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 June 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 August 10, 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
JUNE 30, 1998
(Unaudited)
ASSETS
<TABLE>
<S> <C>
Properties and equipment (net of accumulated depreciation) $ 8,588,000
Cash and cash equivalents 4,908,000
Other receivables, principally tenant property tax
reimbursements 144,000
Accrued rental income 472,000
Prepaid and other 374,000
$14,486,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses:
Property taxes $ 552,000
Other 144,000
Deferred income taxes 1,253,000
1,949,000
Contingencies (Note 3) and commitment (Note 11)
Shareholders' equity:
Common stock, $1 par; authorized, issued and
and outstanding 3,000,000 shares 3,000,000
Capital in excess of par 8,828,000
Retained earnings 709,000
12,537,000
$14,486,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
</CAPTION>
<S> <C> <C> <C> <C>
Income:
Rentals, including garage and
surface parking revenues in
1997 of $142,000 and
$262,000, respectively $479,000 $544,000 $ 917,000 $1,051,000
Petroleum storage facilities,
net of cost of product sold 112,000 3,000 162,000 7,000
Interest:
Providence and Worcester
Railroad Company 103,000 98,000 207,000
Other 52,000 9,000 61,000 18,000
643,000 659,000 1,238,000 1,283,000
Expenses:
Expenses applicable to:
Rental income, including
garage and surface parking
expenses in 1997
of $186,000 and $376,000,
respectively 257,000 291,000 506,000 576,000
Petroleum storage facilities 201,000 138,000 378,000 273,000
General and administrative 328,000 300,000 683,000 474,000
786,000 729,000 1,567,000 1,323,000
Loss before income taxes (143,000) (70,000) (329,000) (40,000)
Income taxes (benefit) (57,000) (12,000) (125,000) 2,000
Net loss $(86,000) $ (58,000) $(204,000) $ (42,000)
Basic loss per common share $(.03) $(.02) $(.07) $(.01)
Dividends per common share $ .05 $ .05 $ .05 $ .05
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
1998 1997
<TABLE>
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (204,000) $ (42,000)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 174,000 181,000
Deferred income taxes (33,000) (27,000)
Other, principally net changes in other
receivables, accounts payable and
accrued expenses 433,000 (422,000)
Net cash provided by (used in) operating
activities 370,000 (310,000)
Cash flows from investing activities:
Purchase of properties and equipment (98,000)
Proceeds from:
Collection of note receivable, Providence and
Worcester Railroad Company 3,993,000 107,000
Maturity of temporary cash investments 203,000
Cash provided by investing activities 3,895,000 310,000
Cash used in financing activities, payment
of dividends (150,000) (150,000)
Increase (decrease) in cash and cash equivalents 4,115,000 (150,000)
Cash and cash equivalents, beginning 793,000 948,000
Cash and cash equivalents, ending $4,908,000 $798,000
Supplemental disclosure, cash paid for
income taxes $ 49,000 $175,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 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
June 30, 1998 and the results of operations and cash flows for the three and
six months ended June 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 loss for the three and six months ended June 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 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 which is expected to be tried late in 1998.
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 plans to appeal
these assessments and expects to amend the lawsuit to include these tax bills.
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.
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 loss totalled
$208,000 and $205,000 for the three months ended June 30, 1998 and 1997,
respectively; and $433,000 and $416,000 for the six months ended June 30,
1998 and 1997, respectively.
The real property tax bills received by the Company on August 5, 1998 from
the City indicate that there remains unpaid taxes of $9,376,000 and interest
thereon of $4,590,000 for assessment dates of December 31,1990 through 1996.
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
Building 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 86,000
212,000
13,513,000
Less accumulated depreciation:
Petroleum storage facilities 4,203,000
Other 722,000
4,925,000
$ 8,588,000
</TABLE>
6. Description of leasing arrangements:
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 before year-end. 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 $11,174,000 through
June 30, 1998. Management has concluded that a portion of the excess of
straight-line over contractual rentals ($472,000 at June 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 June 30, 1998 were as follows:
<TABLE>
<S> <C>
Gross deferred tax liabilities:
Property having a financial statement
basis in excess of its tax basis $1,248,000
Accrued rental income 189,000
1,437,000
Gross deferred tax assets, principally
professional fees in connection with
condemnation case (184,000)
$1,253,000
</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 six months ended June 30,
1998, is $46,000 and $93,000, 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 has 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. Although the Superior Court has
ordered the State to pay the judgment by August 14, 1998, the State could
move for a stay of this order, file an appeal with the Supreme Court, or take
other procedural steps to delay or block the payment.
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.
11. Commitment
The Company has entered into several contracts for scheduled maintenance
projects at its petroleum storage facilities totaling $176,000, all which
will be completed during the second half of 1998.
<PAGE>
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 before year-end. 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.
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 which is expected to be tried late in 1998.
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 plans to appeal
these assessments and expects to amend the lawsuit to include these tax bills.
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.
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
loss totalled $208,000 and $205,000 for the three months ended June 30, 1998
and 1997, respectively; and $433,000 and $416,000 for the six months ended
June 30, 1998 and 1997, respectively.
The real property tax bills received by the Company on August 5, 1998 from
the City indicate that there remains unpaid taxes of $9,376,000 and interest
thereon of $4,590,000 for assessment dates of December 31,1990 through 1996.
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 has 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. Although the Superior Court has
ordered the State to pay the judgment by August 14, 1998, the State could
move for a stay of this order, file an appeal with the Supreme Court, or take
other procedural steps to delay or block the payment.
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 most of its product had 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. The Company presently operates in one
business segment as a lessor of properties principally in the Providence,
Rhode Island area.
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 and six months ended June 30, 1998, total income decreased
approximately 2% and 4%, respectively, from 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.
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 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on April 28, 1998. Of
the 3,000,000 shares entitled to vote, 2,573,300 shares of stock were
present, in person or by proxy.
All directors of the Registrant are elected on an annual basis and
the following were so elected at this Annual Meeting: Ronald P.
Chrzanowski, James H. Dodge, Robert H. Eder, Harold J. Harris and
Henry S. Woodbridge, Jr. Each director received 2,571,860
affirmative votes; 1,440 abstained.
Also presented for approval was a resolution for the appointment of
Lefkowitz, Garfinkel, Champi & DeRienzo P.C. as independent auditors
of the accounts of the Registrant for the year 1998. The resolution
received 2,558,224 affirmative votes and 14,403 negative votes; and
673 abstained.
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
A report on Form 8-K was filed on April 17, 1998 reporting an
order entered by the Rhode Island Supreme Court affirming the
judgment of the Rhode Island Superior Court issued in March 1997
in connection with the condemnation of a portion of the
Company's property in 1987.
<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: August 10, 1998
<PAGE>
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