Edgar Filing: CAPITAL PROPERTIES INC /RI/

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________________ .

Commission File Number 0-9380

CAPITAL PROPERTIES, INC.
(Name of small business issuer in its charter)

RHODE ISLAND 05-0386287
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

100 DEXTER ROAD
EAST PROVIDENCE, RHODE ISLAND 02914
(Address of principal executive offices) (ZipCode)

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

Securities registered under Section 12(b) of the Exchange Act:
CLASS A COMMON STOCK, $.01 PAR VALUE
AMERICAN STOCK EXCHANGE

Securities registered under Section 12(g) of the Exchange Act:
NONE

Check whether the Company: (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 Company was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No[ ]

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]

For the year ended December 31, 2003, the Company's revenues totaled $6,918,000.

As of March 1, 2004, the aggregate market value of the Class A voting stock held
by non-affiliates of the Company was $15,889,000, which excludes voting stock
held by directors, executive officers and holders of 5% 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 1, 2004, the Company had 3,000,000 shares of Class A Common Stock
and 299,956 shares of Class B Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company's Proxy Statement for the 2004 Annual Meeting of
Shareholders to be held on April 27, 2004, is incorporated by reference into
Part III of this Form 10-KSB.

Transitional Small Business Disclosure Format. Yes [ ] No [X]

PART I

ITEM 1. DESCRIPTION OF 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. The Company's corporate
name was changed to Capital Properties, Inc. in 1984.

BUSINESS OF COMPANY

The Company owns approximately 18 acres of land in the Capital Center Project
Area in downtown Providence, Rhode Island which it leases or is holding for
lease to third parties (see "Properties Under Long-Term Leases" and "Properties
Under Short-Term Leases," in Item 2 below). The Company is the largest single
landowner in the Capital Center Project Area but is nevertheless subject to some
measure of competition from other landowners in the vicinity of the Company's
properties.

The Company owns all of the outstanding capital stock and/or membership
interests in the following companies:

- Tri-State Displays, Inc. (through which the Company leases
land for billboards along interstate and primary highways for
outdoor advertising purposes);

- Dunellen, LLC which was formed in 2000 (through which the
Company owns the petroleum storage facilities in East
Providence, Rhode Island); and

- Capital Terminal Company (through which the Company operates
its petroleum storage facilities). (See "Petroleum Storage
Facilities" in Item 2 below.)

References hereinafter to the "Company" are, unless the context indicates
otherwise, collectively to the Company and its wholly-owned subsidiaries and its
predecessors.

MISCELLANEOUS

For information relating to the Company's dependence on one or a few major
customers, see Note 9 of Notes to Consolidated Financial Statements in Item 7
hereof.

During the last two years, no monies were expended by the Company and its
subsidiaries on material research and development activities.

Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material effect
upon the capital expenditures and competitive position of the Company. However,
certain ongoing costs are necessary due to the nature of the petroleum storage
facilities. See Note 6 of Notes to Consolidated Financial Statements in Item 7
hereof.

EMPLOYEES

On December 31, 2003, the Company employed a total of 11 full-time employees and
2 part-time employees.

ITEM 2. - DESCRIPTION OF PROPERTY

PRINCIPAL FACILITIES

The Company's principal executive offices are located at its petroleum storage
facilities at 100 Dexter Road, East Providence, Rhode Island 02914.

INVESTMENT POLICIES AND INVESTMENTS IN REAL ESTATE

The Company has no established policy for the purchase of additional developed
or undeveloped property. However, should suitable parcels become available in
the general area of the Company's current land holdings in downtown Providence,
Rhode Island, the Company would consider such an acquisition depending on
current levels of cash and the availability of financing and unused condemnation
proceeds qualifying for deferred reinvestment under the Internal Revenue Code.
Any properties acquired would most likely be leased primarily to developers
under long-term leases. The Company periodically invests its excess cash in
United States government and governmental agency obligations maturing in not
more than eighteen months.

DESCRIPTION OF REAL ESTATE AND OPERATING DATA

All of the properties described below (except the petroleum storage facilities)
are shown on a map in Exhibit 20.1 hereof, which map is incorporated herein by
reference.

All the properties described below are owned in fee by the Company. There are no
mortgages, liens or other encumbrances on such properties.

In the opinion of management, all of the properties described below are
adequately covered by insurance. Insurance is also required of all tenants, with
the Company being named as an additional insured.

Petroleum Storage Facilities - The Company holds title to approximately 10 acres
of land along the Seekonk River in East Providence, Rhode Island which are shown
on a map in Exhibit 20.2 hereof, which map is incorporated herein by reference.
The property is used and operated primarily as a petroleum storage facility
(Petroleum Facilities).

In January 1998, the Company purchased the Wilkesbarre Pier in the Port of
Providence and its deep-water berth for receiving petroleum products by
ocean-going vessels. In January 1998, the Company also purchased the perpetual
right to transport petroleum products from the Pier to its terminal property
through pipelines owned by a third party.

Petroleum Facilities is the only independent petroleum storage facility with
deep-water access in the market area. All of the petroleum storage tanks,
buildings and pier are owned by the Company.

In 1998, the Company entered into a short-term arrangement with Global
Companies, L.L.C. (Global) under which the Company operates the entire Petroleum
Facilities for Global. In 1999, the Company entered into an agreement with
Global extending the arrangement for an additional three years and in 2000, the
agreement was further extended to April 30, 2004. In June 2003, the agreement
was amended (Amended Agreement) and will now expire April 30, 2013; however,

the Amended Agreement will continue thereafter on a year-to-year basis unless
terminated by either party upon ninety days' written notice. Global may
terminate the Amended Agreement after five years upon one year written notice.
Global was also granted the option to purchase the Petroleum Facilities at any
time during the term of the Amended Agreement under certain terms and conditions
set forth in an option agreement.

The following schedule sets forth certain information on the federal income tax
basis of that portion of the petroleum terminal property which is depreciable:

Land
Improvements Buildings Tanks Equipment
------------ --------- ----- ---------

Federal income
tax basis (cost) $ 1,086,652 $ 126,562 $ 4,617,755 $ 2,686,154
Rate per year 6.67% 2.56% 20% 20%
Method 150% DB S/L 200% DB 200% DB
Life (Years) 15 39 5 5

The 2003 real estate taxes are $72,265 for the petroleum storage facilities and
$40,349 for the Wilkesbarre Pier at a $26.05 per thousand dollars of assessed
valuation tax rate.

The Company has obtained all the necessary approvals from the City of East
Providence and State of Rhode Island to construct three additional 152,000
barrel tanks. In February 2004, the Company entered into a contract to construct
one additional 152,000 barrel tank which is expected to be completed in the fall
of 2004. The Company has no present plans to construct the remaining two tanks.

Properties Under Long-Term Leases - The Company owns approximately 18 acres of
land within the Capital Center Project area in downtown Providence, Rhode
Island. (The land underlying the Parking Garage described below is also included
in this acreage.) See map in Exhibit 20.1 hereof, which map is incorporated
herein by reference.

At December 31, 2003, the Company had entered into land leases for three
separate land parcels within this area upon which improvements have been built
(developed parcels) with remaining terms of up to 139 years. These leases have
scheduled rent increases over their terms. Tenant improvements on the land
subject to these leases and the lease terms are as follows:

- Parcel 3S - A 13-story office building containing
approximately 235,000 square feet, which lease terminates in
2087.

- Parcel 5 - An 8-story apartment building containing
approximately 454,000 square feet with 225 units, which lease
terminates in 2142.

- Parcel 8 - A 4-story office building containing approximately
114,000 square feet, which lease terminates in 2090.

The Company has entered into three additional land leases (undeveloped parcels),
all of which provide a period of time within which each developer may perform
its due diligence, seek the approval of the plans for its complex from the
Capital Center Commission and enter into a tax stabilization agreement with the
City of Providence. The term of each lease commences when the developer begins
construction. There can be no assurance that each developer will be able to
satisfy the conditions precedent to proceeding with the development. The Company
is unable to determine at this time when construction will begin and therefore
the time at which the term of each lease will commence.

- Parcel 9 - In December 1998, the Company entered into a lease
for 149 years. In November 2001, this lease was terminated and
a new lease was entered into with a successor developer. In
July 2003, the successor developer assigned its interests in
the lease to GTECH Corporation, which plans to construct its
world headquarters on the parcel, containing approximately
225,000 square feet of office space and a parking garage
containing approximately 450 public parking spaces.

- Parcel 2 - In August 2000, the Company entered into a lease
for 97 years. In January 2004 this lease was assigned to a new
developer who proposes to construct two buildings containing a
total of 275 apartments, a parking garage containing 440
public parking spaces and two additional buildings for either
hotel or office use.

- Parcel 6 - In December 2002, the Company entered into a lease
for 99 years under which the developer plans to construct
several buildings containing a total of approximately 675,000
square feet of residential, office or retail space, and
parking structures which will contain sufficient spaces to
satisfy the requirements for the project.

Properties Under Short-Term Leases - The Company owns a 330-car parking garage
adjacent to a rail passenger station in downtown Providence, Rhode Island,
together with the underlying land (the Parking Garage), which is leased under a
short-term cancelable lease to a firm experienced in parking operations. The
annual rent is $174,000 ($1.14 per square foot). The federal tax cost basis of
the Parking Garage (exclusive of the underlying land) is $2,500,000, which is
being depreciated on the straight-line method at the rate of 2.5% per year over
a 40-year life. The 2003 real estate taxes are $120,427 on the Parking Garage
and $93,155 on the underlying land at a $38.82 per thousand dollars of assessed
valuation tax rate. (For a discussion of the litigation with the Federal
Railroad Administration (FRA) concerning the parking rates in the garage,
reference is made to Item 3, Legal Proceedings below.)

Parcels 3E, 3W, 4E, 4W and 6 in the Capital Center Project area and Parcels 21
and 22 immediately adjacent to this area are leased for surface parking purposes
to the same firm that leases the Parking Garage described above. The short-term
lease on Parcel 6 will terminate in part when construction on that parcel
commences. The Company continues to seek a developer for the remaining parcels.
These leases can be terminated on short notice should suitable development
opportunities arise or when construction on a parcel commences as described
above.

ITEM 3. LEGAL PROCEEDINGS

For a discussion of the litigation currently pending with an Oil Company,
reference is made to Note 6 of Notes to Consolidated Financial Statements in
Item 7 hereof.

The Company was in litigation with FRA. In 1999, the State of Rhode Island sued
the Company to block an increase of commuter parking rates charged in its
parking garage by the tenant. The U. S. District Court entered a preliminary
injunction preventing the Company's tenant from doing so without prior FRA
approval. The United States Court of Appeals for the First Circuit affirmed this
order. The Company thereafter entered into a consent judgment with the State of
Rhode Island whereby the Company's tenant is restrained from increasing certain
parking rates without FRA approval. In connection with this litigation, the
Company requested FRA approval to increase the commuter parking rates. FRA
denied this request. The Company then filed suit against FRA in the United
States Court of Claims alleging that FRA's denial constituted a breach of its
contractual obligations and seeking unspecified money damages. The Company moved
for summary judgment on its claim in September 2001 and FRA cross-moved for
Summary Judgment. The Court of Claims entered summary judgment in favor of FRA,
dismissing the Company's case. The Company appealed to the United States Court
of Appeals for the Federal

Circuit, and on March 4, 2004, the Court of Appeals affirmed the judgment of the
District Court. The Company does not intend to seek further judicial review.
While the litigation was pending, FRA partially approved several subsequent
requests by the Company to allow its tenant to increase rates at the parking
garage. The Company intends to submit further rate increase requests to FRA as
circumstances dictate.

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 2003.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES

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
---- --- ---------

2003
1st Quarter........................ 8.40 8.05 --
2nd Quarter........................ 8.90 7.90 --
3rd Quarter........................ 11.30 8.40 --
4th Quarter........................ 13.10 11.05 .03

2002
1st Quarter........................ 9.25 8.06 .03
2nd Quarter........................ 10.00 8.90 --
3rd Quarter........................ 9.40 8.87 --
4th Quarter........................ 8.75 8.25 --

Information with respect to the high and low trading prices for the Class B
Common Stock is not available because the stock is not listed on any exchange,
is not quoted by any quotation service, and there is no known market for such
Class B Common Stock.

At March 1, 2004, there were 386 holders of record of the Company's Class A
Common Stock.

In February 2002, the Company paid a quarterly dividend of $99,000 to holders of
Class A and Class B common stock at the rate of $.03 per share. However, at
subsequent quarterly meetings, the Board of Directors elected to omit the
quarterly dividend pending resolution of certain tax appeals against the City of
Providence and other matters. In October 2003 and January 2004, the Board
re-examined the situation and declared dividends on both classes of common stock
at the rate of $.03 per share, which were subsequently paid. The declaration of
future dividends and the amount thereof will depend on the Company's future
earnings, financial factors and other events.

The Company does not have any compensation plans under which its equity
securities are authorized for issuance.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 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 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 1
of Notes to Consolidated Financial Statements in Item 7 hereof. 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 (contractual amount). In subsequent years, as the tenant pays
higher rents, the multiple gradually decreases until the 57th year of
the lease, at which time the contractual amount paid by the tenant will
exceed the calculated straight-line amount. If the Company were to
report annual revenue for this lease using the straight-line amount, it
would record a significant receivable for each of the first 56 years,
which receivable

would grow to approximately $33,000,000. Management does not believe
that the Company should record a receivable that would not begin to be
collected for 56 years (turnaround date) since management could not be
assured of collection.

In 1988, management met with the 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, 2003, the receivable on this lease has grown to
approximately $14,310,000 (cumulative excess of straight-line over
contractual rentals) and management has not been able to conclude that
any portion is collectible as the turnaround date is still 41 years
away. Accordingly, the Company has not reported any portion of this
amount as leasing revenue in its consolidated financial statements and
does not anticipate that it can reach such a conclusion until the
turnaround date is closer.

By contrast, the Company's long-term lease for outdoor advertising
locations had an original term of 30 years, scheduled rent increases
where the future dollar increases were known at the time of the
commencement of the lease, and a turnaround date in the 9th year. In
this instance, management is of the opinion that the receivable is
collectible due to the closeness of the turnaround date and other
factors. Accordingly, the Company recognizes leasing revenue using the
annual straight-line amount in its consolidated financial statements
since the inception of the lease.

Although the Company's other long-term land leases provide for
scheduled rent increases, the provisions of the leases are such that
the future dollar amounts could not be calculated either at the time of
the commencement of the lease or now, as such amounts are based on
factors that are not presently known, i.e., future cost-of-living
adjustments or future appraised values. The Company is reporting the
annual rental income under these leases using the contractual amounts
in accordance with the provisions of FAS No. 13.

The Audit Committee of the Board of Directors concurs with the
Company's application of its critical accounting policy relating to
leasing revenue under long-term land leases.

Segments:

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

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, as shown on a map in Exhibit 20.1 hereof. 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, with the
exception of the parking garage.

The Company first began offering parcels for lease in the late 1980's.
As part of the construction of the Railroad Station, the Federal
Railroad Administration constructed a 330-car parking garage 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 is currently leased to an experienced parking
operator (parking operator). Three 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, a 225-unit luxury
apartment complex and a 114,000 square foot office building.

Three of the remaining parcels (undeveloped parcels) are the subject of
three leases, the term of each of which has not commenced pending
completion of development plans and closing of construction financing.

During the interim, option payments are being made by the developers.
Under one of the leases, the developer made a series of option
payments, the last of which was paid in December 2003. This option will
terminate March 31, 2004. Under the other two leases, the Company
receives option payments pursuant to a month-to-month arrangement.
There is no assurance that any one or more of these development
projects 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.

Pending future development or commencement of the leases, five of the
parcels 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 an outdoor advertising
company. 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. The Company
added three locations in 2002; no locations were added in 2003.

Petroleum storage facilities:

The Company, through a wholly-owned subsidiary, owns a 524,500 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 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 after five years upon one year
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 at the 2002 level and insurance charges. 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.

Pursuant to an agreement (Agreement) with another company (Oil
Company), which afforded the Oil Company the right to use the
Wilkesbarre Pier, the Company received payments of

$185,000 in 2002 and $45,000 for the first quarter of 2003, at which
time the Agreement terminated.

As described in Note 6 of Notes to Consolidated Financial Statements in
Item 7 hereof, the Company was in litigation (Wilkesbarre Pier
litigation) with Oil Company and a related party (Other Company) over
the Agreement and the rights of others to utilize the Wilkesbarre Pier.
During 2003, the Company settled all litigation with Oil Company. In
October 2003, the Company appealed to the U. S. Court of Appeals for
the First Circuit the inconsistent judgments concerning whether the
Company or Other Company is responsible for the cost of the fire
suppression equipment at the Pier. Neither Oil Company nor Other
Company filed an appeal, and a hearing and decision is anticipated in
2004.

In March 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
location of what is now the Company's Petroleum Facilities. The Company
notified the State of Rhode Island Department of Environmental
Management (RIDEM). The Company will continue to monitor RIDEM's
investigation of this contamination to ensure that the responsible
party addresses this contamination.

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

In 2002, the Company incurred costs totaling $102,000 principally for
the initial investigation and laboratory analysis. 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
Petroleum Facilities.

In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facilities which allowed the escape of a small amount of fuel
oil. All required notices were made to RIDEM. In 2000, the tank was
demolished and testing of the groundwater indicated that there 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 December 2002, the Company
determined that it would no longer incur significant costs in
connection with the implementation of this monitoring plan and reversed
into income a previously recorded payable of $50,000. In the spring of
2003, RIDEM decided that the passive monitoring system previously
approved was not sufficient and is requiring the Company to install an
active remediation system for the removal of product from the
contaminated site. The Company anticipates installing the system in the
spring of 2004 at an estimated cost of $50,000. The Company anticipates
that the ongoing cost of meeting its obligations under the new
remediation plan will not be material.

The Company has sufficient land to expand the storage capacity and has
obtained all the necessary approvals from the City of East Providence
and State of Rhode Island to construct three additional 152,000 barrel
tanks. In February 2004, the Company entered into a contract to
construct one additional 152,000 barrel tank at an estimated cost of
$1,300,000, which

construction will be completed in the fall of 2004. The Company has no
present plans to construct the remaining two tanks.

The Company manages its exposure to contamination, cleanup or similar
costs associated with the petroleum storage facilities through
adherence to established procedures for operations and equipment
maintenance.

Changes in capital structure:

In 2001, the shareholders of the Company approved a change in its
capital structure to create three new classes of stock, Class A Common
Stock, Class B Common Stock and Excess Stock. The former common stock
has been reclassified to Class A, 3,000,000 shares of which are
outstanding. In addition, in December 2001, the Company issued in the
form of a stock dividend one Class B share for each ten Class A shares
held, resulting in the issuance of 299,956 Class B shares. The Company
further amended its Articles of Incorporation to prohibit shareholders
from acquiring more than a 5% interest in the Company and to prohibit
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 was to provide the Company with the necessary flexibility to
qualify as a real estate investment trust (REIT). The Company has not
decided to make an election to be taxed as a REIT and, depending on
future circumstances, may never do so. In the event that the Company
elects to become a REIT, the holders of Class A common stock would be
entitled to elect one-third of the Company's Board of Directors, with
the balance of the Directors to be elected by the owners of the Class B
common stock. If the Company does not make an election to be taxed as a
REIT on or before March 31, 2005, the restrictions on share ownership
will lapse and the shares of Class B Common Stock will automatically be
converted into shares of Class A Common Stock on a one for one basis.

2. RESULTS OF OPERATIONS:

Leasing segment:

As described in Note 2 of Notes to Consolidated Financial Statements in
Item 7 hereof, in each year since 1995 (with the exception of year
2000), the Company appealed the real property taxes assessed against
certain of the parcels of land owned by it in the City of Providence.
In August 2003 the Company and the City engaged in mediation in an
effort to resolve all property tax disputes. In September 2003, the
Company and the City agreed to an omnibus settlement pursuant to which
the City paid the Company $1,700,000 in settlement of all litigation
resulting from property tax appeals.

Exclusive of the property tax settlement, revenue from leasing for 2003
increased 15% from 2002 due principally to higher option payments
received on those leases which will not commence until construction
begins, renewals of short-term parking leases, and the commencement of
contingent rentals relating to one developed parcel. Exclusive of a
$92,000 settlement of an electricity issue in the Company's parking
garage with Amtrak in 2002, expenses applicable to leasing remained at
the 2002 level. An increase in property tax expense was offset in part
by a decrease in professional fees.

Petroleum storage facilities segment:

Revenue from petroleum storage facilities for 2003 increased 9% from
2002 principally resulting from higher contingent revenues due to a
colder winter and higher monthly fees under the Amended Agreement
effective May 1, 2003, offset in part by the March 31, 2003 termination
of the agreement with Oil Company for the use of the Wilkesbarre Pier.
Exclusive of the $100,000

for the verdict against the Company in connection with the Wilkesbarre
Pier litigation in 2002, expenses applicable to petroleum storage
facilities for 2003 decreased 6% from 2002 principally due to a
decrease in legal fees associated with the litigation offset in part by
an increase in repairs and maintenance expense. For 2003 and 2002, the
legal fees in connection with the litigation were $315,000 and
$690,000, respectively.

General:

Exclusive of $94,000 of interest on income tax refunds which the
Company received in 2002, interest income for 2003 remained
approximately at the 2002 level.

General and administrative expenses for 2003 increased 10% from 2002
due principally to higher professional fees and an increase in payroll
and related costs.

Due to the inability to carryback state income tax losses, the income
tax provision for 2002 does not bear the customary relationship to the
pretax loss.

Liquidity:

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

As described in Note 3 of Notes to Consolidated Financial Statements in
Item 7 hereof, certain of the Company's property adjacent to Amtrak's
Northeast Corridor in Providence, Rhode Island was condemned by Amtrak
in 1999 and 2001. The Company believed that the amounts paid by Amtrak
were inadequate and made a claim for additional condemnation proceeds.
In November 2002, the U. S. District Court for the District of Rhode
Island awarded the Company additional damages of $1,378,000 plus
interest. In February 2003, Amtrak appealed the decision to the U. S.
Court of Appeals for the First Circuit. In January 2004, 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.

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
anticipates payment from the City in March 2004. No interest was
awarded on the judgment.

As a part of the omnibus property tax settlement with the City,
commencing in 2004 the assessed values have been set for two of the
parcels which will result in future annual decreases in property tax
expense of approximately $315,000. With respect to the remaining
parcels, no agreement as to assessed value was reached with the City
and there can be no assurance that assessments as of December 31, 2003
and subsequent assessments will be satisfactory to the Company. To
date, all of the Company's long-term leases which have commenced
require the tenant to pay all real property taxes. The three long-term
leases which have not commenced also require the tenant to pay all real
property taxes upon commencement of the lease, at which time the tenant
will no longer make option payments but will commence paying
contractual rent, which is minimal during the construction and lease-up
phases of the project. The total amount of the taxes on these three
parcels for 2003 was $1,071,000. The Company has no reason to believe
that future leases will not contain a similar requirement.

Under the three land leases which have not commenced, option payments
are being made by the developers. Under the lease with GTECH, the
developer made a $100,000 option payment in December 2003, which option
will terminate March 31, 2004. Under the other two leases which have
not commenced, the Company receives option payments pursuant to
month-to-month arrangements. The Company has no assurance that
additional option payments will be made.

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

Under another long-term land lease which has commenced, a scheduled
rent increase based upon a cost-of-living adjustment will become
effective February 2005; the Company estimates that the annual increase
will be approximately $40,000. The tenant has advised the Company that
its tenant will vacate the entire building by December 31, 2004. The
Company has also been advised that its tenant is engaged in finding a
suitable replacement tenant for the building.

The Company has been adversely impacted by the cost of the Wilkesbarre
Pier litigation, but the Company anticipates future legal fees in
connection with the litigation will be lower.

In 1999, the Company received permanent condemnation proceeds from the
State of Rhode Island which qualified for deferred reinvestment for
income tax reporting purposes whereby the Company may elect to reduce
the income tax basis of qualifying subsequent acquisitions, subject to
certain restrictions. In February 2002, the Company effected a
qualifying purchase with a consolidated subsidiary which permitted it
to amend its 1999 federal and state income tax returns to claim refunds
totaling $568,000 with respect to condemnation proceeds previously
taxed. For federal income tax reporting purposes, the Company reported
a loss for 2001 and filed a carryback claim that resulted in a refund
of federal income taxes previously paid for years 1996 through 1999 in
the amount of $607,000. The Company received all of these refunds plus
interest in 2002.

For income tax reporting purposes, the Company reported a tax loss for
2002 and filed a carryback claim that resulted in a refund of federal
income taxes previously paid in the amount of $372,000. With this
refund, the Company have recovered substantially all federal income
taxes paid during the carryback period.

The additional Amtrak condemnation proceeds of $1,378,000 which the
Company received in February 2004 also qualify for deferred
reinvestment for income tax reporting purposes. The Company has until
the filing of its 2004 income tax returns to make this election. Should
the Company so elect, its cash outlay for income taxes for 2004 would
be reduced by approximately $550,000. However, the Company would be
required to reinvest the condemnation proceeds in qualifying assets by
December 31, 2007. Whether or not the Company elects deferred
reinvestment, it anticipates reporting taxable income for 2004,
requiring cash outlays for income taxes.

In February 2002, the Company paid a quarterly dividend of $99,000 to
holders of Class A and Class B common stock at the rate of $.03 per
share. However, at subsequent quarterly meetings, the Board of
Directors elected to omit the dividend pending resolution of the
Company's tax appeals against the City of Providence and other matters.
In October 2003 and January 2004, the Board re-examined the situation
and declared dividends on both classes of stock at the rate of $.03 per
share, which were subsequently paid. The declaration of future
dividends and the amount thereof will depend on the Company's future
earnings, financial factors and other events.

The Company has obtained all the necessary approvals from the City of
East Providence and State of Rhode Island to construct three additional
152,000 barrel tanks at the Petroleum Facilities. In February 2004, the
Company entered into a contract to construct one additional

tank at an estimated total cost of $1,300,000, which is expected to be
completed in the fall of 2004. The Company expects to pay for the tank
with available cash. The agreement with Global grants it the right to
use the new tank at a monthly fee of approximately $35,000. In the
event Global does not elect to use the tank, the Company believes it
will be able to contract with another company to use the tank. The
Company has no present plans to build the two additional tanks.
Remaining commitments for the purchase of properties and equipment are
immaterial.

In management's opinion, the Company should be able to generate
sufficient amounts of cash to meet all of its anticipated obligations.
In the event temporary additional liquidity is required, the Company
believes that a line of credit or other arrangements could be obtained
by pledging some or all of its unencumbered assets as collateral.

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

Lefkowitz, Garfinkel, Champi & DeRienzo P.C.
Certified Public Accountants
10 Weybosset Street
Suite 700
Providence, Rhode Island 02903

INDEPENDENT AUDITORS' REPORT

Board of Directors
Capital Properties, Inc.
East Providence, Rhode Island

We have audited the accompanying consolidated balance sheet of Capital
Properties, Inc. and subsidiaries as of December 31, 2003, and the
related consolidated statements of income (loss) and retained earnings,
and cash flows for the years ended December 31, 2003 and 2002. These
financial statements 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 auditing standards generally
accepted in the 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. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as 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, 2003, and
the results of their operations and their cash flows for the years
ended December 31, 2003 and 2002, in conformity with accounting
principles generally accepted in the United States.

/s/ Lefkowitz, Garfinkel, Champi & DeRienzo P.C.

February 26, 2004

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003

ASSETS

Properties and equipment (net of accumulated depreciation) ........... $ 14,879,000
Cash and cash equivalents ............................................ 2,641,000
Receivables, tenant and other ........................................ 200,000
Accrued rental income ................................................ 417,000
Prepaid and other .................................................... 274,000
-------------
$ 18,411,000
=============
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Accounts payable and accrued expenses:
Property taxes .................................................. $ 1,016,000
Other ........................................................... 308,000
Income taxes:
Current ......................................................... 98,000
Deferred, net ................................................... 3,667,000
-------------
5,089,000
-------------

Commitment (Note 4)

Shareholders' equity (Note 7):
Class A common stock, $.01 par; authorized 6,000,000 shares;
issued and outstanding 3,000,000 shares ......................... 30,000
Class B common stock, $.01 par; authorized 300,000 shares;
issued and outstanding 299,956 shares ........................... 3,000
Excess stock, $.01 par; authorized 1,000,000 shares; none issued
and outstanding ................................................. --
Capital in excess of par .......................................... 11,795,000
Retained earnings ................................................. 1,494,000
-------------
13,322,000
-------------
$ 18,411,000
=============

See notes to consolidated financial statements.

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2003 AND 2002

2003 2002
------------- -------------

Income:
Revenues:
Leasing, including property tax settlement of
$1,700,000 in 2003 ....................................... $ 4,890,000 $ 2,778,000
Petroleum storage facilities ................................ 2,021,000 1,857,000
------------- -------------
6,911,000 4,635,000

Interest ..................................................... 7,000 103,000
------------- -------------
6,918,000 4,738,000
------------- -------------
Expenses:
Expenses applicable to:
Leasing ..................................................... 2,329,000 2,416,000
Petroleum storage facilities ................................ 2,036,000 2,271,000
General and administrative ................................... 1,093,000 998,000
------------- -------------
5,458,000 5,685,000
------------- -------------

Income (loss) before income taxes ............................... 1,460,000 (947,000)
------------- -------------

Income tax expense (benefit):
Current ...................................................... 428,000 (955,000)
Deferred ..................................................... 148,000 681,000
------------- -------------
576,000 (274,000)
------------- -------------

Net income (loss) ............................................... 884,000 (673,000)

Retained earnings, beginning .................................... 709,000 1,481,000

Dividends on common stock ($.03 per share) ...................... (99,000) (99,000)
------------- -------------

Retained earnings, ending ....................................... $ 1,494,000 $ 709,000
============= =============

Basic income (loss) per share ................................... $ .27 $ (.20)
============= =============

See notes to consolidated financial statements.

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 AND 2002

2003 2002
------------- --------------

Cash flows from operating activities:
Net income (loss)............................................... $ 884,000 $ (673,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.................................................. 413,000 418,000
Accrued rental income......................................... 63,000 (24,000)
Deferred income taxes......................................... 148,000 681,000
Changes in assets and liabilities:
Increase in:

Prepaid and other........................................... (6,000) (58,000)
Current income taxes payable................................ 98,000 --
Accounts payable and accrued expenses....................... -- 278,000
Decrease in:

Receivables................................................. 255,000 179,000
Accounts payables and accrued expenses...................... (484,000) --
------------- --------------
Net cash provided by operating activities....................... 1,371,000 801,000

Cash used in investing activities, payments for
properties and equipment........................................ (264,000) (236,000)

Cash used in financing activities, payment of dividends............ (99,000) (99,000)
------------- --------------

Increase in cash and cash equivalents............................. 1,008,000 466,000
Cash and cash equivalents, beginning............................... 1,633,000 1,167,000
------------- --------------
Cash and cash equivalents, ending.................................. $ 2,641,000 $ 1,633,000
============= ==============

Supplemental disclosures:
Cash paid or received for income taxes:
Cash paid...................................................... $ 343,000 $ 7,000
============= ==============
Refunds received............................................... $ 381,000 $ 1,198,000
============= ==============
Cash paid for interest (Note 4)................................. $ 65,000 $ --
============= ==============

Non-cash investing activities:
As discussed in Note 6, in 2002 the Company reclassified as properties and
equipment $197,000 previously reported as a receivable.

See notes to consolidated financial statements.

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003 AND 2002

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of presentation and principles of consolidation:

The accompanying consolidated financial statements include the accounts
of Capital Properties, Inc. and its wholly-owned subsidiaries,
Tri-State Displays, Inc., Capital Terminal Company and Dunellen, LLC
(collectively referred to as "the Company"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.

Description of business:

The Company operates in two segments: (1) the leasing of certain of its
real estate interests in downtown Providence, Rhode Island, and
locations along interstate and primary highways in Rhode Island and
Massachusetts for outdoor advertising purposes; and (2) the operation
of its petroleum storage facilities (Petroleum Facilities) in East
Providence, Rhode Island.

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.

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, 2003, cash equivalents consisted of a short-term uninsured
repurchase agreement which the Company routinely purchases, totaling
$2,112,000.

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.

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.

Leasing and option revenue:

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 terms (30 to 149 years). In accordance with the
provisions of FAS No. 13 (Accounting for Leases) and certain of its
interpretations, the Company is recognizing leasing revenue on the
straight-line basis over the terms of the leases; however, the Company
does not report as income 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.

The Company reports option revenue when earned.

Contingent revenue:

The Company reports contingent revenue in the period in which the
factors occur on which the contingent payments are based.

Litigation and condemnation revenue:

The Company recognizes revenue resulting from litigation and from
permanent condemnations in the period in which the cash is received.

Income taxes:

The Company and its subsidiaries file consolidated income tax returns.

Income taxes are provided based on income reported for financial
statement 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.

2. SETTLEMENT OF CITY OF PROVIDENCE PROPERTY TAX DISPUTE:

In each year since 1995 (with the exception of the year 2000), the
Company appealed the real estate taxes assessed against one or more of
the parcels of land owned by it in the City of Providence (the City).
With respect to certain years, the appeals were heard by the Providence
Board of Assessment Review and in each case denied. The Company
appealed each such denial to the Rhode Island Superior Court. With
respect to the remaining years, the Providence Board of Assessment
Review never scheduled a hearing on the appeals.

In August 2003 the Company and the City engaged in mediation in an
effort to resolve all property tax disputes. In September 2003, the
Company and the City agreed to an omnibus settlement pursuant to which
the City paid the Company $1,700,000 in settlement of all litigation
resulting from tax appeals.

The omnibus settlement also set the assessed values for two parcels in
the Capital Center Area which will result in future annual decreases in
real property taxes of approximately $315,000. With respect to the
remaining parcels, no agreement as to assessed value has been reached
with the City and there can be no assurance that assessments as of
December 31, 2003 and subsequent assessments will be satisfactory to
the Company.

3. LITIGATION JUDGMENTS RENDERED IN 2004:

Dispute with Amtrak:

During the 1980's, the Company, the State of Rhode Island, the City of
Providence and the National Railroad Passenger Corporation (Amtrak)
each conveyed parcels of land in Capital Center so that each party had
the land it needed for its designated functions within Capital Center.
As part of this arrangement, the Company was conveyed approximately 1.9
acres of air rights over Amtrak's Northeast Corridor, which rights
began 19.3 feet above the top of rail. Following that conveyance, the
railroad station and the Company's adjacent parking garage were
constructed and partially financed by the Federal Railroad
Administration (FRA).

Many of the facilities needed to service the railroad station were
built within the confines of the Company's parking garage parcel. Over
the years, the Company did not charge Amtrak for this intrusion on its
property; and over the years Amtrak assumed the cost of electricity
provided to the parking garage. In 1997, Amtrak unilaterally refused to
pay for the electricity, and the Company brought suit in the United
States District Court for the District of Rhode Island (U. S. District
Court) seeking an order requiring Amtrak to remove its facilities from
the parking garage parcel.

In 1998, as part of Amtrak's electrification of the Northeast Corridor,
Amtrak erected towers and a signal bridge within the air rights (the
tops of which vary in height between 27 and 42 feet above the top of
rail).

In July 1999, Amtrak condemned a three-year temporary easement of all
the air rights owned by the Company retroactive to August 1998. In
October 1999, the Company received from Amtrak $335,000, the sum
estimated by Amtrak to be just compensation for the property taken.

In 2001, Amtrak permanently condemned the air rights and a parcel of
land adjacent to the air rights (with a carrying value of $625,000) for
which the Company received from Amtrak $925,000, the amount estimated
by Amtrak to be just compensation for the air rights and property
taken. The Company believed that the condemnation amounts paid by
Amtrak were inadequate and accordingly brought suit in the U. S.
District Court against Amtrak seeking additional compensation.

In 2002, the Company paid $92,000 to Amtrak in full settlement of all
claims for electricity used in the parking garage from 1988 to 1997,
which amount is included in expenses applicable to leasing on the
accompanying consolidated statement of loss and retained earnings for
the year ended December 31, 2002. In 2003, the Company and Amtrak
entered into a reciprocal cross easement agreement relative to all
encroachments.

In November 2002, the consolidated condemnation case was tried in the
U.S. District Court and the Company was awarded additional damages
resulting from the aforementioned condemnations of $1,378,000 plus
interest. In February 2003, Amtrak appealed the decision to the U. S.
Court of Appeals for the First Circuit. In January 2004, 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.

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.

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 January
2004, the Supreme Court affirmed the judgment against the City, and the
Company anticipates payment from the City in March 2004. No interest
was awarded on the judgment.

4. PROPERTIES AND EQUIPMENT AND COMMITMENT:

At December 31, 2003, properties and equipment consists of:

Properties on lease or held for lease:
Land and land improvements .................... $ 3,740,000
Parking garage ................................ 2,500,000
-------------
6,240,000
-------------

Petroleum storage facilities:

Land and land improvements ................... 5,106,000
Buildings and structures ..................... 776,000
Tanks and equipment .......................... 9,013,000
-------------
14,895,000
-------------

Office equipment ................................ 84,000
-------------
21,219,000
-------------

Less accumulated depreciation:

Properties on lease or held for lease ........ 991,000
Petroleum storage facilities ................. 5,270,000
Office equipment ............................. 79,000
-------------
6,340,000
-------------
$ 14,879,000
=============

Under a 1990 agreement with the State of Rhode Island, the Company was
obligated to pay the State $158,000 for the construction of certain
improvements in the Capital Center Project area. In December 1999, the
Company attempted to tender the $158,000 to the State in satisfaction
of its obligation, which amount was reported as an addition to
properties and equipment in that year. Subsequently, the State claimed
that the Company owed interest in the amount of $130,000, which the
Company disputed. In July 2000, the Company and the State reached an
agreement whereby the Company agreed to pay a total of $65,000 in
interest, which amount was accrued in 2000. The State was unable to
locate the original note and to deliver a discharge of

the mortgage held by it with respect to this property. The Company
commenced proceedings against the State in the Rhode Island Superior
Court seeking an order from the Superior Court decreeing, upon payment
of the $223,000, the Company would be discharged from all
responsibility under the note and the note would be paid in full. In
September 2003, the Company paid the State the $223,000 and a consent
judgment was entered in Superior Court discharging and canceling the
note and mortgage.

The Company has obtained all the necessary approvals from the City of
East Providence and State of Rhode Island to construct three additional
152,000 barrel tanks at the petroleum storage facilities. In February
2004, the Company entered into a contract to construct one additional
152,000 barrel tank at an estimated total cost of $1,300,000, which is
expected to be completed in the fall of 2004. The Company expects to
pay for the tank with available cash.

5. DESCRIPTION OF LEASING ARRANGEMENTS:

At December 31, 2003, the Company had entered into six long-term land
leases covering six land parcels; of these leases, three will not
commence until construction begins.

The Company also leases various parcels of land for outdoor advertising
purposes for remaining terms of up to 28 years and for public parking
purposes under short-term cancellable leases.

For those leases with presently known scheduled rent increases, the
cumulative excess of straight-line over contractual rentals
(considering scheduled rent increases over the 30 to 149 year terms of
the leases) amounted to $15,556,000 through December 31, 2003.
Management has concluded that a portion of the excess of straight-line
over contractual rentals ($417,000 at December 31, 2003) is realizable
when payable over the terms of the leases.

Minimum future contractual rental payments to be received from
noncancellable leases as of December 31, 2003 are:

Year ending December 31,
2004................................... $ 1,623,000
2005................................... 1,666,000
2006................................... 1,615,000
2007................................... 1,609,000
2008................................... 1,609,000
2009 to 2142........................... 183,107,000
--------------
$ 191,229,000
==============

In the event of tenant default, the Company has the right to reclaim
its leased land together with any improvements thereon.

The three long-term land leases which have commenced provide that the
tenants pay the City of Providence for real property taxes, which
amounts are excluded from leasing revenues and expenses applicable to
leasing on the accompanying consolidated statements of income (loss)
and retained earnings. The real property taxes attributable to the
Company's land under these three leases totaled $352,000 and $330,000
for the years ended December 31, 2003 and 2002, respectively.

Under one of the long-term land leases which has commenced, effective
April 1, 2003, the Company receives contingent rental based upon a
fixed percentage of gross revenue received by the tenant, which totaled
$43,000 for the year ended December 31, 2003.

The lease pertaining to outdoor advertising provides that the Company
receive contingent rentals based upon a fixed percentage of the total
annual revenue received by the tenant provided such

revenue exceeds the contractual base payment. Contingent rental income
totaled $47,000 and $57,000 for the years ended December 31, 2003 and
2002, respectively.

Under the three land leases which will not commence until construction
begins, option payments are being made by the developers. Under one of
the leases, the developer made a series of option payments, the last of
which was paid in December 2003 in the amount of $100,000. This option
will terminate March 31, 2004. Under the other two leases, the Company
receives option payments pursuant to month-to-month arrangements.

6. PETROLEUM STORAGE FACILITIES:

Current operations:

The Company and a petroleum distribution company (Petroleum Company)
are parties to an agreement whereby the Company operates the entire
Petroleum Facilities for the Petroleum Company. The Company is
responsible for labor, insurance, property taxes and other operating
expenses, as well as capital improvements. Through April 30, 2003, the
agreement provided for a monthly fee which increased annually by 4.5%
($117,000 effective May 1, 2002), as well as an additional $.10 per
barrel for every barrel in excess of 2,000,000 barrels of throughput in
any agreement year (contingent revenues). For the agreement year ended
April 30, 2003, throughput exceeded 2,000,000 barrels in December 2002.
For the agreement year ended April 30, 2002, throughput exceeded
2,000,000 barrels in January 2002. For the years ended December 31,
2003 and 2002, the Company earned contingent revenues of $265,000 and
$188,000, respectively.

Effective May 1, 2003, the Company and Petroleum Company entered into
an amended and restated lease agreement (Amended Agreement) which,
among other things, provides as follows: (1) the Amended Agreement will
expire April 30, 2013, but will continue thereafter on a year-to-year
basis unless terminated by either party upon ninety days' written
notice; (2) Petroleum Company may terminate the Amended Agreement after
five years upon one year written notice; (3) a monthly fee of $147,000
subject to annual cost of living adjustments; (4) Petroleum Company
will reimburse the Company for any increase in real property taxes over
the 2002 level; and (5) the Company will receive an additional $.10 per
barrel for every barrel in excess of 4,000,000 barrels of throughput in
any agreement year. For the agreement year ending April 30, 2004,
throughput exceeded 4,000,000 barrels in February 2004. Also effective
May 1, 2003, Petroleum Company was granted the option to purchase the
Petroleum Facilities at any time during the term of the Amended
Agreement under the terms and conditions set forth in an option
agreement. In a separate but related agreement, Petroleum Company
agreed to make certain capital improvements at the Wilkesbarre Pier.
[See Wilkesbarre Pier below].

Environmental incidents:

For the year ended December 31, 2002, the Company incurred costs
totaling $102,000 during its initial investigation and laboratory
analysis, which costs are included in expenses, petroleum storage
facilities on the accompanying consolidated statement of loss and
retained earnings for the year ended December 31, 2002. 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
Petroleum Facilities.

In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facilities which allowed the escape of a small amount of fuel
oil. All required notices were made to RIDEM. In 2000, the tank was
demolished and testing of the groundwater indicated that there 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 December 2002, the Company
determined that it would no longer incur significant costs in
connection with the implementation of this monitoring plan and reversed
into income a previously recorded payable of $50,000. In the spring of
2003, RIDEM decided that the passive monitoring system previously
approved was not sufficient and is requiring the Company to install an
active remediation system for the removal of product from the
contaminated site. The Company anticipates installing the system in the
spring of 2004 at an estimated cost of $50,000, at which time this
amount will be included in properties and equipment on the Company's
consolidated balance sheet. The Company anticipates that the ongoing
cost of meeting its obligations under the new remediation plan will not
be material.

Wilkesbarre Pier:

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 Petroleum Facilities. The Pier and the Petroleum Facilities are
connected by two petroleum pipelines. In 1995, the Company and
Providence and Worcester Railroad Company (Railroad) (the then owner of
the Pier) entered into an agreement which, among other provisions, gave
the Company the right to acquire the Pier for $1. The Company and
Railroad have a common controlling shareholder.

Effective January 1, 1998, Railroad and a company which uses the Pier
to off-load primarily gasoline from ships to its terminal (Oil Company)
entered into an agreement (the Agreement) whereby Oil Company agreed to
pay annual fees for five years ($185,000 in 2002). In January 1998, the
Company exercised its right and acquired the Pier, and Railroad
assigned its rights under the Agreement to the Company. The Agreement
was extended to March 31, 2003 at a monthly fee of $15,000, which
Agreement terminated at that time. Under the terms of the Agreement,
the owner of the Pier was not required to make any repairs to the Pier.

In May 2000, the Fire Department of the City of East Providence (Fire
Department) notified the Company, Oil Company and another company then
related to Oil Company (Other Company) that there was a lack of
adequate fire protection at the Pier and ordered them to install
certain equipment and facilities. The Company demanded that Other
Company take steps to commence and complete the performance of all work
and to supply all material required to satisfy the Fire Department. In
2000 and 2001, the Company incurred costs totaling $197,000, which were
reported as a receivable on its consolidated balance sheets, since the
Company anticipated being reimbursed by Other Company. In 2002, the
Company incurred additional costs totaling $175,000 to complete the
installation.

In August 2000, Oil Company and Other Company (collectively Plaintiffs)
filed a lawsuit against the Company in the United States District Court
for the District of Rhode Island (the Court) claiming fraud on the part
of Railroad and sought rescission of the Agreement and other
agreements. The Company filed counterclaims against Other Company,
including one for damages based on Other Company's failure to comply
with the order and direction of the Fire Department as well as the
failure of Other Company to comply with certain other agreements.
Plaintiffs amended their complaint in June 2001 to include additional
claims. Following the close of discovery, the Court dismissed all the
fraud claims. The Court later bifurcated the trial of the jury claims
for damages and the non-jury claims for declaratory and injunctive
relief. The jury claims were tried in December 2002.

The jury returned a verdict against the Company in the amount of
$100,000, which amount was recorded in expenses applicable to petroleum
storage facilities in the accompanying consolidated statement of loss
and retained earnings for the year ended December 31, 2002. The Company
filed a post-trial motion requesting that the Court vacate the verdict.
In September 2003, judgment was entered against the Company in the
amount of $100,000 plus $27,000 in interest through that date. To avoid
further litigation of the matter, the Company and the Oil Company
agreed to settle this claim for $80,000, which amount the Company paid
to Oil Company in November 2003; the balance of $20,000 is reported as
a reduction to expenses applicable to petroleum storage facilities on
the accompanying consolidated statement of income and retained earnings
for the year ended December 31, 2003. There is no remaining litigation
outstanding with Oil Company.

The Court entered judgment as a matter of law against the Company on
the Company's claim that Other Company was obligated to pay for the
installation of certain fire suppression equipment on the Pier.
Accordingly, in 2002 the Company reclassified as properties and
equipment the previously reported receivable in the amount of $197,000
and capitalized as properties and equipment the $175,000 of costs
incurred in 2002.

In June 2003, the remaining non-jury claims were tried and in September
2003 the Court ordered Other Company to install a new sixteen-inch
pipeline on the Pier for the Company's use and benefit. The Company
anticipates that the pipeline will be installed in the summer of 2004.
The Court rejected Other Company's claim that it was not obligated to
pay for the fire suppression equipment on the Pier as well as Other
Company's claim that the Company remove or relocate the fire
suppression equipment. However, the Court also held that Oil Company
and Other Company had the right to use the north side of the Pier
pursuant to a deed in 1941. The Court declined the Company's request
that it declare what are the corresponding obligations attached to that
right.

In October 2003, the Company appealed the inconsistent judgments
concerning which party is responsible for the cost of the fire
suppression equipment at the Pier to the U. S. Court of Appeals for the
First Circuit. Neither Oil Company nor Other Company filed an appeal,
and a hearing and decision is anticipated in 2004.

For the years ended December 31, 2003 and 2002, the Company incurred
legal fees in connection with this litigation of $315,000 and $690,000,
respectively, which amounts are included in expenses applicable to
petroleum storage facilities on the accompanying consolidated
statements of income (loss) and retained earnings for the years ended
December 31, 2003 and 2002.

Pursuant to a 1986 Guaranty and Indemnity Agreement, the Company filed
a lawsuit in September 2002 against Other Company and Other Company's
parent in the U. S. District Court for the Eastern District of New York
seeking reimbursement for all reasonable costs incurred by the Company
in defending the Wilkesbarre Pier litigation described above. The
matter has been

transferred to the U. S. District Court for the District of Rhode
Island and is in the discovery stage.

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 holders of the Class A and Class B Common Stock presently vote
together as a single class on all matters required to be submitted to
the shareholders for approval and share equally in dividends declared
by the Company. The Class A Common Stock is listed on the American
Stock Exchange. The Class B Common Stock is not listed on any national
or regional stock exchange or on the National Association of Securities
Dealers Automated Quotation National Market System.

The amended Articles of Incorporation prohibit any shareholder from
acquiring more than a 5% interest in the Company's classes of common
stock and prohibit 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.
Should a shareholder acquire a number of shares that results in the
limitation being exceeded, shares in excess of the limitation would be
converted into an equal number of shares of Excess Stock. Excess Stock
is non-voting and is not entitled to dividends. However, the
shareholder may designate a qualifying transferee for shares of Excess
Stock, at which time such shares would be converted and reissued as
Class A or B Common shares as the case may be.

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 Company has not
decided to make an election to become a REIT and, depending on future
circumstances, may never do so.

In the event the Company elects to become a REIT, the holders of the
Class A Common Stock would be entitled to elect one-third of the
Company's Board of Directors, with the balance of the Directors to be
elected by the holders of the Class B Common Stock.

If the Company does not make an election to be taxed as a REIT on or
before March 31, 2005, the restrictions on share ownership will
automatically lapse and shares of Class B Common Stock will
automatically be converted into shares of Class A Common Stock on a one
for one basis.

8. INCOME TAXES:

For income tax reporting purposes, the Company reported a tax loss for
the year ended December 31, 2001, and filed carryback claims that
resulted in a refund of federal income taxes previously paid in the
amount of $631,000, all of which was received in 2002.

For income tax reporting purposes, the Company reported a tax loss for
the year ended December 31, 2002, and filed carryback claims that
resulted in a refund of federal income taxes previously paid in the
amount of $381,000, which amount was received in 2003.

Under present Rhode Island law, income tax losses cannot be carried
back, and state tax loss carryforwards are limited to the amount of the
federal tax loss carryforward. As of December 31, 2003, the Company
does not have any federal or state loss carryforwards.

As a result of these differences in the federal and state tax laws, the
income tax provision for the year ended December 31, 2002, does not
bear the customary relationship to income (loss) before income taxes as
the current provision does not recognize any state income tax benefit
from carryback claims while the deferred provision provides for state
taxes on temporary differences at the applicable state rate. A
reconciliation of the income tax provision as computed by applying the
United States income tax rate (34%) to income (loss) before income
taxes is as follows:

2003 2002
----------- -----------

Computed "expected" tax (benefit) .............................. $ 496,000 $ (322,000)
Increase (decrease) in "expected" tax
(benefit) resulting from:
State income tax, net of Federal income tax
(benefit) ................................................... 88,000 48,000
Statutory and other ........................................... (8,000) --
----------- -----------
$ 576,000 $ (274,000)
=========== ===========

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
December 31, 2003 were as follows:

Gross deferred tax liabilities:
Property having a financial statement basis
in excess of tax basis ........................... $ 3,691,000
Accrued rental income ............................ 167,000
-------------
3,858,000
Gross deferred tax assets ............................. (191,000)
-------------
$ 3,667,000
=============

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 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 and an adjacent parking
garage for public parking purposes under short-term cancellable leasing
arrangements.

The Petroleum Storage Facilities segment consists of the operating of the
Petroleum Facilities in East Providence under an Amended Agreement effective May
1, 2003, that expires in 2013 at a fixed monthly rate for the Petroleum Company
which stores and distributes petroleum products. The Amended Agreement includes
provisions to extend and additional payments based upon throughput. (See Note
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 (loss) 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, 2003 and 2002.

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

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

Year ended December 31, 2003:

Revenues:
Contractual .............................. $ 2,389,000 $ 1,756,000 $ 4,145,000
Contingent ............................... 90,000 265,000 355,000
Option ................................... 774,000 -- 774,000
Property tax settlement .................. 1,700,000 -- 1,700,000
Non-cash, excess of contractual over
straight-line rentals .................. (63,000) -- (63,000)
------------ ------------ ------------
Total revenues ...................... $ 4,890,000 $ 2,021,000 $ 6,911,000
============ ============ ============

Property tax expense ........................ $ 1,978,000 $ 113,000 $ 2,091,000
============ ============ ============

Depreciation ................................ $ 63,000 $ 340,000 $ 403,000
============ ============ ============

Income (loss) before income taxes ........... $ 2,561,000 $ (15,000) $ 2,546,000
============ ============ ============

Assets ...................................... $ 6,143,000 $ 10,151,000 $ 16,294,000
============ ============ ============

Additions to properties and equipment ....... $ -- $ 108,000 $ 108,000
============ ============ ============

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

Year ended December 31, 2002:

Revenues:
Contractual ................................ $ 2,265,000 $ 1,669,000 $ 3,934,000
Contingent ................................. 57,000 188,000 245,000
Option ..................................... 432,000 -- 432,000
Non-cash, excess of straight-line over
contractual rentals ...................... 24,000 -- 24,000
------------ ------------ ------------
Total revenues ........................ $ 2,778,000 $ 1,857,000 $ 4,635,000
============ ============ ============

Property tax expense ........................... $ 1,835,000 $ 108,000 $ 1,943,000
============ ============ ============

Depreciation ................................... $ 63,000 $ 344,000 $ 407,000
============ ============ ============

Income (loss) before income taxes .............. $ 362,000 $ (414,000) $ (52,000)
============ ============ ============
Assets ......................................... $ 5,843,000 $ 10,243,000 $ 16,086,000
============ ============ ============

Properties and equipment:
Additions .................................. $ -- $ 544,000 $ 544,000
============ ============ ============
Deletions .................................. $ (10,000) $ -- $ (10,000)
============ ============ ============

The following is a reconciliation of the segment information to the amounts
reported in the accompanying consolidated financial statements:

2003 2002
------------ ------------

Income:
Revenues for operating segments ..................... $ 6,911,000 $ 4,635,000
Interest income ..................................... 7,000 103,000
------------ ------------
Total consolidated income .......................... $ 6,918,000 $ 4,738,000
============ ============

Property tax expense:
Property tax expense for operating segments ......... $ 2,091,000 $ 1,943,000
Unallocated corporate property tax expense .......... 1,000 1,000
------------ ------------
Total consolidated property tax expense ............ $ 2,092,000 $ 1,944,000
============ ============

Depreciation:
Depreciation for operating segments ................. $ 403,000 $ 407,000
Unallocated corporate depreciation .................. 10,000 11,000
------------ ------------
Total consolidated depreciation .................... $ 413,000 $ 418,000
============ ============

Income (loss) before income taxes:
Income (loss) for operating segments ................ $ 2,546,000 $ (52,000)
Interest income ..................................... 7,000 103,000
Unallocated corporate expenses ...................... (1,093,000) (998,000)
------------ ------------
Total consolidated income (loss) before
income taxes .................................... $ 1,460,000 $ (947,000)
============ ============

2003 2002
------------ ------------

Assets:
Assets for operating segments .................................. $ 16,294,000 $ 16,086,000
Corporate cash and cash equivalents ............................ 2,112,000 1,507,000
Income tax receivable .......................................... -- 372,000
Other unallocated amounts ...................................... 5,000 55,000
------------ ------------
Total consolidated assets ..................................... $ 18,411,000 $ 18,020,000
============ ============

Additions (deletions) to properties and equipment:
Additions:
Operating segments ............................................ $ 108,000 $ 544,000
Unallocated corporate additions ............................... -- 1,000
------------ ------------
Total consolidated additions ................................ $ 108,000 $ 545,000
============ ============
Deletions, operating segment and total
consolidated deletion ......................................... $ -- $ (10,000)
============ ============

The following table sets forth those customers whose revenues exceed
10% of the Company's segment revenue, exclusive of the property tax
settlement in 2003.

2003 2002
------------ ------------

Leasing segment:
A.............................................................. $ 826,000 $ 779,000
B.............................................................. 659,000 676,000
C.............................................................. 449,000 219,000
D.............................................................. 367,000 367,000
E.............................................................. 344,000 344,000
------------ ------------
$ 2,645,000 $ 2,385,000
============ ============

Petroleum storage facilities segment
(one customer)................................................. $ 1,976,000 $ 1,622,000
============ ============

10. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts of the Company's financial instruments approximate
their fair values at December 31, 2003, due to the short maturities of
cash and cash equivalents, receivables and accounts payable and accrued
expenses.

ITEM 8. 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-B.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
ISSUER

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," "Security Ownership of Certain
Beneficial Owners and Management" and "Audit Committee Report" in the Company's
Definitive Proxy for the 2004 Annual Meeting of the Shareholders to be filed
with the SEC.

The following are the executive officers of the Issuer:

Date of First
Name Age Office Held Election to Office
---- --- ----------- ------------------

Robert H. Eder 71 Chairman 1995
Ronald P. Chrzanowski 61 President 1997
Barbara J. Dreyer 65 Treasurer 1997
Stephen J. Carlotti 61 Secretary 1998

All officers hold their respective offices until their successors are duly
elected and qualified. Mr. Chrzanowski served as Vice President of the Issuer
from November 12, 1997 to December 31, 1997, and as President since that date.
Ms. Dreyer served as President and Treasurer of the Issuer 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 Chief
Executive Officer (CEO) 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-B. 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 CEO or Treasurer, or any person
performing similar functions.

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 15d-14(c) under the Securities Exchange Act of
1934) as of a date within 90 days prior to the filing date of 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.

There were no significant changes made in the Company's internal controls during
the period covered by this report or, to the Company's knowledge, in the factors
that could significantly affect these controls subsequent to the date of their
evaluation.

ITEM 10. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to the
Section entitled "Executive Compensation" in the Company's Definitive Proxy
Statement for the 2004 Annual Meeting of Shareholders to be filed with the SEC.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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 2004 Annual
Meeting of Shareholders to be filed with the SEC.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable

ITEM 13. 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) LEASES BETWEEN METROPARK, LTD. AND COMPANY:

(i) Dated December 12, 2001 (incorporated by reference to
Exhibit 10(a)(i) to the Issuer's annual report on
Form 10-KSB for the year ended December 31, 2001).

(ii) Dated December 12, 2001 (incorporated by reference to
Exhibit 10(a)(ii) to the Issuer's annual report on
Form 10-KSB for the year ended December 31, 2001).

(iii) Dated December 12, 2001 (incorporated by reference to
Exhibit 10(a)(iii) to the Issuer's annual report on
Form 10-KSB for the year ended December 31, 2001).

(iv) Dated December 12, 2001 (incorporated by reference to
Exhibit 10(a)(iv) to the Issuer's annual report on
Form 10-KSB for the year ended December 31, 2001).

(v) Dated December 12, 2001 (incorporated by reference to
Exhibit 10(a)(v) to the Issuer's annual report on
Form 10-KSB for the year ended December 31, 2001).

(b) MISCELLANEOUS 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 Issuer's
Report on Form 10-QSB/A for the quarterly period
ended June 30, 2003).

20.1 Map of the Company's parcels in Downtown Providence, Rhode
Island

20.2 Map of the Company's petroleum storage facilities in East
Providence, Rhode Island

21 Subsidiaries of the Company

31.1 Rule 13a-14(a) Certification of President and Principal
Executive Officer

31.2 Rule 13a-14(a) Certification of Treasurer and Principal
Financial Officer

32.1 Certification of President and Principal Executive Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Treasurer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

(b) For the quarter ended December 31, 2003, no reports on Form 8-K were
filed.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to the
Section entitled "Independent Public Accountants" in the Company's Definitive
Proxy Statement for the 2004 Annual Meeting of the Shareholders to be filed with
the SEC.

SIGNATURE

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/ Ronald P. Chrzanowski
-------------------------------------------
Ronald P. Chrzanowski
President and Principal Executive Officer

DATED: March 10, 2004

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 11, 2004
------------------------------------
Robert H. Eder
Chairman and Director

/s/ Ronald P. Chrzanowski March 10, 2004
------------------------------------
Ronald P. Chrzanowski
President and Director
Principal Executive Officer

/s/ Barbara J. Dreyer March 10, 2004
------------------------------------
Barbara J. Dreyer
Treasurer, Principal Financial Officer
And Principal Accounting Officer

/s/ Harold J. Harris March 10, 2004
------------------------------------
Harold J. Harris, Director