CPTP 10-Q
Capital Properties Inc /Ri/ (CPTP)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
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For the quarterly period ended
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Commission File Number
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identification No.) |
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Securities registered pursuant to Section 12 (g) of the Act:
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OTCQX |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of the "large accelerated filer," "accelerated filer," "non-accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer |
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Smaller reporting company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to it management’s assessment of the effectiveness of its internal control over financial reporting under Section 404 (b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued it audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes
As of September 30, 2021, the Company had
CAPITAL PROPERTIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
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PART I – FINANCIAL INFORMATION |
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Item 1. |
3 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 4. |
13 |
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PART II – OTHER INFORMATION |
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Item 6. |
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15 |
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2
PART I
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Item 1. |
Financial Statements |
CAPITAL PROPERTIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30, 2021 (Unaudited) |
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December 31, 2020 |
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ASSETS |
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Properties and equipment (net of accumulated depreciation) |
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$ |
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$ |
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Cash and cash equivalents |
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Prepaid and other |
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Prepaid income taxes |
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- |
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Deferred income taxes associated with discontinued operations (Note 8) |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Liabilities: |
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Property taxes |
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$ |
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$ |
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Other |
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Income taxes payable |
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- |
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Deferred income taxes, net |
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Liability associated with discontinued operations (Note 8) |
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Shareholders’ equity: |
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Class A common stock, $ |
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issued and outstanding |
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Capital in excess of par |
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Retained earnings |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
3
CAPITAL PROPERTIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND SHAREHOLDERS’ EQUITY
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenue and other income: |
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Leasing revenue |
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$ |
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$ |
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$ |
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$ |
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Other income, interest |
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Expenses: |
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Operating |
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General and administrative |
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Income from operations before income taxes |
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Income tax expense (benefit): |
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Current |
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Deferred |
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Net income |
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Retained earnings, beginning |
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Dividends on common stock ($ |
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based upon |
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Retained earnings, ending |
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Class A common stock |
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Capital in excess of par |
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Shareholders' equity, ending |
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$ |
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$ |
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$ |
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$ |
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Basic income per common share based upon 6,599,912 shares outstanding |
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$ |
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$ |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
4
CAPITAL PROPERTIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
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Nine Months Ended September 30, |
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2021 |
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2020 |
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Cash flows from operating activities: |
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Continuing operations: |
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Income from continuing operations |
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$ |
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$ |
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Adjustments to reconcile income from continuing operations to net cash provided by operating activities, continuing operations: |
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Depreciation |
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Deferred income taxes |
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Income taxes |
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Other, net changes in prepaids, property tax payable and other |
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Net cash provided by operating activities, continuing operations |
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Cash flows from investing activities: |
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Continuing operations: |
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Deferred revenue |
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Discontinued operations: |
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Cash used to settle obligations |
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Noncash adjustment to gain on sale of discontinued operations |
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Net cash used in discontinued operations |
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Net cash provided by (used in) investing activities |
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Cash flows used in financing activities, payment of dividends |
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Increase in cash and cash equivalents |
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Cash and cash equivalents, beginning |
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Cash and cash equivalents, ending |
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$ |
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$ |
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Supplemental disclosure: |
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Cash paid for income taxes |
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$ |
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$ |
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See notes to condensed consolidated financial statements.
5
CAPITAL PROPERTIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020
(Unaudited)
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1. |
Description of business: |
The operations of Capital Properties, Inc. and its wholly-owned subsidiary, Tri-State Displays, Inc. (collectively “the Company”) consist of the long-term leasing of certain of its real estate interests in and adjacent to the Capital Center area in downtown Providence, Rhode Island (upon the commencement of which the tenants have been required to construct buildings thereon, with the exception of the parking garage and Parcel 20) and the leasing of locations along interstate and primary highways in Rhode Island and Massachusetts to Lamar Outdoor Advertising, LLC (“Lamar”) which has constructed outdoor advertising boards thereon. The Company anticipates that the future development of its remaining properties in the Capital Center area will consist primarily of long-term ground leases. Pending this development, the Company leases these undeveloped parcels (other than Parcel 6C) for public parking to Metropark, Ltd.
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2. |
Basis of presentation and summary of significant accounting policies: |
Principles of consolidation:
The accompanying condensed consolidated financial statements include the accounts and transactions of the Company. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated balance sheet as of December 31, 2020 has been derived from audited financial statements. The unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Form 10-K for the year ended December 31, 2020.
In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2021 and the results of operations for the three and nine months ended September 30, 2021 and 2020, and cash flows for the nine months ended September 30, 2021 and 2020.
The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
Use of estimates:
The preparation of consolidated financial statements in conformity with GAAP 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.
Environmental incidents:
The Company accrues a liability when an environmental incident has occurred and the costs are estimable. The Company does not record a receivable for recoveries from third parties for environmental matters until it has determined that the amount of the collection is reasonably assured. The accrued liability is relieved when the Company pays the liability or a third party assumes the liability. Upon determination that collection is reasonably assured or a third party assumes the liability, the Company records the amount as a reduction of expense.
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3. |
Properties and equipment: |
Properties and equipment consist of the following:
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September 30, 2021 |
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December 31, 2020 |
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Properties on lease or held for lease: |
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Land and land improvements |
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$ |
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$ |
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Steeple Street property (see Note 6) |
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$ |
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Office equipment |
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Less accumulated depreciation: |
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Land improvements on lease or held for lease |
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Steeple Street property (see Note 6) |
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Office equipment |
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$ |
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$ |
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4. |
Liabilities, other: |
Liabilities, other consist of the following:
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September 30, 2021 |
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December 31, 2020 |
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Deferred revenue, Steeple Street property (see Note 6) |
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$ |
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$ |
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Accrued professional fees |
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Deposits and prepaid rent |
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Accrued payroll and related costs |
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Other |
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$ |
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$ |
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5. |
Note Payable - Revolving Credit Line: |
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In March 2021, the Company entered into a financing agreement (“Agreement”) with BankRI that provides for a revolving line-of-credit (“Line”) with a maximum borrowing capacity of $ |
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6. |
Description of leasing arrangements and subsequent event: |
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Long-term land leases:
The Company’s leases generally have a term of
Through September 30, 2021, excluding the Parcel 6C lease, the Company had entered into
The Parcel 20 Steeple Street Building (“Building”) lease was originally accounted for as a sales-type lease due to the transfer of the Building to the tenant. The land directly under the Building was allocated in the determination of the value of the property transferred in accordance with ASC 360-20, Property, Plant and Equipment - Real Estate Sales. Since the initial investment by the tenant was insufficient to recognize the transaction as a sale, in accordance with ASC 360-20, the Company reported the acquisition period rent and an allocable portion of the ground rent collected as deferred revenue on its
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consolidated balance sheet. Upon termination of the lease, the $
Under the
With respect to Parcel 6C lease, on the termination date the annual rent was $
Under
Lamar lease:
Tri-State Displays Inc. leases
Parking lease:
The Company leases the undeveloped parcels of land in the Capital Center area (other than Parcel 6C) and, effective November 1, 2021 as a result of the lease termination, Parcel 20 for public parking purposes to Metropark under a lease (the “Parking Lease”). The lease is cancellable as to all or any portion of the leased premises at any time on
The COVID-19 pandemic and stay-at-home orders have had a significant adverse impact on Metropark’s parking operations. On July 31, 2020, Metropark and the Company entered into an agreement for revenue sharing at various percentages until parking revenues received by Metropark equal or exceed $
At September 30, 2021 the receivable from Metropark equaled $
8
Historically, the Company has made financial statement footnote disclosure of the excess of straight-line rentals over contractual payments and its determination of collectability of such excess. Included in the amount of the excess were payments which under ASC 842 are deemed variable payments. As part of its ongoing review of the requirements of ASC 842, the Company has concluded that under ASC 842 variable rental payments should not be included in the straight-line rental amount. To the extent the Company determines that, with respect to any of its leases, the excess of straight-line rentals over contractual payments is not collectible, such excess is not recognized as revenue. Consistent with prior conclusions, the Company has determined that, at this time, the excess of straight-line rentals over contractual payments is not probable of collection. Accordingly, the Company has not included any part of that amount in revenue. As a matter of information only, as of September 30, 2021 the excess of straight-line rentals (calculated by excluding variable payments) over contractual payments was $
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7. |
Income taxes, continuing operations: |
Deferred income taxes are recorded based upon differences between financial statement and tax basis amounts of assets and liabilities.
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September 30, 2021 |
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December 31, 2020 |
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Gross deferred tax liabilities: |
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Property having a financial statement basis in excess of tax basis |
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$ |
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$ |
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Accounts receivable |
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Deferred income - conversion to cash basis of accounting for tax purposes |
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Insurance premiums and accrued leasing revenues |
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Gross deferred tax assets: |
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Allowance for doubtful accounts |
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Prepaid rent |
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Accounts payable and accrued expenses |
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Accrued property taxes |
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Deferred income, Parcel 20 |
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- |
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( |
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$ |
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$ |
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8. |
Discontinued operations: |
Prior to February 2017, the Company operated a petroleum storage facility (“Terminal”) through
Pursuant to the Terminal Sale Agreement, the Sale Price was reduced by $
As part of the Terminal Sale Agreement, the Company has agreed to retain and pay for the environmental remediation costs associated with a 1994 storage tank fuel oil leak which allowed the escape of a small amount of fuel oil. In February 2020, the Company filed a revised Remediation Action Work Plan (“RAWP”) with the Rhode Island Department of Environmental Management (“RIDEM”) to describe the technical details associated with the preferred remedial activities and to update the previously filed RAWP. In 2019, the Company incurred remediation costs of $
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the revised remedial activities included in the 2020 RAWP, the remediation accrual was increased by $
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9. |
Fair value of financial instruments: |
The Company believes that the fair values of its financial instruments, including cash and cash equivalents, receivables and payables, approximate their respective book values because of their short-term nature. The fair values described herein were determined using significant other observable inputs (Level 2) as defined by GAAP.
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10. |
Subsequent events: |
On October 6, 2021 the tenant of the Parcel 20 lease was sent a Notice of Lease Termination (“Termination Notice”) informing the tenant that the lease would terminate on October 18, 2021 unless the failure to pay the first quarter real estate taxes along with any related penalties and interest was cured. Subsequently, it was agreed that, provided the first and second quarter real estate taxes and any related penalties and interest were paid in full by October 31, 2021, the lease would not be terminated. The tenant did not make the required payments and accordingly, the lease was terminated.
At its
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Item 2. |
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, contain forward-looking statements within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Sections 21E of the Securities Exchange Act of 1934, as amended, 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 collectability of the excess of straight-line over contractual rents when due over the terms of the long-term leases; tenant default under one or more of the leases; the commencement of additional long-term land leases; changes in economic conditions that may affect either the current or future development on the Company’s parcels; the impact of the COVID-19 pandemic on the economy, parking operations, and the Company’s financial performance; exposure to remediation costs associated with its former operation of the petroleum storage facility and resolution of the Sprague action against the Company in connection with the construction of the breasting dolphin at the Terminal’s Pier. The Company does not undertake the obligation to update forward-looking statements in response to new information, future events or otherwise.
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1. |
Overview: |
Critical accounting policies:
The Company believes that its revenue recognition policy for long-term leases with scheduled rent increases meets the definition of a critical accounting policy which is discussed in the Company’s Form 10-K for the year ended December 31, 2020. There have been no changes to the application of this accounting policy since December 31, 2020.
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2. |
Liquidity and capital resources: |
Historically, the Company has had adequate liquidity to fund its operations.
Cash and cash commitments:
At September 30, 2021, the Company had cash and cash equivalents of $1,818,000. The Company and its subsidiary each maintain checking accounts and a money market account in one bank, all of which are insured by the Federal Deposit Insurance Corporation to a maximum of $250,000. The Company periodically evaluates the financial stability of the financial institutions at which the Company’s funds are held.
On July 30, 2020, the Company received notice that the tenant of Parcel 6C exercised its right to terminate the ground lease effective August 29, 2020. On the termination date, the annual rent on Parcel 6C was $220,000 and the annual real estate taxes paid by the tenant equaled $311,000. Upon termination, the real estate taxes became an obligation of the Company effective with the taxes assessed as of December 31, 2020. The Company believes that the assessed value of Parcel 6C as contained in a treaty between the City of Providence (“City”) and the tenant is much greater than similar parcels in the Capital Center area. The Company is not a party to the tax treaty. Negotiations with the City to reduce the assessment were unsuccessful. Accordingly, the Company filed a complaint against the Providence Tax Assessor in Rhode Island Superior asserting that the Company is not a party to the Tax Stabilization Agreement and that the assessed value should be determined based on the value of other Parcels in the Capital Center Area. The Company believes that it will prevail and accordingly, is recording real estate taxes based on the assessed value as determined by the firm engaged by the City, Vision Government Solution, Inc. which results in an annual real estate tax of $160,000.
On October 6, 2021 the tenant of Parcel 20 lease was sent a Notice of Lease Termination (“Termination Notice”) informing it that the lease would terminate on October 18, 2021 unless the failure to pay the first quarter real estate taxes along with any related penalties and interest was cured. Subsequently, it was agreed that, provided the first and second quarter real estate taxes and any related penalties and interest were paid in full by October 31, 2021, the lease would not be terminated. The tenant did not make the required payments and accordingly, the lease was terminated. On the termination date, the annual amount due from the tenant of Parcel 20 for ground rent and acquisition period rent equaled $195,000 and the annual real estate taxes paid by the tenant equaled $134,000. Upon termination, the real estate taxes became an obligation of the Company.
As of November 9, 2021, all tenants have paid their monthly rent in accordance with their lease agreements except for Metropark. The coronavirus (COVID-19) pandemic has had a significant adverse impact on Metropark. At September 30, 2021 its total rent arrearage is $683,000 and has been fully reserved by the Company. The Company does not know when or
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if Metropark’s operations will return to normal. Until parking revenues received by Metropark equal or exceed $70,000 per month whereupon Metropark is obligated to resume regularly scheduled rental payments under its lease, the Company will continue to recognize revenue from Metropark on a cash basis.
For the three and nine months ended September 30, 2021 rent collected from Metropark equaled $42,000 and $65,000 respectively and was $11,000 and $170,000 for the same periods in 2020.
The Company does not expect to receive contingent rent from Metropark in 2021.
The Terminal Sale Agreement and related documentation provides that the Company is required to secure an approved remediation plan and to remediate contamination caused by a leak in 1994 from a storage tank at the Terminal. At September 30, 2021, the Company’s accrual for the remaining cost of remediation was $382,000 of which $34,000 is expected to be incurred in the last quarter of 2021. Any subsequent increases or decreases to the expected cost of remediation will be recorded in gain (loss) on sale of discontinued operations, net of taxes.
The Terminal Sale Agreement also contained a cost sharing provision for a breasting dolphin whereby any costs incurred in connection with the construction of the breasting dolphin in excess of the initial estimate of $1,040,000 would be borne equally by Sprague and the Company subject to certain limitations, including, in the Company’s opinion, a 20% cap on the increase from the initial estimate subject to the sharing arrangement. In November 2019, the Company received a demand letter from Sprague asserting that it is owed $427,000, which amount represents 50% of the actual costs incurred ($1,894,000) in excess of $1,040,000. The Company asserts that its obligation cannot exceed $104,000. On June 17, 2021 the Company and Sprague met with a mediator to review Sprague’s claim. On July 15, 2021, Sprague commenced an action against the Company in the Rhode Island Superior Court seeking monetary damages of $427,000, interest and attorney’s fees. The Company intends to vigorously defend against the claims being asserted by Sprague.
The declaration of future dividends will depend on future earnings and financial performance.
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3. |
Results of operations: |
Three months ended September 30, 2021 compared to three months ended September 30, 2020:
Revenue, leasing increased $312,000 from 2020 due to the termination of the Parcel 20 lease which resulted in the recognition of $283,000 of deferred rental income, scheduled increases in long-term leases ($35,000) and increased cash collections from Metropark ($31,000) offset by the termination of the Parcel 6C lease ($37,000).
Operating expenses increased $113,000 due principally to increased property tax expense due to the termination of the Parcel 6C and Parcel 20 leases ($128,000) offset by other net decreases of $15,000.
General and administrative expense increased $42,000 due principally to increased legal costs associated with the Sprague breasting dolphin matter and the property tax matter associated with Parcel 6C ($31,000) and increases in other various expenses.
For the three and nine months ended September 30, 2021 and 2020, the Company’s effective income tax rate is approximately 28% of income before income taxes.
Nine months ended September 30, 2021 compared to nine months ended September 30, 2020:
Leasing revenue increased $133,000 from 2020 due to the termination of the Parcel 20 lease ($283,000, a net increase of $72,000 in long-term land leases offset by a net decline in lease revenue from Parcel 6C and Metropark of $147,000 and $78,000, respectively.
Operating expenses increased $200,000 due principally to increased property tax expense due to the tenant’s termination of the Parcel 6C lease ($80,000), the Company’s termination of the Parcel 20 lease ($101,000) and increases in other various expenses.
General and administrative expenses increased $78,000 due principally to increased legal costs ($105,000) associated with the Sprague breasting dolphin matter and the property tax matter associated with Parcel 6C offset by a decrease in accounting costs ($51,000) related to lease accounting matters along with other net increases of $24,000.
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Item 4. |
Controls and Procedures |
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's principal executive officer and the Company's principal financial officer. Based upon that evaluation, the principal executive officer and the principal financial officer concluded that the Company's disclosure controls and procedures are effective 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 Securities and Exchange Commission rules and forms.
There was no significant change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting.
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PART II – OTHER INFORMATION
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Item 6. |
Exhibits |
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(b) |
Exhibits: |
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3.1 |
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3.2 |
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Material contracts: |
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Lease between Metropark, Ltd. and Company: |
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Loan Agreement between Bank Rhode Island and Company dated March 30, 2021. |
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31.1 |
Rule 13a-14(a) Certification of Chairman and Principal Executive Officer |
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31.2 |
Rule 13a-14(a) Certification of Treasurer and Principal Financial Officer |
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32.1 |
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32.2 |
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101 |
The following financial information from the Company’s Quarterly Report on Form 10-Q for the Quarter ended September 30, 2021, filed with the Securities and Exchange Commission on August 4, 2021 formatted in iXBRL(“InLine eXtensible Business Reporting Language”): |
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(i) |
Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 |
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(ii) |
Condensed Consolidated Statements of Income and Shareholders’ Equity for the Three and Six Months ended September 30, 2021 and 2020 |
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(iii) |
Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2021 and 2020 |
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(iv) |
Notes to Condensed Consolidated Financial Statements. |
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Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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SIGNATURES
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.
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CAPITAL PROPERTIES, INC. |
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By |
/s/ Robert H. Eder |
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Robert H. Eder |
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Chairman and Principal Executive Officer |
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By |
/s/ Susan R. Johnson |
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Susan R. Johnson |
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Treasurer and Principal Financial Officer |
DATED: November 9, 2021
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