UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 0-9380
CAPITAL PROPERTIES, INC.
(Name of small business issuer in its charter)
RHODE ISLAND 05-0386287
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 DEXTER ROAD
EAST PROVIDENCE, RHODE ISLAND 02914
(Address of principal executive offices) (Zip Code)
(401) 435-7171
(Small business issuer's telephone number, including area code)
Check whether the small business issuer: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the small business issuer was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:
As of October 31, 2003, the Issuer had 3,000,000 shares of Class A Common Stock
and 299,956 shares of Class B Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I
ITEM 1. FINANCIAL STATEMENTS
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2003
(UNAUDITED)
ASSETS
Properties and equipment (net of accumulated depreciation) ......... $14,912,000
Cash and cash equivalents .......................................... 1,878,000
Receivables:
Property tax settlement ...................................... 1,700,000
Other ........................................................ 89,000
Accrued rental income .............................................. 432,000
Prepaid and other .................................................. 41,000
-----------
$19,052,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses:
Property taxes ............................................... $ 1,040,000
Other ........................................................ 399,000
Income taxes payable ........................................... 480,000
Deferred income taxes, net ..................................... 3,652,000
-----------
5,571,000
-----------
Shareholders' equity:
Class A common stock, $.01 par; authorized 6,000,000 shares;
issued and outstanding 3,000,000 shares ...................... 30,000
Class B common stock, $.01 par; authorized 300,000 shares;
issued and outstanding 299,956 shares ........................ 3,000
Excess stock, $.01 par; authorized 1,000,000 shares; none issued
and outstanding .............................................. --
Capital in excess of par ....................................... 11,795,000
Retained earnings .............................................. 1,653,000
-----------
13,481,000
-----------
$19,052,000
===========
See notes to consolidated financial statements.
-2-
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Income:
Revenues:
Leasing, including property tax settlement of
$1,700,000 in 2003 ............................. $ 2,560,000 $ 689,000 $ 4,166,000 $ 2,012,000
Petroleum storage facilities .................... 458,000 403,000 1,568,000 1,339,000
----------- ----------- ----------- -----------
3,018,000 1,092,000 5,734,000 3,351,000
Interest ............................................ 2,000 3,000 5,000 36,000
----------- ----------- ----------- -----------
3,020,000 1,095,000 5,739,000 3,387,000
----------- ----------- ----------- -----------
Expenses:
Expenses applicable to:
Leasing ......................................... 625,000 618,000 1,752,000 1,769,000
Petroleum storage facilities .................... 532,000 470,000 1,643,000 1,343,000
General and administrative .......................... 239,000 242,000 760,000 753,000
Interest ............................................ 27,000 -- 27,000 --
----------- ----------- ----------- -----------
1,423,000 1,330,000 4,182,000 3,865,000
----------- ----------- ----------- -----------
Income (loss) before income taxes ....................... 1,597,000 (235,000) 1,557,000 (478,000)
----------- ----------- ----------- -----------
Income tax expense (benefit):
Current ............................................. 478,000 (118,000) 480,000 (864,000)
Deferred ............................................ 159,000 43,000 133,000 742,000
----------- ----------- ----------- -----------
637,000 (75,000) 613,000 (122,000)
----------- ----------- ----------- -----------
Net income (loss) ....................................... $ 960,000 $ (160,000) $ 944,000 $ (356,000)
=========== =========== =========== ===========
Basic income (loss) per common
share ............................................... $ .29 $ (.05) $ .29 $ (.11)
=========== =========== =========== ===========
Dividends on common stock ............................... $ -- $ -- $ -- $ .03
=========== =========== =========== ===========
See notes to consolidated financial statements.
-3-
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
----------- -----------
Cash flows from operating activities:
Net income (loss) ............................................ $ 944,000 $ (356,000)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation ........................................... 313,000 314,000
Deferred income taxes .................................. 133,000 742,000
Other, principally net changes in receivables,
prepaids, accounts payable, income taxes and
accrued expenses ................................... (992,000) 121,000
----------- -----------
Net cash provided by operating activities .................... 398,000 821,000
----------- -----------
Cash used in investing activities, purchase
of properties and equipment ................................ (153,000) (173,000)
----------- -----------
Cash used in financing activities, payment of dividends ......... -- (99,000)
----------- -----------
Increase in cash and cash equivalents ........................... 245,000 549,000
Cash and cash equivalents, beginning ............................ 1,633,000 1,167,000
----------- -----------
Cash and cash equivalents, ending ............................... $ 1,878,000 $ 1,716,000
=========== ===========
Supplemental disclosures, cash paid or received for income taxes:
Cash paid ............................................... $ 9,000 $ 9,000
=========== ===========
Refunds received ........................................ $ 381,000 $ 724,000
=========== ===========
See notes to consolidated financial statements.
-4-
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements have been prepared
by the Company. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed
or omitted. These statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form
10-KSB for the year ended December 31, 2002. In the opinion of
management, the accompanying consolidated financial statements contain
all adjustments necessary to present fairly the financial position as
of September 30, 2003 and the results of operations for the three and
nine months ended September 30, 2003 and 2002 and the cash flows for
the nine months ended September 30, 2003 and 2002.
The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.
2. USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates also
affect the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
3. PROPERTIES AND EQUIPMENT:
Properties on lease or held for lease:
Land and land improvements ....................... $ 3,740,000
Parking garage ................................... 2,500,000
-----------
6,240,000
-----------
Petroleum storage facilities:
Land and land improvements ...................... 5,106,000
Buildings and structures ........................ 709,000
Tanks and equipment ............................. 9,013,000
-----------
14,828,000
-----------
Office equipment ................................... 84,000
-----------
21,152,000
-----------
Less accumulated depreciation:
Properties on lease or held for lease ........... 975,000
Petroleum storage facilities .................... 5,188,000
Office equipment ................................ 77,000
-----------
6,240,000
-----------
$14,912,000
===========
-5-
Under a 1990 agreement with the State of Rhode Island, the Company was
obligated to pay the State $158,000 for the construction of certain
improvements in the Capital Center Project area. In December 1999, the
Company attempted to tender the $158,000 to the State in satisfaction
of its obligation, which amount was reported as an addition to
properties and equipment. Subsequently, the State claimed that the
Company owed interest in the amount of $130,000, which the Company
disputed. In July 2000, the Company and the State reached an agreement
whereby the Company agreed to pay a total of $65,000 in interest. The
State was unable to locate the original note and to deliver a discharge
of the mortgage held by it with respect to this property. The Company
commenced proceedings against the State in the Rhode Island Superior
Court seeking an order from the Superior Court that, upon payment of
the $223,000, the Company would be discharged from all responsibility
under the note and that the note would be paid in full. In September
2003, the Company paid the State the $223,000 and a consent judgment
was entered in Superior Court discharging and canceling the note and
mortgage.
4. DESCRIPTION OF LEASING ARRANGEMENTS:
At September 30, 2003, the Company had entered into seven long-term
land leases covering ten land parcels; of these leases, four will not
commence until construction begins.
The Company also leases various parcels of land for outdoor advertising
purposes for remaining terms of up to 28 years and for public parking
purposes under short-term cancellable leases.
For those leases with presently known scheduled rent increases, the
cumulative excess of straight-line over contractual rentals
(considering scheduled rent increases over the 30 to 149 year terms of
the leases) amounted to $15,386,000 through September 30, 2003.
Management has concluded that a portion of the excess of straight-line
over contractual rentals ($432,000 at September 30, 2003) is realizable
when payable over the terms of the leases.
The three long-term land leases which have commenced provide that the
tenants pay the City of Providence for real property taxes, which
amounts are excluded from leasing revenues and expenses applicable to
leasing on the accompanying consolidated statements of income (loss).
These tenant payments attributable to the Company's land are as
follows: for the three months ended September 30, 2003 and 2002,
$86,000 and $81,000 respectively; and for the nine months ended
September 30, 2003 and 2002, $264,000 and $247,000, respectively.
5. PETROLEUM STORAGE FACILITIES:
Current operations:
The Company and a petroleum distribution company (Petroleum Company)
are parties to an agreement whereby the Company operates the entire
Petroleum Facilities for the Petroleum Company. The Company is
responsible for labor, insurance, property taxes and other operating
expenses, as well as capital improvements. Through April 30, 2003, the
agreement provided for a monthly fee which increased annually by 4.5%,
as well as an additional $.10 per barrel for every barrel in excess of
2,000,000 barrels in any agreement year (contingent revenues). For the
agreement year ended April 30, 2003, throughput
-6-
exceeded 2,000,000 barrels in December 2002. For the agreement year
ended April 30, 2002, throughput exceeded 2,000,000 barrels in January
2002. For the nine months ended September 30, 2003 and 2002, the
Company earned contingent revenues of $264,000 and $135,000,
respectively.
Effective May 1, 2003, the Company and Petroleum Company entered into
an amended and restated lease agreement (Amended Agreement) which,
among other things, provides as follows: (1) the Amended Agreement will
expire April 30, 2013, but will continue thereafter on a year-to-year
basis unless terminated by either party upon ninety days' written
notice; (2) the Petroleum Company may terminate the Amended Agreement
after five years upon one year written notice; (3) the monthly fee is
$147,000 (an increase of $30,000) and is subject to annual cost of
living adjustments; (4) the Petroleum Company will reimburse the
Company for any increase in real property taxes over the 2002 level;
and (5) the Company will receive an additional $.10 per barrel for
every barrel in excess of 4,000,000 barrels of throughput in any
twelve-month period ending on April 30 during each year the Amended
Agreement is in effect. Also effective May 1, 2003, the Petroleum
Company was granted the option to purchase the Petroleum Facilities at
any time during the term of the Amended Agreement under the terms and
conditions set forth in an option agreement. In a separate but related
agreement, the Petroleum Company agreed to pay a portion of certain
costs which may be incurred at the Wilkesbarre Pier. [See Wilkesbarre
Pier below].
Environmental incidents:
In March 2002, during testing of monitoring wells at the Petroleum
Facilities, the Company's consultant sampled a groundwater monitoring
well located on that portion of the Petroleum Facilities purchased in
2000 and discovered free floating phase product. Preliminary laboratory
analysis indicated that the product was gasoline, which is not a
product the Company ever stored at its Petroleum Facilities. However,
in the 1950's gasoline was stored on the Company's property by a
predecessor owner. The Company commenced an environmental investigation
and analysis, and the results indicate that the gasoline is not coming
from the Company's Petroleum Facilities. The Company notified the State
of Rhode Island Department of Environmental Management (RIDEM). The
Company will continue to monitor RIDEM's investigation of this
contamination to ensure that the responsible party addresses this
contamination.
The Company maintains what management believes to be adequate levels of
insurance. The Company notified its insurance company of the
contamination. The insurance company advised the Company that coverage
is only provided under policies in place at the time the contamination
occurs.
For the year ended December 31, 2002, the Company incurred costs
totaling $102,000 during its initial investigation and laboratory
analysis. Currently, the Company is not incurring significant costs in
connection with this matter and is unable to determine the costs it
might incur to remedy the situation as well as any costs to
investigate, defend and seek reimbursement from the responsible party
with respect to this contamination. This situation does not affect
current operations at the Petroleum Facilities.
In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facilities which allowed the escape of a small amount of fuel
oil. All required notices were made to RIDEM. In 2000, the tank was
demolished and testing of the groundwater indicated that
-7-
there were no large pooling of contaminants. In 2001, RIDEM approved a
plan whereby the Company installed a passive system consisting of three
wells and commenced monitoring the wells. In December 2002, the Company
determined that it would no longer incur significant costs in
connection with the implementation of this monitoring plan and reversed
into income a previously recorded payable of $50,000. In the spring of
2003, RIDEM decided that the passive monitoring system previously
approved was not sufficient and is now requiring the Company to install
an active remediation system for the removal of product from the
contaminated site. The Company anticipates installing the system before
year-end at an estimated cost of $50,000, at which time this amount
will be included in properties and equipment on the Company's balance
sheet. The Company anticipates that the ongoing cost of meeting its
obligations under the new remediation plan will not be significant.
Wilkesbarre Pier:
Wilkesbarre Pier (the Pier) is a deep-water pier in East Providence,
Rhode Island, now owned by the Company, which is integral to the
operation of the Petroleum Facilities. The Pier and the Petroleum
Facilities are connected by two petroleum pipelines. In 1995, the
Company and Providence and Worcester Railroad Company (Railroad) (the
then owner of the Pier) entered into an agreement which, among other
provisions, gave the Company the right to acquire the Pier for $1. The
Company and Railroad have a common controlling shareholder.
Effective January 1, 1998, Railroad and a company which uses the Pier
to off-load primarily gasoline from ships to its terminal (Oil Company)
entered into an agreement (the Agreement) whereby Oil Company agreed to
pay annual fees for five years ($185,000 in 2002). In January 1998, the
Company exercised its right and acquired the Pier, and Railroad
assigned its rights under the Agreement to the Company. The Agreement
was extended to March 31, 2003 at a monthly fee of $15,000, which
Agreement terminated at that time. Under the terms of the Agreement,
the owner of the Pier was not required to make any repairs to the Pier.
In May 2000, the Fire Department of the City of East Providence (Fire
Department) notified the Company, Oil Company and another company then
related to Oil Company (Other Company) that there was a lack of
adequate fire protection at the Pier and required them to install
certain equipment and facilities. The Company demanded that Other
Company take steps to commence and complete the performance of all work
and to supply all material required to satisfy the Fire Department.
In August 2000, Oil Company and Other Company (collectively Plaintiffs)
filed a lawsuit against the Company in the United States District Court
for the District of Rhode Island (the Court) claiming fraud on the part
of Railroad and sought rescission of the Agreement and other
agreements. The Company filed counterclaims against Other Company,
including one for damages based on Other Company's failure to comply
with the order and direction of the Fire Department as well as the
failure of Other Company to comply with certain other agreements.
Plaintiffs amended their complaint in June 2001 to include additional
claims. Following the close of discovery, the Court dismissed all the
fraud claims. The Court later bifurcated the trial of the jury claims
for damages and the non-jury claims for declaratory and injunctive
relief.
-8-
The jury claims were tried in December 2002. The jury returned a
verdict against the Company in the amount of $100,000, which amount was
recorded as an expense in 2002 and is included in accounts payable and
accrued expenses, other on the accompanying consolidated balance sheet.
The Company filed a post-trial motion requesting that the Court vacate
the verdict. In September 2003, judgment was entered against the
Company in the amount of $100,000 plus $27,000 in interest through that
date. Interest expense in the amount of $27,000 is included in the
accompanying statements of income for 2003. The Court entered judgment
as a matter of law against the Company on the Company's claim that
Other Company was obligated to pay for the installation of certain fire
suppression equipment on the Pier.
In June 2003, the remaining non-jury claims were tried and in September
2003 the Court rendered its decision as follows. The Court ordered
Other Company to install a new sixteen-inch pipeline on the Pier for
the Company's use and benefit. The Court rejected Other Company's claim
that it was not obligated to pay for the fire suppression equipment on
the Pier as well as Other Company's claim that the Company remove or
relocate the fire suppression equipment. However, the Court also held
that Oil Company and Other Company had the right to use the north side
of the Pier pursuant to a deed in 1941 but declined the Company's
request that it declare what are the corresponding obligations attached
to that right.
The Company appealed to the U. S. Court of Appeals for the First
Circuit. Neither Oil Company nor Other Company filed an appeal. A
briefing schedule has not been issued. A decision on appeal is expected
in 2004.
In connection with this litigation, the Company incurred legal fees as
follows: for the three months ended September 30, 2003 and 2002,
$29,000 and $74,000, respectively; for the nine months ended September
30, 2003 and 2002, $246,000 and $219,000, respectively. These amounts
are included in expenses, petroleum storage facilities on the
accompanying consolidated statements of income (loss).
Pursuant to a Guaranty and Indemnity Agreement, the Company filed a
lawsuit in September 2002 against Other Company and Other Company's
parent in the U. S. District Court for the Eastern District of New York
seeking reimbursement for all reasonable costs incurred by the Company
in defending the Wilkesbarre Pier litigation described above. The
matter has been transferred to the U. S. District Court for the
District of Rhode Island and is in the discovery stage.
6. CLAIM AGAINST CITY OF PROVIDENCE FOR ATTORNEYS FEES:
In 1997, the City of Providence (the City) revalued certain of the
Company's properties within the Capital Center area in downtown
Providence, Rhode Island, and reached back six years to assess over
$13,000,000 in back taxes, interest and penalties on the properties
based upon a retroactive increase in the assessed values. These
increases were not a part of a city-wide revaluation. The Company
contended that this action by the City was both unprecedented and
illegal.
In another action, the City claimed that the Company was not the owner
of a certain parcel of land in the Capital Center (Disputed Parcel),
which the Company purchased in 1989 from
-9-
the State of Rhode Island subsequent to the State's acquiring the
parcel from the City. Moreover, the City attempted to condemn the
Disputed Parcel. The Company contested both the City's claim of
ownership and the City's attempt to condemn the Disputed Parcel.
In July 1999, the Rhode Island Superior Court (Superior Court) ruled in
favor of the Company and found (1) that both the City's new tax
assessments and back taxes were illegal and void, and (2) that the
Company is the rightful owner of the Disputed Parcel and that the City
had no right to condemn same. The City appealed the judgments to the
Rhode Island Supreme Court (Supreme Court), which denied and dismissed
the City's appeal in December 1999.
After prevailing on the merits, the Company made claim against the City
for attorneys fees.
In July 2000, the City filed a motion to vacate the Superior Court and
Supreme Court judgments entered in favor of the Company. In October
2000, the Superior Court denied the motion to vacate and awarded the
Company attorneys fees of $258,000. The City has filed an appeal in the
Supreme Court. The matter was heard in September 2003 and the Company
expects a decision before year-end. Pending the ultimate resolution of
the matter, the Company has not reported the award as income in its
consolidated financial statements.
7. SETTLEMENT OF CITY OF PROVIDENCE PROPERTY TAX DISPUTE:
In each year since 1995 (with the exception of year 2000), the Company
has appealed the real estate taxes assessed against one or more of the
parcels of land owned by it in the City of Providence. With respect to
certain years, the appeals were heard by the Providence Board of
Assessment Review and in each case denied. The Company appealed each
such denial to the Superior Court. With respect to the remaining years,
the Providence Board of Assessment Review has yet to hear the appeals.
At the request of the Court, in August 2003 the Company and the City
engaged in mediation in an effort to resolve all property tax disputes.
In September 2003, the Company and the City agreed to an omnibus
settlement in the amount of $1,700,000 covering all litigation
resulting from tax appeals filed by the Company with the City for real
property taxes covering the tax years 1994 through 1999 and 2001
through 2003. The settlement has been approved by the City Council and
the Company anticipates payment before year-end. For two of the parcels
in the Capital Center area, the assessed values have been set which
will result in future annual decreases in real property taxes of
approximately $315,000. With respect to the remaining parcels, no
agreement as to assessed value has been reached with the City and there
can be no assurance assessments as of December 31, 2003 and subsequent
assessments will be satisfactory to the Company.
8. DISPUTE WITH AMTRAK:
The Company is in litigation with the National Railroad Passenger
Corporation (Amtrak) concerning various trespasses by Amtrak. During
the 1980's, the Company, State, City and Amtrak each conveyed parcels
of land in Capital Center so that each party had the land it needed for
its designated functions within Capital Center. As part of this
arrangement, Amtrak conveyed to the Company approximately 1.9 acres of
air rights over Amtrak's Northeast Corridor, which rights began 19.3
feet above the top of rail. Following that
-10-
conveyance, the railroad station and the Company's adjacent parking garage
were constructed and partially financed by the Federal Railroad
Administration (FRA).
In the fall of 1998, as part of Amtrak's electrification of the Northeast
Corridor, Amtrak erected towers and a signal bridge within the air rights
(the tops of which vary in height between 27 and 42 feet above the top of
rail).
In July 1999, Amtrak condemned a three-year temporary easement of all the
air rights owned by the Company retroactive to August 1998. In October
1999, the Company received from Amtrak $335,000, the sum estimated by
Amtrak to be just compensation for the property taken.
In May 2001, Amtrak permanently condemned the air rights and a parcel of
land adjacent to the air rights (with a carrying value of $625,000) for
which the Company received from Amtrak $925,000, the amount estimated by
Amtrak to be just compensation for the air rights and property taken.
The Company believed that the condemnation amounts paid by Amtrak were
inadequate and accordingly, brought suit in the United States District
Court for the District of Rhode Island (U.S. District Court) against Amtrak
seeking additional compensation for the land condemned.
In November 2002, the case was tried in the U.S. District Court and the
Company was awarded approximately $1,500,000, including interest, in
additional damages resulting from the aforementioned condemnations. In
February 2003, Amtrak appealed the decision to the U. S. Court of Appeals
for the First Circuit. In July 2003, Amtrak posted an appeal bond with the
Court in the amount of the judgment. The Company is unable to determine
when the appeal will be heard and the amount of additional damages, if any,
the Company may ultimately receive. Pending the final resolution of the
matter, the Company is not reporting the award as income in the
accompanying consolidated financial statements.
9. INCOME TAXES:
The permanent condemnation proceeds received in 1999 from the State of
Rhode Island qualify for deferred reinvestment for income tax reporting
purposes whereby the Company may elect to reduce the income tax basis of
qualifying subsequent acquisitions, subject to certain restrictions. In
February 2002, the Company effected a qualifying purchase with a
consolidated subsidiary and amended its 1999 federal and state income tax
returns to claim refunds totaling $568,000 with respect to condemnation
proceeds previously taxed. Through September 30, 2002, the Company received
the state refund of $117,000 plus interest of $30,000. The federal income
tax refund plus interest was received in the fourth quarter of 2002.
For income tax reporting purposes, the Company reported a tax loss for the
year ended December 31, 2001 and filed carryback claims that resulted in a
refund of federal income taxes previously paid in the amount of $607,000,
all of which was received by June 30, 2002.
For income tax reporting purposes, the Company reported a tax loss for the
year ended December 31, 2002 and filed carryback claims that resulted in a
refund of federal income
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taxes previously paid in the amount of $381,000, which amount was received
in May 2003. With this refund, the Company has recovered substantially all
federal income taxes paid during the carryback period.
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, 2003 were as follows:
Gross deferred tax liabilities:
Property having a financial statement basis in excess of tax
basis.......................................................... $ 3,677,000
Accrued rental income............................................. 173,000
------------
3,850,000
------------
Gross deferred tax assets:
Professional fees in connection with Amtrak dispute and
environmental matters.......................................... 164,000
Other............................................................. 34,000
------------
198,000
------------
$ 3,652,000
============
10. OPERATING SEGMENT DISCLOSURES:
The Company operates in two segments: (1) Leasing and (2) Petroleum Storage
Facilities.
The Leasing segment consists of the long-term leasing of certain of its
real estate interests in downtown Providence, Rhode Island (upon the
commencement of which the tenants are required to construct buildings
thereon) and locations along interstate and primary highways in Rhode
Island and Massachusetts (to a company which has constructed outdoor
advertising boards thereon). The Company anticipates that the future
development of its remaining properties will consist primarily of long-term
ground leases. Pending this development, the Company leases these parcels
and an adjacent parking garage for public parking purposes under short-term
cancellable leasing arrangements.
The Petroleum Storage Facilities segment consists of the operating of the
Petroleum Facilities in East Providence under the Amended Agreement that
expires in 2013 at a fixed monthly rate for the Petroleum Company which
stores and distributes petroleum products. The Amended Agreement includes
provisions to extend and additional payments based upon throughput. (See
Note 5.)
The principal difference between the two segments relates to the nature of
the operations. The tenants in the Leasing segment incur substantially all
of the development and operating costs of the asset constructed on the
Company's land, whereas the Company is responsible for the operating and
maintenance expenditures as well as capital improvements at the Petroleum
Facilities.
The Company makes decisions relative to the allocation of resources and
evaluates performance based on income (loss) before income taxes, interest
income and expense and certain corporate expenses.
There are no inter-segment revenues.
-12-
The following financial information is used for making operating decisions
and assessing performance of the Company's segments:
Petroleum
Storage
Leasing Facilities Total
------------- -------------- -------------
Nine months ended September 30, 2003:
Revenues:
Contractual..................................... $ 1,792,000 $ 1,304,000 $ 3,096,000
Contingent...................................... 90,000 264,000 354,000
Option.......................................... 632,000 -- 632,000
Property tax settlement......................... 1,700,000 -- 1,700,000
Noncash, excess of contractual over
straight-line rentals......................... (48,000) -- (48,000)
------------- -------------- -------------
$ 4,166,000 $ 1,568,000 $ 5,734,000
============= ============== =============
Property tax expense............................... $ 1,510,000 $ 84,000 $ 1,594,000
============= ============== =============
Depreciation....................................... $ 47,000 $ 259,000 $ 306,000
============= ============== =============
Income (loss) before income taxes.................. $ 2,414,000 $ (75,000) $ 2,339,000
============= ============== =============
Assets............................................. $ 7,550,000 $ 9,853,000 $ 17,403,000
============= ============== =============
Additions to properties and equipment.............. $ -- $ 41,000 $ 41,000
============= ============== =============
Nine months ended September 30, 2002:
Revenues:
Contractual..................................... $ 1,682,000 $ 1,204,000 $ 2,886,000
Contingent...................................... 59,000 135,000 194,000
Option.......................................... 300,000 -- 300,000
Noncash, excess of contractual over
straight-line rentals......................... (29,000) -- (29,000)
------------- -------------- -------------
$ 2,012,000 $ 1,339,000 $ 3,351,000
============= ============== =============
Property tax expense............................... $ 1,401,000 $ 79,000 $ 1,480,000
============= ============== =============
Depreciation....................................... $ 47,000 $ 259,000 $ 306,000
============= ============== =============
Income (loss) before income taxes.................. $ 243,000 $ (4,000) $ 239,000
============= ============== =============
Assets............................................. $ 5,921,000 $ 9,905,000 $ 15,826,000
============= ============== =============
Additions to properties and equipment.............. $ -- $ 172,000 $ 172,000
============= ============== =============
-13-
The following is a reconciliation of the segment information to the amounts
reported in the accompanying consolidated financial statements for the nine
months ended September 30, 2003 and 2002:
2003 2002
-------------- --------------
Income:
Revenues for operating segments................................... $ 5,734,000 $ 3,351,000
Interest income................................................... 5,000 36,000
-------------- --------------
Total consolidated income....................................... $ 5,739,000 $ 3,387,000
============== ==============
Property tax expense:
Property tax expense for operating segments....................... $ 1,594,000 $ 1,480,000
Unallocated corporate property tax expense........................ 1,000 1,000
-------------- --------------
Total consolidated property tax expense......................... $ 1,595,000 $ 1,481,000
============== ==============
Depreciation:
Depreciation for operating segments............................... $ 306,000 $ 306,000
Unallocated corporate depreciation................................ 7,000 8,000
-------------- --------------
Total consolidated depreciation................................. $ 313,000 $ 314,000
============== ==============
Income before income taxes:
Income for operating segments..................................... $ 2,339,000 $ 239,000
Interest:
Income.......................................................... 5,000 36,000
Expense......................................................... (27,000) --
Unallocated corporate expenses.................................... (760,000) (753,000)
-------------- --------------
Total consolidated income (loss) before
income taxes................................................. $ 1,557,000 $ (478,000)
============== ==============
Assets:
Assets for operating segments..................................... $ 17,403,000 $ 15,826,000
Corporate cash and cash equivalents............................... 1,603,000 1,428,000
Receivables, other................................................ -- 729,000
Other unallocated amounts......................................... 46,000 60,000
-------------- --------------
Total consolidated assets....................................... $ 19,052,000 $ 18,043,000
============== ==============
Additions to properties and equipment:
Operating segments................................................ $ 41,000 $ 172,000
Unallocated corporate additions................................... -- 1,000
-------------- --------------
Total consolidated additions ................................... $ 41,000 $ 173,000
============== ==============
-14-
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
CERTAIN PORTIONS OF THIS REPORT, AND PARTICULARLY THE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND THE NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS, CONTAIN FORWARD-LOOKING STATEMENTS WHICH REPRESENT THE
COMPANY'S EXPECTATIONS OR BELIEFS CONCERNING FUTURE EVENTS. THE COMPANY
CAUTIONS THAT THESE STATEMENTS ARE FURTHER QUALIFIED BY IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
IN THE FORWARD-LOOKING STATEMENTS, INCLUDING, WITHOUT LIMITATION, THE
FOLLOWING: THE ABILITY OF THE COMPANY TO GENERATE ADEQUATE AMOUNTS OF
CASH; THE COLLECTIBILITY OF THE ACCRUED RENTAL INCOME WHEN DUE OVER THE
TERMS OF THE LONG-TERM LAND LEASES AND THE PROPERTY TAX SETTLEMENT WITH
THE CITY OF PROVIDENCE; THE COMMENCEMENT OF ADDITIONAL LONG-TERM LAND
LEASES; CHANGES IN ECONOMIC CONDITIONS THAT MAY AFFECT EITHER THE
CURRENT OR FUTURE DEVELOPMENT ON THE COMPANY'S PARCELS; THE FINAL
OUTCOME OF THE AMTRAK, OIL COMPANY AND CITY OF PROVIDENCE LAWSUITS; AND
EXPOSURE TO CONTAMINATION, CLEANUP OR SIMILAR COSTS ASSOCIATED WITH THE
OPERATION OF THE PETROLEUM STORAGE FACILITIES.
1. OVERVIEW:
Critical accounting policies:
Critical accounting policies are policies that require application of
management's most difficult, subjective or complex judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain and may change in subsequent periods.
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements in its Report on Form 10-KSB
for the year ended December 31, 2002. Not all of these significant
accounting policies require management to make difficult, subjective or
complex judgments or estimates. Management believes that the Company's
revenue recognition policy for long-term leases with scheduled rent
increases (leasing segment) meets the definition of "critical."
Certain of the Company's long-term land leases have original terms of 30 to
149 years and contain scheduled rent increases where the future dollar
increases are known at the time of the commencement of the lease or at a
subsequent date.
The first such lease commenced in 1988, had an original term of 99 years
and provides for fixed percentage increases at specified intervals (as well
as reappraisal increases). In accordance with the provisions of Statement
of Financial Accounting Standards (FAS) No. 13 (Accounting for Leases) and
certain of its interpretations, rental income related to the fixed
percentage increases that are presently known should be recognized on a
straight-line basis. To calculate the annual straight-line amount, the 99
annual rental amounts are totaled and this total is divided by 99.
-15-
For this lease, the calculated annual straight-line amount for 1988 was
eight times (multiple) the amount paid by the tenant under the terms of the
lease (contractual amount). In subsequent years, as the tenant pays higher
rents, the multiple gradually decreases until the 57th year of the lease,
at which time the contractual amount paid by the tenant will exceed the
calculated straight-line amount. If the Company were to report annual
revenue for this lease using the straight-line amount, it would record a
significant receivable for each of the first 56 years, which receivable
would grow to approximately $33,000,000. Management does not believe that
the Company should record a receivable that would not begin to be collected
for 56 years (turnaround date) since management could not be assured of
collection.
In 1988, management met with the Securities and Exchange Commission (SEC)
accounting staff to discuss its concerns over the provisions of FAS No. 13
as they related to a lease of this length which results in the recording of
such a significant receivable that would remain on the Company's balance
sheet and continue to grow on an annual basis with a turnaround date so far
in the future. The Company presented the SEC accounting staff with an
application of the accounting policy whereby management would evaluate the
collectibility of the receivable on an annual basis and report as leasing
revenue only that portion of the receivable that management could conclude
would be collectible. The SEC accounting staff did not object to this
application by the Company.
Through September 30, 2003, the receivable on this lease has grown to
approximately $14,112,000 (cumulative excess of straight-line over
contractual rentals) and management has not been able to conclude that any
portion is collectible as the turnaround date is still 41 years away.
Accordingly, the Company has not reported any portion of this amount as
leasing revenue in its consolidated financial statements and does not
anticipate that it can reach such a conclusion until the turnaround date is
closer.
By contrast, the Company's long-term lease for outdoor advertising
locations had an original term of 30 years, scheduled rent increases where
the future dollar increases were known at the time of the commencement of
the lease, and a turnaround date in the 9th year. In this instance,
management was of the opinion that the receivable was collectible due to
the closeness of the turnaround date and other factors. Accordingly, the
Company has recognized leasing revenue using the annual straight-line
amount in its consolidated financial statements since the inception of the
lease.
Although the Company's other long-term land leases provide for scheduled
rent increases, the provisions of the leases are such that the future
dollar amounts could not be calculated either at the time of the
commencement of the lease or now, as such amounts are based on factors that
are not presently known, i.e., future cost-of-living adjustments or future
appraised values. The Company is reporting the annual rental income under
these leases using the contractual amounts in accordance with the
provisions of FAS No. 13.
The Audit Committee of the Board of Directors concurs with the Company's
application of its critical accounting policy relating to leasing revenue
under long-term land leases.
Segments:
The Company operates in two segments, leasing and petroleum storage.
-16-
Leasing:
The leasing segment is principally devoted to the leasing of Company-owned
land in the Capital Center Project Area (Capital Center), in downtown
Providence, Rhode Island under long-term ground leases. The Company owns
approximately 18 acres in the Capital Center consisting of 11 parcels. The
Capital Center (approximately 77 acres of land) is the result of a
development project undertaken by the State of Rhode Island, the City of
Providence, the National Railroad Passenger Corporation (Amtrak) and the
Company during the 1980's in which two rivers, the Moshassuck and the
Woonasquatucket, were moved, a new railroad station (the Railroad Station)
was constructed and significant public improvements were made to improve
pedestrian and vehicular traffic in the area. The Company has not acted,
and does not intend to act, as a developer with respect to any improvements
constructed on Company-owned parcels.
The Company first began offering parcels for lease in the late 1980's. As
part of the construction of the Railroad Station, the Federal Railroad
Administration constructed a 330-car parking garage on one of the Company's
parcels adjacent to the Railroad Station, and the Company paid one-half of
the construction cost. Subsequently, the Company became sole owner of the
parking garage, which is currently leased to an experienced parking
operator (parking operator). Three other parcels have been leased by the
Company under long-term leases of 99 years or more. Located on these
parcels are a 13-story office building, a 225-unit luxury apartment complex
and a 114,000 square foot office building. In accordance with the terms of
the lease associated with the apartment complex, effective April 1, 2003,
the Company is receiving a percentage of the tenant's gross revenue, which
presently is approximately $5,000 per month.
Three of the remaining seven parcels (undeveloped parcels) are the subject
of three leases, the term of each of which has not commenced pending
completion of development plans and closing of construction financing.
During the interim, option payments are being made by the developers under
the leases for the undeveloped parcels. Under one of the leases, the
developer made a series of six-month option payments, the last of which was
paid in June 2003 for the period ending December 27, 2003. In July 2003,
this lease was assigned to GTECH Corporation which plans to construct its
corporate headquarters on this parcel. Under another lease, the Company
receives option payments pursuant to a month-to-month arrangement. Under
the third lease, the Company began receiving option payments April 1, 2003.
The four remaining undeveloped parcels were the subject of a lease that had
not commenced but under which option payments had been made by the
developer since April 1, 2003, totaling $224,000 through September 30,
2003. However, the developer notified the Company that effective October 1,
2003, it is terminating its option and lease. The present monthly income
for the remaining options totals $48,000.
There is no assurance that any one or more of these development projects
will actually proceed.
Pending future development or commencement of the leases, five of the
parcels are subject to short-term leases with the parking operator.
The Company also owns two land parcels (18,000 sq. ft.) adjacent to the
Company's parcels in the Capital Center which are also subject to a
short-term lease with the parking operator.
Additionally, the Company, through a wholly-owned subsidiary, leases
certain outdoor advertising locations along interstate and primary highways
in Rhode Island and Massachusetts to an outdoor advertising company.
Presently, there are fifty billboard faces leased. The lease
-17-
expires in 2031. The term of the lease is extended for two years for each
additional location added. The Company added three locations in 2002.
Petroleum storage:
The Company, through a wholly-owned subsidiary, owns a 524,500 barrel
petroleum storage facility located in East Providence, Rhode Island, and a
deep-water pier (Wilkesbarre Pier) and pipeline connecting the Wilkesbarre
Pier to the petroleum storage facilities (Petroleum Facilities). The
Company and a petroleum distribution company (Petroleum Company) are
parties to an agreement whereby the Company operates the entire Petroleum
Facilities for the Petroleum Company. The Company is responsible for labor,
insurance, property taxes and other operating expenses, as well as capital
improvements. Through April 30, 2003, the agreement provided for a monthly
fee which increased annually by 4.5%, as well as an additional $.10 per
barrel for every barrel in excess of 2,000,000 barrels in any agreement
year.
Effective May 1, 2003, the Company and Petroleum Company entered into an
amended and restated lease agreement (Amended Agreement) which, among other
things, provides as follows: (1) the Amended Agreement will expire April
30, 2013, but will continue thereafter on a year-to-year basis unless
terminated by either party upon ninety days' written notice; (2) the
Petroleum Company may terminate the Amended Agreement after five years upon
one year written notice; (3) the monthly fee is $147,000 (an increase of
$30,000) and is subject to annual cost of living adjustments; (4) the
Petroleum Company will reimburse the Company for any increase in real
property taxes over the 2002 level; and (5) the Company will receive an
additional $.10 per barrel for every barrel in excess of 4,000,000 barrels
of throughput in any twelve-month period ending on April 30 during each
year the Amended Agreement is in effect. Also effective May 1, 2003, the
Petroleum Company was granted the option to purchase the Petroleum
Facilities at any time during the term of the Amended Agreement under the
terms and conditions set forth in an option agreement. In a separate but
related agreement, the Petroleum Company agreed to pay a portion of certain
costs which may be incurred at the Wilkesbarre Pier.
Pursuant to an agreement (Agreement) with another company (Oil Company),
which afforded that Oil Company the right to use the Wilkesbarre Pier, the
Company received annual payments. In 2002, this payment was $185,000. This
Agreement was extended to March 31, 2003 at a monthly fee of $15,000, which
Agreement terminated at that time. As described in Note 5 of Notes to
Consolidated Financial Statements, the Company is in litigation
(Wilkesbarre Pier litigation) with Oil Company and a related party over the
Agreement and the rights of others to utilize the Wilkesbarre Pier.
In March 2002, during testing of a monitoring well at the Petroleum
Facilities, the Company's consultant sampled a groundwater monitoring well
on that portion of the Petroleum Facilities purchased in 2000 and
discovered free floating phase product. Preliminary laboratory analysis
indicated that the product was gasoline, which is not a product the Company
ever stored at its Petroleum Facilities. However, in the 1950's gasoline
was stored on the Company's property by a predecessor owner. The Company
commenced an environmental investigation and analysis, and the results
indicate that the gasoline is not coming from the Company's Petroleum
Facilities. The Company notified the State of Rhode Island Department of
Environmental Management (RIDEM). The Company will continue to monitor
RIDEM's investigation of this contamination.
The Company maintains what management believes to be adequate levels of
insurance. The Company notified its insurance company of the contamination.
The insurance company advised
-18-
the Company that coverage is only provided under policies in place at the
time the contamination occurs.
For the year ended December 31, 2002, the Company incurred costs totaling
$102,000 during its initial investigation and laboratory analysis.
Currently, the Company is not incurring significant costs in connection
with this matter and is unable to determine the costs it might incur to
remedy the situation as well as any costs to investigate, defend and seek
reimbursement from the responsible party with respect to this
contamination. This situation does not affect current operations at the
Petroleum Facilities.
In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facilities which allowed the escape of a small amount of fuel
oil. All required notices were made to RIDEM. In 2000, the tank was
demolished and testing of the groundwater indicated that there were no
large pooling of contaminants. In 2001, RIDEM approved a plan whereby the
Company installed a passive system consisting of three wells and commenced
monitoring the wells. In December 2002, the Company determined that it
would no longer incur significant costs in connection with the
implementation of this monitoring plan and reversed into income a
previously recorded payable of $50,000. In the spring of 2003, RIDEM
decided that the passive monitoring system previously approved was not
sufficient and is now requiring the Company to install an active
remediation system for the removal of product from the contaminated site.
The Company anticipates installing the system before year-end at an
estimated cost of $50,000. The Company anticipates that the ongoing cost of
meeting its obligations under the new remediation plan will not be
significant.
The Company manages its exposure to contamination, cleanup or similar costs
associated with the Petroleum Facilities through adherence to established
procedures for operations and equipment maintenance.
Condemnation proceedings:
As described in Note 8 to the accompanying consolidated financial
statements, certain of the Company's property adjacent to Amtrak's
Northeast Corridor in Providence, Rhode Island was condemned by Amtrak in
1999 and 2001. The Company believed that the amounts paid by Amtrak were
inadequate and made a claim for additional condemnation proceeds. In
November 2002 the U. S. District Court for the District of Rhode Island
awarded the Company $1,500,000, including interest, in additional damages.
In February 2003, Amtrak appealed the decision to the U. S. Court of
Appeals for the First Circuit. In July 2003, Amtrak posted an appeal bond
with the Court in the amount of the judgment. The Company is unable to
determine when the appeal will be heard and the amount of additional
damages, if any, the Company may ultimately receive.
2. RESULTS OF OPERATIONS:
Leasing segment:
For the three and nine months ended September 30, 2003, exclusive of the
property tax settlement, revenue from leasing increased 25% and 23%,
respectively, from 2002 due principally to higher option payments received
on those leases which will not commence until construction begins, renewals
of short-term parking leases, revenue associated with the three billboard
locations added in the fourth quarter of 2002, and the commencement of
contingent rentals relating to one developed parcel. For the three months
ended September 30, 2003,
-19-
expenses applicable to leasing remained approximately at the 2002 level.
However, the three months ended September 30, 2002 includes a $92,000
settlement with Amtrak related to a dispute involving electricity in the
Company's parking garage, which is adjacent to the Amtrak passenger
station. Excluding the Amtrak settlement amount, for the three months ended
September 30, 2003, expenses applicable to leasing increased 19% from 2002
due to an increase in professional fees and property tax expense. Excluding
the Amtrak settlement amount, for the nine months ended September 30, 2003,
expenses applicable to leasing increased 4% over 2002, due principally to
an increase in property tax expense offset by a decrease in professional
fees.
Settlement of City of Providence property tax dispute:
In each year since 1995 (with the exception of year 2000), the Company has
appealed the real estate taxes assessed against one or more of the parcels
of land owned by it in the City of Providence. With respect to certain
years, the appeals were heard by the Providence Board of Assessment Review
and in each case denied. The Company appealed each such denial to the
Superior Court. With respect to the remaining years, the Providence Board
of Assessment Review has yet to hear the appeals.
At the request of the Court, in August 2003 the Company and the City
engaged in mediation in an effort to resolve all property tax disputes. In
September 2003, the Company and the City agreed to an omnibus settlement in
the amount of $1,700,000 covering all litigation resulting from tax appeals
filed by the Company with the City for real property taxes covering the tax
years 1994 through 1999 and 2001 through 2003. The settlement has been
approved by the City Council and the Company anticipates payment before
year-end. For two of the parcels in the Capital Center area, the assessed
values have been set which will result in future annual decreases in real
property taxes of approximately $315,000. With respect to the remaining
parcels, no agreement as to assessed value has been reached with the City
and there can be no assurance assessments as of December 31, 2003 and
subsequent assessments will be satisfactory to the Company.
Petroleum storage:
For the three and nine months ended September 30, 2003, revenue from
petroleum storage facilities increased 14% and 17%, respectively, from 2002
resulting principally from higher monthly fees and higher contingent
revenues due to a colder winter, offset in part by the March 31, 2003
termination of the agreement with Oil Company for its use of the
Wilkesbarre Pier. For the three months ended September 30, 2003, expenses
applicable to petroleum storage facilities increased 13% from 2002
principally due to an increase in repairs and maintenance expense offset in
part by a decrease in legal fees associated with the Wilkesbarre Pier
litigation. For the nine months ended September 30, 2003, expenses
applicable to petroleum storage facilities increased 22% from 2002
principally due to an increase in repairs and maintenance expense,
insurance costs and expenses associated with the higher volume of
throughput at the Petroleum Facilities.
General:
For the three and nine months ended September 30, 2003, general and
administrative expenses remained approximately at the 2002 level.
The interest expense for 2003 relates to the Wilkesbarre Pier litigation.
-20-
Under Rhode Island law, state income tax losses cannot be carried back, and
state tax loss carryforwards are limited to the amount of the federal tax
loss carryforward resulting in an income tax benefit for 2002 that does not
bear the customary relationship to loss before income taxes.
Liquidity:
Historically, the Company has had adequate liquidity to fund its
operations.
In 1999, the Company was the recipient of substantial condemnation proceeds
from the State of Rhode Island. In February 2002, the Company effected a
qualifying purchase with a consolidated subsidiary which permitted it to
amend its 1999 federal and state income tax returns to claim refunds
totaling $568,000 with respect to condemnation proceeds previously taxed.
Through September 30, 2002, the Company received the state refund of
$117,000 plus interest of $30,000. For federal income tax reporting
purposes, the Company reported a loss for the year ended December 31, 2001,
and filed carryback claims that resulted in a refund of federal income
taxes previously paid in the amount of $607,000, all of which was received
by September 30, 2002.
For income tax reporting purposes, the Company reported a tax loss for the
year ended December 31, 2002 and filed carryback claims that resulted in a
refund of federal income taxes previously paid in the amount of $381,000
which was received in May 2003. With this refund, the Company has recovered
substantially all federal income taxes paid during the carryback period.
The Company expects to report taxable income for 2003, requiring the outlay
of funds for the payment of federal and state income taxes commencing in
December 2003.
In February 2002, the Company paid a quarterly dividend of $99,000 to
holders of Class A and Class B common stock at the rate of $.03 per share.
At subsequent quarterly meetings, the Board of Directors elected to omit
the dividend pending resolution of the Company's tax appeals against the
City of Providence and other matters. However, in October 2003, the Board
re-examined the situation and declared a dividend of $99,000 to holders of
Class A and Class B common stock at the rate of $.03 per share to be paid
in November 2003. The declaration of future dividends and the amount
thereof will depend on the Company's future earnings, financial factors and
other events.
Under a 1990 agreement with the State of Rhode Island, the Company was
obligated to pay the State $158,000 for the construction of certain
improvements in the Capital Center Project area. In December 1999, the
Company attempted to tender the $158,000 to the State in satisfaction of
its obligation. The State claimed that the Company owed interest in the
amount of $130,000, which the Company disputed. In July 2000, the Company
and the State reached an agreement whereby the Company agreed to pay a
total of $65,000 in interest. The State was unable to locate the original
note and to deliver a discharge of the mortgage held by it with respect to
this property. The Company commenced proceedings against the State in the
Rhode Island Superior Court seeking an order from the Superior Court that,
upon payment of the $223,000, the Company would be discharged from all
responsibility under the note and that the note would be paid in full. In
September 2003, the Company paid the State the $223,000 and a consent
judgment was entered in the Superior Court discharging and canceling the
note and mortgage. All of the Company's properties are now unemcumbered.
-21-
In January 2003, the Company paid $112,000 for properties purchased in
2002. The Company will incur approximately $50,000 for the installation of
the active remediation system at the Petroleum Facilities.
As discussed above, in September 2003 the Company reached agreement with
the City of Providence settling all litigation resulting from tax appeals
and anticipates the receipt of the $1,700,000 settlement amount in full by
year-end.
In connection with the condemnation by Amtrak, in November 2002 the Company
was awarded approximately $1,500,000 including interest in additional
damages. In February 2003, Amtrak appealed the decision to the U. S. Court
of Appeals for the First Circuit. In July 2003, Amtrak posted an appeal
bond with the Court in the amount of the judgment. The Company is unable to
determine when the appeal will be heard and the amount of additional
damages, if any, the Company may ultimately receive.
While the Company has been adversely impacted by the cost of the
Wilkesbarre Pier litigation and the increase in the City of Providence real
property taxes, in management's opinion, the Company should be able to
generate sufficient amounts of cash to meet all of its anticipated
obligations. In the event temporary additional liquidity is required, the
Company believes that a line of credit or other arrangements could be
obtained by pledging some or all of its unencumbered assets as collateral.
-22-
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-15 of the Securities Exchange Act of 1934 (the
"Exchange Act"), the President and Treasurer carried out an evaluation
of the effectiveness of the Company's disclosure controls and
procedures as of the end of the period covered by this report. Based on
that evaluation, the undersigned officers of the Company have concluded
that such disclosure controls and procedures were adequate to ensure
that information required to be disclosed by the Company in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC
rules and regulations. There was no significant change in the Company's
internal control over financial reporting that occurred during the most
recent fiscal quarter that has materially affected or is reasonably
likely to materially affect the Company's internal control over
financial reporting.
-23-
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on April 29, 2003.
Of the 3,000,000 "A" shares entitled to vote, 2,807,101 shares
of stock were present, in person or by proxy. Of the 299,956
"B" shares entitled to vote, 179,750 shares of stock were
present, in person or by proxy.
All directors of the Issuer are elected on an annual basis and
the following were so elected at this Annual Meeting: Ronald
P. Chrzanowski, Robert H. Eder, Harold J. Harris, Harris N.
Rosen and Henry S. Woodbridge, Jr. Of the "A" shares, each
director received 2,630,401 affirmative votes; 176,700 votes
withheld. Of the "B" shares, each director received 178,883
affirmative and 867 votes withheld.
Also presented for approval was a resolution for the
appointment of Lefkowitz, Garfinkel, Champi & DeRienzo P.C. as
independent auditors of the accounts of the Issuer for the
year 2003. Of the "A" shares, the resolution received
2,791,872 votes for the resolution, 15,103 votes against the
resolution, 126 votes abstaining. Of the "B" shares, the
resolution received 179,729 votes for the resolution, 15 votes
against the resolution and 6 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX OF EXHIBITS:
3.1 Amended Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Issuer's report on
Form 8-K filed December 10, 2001).
3.2 By-laws, as amended (incorporated by reference to
Exhibit 3(b) to the Issuer's quarterly report on Form
10-QSB for the quarter ended September 30, 1999).
10 Material contracts: leases between Metropark, Ltd.
and small business issuer:
(i) Dated December 12, 2001 (incorporated by
reference to Exhibit 10(a)(i) to the
Issuer's annual report on Form 10-KSB for
the year ended December 31, 2001).
(ii) Dated December 12, 2001 (incorporated by
reference to Exhibit 10(a)(ii) to the
Issuer's annual report on Form 10-KSB for
the year ended December 31, 2001).
(iii) Dated December 12, 2001 (incorporated by
reference to Exhibit 10(a)(iii) to the
Issuer's annual report on Form 10-KSB for
the year ended December 31, 2001).
(iv) Dated December 12, 2001 (incorporated by
reference to Exhibit 10(a)(iv)
-24-
to the Issuer's annual report on Form 10-KSB
for the Year ended December 31, 2001).
(v) Dated December 12, 2001 (incorporated by
reference to Exhibit 10(a)(v) to the
Issuer's annual report on Form 10-KSB for
the year ended December 31, 2001).
(b) MISCELLANEOUS CONTRACTS:
(i) Option Agreement to Purchase Real Property
and Related Assets, dated June 9, 2003, by
and between Dunellen, LLC and Global
Companies, LLC. (incorporated by reference
to Exhibit 10(b)(i) to the Issuer's Report
on Form 10-QSB/A for the quarterly period
ended June 30, 2003)
31.1 Rule 13a-14(a) Certification of President and Principal
Executive Officer
31.2 Rule 13a-14(a) Certification of Treasurer and Principal
Financial Officer
32.1 Certification of President and Principal Executive Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Treasurer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) A report on Form 8-K was filed on September 22, 2003 announcing
that the Company has agreed to an omnibus settlement with the City of
Providence in the amount of $1,700,000 covering all litigation
resulting from tax appeals filed by the Company for real estate taxes
on properties in downtown Providence, Rhode Island.
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SIGNATURE
In accordance with the requirements of the Exchange Act, the Issuer
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CAPITAL PROPERTIES, INC.
By /s/ Ronald P. Chrzanowski
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Ronald P. Chrzanowski
President and Principal Executive Officer
By /s/ Barbara J. Dreyer
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Barbara J. Dreyer
Treasurer and Principal Financial Officer
DATED: October 31, 2003
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