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CAPITAL PROPERTIES INC /RI/ - Annual Report: 2007 (Form 10-K)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
     
o   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.
(Exact name of registrant as specified 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
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of each exchange on which registered
Class A Common Stock, $.01 par value   American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
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. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o    Accelerated filer o    Non-accelerated filer   o
(Do not check if a smaller reporting company)
  Smaller Reporting Company þ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of June 30, 2007, the aggregate market value of the Class A voting stock held by non-affiliates of the Company was $32,769,000, which excludes voting stock held by directors, executive officers and holders of 5 percent or more of the voting power of the Company’s common stock (without conceding that such persons are “affiliates” of the Company for purposes of federal securities laws). The Company has no outstanding non-voting common equity.
As of March 3, 2008, the Company had 3,299,956 shares of Class A Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company’s Proxy Statement for the 2008 Annual Meeting of Shareholders to be held on April 29, 2008, are incorporated by reference into Part III of this Form 10-K.
 
 

 


 

CAPITAL PROPERTIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
TABLE OF CONTENTS
PART I
     
    Page
  3
  7
  9
  9
  9
PART II
     
  10
  12
  13
  17
  18
  36
  36
Part III
     
  37
  37
  37
  37
  38
PART IV
     
  38
     
  39
 EX-3.2 By-Laws, as amended December 10, 2007
 EX-20.1 Map of Company's Downtown Providence, RI
 EX-20.2 Map of the Company's East Providence, RI
 EX-21 Subsidiaries of the Company
 EX-31.1 Section 302 Certification of CEO
 EX-31.2 Section 302 Certification of CFO
 EX-32.1 Section 906 Certification of CEO
 EX-32.2 Section 906 Certification of CFO

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PART I
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 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 leasing revenues when due over the terms of the long-term land 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; and exposure to contamination, remediation or similar costs associated with the operation of the petroleum storage facility.
Item 1. Business
Business Development
The Company was organized as a business corporation under the laws of Rhode Island in 1983 as Providence and Worcester Company and is the successor by merger in 1983 to a corporation also named Providence and Worcester Company which was organized under the laws of Delaware in 1979. In 1984, the Company’s name was changed to Capital Properties, Inc.
Segments
The Company operates in two segments, leasing and petroleum storage. For financial information, see Note 7 of Notes to Consolidated Financial Statements in Item 8.
Leasing
Capital Center
The leasing segment is principally devoted to the leasing of Company-owned land in the Capital Center 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 individual 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, Amtrak’s Northeast Corridor rail was relocated, 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. Rather, the Company offers individual parcels for lease pursuant to long-term ground leases with terms of 99 years or more. Each lease contains provisions permitting the tenant to develop the land under certain terms and conditions. Each lease provides for periodic rent adjustments of various kinds. Under the leases, the tenants are responsible for insuring the Company against various hazards and events. Each tenant is required to indemnify the Company with respect to all of the tenant’s activities on the land. The leases contain other terms and conditions customary to such instruments.
As part of the construction of the Railroad Station, the Federal Railroad Administration constructed a 330-car parking garage on the Company’s land adjacent to the Railroad Station, and the Company paid one-half of the construction cost. Subsequently, the Company became the sole owner of the parking garage, which was leased at an annual rental of $189,000. The Company paid all maintenance expenses, real estate taxes and insurance relating to the parking garage which, in 2004, amounted to $110,000. In March 2005, the Company sold the parking garage for $2,500,000 in cash and leased the underlying land for 99 years at an initial annual contractual rental of $100,000. Under the lease the buyer is responsible for all real estate taxes and other expenses relating to the parking garage. The sale of the parking garage while retaining title to the underlying land is consistent with the Company’s policy not to act as a developer with respect to improvements constructed on land that it currently owns or may hereafter acquire.

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The Company first began offering parcels for lease in the Capital Center area in the late 1980’s. As of December 31, 2007, five developed 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 (235,000 gross square feet), an 8-story 225-unit apartment building (454,000 gross square feet), a 4-story office building (114,000 gross square feet), a 10-story office building (210,000 gross square feet) and the 330-car public parking garage.
In 2005, long-term land leases commenced on two of the remaining parcels (undeveloped parcels).
    On the southerly portion of one of the parcels, an underground parking garage and two buildings containing 193 condominiums are under construction with an expected completion date in the spring of 2008. On the northerly portion of the same parcel, a 10-story, 307,000 gross square foot building is under construction with an expected completion date of 2010 and will be the headquarters of Blue Cross and Blue Shield of Rhode Island.
 
    On the other undeveloped parcel, two residential buildings are under construction. One building containing 96 condominiums is expected to be completed in the fall of 2008. The other building containing 153 apartments is in the early stages of construction.
While seeking developers, the Company also leases Parcels 3E, 3W, 4E and 4W in the Capital Center area for public parking purposes on a short-term basis.
Parcel 20 Adjacent to the Capital Center
Since the 1980’s, the Company has owned an undeveloped parcel of land containing 20,500 square feet adjacent to the Capital Center (Parcel 20). This parcel is leased out for public parking purposes on a short-term basis. In November 2007, the Company purchased a three/four-story 18,000 square foot building and related land for $2,329,000. The building and accompanying land is contiguous to Parcel 20 on the north and east. The building is on the State Registry of Historic Buildings. At the time of acquisition, the building had both residential and commercial tenants. It now has only four commercial tenants who lease their respective spaces under short-term leasing arrangements. While seeking a developer for the entire parcel, the Company is undertaking a plan for the restoration of the building and utility infrastructure.
All of the properties described above are located in the Capital Center area and are shown on a map contained in Exhibit 20.1.
Lamar Lease
The Company, through a wholly-owned subsidiary, leases certain outdoor advertising locations along interstate and primary highways in Rhode Island and Massachusetts to Lamar Outdoor Advertising, LLC (“Lamar”) under a lease which expires in 2033. Presently, there are 25 locations under lease, containing 48 billboard faces. Of these locations, 22 are controlled by the Company through easements granted to the Company pursuant to an agreement between the Company and Providence & Worcester Railroad Company, a related company (“Railroad”), and 3 are leased by the Company from third parties under leases with remaining terms of one to eight years. The term of the Lamar lease is extended for two years for each additional location added. Although no new locations have been added since 2002, one structure was moved to a different location and the lease was extended for two years. Lamar has a right of first refusal for additional billboard location sites acquired by the Company in New England and Metropolitan New York City.
Effective June 1, 2006, the Company entered into an Amended and Restated Agreement with Lamar which among other things provides the following: (1) the base rent will increase annually at the rate of 2.75% for each leased billboard location commencing June 1, 2006 and on each June 1 thereafter; and (2) in addition to base rent, for each 12-month period commencing each June 1, Lamar must pay to the Company 30% of the gross revenues from each standard billboard (20% of the gross revenues from each electronic billboard) for such 12-month period, reduced by the sum of (a) commissions paid to third parties and (b) the base monthly rent for each leased billboard display for such 12-month period. In all other respects, the lease remains substantially unchanged.
The Company has the right to require the Providence & Worcester Railroad Company to grant to it easements for the location of billboards along the Railroad’s right-of-way on commercially reasonable terms.

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A summary of the long-term leases which have commenced is as follows:
                                     
    Parcels in Capital Center Area
    2   3S   5   6, Phase I   6, Phase II   7A   8   9   Lamar
 
Description of Usage
  Residential/   Office   Residential   Residential   Residential   Garage   Office   Office   Billboard
 
  Office                                
Term of Lease
  103 Yrs.   99 Yrs.   149 Yrs.   99 Yrs.   99 Yrs.   99 Yrs.   99 Yrs.   149 Yrs.   27 Yrs.
Termination Date
  2108   2087   2142   2103   2103   2104   2090   2153   2033
Options to Extend
  Two   None   None   Two   Two   Two   None   None   See LamarLease above
Lease
  75-Year           50-Year   50-Year   75-Year            
Current Annual Contractual Rental
  $36,000   $468,000   $345,000   $48,000   $24,000   $100,000   $223,000   $100,000   $723,000
Contingent Rent
  None   None   1%Gross   None   None   None   None   None   See LamarLease above
 
          Revenues                        
Next Periodic Rental Adjustment
  2008   2009   2013   2010   2009   2010   2010   2011   2007
Amount and/or Type
                      Cost of Living   Appraisal and    
of Next Adjustment
  $36,000   Appraisal   Appraisal   $252,000   $24,000   Adjustment   1%Gross   $260,000   $20,000
 
                          Receipts Rent    

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Competition
The Company competes for tenants with other owners of undeveloped real property in downtown Providence. The Company maintains no listing of other competitive properties and will not engage in a competitive bid arrangement with proposed developers. The Company’s refusal to sell the land that it owns may restrict the number of interested developers.
Employees
The leasing segment has 2 employees.
Petroleum Storage
Terminal and Pier Facility
The Company, through a wholly-owned subsidiary, owns a petroleum storage terminal with a capacity of approximately 1,000,000 barrels (the “Terminal”) and the Wilkesbarre Pier (the “Pier”), collectively referred to as the “Facility,” located in East Providence, Rhode Island. The Facility is leased to Global Companies, LLC (“Global”) for the storage and sale of petroleum distillates. The Terminal utilizes the Company’s Pier and pipelines connecting the Pier to the Terminal. The Company operates the Facility for Global pursuant to a contract with another Company subsidiary. The lease provides for a fixed monthly rent which is subject to annual cost-of-living adjustments. The lease expires April 30, 2013, but will continue thereafter on a year-to-year basis unless terminated by either party upon ninety days’ written notice. Global may terminate the lease on or after April 30, 2008, upon one year’s written notice. The lease includes provisions for additional payments based upon petroleum throughput in any twelve-month period beginning on May 1 of each year and ending on April 30 of the subsequent year at the rate of $.10 per barrel for every barrel in excess of 4,000,000 barrels, and for real property taxes in excess of $106,000 annually. The Company bears all of the operating costs with respect to the Facility, including taxes and insurance. In addition, Global has an option to purchase the Facility at any time during the term of the lease (other than the last year thereof) on the terms and conditions set forth in a separate option agreement. Under a companion agreement, Global has agreed to pay 50% of the cost of all improvements to the Pier but not more than $1,000,000. To date, Global has paid approximately $580,000.
Environmental
The operation of a petroleum storage facility carries with it the risk of environmental contamination.
In 1994, a leak was discovered in a 25,000 barrel storage tank at the Terminal which allowed the escape of a small amount of fuel oil. All required notices were made to the State of Rhode Island Department of Environmental Management (“RIDEM”). In 2000, the tank was demolished and testing of the groundwater indicated that there was no large pooling of contaminants. In 2001, RIDEM approved a plan pursuant to which the Company installed a passive system consisting of three wells and commenced monitoring the wells.
In 2003, RIDEM decided that the passive monitoring system previously approved was not sufficient and required the Company to design an active remediation system for the removal of product from the contaminated site. The Company and its consulting engineers began the pre-design testing of the site in the fourth quarter of 2004. The consulting engineers estimated a total cost of $200,000 to design, install and operate the system, which the Company reported as an expense in 2004. Through December 31, 2007, the Company has expended $119,000. RIDEM has not taken any action on the Company’s proposed plan. As designed, the system will pump out the contaminants which will be disposed of in compliance with applicable regulations. After a period of time, the groundwater will be tested to determine if sufficient contaminants have been removed. While the Company and its consulting engineers believe that the proposed active remediation system will correct the situation, it is possible that RIDEM could require the Company to expand remediation efforts, which could result in the Company incurring additional costs.
In 2002, during testing of monitoring wells at the Terminal, the Company’s consulting engineers discovered free floating phase product in a groundwater monitoring well located on that portion of the Terminal purchased in 2000. Preliminary laboratory analysis indicated that the product was gasoline, which is not a product the Company ever stored at its Terminal. 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, the results of which indicate that the gasoline did not come from the Company’s Terminal. The Company notified RIDEM. The Company will continue to monitor RIDEM’s investigation.

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Since January 2003, the Company has not incurred 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 Facility but may affect the Company’s ability to sell the Facility should it determine to do so.
The Company manages its exposure to contamination, remediation or similar costs associated with the Facility through adherence to established procedures for operations and equipment maintenance.
Insurance
The Company maintains what management believes to be adequate levels of insurance, including environmental insurance. The Company notified its insurance company of the gasoline contamination. The insurance company advised the Company that coverage is only provided under policies in place at the time the contamination occurs.
Competition
The Facility competes with several other similar facilities located on and adjacent to the Providence Harbor. The Terminal has approximately 42% of the total distillate storage capacity in the Providence area. Global competes with other terminal operators on the basis of price, availability, and a willingness to advance credit to local wholesalers. The amount of petroleum throughput at the Terminal is a function of Global’s ability to compete effectively in the marketplace.
Employees
The Terminal employs 7 people on a full-time and 1 person on a part-time basis.
Item 1A. Risk Factors
General Risk Factors
Control. We are controlled by Robert and Linda Eder who own more than 50% of our common stock. As a result, the Eders are in a position to dictate the Company’s future and, in most cases, to dictate whether any action is approved by the shareholders. There can be no assurance that on the death of Mr. and Mrs. Eder, their heirs will decide to continue to operate the Company in the manner in which it is operated today.
Succession; Senior Management Personnel. Robert Eder, our Chief Executive Officer, is 75 years old. His age creates the risk of the loss of his services, either permanently or for an indeterminate period of time. In such circumstances, we would be obligated to find a replacement for him and during the period of the search for replacement, our operating results might be adversely affected.
Lack of Liquidity. Our common stock is registered on the American Stock Exchange. Trading in our stock is very thin and the purchase or sale of a small amount of shares can have a substantial impact on the price of our stock.
Cost of Compliance with Federal Securities Laws. We are a small company with a small number of employees. As a publicly traded company, we are subject to significant regulations including the Sarbanes-Oxley Act of 2002. While we maintain a corporate compliance program, we cannot assure you that we are now, or will in the future be, in compliance with all such applicable laws and regulations. If we fail to comply with any of these regulations, we could be subject to significant penalties, including fines and other sanctions as well as litigation. Our preparation for implementation of various corporate governance and reporting reforms and enhanced disclosure laws and regulations adopted in recent years required us to incur significant additional accounting and legal costs and may continue to do so as new or existing laws and regulations are adopted or modified.
Leasing Segment
Geographic Concentration. All of our non-billboard property is located in downtown Providence. We are, therefore, dependent on the Providence commercial real estate market with respect to the development of our undeveloped properties. The loss of major tenants by any one or more of our ground lease tenants of the developed properties could result in a default. Upon default and absent any mortgagee of the leasehold interest entering into a new ground lease with us, we would succeed to the ownership of the improvements. We would then be obligated to manage those improvements. We lack personnel with experience in managing large commercial structures. Additionally, a certain amount of our rental income is dependent upon the amount of rent received by our ground lease tenants. Accordingly, an economic downturn in Providence could adversely affect the rents paid to us.

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Undeveloped Properties. We have five parcels of land which are not subject to long-term ground leases and portions of which are being leased for off-street parking. There is no assurance that we will find tenants for these properties. Historically, each of the Company’s tenants has been a single purpose entity with no other assets. While our leases require provision of performance and payment bonds during construction, there is always risk that an owner may default, or its contractor may default and the bonding company for various reasons may not discharge the liens on the property, leaving us with the obligation to discharge the liens in order to protect our interests.
Generally, our leases provide for very modest rents during the construction and lease-up periods which have historically run about five years. Therefore, the impact on our revenues during the early years of any lease is primarily the avoidance of payment of real estate taxes. The rents that we receive from the use of the undeveloped properties for surface parking have generally covered our real estate taxes. Therefore, during the early years of any new lease, the additional net revenues will be marginal.
Reliance on Senior Management. Mr. Eder is responsible for managing the leasing segment of the Company’s business. There is no one in the Company who could take over his responsibilities should something happen to him. If that circumstance arose, we would be obligated to search for a replacement.
Reliance on Single Tenant. All of our billboard locations are leased by Lamar. We have no experience in the outdoor advertising business. If Lamar defaults, we lack the expertise to find other advertisers and we might have difficulty finding a new tenant on the same terms and conditions or acquiring control over the billboard structures which are owned by Lamar. In such event, our revenues would be adversely affected for an indeterminate period.
Insurance Coverage. We require all of our tenants to maintain specific insurance coverages in amounts which we believe are sufficient to protect us against loss. There may, however, be circumstances where the amount of that insurance is inadequate. We could experience a loss of rental income while pursuing an insurance claim. While all of our leases require that the tenant carry business interruption insurance to ensure the continued payment of rents to us in the event that a building could no longer be occupied due to fire or other casualty, the holder of any mortgage on the tenant’s interest in the property might not permit the rebuilding and our lease would terminate leaving us with no rental income.
Environmental. While each of our tenants is required to protect the Company against any environmental hazards created as a result of its tenancy, nevertheless, as owner of the property, we have a residual obligation to remediate any contamination. Additionally, much of our property in downtown Providence has been filled over time and much of it was at one time dedicated to railroad use. While we believe that the environmental issues are not significant, nevertheless, underlying soil conditions may prohibit or restrict the type of use to which the land can be put.
Newly-acquired property. In November 2007, we acquired a three/four-story 18,000 square foot office building and accompanying land. At the time of the acquisition, the building had both commercial and residential tenants. There are no longer residential tenants in the building. The building is on the State Registry of Historic Buildings. We are examining the feasibility of rehabilitating the building’s façade and utility infrastructure. We have not previously managed a similar project, and there is no assurance that we will be able to successfully manage the project and be able to rent-up the building. We plan to offer the building together with the undeveloped portion of Parcel 20 to a developer as one package.
Petroleum Storage Segment
Single Tenant for the Facility. We lease the Facility to one tenant and operate it for the account of that tenant under a lease which ends April 30, 2013. On or after April 30, 2008, this tenant has the right to terminate the lease and operating agreement at any time on giving us one year’s notice. Upon such termination or default by the tenant, there is no assurance that we could find another tenant for the Facility or, if we did find a tenant, that such tenant would pay the same rent. Any failure to secure a tenant willing to pay the same rental could have an adverse impact on our financial performance.
Environmental Concerns. The operation of the Facility carries with it significant environmental risk, including the potential for spills at the Terminal and the Pier. We have two known environmental problems at the Facility, one of which we think is insignificant. The other is a substantial plume of gasoline which our consulting engineers tell us was caused by the activities of an adjacent landowner which denies responsibility. Regulatory authorities are pursuing the claim against the adjacent landowner but to date there has been no resolution of the claim and there can be no assurance that there will be resolution in the future. As such, the existence of this environmental condition
may restrict our ability to sell or otherwise dispose of the Facility and may at some point impose on us significant costs which we might not be able to recover from a third party.
Reliance on the Pier and Related Pipeline. The Terminal relies almost exclusively on the Pier for supplying petroleum products to the Terminal. The Pier is connected to the Terminal by underground pipelines. If for any

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reason either the Pier or any portion of the connecting pipelines were to be unavailable, the Terminal would experience a severe reduction in supply and petroleum throughput. Depending on the time of year, this could have an adverse impact on our revenues.
Insurance. While we carry insurance with respect to the Facility which we think is adequate given the cost, there is no assurance that our coverage fully protects us.
Terrorism. The Facility is potentially a target for terrorists. We have taken the steps required by the United States Transportation Security Administration and the United States Coast Guard to provide security at both the Terminal and the Pier. We believe that our security measures are adequate. They are, however, not foolproof and there always exists a possibility that we could be subject to an act of terrorism that could result in substantial damage to the Terminal. We maintain terrorism insurance. The coverages and amounts of that insurance might not be adequate in the event that the Terminal were substantially destroyed.
Potential for Increased Governmental Regulation. We are subject to governmental regulation by the Environmental Protection Agency, the United States Department of Homeland Security and other federal, state and local regulatory authorities with respect to the operation and security of the Facility. Any change in the regulations applicable to the Facility could impose on us additional costs and could adversely affect our financial performance. In particular, the Department of Homeland Security could change the threat classification of the Terminal or the Pier which could result in our incurring substantial additional capital and ongoing operating costs.
Item 2. Properties
The Company owns approximately 18.5 acres and a historic building in and adjacent to the Capital Center District in Providence, Rhode Island. All of the property and a portion of the building are leased either under long-term leases or short-term leases as more particularly described in Item 1. See Item 1, Leasing Segment. The Company also owns or controls 25 locations on which billboards have been constructed. Of these, 22 are owned by the Company under easements from a related company, the Providence and Worcester Railroad Company, and 3 are leased from unrelated third parties with terms remaining from 1 to 8 years. The Company owns an approximately 10-acre site in East Providence, Rhode Island on which there are located 9 petroleum storage tanks and related racks together with a 3,000 square foot single story office building in which the Company’s headquarters and other support operations are located. In 2006, the Company completed the development of the land currently owned by the Company at the Terminal. In addition, the Company is the owner of the Pier located in East Providence, Rhode Island. The Pier, which has a deep water draft capacity of -40 feet MLW, can accommodate ships up to 800 hundred feet in length. The Company has a permanent right to use the pipelines connecting the Pier to the Terminal.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company’s security holders during the fourth quarter of fiscal year 2007.

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PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The Company’s Class A Common Stock is traded on the American Stock Exchange, symbol “CPI.” The following table shows the high and low trading prices for the Company’s Class A Common Stock during the quarterly periods indicated as obtained from the American Stock Exchange, together with dividends paid per share during such periods.
                         
    Trading Prices   Dividends
    High   Low   Paid
2007                        
1st Quarter
    24.21       21.81       .05  
2nd Quarter
    24.20       21.00       .05  
3rd Quarter
    32.85       23.50       .06  
4th Quarter
    25.55       23.05       .06  
 
                       
2006
                       
1st Quarter
    32.00       27.50       .03  
2nd Quarter
    33.30       29.27       .03  
3rd Quarter
    29.74       23.50       .04  
4th Quarter
    24.70       22.60       .04  
At March 31, 2008, there were 360 holders of record of the Company’s Class A Common Stock.
(Balance of page intentionally left blank.)

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Performance Graph
Prepared by Burnham Securities Inc. for Capital Properties, Inc.
Five — Year Return
Capital Properties, Inc.,
Dow Jones Wilshire Real Estate Securities Index® and Russell 2000 Index®
(PERFORMANCE GRAPH)
Fiscal Years Ended December 31
                                                 
    2002   2003   2004   2005   2006   2007
CPI
    100.0       175.0       160.1       174.9       97.9       113.2  
Dow Jones Wilshire Real
    100.0       123.0       157.7       171.3       223.2       176.2  
Estate Securities Index®
                                               
Russell 2000 Index®
    100.0       110.3       129.1       139.2       161.2       200.0  
The Dow Jones Wilshire Real Estate Securities Index® measures the performance of publicly traded real estate securities. The Russell 2000 Index® measures the performance of small capitalization US companies by measuring the performance of the 2,000 smallest securities in the Russell 3000 Index®.

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Item 6. Selected Financial Data
The selected financial data set forth below has been derived from the Company’s consolidated financial statements. The selected data should be read in conjunction with the Company’s consolidated financial statements and notes thereto, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the other information included elsewhere in this annual report on Form 10-K.
                         
Income statement data:
                                         
    Years Ended December 31,  
    2007     2006     2005     2004     2003  
Total revenues and other income
  $ 6,695,000     $ 5,789,000     $ 6,463,000 1   $ 7,075,000 2   $ 6,918,000 3
 
                             
Total expenses4
  $ 4,388,000     $ 3,574,000     $ 3,707,000     $ 4,504,000     $ 5,458,000  
 
                             
Income taxes
  $ 922,000     $ 896,000     $ 1,093,000     $ 1,010,000     $ 576,000  
 
                             
Net income
  $ 1,385,000     $ 1,319,000     $ 1,663,000     $ 1,561,000     $ 884,000  
 
                             
Basic income per common share
  $ 0.42     $ 0.40     $ 0.50     $ 0.47     $ 0.27  
 
                             
Dividends per common share
  $ 0.22     $ 0.14     $ 0.12     $ 0.30     $ 0.03  
 
                             
Balance sheet data:
                                         
    December 31,  
    2007     2006     2005     2004     2003  
Properties and equipment, net
  $ 20,717,000     $ 18,471,000     $ 16,756,000     $ 16,527,000     $ 14,879,000  
 
                             
Total assets
  $ 23,037,000     $ 21,858,000     $ 21,492,000     $ 19,531,000     $ 18,411,000  
 
                             
Shareholders’ equity
  $ 16,676,000     $ 16,017,000     $ 15,160,000     $ 13,893,000     $ 13,322,000  
 
                             
 
1   Includes a $1,057,000 gain from the sale of the parking garage; see Note 3 to Notes to Consolidated Financial Statements in Item 8.
 
2   Includes $1,672,000 in condemnation proceeds received from Amtrak and $258,000 from the City of Providence for reimbursement of attorneys fees.
 
3   Includes $1,700,000 received from the City of Providence in settlement of tax appeals from the period 1995 to 2002.
 
4   The downward trend in total expenses between 2003 and 2006 resulted principally from the assumption of the payment of real estate taxes by tenants under long-term land leases entered into in 2004 and 2005 and the tax settlement with the City of Providence in 2003. The increase in 2007 from 2006 results principally from increased depreciation relating to the construction of tanks at the petroleum storage facility and bonuses paid to two retiring employees.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
1. Overview:
Critical accounting policies:
The Securities and Exchange Commission (“SEC”) has issued guidance for the disclosure of “critical accounting policies.” The SEC defines such policies as those 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 2 of Notes to Consolidated Financial Statements in Item 8. 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 SEC 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 known annual rental amounts are totaled and this total is divided by 99.
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 (the “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 until the 56th year (the “turnaround date”) since management could not be assured of collection.
In 1988, management met with the 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 presently conclude would be collectible. The SEC accounting staff did not object to this application by the Company.
Through December 31, 2007, the receivable on this lease has grown to approximately $17,150,000 (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 38 years away.
In 2004, a second such lease commenced with an original term of 149 years and provides for fixed minimum percentage increases at specified intervals (as well as reappraisal increases). For this lease, the contractual amount paid by the tenant will not exceed the calculated straight-line amount until the 94th year of the lease. Through December 31, 2007, the receivable on this lease is approximately $8,899,000 (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 91 years away.
In June 2006, the Company entered into an Amended and Restated Agreement of its lease with Lamar Outdoor Advertising LLC (“Lamar”) with a current remaining term of 27 years which provides for fixed percentage increases annually. For this lease, the contractual amount paid by Lamar will not exceed the calculated straight-line amount until the 16th year of the lease. Through December 31, 2007, the receivable on this lease is approximately $351,000 (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 15 years away.

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Accordingly, the Company has not reported any portion of these amounts as leasing revenue in its consolidated financial statements and does not anticipate that it can reach such a conclusion until the turnaround dates are closer.
Although the Company’s other long-term land leases provide for scheduled rent increases, the provisions of the leases are such that certain 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 revenues under these leases using the contractual amounts in accordance with the provisions of FAS No. 13. The Company continues to recognize accrued leasing revenue from two leases which were recorded in prior years.
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.
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 have been required to construct buildings thereon, with the exception of a parking garage), the leasing of a portion of the building acquired in November 2007 under short-term leasing arrangements and the leasing of locations along interstate and primary highways in Rhode Island and Massachusetts to Lamar which has constructed outdoor advertising boards thereon. The Company anticipates that the future development of its remaining properties in and adjacent to the Capital Center area will consist primarily of long-term ground leases. Pending this development, the Company leases these parcels for public parking under short-term leasing arrangements.
The petroleum storage segment consists of operating the Facility in East Providence, Rhode Island, for Global Companies, LLC (“Global”).
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 assets constructed on the Company’s land, including the payment of real property taxes on both the land and any improvements constructed thereon; whereas the Company is responsible for the operating and maintenance expenses, including real property taxes, as well as capital improvements at the Facility.
Changes in capital structure:
In December 2001, the Company amended its Articles of Incorporation to create three classes of $.01 par value stock—Class A Common Stock, Class B Common Stock, and Excess Stock. The Company converted the then outstanding 3,000,000 shares of $1.00 par value common shares into 3,000,000 shares of Class A Common Stock. In addition, the Company issued (in the form of a stock dividend) 299,956 shares of Class B Common Stock (one share for each ten shares of Class A Common Stock held). No fractional Class B shares were issued.
The amended Articles of Incorporation prohibited any shareholder from acquiring more than a 5% interest in the Company’s classes of common stock and prohibited the two shareholders who each beneficially then owned in excess of 5% of the Company’s classes of common stock from increasing their percentage ownership of each class of common stock. The purpose of the amendment of the Articles of Incorporation was to provide the Company with the necessary flexibility to qualify to be taxed as a real estate investment trust (“REIT”). The amendment provided that if the Company did not make an election to be taxed as a REIT on or before March 31, 2005, the restrictions on share ownership would automatically lapse and shares of Class B Common Stock would automatically be converted into shares of Class A Common Stock on a one for one basis.
The Company did not make the election and on March 31, 2005, the shares of Class B Common Stock were converted into shares of Class A Common Stock, resulting in the Company having 3,299,956 shares of Class A Common Stock outstanding. No Excess Stock was issued and it is no longer authorized.

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2.   Results of operations:
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Leasing segment:
                         
    2007     2006     Difference  
Leasing revenues
  $ 2,853,000     $ 2,493,000     $ 360,000  
Leasing expense
    566,000       663,000     $ (97,000 )
 
                   
 
  $ 2,287,000     $ 1,830,000          
 
                   
Leasing revenues increased as a result of the following:
    In June 2007, the Company entered into a settlement agreement with a former tenant concerning amounts due the Company resulting from the tenant’s prematurely terminating its lease with the Company in 2003 and received $100,000 in settlement, which amount is included in leasing revenues.
 
    Effective June 1, 2006, the Company entered into an Amended and Restated Agreement of Lease with Lamar, which changed the contractual rental payments thereby extending the turnaround date until 2022. As a result, the Company concluded that it should not presently record a receivable resulting from reporting leasing revenue on straight-line basis. However, prior to June 1, 2006, the Company had been recognizing revenue on this lease on a straight-line basis and, accordingly, had recorded a reduction in leasing revenue of $187,000 for the year ended December 31, 2006.
 
    Increases in rentals under the short-term leases, including rentals from the newly-acquired building.
Leasing expense decreased principally due to lower real property taxes due to an existing tenant’s assumption of all real property taxes on its parcel as of January 1, 2007.
Petroleum storage segment:
                         
    2007     2006     Difference  
Petroleum storage facility revenues
  $ 3,714,000     $ 3,187,000     $ 527,000  
Petroleum storage facility expense
    2,451,000       1,798,000     $ 653,000  
 
                   
 
  $ 1,263,000     $ 1,389,000          
 
                   
Petroleum storage facility revenue increased as a result of the following:
    Rent for the new 175,000 barrel tank effective August 2006;
 
    Higher monthly rent resulting from the annual cost-of-living adjustments;
 
    Higher contingent revenue; and
 
    Rental of $97,000 resulting from the increase in real property taxes as required by the lease, which amount resulted principally from an increase in the assessment on the petroleum storage facility.
Petroleum storage facility expense increased principally due to the following:
    Payroll and related costs resulting from the hiring of a new employee and the payment of a bonus to the retiring president of the petroleum storage facility;
 
    Higher depreciation related to the new tank built in 2006;
 
    Higher real estate taxes resulting principally from an increased assessment on the petroleum storage facility, which amount was substantially reimbursed by the tenant; and
 
    Higher legal fees associated with a Wilkesbarre Pier litigation.
General:
For the year ended December 31, 2007, general and administrative expense increased $258,000 from 2006 due principally to payroll and related costs resulting from the payment of a bonus to the retiring president of the Company and higher professional fees in connection with the Company’s filing status changing from a small business issuer to a non-accelerated filer for the year ended December 31, 2006, and the costs incurred in complying with Section 404(a) of the Sarbanes-Oxley Act of 2002.

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Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Leasing segment:
                         
    2006     2005     Difference  
Leasing revenues
  $ 2,493,000     $ 2,663,000     $ (170,000 )
Leasing expense
    663,000       778,000     $ (115,000 )
 
                   
 
  $ 1,830,000     $ 1,885,000          
 
                   
Leasing revenues decreased principally due to the reversal of $159,000 of previously reported accrued leasing revenue from Lamar.
Prior to the commencement of two long-term land leases in 2005, the Company was receiving option payments and revenue from a short-term surface parking lease but was paying all real property taxes. Upon commencement of the leases, the Company receives an annual rental which is lower during the construction and lease-up periods (approximately five years) than the amounts received from the short-term parking leases; however, the tenant pays the real property taxes, resulting in a decrease in real property tax expense of $30,000 for the year ended December 31, 2006 from 2005. The decrease in leasing expense is also due in part to lower legal fees.
Petroleum storage segment:
                         
    2006     2005     Difference  
Petroleum storage facility revenues
  $ 3,187,000     $ 2,549,000     $ 638,000  
Petroleum storage facility expense
    1,798,000       1,713,000     $ 85,000  
 
                   
 
  $ 1,389,000     $ 836,000          
 
                   
Petroleum storage facility revenue increased due principally to rent for the new 152,000 barrel tank effective December 2005 and the new 175,000 barrel tank effective August 2006, and higher monthly rent resulting from the annual cost-of-living adjustment May 1, 2006.
Petroleum storage facility expense increased due principally to higher depreciation related principally to the new tanks offset by lower insurance costs and a decrease in levels of scheduled repairs and maintenance.
Other income:
Other income decreased due to the sale in March 2005 of the Company’s parking garage for $2,500,000, resulting in a gain of $1,057,000, and the sale in July 2005 of a billboard permit, resulting in a gain of $100,000.
General:
For the year ended December 31, 2006, general and administrative expense decreased $103,000 from 2005 due principally to lower professional fees; in 2005, the Company incurred costs in (1) the conversion of its Class B common stock to Class A common stock and (2) responding to a tender offer to acquire shares of the Company’s stock.
3.   Liquidity and capital resources:
Historically, the Company has had adequate liquidity to fund its operations.
A summary of cash flows by year is as follows:
                         
    2007     2006     2005  
Operating activities
  $ 2,502,000     $ 1,542,000     $ 2,245,000  
 
                 
 
                       
Investing activities
  $ (2,794,000 )   $ (2,399,000 )   $ 627,000  
 
                 
 
                       
Financing activities
  $ (726,000 )   $ (462,000 )   $ (396,000 )
 
                 

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Operating activities:
The changes in cash flows from operating activities among the years results principally from the payment in 2006 of income taxes attributable to 2005. In 2007, the increase also includes the $100,000 in cash received under a settlement agreement with a former tenant. In 2006, the decrease resulting from the payment of the 2005 income taxes was offset in part by increased revenue from the newly constructed tanks at the Terminal.
Investing activities:
Exclusive of the cash received from the sales of the parking garage and the billboard in 2005 ($2,600,000), the cash used in investing activities relates principally to the acquisition of a building and the underlying land in 2007 ($2,329,000) and the costs incurred in the construction of a petroleum tank in each of 2006 and 2005.
Financing activities:
The cash used in financing activities is for the payment of dividends.
Cash and cash equivalents and cash commitments:
At December 31, 2007, the Company had cash and cash equivalents of $1,974,000.
The Company anticipates making no major capital additions to the Facility but does expect to expend $300,000 in 2008 for improvements at the Pier.
In 2004, the Company received condemnation proceeds from Amtrak of $1,428,000 which qualified for deferred reinvestment for income tax reporting purposes pursuant to which the Company elected to reduce the income tax basis of qualifying subsequent acquisitions, thereby avoiding paying income taxes on the proceeds, subject to certain restrictions. The Company’s 2004 income tax returns made such election, thereby reducing its cash outlay for income taxes for 2004 by approximately $570,000. At December 31, 2006, the Company had made qualifying acquisitions totaling $250,000 and in November 2007 purchased land and buildings for $2,329,000 which were qualifying assets, thereby reinvesting the remaining proceeds from the condemnation.
In January 2008, the Company paid a quarterly dividend of $198,000 ($.06 per common share). The declaration of future dividends and the amount thereof will depend on the Company’s future earnings, financial factors and other events.
In management’s opinion, the Company should be able to generate adequate 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.
At December 31, 2007, the Company has no non-cancellable contract obligations other than three operating leases for billboard locations for which the rent expense is not material in amount.
Item 7A. Quantitative and Qualitative Disclosures About Market Securities
The Company’s cash and cash equivalent balances are exposed to risk of changes in short-term interest rates. Reductions in short-term interest rates could result in a reduction in interest income; however, the impact on income would not be material in amount.

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     Item 8. Consolidated Financial Statements and Supplementary Data
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
    Page  
    19  
 
       
    20  
 
       
    21  
 
       
    22  
 
       
    23-32  
 
       
    33  
 
       
    34-35  

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Lefkowitz, Garfinkel, Champi & DeRienzo P.C.
Certified Public Accountants
10 Weybosset Street, Suite 700
Providence, Rhode Island 02903
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors
Capital Properties, Inc.
East Providence, Rhode Island
We have audited the accompanying consolidated balance sheets of Capital Properties, Inc. and subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Capital Properties, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with U. S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Lefkowitz, Garfinkel, Champi & DeRienzo P.C.
March 26, 2008

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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    December 31,  
    2007     2006  
ASSETS
               
 
               
Properties and equipment (net of accumulated depreciation)
  $ 20,717,000     $ 18,471,000  
Cash and cash equivalents
    1,974,000       2,992,000  
Income taxes receivable
    12,000        
Prepaid and other
    334,000       395,000  
 
           
 
  $ 23,037,000     $ 21,858,000  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Liabilities:
               
Accounts payable and accrued expenses:
               
Property taxes
  $ 276,000     $ 298,000  
Environmental remediation
    81,000       82,000  
Other
    333,000       137,000  
Deferred leasing revenues
    520,000       448,000  
Income taxes:
               
Current
          18,000  
Deferred, net
    5,151,000       4,858,000  
 
           
 
    6,361,000       5,841,000  
 
           
 
               
Shareholders’ equity:
               
Class A common stock, $.01 par; authorized 6,000,000 shares; issued and outstanding 3,299,956 shares
    33,000       33,000  
Capital in excess of par
    11,795,000       11,795,000  
Retained earnings
    4,848,000       4,189,000  
 
           
 
    16,676,000       16,017,000  
 
           
 
  $ 23,037,000     $ 21,858,000  
 
           
See accompanying notes to consolidated financial statements.

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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
                         
    Years Ended December 31,  
    2007     2006     2005  
Revenues and other income:
                       
Revenues:
                       
Leasing
  $ 2,853,000     $ 2,493,000     $ 2,663,000  
Petroleum storage facility
    3,714,000       3,187,000       2,549,000  
 
                 
 
    6,567,000       5,680,000       5,212,000  
 
                       
Other income:
                       
Gain on sale of parking garage
                1,057,000  
Gain on sale of billboard permit
                100,000  
Interest
    128,000       109,000       94,000  
 
                 
 
    6,695,000       5,789,000       6,463,000  
 
                 
 
                       
Expenses:
                       
Leasing
    566,000       663,000       778,000  
Petroleum storage facility
    2,451,000       1,798,000       1,713,000  
General and administrative
    1,371,000       1,113,000       1,216,000  
 
                 
 
    4,388,000       3,574,000       3,707,000  
 
                 
 
                       
Income before income taxes
    2,307,000       2,215,000       2,756,000  
 
                 
 
                       
Income tax expense:
                       
Current
    629,000       683,000       976,000  
Deferred
    293,000       213,000       117,000  
 
                 
 
    922,000       896,000       1,093,000  
 
                 
 
                       
Net income
    1,385,000       1,319,000       1,663,000  
 
                       
Retained earnings, beginning
    4,189,000       3,332,000       2,065,000  
 
                       
Dividends on common stock ($.22, $.14 and $.12 per share in 2007, 2006 and 2005, respectively)
    (726,000 )     (462,000 )     (396,000 )
 
                 
 
                       
Retained earnings, ending
  $ 4,848,000     $ 4,189,000     $ 3,332,000  
 
                 
 
                       
Basic income per share
  $ .42     $ .40     $ .50  
 
                 
See accompanying notes to consolidated financial statements.

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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
    Years Ended December 31,  
    2007     2006     2005  
Cash flows from operating activities:
                       
Net income
  $ 1,385,000     $ 1,319,000     $ 1,663,000  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation
    664,000       551,000       431,000  
Gain on sale of parking garage
                (1,057,000 )
Gain on sale of billboard permit
                (100,000 )
Reversal of accrued leasing revenues
          159,000        
Deferred income taxes
    293,000       213,000       117,000  
Changes in assets and liabilities:
                       
Increase in:
                       
Income taxes receivable
    (12,000 )            
Prepaid and other
          (158,000 )      
Current income taxes payable
                647,000  
Deferred leasing revenues
    72,000       142,000       306,000  
Decrease in:
                       
Receivables
                413,000  
Accrued leasing revenues
          29,000       94,000  
Prepaid and other
    61,000             237,000  
Accounts payable and accrued expenses
    57,000       (49,000 )     (506,000 )
Current income taxes payable
    (18,000 )     (664,000 )      
 
                 
Net cash provided by operating activities
    2,502,000       1,542,000       2,245,000  
 
                 
 
                       
Cash flows from investing activities:
                       
Payments for properties and equipment
    (2,794,000 )     (2,399,000 )     (1,973,000 )
Proceeds from:
                       
Sale of parking garage
                2,500,000  
Sale of billboard permit
                100,000  
 
                 
Net cash provided by (used in) investing activities
    (2,794,000 )     (2,399,000 )     627,000  
 
                 
 
                       
Cash used in financing activities, payment of dividends
    (726,000 )     (462,000 )     (396,000 )
 
                 
 
                       
Increase (decrease) in cash and cash equivalents
    (1,018,000 )     (1,319,000 )     2,476,000  
Cash and cash equivalents, beginning
    2,992,000       4,311,000       1,835,000  
 
                 
Cash and cash equivalents, ending
  $ 1,974,000     $ 2,992,000     $ 4,311,000  
 
                 
 
                       
Supplemental disclosure, cash paid for income taxes
  $ 647,000     $ 1,357,000     $ 152,000  
 
                 
See accompanying notes to consolidated financial statements.

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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
1.   Description of business:
Capital Properties, Inc. and its wholly-owned subsidiaries, Tri-State Displays, Inc., Capital Terminal Company and Dunellen, LLC (collectively referred to as “the Company”), operate in two segments: (1) Leasing and (2) Petroleum Storage.
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, with the exception of a parking garage), the leasing of a portion of the building acquired in November 2007 under short-term leasing arrangements 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 and adjacent to the Capital Center area will consist primarily of long-term ground leases. Pending this development, the Company leases these parcels for public parking under short-term leasing arrangements.
The petroleum storage segment consists of the operating of the petroleum storage terminal (the “Terminal”) and the Wilkesbarre Pier (the “Pier”), collectively referred to as the “Facility,” located in East Providence, Rhode Island, for Global Companies, LLC (“Global”) which stores and distributes petroleum products.
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 assets constructed on the Company’s land, including the payment of real property taxes on both the land and any improvements constructed thereon; whereas the Company is responsible for the operating and maintenance expenditures, including real property taxes, as well as capital improvements at the Facility.
2.   Summary of significant accounting policies:
Principles of consolidation:
The accompanying consolidated financial statements include the accounts and transactions of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates:
The preparation of consolidated 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.
Fair value of financial instruments:
The Company believes that the fair value of financial instruments, including cash and cash equivalents and accounts payable and accrued expenses, approximate their respective book values at December 31, 2007 and 2006.
Cash and cash equivalents:
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. At December 31, 2007 and 2006, cash equivalents consisted of an overnight uninsured sweep with the Company’s principal bank totaling $1,866,000 and $2,787,000, respectively.
Properties and equipment:
Properties and equipment are stated at cost. Acquisitions and additions are capitalized while routine maintenance and repairs, which do not improve the asset or extend its life, are charged to expense when incurred. Depreciation is being provided by the straight-line method over the estimated useful lives of the respective assets.

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The Company follows the provisions of Statement of Financial Accounting Standards (FAS) No. 144 (Accounting for the Impairment or Disposal of Long-Lived Assets) which requires that properties and equipment held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the net book value of the asset may not be recoverable. An impairment loss will be recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the asset is less than the net book value of the asset. Generally, the amount of the impairment loss is measured as the difference between the net book value and the estimated fair value of the asset.
Environmental remediation:
The Company accrues a liability when the environmental remediation is probable and the costs are estimable. The Company charges to expense those costs that do not extend the life, increase the capacity or improve the safety or efficiency of the property owned by the Company.
Revenues and other income:
Leasing — The Company’s properties leased to others are under operating leases. The Company reports leasing revenue when earned under the operating method.
Certain of the Company’s long-term land leases, including the outdoor advertising locations, provide for presently known scheduled rent increases over the remaining terms (27 to 147 years). In accordance with the provisions of FAS No. 13 (Accounting for Leases) and certain of its interpretations, the Company recognizes leasing revenue on the straight-line basis over the terms of the leases; however, the Company does not report as revenue that portion of such straight-line rentals which management is unable to conclude is realizable (collectible) due to the length of the lease terms and other related uncertainties.
Options — The Company reports option revenue when earned.
Petroleum storage facility — The Company reports revenue from the operations of the Facility when earned and reports as revenue the tenant’s portion of the real property taxes as required by the lease.
Contingent — The Company reports contingent revenue in the period in which the factors occur on which the contingent payments are predicated.
Litigation and condemnation — The Company reports income resulting from litigation and condemnations in the period in which the cash is received.
Income taxes:
The Company and its subsidiaries file consolidated income tax returns.
The Company provides for income taxes based on income reported for financial reporting purposes. The provision for income taxes differs from the amounts currently payable because of temporary differences associated with the recognition of certain income and expense items for financial reporting and tax reporting purposes.
New accounting standards:
The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007. The interpretation clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with FAS No. 109 (Accounting for Income Taxes). Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements.
The Company reviews new accounting standards as issued. Although some of these accounting standards may be applicable to the Company, the Company has not identified any other standards that it believes merit further discussion. The Company expects that none of the new standards would have a significant impact on its consolidated financial statements.

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3.   Properties and equipment:
Properties and equipment consists of the following:
                         
    Estimated        
    Useful Life     December 31,  
    in Years     2007     2006  
Properties on lease or held for lease:
                       
Land and land improvements
        $ 4,621,000     $ 3,991,000  
Building
    39       1,699,000        
 
                   
 
            6,320,000       3,991,000  
 
                   
 
                       
Petroleum storage facility, on lease:
                       
Land and land improvements
          5,561,000       5,398,000  
Buildings and structures
    33       1,406,000       1,338,000  
Tanks and equipment
    15-20       14,569,000       14,322,000  
 
                   
 
            21,536,000       21,058,000  
 
                   
 
                       
Office equipment
    5-10       126,000       97,000  
 
                   
 
            27,982,000       25,146,000  
 
                   
 
                       
Less accumulated depreciation:
                       
Properties on lease or held for lease
            16,000       12,000  
Petroleum storage facility, on lease
            7,160,000       6,576,000  
Office equipment
            89,000       87,000  
 
                   
 
            7,265,000       6,675,000  
 
                   
 
          $ 20,717,000     $ 18,471,000  
 
                   
In November 2007, the Company purchased a building and accompanying land for $2,329,000, which is contiguous on the north and east with Parcel 20 already owned by the Company. The Company is leasing a portion of the building to four tenants under short-term leasing arrangements.
The Company was the owner of a parking garage located on Parcel 7A in the Capital Center area, which was leased for several years. In March 2005, the Company sold the parking garage with a net book value of $1,443,000 for $2,500,000 in cash but retained ownership of the underlying land which is leased for 99 years at a current annual contractual rental of $100,000. Consistent with other Company long-term land leases, the tenant pays the real property taxes on the land. The lease further provides for future periodic rental adjustments.
4.   Description of leasing arrangements:
Long-term land leases:
As of December 31, 2007, the Company had entered into five long-term land leases for five separate parcels upon which the improvements have been completed (“developed parcels”), including the lease for the land under the parking garage discussed in Note 3. In 2005, two additional long-term land leases commenced (“undeveloped parcels”) and construction of the improvements is in process on both parcels.
Under the seven land leases, the tenants are required to negotiate any tax stabilization treaty or other arrangements, appeal any changes in real property assessments, and pay real property taxes assessed under these arrangements. Accordingly, the amounts paid by the tenants are excluded from leasing revenues and leasing expense on the accompanying consolidated statements of income and retained earnings. The real property taxes attributable to the Company’s land under these seven leases are as follows:
     
Year Ended December 31,   Real Property Taxes
2007
  $1,434,000
2006   $1,302,000
2005   $1,277,000
Under one of the leases which commenced in 2005, the tenant is entitled to a credit for future rents equal to a portion of the real property taxes paid by the tenant through April 2007, which credit now totals $520,000, the maximum amount. For real estate taxes prior to 2007, the Company reported the portion of the real property taxes subject to

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the future credit as property tax expense on the accompanying consolidated statements of income and retained earnings and as accrued property taxes on its consolidated balance sheets. As the tenant made the tax payment, the amount of the payment was reclassified from accrued property taxes to deferred leasing revenues which totaled $520,000 and $448,000 at December 31, 2007 and 2006, respectively. During the periods that the tenant is entitled to the credit (commencing in 2010), the Company will reclassify deferred leasing revenues to leasing revenues.
In June 2007, the Company entered into a settlement agreement with a former tenant concerning amounts due the Company resulting from the tenant’s prematurely terminating its lease with the Company in 2003. The Company received $100,000 in settlement, which amount is included in leasing revenues on the accompanying consolidated statement of income and retained earnings for the year ended December 31, 2007.
Prior to the commencement of the May 1, 2005 lease, the Company received option payments pursuant to a month-to-month arrangement.
Under one of the long-term land leases, the Company receives contingent rentals (based upon a fixed percentage of gross revenue received by the tenant) which totaled $59,000, $62,000, and $58,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
The Company also leases various parcels of land for outdoor advertising purposes to Lamar under a lease having a remaining term of 27 years. Effective June 1, 2006, the Company entered into an Amended and Restated Agreement with Lamar which among other things provides the following: (1) the base rent will increase annually in fixed increases of 2.75% for each leased billboard location commencing June 1, 2006 and on each June 1 thereafter; and (2) in addition to base rent, for each 12-month period commencing each June 1, Lamar must pay to the Company the difference between 30% of the gross revenues from each standard billboard (20% of the gross revenues from each electronic billboard) for such 12-month period reduced by the sum of (a) commissions paid to third parties and (b) the base monthly rent for each leased billboard display for such 12-month period (“contingent revenue”). For the years ended December 31, 2007, 2006 and 2005, contingent revenues totaled $71,000, $78,000 and $87,000, respectively. In all other respects, the lease remains substantially unchanged.
The June 1, 2006 change in the contractual rental payments extended the turnaround date until 2022, resulting in the Company concluding that it should not presently record a receivable resulting from reporting leasing revenue on a straight-line basis. Accordingly, the Company reversed a previously recorded receivable for accrued leasing revenue from Lamar of $159,000 and is not reporting as leasing revenue any portion of the current excess of straight-line over contractual revenue.
At December 31, 2007, there are 25 locations under lease with 48 billboard faces. Of these locations, 22 are controlled through easements and 3 are leased from third parties under operating leases with remaining terms of one to eight years. In July 2005, another of the Company’s operating leases with a third party terminated since the Company had been unable to negotiate a renewal. The Company sold the permit for this billboard to the former lessor for $100,000 in cash.
Minimum future contractual rental payments to be received from noncancellable long-term leases as of December 31, 2007 are:
         
Year ending December 31,        
2008
  $ 2,093,000  
2009
    2,137,000  
2010
    2,278,000  
2011
    2,858,000  
2012
    3,135,000  
2013 to 2153
    714,542,000  
 
     
 
  $ 727,043,000  
 
     
For those leases with presently known scheduled rent increases at December 31, 2007 and 2006, the cumulative excess of straight-line over contractual rentals (considering scheduled rent increases over the 30 to 149 year terms of the leases) and the portion of the excess of straight-line over contractual rentals which management has concluded is realizable when payable over the terms of the leases is as follows:
                 
    2007     2006  
Cumulative excess of straight-line over contractual rentals
  $ 30,539,000     $ 25,998,000  
Amount management has not been able to conclude is collectible
    30,496,000       25,954,000  
 
           
Accrued leasing revenues, which are included in prepaid and other on the accompanying consolidated balance sheets
  $ 43,000     $ 44,000  
 
           

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In the event of tenant default, the Company has the right to reclaim its leased land together with any improvements thereon, subject to the right of any leasehold mortgagee to enter into a new lease with the Company with the same terms and conditions as the lease in default.
Short-term leases:
The Company leases the undeveloped parcels of land in or adjacent to the Capital Center area for public parking purposes to one tenant under short-term cancellable leases.
In November 2007, the Company purchased a building and underlying land, which is contiguous on the north and east with Parcel 20 already owned by the Company. The Company is leasing a portion of the building to four tenants under short-term leases (one year or less) at a current annual rental of $134,000.
5.   Petroleum storage facility:
Current operations:
The Company and Global are parties to a lease agreement whereby the Company operates the entire Facility for Global. The Company is responsible for labor, insurance, property taxes and other operating expenses, as well as capital improvements.
The lease provides as follows:
    The lease expires April 30, 2013, but will continue thereafter on a year-to-year basis unless terminated by either party upon ninety days’ written notice;
 
    Global may terminate the lease on or after April 30, 2008, upon one year’s written notice;
 
    Global will pay a monthly rent as shown in the following schedule, subject to annual cost-of-living adjustments;
 
    Global will reimburse the Company for real property taxes in excess of $106,000 annually; and
 
    The Company will receive an additional $.10 per barrel for every barrel in excess of 4,000,000 barrels of throughput in any lease year (contingent revenue).
For the years ended December 31, 2007, 2006 and 2005, the Company earned contingent revenue of $171,000, $141,000 and $123,000, respectively.
The monthly rent as of January 1, 2005 was $185,000 and has increased as follows:
                         
Effective       Amount of   New
Date   Reason for Increase   Increase   Monthly Rent
May 2005  
Annual cost-of-living adjustment
  $ 6,000     $ 191,000  
December 2005  
Completion of 152,000 barrel tank
    36,000       227,000  
May 2006  
Annual cost-of-living adjustment
    7,000       234,000  
August 2006  
Completion of 175,000 barrel tank
    43,000       277,000  
May 2007  
Annual cost-of-living adjustment
    8,000       285,000  
Effective May 2003, Global has an option to purchase the Facility at any time during the term of the lease (other than the last year thereof) on the terms and conditions set forth in a separate option agreement. Under a companion agreement, Global agreed to make certain improvements at the Pier which totaled approximately $170,000 and $110,000 for the years ended December 31, 2006 and 2005, respectively. No improvements were made in 2007. [See Wilkesbarre Pier below].
Environmental remediation:
In 1994, a leak was discovered in a 25,000 barrel storage tank at the Terminal which allowed the escape of a small amount of fuel oil. All required notices were made to the State of Rhode Island Department of Environmental Management (“RIDEM”). In 2000, the tank was demolished and testing of the groundwater indicated that there was no large pooling of contaminants. In 2001, RIDEM approved a plan pursuant to which the Company installed a passive system consisting of three wells and commenced monitoring the wells.

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In 2003, RIDEM decided that the passive monitoring system previously approved was not sufficient and required the Company to design an active remediation system for the removal of product from the contaminated site. The Company and its consulting engineers began the pre-design testing of the site in the fourth quarter of 2004. The consulting engineers estimated a total cost of $200,000 to design, install and operate the system, which amount was accrued in 2004. Through December 31, 2007, the Company has expended $119,000. RIDEM has not taken any action on the Company’s proposed plan. As designed, the system will pump out the contaminants which will be disposed of in compliance with applicable regulations. After a period of time, the groundwater will be tested to determine if sufficient contaminants have been removed. While the Company and its consulting engineers believe that the proposed active remediation system will correct the situation, it is possible that RIDEM could require the Company to expand remediation efforts, which could result in the Company incurring additional costs.
Environmental incident:
In 2002, during testing of monitoring wells at the Terminal, the Company’s consulting engineer discovered free floating phase product in a groundwater monitoring well located on that portion of the Terminal purchased in 2000. Preliminary laboratory analysis indicated that the product was gasoline, which is not a product the Company ever stored at the Terminal. 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, the results of which indicate that the gasoline did not come from the Terminal. The Company notified RIDEM. The Company will continue to monitor RIDEM’s investigation.
Since January 2003, the Company has not incurred 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.
Wilkesbarre Pier:
The Pier is a deep-water pier in East Providence, Rhode Island owned by the Company which is integral to the operation of the Terminal. The Pier and the Terminal are connected by two petroleum pipelines which the Company has a permanent right to use. In 1995, the Company and Providence and Worcester Railroad Company (the “Railroad”) (the then owner of the Pier) entered into an agreement which, among other things, gave the Company the right to acquire the Pier for One Dollar ($1.00). The Company acquired the Pier from the Railroad in 1998. The Company and the Railroad have a common controlling shareholder.
Since 2000, the Company has been involved in litigation with Getty Properties Corp. (“Properties”), the owner of an adjacent petroleum storage facility and a party with a claimed interest in the Pier, and Getty Petroleum Marketing, Inc. (“Marketing”), the lessee of Properties with respect to the interest of Properties in the Pier and the obligations attendant thereto and concerning certain obligations under agreements entered into between the Company, Properties and Marketing in 1997. Among the issues litigated between the parties was the question of whether or not Properties and/or Marketing was under an obligation to participate in the cost of the installation of certain fire suppression equipment required by the Fire Department of the City of East Providence. It was the position of the Company that Properties was obligated under certain agreements with the Railroad to which the Company succeeded to participate in the payment. In December 2004, the United States Court of Appeals for the First Circuit determined that Properties had no such obligation. In another aspect of the litigation, the United States District Court determined that Properties had the obligation to install an additional 16-inch pipeline on the Pier. The Company undertook the installation in 2004 and in February 2005, Properties paid $394,000 for the installation.
The Company was also engaged in litigation with Properties over the question of whether either party had the obligation to indemnify the other for litigation expenses incurred in the underlying litigation with respect to the Pier pursuant to a 1986 Guaranty and Indemnity Agreement. In February 2005, the Judge Magistrate of the United States District Court for the District of Rhode Island recommended that the Court deny and dismiss all of the claims asserted by the parties in the action. Both parties appealed that recommendation, and in September 2005, the Court denied and dismissed all claims. Neither party appealed the Court’s decision.
6.   Income taxes:
In 2004, the Company received condemnation proceeds from Amtrak totaling $1,428,000 which qualified for deferred reinvestment for income tax reporting purposes pursuant to which the Company elected to reduce the income tax basis of qualifying subsequent acquisitions, thereby avoiding paying income taxes on the proceeds, subject to certain restrictions. The Company’s 2004 income tax returns made such election, thereby reducing its cash outlay for income taxes for 2004 by approximately $570,000. Through December 31, 2006, the Company had made qualifying acquisitions totaling $250,000, and in November 2007 purchased a building and related land for $2,329,000 which were qualifying assets, thereby reinvesting the remaining proceeds from the condemnation.

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Income tax expense is comprised of the following components:
                         
    2007     2006     2005  
Current:
                       
Federal
  $ 519,000     $ 528,000     $ 771,000  
State
    110,000       155,000       205,000  
 
                 
 
    629,000       683,000       976,000  
 
                 
 
                       
Deferred:
                       
Federal
    218,000       152,000       70,000  
State
    75,000       61,000       47,000  
 
                 
 
    293,000       213,000       117,000  
 
                 
 
  $ 922,000     $ 896,000     $ 1,093,000  
 
                 
A reconciliation of the income tax provision as computed by applying the United States income tax rate (34%) to income before income taxes is as follows:
                         
    2007     2006     2005  
Computed “expected” tax
  $ 784,000     $ 753,000     $ 937,000  
Increase (decrease) in “expected” tax resulting from:
                       
State income tax, net of Federal income tax benefit
    140,000       133,000       165,000  
Statutory and other
    (2,000 )     10,000       (9,000 )
 
                 
 
  $ 922,000     $ 896,000     $ 1,093,000  
 
                 
Deferred income taxes are recorded based upon differences between financial statement and tax basis amounts of assets and liabilities. The tax effects of temporary differences which give rise to deferred tax assets and liabilities were as follows:
                 
    December 31,  
    2007     2006  
Gross deferred tax liabilities:
               
Property having a financial statement basis in excess of tax basis:
               
Cost differences
  $ 3,517,000     $ 3,150,000  
Depreciation differences
    1,874,000       1,578,000  
 
           
 
    5,391,000       4,728,000  
Condemnation proceeds
          470,000  
Insurance premiums
    80,000       74,000  
 
           
 
    5,471,000       5,272,000  
Gross deferred tax assets
    (320,000 )     (414,000 )
 
           
 
  $ 5,151,000     $ 4,858,000  
 
           
7.   Operating segment disclosures:
The Company operates in two segments: (1) Leasing and (2) Petroleum Storage.
The Company makes decisions relative to the allocation of resources and evaluates performance based on each segment’s respective income before income taxes, excluding interest income, and certain corporate expenses.
Inter-segment revenues are immaterial in amount. The Company did not incur interest expense during the years ended December 31, 2007, 2006 and 2005.

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The following financial information is used for making operating decisions and assessing performance of the Company’s segments:
                         
    December 31,  
    2007     2006     2005  
Leasing:
                       
Revenues and other income:
                       
Revenues:
                       
Long-term leases:
                       
Contractual
  $ 2,053,000     $ 2,010,000     $ 1,983,000  
Contingent
    130,000       140,000       145,000  
Option
    100,000             81,000  
Excess of contractual over straight-line rentals
    (1,000 )     (29,000 )     (94,000 )
Non-cash reversal of accrued leasing revenues
          (159,000 )      
Short-term leases
    571,000       531,000       548,000  
 
                 
 
    2,853,000       2,493,000       2,663,000  
 
                       
Other income:
                       
Gain on sale of parking garage
                1,057,000  
Gain on sale of billboard permit
                100,000  
 
                 
Total revenues and other income
  $ 2,853,000     $ 2,493,000     $ 3,820,000  
 
                 
 
                       
Property tax expense
  $ 447,000     $ 543,000     $ 574,000  
 
                 
 
                       
Depreciation
  $ 4,000     $ 1,000     $ 14,000  
 
                 
 
                       
Income before income taxes
  $ 2,287,000     $ 1,830,000     $ 3,042,000  
 
                 
 
                       
Assets
  $ 6,498,000     $ 4,179,000     $ 4,271,000  
 
                 
 
                       
Properties and equipment:
                       
Additions
  $ 2,329,000     $ 35,000     $  
 
                 
Deletion, parking garage
  $     $     $ (2,500,000 )
 
                 
 
                       
Petroleum storage:
                       
Revenues:
                       
Contractual
  $ 3,543,000     $ 3,046,000     $ 2,426,000  
Contingent
    171,000       141,000       123,000  
 
                 
Total revenues
  $ 3,714,000     $ 3,187,000     $ 2,549,000  
 
                 
 
                       
Property tax expense
  $ 204,000     $ 107,000     $ 95,000  
 
                 
 
                       
Depreciation
  $ 657,000     $ 549,000     $ 415,000  
 
                 
 
                       
Income before income taxes
  $ 1,263,000     $ 1,389,000     $ 836,000  
 
                 
 
                       
Assets
  $ 14,625,000     $ 14,871,000     $ 13,273,000  
 
                 
 
                       
Properties and equipment:
                       
Additions
  $ 551,000     $ 2,230,000     $ 2,103,000  
Deletion
    (73,000 )            
 
                 
 
  $ 478,000     $ 2,230,000     $ 2,103,000  
 
                 

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The following is a reconciliation of the segment information to the amounts reported in the accompanying consolidated financial statements:
                         
    2007     2006     2005  
Revenues and other income:
                       
Revenues and other income for operating segments:
                       
Leasing
  $ 2,853,000     $ 2,493,000     $ 3,820,000  
Petroleum storage
    3,714,000       3,187,000       2,549,000  
 
                 
 
    6,567,000       5,680,000       6,369,000  
Interest income
    128,000       109,000       94,000  
 
                 
Total consolidated revenues and other income
  $ 6,695,000     $ 5,789,000     $ 6,463,000  
 
                 
 
                       
Property tax expense:
                       
Property tax expense for operating segments:
                       
Leasing
  $ 447,000     $ 543,000     $ 574,000  
Petroleum storage
    204,000       107,000       95,000  
 
                 
 
    651,000       650,000       669,000  
Unallocated corporate property tax expense
    1,000       1,000       1,000  
 
                 
Total consolidated property tax expense
  $ 652,000     $ 651,000     $ 670,000  
 
                 
 
                       
Depreciation:
                       
Depreciation for operating segments:
                       
Leasing
  $ 4,000     $ 1,000     $ 14,000  
Petroleum storage
    657,000       549,000       415,000  
 
                 
 
    661,000       550,000       429,000  
Unallocated corporate depreciation
    3,000       1,000       2,000  
 
                 
Total consolidated depreciation
  $ 664,000     $ 551,000     $ 431,000  
 
                 
 
                       
Income before income taxes:
                       
Income for operating segments:
                       
Leasing
  $ 2,287,000     $ 1,830,000     $ 3,042,000  
Petroleum storage
    1,263,000       1,389,000       836,000  
 
                 
 
    3,550,000       3,219,000       3,878,000  
Interest income
    128,000       109,000       94,000  
Unallocated corporate expenses
    (1,371,000 )     (1,113,000 )     (1,216,000 )
 
                 
Total consolidated income before income taxes
  $ 2,307,000     $ 2,215,000     $ 2,756,000  
 
                 
 
                       
Assets:
                       
Assets for operating segments:
                       
Leasing
  $ 6,498,000     $ 4,179,000     $ 4,271,000  
Petroleum storage
    14,625,000       14,871,000       13,273,000  
 
                 
 
    21,123,000       19,050,000       17,544,000  
Corporate cash and cash equivalents
    1,866,000       2,787,000       3,936,000  
Other unallocated amounts
    48,000       21,000       12,000  
 
                 
Total consolidated assets
  $ 23,037,000     $ 21,858,000     $ 21,492,000  
 
                 
 
                       
Additions and deletions to properties and equipment:
                       
Additions and deletions to properties and equipment:
                       
Leasing
  $ 2,329,000     $ 35,000     $ (2,500,000 )
Petroleum storage
    478,000       2,230,000       2,103,000  
 
                 
 
    2,807,000       2,265,000       (397,000 )
Unallocated corporate additions to properties and equipment
    29,000       1,000        
 
                 
Total consolidated additions (deletions)
  $ 2,836,000     $ 2,266,000     $ (397,000 )
 
                 

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The following table sets forth those customers whose revenues exceed 10% of the Company’s segment revenues:
                         
    2007     2006     2005  
Leasing segment:
                       
Metropark, Ltd.
  $ 805,000     $ 605,000     $ 718,000  
Lamar Outdoor Advertising, LLC
    558,000       531,000       548,000  
Gramercy Capital Corp
    468,000       468,000       468,000  
AvalonBay Communities, Inc.
    404,000       406,000       403,000  
 
                 
 
  $ 2,235,000     $ 2,010,000     $ 2,137,000  
 
                 
 
                       
Petroleum storage segment, Global Companies, LLC
  $ 3,714,000     $ 3,187,000     $ 2,549,000  
 
                 
8.   Fourth quarter transactions for 2007:
 
    In December 2007, the president of Capital Properties, Inc. retired and was paid a bonus totaling $125,000, which amount is recorded in general and administrative expense on the accompanying statement of income and retained earnings for the year ended December 31, 2007. In December 2007, the president of Capital Terminal Company also retired and was paid a bonus totaling $109,000, which amount is recorded in petroleum storage facility expense on the accompanying statement of income and retained earnings for the year ended December 31, 2007.
 
9.   Selected quarterly financial data (unaudited):
 
    The following table sets forth selected financial data for each quarter of 2007 and 2006. The information for each of these quarters is unaudited but includes all normal recurring adjustments that the Company considers necessary for a fair presentation. These results, however, are not necessarily indicative of results for any future period. The sum of the quarterly basic income per common share may vary from the total for the year due to rounding.
                                 
    Year Ended December 31, 2007,  
    First     Second     Third     Fourth  
    Quarter     Quarter     Quarter     Quarter  
Total revenues and other income
  $ 1,665,000     $ 1,776,000     $ 1,565,000     $ 1,689,000  
 
                       
Net income
  $ 380,000     $ 489,000     $ 333,000     $ 183,000  
 
                       
Basic income per common share
  $ 0.12     $ 0.15     $ 0.10     $ 0.06  
 
                       
                                 
    Year Ended December 31, 2006,  
    First     Second     Third     Fourth  
    Quarter     Quarter     Quarter     Quarter  
Total revenues and other income
  $ 1,470,000     $ 1,320,000     $ 1,471,000     $ 1,528,000  
 
                       
Net income
  $ 321,000     $ 252,000     $ 373,000     $ 373,000  
 
                       
Basic income per common share
  $ 0.10     $ 0.07     $ 0.11     $ 0.11  
 
                       
Total revenues and other income for the second quarter of 2007 include option revenue of $100,000 resulting from the settlement of a dispute with a former tenant. As discussed in Note 8 above, two bonuses were recorded in the fourth quarter of 2007.

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Capital Properties, Inc. and Subsidiaries
Valuation and Qualifying Accounts
December 31, 2007, 2006 and 2005
Schedule II
                                         
Description:                        
Cumulative Excess of Straight-line over                        
Contractual Rentals Which Management Has   Balance at   Charged to   Charged to Accrued           Balance at
Not Been Able to Conclude is Collectible   Beginning of Period   Revenues   Leasing Revenues   Deductions   End of Period
 
Year ended 12/31/07:
  $ 25,954,000     $     $ 4,548,000     $ (6,000 )   $ 30,496,000  
     
 
       
Year ended 12/31/06:
  $ 21,686,000     $     $ 4,274,000     $ (6,000 )   $ 25,954,000  
     
 
       
Year ended 12/31/05:
  $ 17,680,000     $     $ 4,013,000     $ (7,000 )   $ 21,686,000  
     

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Capital Properties, Inc. and Subsidiaries
Real Estate and Accumulated Depreciation
December 31, 2007
Schedule III
                                                                                               
                      Costs Capitalized                                    
                      Subsequent to     Gross Amount at Which Carried                             Life on
    Initial Cost     Acquisition     at Close of Period (2)                             which
            Buildings             Buildings             Buildings             Accumulated   Date of   Date   Depreciation
Description   Land   and Other     Land   and Other     Land   and Other   Total     Depreciation   Construction   Acquired   is Computed
Prov RI
                                                                                             
Parcel 2
  $ 191,000     $       $ 236,000     $       $ 427,000     $     $ 427,000         N/A               12/29/82          
Parcel 3E
    44,000               19,000               63,000             63,000         N/A               12/29/82          
Parcel 3S
    88,000               23,000               111,000             111,000         N/A               12/29/82          
Parcel 3W
    73,000               40,000               113,000             113,000         N/A               12/29/82          
Parcel 4E
    44,000               19,000               63,000             63,000         N/A               12/29/82          
Parcel 4W
    103,000               40,000               143,000             143,000         N/A               12/29/82          
Parcel 5
    118,000               30,000               148,000             148,000         N/A               12/29/82          
Parcel 6
    573,000               723,000               1,296,000             1,296,000         N/A               12/29/82          
Parcel 7A
    162,000               31,000               193,000             193,000         N/A               12/29/82          
Parcel 8
    73,000               20,000               93,000             93,000         N/A               12/29/82          
Parcel 9
    17,000               33,000               50,000             50,000         N/A               9/28/89          
Parcel 20
    672,000               536,000               1,208,000             1,208,000         N/A               5/31/88          
2007 Addition
                  630,000       1,699,000         630,000       1,699,000       2,329,000       $ 4,000               11/30/07     39 Years
Billboard Easements MA and RI
    70,000               13,000               83,000             83,000         12,000               12/31/87     21 Years
                                           
 
  $ 2,228,000     $       $ 3,393,000     $ 1,699,000       $ 4,621,000     $ 1,699,000     $ 6,320,000       $ 16,000                          
                                               

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Capital Properties, Inc. and Subsidiaries
Real Estate and Accumulated Depreciation (continued)
December 31, 2007
Schedule III
         
Cost:
       
Balance, January 1, 2005
  $ 6,456,000  
Cost of parking garage sold
    (2,500,000 )
 
     
Balance, December 31, 2005
    3,956,000  
Acquisitions
    35,000  
 
     
Balance, December 31, 2006
    3,991,000  
Acquisitions
    2,329,000  
 
     
Balance, December 31, 2007
  $ 6,320,000  
 
     
 
       
Accumulated depreciation:
       
Balance, January 1, 2005
  $ 1,054,000  
Depreciation
    14,000  
Accumulated depreciation on parking garage sold
    (1,057,000 )
 
     
Balance, December 31, 2005
    11,000  
Depreciation
    1,000  
 
     
Balance, December 31, 2006
    12,000  
Depreciation
    4,000  
 
     
Balance, December 31, 2007
  $ 16,000  
 
     
 
(1)   The “Encumbrance” column has been deleted since not applicable.
 
(2)   The aggregate cost for Federal income tax reporting purposes of the above assets at December 31, 2007 is $3,361,000.

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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
There were no changes in, or disagreements with, accountants on accounting or financial disclosure as defined by Item 304 of Regulation S-K.
Item 9A. Controls and Procedures
Under the supervision of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of such date, the Company’s disclosure controls and procedures were effective in making them aware on a timely basis of the material information relating to the Company required to be included in the Company’s periodic filings with the Securities and Exchange Commission.
Management’s Annual Report on Internal Control over Financial Reporting.
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.
However, because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or the degree of compliance with policies may deteriorate.
Management conducted its evaluation of the effectiveness of its internal control over financial reporting based on the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) as of December 31, 2007.
Based on this assessment, the principal executive officer and principal financial officer believe that as of December 31, 2007, the Company’s internal control over financial reporting was effective based on criteria set forth by COSO in “Internal Control-Integrated Framework.”
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control Over Financial Reporting.
During the quarter ended December 31, 2007, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART III
Item 10. Directors, Executive Officers and Corporate Governance of the Registrant
The information concerning directors required by this item, including the Audit Committee and the Audit Committee financial expert, is incorporated by reference to the Sections entitled “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Security Ownership of Certain Beneficial Owners and Management” and “Audit Committee Report” in the Company’s Definitive Proxy for the 2008 Annual Meeting of the Shareholders to be filed with the SEC.
The following are the executive officers of the Registrant:
                     
                Date of First
Name   Age   Office Held   Election to Office
Robert H. Eder
    75     President, Capital Properties, Inc.     1995  
Barbara J. Dreyer
    69     Treasurer, Capital Properties, Inc.     1997  
Stephen J. Carlotti
    65     Secretary, Capital Properties, Inc.     1998  
Todd D. Turcotte
    36     President, Capital Terminal Company and Vice President, Capital Properties, Inc.     2008  
All officers hold their respective offices until their successors are duly elected and qualified. Ms. Dreyer served as President and Treasurer of the Registrant from 1995 to 1997 and as Treasurer since that date. Mr. Carlotti is a partner in the law firm, Hinckley, Allen & Snyder LLP, which firm provides legal services to the Company.
Code of Ethics:
The Company has adopted a Code of Ethics which applies to all directors, officers and employees of the Company and its subsidiaries including the Principal Executive Officer and the Treasurer (who is both the principal accounting and financial officer), which meets the requirement of a “code of ethics” as defined in Item 406 of Regulation S-K. The Company will provide a copy of the Code to shareholders pursuant to any request directed to the Treasurer at the Company’s principal offices. The Company intends to disclose any amendments to, or waiver of, any provisions of the Code for the Principal Executive Officer or Treasurer, or any person performing similar functions.
The additional information required by this item is incorporated by reference to the Section entitled “Corporate Governance” in the Company’s Definitive Proxy Statement for the 2008 Annual Meeting of the Shareholders to be filed with the Securities and Exchange Commission.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the Sections entitled “Compensation of Directors”, “Compensation Discussion and Analysis”, “Compensation Committee Report”, and “Executive Compensation” in the Company’s Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission..
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to the Section entitled “Security Ownership of Certain Beneficial Owners and Management” in the Company’s Definitive Proxy Statement for the 2008 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by this item is incorporated by reference to the Sections entitled “Election of Directors” and “Transactions with Management” in the Company’s Definitive Proxy Statement for the 2008 Annual Meeting of the Shareholders to be filed with the Securities and Exchange Commission.

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Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference to the Section entitled “Independent Registered Public Accountants” in the Company’s Definitive Proxy Statement for the 2008 Annual Meeting of the Shareholders to be filed with the Securities and Exchange Commission
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)   and (c) The consolidated financial statements and supplementary data (including financial statement schedules) are included in Item 8.
(b) Exhibits:
  3.1   Amended Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s report on Form 8-K filed December 10, 2001).
 
  3.2   By-laws, as amended December 10, 2007
 
  10   Material contracts:
  (a)   Lease between Metropark, Ltd. and Company:
 
  (i)   Dated January 1, 2005 (incorporated by reference to Exhibit 10(a) to the registrant’s annual report on Form 10-KSB for the year ended December 31, 2004), as amended.
 
  (b)   Miscellaneous contract:
 
  (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 registrant’s Report on Form 10-QSB/A for the quarterly period ended June 30, 2003), as amended.
  20.1   Map of the Company’s parcels in Downtown Providence, Rhode Island
 
  20.2   Map of the Company’s petroleum storage facility in East Providence, Rhode Island
 
  21   Subsidiaries of the Company
 
  31.1   Rule 13a-14(a) Certification of Chairman of the Board and Principal Executive Officer
 
  31.2   Rule 13a-14(a) Certification of Treasurer and Principal Financial Officer
 
  32.1   Certification of Chairman of the Board 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

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SIGNATURES
     In accordance with Section 13 or 15(d) of the Exchange Act, the Company has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
    CAPITAL PROPERTIES, INC.
 
       
 
  By   /s/ Robert H. Eder
 
       
 
      Robert H. Eder
 
      President and Principal Executive Officer
DATED: March 26, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Company and on the dates indicated.
     
/s/ Robert H. Eder
  March 25, 2008
 
   
Robert H. Eder
   
President and Director
   
Principal Executive Officer
   
 
   
/s/ Barbara J. Dreyer
  March 26, 2008
 
   
Barbara J. Dreyer
   
Treasurer, Principal Financial Officer
   
and Principal Accounting Officer
   
 
   
/s/ Ronald P. Chrzanowski
  March 26, 2008
 
   
Ronald P. Chrzanowski, Director
   
 
   
/s/ Alfred J. Corso
  March 26, 2008
 
   
Alfred J. Corso, Director
   

39