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 MARCH 31, 2006
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 [ ]
Indicate by check mark whether the small business issuer is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
As of April 28, 2006, the Issuer had 3,299,956 shares of Class A Common Stock
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2006
(UNAUDITED)
ASSETS
Properties and equipment (net of accumulated depreciation).............................. $17,289,000
Cash and cash equivalents............................................................... 3,441,000
Receivables, tenant..................................................................... 144,000
Accrued leasing revenues................................................................ 215,000
Prepaid and other....................................................................... 143,000
-----------
$21,232,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses:
Property taxes..................................................................... $ 309,000
Environmental remediation.......................................................... 101,000
Other, including $194,000 relating to properties and equipment..................... 347,000
Deferred leasing revenues............................................................ 341,000
Income taxes:
Current............................................................................ 68,000
Deferred, net...................................................................... 4,684,000
-----------
5,850,000
-----------
Commitment (Note 2)
Shareholders' equity:
Class A common stock, $.01 par; authorized 6,000,000 shares;
issued and outstanding 3,299,956 shares............................................ 33,000
Capital in excess of par............................................................. 11,795,000
Retained earnings.................................................................... 3,554,000
-----------
15,382,000
-----------
$21,232,000
===========
See notes to consolidated financial statements.
2
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
---------- ----------
Revenues and other income:
Revenues:
Leasing ................................ $ 632,000 $ 695,000
Petroleum storage facility ............. 807,000 658,000
---------- ----------
1,439,000 1,353,000
Other income:
Gain on sale of parking garage ......... -- 1,057,000
Interest ............................... 31,000 9,000
---------- ----------
1,470,000 2,419,000
---------- ----------
Expenses:
Expenses applicable to:
Leasing ................................ 172,000 295,000
Petroleum storage facility ............. 445,000 459,000
General and administrative .............. 317,000 289,000
---------- ----------
934,000 1,043,000
---------- ----------
Income before income taxes ................. 536,000 1,376,000
---------- ----------
Income tax expense:
Current ................................. 176,000 566,000
Deferred ................................ 39,000 --
---------- ----------
215,000 566,000
---------- ----------
Net income ................................. $ 321,000 $ 810,000
========== ==========
Basic income per share ..................... $.10 $.25
==== ====
Dividends on common stock .................. $.03 $.03
==== ====
See notes to consolidated financial statements.
3
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(UNAUDITED)
2006 2005
----------- -----------
Cash flows from operating activities:
Net income ............................................. $ 321,000 $ 810,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of parking garage ....................... -- (1,057,000)
Depreciation ......................................... 127,000 121,000
Deferred income taxes ................................ 39,000 --
Other, principally net changes in receivables,
prepaids, accounts payable, accrued expenses,
deferred leasing revenues and income taxes ........ (629,000) 632,000
----------- -----------
Net cash provided by (used in) operating activities (142,000) 506,000
----------- -----------
Cash flows from investing activities:
Proceeds from sale of parking garage .................. -- 2,500,000
Payments for properties and equipment ................. (629,000) (78,000)
----------- -----------
Net cash provided by (used in) investing activities ... (629,000) 2,422,000
----------- -----------
Cash used in financing activities, payment of dividends... (99,000) (99,000)
----------- -----------
Increase (decrease) in cash and cash equivalents ......... (870,000) 2,829,000
Cash and cash equivalents, beginning ..................... 4,311,000 1,835,000
----------- -----------
Cash and cash equivalents, ending ........................ $ 3,441,000 $ 4,664,000
=========== ===========
Supplemental disclosure, cash paid for income taxes ..... $ 788,000 $ 86,000
=========== ===========
See notes to consolidated financial statements.
4
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(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, 2005. In the opinion of management,
the accompanying consolidated financial statements contain all adjustments
necessary to present fairly the financial position as of March 31, 2006 and
the results of operations and cash flows for the three months ended March
31, 2006 and 2005.
Certain amounts on the accompanying consolidated statement of income for
the three months ended March 31, 2005, have been reclassified to conform to
the presentations for the three months ended March 31, 2006.
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. PROPERTIES AND EQUIPMENT:
At March 31, 2006, properties and equipment consists of:
Properties on lease or held for lease, land and land improvements...... $ 3,989,000
-----------
Petroleum storage facility:
Land and land improvements............................................ 5,284,000
Buildings and structures.............................................. 1,206,000
Tanks and equipment, including $626,000 relating to
tank under construction.............................................. 12,965,000
-----------
19,455,000
-----------
Office equipment....................................................... 96,000
-----------
23,540,000
-----------
Less accumulated depreciation:
Properties on lease or held for lease................................. 11,000
Petroleum storage facility............................................ 6,154,000
Office equipment...................................................... 86,000
-----------
6,251,000
-----------
$17,289,000
===========
5
In November 2005, the Company entered into a contract to construct a
175,000 barrel tank at a remaining cost of $1,300,000. Construction
commenced in the first quarter of 2006, and the Company anticipates that
the tank will be completed in the third quarter of 2006.
The Company was the owner of a parking garage located on Parcel 7A in the
Capital Center area, which was leased for several years. In March 2005, the
Company sold the parking garage with a carrying value of $1,443,000 for
$2,500,000 in cash but retained ownership of the underlying land which is
leased for 99 years at a current annual contractual rental of $100,000.
Consistent with other Company long-term land leases, the tenant pays the
real property taxes on the land. The lease further provides for future
cost-of-living rental adjustments and periodic appraisals.
4. DESCRIPTION OF LEASING ARRANGEMENTS:
As of March 31, 2006, the Company had entered into four long-term land
leases for four separate parcels upon which the improvements have been
completed (developed parcels), including the lease for the land under the
parking garage discussed in Note 3. The Company has entered into three
additional long-term land leases (undeveloped parcels) with commencement
dates of April 1, 2004, January 1, 2005, and May 1, 2005, respectively.
Construction of the improvements has commenced on two of the three parcels.
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 $22,936,000 through March 31, 2006. Management has concluded
that a portion of the excess of straight-line over contractual rentals
($215,000 at March 31, 2006) is realizable when payable over the terms of
the leases.
Under the seven land leases which have commenced, the tenants are required
to pay the City for real property taxes, which amounts are excluded from
leasing revenues and expenses applicable to leasing on the accompanying
consolidated statements of income. For the three months ended March 31,
2006 and 2005, real property taxes attributable to the Company's land under
these seven leases totaled $327,000 and $311,000, respectively.
Under the lease which commenced January 1, 2005, the tenant is entitled to
a credit for future rents equal to a portion of the real property tax
expense currently being paid by the tenant. For the three months ended
March 31, 2006 and 2005, the Company reported the portion of the real
property taxes subject to the future credit ($36,000) as property tax
expense on the accompanying consolidated statements of income and as
accrued property taxes on its consolidated balance sheet. As the tenant
makes the tax payment, the amount of the payment is reclassified from
accrued property taxes to deferred leasing revenues which totaled $341,000
at March 31, 2006. During the periods that the tenant is entitled to the
credit (commencing in 2010), the Company will reclassify deferred leasing
revenues to leasing revenues.
Prior to the commencement of the May 1, 2005 lease, the Company received
option payments pursuant to a month-to-month arrangement.
Under one of the long-term land leases, the Company receives contingent
rentals (based upon a fixed percentage of gross revenue received by the
tenant). For the three months ended March 31, 2006 and 2005, the contingent
rentals total $16,000 and $14,000, respectively.
The Company also leases various parcels of land for outdoor advertising
purposes to Lamar Outdoor Advertising (Lamar) under a lease having a
remaining term of 28 years. Presently,
6
there are 25 locations under lease with 48 billboard faces. Of these
locations, 22 are owned by the Company and 3 are leased by the Company from
third parties under operating leases with original terms of 1 to 11 years.
In July 2005, another of the Company's operating leases with a third party
terminated since the Company had been unable to negotiate a renewal, and
the Company sold the permit for this billboard to the former lessor for
$100,000 in cash.
The Company leases the undeveloped parcels of land in or adjacent to the
Capital Center area for public parking purposes under short-term
cancellable leases.
5. PETROLEUM STORAGE FACILITY:
Current operations:
The Company and Global Companies, L.L.C. (Global) are parties to an
agreement whereby the Company operates the entire Petroleum Facility for
Global. The Company is responsible for labor, insurance, property taxes and
other operating expenses, as well as capital improvements.
In May 2003, the Company and Global 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) Global may terminate the
Amended Agreement on or after April 30, 2008, upon one year's written
notice; (3) Global will pay a monthly fee of $150,000 effective May 1,
2004, subject to annual cost-of-living adjustments; (4) Global will
reimburse the Company for certain increases in real property taxes over the
2002 level; and (5) the Company will receive an additional $.10 per barrel
(contingent revenue) for every barrel in excess of 4,000,000 barrels of
throughput in any agreement year.
For the three months ended March 31, 2006 and 2005, the Company earned
contingent revenues of $107,000 and $84,000, respectively.
On May 1, 2005, the scheduled cost-of-living adjustment resulted in an
increased monthly fee of $191,000. In December 2005, the Company completed
the construction of a 152,000 barrel tank which Global immediately leased
at a monthly fee of $36,000, increasing Global's total present monthly fee
to $227,000.
In October 2005, the Company and Global entered into the First Amendment to
the Amended Agreement whereby Global agreed to include the 175,000 barrel
tank being constructed in 2006 (see Note 3) under the existing Amended
Agreement at a monthly fee of approximately $43,000.
Also effective May 2003, Global was granted the option to purchase the
Petroleum Facility 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, Global agreed to make certain improvements
at the Wilkesbarre Pier which, for 2005, totaled approximately $110,000 and
are estimated to be $190,000 for 2006. [See Wilkesbarre Pier below].
Environmental remediation:
In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facility which allowed the escape of a small amount of fuel oil.
All required notices were made to the State of Rhode Island Department of
Environmental Management (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.
7
In 2003, RIDEM decided that the passive monitoring system previously
approved was not sufficient and required the Company to design an active
remediation system for the removal of product from the contaminated site.
The Company and its consulting engineers began the pre-design testing of
the site in the fourth quarter of 2004, and the Company continues to work
with RIDEM to design an acceptable system. The consulting engineers
estimated a total cost of $200,000 to design, install and operate the
system, which amount was included in expenses applicable to petroleum
storage facility in 2004. Through March 31, 2006, the Company has expended
$99,000. The Company expects the system to be installed during the second
quarter of 2006. The system will pump out the contaminants which will be
disposed of in compliance with applicable regulations. After a period of
time, the groundwater will be tested to determine if sufficient
contaminants have been removed. The Company anticipates that the
remediation process will be completed during 2007. While the Company and
its consulting engineers believe that the proposed active remediation
system will correct the situation, it is possible that RIDEM could require
the Company to expand remediation efforts, which could result in the
Company incurring additional costs.
Environmental incident:
In 2002, during testing of monitoring wells at the Petroleum Facility, the
Company's consultant discovered free floating phase product in a
groundwater monitoring well located on that portion of the Petroleum
Facility purchased in 2000. Preliminary laboratory analysis indicated that
the product was gasoline, which is not a product the Company ever stored at
its Petroleum Facility. 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 Company's Petroleum Facility. The
Company notified RIDEM. The Company will continue to monitor RIDEM's
investigation of this contamination to ensure that the responsible party
addresses this contamination.
Since 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.
Wilkesbarre Pier (the 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 Facility. The
Pier and the Petroleum Facility are connected by two petroleum pipelines.
Since 2000, the Company has been involved in litigation with Getty
Properties Corp. (Properties), the owner of an adjacent petroleum storage
facility and a party with a claimed interest in the Pier, which included,
among other issues, the obligation to install a 16-inch pipeline on the
Pier. In December 2004, the United States Court of Appeals for the First
Circuit determined that Properties had the obligation to install the
additional pipeline. The Company undertook the installation and in February
2005, Properties paid $394,000 for the installation.
The Company was also engaged in litigation with Properties over the
question of whether either party had the obligation to indemnify the other
for litigation expenses incurred in the underlying litigation with respect
to the Pier pursuant to a 1986 Guaranty and Indemnity Agreement. In
February 2005, the Judge Magistrate of the United States District Court for
the District of Rhode Island recommended that the Court deny and dismiss
all of the claims asserted by the parties in the action. Both parties
appealed that recommendation, and in September 2005, the Court denied and
dismissed all claims. Neither party appealed the Court's decision.
8
6. 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 amended Articles of Incorporation prohibited any shareholder from
acquiring more than a 5% interest in the Company's classes of common stock
and prohibited the two shareholders who each beneficially then owned in
excess of 5% of the Company's classes of common stock from increasing their
percentage ownership of each class of common stock. 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 amendment provided that if the Company did not
make an election to be taxed as a REIT on or before March 31, 2005, the
restrictions on share ownership would automatically lapse and shares of
Class B Common Stock would automatically be converted into shares of Class
A Common Stock on a one for one basis.
The Company did not make the election and on March 31, 2005, the shares of
Class B Common Stock were converted into shares of Class A Common Stock,
resulting in the Company having 3,299,956 shares of Class A Common Stock
outstanding, and the Excess Stock is no longer authorized.
7. INCOME TAXES:
In 2004, the Company received condemnation proceeds from National Railroad
Passenger Corporation (Amtrak) totaling $1,428,000 which qualify for
deferred reinvestment for income tax reporting purposes whereby the Company
elected to reduce the income tax basis of qualifying subsequent
acquisitions, which resulted in the Company's not then paying income taxes
on the proceeds, subject to certain restrictions. Through March 31, 2006,
the Company has made qualifying acquisitions totaling $250,000.
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 March 31, 2006 were as follows:
Gross deferred tax liabilities:
Property having a financial statement basis
in excess of tax basis.............................. $4,462,000
Condemnation proceeds................................. 471,000
Accrued leasing revenues.............................. 86,000
Insurance premiums.................................... 42,000
----------
5,061,000
Gross deferred tax assets............................... (377,000)
----------
$4,684,000
==========
9
8. OPERATING SEGMENT DISCLOSURES:
The Company operates in two segments: (1) Leasing and (2) Petroleum storage
facility.
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, with the exception of the parking garage, and to pay real property
taxes) and locations along interstate and primary highways in Rhode Island
and Massachusetts (to Lamar which has constructed outdoor advertising
boards thereon). The Company anticipates that the future development of its
remaining properties in and adjacent to the Capital Center area will
consist primarily of long-term ground leases. Pending this development, the
Company leases these parcels for public parking purposes under short-term
cancellable leasing arrangements.
The Petroleum Storage Facility segment consists of the operating of the
Petroleum Facility in East Providence under an Amended Agreement effective
May 1, 2003, that expires in 2013 at a fixed monthly rate for Global which
stores and distributes petroleum products. The Amended Agreement includes
provisions to extend and additional payments based upon throughput. (See
Note 5).
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 assets 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
Facility.
The Company makes decisions relative to the allocation of resources and
evaluates performance based on income before income taxes, excluding
interest income, condemnation proceeds and certain corporate expenses.
Inter-segment revenues are immaterial in amount. The Company did not incur
interest expense during the three months ended March 31, 2006 and 2005.
The following financial information is used for making operating decisions
and assessing performance of the Company's segments:
10
Petroleum
Storage
Leasing Facility Total
------------ ------------ ------------
Three months ended March 31, 2006:
Revenues:
Revenues:
Long-term leases:
Contractual ............................................. $ 500,000 $ 700,000 $ 1,200,000
Contingent .............................................. 16,000 107,000 123,000
Non-cash, excess of contractual over
straight-line rentals ................................. (17,000) -- (17,000)
Short-term lease .......................................... 133,000 -- 133,000
------------ ------------ ------------
Total revenues .............................................. $ 632,000 $ 807,000 $ 1,439,000
============ ============ ============
Property tax expense ........................................... $ 144,000 $ 27,000 $ 171,000
============ ============ ============
Depreciation ................................................... $ -- $ 125,000 $ 125,000
============ ============ ============
Income before income taxes ..................................... $ 460,000 $ 362,000 $ 822,000
============ ============ ============
Assets ........................................................ $ 4,354,000 $ 13,797,000 $ 18,151,000
============ ============ ============
Properties and equipment, additions ............................ $ 33,000 $ 627,000 $ 660,000
============ ============ ============
Three months ended March 31, 2005:
Revenues and other income:
Revenues:
Long-term leases:
Contractual ............................................. $ 473,000 $ 574,000 $ 1,047,000
Contingent .............................................. 14,000 84,000 98,000
Option .................................................. 61,000 -- 61,000
Non-cash, excess of contractual over
straight-line rentals ................................. (25,000) -- (25,000)
Short-term lease .......................................... 172,000 -- 172,000
------------ ------------ ------------
695,000 658,000 1,353,000
Other income, gain on sale of parking garage ................ 1,057,000 -- 1,057,000
------------ ------------ ------------
Total revenues and other income ............................. $ 1,752,000 $ 658,000 $ 2,410,000
============ ============ ============
Property tax expense ........................................... $ 225,000 $ 20,000 $ 245,000
============ ============ ============
Depreciation ................................................... $ 13,000 $ 107,000 $ 120,000
============ ============ ============
Income before income taxes ..................................... $ 1,457,000 $ 199,000 $ 1,656,000
============ ============ ============
Assets ........................................................ $ 4,590,000 $ 11,695,000 $ 16,285,000
============ ============ ============
Properties and equipment:
Additions ................................................... $ -- $ 75,000 $ 75,000
============ ============ ============
Deletions ................................................... $ (2,500,000) $ -- $ (2,500,000)
============ ============ ============
11
The following is a reconciliation of the segment information to the amounts
reported in the accompanying consolidated financial statements for the three
months ended March 31, 2006 and 2005:
2006 2005
------------ ------------
Revenues and other income:
Revenues and other income for operating segments.................. $ 1,439,000 $ 2,410,000
Interest income................................................... 31,000 9,000
------------ ------------
Total consolidated revenues and other income.................... $ 1,470,000 $ 2,419,000
============ ============
Property tax expense:
Property tax expense for operating segments....................... $ 171,000 $ 245,000
Unallocated corporate property tax expense........................ 1,000 1,000
------------ ------------
Total consolidated property tax expense......................... $ 172,000 $ 246,000
============ ============
Depreciation:
Depreciation for operating segments............................... $ 125,000 $ 120,000
Unallocated corporate depreciation................................ 2,000 1,000
------------ ------------
Total consolidated depreciation................................. $ 127,000 $ 121,000
============ ============
Income before income taxes:
Income for operating segments..................................... $ 822,000 $ 1,656,000
Interest income................................................... 31,000 9,000
Unallocated corporate expenses.................................... (317,000) (289,000)
------------ ------------
Total consolidated income before income taxes................... $ 536,000 $ 1,376,000
============ ============
Assets:
Assets for operating segments..................................... $ 18,151,000 $ 16,285,000
Corporate cash and cash equivalents............................... 3,070,000 4,231,000
Other unallocated amounts......................................... 11,000 12,000
------------ ------------
Total consolidated assets....................................... $ 21,232,000 $ 20,528,000
============ ============
Additions to properties and equipment, operating segment
and total consolidated additions.................................. $ 660,000 $ 75,000
============ ============
Deletion to properties and equipment, parking garage,
operating segment and total consolidated deletion................. $ -- $ (2,500,000)
============ ============
12
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision of the Company's management, including its principal
executive officer and principal financial officer, the Company has evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rule 15d-14(c) under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon this
evaluation, the principal executive officer and principal financial officer have
concluded that, as of such date, the Company's disclosure controls and
procedures were effective in making them aware on a timely basis of the material
information relating to the Company required to be included in the Company's
periodic filings with the Securities and Exchange Commission.
There were no significant changes made in the Company's internal controls during
the period covered by this report or, to the Company's knowledge, in the factors
that could significantly affect these controls subsequent to the date of their
evaluation.
13
FORWARD LOOKING STATEMENTS
CERTAIN PORTIONS OF THIS REPORT, AND PARTICULARLY THE MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS, AND THE NOTES TO
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 LEASING REVENUES 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; AND EXPOSURE TO
CONTAMINATION, REMEDIATION OR SIMILAR COSTS ASSOCIATED WITH THE
OPERATION OF THE PETROLEUM STORAGE FACILITY.
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 is discussed in the Company's Form
10-KSB for the year ended December 31, 2005. There have been no changes to
the application of this accounting policy since December 31, 2005.
Segments:
The Company operates in two segments, leasing and petroleum storage
facility.
Leasing:
The leasing segment is principally devoted to the leasing of Company-owned
land in the Capital Center 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, as
shown on a map in Exhibit 20.1 hereof. 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.
As part of the construction of the Railroad Station, the Federal Railroad
Administration constructed a 330-car parking garage on the Company's land
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 was leased at an annual rental of $189,000. In March
2005, the Company sold the parking garage for $2,500,000 in cash and leased
the underlying land for 99 years at an initial annual contractual rental of
$100,000. At the end of the lease period or any extension thereof, the
tenant will surrender the parking garage to the Company, in good order,
condition and repair, ordinary wear and tear and damage by fire or
unavoidable
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casualty excepted. Consistent with other long-term land leases, the tenant
assumed the obligation for the payment of the real property taxes on the
land. The lease further provides for future cost-of-living rental
adjustments and periodic appraisals.
The sale of the parking garage while retaining title to the underlying land
is consistent with the Company's policy not to act as a developer with
respect to improvements constructed on land that it currently owns or may
hereafter acquire.
The Company first began offering parcels for lease in the late 1980's. As
of March 31, 2006, four 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, a 114,000
square foot office building and the parking garage.
Long-term leases commenced April 1, 2004, January 1, 2005 and May 1, 2005
on three of the remaining parcels (undeveloped parcels). On one of these
parcels, a 10-story office building containing 210,000 square feet is under
construction and is expected to be completed in November 2006. On a second
parcel, an underground parking garage and two buildings containing 193
condominiums are under construction with an expected completion date in the
fall of 2007. Construction on the third undeveloped parcel has not
commenced.
While seeking developers, the Company also leases various parcels of land
in or adjacent to the Capital Center area for public parking purposes.
Additionally, the Company, through a wholly-owned subsidiary, leases
certain outdoor advertising locations along interstate and primary highways
in Rhode Island and Massachusetts to Lamar Outdoor Advertising under a
lease which expires in 2033. Presently, there are 25 locations under lease
containing 48 billboard faces. Of these locations, 22 are owned by the
Company, and 3 are leased by the Company from third parties under leases
with original terms of one to eleven years. The term of the Lamar lease is
extended for two years for each additional location added. Although no new
locations have been added since 2002, one structure was moved to a
different location and the lease was extended for two years. In July 2005,
another of the Company's leases with a third party terminated since the
Company had been unable to negotiate a renewal. In July 2005, the Company
sold the permit for this billboard to the former lessor for $100,000 in
cash, and this location was removed from the Lamar lease. The annual
leasing revenue (including contingent rent) from this location had been
approximately $50,000 and the lease expense was approximately $11,000.
Subsequent event:
On April 19, 2006, the Company entered into an Amended and Restated
Agreement of its lease with Lamar which among other things provides the
following: (1) the base rent will increase annually in fixed increases of
2.75% for each leased billboard location commencing June 1, 2006 and on
each June 1 thereafter; and (2) in addition to base rent, for each 12-month
period commencing each June 1, Lamar must pay to the Company, the
difference between (a) 30% of the gross revenues from each standard
billboard and 20% of the gross revenues from each electronic billboard for
such 12-month period, less commissions paid to third parties and (b) the
base monthly rent for each leased billboard display for such 12-month
period. In all other respects, the lease remains substantially unchanged.
Petroleum storage facility:
The Company, through a wholly-owned subsidiary, owns a petroleum storage
facility (the Petroleum Facility) located in East Providence, Rhode Island
with a current capacity of 835,000
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barrels. The Petroleum Facility utilizes the Company's Wilkesbarre Pier and
a pipeline connecting the Wilkesbarre Pier to the Petroleum Facility. The
Company (through this wholly-owned subsidiary) and Global Companies, LLC
(Global) are parties to an agreement whereby the Company (through another
wholly-owned subsidiary) operates the entire Petroleum Facility for Global
at a fixed monthly fee which is subject to annual cost-of-living
adjustments. The 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 agreement on or after
April 30, 2008, upon one year's written notice. The 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 certain increases in real property taxes.
The Company bears all of the operating costs with respect to the Petroleum
Facility, including real estate taxes and insurance. In addition, Global
was granted an option to purchase the Petroleum Facility at any time during
the term of the agreement under the terms and conditions set forth in an
option agreement.
In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facility which allowed the escape of a small amount of fuel oil.
All required notices were made to the State of Rhode Island Department of
Environmental Management (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 2003, RIDEM decided that the passive monitoring system previously
approved was not sufficient and required the Company to design an active
remediation system for the removal of product from the contaminated site.
The Company and its consulting engineers began the pre-design testing of
the site in the fourth quarter of 2004, and the Company continues to work
with RIDEM to design an acceptable system. The consulting engineers
estimated a total cost of $200,000 to design, install and operate the
system, which the Company reported as an expense in 2004. Through March 31,
2006, the Company has expended $99,000. The Company expects the system to
be installed during the second quarter of 2006. The system will pump out
the contaminants which will be disposed of in compliance with applicable
regulations. After a period of time, the groundwater will be tested to
determine if sufficient contaminants have been removed. The Company
anticipates that the remediation process will be completed by the second
quarter of 2007. While the Company and its consulting engineers believe
that the proposed active remediation system will correct the situation, it
is possible that RIDEM could require the Company to expand remediation
efforts, which could result in the Company incurring additional costs.
In 2002, during testing of monitoring wells at the Petroleum Facility, the
Company's consultant discovered free floating phase product in a
groundwater monitoring well located on that portion of the Petroleum
Facility purchased in 2000. Preliminary laboratory analysis indicated that
the product was gasoline, which is not a product the Company ever stored at
its Petroleum Facility. 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 Company's Petroleum Facility. The
Company notified RIDEM. The Company will continue to monitor RIDEM's
investigation of this contamination to ensure that the responsible party
addresses this contamination.
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 Facility.
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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.
In 2005, the Company constructed a 152,000 barrel tank. In 2006, the
Company commenced the construction of a 175,000 barrel tank at an estimated
remaining cost of $1,300,000. The tank is expected to be completed in the
third quarter of 2006. This will conclude the development of the land
currently owned by the Company at its Petroleum Facility.
The Company manages its exposure to contamination, remediation or similar
costs associated with the Petroleum Facility through adherence to
established procedures for operations and equipment maintenance.
2. RESULTS OF OPERATIONS:
Leasing segment:
As discussed above, in March 2005 the Company sold its parking garage for
$2,500,000, resulting in a gain of $1,057,000. Exclusive of this gain, for
the three months ended March 31, 2006, revenues from leasing decreased
$63,000 from 2005. Prior to the commencement of the two long-term land
leases in 2005, the Company was receiving option payments and revenue from
a short-term surface parking lease but was paying all real property taxes.
Upon commencement of the leases, the Company receives an annual rental
which is lower during the construction and lease-up periods (approximately
five years) but the tenants directly pay the real property taxes, resulting
in a decrease in real property tax expense for the three months ended March
31, 2006 of $81,000 from 2005. The net effect of the above is the principal
reason for the increase to income before income taxes of the leasing
segment for the three months ended March 31, 2006 from 2005.
Petroleum storage facility segment:
For the three months ended March 31, 2006 revenue from the petroleum
storage facility increased $149,000 from 2005 due principally to fees for
the new 152,000 barrel tank effective December 2005, higher monthly fees
resulting from the annual cost-of-living adjustment and higher contingent
revenue.
For the three months ended March 31, 2006, expenses applicable to petroleum
storage facility decreased $14,000 from 2005. Lower legal fees in
connection with the Wilkesbarre Pier litigation and a decrease in expenses
relating to security maintenance were offset in part by higher depreciation
expense related principally to the new 152,000 barrel tank constructed in
2005 and higher payroll and related costs.
General:
For the three months ended March 31, 2006, interest income increased
$22,000 from 2005 resulting from higher levels of cash available for
short-term investments.
For the three months ended March 31, 2006, general and administrative
expense increased $27,000 from 2005 due principally to higher payroll and
related costs and directors fees.
17
Liquidity:
Historically, the Company has had adequate liquidity to fund its
operations.
A land lease for an undeveloped parcel commenced January 1, 2005, under the
terms of which the Company receives an annual contractual rental equal to
the option revenue it was previously receiving ($24,000), during the
thirty-month construction phase, and the tenant commenced paying real
property taxes at a current annual rate of $518,000. Starting in 2010, the
tenant will receive a credit against future rentals for real property taxes
paid as follows: 2004, $234,000; 2005, $143,000; and 2006, $143,000.
Under another land lease for an undeveloped parcel, the Company received
option payments equal to the real property taxes, which option terminated
April 30, 2005. This lease commenced May 1, 2005, under the terms of which
the Company receives an annual contractual rental of $36,000 during the
thirty-six month construction phase, and the tenant commenced paying real
property taxes at a current annual rate of $243,000.
Under another long-term land lease which commenced in 1988, the tenant
filed for protection under Chapter 11 of the United States Bankruptcy Code
but continued to pay the contractual rent in full. In May 2005, the
tenant's secured lender, the Employees Retirement System of Rhode Island
(ERS), a Rhode Island state agency, took control of the property at issue
and continued to pay the contractual rent under the lease. In November
2005, the lease was assigned to ERS's nominee, Gateway Holdings, LLC, which
took possession of the tenant's property. The building has been sub-leased
for three years. As of March 31, 2006, all rent and tax payments are
current.
In 2004, the Company received condemnation proceeds from Amtrak of
$1,428,000, excluding interest, 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, which results in
the Company's not currently paying income taxes on the proceeds, subject to
certain restrictions. The Company filed its 2004 income tax returns, making
such election, thereby reducing its cash outlay for income taxes for 2004
by approximately $570,000. However, the Company will be required to
reinvest the condemnation proceeds in qualifying assets by December 31,
2007, or then pay the income tax on the unexpended proceeds. At March 31,
2006, the Company has purchased qualifying assets totaling $250,000.
In 2005, the Company constructed a 152,000 barrel tank at a total cost of
$1,688,000 paid for in cash. Effective December 15, 2005, Global commenced
using the tank at a monthly fee of $36,000, resulting in a current total
monthly fee of $227,000. The annual cost-of-living adjustment effective May
1, 2006, will increase the monthly fee to $234,000. In November 2005, the
Company entered into a contract to construct a 175,000 barrel tank at an
estimated remaining cost of $1,300,000. Construction commenced in March
2006 and the tank is expected to be completed in the third quarter of 2006.
The Company presently intends to pay for the tank from available cash. When
completed, Global will include this new tank under the existing Amended
Agreement at a monthly fee of approximately $43,000.
Regulations of the Department of Homeland Security required the Company to
secure the Petroleum Facility (including the Wilkesbarre Pier) against
possible threats by the installation of fences, barricades and similar
items in 2004. The Company cannot predict what additional expenses it may
incur in the future to maintain required security levels.
As discussed in Note 5 of Notes to Consolidated Financial Statements, in
2003, the remaining non-jury claims in the litigation with Getty were tried
and the Court ordered Getty Properties Corp. (Properties) to install a new
sixteen-inch pipeline on the Pier for the Company's use and
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benefit. Pursuant to an agreement with Properties in the fall of 2004,
the Company installed the pipeline at a cost of $394,000. The Company
received payment from Properties in February 2005.
Other than the 175,000 barrel tank being constructed in 2006 and the
painting of two tanks in 2007 at an estimated cost of $225,000, remaining
commitments for the purchase of properties and equipment are immaterial.
In January 2005, the Company paid a quarterly dividend of $99,000 to
holders of Class A and Class B Common Stock. On April 1, 2005, Class B
Common Stock was converted into Class A Common Stock. In May, August and
November 2005, the Company paid a quarterly dividend of $99,000 to holders
of its Class A Common Stock. In January 2006, the Company paid a quarterly
dividend of $99,000 to holders of its Class A Common Stock. The declaration
of future dividends and the amount thereof will depend on the Company's
future earnings, financial factors and other events.
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.
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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) LEASE BETWEEN METROPARK, LTD. AND COMPANY:
(i) Dated January 1, 2005 (incorporated by reference to Exhibit 10(a)
to the Issuer's annual report on Form 10-KSB for the year ended
December 31, 2004), as amended.
(b) MISCELLANEOUS CONTRACT:
(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), as amended.
31.1 Rule 13a-14(a) Certification of Chairman of the Board and Principal
Executive Officer
31.2 Rule 13a-14(a) Certification of Treasurer and Principal Financial
Officer
32.1 Certification of Chairman of the Board 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 March 31, 2006, no reports on Form 8-K were filed.
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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/ Robert H. Eder
-----------------------------------------
Robert H. Eder
Chairman of the Board and
Principal Executive Officer
By /s/ Barbara J. Dreyer
-----------------------------------------
Barbara J. Dreyer
Treasurer and Principal Financial Officer
DATED: April 28, 2006
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