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, 1998
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)
100 Dexter Road, East Providence, RI 02914
(Address of principal executive offices)
Issuer's telephone number 401-435-7171 Issuer's Fax number 40l-435-7179
(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 3, 1998, 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, 1998
(Unaudited)
ASSETS
<TABLE>
<S> <C>
Properties and equipment (net of accumulated depreciation) $ 8,503,000
Cash and cash equivalents 4,926,000
Other receivables, principally tenant property
tax reimbursements 185,000
Accrued rental income 455,000
Prepaid and other 337,000
$14,406,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses:
Property taxes $ 540,000
Other 186,000
Deferred income taxes 1,208,000
1,934,000
Contingencies (Note 3)
Shareholders' equity:
Common stock, $1 par; authorized, issued and
outstanding 3,000,000 shares 3,000,000
Capital in excess of par 8,828,000
Retained earnings 644,000
12,472,000
$14,406,000
</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
1998 1997 1998 1997
</CAPTION>
<S> <C> <C> <C> <C>
Income:
Rentals, including garage and
surface parking revenues in
1997 of $122,000 and
$384,000, respectively $472,000 $510,000 $1,389,000 $1,561,000
Petroleum storage facilities,
net of cost of product sold 233,000 51,000 396,000 58,000
Interest:
Providence and Worcester
Railroad Company 102,000 98,000 309,000
Other 55,000 6,000 114,000 24,000
Other income 37,000 37,000
760,000 706,000 1,997,000 1,989,000
Expenses:
Expenses applicable to:
Rental income, including
garage and surface parking
expenses in 1997 of $185,000
and $561,000, respectively 218,000 294,000 724,000 870,000
Petroleum storage facilities 378,000 131,000 756,000 404,000
General and administrative 270,000 225,000 953,000 699,000
866,000 650,000 2,433,000 1,973,000
Income (loss) before income
taxes (106,000) 56,000 (436,000) 16,000
Income tax expense (benefit) (49,000) 23,000 (174,000) 25,000
Net income (loss) $(57,000) $ 33,000 $ (262,000) $ (9,000)
Basic income (loss) per
common share $(.02) $ .01 $(.09) $.0
Dividends per common share $ .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, 1998 AND 1997
(Unaudited)
1998 1997
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (262,000) $ (9,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 262,000 272,000
Deferred income taxes (78,000) (40,000)
Other, principally net changes in other
receivables, accounts payable and
accrued expenses 469,000 (371,000)
Net cash provided by (used in) operating
activities 391,000 (148,000)
Cash flows from investing activities:
Purchase of properties and equipment (101,000)
Proceeds from:
Collection of note receivable, Providence and
Worcester Railroad Company 3,993,000 162,000
Maturity of temporary cash investments 203,000
Cash provided by investing activities 3,892,000 365,000
Cash used in financing activities, payment of
dividends (150,000) (150,000)
Increase in cash and cash equivalents 4,133,000 67,000
Cash and cash equivalents, beginning 793,000 948,000
Cash and cash equivalents, ending $4,926,000 $1,015,000
Supplemental disclosure, cash paid for
income taxes $ 79,000 $ 232,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(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, 1998
and the results of operations and cash flows for the three and nine
months ended September 30, 1998 and 1997.
Commencing January 1, 1998, the Company leased under operating
leases its garage and surface parking properties previously
operated by the Company. Accordingly, the Company has reclassified
the accompanying consolidated statements of income (loss) for the
three and nine months ended September 30, 1997 to include in rental
income and expense amounts previously reported as garage and
surface parking.
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 (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 annual 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 subsequent years.
On August 18, 1997, the Company received from the City 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 $1,370,000. This increase was not part of a city-
wide revaluation.
On August 21, 1997, the Company received from the City real
property tax bills purporting to assess taxes for assessment years
ending December 31, 1990 through December 31, 1995, based upon a
$42,000,000 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 $7,100,000, which amount did not include any
interest. The Company believes that the change of assessments is
related to the March 1997 Rhode Island Superior Court decision that
determined a 1987 value for certain properties condemned by the
State of Rhode Island in 1987.
On October 14, 1997, the Company received from the City real
property tax bills for the second quarter of 1997 indicating
interest due on the 1996 assessment of $76,000 and interest due on
the purported assessed taxes for the years 1990 through 1995 of
$3,300,000. The City asserts that the parcels subject to the
retroactive assessment were under-assessed in the prior assessment
periods.
On November 14, 1997, the Company filed appeals of the 1997 tax
bills.
On February 19, 1998, the Company received notices from the City of
tax sales of nine parcels scheduled to occur June 11, 1998. On
April 29, 1998, the City informed the Company that the City had
cancelled the tax sales.
The Company believes that the increased assessments for 1997 and
prior periods are illegal and on August 27, 1997 filed a lawsuit
against the City in the Rhode Island Superior Court.
On August 5, 1998, the Company received from the City real property
tax bills for taxes assessed as of December 31, 1997 which taxes
are based upon the assessed valuations as of December 31, 1996.
The Company has appealed these assessments and has filed a lawsuit
against the City in the Rhode Island Superior Court claiming that
the increased assessments for 1998 are illegal.
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 and its administrative
appeals. City of Providence property tax expense reported on the
accompanying consolidated statements of income (loss) totalled
$171,000 and $198,000 for the three months ended September 30, 1998
and 1997, respectively; and $583,000 and $587,000 for the nine
months ended September 30, 1998 and 1997, respectively.
The real property tax bills received by the Company on October 15,
1998 from the City indicate that there remains unpaid taxes of
$9,376,000 and interest thereon of $4,871,000 for assessment dates
of December 31,1990 through 1996 .
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 and 1998 increases 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, upon
consultation with counsel, that the likelihood of such failure is
remote, if a court were to require the Company to pay the
retroactive assessments and related interest, the Company could be
forced to seek the protection of the bankruptcy courts.
4. Note receivable, Providence and Worcester Railroad Company:
In 1988, in accordance with a plan of distribution, the Company
transferred the ownership of Providence and Worcester Railroad
Company (Railroad) to the Company's shareholders. The Company and
Railroad have a common controlling shareholder. As part of the
plan, the Company received a promissory note in the amount of
$9,377,000 payable over a period of twenty years with interest at
12% per year (reduced to 10% in 1995), prepayable at any time
without penalty. On March 30, 1998, Railroad prepaid the note in
full.
5. Properties and equipment:
<TABLE>
<S> <C>
Properties on lease or held for lease:
Land and land improvements $ 4,123,000
Parking garage 2,500,000
6,623,000
Petroleum storage facilities:
Land 2,175,000
Buildings and structures 325,000
Tanks and equipment 4,178,000
6,678,000
Other:
Land and land improvements 126,000
Equipment 89,000
215,000
13,516,000
Less accumulated depreciation:
Petroleum storage facilities 4,272,000
Other 741,000
5,013,000
$ 8,503,000
</TABLE>
6. Description of leasing arrangements:
At September 30, 1998, the Company had entered into long-term land
leases for four separate land parcels, one of which will not
commence until construction begins which is anticipated in the
spring of 1999. Another lease was amended in May 1997, extending
the term thereof from 2092 to 2142 with no change in the rents due
under the original term of the lease, and rents for the extended
period to be calculated in accordance with the formulas set forth
for the original term. The Company also leases various parcels
principally for outdoor advertising for remaining terms of up to 28
years and parking for terms of 2 years.
For those leases with 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 $11,391,000 through September 30, 1998.
Management has concluded that a portion of the excess of straight-
line over contractual rentals ($455,000 at September 30, 1998) 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 carrying amounts of assets and
liabilities. The tax effects of temporary differences which give
rise to deferred tax assets and liabilities at September 30, 1998
were as follows:
<TABLE>
<S> <C>
Gross deferred tax liabilities:
Property having a financial statement
basis in excess of its tax basis $1,221,000
Accrued rental income 182,000
1,403,000
Gross deferred tax assets, principally
professional fees in connection with
condemnation case (195,000)
$1,208,000
</TABLE>
8. Petroleum storage facilities:
Termination of lease and arbitration:
The Company's petroleum storage facilities (the Facilities) were
leased to an operator (the Operator) from October 1, 1991 through
September 30, 1996 at an annual rental of $183,000 plus
reimbursement of property taxes (approximately $90,000 annually).
In 1994, a leak was discovered in a 25,000 barrel storage tank at
the Facilities which allowed 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). To date, monitoring
wells have shown no ground water contamination, and the leak has
been contained in the soil under the tank. The Company's
engineering consultants (the Consultants) are working with the
Agency to determine the extent of remediation. The Consultants
proposed several acceptable options and determined a current range
of estimated costs (including professional fees) to be $40,000 (for
the capping of the contaminated area) to $398,000 (for the 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 of a
slope and damage to a retaining wall which caused the washing away
of several tons of soil. The Consultants proposed several options
and determined a range of estimated costs (including professional
fees) to be $15,000 (to repair the eroded channel) to $136,000 (to
include the replacement of the retaining wall).
In 1995, the Company provided for the estimated costs to remediate
the contaminated soil and repair the eroded channel by reporting a
liability and a corresponding receivable from the Operator. In
1996, the Company paid $15,000 to repair the eroded channel.
Management was of the opinion that 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 retaining wall, but also required the Operator to return
the Facilities at the termination of the lease in a condition
substantially the same as when the Operator took possession. 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 $65,000.
Since 1985, the Company had been a party to an agreement (the Pier
Operating Agreement) covering the operation and maintenance of the
Pier which was owned by Railroad. The Pier, which is connected by
two petroleum pipelines to the Company's Facilities, is integral to
the operation of the Facilities. In 1991, the Pier Operating
Agreement was amended by the parties then subject to it, which
were the Company, Railroad and two oil companies. The Pier
Operating Agreement provided that the parties would share the annual
cost of operating and maintaining the Pier based on their relative
usage of the Pier as measured by vessel berthing hours.
Commencing in 1991, Railroad notified the parties on a periodic
basis of the need for several significant repair, maintenance and
dredging projects to the Pier and attempted to obtain agreement
among the parties to proceed with such repairs. In 1996, Railroad
notified the parties that the estimated cost of the projects
totalled approximately $1,100,000 and requested the parties to
consent to its undertaking such projects. All of the Company's
responsibilities and obligations under the Pier Operating Agreement
were assumed by the Operator in accordance with the terms of its
lease. Although the Operator paid for certain on-going operating
costs, it did not agree that it was responsible for any portion of
the costs of the projects identified by Railroad.
Because the Operator did not accept responsibility for any of the
aforementioned costs, the Company initiated arbitration proceedings
in accordance with the lease. In the arbitration proceedings, the
Operator again denied responsibility and set forth counterclaims
asserting that it was entitled to recover $96,000 plus interest from
the Company for operating expenses. The Company denied any
liability in connection with the counterclaims.
In August 1997, the arbitrator awarded the Company $184,000 with
respect to all claims. The Operator paid the Company $74,000 in
1997 and the balance in May 1998.
Wilkesbarre Pier:
In October 1997, Railroad was notified by one of the two oil
companies party to the Pier Operating Agreement (the Withdrawing
Company) that the Withdrawing Company was with drawing from the Pier
Operating 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 but never withdrew from
the Pier Operating Agreement.
In December 1997, Railroad and the Withdrawing Company entered into
a new agreement (New Agreement) whereby the Withdrawing Company
agrees to pay in monthly installments annual minimum fees for five
years commencing January 1, 1998, which range from $185,000 to
$235,000. Under the terms of the New Agreement, the owner of the
Pier is not required to make any repairs to the Pier. The New
Agreement may be terminated by the Withdrawing Company upon ninety
days' notice only in the event of a failure of a component of the
Pier that the owner does not repair.
Of the maintenance, repair and dredging projects estimated by
Railroad in 1996 to cost approximately $1,100,000, one of the
projects was completed in 1997 at a cost of $130,000, of which the
Company's share was $15,000.
In 1995, the Company and Railroad entered into an agreement which,
among other provisions, gave the Company the right to acquire the
Pier for $1. In January 1998, the Company exercised its right and
acquired the Pier; and Railroad assigned its rights under the New
Agreement to the Company.
The Company believes that the remaining projects proposed by
Railroad are no longer necessary in light of the Company's planned
operation of the Pier.
Included in income, petroleum storage facilities on the
accompanying consolidated statements of loss for the three and nine
months ended September 30, 1998, is $46,000 and $139,000,
respectively, of fees paid by the Withdrawing Company.
Pipeline rights:
A trust for the benefit of the Company's controlling shareholder
(the Trust) was party to an agreement (the Pipeline Agreement) with
respect to the use of the two petroleum pipelines which connect the
Pier to the Facilities. 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 was 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 $20,000 to the Trust and was
not required to make any payment with respect to maintenance and
other expenses.
In December 1997, the Trust entered into an agreement with the
Withdrawing Company which owns the two petroleum pipelines, whereby
the Withdrawing Company released the Trust from liability in
connection with the pipelines for any costs incurred to date by the
Withdrawing Company. Pursuant to said agreement, the Trust will
only be responsible in the future for its proportionate share of a
repair or replacement to the pipelines in excess of $25,000.
The Company had the option to purchase the rights of the Trust under
the Pipeline Agreement and exercised its option in January 1998,
acquiring all rights of the Trust for $50,000, which amount is
included in properties and equipment on the accompanying
consolidated balance sheet.
9. Stock split:
In May 1997, the Company's 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.
10. Pending litigation:
In connection with the River Relocation Project, in 1987 the State
of Rhode Island condemned a portion of the Company's property. On
January 16, 1987, the Company entered into an Agreement with the
State of Rhode Island (the 1987 Agreement) relating to the State's
obligation with respect to the condemnation. In November 1987, the
State paid a condemnation award of $2,600,000. Under the 1987
Agreement, the Company purchased another parcel of land from the
State and was required to return to the State a portion of the
condemnation award.
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.
In May 1997, the Superior Court entered final judgment awarding
additional 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 filed an appeal with the Supreme Court. The
matter was argued before the Supreme Court on April 8, 1998. On
April 17, 1998, the Supreme Court entered an order affirming the
judgment of the Superior Court. Interest is accruing on the
judgment. The Supreme Court expressly stated that its decision was
"without prejudice to any party seeking to enforce any contractual
obligations that may be implicated by the enforcement of the
Judgment."
The State filed several motions to prevent the Company from
collecting the judgment, which now exceeds $11,000,000 including
interest. The Superior Court has denied the State's motions and
ordered the State to pay the judgment by August 14, 1998. The State
filed an appeal with the Supreme Court, and argument is scheduled
for November 17, 1998.
Under the 1987 Agreement, the Company may be required to return to
the State a portion of the award. Because the State and the Company
may disagree concerning their respective obligations under the 1987
Agreement, the Company and its counsel are currently reviewing the
1987 Agreement to determine the amount, if any, to be included in
the Company's financial statements when the Company receives
payment of the judgment.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis or Plan of Operation
Financial condition:
In 1988, in accordance with a plan of distribution, the Company
transferred the ownership of Providence and Worcester Railroad
Company (Railroad) to the Company's shareholders. The Company and
Railroad have a common controlling shareholder. As part of the plan,
the Company received a promissory note in the amount of $9,377,000
payable over a period of twenty years with interest at 12% per year
(reduced to 10% in 1995), prepayable at any time without penalty. On
March 30, 1998, Railroad prepaid the note in full. The Company has
invested the proceeds in a certificate of deposit while management is
evaluating ways to use the proceeds to maximize shareholder value.
However, the Company anticipates that it will not be able to invest
the proceeds at rates comparable to the interest rate formerly paid by
Railroad.
The Company's principal assets consist of land, a public parking
garage, petroleum storage facilities and outdoor advertising sites. A
significant portion of the land consists of approximately 20.5 acres,
including 1.9 acres of air rights, in downtown Providence, Rhode
Island, held for development. At June 30, 1998, the Company had
entered into long-term land leases for four separate land parcels, one
of which will not commence until construction begins, which is
anticipated in the spring of 1999. Another lease was amended in May
1997, extending the term thereof from 2092 to 2142, with no change in
the rents due under the original term of the lease, and rents for the
extended period to 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 for remaining terms of up
to 28 years and surface parking for terms of 2 years.
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 lease the available parcels suitable for public surface parking
under short-term cancellable leases. The Company anticipates that
future development of the remaining properties will consist primarily
of long-term ground leases under which the significant portion of
future rental income will not be earned until the buildings are
completed by the tenants and occupied. The timing of the development
of the Company's parcels located in the Capital Center area may be
adversely affected by the tax dispute with the City of Providence
described below.
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 (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 subsequent years.
On August 18, 1997, the Company received from the City 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 $1,370,000.
This increase was not part of a city-wide revaluation.
On August 21, 1997, the Company received from the City real property
tax bills purporting to assess taxes for assessment years ending
December 31, 1990 through December 31, 1995, based upon a $42,000,000
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
$7,100,000, which amount did not include any interest. The Company
believes that the change of assessments is related to the March 1997
Rhode Island Superior Court decision that determined a 1987 value for
certain properties condemned by the State of Rhode Island in 1987.
On October 14, 1997, the Company received from the City real property
tax bills for the second quarter of 1997 indicating interest due on
the 1996 assessment of $76,000 and interest due on the purported
assessed taxes for the years 1990 through 1995 of $3,300,000. The
City asserts that the parcels subject to the retroactive assessment
were under-assessed in the prior assessment periods.
On November 14, 1997, the Company filed appeals of the 1997 tax bills.
On February 19, 1998, the Company received notices from the City of
tax sales of nine parcels scheduled to occur June 11, 1998. On April
29, 1998, the City informed the Company that the City had cancelled
the tax sales.
The Company believes that the increased assessments for 1997 and prior
periods are illegal and on August 27, 1997 filed a lawsuit against the
City in the Rhode Island Superior Court.
On August 5, 1998, the Company received from the City real property
tax bills for taxes assessed as of December 31, 1997 which taxes are
based upon the assessed valuations as of December 31, 1996. The
Company has appealed these assessments and has filed a lawsuit against
the City in the Rhode Island Superior Court claiming that the
increased assessments for 1998 are illegal.
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 and its administrative appeals. City of
Providence property tax expense reported on the accompanying
consolidated statements of income (loss) totalled $171,000 and
$198,000 for the three months ended September 30, 1998 and 1997,
respectively; and $583,000 and $587,000 for the nine months ended
September 30, 1998 and 1997, respectively.
The real property tax bills received by the Company on October 15,
1998 from the City indicate that there remains unpaid taxes of
$9,376,000 and interest thereon of $4,871,000 for assessment dates of
December 31,1990 through 1996.
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 and
1998 increases 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, upon consultation with counsel, that the likelihood
of such failure is remote, if a court were to require the Company to
pay the retroactive assessments and related interest, the Company
could be forced to seek the protection of the bankruptcy courts.
In connection with the River Relocation Project, in 1987 the State of
Rhode Island condemned a portion of the Company's property. On January
16, 1987, the Company entered into an Agreement with the State of
Rhode Island (the 1987 Agreement) relating to the State's obligation
with respect to the condemnation. In November 1987, the State paid a
condemnation award of $2,600,000. Under the 1987 Agreement, the
Company purchased another parcel of land from the State and was
required to return to the State a portion of the condemnation award.
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.
In May 1997, the Superior Court entered final judgment awarding
additional 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 filed an appeal with the Supreme Court. The matter was argued
before the Supreme Court on April 8, 1998. On April 17, 1998, the
Supreme Court entered an order affirming the judgment of the Superior
Court. Interest is accruing on the judgment. The Supreme Court
expressly stated that its decision was "without prejudice to any party
seeking to enforce any contractual obligations that may be implicated
by the enforcement of the Judgment."
The State filed several motions to prevent the Company from collecting
the judgment, which now exceeds $11,000,000 including interest. The
Superior Court has denied the State's motions and ordered the State to
pay the judgment by August 14, 1998. The State filed an appeal with
the Supreme Court, and argument is scheduled for November 17, 1998.
Under the 1987 Agreement, the Company may be required to return to the
State a portion of the award. Because the State and the Company may
disagree concerning their respective obligations under the 1987
Agreement, the Company and its counsel are currently reviewing the
1987 Agreement to determine the amount, if any, to be included in the
Company's financial statements when the Company receives payment of
the judgment.
Since June 1, 1998, the Company's petroleum storage facilities have
been leased under short- term arrangements and all of its product has
been sold. The Company anticipates that the leasing arrangements will
continue into the first quarter of 1999.
The Company manages its exposure to future contamination, cleanup or
similar costs associated with the petroleum storage facilities through
its adherence to established procedures for operations and equipment
maintenance. In addition, the Company maintains what it believes to
be adequate levels of insurance.
During 1997, FAS No. 130 (Reporting Comprehensive Income) and FAS No.
131 (Disclosures about Segments of an Enterprise and Related
Information) were issued and are effective for the year 1998. FAS No.
130 establishes standards for reporting and display of comprehensive
income and its components (income, expenses, gains and losses) in a
full set of general purpose financial statements. The Company does
not have any components of comprehensive income. FAS No. 131
establishes standards for the way public companies report information
about operating segments and requires that those companies report
selected information about operating segments and establishes
standards for related disclosures about products and services,
geographic areas and major customers.
Certain portions of this report, and particularly the Management's
Discussion and Analysis of Financial Condition 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, without limitation, the following: the
collectibility of the accrued rental income when due over the terms of
the long-term land leases; changes in economic conditions that may
affect either the current or future development on the Company's
parcels; the final outcome of the condemnation litigation; the
resolution of the property tax litigation with the City; and exposure
to future contamination, cleanup or similar costs associated with the
operation of the petroleum storage facilities.
Results of operations:
For the three months ended September 30, 1998, total income increased
approximately 8% from the 1997 level. For the nine months ended
September 30, 1998, total income remained at the 1997 level.
The decrease in rental income was offset in part by a decrease in
expenses applicable to rental income resulting principally from
certain direct expenses in connection with the garage and surface
parking facilities previously operated by the Company which are now
under lease.
The increase in revenue from petroleum storage facilities results
principally from fees received under the Company's New Agreement in
connection with the Wilkesbarre Pier and rental income from the short-
term leasing arrangements which commenced June 1, 1998. The increase
in expenses applicable to petroleum storage facilities results
principally from increased insurance costs and repairs and maintenance
relating principally to the exterior painting of the entire terminal
facilities.
The increase in general and administrative expenses results
principally from an increase in payroll and related costs due to an
increased number of employees and from an increase in legal and
professional fees.
<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 as of December 1, 1997 (incorporated by
reference to Exhibit 10(b)(i) to the Issuer's annual
report on Form 10-KSB for the year ended December 31,
1997).
(ii) Dated as of December 1, 1997 (incorporated by
reference to Exhibit 10(b)(ii) to the Issuer's annual
report on Form 10-KSB for the year ended December 31,
1997).
(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
No reports on Form 8-K were filed in the quarter ended
September 30, 1998.
<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/ Ronald P. Chrzanowski
Ronald P. Chrzanowski
President
By /s/ Barbara J. Dreyer
Barbara J. Dreyer
Treasurer and Principal Financial
Officer
DATED: November 3, 1998
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