U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
For the transition period from to
Commission File Number 0-3960
CAPITAL PROPERTIES, INC.
(Exact Name of Small Business Issuer as specified in its Charter)
Rhode Island 05-0386287
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Hospital Trust Plaza, Suite 920, Providence, RI 02903
(Address of principal executive offices)
Issuer's telephone number 401-331-0100 Issuer's Fax number 40l-331-2965
(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) 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 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 November 14, 1997, the registrant had 3,000,000 shares
of common stock outstanding.
Transitional small business disclosure format (check one).
YES_____ NO X .
<PAGE>
PART I
Item 1. Financial Statements
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(Unaudited)
ASSETS
<TABLE>
<S> <C>
Properties and equipment (net of accumulated depreciation) $ 8,755,000
Cash and cash equivalents 1,015,000
Note receivable, Providence and Worcester Railroad Company 4,050,000
Other receivables 382,000
Accrued rental income (Note 6) 432,000
Prepaid and other 410,000
$15,044,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses:
Property taxes $ 650,000
Other 106,000
Deferred income taxes 1,320,000
2,076,000
Commitments and contingencies (Notes 8 and 9)
Shareholders' equity:
Common stock, $1 par; authorized, issued and
outstanding 3,000,000 shares (Note 10) 3,000,000
Capital in excess of par (Note 10) 8,828,000
Retained earnings 1,140,000
12,968,000
$15,044,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
<S> <C> <C> <C> <C>
1997 1996 1997 1996
Income:
Rentals $388,000 $429,000 $1,177,000 $1,310,000
Garage and surface parking
revenues 122,000 107,000 384,000 378,000
Petroleum storage facilities 112,000 407,000
Interest:
Providence and Worcester
Railroad Company 102,000 107,000 309,000 331,000
Other 6,000 15,000 24,000 34,000
Other income (Note 8) 37,000 37,000
767,000 658,000 2,338,000 2,053,000
Expenses:
Expenses applicable to:
Rental income 109,000 184,000 309,000 550,000
Garage and surface parking 185,000 132,000 561,000 538,000
Petroleum storage facilities 192,000 753,000
General and administrative 225,000 141,000 699,000 459,000
711,000 457,000 2,322,000 1,547,000
Income before income taxes 56,000 201,000 16,000 506,000
Income tax expense 23,000 81,000 25,000 205,000
Net income (loss) $ 33,000 $120,000 $ (9,000) $ 301,000
Income (loss) per common share
restated to reflect 3-for-1
stock split in June 1997
(Note 10) $.01 $.04 $ .0 $.10
Dividends per common share
restated to reflect 3-for-1
stock split in June 1997
(Note 10) $.0 $.0 $.05 $.05
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(Unaudited)
<TABLE>
<S> <C> <C>
1997 1996
Cash flows from operating activities:
Net income (loss) $ (9,000) $ 301,000
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation 272,000 271,000
Deferred income taxes (40,000) (70,000)
Other, principally net changes
in other receivables, accounts
payable and accrued expenses (371,000) 66,000
Net cash provided by (used in)
operating activities (148,000) 568,000
Cash flows from investing activities:
Purchase of properties and equipment (8,000)
Proceeds from:
Collection of note receivable,
Providence and Worcester Railroad
Company 162,000 351,000
Maturity of temporary cash
investments 203,000
Cash provided by investing activities 365,000 343,000
Cash used in payment of dividends (150,000) (150,000)
Increase in cash and cash equivalents 67,000 761,000
Cash and cash equivalents, beginning 948,000 767,000
Cash and cash equivalents, ending $1,015,000 $1,528,000
Supplemental disclosure, cash paid for
Income taxes $ 232,000 $ 91,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(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 generally accepted accounting principles
have been condensed or omitted. In the opinion of management,
the accompanying consolidated financial statements contain all
adjustments necessary to present fairly the financial position
as of September 30, 1997 and the results of operations for the
three and nine months ended September 30, 1997 and 1996 and
the cash flows for the nine months ended September 30, 1997
and 1996.
The results of operations for the 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
generally accepted accounting principles 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
revenue and expenses during the reporting period. Actual
results could differ from those estimates.
3. Property tax dispute with the City of Providence
During 1995, the Company received notice of an increase in
the assessed valuation of several of its parcels in
Providence, Rhode Island. The increase in the assessment was
not the result of a city-wide revaluation, pertained to 1995
and subsequent years and resulted in an annual increase in
property taxes of $265,000. The Company filed appeals for
1995 and 1996 but elected to make property tax payments as due
pending the outcome of the appeals. During the fourth quarter
of 1996, the City of Providence reduced the assessed valuation
on one of the parcels, resulting in an abatement of property
taxes of $107,000 for 1995 and a reduction in the tax of
$115,000 for 1996 and subsequent years. The Company is unable
to determine if the remaining appeals will result in an
abatement of the property taxes for 1995 and 1996.
On August 18, 1997, the Company received from the City of
Providence real property tax bills for taxes assessed as of
December 31, 1996 reflecting an unexpected 200% increase in
the assessed valuation of a majority of the Company's parcels
in the Capital Center area, resulting in an annual increase in
property tax expense of approximately $1.37 million. This
increase was not part of a city-wide valuation.
On August 21, 1997, the Company received from the City of
Providence real property tax bills purporting to assess taxes
for assessment years ending December 31, 1990 through December
31, 1995, based upon a $42 million retroactive increase in the
assessed valuation of these same properties. These increases
were not part of a City wide revaluation. The aggregate
amount of such taxes as billed is approximately $7.1 million,
which amount did not include any interest.
On October 14, 1997, the Company received from the City of
Providence real property tax bills for the second quarter of
1997 indicating interest due on 1996 assessment of
approximately $76,000 and interest due on the purported
assessed taxes for the years 1990 through 1995 of $3.3
million. The City of Providence asserts that the parcels
subject to the retroactive assessment were under-assessed in
the prior assessment periods.
The Company believes that the assessments for 1997 and the
prior periods are illegal and on August 27, 1997 filed a
lawsuit against the City of Providence in the Rhode Island
Superior Court. The Company, upon consultation with counsel,
believes that its position with respect to these assessments
will be sustained; however, such proceedings can be protracted
and costly, and there can be no assurance that the Company
will be successful in having the 1997 increase or the
retroactive assessments overturned. The failure of the
Company to prevail in the proceedings contesting the
retroactive assessments would have a material adverse effect
on the Company's results of operations and financial condition
and, while the Company believes the likelihood of such failure
to be remote, if a court requires the Company to pay the
retroactive assessments and related interest, the Company
could be forced to seek the protection of the bankruptcy
courts.
The Company is accruing for financial reporting purposes (and
paying) property taxes based on the 1994 and 1995 assessed
valuation while it pursues its lawsuit contesting the 1996
increase and the retroactive assessments, and its
administrative appeals of the 1994 and 1995 assessments.
4. Properties and equipment:
<TABLE>
<S> <C>
Properties on lease or held for lease, land
and land improvements $ 4,014,000
Petroleum storage facilities:
Land 1,825,000
Buildings and structures 325,000
Tanks and equipment 4,163,000
6,313,000
Other:
Land and land improvements 492,000
Buildings, principally parking garage 2,537,000
Equipment 96,000
3,125,000
13,452,000
Less accumulated depreciation:
Petroleum storage facilities 3,994,000
Other 703,000
4,697,000
$ 8,755,000
</TABLE>
5. Other receivables:
<TABLE>
<S> <C>
Rentals, principally tenant property
tax reimbursements $ 303,000
Property tax abatement 32,000
Interest, Providence and Worcester
Railroad Company 34,000
Other 13,000
$ 382,000
</TABLE>
6. Description of leasing arrangements:
At September 30, 1997, the Company had entered into land
leases for three separate land parcels. One lease was amended
in May 1997, extending the term thereof from 2092 to 2142.
There was no change in the rents due under the original term
of the lease, and rents for the extended period will be
calculated in accordance with the formulas set forth for the
original term. The Company also leases various parcels of land
principally for outdoor advertising and surface parking for
remaining terms of up to 27 years. For those leases with
scheduled rent increases, the cumulative excess of straight-
line over contractual rentals (considering scheduled rent
increases over the initial 30 to 149-year terms of the leases)
amounted to $10,503,000 through September 30, 1997.
Management has concluded that a portion of the excess of
straight-line over contractual rentals ($432,000 at September
30, 1997) is realizable when payable over the terms of the
leases.
7. Income taxes:
Deferred income taxes are recorded based upon differences
between financial statement and tax bases of assets and
liabilities. The tax effects of temporary differences which
give rise to deferred tax assets and liabilities at September
30, 1997 were as follows:
<TABLE>
<S> <C>
Gross deferred tax liabilities:
Property having a financial statement
basis in excess of its tax basis $1,328,000
Excess of straight-line over contractual
rental income 173,000
1,501,000
Gross deferred tax assets, principally
professional fees (181,000)
$1,320,000
</TABLE>
8. Petroleum storage facilities:
The Company owns petroleum storage facilities (the
"Facilities") located in East Providence, Rhode Island which,
for the period October 1, 1991 through September 30, 1996 were
leased to an operator (the "Operator"). Pursuant to the
lease, the Operator paid an annual rent of $183,000 plus
reimbursement of property taxes (approximately $90,000).
In 1994, a leak was discovered in the 25,000 barrel storage
tank at the Facilities. The leak resulted in the escape of a
small amount of fuel oil. The tank was emptied and all
required notices were made to the appropriate environmental
agency (the "Agency"). As part of its remediation plan, the
Company installed monitoring wells which to date have
evidenced no ground water contamination. The Company
believes the leak has been contained in the soil under the
tank. The Company's engineering consultants (the
"Consultants") are working closely with the Agency to
determine the extent of the remediation. The Consultants have
proposed several options which are acceptable to the Company
and have determined a range of estimated costs (including
professional fees) of $27,000 (for capping of the contaminated
area) to $383,000 (for a complete removal of the contaminated
soil and its off-site disposal). The Agency has advised the
Company that it will accept the capping of the contaminated
area as an appropriate remediation measure, subject to the
placement of a notice on the Company's deed describing the
location of the contaminated area.
During 1995, the Operator informed the Company of the erosion
and damage to a retaining wall which, in turn, resulted in the
washing away of several tons of soil. The Consultants
proposed several options for the repair of the retaining wall
and replacement of the soil which range from $15,000 (to
repair the eroded channel) to $136,000 (to include
replacement of the retaining wall).
In its financial statements for 1995, the Company recorded the
estimated cost of $42,000 to remediate the contaminated soil
and erosion and repair the retaining wall and reported a
corresponding receivable from the Operator for $42,000. In
1996, the Company paid $15,000 to effect repairs to a portion
of the eroded area which amount reduced the reported liability
to $27,000. After the Operator vacated the Facilities and
emptied the tanks, the Company inspected the Facilities and
determined that one of the tanks had a structural failure.
In 1996 the Company repaired the tank at a cost of $60,000.
In the opinion of management, the terms of the lease not only
made the Operator solely responsible for the payment of all
costs to remediate the contaminated soil and to repair the
erosion of the slope and the retaining wall, but also required
the Operator to return the Facilities at termination of the
lease in a condition substantially the same as when the
Operator first took possession. The Company made demand on
the Operator for the cost of remediation and repairs to the
slope and retaining wall and for repairs of the tank. When
the Operator refused the Company's demand, the Company
initiated arbitration proceedings in accordance with the
provisions of the lease. In connection with the arbitration
proceedings, the Operator asserted that it was entitled to
recover $96,000 plus interest from the Company for operating
expenses.
In August of 1997, the arbitrator awarded the Company $184,000
with respect to its claims. The Operator has paid the Company
$74,000, but has challenged the disposition of the remaining
portion of the award relating to the leak in the storage tank
by appealing the award to the Rhode Island Superior Court. In
its appeal the Operator demands that the Agency be joined as a
party and the funds be expended only in connection with a
remediation plan approved by the Agency. The Company contends
that there should be no restriction on its use of the funds.
On October 23, 1997 a hearing was held and the parties were
instructed to file briefs on or before November 24, 1997.
The Company has recorded the $74,000 arbitration payment as
follows:
<TABLE>
<S> <C>
Partial award payment received $74,000
Application against receivable ($42,000)
and write off of payable ($27,000) (15,000)
Amount payable to Operator for refund
of 1996 property tax paid in advance (22,000)
Balance recorded as other income $37,000
</TABLE>
9. Pier agreement
Since 1985, the Company has been a party to an agreement (the
"Pier Agreement") covering the operation and maintenance of
the Wilkes-Barre Pier (the "Pier") which is owned by
Providence and Worcester Railroad Company (the "Railroad"), an
affiliate of the Company through common ownership. The Pier
is integral to the operation of the Company's Facilities. The
Pier Agreement, which is between the Company, the Railroad and
two (2) oil companies, requires the parties utilizing the Pier
to share the cost of operating and maintaining the Pier in
accordance with their relative usage as measured by vessel
berthing hours. Beginning in 1991, the Railroad notified the
parties of the need to effect repairs to the Pier and
attempted to obtain the agreement among the parties to proceed
therewith. In 1996 the Railroad notified the parties that the
estimated cost to repair the Pier then totaled $1.1 million
and requested the parties to consent to the Railroad
undertaking such projects. All the parties except one (1)
consented. In connection with the lease of its Facilities as
previously described in Note 8, the Operator undertook to
assume all of the Company's obligations under the Pier
Agreement. Although the Operator paid for certain ongoing
operating costs, it did not agree that it was responsible for
any portion of the costs of the repair and maintenance
projects. The Company is unable to determine what its share
of the cost of repair will be and when reimbursement will be
due to the Railroad.
In October 1997, the Railroad was notified by one of the two
oil companies party to the Pier Agreement (the "Withdrawing
Company") that the Withdrawing Company was withdrawing from
the Pier Agreement on April 1, 1998 and that it would no
longer be using the Pier after December 31, 1997. The other
oil company had previously discontinued utilizing the Pier.
Accordingly, if the withdrawal is effected, the Company will
be the only user of the Pier and, therefore, will be
responsible for all of the expenses in connection with the
operation and maintenance of the Pier. The Company has been
informed that the Railroad and the Withdrawing Company are
negotiating a continuation of the Withdrawing Company's
participation, but that there is no assurance whether an
agreement will, in fact, be reached and, if so, what the terms
will be and how it will impact the Company's financial
obligations.
10. Stock split:
In May 1997, the Board of Directors declared a three-for-one
split of the Company's common stock (effected in the form of a
200% stock dividend) which was paid on June 16, 1997. To
permit the split, the Company's articles of incorporation were
restated to increase the number of authorized common shares,
$1 par value, from 1,000,000 to 3,000,000 shares. To account
for the split, the Company transferred $2,000,000 from capital
in excess of par value to common stock on the accompanying
consolidated balance sheet. On June 16, 1997, the Company's
common stock was listed on the American Stock Exchange.
11. Transactions with related parties:
A trust for the benefit of the Company's controlling
shareholder (the "Trust") is party to an agreement (the
"Pipeline Agreement") with respect to the use of two petroleum
pipelines located in East Providence which connect the Pier
described in Note 9 to the Company's Facilities described in
Note 8. Since February 1983, the Company and any operator of
its Facilities have had the right to use the pipelines for the
transportation of petroleum products in consideration for
which the Company assumed all of the Trust's obligations for
repair and maintenance under the Pipeline Agreement and agreed
to pay to the Trust a fee based upon the number of barrels of
product transported through the pipelines. The fee is subject
to adjustment as of October 1 of each year to reflect changes
in the Consumer Price Index (1967 = 100). For the twelve
month period ending September 30, 1997, the Company paid
$19,560 to the Trust and was not required to make any payment
with respect to maintenance and other expenses.
he Company has the option to purchase the rights of the Trust
at any time during the twelve month period following September
30, 1997 at a price equal to twice the payments due for the
twelve month period ending September 30, 1997, but not less
than $50,000. The Company has not determined if it will
exercise the option. Should the Company not exercise the
option the Company's responsibilities will continue
indefinitely under the present arrangement. The Trust has been
notified by the Withdrawing Company, which is the only other
user of such pipelines, that it will be transferring its
rights under the Pipeline Agreement to the Trust. The Trust
has agreed to accept such transfer. If the transfer occurs,
the Company will be solely responsible for the maintenance and
other expenses associated with the operation and use of the
pipelines. The Company is unable to determine whether this
transfer would result in materially increasing its financial
obligations under the Pipeline Agreement.
12. Pending litigation and subsequent event:
In connection with the River Relocation Project, in 1987 the
State of Rhode Island condemned a portion of the Company's
property and paid an award of $2,600,000. As part of an
agreement to purchase another parcel of land from the State,
the Company was required to return to the State a portion of
the condemnation award ($1,600,000).
In April 1988, the Company filed a petition in the Rhode
Island Superior Court for an increased condemnation award
alleging that the award paid in 1987 was inadequate. In
January 1992, the Superior Court awarded the Company an
additional condemnation award of $401,000 plus interest from
the date of the condemnation. The Company had asserted in the
Superior Court that it was entitled to an additional
condemnation award in excess of $6,000,000 plus interest, and
accordingly, in February 1992, the Company appealed the
decision of the Superior Court to the Rhode Island Supreme
Court. In January 1994, the Supreme Court overturned the
Superior Court decision and returned the matter to the
Superior Court for a retrial of the case. The case was
retried in 1995, and on March 5, 1997, the Superior Court
issued a decision awarding the Company an additional
$6,100,000 plus interest. On May 6, 1997, the Court entered
final judgment awarding condemnation proceeds of $6,101,000 in
favor of the Company and interest on the judgment through that
date of $4,552,000. The State has filed an appeal with the
Rhode Island Supreme Court. Interest is accruing on the
judgment. The Company is unable to predict when the matter
will be decided by the Supreme Court. Under the
aforementioned agreement, the Company may be required to
return to the State a portion of this award.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis or Plan of Operation
Financial condition:
A significant portion of the Company's land consists of
approximately 20.5 acres, including 1.9 acres of air rights, in
downtown Providence, Rhode Island, held for development. The
Company is engaged in discussions concerning the possible
development of other parcels but is unable to predict when leases
on additional parcels will commence; however, the Company will
continue to use the available parcels for public surface parking.
In May 1997, one of the Company's land leases was amended,
extending the term thereof from 2092 to 2142. There was no
change in the rents due under the original term of the lease; and
rents for the extended period will be calculated in accordance
with the formulas set forth for the original term.
During 1995, the Company received notice of an increase in the
assessed valuation of several of its parcels in Providence,
Rhode Island. The increase in the assessment was not the result
of a city-wide revaluation, pertained to 1995 and subsequent
years and resulted in an annual increase in property taxes of
$265,000. The Company filed appeals for 1995 and 1996 but
elected to make property tax payments as due pending the outcome
of the appeals. During the fourth quarter of 1996, the City
reduced the assessed valuation on one of the parcels, resulting
in an abatement of property taxes of $107,000 for 1995 and a
reduction in the tax of $115,000 for 1996 and subsequent years.
The Company is unable to determine if the remaining appeals will
result in an abatement of the property taxes for 1995 and 1996.
On August 18, 1997, the Company received from the City of
Providence real property tax bills for taxes assessed as of
December 31, 1996 reflecting an unexpected 200% increase in the
assessed valuation of a majority of the Company's parcels in the
Capital Center area, resulting in an annual increase in property
tax expense of approximately $1.37 million. This increase was
not part of a city-wide valuation.
On August 21, 1997, the Company received from the City of
Providence real property tax bills purporting to assess taxes for
assessment years ending December 31, 1990 through December 31,
1995, based upon a $42 million retroactive increase in the
assessed valuation of these same properties. These increases
were not part of a City wide revaluation. The aggregate amount
of such taxes as billed is approximately $7.1 million, which
amount did not include any interest.
On October 14, 1997, the Company received from the City of
Providence real property tax bills for the second quarter of 1997
indicating interest due on 1996 assessments of approximately
$76,000 and interest due on the purported assessed taxes for the
years 1990 through 1995 of $3.3 million. The City of Providence
asserts that the parcels subject to the retroactive assessment
were under assessed in the prior assessment periods.
The Company believes that the assessments for 1997 and the prior
periods are illegal and on August 27, 1997 filed a law suit
against the City of Providence in the Rhode Island Superior
Court. The Company, upon consultation with counsel, believes
that its position with respect to these assessments will be
sustained; however, such proceedings can be protracted and
costly, and there can be no assurance that the Company will be
successful in having the 1997 increase or the retroactive
assessments overturned. The failure of the Company to prevail in
the proceedings contesting the retroactive assessments would have
a material adverse effect on the Company's results of operations
and financial condition and, while the Company believes the
likelihood of such failure to be remote, if a court requires the
Company to pay the retroactive assessments and related interest,
the Company could be forced to seek the protection of the
bankruptcy courts.
The Company is accruing for financial reporting purposes (and
paying) property taxes based on the 1994 and 1995 assessed
valuations while it pursues its lawsuit contesting the 1996
increase and the retroactive assessments, and its administrative
appeals of the 1994 and 1995 assessments.
The Company owns petroleum storage facilities (the "Facilities")
located in East Providence, Rhode Island which, for the period
October 1, 1991 through September 30, 1996, were leased to an
operator (the "Operator"). Pursuant to the lease, the Operator
paid an annual rent of $183,000 plus reimbursement of property
taxes (approximately $90,000).
In 1994, a leak was discovered in the 25,000 barrel storage tank
at the Facilities. The leak resulted in the escape of a small
amount of fuel oil. The tank was emptied and all required
notices were made to the appropriate environmental agency (the
"Agency"). As part of its remediation plan, the Company installed
monitoring wells which to date have evidenced no ground water
contamination. The Company believes the leak has been contained
in the soil under the tank. The Company's engineering
consultants (the "Consultants") are working closely with the
Agency to determine the extent of the remediation. The
Consultants have proposed several options which are acceptable to
the Company and have determined a range of estimated costs
(including professional fees) of $27,000 (for capping of the
contaminated area) to $383,000 (for a complete removal of the
contaminated soil and its off-site disposal). The Agency has
advised the Company that it will accept the capping of the
contaminated area as an appropriate remediation measure, subject
to the placement of a notice on the Company's deed describing the
location of the contaminated area.
During 1995, the Operator informed the Company of the erosion and
damage to a retaining wall which, in turn, resulted in the
washing away of several tons of soil. The Consultants proposed
several options for the repair of the retaining wall and
replacement of the soil which range from $15,000 (to repair the
eroded channel) to $136,000 (to include replacement of the
retaining wall).
In its financial statements for 1995, the Company recorded the
estimated cost of $42,000 to remediate the contaminated soil and
erosion and repair the retaining wall and reported a
corresponding receivable from the Operator for $42,000. In 1996,
the Company paid $15,000 to effect repairs to a portion of the
eroded area which amount reduced the reported liability to
$27,000. After the Operator vacated the Facilities and emptied
the tanks, the Company inspected the Facilities and determined
that one of the tanks had a structural failure. In 1996 the
Company repaired the tank at a cost of $60,000.
In the opinion of management, the terms of the lease not only
made the Operator solely responsible for the payment of all costs
to remediate the contaminated soil and to repair the erosion of
the slope and the retaining wall, but also required the Operator
to return the Facilities at termination of the lease in a
condition substantially the same as when the Operator first took
possession. The Company made demand on the Operator for the cost
of remediation and repairs to the slope and retaining wall and
for repairs of the tank. When the Operator refused the Company's
demand, the Company initiated arbitration proceedings in
accordance with the provisions of the lease. In connection with
the arbitration proceedings, the Operator asserted that it was
entitled to recover $96,000 plus interest from the Company for
operating expenses.
In August of 1997, the arbitrator awarded the Company $184,000
with respect to its claims. The Operator has paid the Company
$74,000, but has challenged the disposition of the remaining
portion of the award relating to the leak in the storage tank by
appealing the award to the Rhode Island Superior Court. In its
appeal the Operator demands that the Agency be joined as a party
and the funds be expended only in connection with a remediation
plan approved by the Agency. The Company contends that there
should be no restriction on its use of the funds. On October 23,
1997 a hearing was held and the parties were instructed to file
briefs on or before November 24, 1997.
On October 1, 1996, the Company took possession of the
Facilities. On September 1, 1997, the Company entered into a
short-term agreement with Vitol S.A., Inc., for the rental of two
of the Company's storage tanks for which the Company receives
$50,000 per month. The agreement is cancelable on 15 days'
notice by Vitol, which notice has not yet been received. The
Company does not know how long Vitol will rent the tanks. The
Company continues to seek oil companies to enter into thru-put
arrangements under which the Company would receive, store and
disburse product (thru-put) for such companies. However, there
is no assurance when and if such arrangements can be completed.
Pending the completion of thru-put arrangements, the Company
began purchasing petroleum products which it stores at the
Facilities and resells. In the absence of such arrangements for
rental of storage tanks or thru-put, the annual cash outlay to
maintain the Facilities is approximately $240,000.
Since 1985, the Company has been a party to an agreement (the
"Pier Agreement") covering the operation and maintenance of the
Wilkes-Barre Pier (the "Pier") which is owned by Providence and
Worcester Railroad Company (the "Railroad"), an affiliate of the
Company through common ownership. The Pier is integral to the
operation of the Company's Facilities. The Pier Agreement, which
is between the Company, the Railroad and two (2) oil companies,
requires the parties utilizing the Pier to share the cost of
operating and maintaining the Pier in accordance with their
relative usage as measured by vessel berthing hours. Beginning
in 1991, the Railroad notified the parties of the need to effect
repairs to the Pier and attempted to obtain the agreement among
the parties to proceed therewith. In 1996 the Railroad notified
the parties that the estimated cost to repair the Pier then
totaled $1.1 million and requested the parties to consent to the
Railroad undertaking such projects. All the parties except one
(1) consented. In connection with the lease of its Facilities as
previously described in Note 8 of the accompanying Financial
Statements, the Operator undertook to assume all of the Company's
obligations under the Pier Agreement. Although the Operator paid
for certain ongoing operating costs, it did not agree that it was
responsible for any portion of the costs of the repair and
maintenance projects. The Company is unable to determine what
its share of the cost of repair will be and when reimbursement
will be due to the Railroad.
In October 1997, the Railroad was notified by one of the two oil
companies party to the Pier Agreement (the "Withdrawing Company")
that the Withdrawing Company was withdrawing from the Pier
Agreement on April 1, 1998 and that it would no longer be using
the Pier after December 31, 1997. The other oil company had
previously discontinued utilizing the Pier. Accordingly, if the
withdrawal is effected, the Company will be the only user of the
Pier and, therefore, will be responsible for all of the expenses
in connection with the operation and maintenance of the Pier.
The Company has been informed that the Railroad and the
Withdrawing Company are negotiating a continuation of the
Withdrawing Company's participation, but that there is no
assurance whether an agreement will, in fact, be reached and, if
so, what the terms will be and how it will impact the Company's
financial obligations.
A trust for the benefit of the Company's controlling shareholder
(the "Trust") is party to an agreement (the "Pipeline Agreement")
with respect to the use of two petroleum pipelines located in
East Providence which connects the Pier described in Note 9 of
the accompanying Financial Statements to the Company's Facilities
in East Providence. Since February 1983, the Company and any
operator of its Facilities have had the right to use the
pipelines for the transportation of petroleum products in
consideration for which the Company assumed all of the
obligations for repair and maintenance under the Pipeline
Agreement and agreed to pay to the Trust a fee based upon the
number of barrels of product transported through the pipelines.
The fee is subject to adjustment as of October 1 of each year to
reflect changes in the Consumer Price Index (1967 = 100). For
the twelve month period ending September 30, 1997, the Company
paid $19,560 to the Trust and was not required to make any
payment with respect to maintenance and other expenses.
The Company has the option to purchase the rights of the Trust at
any time during the twelve month period following September 30,
1997 at a price equal to twice the payments due for the twelve
month period ending September 30, 1997, but not less than
$50,000. The Company has not determined if it will exercise the
option. Should the Company not exercise the option the Company's
responsibilities will continue indefinitely under the present
arrangement. The Trust has been notified by the Withdrawing
Company, which is the only other user of such pipelines, that it
will be transferring its rights under the Pipeline Agreement to
the Trust. The Trust has agreed to accept such transfer. If the
transfer occurs, the Company will be solely responsible for the
maintenance and other expenses associated with the operation and
use of the pipelines. The Company is unable to determine whether
this transfer would result in materially increasing its financial
obligations under the Pipeline Agreement.
In connection with the River Relocation Project, in 1987 the
State of Rhode Island condemned a portion of the Company's
property and paid an award of $2,600,000. As part of an
agreement to purchase another parcel of land from the State, the
Company was required to return to the State a portion of the
condemnation award ($1,600,000).
In April 1988, the Company filed a petition in the Rhode Island
Superior Court for an increased condemnation award alleging that
the award paid in 1987 was inadequate. In January 1992, the
Superior Court awarded the Company an additional condemnation
award of $401,000 plus interest from the date of the
condemnation. The Company had asserted in the Superior Court that
it was entitled to an additional condemnation award in excess of
$6,000,000 plus interest, and accordingly, in February 1992, the
Company appealed the decision of the Superior Court to the Rhode
Island Supreme Court. In January 1994, the Supreme Court
overturned the Superior Court decision and returned the matter to
the Superior Court for a retrial of the case. The case was
retried in 1995, and on March 5, 1997, the Superior Court issued
a decision awarding the Company an additional $6,100,000 plus
interest. On May 6, 1997, the Court entered final judgment
awarding condemnation proceeds of $6,101,000 in favor of the
Company and interest on the judgment through that date of
$4,552,000. The State has filed an appeal with the Rhode Island
Supreme Court. Interest is accruing on the judgment. The
Company is unable to predict when the matter will be decided by
the Supreme Court. Under the aforementioned agreement, the
Company may be required to return to the State a portion of this
award.
The Company believes that it has adequate liquidity and financial
resources to support its day to day operations. The Company has
financial exposure with respect to both the Pipeline Agreement
and the Pier Agreement, the amount of which it is unable to
quantify at this time. And as noted above, a determination
adverse to the Company in connection with the litigation against
the City of Providence could force the Company to seek the
protection of the bankruptcy courts.
Certain portions of this report, and particularly the
Management's Discussion and Analysis or Plan of Operation and
Results 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 the outcome of the City of Providence litigation and
changes in status of the Pipeline Agreement or the Pier
Agreement.
Results of operations:
For the three and nine months ended September 30, 1997, total
income increased approximately 17% and 14%, respectively, from
the 1996 level.
The increase in petroleum storage facilities income was due to
the Company operating those facilities as opposed to leasing to a
third party and was offset in part by a decrease in rental income
resulting from the termination of the lease of those facilities
on September 30, 1996. Expenses applicable to petroleum storage
facilities include certain expenses which were included in
expenses applicable to rental income prior to the termination of
the lease.
Income from garage and surface parking remained constant.
Exclusive of the reversal of $59,000 in property tax expense in
1996 resulting from the Company's property tax appeal, expenses
applicable to garage and surface parking remained constant.
The decrease in interest income on the note receivable from
Railroad results from a prepayment of $200,000 in May 1996 and
scheduled principal payments.
For the three and nine months ended September 30, 1997, general
and administrative expenses increased approximately 59% and 52%,
respectively, over the 1996 level due principally to professional
fees in connection with the arbitration proceedings, the
condemnation case and the listing of the Company's common stock
on the American Stock Exchange.
During 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (Earnings per
Share), Financial Accounting Standards No. 130 (Reporting of
Comprehensive Income) and Financial Accounting Standards No. 131
(Disclosure about Segments of an Enterprise and Related
Information). The opinions are effective for periods ended after
December 15, 1997. The adoption of FAS 128 and 130 will not have
any effect on the Company's financial statements. Management is
in the process of evaluating whether FAS 131 will have any effect
on the Company's financial statements.
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(3) (a) Restated articles of incorporation
(incorporated by reference to Exhibit 4.1 to the
Issuer's report on Form 8-A dated June 6, 1997).
(b) 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 June 30, 1995).
(10) (a) Note from Providence and Worcester
Railroad Company to Issuer dated January 1, 1988
(incorporated by reference to Exhibit 10(a) to
the Issuer's annual report on Form 10-KSB for the
year ended December 31, 1992) as modified by
Agreement dated August 16, 1995 (incorporated by
reference to Exhibit 10(a) to the Issuer's annual
report on Form 10-KSB for the year ended December
31, 1995).
(b) Leases between Metropark, Ltd. and Issuer:
(i) Dated November 30, 1995 (incorporated by
reference to Exhibit 10(c)(i) to the Issuer's
annual report on Form 10-KSB for the year ended
December 31, 1995).
(ii) Dated November 10, 1994 (incorporated by
reference to Exhibit 10(c)(ii) to the Issuer's
annual report on Form 10-KSB for the year ended
December 31, 1994).
(iii) Dated November 6, 1996 (incorporated by
reference to Exhibit 10(c)(i) to the Issuer's
annual report on Form 10-KSB for the year ended
December 31, 1996).
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 18, 1997
reporting on the unexpected 200% increase in the assessed
valuation of a majority of the Company's parcels in the
Capital Center area from the prior assessed valuation.
A report on Form 8-K was filed on August 21, 1997
reporting the receipt by the Company of real property tax
bills purporting to assess taxes for assessment years
ending December 31, 1990 through December 31, 1995 totaling
approximately $7.1 million, which amount does not include
any interest.
<PAGE>
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/ Barbara J. Dreyer
Barbara J. Dreyer
President, Treasurer and
Principal Financial Officer
DATED: November 14, 1997
<PAGE>
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