, the agreement provided for a
monthly fee which increased annually by 4.5% ($117,000 effective May 1,
2002), as well as an additional $.10 per barrel for every barrel in excess
of 2,000,000 barrels of throughput in any agreement year (contingent
revenues). For the agreement year ended April 30, 2003, throughput
exceeded 2,000,000 barrels in December 2002.
Effective May 1, 2003, the Company and Petroleum Company entered into an
amended and restated lease agreement (Amended Agreement) which, among
other things, provides as follows: (1) the Amended Agreement will expire
April 30, 2013, but will continue thereafter on a year-to-year basis
unless terminated by either party upon ninety days' written notice; (2)
Petroleum Company may terminate the Amended Agreement after five years
upon one year written notice; (3) a current monthly fee of $150,000
subject to annual cost of living adjustments; (4) Petroleum Company will
reimburse the Company for any increase in real property taxes over the
2002 level; and (5) the Company will receive an additional $.10 per barrel
for every barrel in excess of 4,000,000 barrels of throughput in any
agreement year.
-8-
For the agreement year ending April 30, 2004, throughput exceeded
4,000,000 barrels in February 2004.
For the six months ended June 30, 2004 and 2003, the Company earned
contingent revenues of $140,000 and $264,000, respectively.
Also effective May 1, 2003, Petroleum Company was granted the option to
purchase the Petroleum Facilities at any time during the term of the
Amended Agreement under the terms and conditions set forth in an option
agreement. In a separate but related agreement, Petroleum Company agreed
to make certain capital improvements at the Wilkesbarre Pier. Through the
six months ended June 30, 2004, the improvements totaled approximately
$214,000. [See Wilkesbarre Pier below].
Environmental incidents:
In March 2002, during testing of monitoring wells at the Petroleum
Facilities, the Company's consultant discovered free floating phase
product in a groundwater monitoring well located on that portion of the
Petroleum Facilities purchased in 2000. Preliminary laboratory analysis
indicated that the product was gasoline, which is not a product the
Company ever stored at its Petroleum Facilities. However, in the 1950's
gasoline was stored on the Company's property by a predecessor owner. The
Company commenced an environmental investigation and analysis, the results
of which indicate that the gasoline did not come from the location of what
is now the Company's Petroleum Facilities. The Company notified the State
of Rhode Island Department of Environmental Management (RIDEM). The
Company will continue to monitor RIDEM's investigation of this
contamination to ensure that the responsible party addresses this
contamination.
The Company maintains what management believes to be adequate levels of
insurance. The Company notified its insurance company of the
contamination. The insurance company advised the Company that coverage is
only provided under policies in place at the time the contamination
occurs.
Since January 2003, the Company has not incurred significant costs in
connection with this matter and is unable to determine the costs it might
incur to remedy the situation as well as any costs to investigate, defend,
and seek reimbursement from the responsible party with respect to this
contamination. This situation does not affect current operations at the
Petroleum Facilities.
In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facilities which allowed the escape of a small amount of fuel
oil. All required notices were made to RIDEM. In 2000, the tank was
demolished and testing of the groundwater indicated that there was no
large pooling of contaminants. In 2001, RIDEM approved a plan whereby the
Company installed a passive system consisting of three wells and commenced
monitoring the wells. In December 2002, the Company determined that it
would no longer incur significant costs in connection with the
implementation of this monitoring plan and reversed into income a
previously recorded payable of $50,000. In the spring of 2003, RIDEM
decided that the passive monitoring system previously approved was not
sufficient and is requiring the Company to install an active remediation
system for the removal of product from the contaminated site. The Company
anticipates installing the system in 2004 at an estimated cost of $50,000,
at which time this amount will be included in properties and
-9-
equipment on the Company's consolidated balance sheet. The Company
anticipates that the ongoing cost of meeting its obligations under the new
remediation plan will not be material.
Wilkesbarre Pier:
Wilkesbarre Pier (the Pier) is a deep-water pier in East Providence, Rhode
Island, owned by the Company, which is integral to the operation of the
Petroleum Facilities. The Pier and the Petroleum Facilities are connected
by two petroleum pipelines. In 1995, the Company and Providence and
Worcester Railroad Company (Railroad) (the then owner of the Pier) entered
into an agreement which, among other provisions, gave the Company the
right to acquire the Pier for $1. The Company and Railroad have a common
controlling shareholder.
Effective January 1, 1998, Railroad and a company which uses the Pier to
off-load primarily gasoline from ships to its terminal (Oil Company)
entered into an agreement (the Agreement) whereby Oil Company agreed to
pay annual fees for five years. In January 1998, the Company exercised its
right and acquired the Pier, and Railroad assigned its rights under the
Agreement to the Company. The Agreement was extended to March 31, 2003 at
a monthly fee of $15,000, which Agreement terminated at that time. Under
the terms of the Agreement, the owner of the Pier was not required to make
any repairs to the Pier.
In May 2000, the Fire Department of the City of East Providence (Fire
Department) notified the Company, Oil Company and another company then
related to Oil Company (Other Company) that there was a lack of adequate
fire protection at the Pier and ordered them to install certain equipment
and facilities. The Company demanded that Other Company take steps to
commence and complete the performance of all work and to supply all
material required to satisfy the Fire Department. The Company incurred
costs totaling $372,000 to install the required system.
In 2000, Oil Company and Other Company (collectively Plaintiffs) filed a
lawsuit against the Company in the United States District Court for the
District of Rhode Island (the Court) claiming fraud on the part of
Railroad and sought rescission of the Agreement and other agreements. The
Company filed counterclaims against Other Company, including one for
damages based on Other Company's failure to comply with the order and
direction of the Fire Department as well as the failure of Other Company
to comply with certain other agreements. Plaintiffs amended their
complaint in 2001 to include additional claims. Following the close of
discovery, the Court dismissed all the fraud claims. The Court later
bifurcated the trial of the jury claims for damages and the non-jury
claims for declaratory and injunctive relief.
The jury claims were tried in December 2002 and the jury returned a
verdict against the Company in the amount of $100,000. The Company filed a
post-trial motion requesting that the Court vacate the verdict. In
September 2003, judgment was entered against the Company in the amount of
$100,000 plus $27,000 in interest through that date. To avoid further
litigation of the matter, the Company and the Oil Company agreed to settle
this claim for $80,000, which amount the Company paid to Oil Company in
November 2003. There is no remaining litigation outstanding with Oil
Company.
The Court entered judgment as a matter of law against the Company on the
Company's claim that Other Company was obligated to pay for the
installation of certain fire suppression equipment on the Pier.
-10-
In June 2003, the remaining non-jury claims were tried and in September
2003 the Court ordered Other Company to install a new sixteen-inch
pipeline on the Pier for the Company's use and benefit. The Company
anticipates that the pipeline will be installed in 2004. The Court
rejected Other Company's claim that it was not obligated to pay for the
fire suppression equipment on the Pier as well as Other Company's claim
that the Company remove or relocate the fire suppression equipment.
However, the Court also held that Oil Company and Other Company had the
right to use the north side of the Pier pursuant to a deed in 1941. The
Court declined the Company's request that it declare what are the
corresponding obligations attached to that right.
In October 2003, the Company appealed the inconsistent judgments
concerning which party is responsible for the cost of the fire suppression
equipment at the Pier to the U. S. Court of Appeals for the First Circuit.
Neither Oil Company nor Other Company filed an appeal. Oral arguments were
heard in April 2004 and a decision is anticipated in 2004.
In connection with this litigation, the Company incurred legal fees as
follows: for the three months ended June 30, 2004 and 2003, $55,000 and
$137,000, respectively; for the six months ended June 30, 2004 and 2003,
$75,000 and $217,000, respectively. These amounts are included in expenses
applicable to petroleum storage facilities on the accompanying
consolidated statements of income (loss).
Pursuant to a 1986 Guaranty and Indemnity Agreement, the Company filed a
lawsuit in September 2002 against Other Company and Other Company's parent
in the U. S. District Court for the Eastern District of New York seeking
reimbursement for all reasonable costs incurred by the Company in
defending the Wilkesbarre Pier litigation described above. The matter has
been transferred to the U. S. District Court for the District of Rhode
Island and is in the discovery stage.
8. SHAREHOLDERS' EQUITY:
In December 2001, the Company amended its Articles of Incorporation to
create three classes of $.01 par value stock -- Class A Common Stock,
Class B Common Stock, and Excess Stock. The Company converted the then
outstanding 3,000,000 shares of $1.00 par value common shares into
3,000,000 shares of Class A Common Stock. In addition, the Company issued
(in the form of a stock dividend) 299,956 shares of Class B Common Stock
(one share for each ten shares of Class A Common Stock held). No
fractional Class B shares were issued.
The holders of the Class A and Class B Common Stock presently vote
together as a single class on all matters required to be submitted to the
shareholders for approval and share equally in dividends declared by the
Company. The Class A Common Stock is listed on the American Stock
Exchange. The Class B Common Stock is not listed on any national or
regional stock exchange or on the National Association of Securities
Dealers Automated Quotation National Market System.
The amended Articles of Incorporation prohibit any shareholder from
acquiring more than a 5% interest in the Company's classes of common stock
and prohibit the two shareholders who each beneficially then owned in
excess of 5% of the Company's classes of common
-11-
stock from increasing their percentage ownership of each class of common
stock. Should a shareholder acquire a number of shares that results in the
limitation being exceeded, shares in excess of the limitation would be
converted into an equal number of shares of Excess Stock. Excess Stock is
non-voting and is not entitled to dividends. However, the shareholder may
designate a qualifying transferee for shares of Excess Stock, at which
time such shares would be converted and reissued as Class A or B Common
shares as the case may be.
The purpose of the amendment of the Articles of Incorporation was to
provide the Company with the necessary flexibility to qualify to be taxed
as a real estate investment trust (REIT). The Company has not decided to
make an election to become a REIT and, depending on future circumstances,
may never do so.
In the event the Company elects to become a REIT, the holders of the Class
A Common Stock would be entitled to elect one-third of the Company's Board
of Directors, with the balance of the Directors to be elected by the
holders of the Class B Common Stock.
If the Company does not make an election to be taxed as a REIT on or
before March 31, 2005, the restrictions on share ownership will
automatically lapse and shares of Class B Common Stock will automatically
be converted into shares of Class A Common Stock on a one for one basis.
On July 7, 2004 the Company wrote to the American Stock Exchange asking
for its consent to extend the outside date for making the REIT election
from March 2005 to March 2011. The request is based on the Company's
determination that for the next several years the tax benefits from making
the REIT election do not substantially outweigh the cost of the additional
compliance required by the election. However, commencing in about 2010,
based upon the Company's current estimates and assuming that certain
options to lease are exercised by the end of 2005, a REIT election will
become tax efficient for the Company. The Company has not yet received a
response from the American Stock Exchange. If the Company receives a
favorable response from the American Stock Exchange, the Company will
continue to evaluate the circumstances to determine if and when the REIT
election should be made. If the Company does not receive a favorable
response from the American Stock Exchange, the Board of Directors intends
to reevaluate the Company's position and determine whether or not the
failure of a REIT election by March 2005 and the resultant conversion of
the Company's Class B common stock into Class A common stock will
materially prejudice the Company's ultimate plan to elect to be taxed as a
REIT.
9. INCOME TAXES:
In February 2004, the Company received permanent condemnation proceeds
from Amtrak which qualify for deferred reinvestment for income tax
reporting purposes whereby the Company may elect to reduce the income tax
basis of qualifying subsequent acquisitions, subject to certain
restrictions. Since it is the Company's intention to make such an
election, the income tax provision for the three and six months ended June
30, 2004 reflects such election.
-12-
Deferred income taxes are recorded based upon differences between
financial statement and tax carrying amounts of assets and liabilities.
The tax effects of temporary differences which give rise to deferred tax
assets and liabilities at June 30, 2004 were as follows:
Gross deferred tax liabilities:
Property having a financial statement basis
in excess of tax basis .................. $ 3,760,000
Condemnation proceeds ..................... 550,000
Accrued rental income ..................... 147,000
-----------
4,457,000
Gross deferred tax assets .................... (165,000)
-----------
$ 4,292,000
===========
10. OPERATING SEGMENT DISCLOSURES:
The Company operates in two segments: (1) Leasing and (2) Petroleum
Storage Facilities.
The Leasing segment consists of the long-term leasing of certain of its
real estate interests in downtown Providence, Rhode Island (upon the
commencement of which the tenants are required to construct buildings
thereon and to pay real property taxes) and locations along interstate and
primary highways in Rhode Island and Massachusetts (to a company which has
constructed outdoor advertising boards thereon). The Company anticipates
that the future development of its remaining properties will consist
primarily of long-term ground leases. Pending this development, the
Company leases these parcels and an adjacent parking garage for public
parking purposes under short-term cancellable leasing arrangements.
The Petroleum Storage Facilities segment consists of the operating of the
Petroleum Facilities in East Providence under an Amended Agreement
effective May 1, 2003, that expires in 2013 at a fixed monthly rate for
the Petroleum Company which stores and distributes petroleum products. The
Amended Agreement includes provisions to extend and additional payments
based upon throughput. (See Note 7.)
The principal difference between the two segments relates to the nature of
the operations. The tenants in the Leasing segment incur substantially all
of the development and operating costs of the asset constructed on the
Company's land, whereas the Company is responsible for the operating and
maintenance expenditures as well as capital improvements at the Petroleum
Facilities.
The Company makes decisions relative to the allocation of resources and
evaluates performance based on income before income taxes, excluding
interest income, permanent condemnation proceeds and certain corporate
expenses.
Inter-segment revenues are immaterial in amount. The Company did not incur
interest expense during the six months ended June 30, 2004 and 2003.
The following financial information is used for making operating decisions
and assessing performance of the Company's segments:
-13-
Petroleum
Storage
Leasing Facilities Total
------------ ------------ ------------
Six months ended June 30, 2004:
Revenues:
Contractual ....................... $ 1,251,000 $ 927,000 $ 2,178,000
Contingent ........................ 127,000 140,000 267,000
Option ............................ 272,000 -- 272,000
Attorneys' fees judgment .......... 258,000 -- 258,000
Noncash, excess of contractual over
straight-line rentals .......... (50,000) -- (50,000)
------------ ------------ ------------
$ 1,858,000 $ 1,067,000 $ 2,925,000
============ ============ ============
Property tax expense .................. $ 735,000 $ 38,000 $ 773,000
============ ============ ============
Depreciation .......................... $ 31,000 $ 163,000 $ 194,000
============ ============ ============
Income before income taxes ............ $ 998,000 $ 206,000 $ 1,204,000
============ ============ ============
Assets ................................ $ 6,032,000 $ 10,469,000 $ 16,501,000
============ ============ ============
Properties and equipment, additions ... $ 211,000 $ 433,000 $ 644,000
============ ============ ============
Six months ended June 30, 2003:
Revenues:
Contractual ....................... $ 1,195,000 $ 846,000 $ 2,041,000
Contingent ........................ 75,000 264,000 339,000
Option ............................ 368,000 -- 368,000
Noncash, excess of contractual over
straight-line rentals .......... (32,000) -- (32,000)
------------ ------------ ------------
$ 1,606,000 $ 1,110,000 $ 2,716,000
============ ============ ============
Property tax expense .................. $ 1,000,000 $ 56,000 $ 1,056,000
============ ============ ============
Depreciation .......................... $ 31,000 $ 173,000 $ 204,000
============ ============ ============
Income (loss) before income taxes ..... $ 479,000 $ (1,000) $ 478,000
============ ============ ============
Assets ................................ $ 5,900,000 $ 10,055,000 $ 15,955,000
============ ============ ============
Properties and equipment, additions ... $ -- $ 3,000 $ 3,000
============ ============ ============
-14-
The following is a reconciliation of the segment information to the amounts
reported in the accompanying consolidated financial statements for the six
months ended June 30, 2004 and 2003:
2004 2003
------------ ------------
Income:
Revenues for operating segments ......................... $ 2,925,000 $ 2,716,000
Condemnation proceeds, permanent, including interest .... 1,622,000 --
Interest income ......................................... 7,000 3,000
------------ ------------
Total consolidated income ............................ $ 4,554,000 $ 2,719,000
============ ============
Property tax expense:
Property tax expense for operating segments ............. $ 773,000 $ 1,056,000
Unallocated corporate property tax expense .............. 1,000 1,000
------------ ------------
Total consolidated property tax expense .............. $ 774,000 $ 1,057,000
============ ============
Depreciation:
Depreciation for operating segments ..................... $ 194,000 $ 204,000
Unallocated corporate depreciation ...................... 2,000 5,000
------------ ------------
Total consolidated depreciation ...................... $ 196,000 $ 209,000
============ ============
Income before income taxes:
Income for operating segments ........................... $ 1,204,000 $ 478,000
Condemnation proceeds, permanent ........................ 1,622,000 --
Interest income ......................................... 7,000 3,000
Unallocated corporate expenses .......................... (520,000) (521,000)
------------ ------------
Total consolidated income (loss) before income taxes.. $ 2,313,000 $ (40,000)
============ ============
Assets:
Assets for operating segments ........................... $ 16,501,000 $ 15,955,000
Corporate cash and cash equivalents ..................... 3,503,000 1,769,000
Other unallocated amounts ............................... 16,000 49,000
------------ ------------
Total consolidated assets ............................ $ 20,020,000 $ 17,773,000
============ ============
Additions to properties and equipment:
Operating segments ...................................... $ 644,000 $ 3,000
Unallocated corporate additions ......................... 13,000 --
------------ ------------
Total consolidated additions ......................... $ 657,000 $ 3,000
============ ============
-15-
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
CERTAIN PORTIONS OF THIS REPORT, AND PARTICULARLY THE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND THE NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS, CONTAIN FORWARD-LOOKING STATEMENTS WHICH REPRESENT THE
COMPANY'S EXPECTATIONS OR BELIEFS CONCERNING FUTURE EVENTS. THE
COMPANY CAUTIONS THAT THESE STATEMENTS ARE FURTHER QUALIFIED BY
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS, INCLUDING,
WITHOUT LIMITATION, THE FOLLOWING: THE ABILITY OF THE COMPANY TO
GENERATE ADEQUATE AMOUNTS OF CASH; THE COLLECTIBILITY OF THE ACCRUED
RENTAL INCOME WHEN DUE OVER THE TERMS OF THE LONG-TERM LAND LEASES;
THE COMMENCEMENT OF ADDITIONAL LONG-TERM LAND LEASES; CHANGES IN
ECONOMIC CONDITIONS THAT MAY AFFECT EITHER THE CURRENT OR FUTURE
DEVELOPMENT ON THE COMPANY'S PARCELS; THE FINAL OUTCOME OF THE
WILKESBARRE PIER LITIGATION AND THE CITY OF PROVIDENCE TAX
ASSESSMENTS; AND EXPOSURE TO CONTAMINATION, CLEANUP OR SIMILAR COSTS
ASSOCIATED WITH THE OPERATION OF THE PETROLEUM STORAGE FACILITIES.
1. OVERVIEW:
Critical accounting policies:
The Company believes that its revenue recognition policy for long-term
leases with scheduled rent increases (leasing segment) meets the
definition of a critical accounting policy which was discussed in the
Company's Form 10-KSB for the year ended December 31, 2003. There have
been no changes to the application of this accounting policy since
December 31, 2003.
Segments:
The Company operates in two segments, leasing and petroleum storage.
LEASING:
The leasing segment is principally devoted to the leasing of Company-owned
land in the Capital Center Project Area (Capital Center), in downtown
Providence, Rhode Island under long-term ground leases. The Company owns
approximately 18 acres in the Capital Center consisting of 11 individual
parcels. The Capital Center (approximately 77 acres of land) is the result
of a development project undertaken by the State of Rhode Island, the City
of Providence, the National Railroad Passenger Corporation (Amtrak) and
the Company during the 1980's in which two rivers, the Moshassuck and the
Woonasquatucket, were moved, a new railroad station (the Railroad Station)
was constructed and significant public improvements were made to improve
pedestrian and vehicular traffic in the area. The Company has not acted,
and does not intend to act, as a developer with respect to any
improvements constructed on Company-owned parcels.
-16-
The Company first began offering parcels for lease in the late 1980's. As
part of the construction of the Railroad Station, the Federal Railroad
Administration constructed a 330-car parking garage adjacent to the
Railroad Station, and the Company paid one-half of the construction cost.
Subsequently, the Company became the sole owner of the parking garage,
which is currently leased to an experienced parking operator (parking
operator). Three developed parcels have been leased by the Company under
long-term leases of 99 years or more. Located on these parcels are a
13-story office building, a 225-unit luxury apartment complex and a
114,000 square foot office building.
Three of the remaining parcels (undeveloped parcels) are the subject of
three leases: one lease commenced April 1, 2004 and the two remaining
leases will not commence pending completion of development plans and
closing of construction financing.
During the interim, option payments are being made by the developers under
the leases for the undeveloped parcels. Under one of the leases, the
developer made a series of option payments, the last of which was paid in
December 2003. The option terminated March 31, 2004 and the lease
commenced April 1, 2004 for a term of 149 years. Under the other two
leases, the Company receives option payments pursuant to a month-to-month
arrangement. There is no assurance that any one or more of these
development projects will actually proceed.
The Company continues to seek a developer for the remaining four parcels
in the Capital Center which contain 2.9 acres. The Company is unable to
predict when these parcels will be leased.
Pending future development or commencement of the leases, five of the
parcels are subject to short-term leases to the parking operator.
Additionally, the Company, through a wholly-owned subsidiary, leases
certain outdoor advertising locations along interstate and primary
highways in Rhode Island and Massachusetts to an outdoor advertising
company. Presently, there are 26 locations under lease containing fifty
billboard faces. The lease expires in 2031. The term of the lease is
extended for two years for each additional location added. No locations
have been added since 2002.
PETROLEUM STORAGE FACILITIES:
The Company, through a wholly-owned subsidiary, owns a 524,500 barrel
petroleum storage facility (Petroleum Facilities) located in East
Providence, Rhode Island. The Petroleum Facilities utilize the Company's
Wilkesbarre Pier and a pipeline connecting the Wilkesbarre Pier to the
Petroleum Facilities. The Company (through this wholly-owned subsidiary)
and Global Companies, LLC (Global) are parties to an Amended Agreement
whereby the Company (through another wholly-owned subsidiary) operates the
entire Petroleum Facilities for Global at a fixed monthly rate which is
subject to annual cost of living adjustments. The Amended Agreement
expires April 30, 2013, but will continue thereafter on a year-to-year
basis unless terminated by either party upon ninety days' written notice.
Global may terminate the Amended Agreement after five years upon one year
written notice. The Amended Agreement includes provisions for additional
payments based upon throughput in any twelve-month period beginning on May
1 of each year and ending on April 30 of the subsequent year and for any
increases in real property taxes. The Company bears all of the operating
costs with respect to the Petroleum Facilities, including real estate
taxes at the 2002 level and insurance charges. In addition, Global was
granted an option to purchase the Petroleum Facilities at any time during
the term of the Amended Agreement under the terms and conditions set forth
in an option agreement.
-17-
Pursuant to an agreement (Agreement) with another company (Oil Company),
which afforded the Oil Company the right to use the Wilkesbarre Pier, the
Company received $45,000 for the first quarter of 2003, at which time the
Agreement terminated.
As described in Note 7 of Notes to Consolidated Financial Statements, the
Company was in litigation (Wilkesbarre Pier litigation) with Oil Company
and a related party (Other Company) over the Agreement and the rights of
others to utilize the Wilkesbarre Pier. During 2003, the Company settled
all litigation with Oil Company. In October 2003, the Company appealed the
inconsistent judgments concerning which is responsible for the cost of the
fire suppression equipment at the Pier to the U. S. Court of Appeals for
the First Circuit. Neither Oil Company nor Other Company filed an appeal.
Oral arguments were heard in April 2004 and a decision is anticipated in
2004.
In March 2002, during testing of monitoring wells at the Petroleum
Facilities, the Company's consultant discovered free floating phase
product in a groundwater monitoring well located on that portion of the
Petroleum Facilities purchased in 2000. Preliminary laboratory analysis
indicated that the product was gasoline, which is not a product the
Company ever stored at its Petroleum Facilities. However, in the 1950's
gasoline was stored on the Company's property by a predecessor owner. The
Company commenced an environmental investigation and analysis, the results
of which indicate that the gasoline did not come from the location of what
is now the Company's Petroleum Facilities. The Company notified the State
of Rhode Island Department of Environmental Management (RIDEM). The
Company will continue to monitor RIDEM's investigation of this
contamination to ensure that the responsible party addresses this
contamination.
The Company maintains what management believes to be adequate levels of
insurance. The Company notified its insurance company of the
contamination. The insurance company advised the Company that coverage is
only provided under policies in place at the time the contamination
occurs.
Since January 2003, the Company has not incurred significant costs in
connection with this matter and is unable to determine the costs it might
incur to remedy the situation as well as any costs to investigate, defend
and seek reimbursement from the responsible party with respect to this
contamination. This situation does not affect current operations at the
Petroleum Facilities.
In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facilities which allowed the escape of a small amount of fuel
oil. All required notices were made to RIDEM. In 2000, the tank was
demolished and testing of the groundwater indicated that there was no
large pooling of contaminants. In 2001, RIDEM approved a plan whereby the
Company installed a passive system consisting of three wells and commenced
monitoring the wells. In December 2002, the Company determined that it
would no longer incur significant costs in connection with the
implementation of this monitoring plan and reversed into income a
previously recorded payable of $50,000. In the spring of 2003, RIDEM
decided that the passive monitoring system previously approved was not
sufficient and is requiring the Company to install an active remediation
system for the removal of product from the contaminated site. The Company
anticipates installing the system in 2004 at an estimated cost of $50,000.
The Company anticipates that the ongoing cost of meeting its obligations
under the new remediation plan will not be material.
-18-
The Company has sufficient land to expand the storage capacity and has
obtained all the necessary approvals from the City of East Providence and
State of Rhode Island to construct three additional 152,000 barrel tanks.
In February 2004, the Company entered into a contract to construct one
additional 152,000 barrel tank at an estimated cost of $1,300,000.
Construction commenced in June 2004, and it is anticipated that the tank
will be completed in the fall of 2004. The Company has incurred costs of
$215,000 through June 30, 2004, and expects to pay the remaining cost from
available cash. Global has agreed to use the new tank at a monthly fee of
$35,000 until May 1, 2005, at which time it has the option to include this
tank under the existing Amended Agreement at the total monthly fee of
$185,000, subject to scheduled increases. In the event Global does not
elect to use the tank after May 1, 2005, the Company believes it will be
able to contract with another company to use the tank. The Company has no
present plans to construct the remaining two tanks.
The Company manages its exposure to contamination, cleanup or similar
costs associated with the Petroleum Facilities through adherence to
established procedures for operations and equipment maintenance.
The Company continues to evaluate whether to elect to be taxed as a real
estate investment trust (REIT). (See Note 8 of Notes to Consolidated
Financial Statements.) To date, no determination has been made.
2. RESULTS OF OPERATIONS:
Leasing segment:
In 1997, the City of Providence revalued certain of the Company's
properties within the Capital Center area, reaching back six years to
assess over $13,000,000 in back taxes, interest and penalties based upon a
retroactive increase in the assessed values. The Company contended that
this action by the City was both unprecedented and illegal. In another
action, the City claimed that the Company was not the owner of a certain
parcel in the Capital Center and also attempted to condemn that parcel.
The Company contested both of the City's actions. In 1999, after
prevailing on the merits in both actions, the Company made claim against
the City for attorneys fees. In 2000, the Company was awarded attorneys
fees of $258,000. The City filed an appeal in the Rhode Island Supreme
Court. In January 2004, the Supreme Court affirmed the judgment against
the City, and the Company received the payment from the City in March
2004. No interest was awarded on the judgment.
For the three months ended June 30, 2004, revenue from leasing decreased
$82,000 from 2003. Exclusive of the $258,000 received for the attorney
fees described above, for the six months ended June 30, 2004, revenue from
leasing remained at the 2003 level. During these periods, option payments
decreased due to the termination of two option agreements, one of which is
offset by lease payments which commenced April 1, 2004; this decrease was
offset in part by higher contingent revenues and renewals of short-term
parking leases. For the three and six months ended June 30, 2004, expenses
applicable to leasing decreased $204,000 and $267,000, respectively, from
2003 due principally to a decrease in property taxes. (See Note 3 of Notes
to Consolidated Financial Statements.)
-19-
Petroleum storage:
For the three months ended June 30, 2004, revenue from petroleum storage
facilities increased $24,000 from 2003 resulting principally from a
scheduled annual fee increase. For the six months ended June 30, 2004,
revenue from petroleum storage facilities decreased $43,000 from 2003 due
principally to lower contingent revenues resulting from the Amended
Agreement effective May 1, 2003 which provided for higher monthly fees and
a change in the basis for calculating contingent fees. For the three and
six months ended June 30, 2004, expenses applicable to petroleum storage
facilities decreased $159,000 and $250,000, respectively, from 2003
principally due to lower legal fees associated with the Wilkesbarre Pier
litigation and lower real property taxes.
General:
As described in Note 4 of Notes to Consolidated Financial Statements,
certain of the Company's property adjacent to Amtrak's Northeast Corridor
in Providence, Rhode Island was condemned by Amtrak in 1999 and 2001. The
Company believed that the amounts paid by Amtrak were inadequate and made
a claim for additional condemnation proceeds. In November 2002, the U. S.
District Court for the District of Rhode Island awarded the Company
additional damages of $1,378,000 plus interest. In February 2003, Amtrak
appealed the decision to the U. S. Court of Appeals for the First Circuit.
In January 2004, the First Circuit affirmed the judgment of the U. S.
District Court and in February 2004, the Company received a payment of
$1,622,000.
For the three months and six months ended June 30, 2004, general and
administrative expenses remained approximately at the 2003 level.
Liquidity:
Historically, the Company has had adequate liquidity to fund its
operations.
In each year since 1995 (with the exception of the year 2000), the Company
appealed the real estate taxes assessed against one or more of the parcels
of land owned by it in the City of Providence (the City). With respect to
certain years, the appeals were heard by the Providence Board of
Assessment Review and in each case denied. The Company appealed each such
denial to the Rhode Island Superior Court. With respect to the remaining
years, the Providence Board of Assessment Review never scheduled a hearing
on the appeals.
In August 2003 the Company and the City engaged in mediation in an effort
to resolve all property tax disputes. In September 2003, the Company and
the City agreed to an omnibus settlement pursuant to which the City paid
the Company $1,700,000 in settlement of all litigation resulting from tax
appeals. The omnibus settlement also set the assessed values for two
parcels in the Capital Center Area.
In March 2004, the Company received notices from the City of Providence of
the proposed 2004 assessment for each of its parcels in downtown
Providence. The proposed assessments for the two parcels in the Capital
Center Area (for which the assessed values had been set by the omnibus
settlement) did not reflect the agreed-upon values and were assessed at
approximately the same assessment value in effect since 2000. The proposed
assessments on the remaining parcels were similarly assessed at values
slightly higher than the assessment value in effect since 2000. The
Company is pursuing the matter with the City of Providence. For the three
and six
-20-
months ended June 30, 2004, the Company is reporting property tax expense
based upon its settlement agreement with the City. The Company is unable
to determine what additional property tax expense it may incur in the
event the Company does not prevail in having its assessments lowered since
the City has not yet set its new tax rate. However, using the tax rate in
effect for 2003, the additional property tax expense for the three and six
months ended June 30, 2004 would be approximately $90,000 and $180,000,
respectively.
Under the land leases for undeveloped parcels, option payments are being
made by the developers. Under one lease, the developer made a $100,000
option payment in December 2003, which option terminated March 31, 2004.
This lease commenced April 1, 2004, under the terms of which the Company
receives an annual rental of $100,000 during the construction phase, and
the tenant commenced paying the City of Providence real property taxes at
a current annual rate of $250,000. Under the other two leases which have
not commenced, the Company receives option payments pursuant to
month-to-month arrangements. The Company has no assurance that additional
option payments will be made.
Under one of the long-term land leases which has commenced, a scheduled
annual contractual rent increase of $100,000 becomes effective October
2004.
Under another long-term land lease which has commenced, a scheduled rent
increase based upon a cost-of-living adjustment will become effective
February 2005; the Company estimates that the annual increase will be
approximately $40,000. The tenant has advised the Company that its tenant
will vacate the entire building by December 31, 2004. The Company has also
been advised that its tenant is attempting to find a suitable replacement
tenant for the building.
The Amtrak condemnation proceeds of $1,378,000 which the Company received
in February 2004 qualify for deferred reinvestment for income tax
reporting purposes, whereby the Company may elect to reduce the income tax
basis of qualifying subsequent acquisitions, subject to certain
restrictions. The Company has until the filing of its 2004 income tax
returns to make this election. Since it is the Company's intention to make
such an election, its cash outlay for income taxes for 2004 will be
reduced by approximately $550,000. However, the Company would be required
to reinvest the condemnation proceeds in qualifying assets by December 31,
2007. In May 2004, the Company purchased qualifying assets totaling
$211,000.
The Company has obtained all the necessary approvals from the City of East
Providence and State of Rhode Island to construct three additional 152,000
barrel tanks at the Petroleum Facilities. In February 2004, the Company
entered into a contract to construct one additional tank at an estimated
total cost of $1,300,000. Construction commenced in June 2004, and it is
anticipated that the tank will be completed in the fall of 2004. The
Company has incurred costs of $215,000 through June 30, 2004, and expects
to pay the remaining cost from available cash. Global has agreed to use
the new tank at a monthly fee of $35,000 until May 1, 2005, at which time
it has the option to include this tank under the existing Amended
Agreement at the total monthly fee of $185,000, subject to scheduled
increases. In the event Global does not elect to use the tank after May 1,
2005, the Company believes it will be able to contract with another
company to use the tank. The Company has no present plans to build the two
additional tanks.
Regulations of the Department of Homeland Security require the Company to
secure the petroleum storage facilities (including the Pier) against
possible threats by the installation of fences, barricades and similar
items. Through June 30, 2004, the Company has incurred costs of
approximately $50,000 to comply with these regulations which costs are
capitalized and
-21-
anticipates incurring an additional $65,000 in the third quarter of 2004.
The Company cannot predict what additional expenses it may incur in the
future to maintain the required security levels.
Remaining commitments for the purchase of properties and equipment are
immaterial.
In July 2004, the Board of Directors declared a quarterly dividend of
$99,000 to holders of Class A and Class B common stock at the rate of $.03
per share.
In management's opinion, the Company should be able to generate adequate
amounts of cash to meet all of its anticipated obligations. In the event
temporary additional liquidity is required, the Company believes that a
line of credit or other arrangements could be obtained by pledging some or
all of its unencumbered assets as collateral.
-22-
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-4 of the Securities Exchange Act of 1934 (the "Exchange
Act"), within the 90-day period prior to the filing date of this report, the
President and Treasurer carried out an evaluation of the effectiveness of the
Company's disclosure controls and procedures. Based on that evaluation, the
undersigned officers of the Company have concluded that such disclosure controls
and procedures were adequate to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC rules and regulations. There were no significant changes in internal
controls or, to the Company's knowledge, in other factors that could
significantly affect such internal controls, subsequent to the date of the
evaluation by the undersigned officers of the Company.
-23-
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on April 27, 2004. Of the
3,000,000 "A" shares entitled to vote, 2,805,501 shares of stock were
present, in person or by proxy. Of the 299,956 "B" shares entitled to
vote, 178,870 shares of stock were present, in person or by proxy.
All directors of the Issuer are elected on an annual basis and the
following were so elected at this Annual Meeting: Ronald P.
Chrzanowski, Robert H. Eder, Harold J. Harris, Harris N. Rosen and
Henry S. Woodbridge, Jr. Of the "A" shares, each director received
2,795,411 affirmative votes; 10,090 votes withheld. Of the "B" shares,
each director received 178,861 affirmative and 9 votes withheld.
Also presented for approval was a resolution for the appointment of
Lefkowitz, Garfinkel, Champi & DeRienzo P.C. as independent auditors of
the accounts of the Issuer for the year 2004. Of the "A" shares, the
resolution received 2,795,008 votes for the resolution, 9,520 votes
against the resolution, 973 votes abstaining. Of the "B" shares, the
resolution received 178,861 votes for the resolution, and 9 votes
abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX OF EXHIBITS:
3.1 Amended Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Issuer's report on Form 8-K filed December 10,
2001).
3.2 By-laws, as amended (incorporated by reference to Exhibit 3(b) to
the Issuer's quarterly report on Form 10-QSB for the quarter ended
September 30, 1999).
10 Material contracts:
(a) LEASES BETWEEN METROPARK, LTD. AND COMPANY:
(i) Dated December 12, 2001 (incorporated by reference to Exhibit
10(a)(i) to the Issuer's annual report on Form 10-KSB for the
year ended December 31, 2001).
(ii) Dated December 12, 2001 (incorporated by reference to Exhibit
10(a)(ii) to the Issuer's annual report on Form 10-KSB for the
year ended December 31, 2001).
(iii) Dated December 12, 2001 (incorporated by reference to Exhibit
10(a)(iii) to the Issuer's annual report on Form 10-KSB for
the year ended December 31, 2001).
-24-
(iv) Dated December 12, 2001 (incorporated by reference to Exhibit
10(a)(iv) to the Issuer's annual report on Form 10-KSB for the
Year ended December 31, 2001).
(v) Dated December 12, 2001 (incorporated by reference to Exhibit
10(a)(v) to the Issuer's annual report on Form 10-KSB for the
year ended December 31, 2001).
(b) MISCELLANEOUS CONTRACTS:
(i) Option Agreement to Purchase Real Property and Related Assets,
dated June 9, 2003, by and between Dunellen, LLC and Global
Companies, LLC. (incorporated by reference to Exhibit 10(b)(i)
to the Issuer's Report on Form 10-QSB/A for the quarterly
period ended June 30, 2003)
31.1 Rule 13a-14(a) Certification of President and Principal Executive
Officer
31.2 Rule 13a-14(a) Certification of Treasurer and Principal Financial
Officer
32.1 Certification of President and Principal Executive Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Treasurer and Principal Financial Officer pursuant
to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) For the quarter ended June 30, 2004, no reports on Form 8-K were filed.
-25-
SIGNATURE
In accordance with the requirements of the Exchange Act, the Issuer caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL PROPERTIES, INC.
By /s/ Ronald P. Chrzanowski
-----------------------------------------
Ronald P. Chrzanowski
President and Principal Executive Officer
By /s/ Barbara J. Dreyer
-----------------------------------------
Barbara J. Dreyer
Treasurer and Principal Financial Officer
DATED: August 9, 2004
-26-