Edgar Filing: CAPITAL PROPERTIES INC /RI/

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to _____________________

Commission File Number 0-9380

CAPITAL PROPERTIES, INC.
(Name of small business registrant 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) (ZipCode)

(401) 435-7171 (Registrant's
telephone number, including area code)

Check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

State the number of shares outstanding of each of the Issuer's classes of common
equity, as of the latest practicable date:

As of April 29, 2005, the Issuer had 3,299,956 shares of Class A Common Stock
outstanding.

Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]

PART I

ITEM 1. FINANCIAL STATEMENTS

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MARCH 31, 2005
(UNAUDITED)

ASSETS

Properties and equipment (net of accumulated depreciation)......... $ 15,039,000
Cash and cash equivalents.......................................... 4,664,000
Receivables, tenant and other...................................... 133,000
Accrued rental income.............................................. 301,000
Prepaid and other.................................................. 214,000
-------------
$ 20,351,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Accounts payable and accrued expenses:
Property taxes................................................ $ 502,000
Environmental remediation..................................... 144,000
Other......................................................... 118,000
Deferred rental income.......................................... 117,000
Income taxes:
Current....................................................... 338,000
Deferred, net................................................. 4,528,000
-------------
5,747,000
-------------
Shareholders' equity:
Class A common stock, $.01 par; authorized 6,000,000 shares;
issued and outstanding 3,299,956 shares....................... 33,000
Capital in excess of par........................................ 11,795,000
Retained earnings............................................... 2,776,000
-------------
14,604,000
-------------
$ 20,351,000
=============

See notes to consolidated financial statements.

-2-

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)

2005 2004
------------- --------------

Income:
Revenues:
Leasing, including gain on sale of parking garage
of $1,057,000 in 2005 and attorneys fees
judgment of $258,000 in 2004....................... $ 1,752,000 $ 1,044,000
Petroleum storage facilities......................... 658,000 565,000
------------- --------------
2,410,000 1,609,000
Condemnation proceeds, permanent, including
interest of $244,000................................. - 1,622,000
Interest............................................... 9,000 3,000
------------- --------------
2,419,000 3,234,000
------------- --------------

Expenses:
Expenses applicable to:
Leasing.............................................. 295,000 482,000
Petroleum storage facilities......................... 459,000 432,000
General and administrative............................. 289,000 266,000
------------- --------------
1,043,000 1,180,000
------------- --------------

Income before income taxes................................ 1,376,000 2,054,000
------------- --------------

Income tax expense
Current................................................ 566,000 201,000
Deferred............................................... - 608,000
------------- --------------
566,000 809,000
------------- --------------

Net income................................................ $ 810,000 $ 1,245,000
============= ==============

Basic income per common share............................. $ .25 $ .38
============= ==============

Dividends on common stock................................. $ .03 $ .03
============= ==============

See notes to consolidated financial statements.

-3-

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)

2005 2004
----------- ------------

Cash flows from operating activities:
Net income................................................ $ 810,000 $ 1,245,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of parking garage........................ (1,057,000) -
Condemnation proceeds, permanent...................... - (1,622,000)
Depreciation.......................................... 121,000 98,000
Deferred income taxes................................. - 608,000
Other, principally net changes in receivables,
prepaids, accounts payable, accrued expenses,
deferred rental income and income taxes.............. 632,000 (133,000)
----------- ------------
Net cash provided by operating activities................. 506,000 196,000
----------- ------------
Cash flows from investing activities:
Proceeds from:
Sale of parking garage.................................. 2,500,000 -
Condemnation, permanent................................. - 1,622,000
Payments for properties and equipment..................... (78,000) (41,000)
----------- ------------
Net cash provided by investing activities................. 2,422,000 1,581,000
----------- ------------
Cash used in financing activities, payment of dividends...... (99,000) (99,000)
----------- ------------
Increase in cash and cash equivalents........................ 2,829,000 1,678,000
Cash and cash equivalents, beginning......................... 1,835,000 2,641,000
----------- ------------
Cash and cash equivalents, ending............................ $ 4,664,000 $ 4,319,000
=========== ============

Supplemental disclosures, cash paid for income taxes......... $ 86,000 $ 125,000
=========== ============

See notes to consolidated financial statements.

-4-

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)

1. BASIS OF PRESENTATION:

The accompanying consolidated financial statements have been prepared by
the Company. Certain information and note disclosures normally included in
financial statements prepared in conformity with accounting principles
generally accepted in the United States have been condensed or omitted.
These statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for the
year ended December 31, 2004. In the opinion of management, the
accompanying consolidated financial statements contain all adjustments
necessary to present fairly the financial position as of March 31, 2005
and the results of operations and cash flows for the three months ended
March 31, 2005 and 2004.

The results of operations for interim periods are not necessarily
indicative of the results to be expected for the full year.

2. USE OF ESTIMATES:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Estimates also affect the reported
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates.

3. PROPERTIES AND EQUIPMENT:

At March 31, 2005, properties and equipment consists of:

Properties on lease or held for lease, land
and land improvements........................... $ 3,956,000
-------------

Petroleum storage facilities:
Land and land improvements...................... 5,188,000
Buildings and structures........................ 1,029,000
Tanks and equipment............................. 10,584,000
-------------
16,801,000
-------------

Office equipment................................. 96,000
-------------
20,853,000
-------------
Less accumulated depreciation:
Properties on lease or held for lease........... 10,000
Petroleum storage facilities.................... 5,719,000
Office equipment................................ 85,000
-------------
5,814,000
-------------
$ 15,039,000
=============

-5-

The Company was the owner of a parking garage which had been leased to an
experienced parking operator for several years. In March 2005, the Company
sold the parking garage with a carrying value of $1,443,000 to the tenant
for $2,500,000 in cash but retained ownership of the underlying land which
is leased to the former tenant for 99 years at a current annual
contractual rental of $100,000. Consistent with other long-term land
leases, the tenant pays the real property taxes on the land, which were
$52,000 for 2004. The lease further provides for future cost-of-living
rental adjustments and periodic appraisals.

4. LITIGATION JUDGMENTS:

Disputes with Amtrak regarding condemnations:

In 1998, as part of the electrification of the Northeast Corridor,
National Railroad Passenger Corporation (Amtrak) erected towers and a
signal bridge within the air rights owned by the Company. In 1999, Amtrak
condemned a three-year temporary easement of all the air rights owned by
the Company and the Company received $335,000 from Amtrak. In 2001, Amtrak
permanently condemned the air rights and a parcel of land adjacent to the
air rights (with a carrying value of $625,000) and the Company received
$925,000 from Amtrak. The Company believed that the condemnation amounts
paid by Amtrak were inadequate and accordingly brought suit against Amtrak
in the United States District Court for the District of Rhode Island (U.
S. District Court) seeking additional compensation. In 2002, the U. S.
District Court awarded the Company $1,378,000 plus interest for additional
damages resulting from the aforementioned condemnations. In 2003, Amtrak
appealed the decision to the U.S. Court of Appeals for the First Circuit.
The First Circuit affirmed the judgment of the U.S. District Court, and in
February 2004 the Company received $1,622,000.

In 2004, Amtrak also permanently condemned a small portion of land
surrounding a pole erected by Amtrak on one of the Company's parcels. The
Company and Amtrak entered into an agreement in full settlement of this
matter for which the Company received $50,000 in September 2004.

Claim against City of Providence for attorneys fees:

In 1997, the City revalued certain of the Company's properties within the
Capital Center area in downtown Providence, Rhode Island, and reached back
six years to assess over $13,000,000 in back taxes, interest and penalties
on the properties based upon a retroactive increase in the assessed
values. These increases were not a part of a city-wide revaluation. The
Company contended that this action by the City was both unprecedented and
illegal.

In another action, the City claimed that the Company was not the owner of
a certain parcel of land in the Capital Center (Disputed Parcel), which
the Company purchased in 1989 from the State of Rhode Island subsequent to
the State's acquiring the parcel from the City. Moreover, the City
attempted to condemn the Disputed Parcel. The Company contested both the
City's claim of ownership and the City's attempt to condemn the Disputed
Parcel.

In 1999, the Rhode Island Superior Court (Superior Court) ruled in favor
of the Company and found (1) that both the City's new tax assessments and
back taxes were illegal and void, and (2) that the Company is the rightful
owner of the Disputed Parcel and that the City had no right to condemn
same. The City appealed the judgments to the Rhode Island Supreme Court
(Supreme Court), which denied and dismissed the City's appeal in 1999.

-6-

After prevailing on the merits, the Company made claim against the City
for attorneys fees.

In 2000, the City filed a motion to vacate the Superior Court and Supreme
Court judgments entered in favor of the Company which motion the Superior
Court denied and awarded the Company attorneys fees of $258,000. The City
filed an appeal in the Supreme Court. In 2004, the Supreme Court affirmed
the judgment against the City, and the Company received the payment from
the City in March 2004. No interest was awarded on the judgment.

5. DESCRIPTION OF LEASING ARRANGEMENTS:

At March 31, 2005, the Company had entered into four long-term land leases
for four separate parcels upon which improvements have been built
(developed parcels), including the lease for the land under the parking
garage discussed in Note 3. The Company has entered into three additional
long-term land leases (undeveloped parcels), one of which commenced April
1, 2004, and a second of which commenced January 1, 2005. The third lease
will not commence until construction begins.

The Company also leases parcels of land for outdoor advertising purposes
for the remaining term of 26 years and parcels of land for public parking
purposes under short-term cancellable leases.

For those leases with presently known scheduled rent increases, the
cumulative excess of straight-line over contractual rentals (considering
scheduled rent increases over the 30 to 149 year terms of the leases)
amounted to $18,886,000 through March 31, 2005. Management has concluded
that a portion of the excess of straight-line over contractual rentals
($301,000 at March 31, 2005) is realizable when payable over the terms of
the leases. In the event of tenant default, the Company has the right to
reclaim its leased land together with any improvements thereon.

The six land leases which commenced provide that the tenants pay the City
of Providence for real property taxes, which amounts are excluded from
leasing revenues and expenses applicable to leasing on the accompanying
consolidated statements of income. The real property taxes attributable to
the Company's land under these leases totaled $234,000 (six leases) for
the three months ended March 31, 2005, and $79,000 (three leases) for the
three months ended March 31, 2004.

However, under one of the six leases which commenced, the tenant is
entitled to a credit for future rents equal to a portion of the property
tax expense currently being paid by the tenant. For the three months ended
March 31, 2005, the Company is reporting the portion of the real property
taxes subject to the future credit ($38,000) as property tax expense on
the accompanying consolidated statement of income and as accrued property
taxes on the accompanying consolidated balance sheet. When the tenant
makes the tax payment, the amount of the payment will be reclassified from
accrued property taxes to deferred rental income.

At March 31, 2005, the Company has reclassified $117,000 previously
reported as property tax expense in 2004 from accrued property taxes to
deferred rental income for the payment made in January 2005 by the tenant.

Under the lease which will not commence until construction begins, the
Company receives an option payment pursuant to a month-to-month
arrangement.

-7-

6. PETROLEUM STORAGE FACILITIES:

Current operations:

The Company and Global Companies, L.L.C. (Global) are parties to an
agreement whereby the Company operates the entire Petroleum Facilities for
Global. The Company is responsible for labor, insurance, property taxes
and other operating expenses, as well as capital improvements.

In May 2003, the Company and Global entered into an amended and restated
lease agreement (Amended Agreement) which, among other things, provides as
follows: (1) the Amended Agreement will expire April 30, 2013, but will
continue thereafter on a year-to-year basis unless terminated by either
party upon ninety days' written notice; (2) Global may terminate the
Amended Agreement on or after April 30, 2008, upon one year's written
notice; (3) Global will pay a monthly fee of $150,000 effective May 1,
2004, subject to annual cost-of-living adjustments; (4) Global will
reimburse the Company for any increase in real property taxes over the
2002 level; and (5) the Company will receive an additional $.10 per barrel
for every barrel in excess of 4,000,000 barrels of throughput in any
agreement year.

For the three months ended March 31, 2005 and 2004, the Company earned
contingent revenues of $84,000 and $98,000, respectively.

In October 2004, the Company completed construction of a 152,000 barrel
tank which Global commenced leasing immediately at a monthly cost of
$35,000, which increased Global's monthly fee to $185,000, subject to
annual cost-of-living adjustments.

In May 2003, Global was granted the option to purchase the Petroleum
Facilities at any time during the term of the Amended Agreement under the
terms and conditions set forth in an option agreement. In a separate but
related agreement, Global agreed to make certain improvements at the
Wilkesbarre Pier which, for 2004, totaled approximately $300,000 and are
estimated to be $150,000 for 2005. [See Wilkesbarre Pier below].

Environmental remediation:

In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facilities which allowed the escape of a small amount of fuel
oil. All required notices were made to 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 whereby 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, and the Company continues to work
with RIDEM to design an acceptable system. The consulting engineers
estimated a total cost of $200,000 to design and install the system, which
the Company recorded as a liability in 2004. Through March 31, 2005, the
Company has expended $56,000. The Company anticipates that the remediation
will be completed as designed during the summer of 2006. It is the
Company's understanding that RIDEM will then evaluate the adequacy of the
total amount of product 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, thereby incurring additional costs.

-8-

Environmental incident:

In 2002, during testing of monitoring wells at the Petroleum Facilities,
the Company's consultant discovered free floating phase product in a
groundwater monitoring well located on that portion of the Petroleum
Facilities purchased in 2000. Preliminary laboratory analysis indicated
that the product was gasoline, which is not a product the Company ever
stored at its Petroleum Facilities. However, in the 1950's gasoline was
stored on the Company's property by a predecessor owner. The Company
commenced an environmental investigation and analysis, the results of
which indicate that the gasoline did not come from the Company's Petroleum
Facilities. The Company notified RIDEM. The Company will continue to
monitor RIDEM's investigation of this contamination to ensure that the
responsible party addresses this contamination.

Since 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):

The Pier is a deep-water pier in East Providence, Rhode Island owned by
the Company which is integral to the operation of the Petroleum
Facilities. The Pier and the Petroleum Facilities are connected by two
petroleum pipelines. In 1995, the Company and Providence and Worcester
Railroad Company (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 January of 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 is presently engaged in litigation with Properties over the
question of whether either party has 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. The suit
was commenced in New York and has been transferred to the United States
District Court for the District of Rhode Island. Properties is claiming
damages in an amount of not less than $498,000. Neither of the parties has
engaged in any discovery on the damage claims. In February 2005, the Judge
Magistrate issued a report and recommendation

-9-

recommending that the Court deny and dismiss all of the claims asserted by
the parties in the action. Both parties have appealed that recommendation
and the matter is now pending before the United States District Court
Judge.

7. SHAREHOLDERS' EQUITY:

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.

8. INCOME TAXES:

In 2004, the Company received permanent condemnation proceeds from Amtrak
which qualify for deferred reinvestment for income tax reporting purposes
whereby the Company elected to reduce the income tax basis of qualifying
subsequent acquisitions, which resulted in the Company's not currently
paying income taxes on the proceeds, subject to certain restrictions.
Accordingly, the income tax provision of the three months ended March 31,
2004, reflected such election.

Deferred income taxes are recorded based upon differences between
financial statement and tax carrying amounts of assets and liabilities.
The tax effects of temporary differences which give rise to deferred tax
assets and liabilities at March 31, 2005, were as follows:

Gross deferred tax liabilities:
Property having a financial statement basis
in excess of tax basis.......................... $ 4,259,000
Condemnation proceeds............................. 484,000
Accrued rental income............................. 120,000
-------------
4,863,000
Gross deferred tax assets............................ (335,000)
-------------
$ 4,528,000
=============

-10-

9. OPERATING SEGMENT DISCLOSURES:

The Company operates in two segments: (1) Leasing and (2) Petroleum
Storage Facilities.

The Leasing segment consists of the long-term leasing of certain of its
real estate interests in downtown Providence, Rhode Island (upon the
commencement of which the tenants are required to construct buildings
thereon, with the exception of the parking garage, and to pay real
property taxes) and locations along interstate and primary highways in
Rhode Island and Massachusetts (to a company which has constructed outdoor
advertising boards thereon). The Company anticipates that the future
development of its remaining properties will consist primarily of
long-term ground leases. Pending this development, the Company leases
these parcels for public parking purposes under short-term cancellable
leasing arrangements.

The Petroleum Storage Facilities segment consists of the operating of the
Petroleum Facilities in East Providence under an Amended Agreement
effective May 1, 2003, that expires in 2013 at a fixed monthly rate for
Global which stores and distributes petroleum products. The Amended
Agreement includes provisions to extend and additional payments based upon
throughput. (See Note 6).

The principal difference between the two segments relates to the nature of
the operations. The tenants in the leasing segment incur substantially all
of the development and operating costs of the asset constructed on the
Company's land, whereas the Company is responsible for the operating and
maintenance expenditures as well as capital improvements at the Petroleum
Facilities.

The Company makes decisions relative to the allocation of resources and
evaluates performance based on income before income taxes, excluding
interest income, permanent condemnation proceeds and certain corporate
expenses.

Inter-segment revenues are immaterial in amount. The Company did not incur
interest expense during the three months ended March 31, 2005 and 2004.

The following financial information is used for making operating decisions
and assessing performance of the Company's segments:

-11-

Petroleum
Storage
Leasing Facilities Total
------------ ------------ ------------

Three months ended March 31, 2005:

Revenues:
Contractual .......................... $ 645,000 $ 574,000 $ 1,219,000
Contingent ........................... 14,000 84,000 98,000
Option ............................... 61,000 -- 61,000
Gain on sale of parking garage ....... 1,057,000 -- 1,057,000
Noncash, excess of contractual over
straight-line rentals ................ (25,000) -- (25,000)
------------ ------------ ------------
$ 1,752,000 $ 658,000 $ 2,410,000
============ ============ ============

Property tax expense .................... $ 225,000 $ 20,000 $ 245,000
============ ============ ============

Depreciation ............................ $ 13,000 $ 107,000 $ 120,000
============ ============ ============

Income before income taxes .............. $ 1,457,000 $ 199,000 $ 1,656,000
============ ============ ============

Assets .................................. $ 4,590,000 $ 11,695,000 $ 16,070,000
============ ============ ============

Properties and equipment, additions ..... $ -- $ 75,000 $ 75,000
============ ============ ============

Three months ended March 31, 2004:

Revenues:
Contractual .......................... $ 611,000 $ 467,000 $ 1,078,000
Contingent ........................... 14,000 98,000 112,000
Option ............................... 186,000 -- 85,000
Attorneys' fees judgment ............. 258,000 -- 258,000
Noncash, excess of contractual over
straight-line rentals ................ (25,000) -- (25,000)
------------ ------------ ------------
$ 1,044,000 $ 565,000 $ 1,609,000
============ ============ ============

Property tax expense .................... $ 406,000 $ 29,000 $ 435,000
============ ============ ============

Depreciation ............................ $ 16,000 $ 81,000 $ 97,000
============ ============ ============

Income before income taxes .............. $ 562,000 $ 133,000 $ 695,000
============ ============ ============

Assets ............................... $ 5,790,000 $ 10,429,000 $ 16,219,000
============ ============ ============

Properties and equipment, additions ..... $ -- $ 133,000 $ 133,000
============ ============ ============

-12-

The following is a reconciliation of the segment information to the
amounts reported in the accompanying consolidated financial statements for
the three months ended March 31, 2005 and 2004:

2005 2004
-------------- ---------------

Income:
Revenues for operating segments.......................... $ 2,410,000 $ 1,609,000
Condemnation proceeds, permanent, including interest..... -- 1,622,000
Interest income.......................................... 9,000 3,000
--------------- ---------------
Total consolidated income............................ $ 2,419,000 $ 3,234,000
=============== ===============

Property tax expense:
Property tax expense for operating segments.............. $ 245,000 $ 435,000
Unallocated corporate property tax expense............... 1,000 1,000
--------------- ---------------
Total consolidated property tax expense.............. $ 246,000 $ 436,000
=============== ===============

Depreciation:
Depreciation for operating segments...................... $ 120,000 $ 97,000
Unallocated corporate depreciation....................... 1,000 1,000
--------------- ---------------
Total consolidated depreciation...................... $ 121,000 $ 98,000
=============== ===============

Income before income taxes:
Income for operating segments............................ $ 1,656,000 $ 695,000
Condemnation proceeds, permanent......................... -- 1,622,000
Interest income.......................................... 9,000 3,000
Unallocated corporate expenses........................... (289,000) (266,000)
--------------- ---------------
Total consolidated income before income taxes........ $ 1,376,000 $ 2,054,000
=============== ===============

Assets:
Assets for operating segments............................ $ 16,285,000 $ 16,219,000
Corporate cash and cash equivalents...................... 4,231,000 3,936,000
Other unallocated amounts................................ 12,000 4,000
--------------- ---------------
Total consolidated assets............................ $ 20,528,000 $ 20,159,000
=============== ===============

Additions to properties and equipment:
Operating segments....................................... $ 75,000 $ 133,000
Unallocated corporate additions.......................... -- --
--------------- ---------------
Total consolidated additions......................... $ 75,000 $ 133,000
=============== ===============

-13-

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD LOOKING STATEMENTS

CERTAIN PORTIONS OF THIS REPORT, AND PARTICULARLY THE MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS AND THE NOTES TO THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS, CONTAIN FORWARD-LOOKING
STATEMENTS WHICH REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS
CONCERNING FUTURE EVENTS. THE COMPANY CAUTIONS THAT THESE STATEMENTS
ARE FURTHER QUALIFIED BY IMPORTANT FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS, INCLUDING, WITHOUT LIMITATION, THE FOLLOWING: THE
ABILITY OF THE COMPANY TO GENERATE ADEQUATE AMOUNTS OF CASH; THE
COLLECTIBILITY OF THE ACCRUED RENTAL INCOME WHEN DUE OVER THE TERMS
OF THE LONG-TERM LAND LEASES; THE COMMENCEMENT OF ADDITIONAL
LONG-TERM LAND LEASES; CHANGES IN ECONOMIC CONDITIONS THAT MAY
AFFECT EITHER THE CURRENT OR FUTURE DEVELOPMENT ON THE COMPANY'S
PARCELS; THE FINAL OUTCOME OF THE WILKESBARRE PIER LITIGATION; AND
EXPOSURE TO CONTAMINATION, CLEANUP OR SIMILAR COSTS ASSOCIATED WITH
THE OPERATION OF THE PETROLEUM STORAGE FACILITIES.

1. OVERVIEW:

Critical accounting policies:

The Company believes that its revenue recognition policy for long-term
leases with scheduled rent increases (leasing segment) meets the
definition of a critical accounting policy which was discussed in the
Company's Form 10-KSB for the year ended December 31, 2004. There have
been no changes to the application of this accounting policy since
December 31, 2004.

Segments:

The Company operates in two segments, leasing and petroleum storage.

LEASING:

The leasing segment is principally devoted to the leasing of Company-owned
land in the Capital Center Project Area (Capital Center), in downtown
Providence, Rhode Island under long-term ground leases. The Company owns
approximately 18 acres in the Capital Center consisting of 11 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, 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.

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

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sole owner of the parking garage, which was leased to an experienced
parking operator at an annual rental of $189,000. In March 2005, the
Company sold the parking garage to the tenant for $2,500,000 in cash but
retained ownership of the underlying land which is leased to the former
tenant for 99 years at a current annual contractual rental of $100,000.
Consistent with other long-term land leases, the tenant pays the real
property taxes on the land, which were $52,000 for 2004. The lease further
provides for future cost-of-living rental adjustments and periodic
appraisals.

The Company first began offering parcels for lease in the late 1980's. At
March 31, 2005, four developed parcels have been leased by the Company
under long-term leases of 99 years or more (including the lease for the
land under the parking garage). Located on these parcels are a 13-story
office building, a 225-unit luxury apartment complex, a 114,000 square
foot office building, and the parking garage.

Three of the remaining parcels (undeveloped parcels) are the subject of
three leases, one of which commenced April 1, 2004, and a second of which
commenced January 1, 2005. The third lease has not commenced pending
completion of development plans. Under this lease, the Company receives an
option payment pursuant to a month-to-month arrangement. There is no
assurance that this development project will actually proceed.

The Company continues to seek developers for the remaining four parcels in
the Capital Center which contain 2.9 acres. The Company is unable to
predict when these parcels will be leased and, pending future development,
are subject to short-term leases to the parking operator.

Additionally, the Company, through a wholly-owned subsidiary, leases
certain outdoor advertising locations along interstate and primary
highways in Rhode Island and Massachusetts to Lamar Outdoor Advertising.
Presently, there are 26 locations under lease containing fifty billboard
faces. The lease expires in 2031. The term of the lease is extended for
two years for each additional location added. No locations have been added
since 2002.

PETROLEUM STORAGE FACILITIES:

The Company, through a wholly-owned subsidiary, owns a 676,500 barrel
petroleum storage facility (Petroleum Facilities) located in East
Providence, Rhode Island. The Petroleum Facilities utilize the Company's
Wilkesbarre Pier and a pipeline connecting the Wilkesbarre Pier to the
Petroleum Facilities. The Company (through this wholly-owned subsidiary)
and Global Companies, LLC (Global) are parties to an agreement whereby the
Company (through another wholly-owned subsidiary) operates the entire
Petroleum Facilities for Global at a fixed monthly rate which is subject
to annual cost-of-living adjustments. The agreement 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 agreement on or after April 30, 2008, upon one year's
written notice. The agreement includes provisions for additional payments
based upon throughput in any twelve-month period beginning on May 1 of
each year and ending on April 30 of the subsequent year and for any
increases in real property taxes. The Company bears all of the operating
costs with respect to the Petroleum Facilities, including real estate
taxes and insurance. In addition, Global was granted an option to purchase
the Petroleum Facilities at any time during the term of the agreement
under the terms and conditions set forth in an option agreement.

As described in Note 6 of Notes to Consolidated Financial Statements, the
Company was in litigation (Wilkesbarre Pier litigation) with Getty
Petroleum Marketing, Inc. and Getty Properties Corp. over the rights of
others to utilize the Wilkesbarre Pier. During 2003, the Company settled

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all litigation with Getty Petroleum Marketing, Inc. In 2003, the Company
appealed to the U. S. Court of Appeals for the First Circuit the
inconsistent judgments concerning whether the Company or Getty Properties
Corp. was responsible for the cost of the fire suppression equipment at
the Pier. In December 2004, the Company's appeal was denied.

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 and the Company continues to work
with RIDEM to design an acceptable system. The consulting engineers
estimated a total cost of $200,000 to design and install the system.
Through March 31, 2005, the Company has expended $56,000. The Company
anticipates that the remediation will be completed as designed during the
summer of 2006. It is the Company's understanding that RIDEM will then
evaluate the adequacy of the total amount of product 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 thereby incurring
additional costs.

Since 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
Petroleum Facilities.

The Company maintains what management believes to be adequate levels of
insurance. The Company notified its insurance company of the
contamination. The insurance company advised the Company that coverage is
only provided under policies in place at the time the contamination
occurs.

In 2004, the Company constructed a 152,000 barrel tank. The Company has
sufficient land to further expand the storage capacity and has obtained
all the necessary approvals from the City of East Providence and State of
Rhode Island to construct two additional 152,000 barrel tanks and is
currently assessing the possibility of future tank construction.

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The Company manages its exposure to contamination, remediation or similar
costs associated with the Petroleum Facilities through adherence to
established procedures for operations and equipment maintenance.

Changes in capital structure:

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.

2. RESULTS OF OPERATIONS:

Leasing segment:

As discussed above, in March 2005 the Company sold its parking garage for
$2,500,000, resulting in a gain of $1,057,000.

In 1997, the City of Providence revalued certain of the Company's
properties within the Capital Center area, reaching back six years to
assess over $13,000,000 in back taxes, interest and penalties based upon a
retroactive increase in the assessed values. The Company contended that
this action by the City was both unprecedented and illegal. In another
action, the City claimed that the Company was not the owner of a certain
parcel in the Capital Center and also attempted to condemn that parcel.
The Company contested both of the City's actions. In 1999, after
prevailing on the merits in both actions, the Company made claim against
the City for attorneys fees. In 2000, the Company was awarded attorneys
fees of $258,000. The City filed an appeal in the Rhode Island Supreme
Court. In January 2004, the Supreme Court affirmed the judgment against
the City, and the Company received the payment from the City in March
2004. No interest was awarded on the judgment.

Exclusive of the $1,057,000 gain on the sale of the parking garage and the
$258,000 received for the attorneys fees, for the three months ended March
31, 2005, revenue from leasing decreased $91,000 from 2004. Option
payments decreased due to the termination of an option agreement, which
was offset in part by lease payments which commenced April 1, 2004.
Expenses

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applicable to leasing decreased $187,000 from 2004 due principally to a
decrease in property taxes resulting from the commencement of long-term
land leases under which the tenant directly pays the real property taxes.

Petroleum storage:

For the three months ended March 31, 2005, revenue from petroleum storage
facilities increased $93,000 from 2004 due principally to fees for the new
152,000 barrel tank effective October 2004 and higher monthly fees
resulting from the annual cost-of-living adjustment, offset by lower
contingent revenues. Expenses applicable to petroleum storage facilities
increased $27,000 from 2004 principally due costs associated with
maintaining and monitoring the security at the petroleum storage
facilities as required by the Department of Homeland Security and higher
depreciation offset in part by lower legal fees associated with the
Wilkesbarre Pier litigation.

General:

As described in Note 4 of Notes to Consolidated Financial Statements,
certain of the Company's property adjacent to Amtrak's Northeast Corridor
in Providence, Rhode Island was condemned by Amtrak in 1999 and 2001. The
Company believed that the amounts paid by Amtrak were inadequate and made
a claim for additional condemnation proceeds. In 2002, the U. S. District
Court for the District of Rhode Island awarded the Company additional
damages of $1,378,000 plus interest. In 2003, Amtrak appealed the decision
to the U. S. Court of Appeals for the First Circuit. The First Circuit
affirmed the judgment of the U. S. District Court and in February 2004,
the Company received a payment of $1,622,000.

For the three months ended March 31, 2005, general and administrative
expenses increased $23,000 from 2004 due principally to the costs
associated with the conversion of the Class B common stock to Class A
common stock.

Liquidity:

Historically, the Company has had adequate liquidity to fund its
operations.

Under the land leases for undeveloped parcels, developers make option
payments. Under one lease, the developer made a $100,000 option payment in
December 2003, which option terminated March 31, 2004. This lease
commenced April 1, 2004, under the terms of which the Company receives an
annual contractual rental of $100,000 during the construction phase, and
the tenant commenced paying real property taxes at a current annual rate
of $232,000.

A second land lease for an undeveloped parcel commenced January 1, 2005,
under the terms of which the Company receives an annual contractual rental
equal to the option revenue it was previously receiving ($24,000).
However, the tenant pays real property taxes, commencing with the tax
payments due in January and April 2005, totaling $234,000 for which the
tenant will receive a credit against future rentals starting in 2010. The
tenant will be entitled to additional credits against future rentals for a
portion of real property taxes paid ($150,000 per year) for the years 2005
and 2006.

Under the third land lease for an undeveloped parcel which has not
commenced, the Company receives option payments pursuant to a
month-to-month arrangement. The Company has no assurance that additional
option payments will be made.

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Under one of the long-term land leases which has commenced, a scheduled
annual contractual rent increase of $100,000 became effective October
2004.

Under another long-term land lease which has commenced, during 2004 the
tenant advised the Company that its sub-tenant would vacate the entire
building by December 31, 2004, and the Company's tenant was attempting to
find a suitable replacement sub-tenant for the building. In December 2004,
the tenant filed for protection under Chapter 11 of the United States
Bankruptcy Code. At the time of the filing by the tenant, the tenant was
current in its rent. The lease provides for a scheduled annual rent
increase of $46,000 based upon a cost-of-living adjustment which became
effective February 2005. Subsequent to the filing, with the permission of
the Court, the tenant has continued to make the rental and other payments
required under the lease. Based upon documents filed by the tenant,
management believes that the tenant has sufficient cash resources to
continue to pay the rent and other amounts required to be paid under the
lease until at least September 2005.

In 2004, the Company received permanent condemnation proceeds from Amtrak
of $1,428,000, excluding interest, which qualify for deferred reinvestment
for income tax reporting purposes whereby the Company may elect to reduce
the income tax basis of qualifying subsequent acquisitions, which results
in the Company's not currently paying income taxes on the proceeds,
subject to certain restrictions. The Company filed its 2004 income tax
returns in March 2005, making such election, thereby reducing its cash
outlay for income taxes for 2004 by approximately $570,000. However, the
Company will be required to reinvest the condemnation proceeds in
qualifying assets by December 31, 2007. In 2004, the Company purchased
qualifying assets totaling $216,000.

In 2004, the Company constructed a 152,000 barrel tank at a total cost of
$1,226,000. Effective October 15, 2004, Global commenced using the new
tank at a monthly fee of $35,000, which increased Global's monthly fee to
$185,000, subject to annual cost-of-living adjustments. The Company
anticipates painting the new tank in the fall of 2005 at an estimated cost
of $92,000. The Company has obtained all the necessary approvals from the
City of East Providence and State of Rhode Island to construct two
additional 152,000 barrel tanks at the Petroleum Facilities and is
currently assessing the possibility of future tank construction.

Regulations of the Department of Homeland Security require the Company to
secure the Petroleum Facilities (including the Wilkesbarre Pier) against
possible threats by the installation of fences, barricades and similar
items. For the three months ended March 31, 2005, the Company incurred
costs of $24,000 to comply with these regulations. The Company cannot
predict what additional expenses it may incur in the future to maintain
the required security levels.

As discussed in Note 6 of Notes to Consolidated Financial Statements, in
2003, the remaining non-jury claims in the litigation with Getty were
tried and the Court ordered Getty Properties Corp. to install a new
sixteen-inch pipeline on the Pier for the Company's use and benefit.
Pursuant to an agreement with Getty Properties Corp. in the fall of 2004,
the Company installed the pipeline at a cost of $394,000. The Company
received payment from Getty Properties Corp. in February 2005.

Remaining commitments for the purchase of properties and equipment are
immaterial.

In 2004, the Company paid a dividend of $99,000 each quarter to holders of
Class A and Class B Common Stock at the rate of $.03 per share per
quarter. In addition, in December 2004, the Company paid a special
dividend of $594,000 to holders of Class A and Class B Common Stock

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at the rate of $.18 per share. In January 2005, the Company paid a
quarterly dividend of $99,000 to holders of both classes of stock. 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.

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ITEM 3. CONTROLS AND PROCEDURES

As required by Rule 13a-4 of the Securities Exchange Act of 1934 (the
"Exchange Act"), within the 90-day period prior to the filing date of this
report, the President and Treasurer carried out an evaluation of the
effectiveness of the Company's disclosure controls and procedures. Based
on that evaluation, the undersigned officers of the Company have concluded
that such disclosure controls and procedures were adequate to ensure that
information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the SEC rules and
regulations. There were no significant changes in internal controls or, to
the Company's knowledge, in other factors that could significantly affect
such internal controls, subsequent to the date of the evaluation by the
undersigned officers of the Company.

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PART II

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) INDEX OF EXHIBITS:

3.1 Amended Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Issuer's report on Form 8-K filed December 10,
2001).

3.2 By-laws, as amended (incorporated by reference to Exhibit 3(b) to
the Issuer's quarterly report on Form 10-QSB for the quarter ended
September 30, 1999).

10 Material contracts:

(a) LEASE BETWEEN METROPARK, LTD. AND COMPANY

(i) Dated January 1, 2005 (incorporated by reference to Exhibit
10(a) to the Issuer's annual report on Form 10-KSB for the
year ended December 31, 2004).

(b) MISCELLANEOUS CONTRACTS:

(i) Option Agreement to Purchase Real Property and Related Assets,
dated June 9, 2003, by and between Dunellen, LLC and Global
Companies, LLC. (incorporated by reference to Exhibit 10(b)(i)
to the Issuer's Report on Form 10-QSB/A for the quarterly
period ended June 30, 2003)

31.1 Rule 13a-14(a) Certification of 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

(b) A report on Form 8-K was filed on March 17, 2005, reporting the sale of
the Issuer's parking garage in downtown Providence, Rhode Island for
$2,500,000 in cash and, at the same time, the entering into a 99-year
ground lease for the underlying land.

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SIGNATURE

In accordance with the requirements of the Exchange Act, the Issuer caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

CAPITAL PROPERTIES, INC.

By /s/ Robert H. Eder
-----------------------------------
Robert H. Eder
Chairman of the Board and
Principal Executive Officer

By /s/ Barbara J. Dreyer
------------------------------------
Barbara J. Dreyer
Treasurer and Principal Financial Officer

DATED: April 29, 2005

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