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, 2004

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

Commission File Number 0-9380

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

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

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

(401) 435-7171
(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. [ ]

For the year ended December 31, 2004, the Company's revenues totaled $7,075,000.

As of March 1, 2005, the aggregate market value of the Class A voting stock held
by non-affiliates of the Company was $21,990,000, 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, 2005, 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 2005 Annual Meeting of
Shareholders to be held on April 26, 2005, 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.

Through two of its subsidiaries, the Company owns and operates a 676,500 barrel
petroleum storage facility in East Providence, Rhode Island. The Company leases
the facility to Global Companies, L.L.C., (Global) and operates the facility for
Global. There are other petroleum storage terminals in the Providence area, but
the Company's facility is the only independent facility with deep-water access.

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) (see "Petroleum Storage Facilities" in Item 2 below); and

- Capital Terminal Company (through which the Company operates its
petroleum storage facilities).

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, 2004, 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, 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. Except in connection with
the acquisition of real estate to be used for the conduct of its petroleum
storage business, the Company does not intend to act as a developer with respect
to any improvements constructed on land owned or hereafter acquired by the
Company. 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 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 further 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 on or after April 30, 2008, upon one year's 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) $1,803,008 $126,562 $5,865,293 $2,716,454
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 2004 real estate taxes are $70,381 for the petroleum storage facilities and
$5,396 for the Wilkesbarre Pier at a $19.35 per thousand dollars of assessed
valuation tax rate.

In 2004, the Company constructed a 152,000 barrel tank. The Company has obtained
all the necessary approvals from the City of East Providence and State of Rhode
Island to construct two additional 152,000 barrel tanks but has no present plans
to construct same.

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, 2004, 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 138 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),
one of which commenced April 1, 2004 and the second of which commenced January
1, 2005. Under the third lease, the developer is seeking all necessary public
and final approvals, zoning and other permits required from government
authorities; this lease will not commence until construction begins. There can
be no assurance that the 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 this lease will commence.

- Parcel 9 - In April 2004, the Company's lease with GTECH Corporation
for 149 years commenced. In November 2004, GTECH began construction
of its world headquarters on the parcel which, when completed, will
contain approximately 210,000 square feet of office space and a
parking garage with approximately 250 public parking spaces.

- Parcel 2 - In 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 475 public parking spaces
and two additional buildings for either hotel or office use.

- Parcel 6 - In 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 off-street parking
requirements for the project. The lease commenced January 1, 2005
and the developer anticipates breaking ground May 1, 2005.

Properties Under Short-Term Leases - At December 31, 2004, the Company owned a
330-car parking garage adjacent to the rail passenger station in downtown
Providence, Rhode Island, together with the underlying land (the Parking
Garage), which was leased through yearend to a firm experienced in parking
operations. The annual rent was $189,000 ($1.24 per square foot). The original
federal tax cost basis of the Parking Garage (exclusive of the underlying land)
was $2,500,000, which was being depreciated on the straight-line method at the
rate of 2.5% per year over a 40-year life. The 2004 real estate taxes were
$51,800 on the Parking Garage and $51,800 on the underlying land at a $37.00 per
thousand dollars of assessed valuation tax rate.

Parcels 3E, 3W, 4E and 4W in the Capital Center Project area and Parcel 20
immediately adjacent to this area are leased for surface parking purposes to the
same firm that leased the Parking Garage described above. These leases can be
terminated on short notice should suitable development opportunities arise. The
Company continues to seek a developer for the remaining parcels. The lease for
surface parking on Parcel 6 terminated December 31, 2004.

Subsequent event - In December 2004, the Company entered into a Letter of Intent
with the current tenant to sell the Parking Garage for $2,500,000 in cash and to
lease the underlying land to the tenant for 99 years at a current annual
contractual rental of $100,000. At the end of the lease period or any extension
thereof, the tenant will surrender the Parking Garage to the Company, in good
order, condition and repair, ordinary wear and tear and damage by fire or
unavoidable casualty excepted. Consistent with other long-term land leases,
effective on the date of closing, the tenant assumes the payment of the real
property taxes on the land. The lease further provides for future cost-of-living
rental adjustments and periodic appraisals. At the closing on March 17, 2005,
the Company received the cash proceeds and the land lease commenced.

ITEM 3. LEGAL PROCEEDINGS

For a discussion of the litigation currently pending with Getty Properties Corp.
concerning the Wilkesbarre Pier, reference is made to Note 6 of Notes to
Consolidated Financial Statements in Item 7 hereof.

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 2004.

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

2004
1st Quarter........................ 13.72 11.95 .03
2nd Quarter........................ 17.45 12.85 .03
3rd Quarter........................ 17.50 14.80 .03
4th Quarter........................ 18.10 14.81 .21

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

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.

The Company anticipates that, effective April 1, 2005, all of the Class B Common
Stock will be converted into Class A Common Stock as required by the Company's
Articles of Incorporation, as amended. The Company intends to list the converted
shares on the American Stock Exchange.

At March 1, 2005, there were 381 holders of record of the Company's Class A
Common Stock.

The Company did not pay any dividends from February 2002 to September 2003. In
October 2003, 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. In 2004, the
Company paid a dividend of $99,000 each quarter to holders of Class A and Class
B Common Stock at the rate of $.03 per share per quarter. In addition, in
December 2004, the Company paid a special dividend of $594,000 to holders of
Class A and Class B Common Stock at the rate of $.18 per share. 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, REMEDIATION 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, 2004, the receivable on this lease has grown to
approximately $15,077,000 (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.

In April 2004, a second such lease commenced with an original term of 149
years and provides for fixed minimum percentage increases at specified
intervals (as well as reappraisal increases). For this lease, the
contractual amount paid by the tenant will not exceed the calculated
straight-line amount until the 94th year of the lease. Through December
31, 2004, the receivable on this lease is approximately $1,780,000
(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 94 years away.

Accordingly, the Company has not reported any portion of these amounts as
leasing revenue in its consolidated financial statements and does not
anticipate that it can reach such a conclusion until the turnaround dates
are closer.

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.

As part of the construction of the Railroad Station, the Federal Railroad
Administration constructed a 330-car parking garage on the Company's land
adjacent to the Railroad Station, and the Company paid one-half of the
construction cost. Subsequently, the Company became the sole owner of the
parking garage, which was leased to an experienced parking operator
(parking operator) at an annual rental of $189,000. In December 2004, the
Company entered into a Letter of Intent with the tenant to sell the
Parking Garage for $2,500,000 in cash and to lease the underlying land to
the tenant for 99 years at an initial annual contractual rental of
$100,000. At the end of the lease period or any extension thereof, the
tenant will surrender the Parking Garage to the Company, in good order,
condition and repair, ordinary wear and tear and damage by fire or
unavoidable casualty excepted. Consistent with other long-term land
leases, effective on the date of closing, the tenant assumes the payment
of the real property taxes on the land, which were $52,000 for 2004. The
lease further provides for future cost-of-living rental adjustments and
periodic appraisals. At the closing on March 17, 2005, the Company
received the cash proceeds and the land lease commenced.

The Company first began offering parcels for lease in the late 1980's. At
December 31, 2004, 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, one of which commenced April 1, 2004, and a second of which
commenced January 1, 2005. The third lease has not commenced pending
completion of development plans and closing of construction financing.
Under this lease, the Company receives an option payment pursuant to a
month-to-month arrangement. There is no assurance that this development
project will actually proceed.

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

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

Petroleum storage facilities:

The Company, through a wholly-owned subsidiary, owns a 676,500 barrel
petroleum storage facility (Petroleum Facilities) located in East
Providence, Rhode Island. The Petroleum Facilities utilize the Company's
Wilkesbarre Pier and a pipeline connecting the Wilkesbarre Pier to the
Petroleum Facilities. The Company (through this wholly-owned subsidiary)
and Global Companies, LLC (Global) are parties to an agreement whereby the
Company (through another wholly-owned subsidiary) operates the entire
Petroleum Facilities for Global at a fixed monthly rate which is subject
to annual cost-of-living adjustments. The agreement expires April 30,

2013, but will continue thereafter on a year-to-year basis unless
terminated by either party upon ninety days' written notice. Global may
terminate the agreement on or after April 30, 2008, upon one year's
written notice. The agreement includes provisions for additional payments
based upon throughput in any twelve-month period beginning on May 1 of
each year and ending on April 30 of the subsequent year and for any
increases in real property taxes. The Company bears all of the operating
costs with respect to the Petroleum Facilities, including real estate
taxes and insurance. In addition, Global was granted an option to purchase
the Petroleum Facilities at any time during the term of the agreement
under the terms and conditions set forth in an option agreement.

As described in Note 6 of Notes to Consolidated Financial Statements in
Item 7 hereof, the Company was in litigation (Wilkesbarre Pier litigation)
with Getty Petroleum Marketing, Inc. and Getty Properties Corp. over the
rights of others to utilize the Wilkesbarre Pier. During 2003, the Company
settled all litigation with Getty Petroleum Marketing, Inc. 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 Getty
Properties Corp. was responsible for the cost of the fire suppression
equipment at the Pier. In December 2004, the Company's appeal was denied.

In 1994, a leak was discovered in a 25,000 barrel storage tank at the
Petroleum Facilities which allowed the escape of a small amount of fuel
oil. All required notices were made to the State of Rhode Island
Department of Environmental Management (RIDEM). In 2000, the tank was
demolished and testing of the groundwater indicated that there was no
large pooling of contaminants. In 2001, RIDEM approved a plan whereby the
Company installed a passive system consisting of three wells and commenced
monitoring the wells.

In 2003, RIDEM decided that the passive monitoring system previously
approved was not sufficient and required the Company to design an active
remediation system for the removal of product from the contaminated site.
The Company and its consulting engineers began the pre-design testing of
the site in the fourth quarter of 2004 at a cost of $30,000 through
December 31, 2004. The Company continues to work with RIDEM to design an
acceptable system. The consulting engineers estimate a remaining cost of
$170,000 to design and install the system. The Company anticipates that
the remediation will be completed as designed during the summer of 2006.
It is the Company's understanding that RIDEM will then evaluate the
adequacy of the total amount of product removed. While the Company and its
consulting engineers believe that the proposed active remediation system
will correct the situation, it is possible that RIDEM could require the
Company to expand remediation efforts thereby incurring additional costs.

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 Company's
Petroleum Facilities. The Company notified RIDEM. The Company will
continue to monitor RIDEM's investigation of this contamination to ensure
that the responsible party addresses this contamination.

Since 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.

The Company maintains what management believes to be adequate levels of
insurance. The Company notified its insurance company of the
contamination. The insurance company advised

the Company that coverage is only provided under policies in place at the
time the contamination occurs.

In 2004, the Company constructed a 152,000 barrel tank. The Company has
sufficient land to further expand the storage capacity and has obtained
all the necessary approvals from the City of East Providence and State of
Rhode Island to construct two additional 152,000 barrel tanks but has no
present plans to construct same.

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

Changes in capital structure:

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 amendment provides that if the Company did not make an
election to be taxed as a REIT on or before March 31, 2005, the
restrictions on share ownership 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. In July 2004, the Company wrote to the
American Stock Exchange asking for its consent to extend the outside date
for making the REIT election from March 2005 to March 2011. In August
2004, the American Stock Exchange denied the Company's request. In January
2005, the Board of Directors determined that the election will not be
made, and the Company is taking the necessary steps to effect the
conversion of the Class B Common Stock to Class A Common Stock on April 1,
2005, at which time the provisions of the Company's Articles of
Incorporation authorizing Class B Common Stock, Excess Stock and limiting
share ownership will lapse.

2. RESULTS OF OPERATIONS:

Leasing segment:

In each year during the period 1995 through 2002 (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.

In 1997, the City of Providence revalued certain of the Company's
properties within the Capital Center area, reaching back six years to
assess over $13,000,000 in back taxes, interest and penalties based upon a
retroactive increase in the assessed values. The Company contended that

this action by the City was both unprecedented and illegal. In another
action, the City claimed that the Company was not the owner of a certain
parcel in the Capital Center and also attempted to condemn that parcel.
The Company contested both of the City's actions. In 1999, after
prevailing on the merits in both actions, the Company made claim against
the City for attorneys fees. In 2000, the Company was awarded attorneys
fees of $258,000. The City filed an appeal in the Rhode Island Supreme
Court. In January 2004, the Supreme Court affirmed the judgment against
the City, and the Company received the payment from the City in March
2004. No interest was awarded on the judgment.

Exclusive of the $1,700,000 received in September 2003 in the omnibus tax
settlement and the $258,000 received in March 2004 for attorneys fees, for
the year ended December 31, 2004, revenue from leasing decreased $141,000
from 2003. Option payments decreased due to the termination of two option
agreements, one of which is offset by lease payments which commenced April
1, 2004; this decrease was offset in part by higher contingent revenues
and renewals of short-term parking leases. For the year ended December 31,
2004, expenses applicable to leasing decreased $739,000 from 2003 due
principally to a decrease in professional fees and a decrease in real
property taxes resulting from lower assessments attributable to the
omnibus tax settlement and the commencement of the long-term land lease in
April 2004 under which the tenant directly pays the real property taxes.

Petroleum storage facilities segment:

Revenue from petroleum storage facilities for 2004 increased $53,000 from
2003 due principally to fees for the new 152,000 barrel tank effective
October 15, 2004, and higher monthly fees resulting from the annual
cost-of-living adjustment offset in part by lower contingent revenues
resulting from the Amended Agreement effective May 1, 2003, which changed
the basis for calculating contingent fees. For the year ended December 31,
2004, expenses applicable to petroleum storage facilities decreased
$160,000 from 2003 principally due to lower legal fees associated with the
Wilkesbarre Pier litigation and a decrease in repairs and maintenance
expense, offset in part by the remediation costs associated with the 1994
leak.

General:

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

For the year ended December 31, 2004, general and administrative expenses
decreased $55,000 from the 2003 level due to a decrease in payroll and
related costs.

Liquidity:

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

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

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

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

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

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

In each year during the period 1995 to 2002 (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 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.

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

In 2004, the Company constructed a 152,000 barrel tank at a total cost of
$1,226,000. Effective October 15, 2004, Global commenced using the new
tank at a monthly fee of $35,000, which increased Global's monthly fee to
$185,000, subject to annual cost-of-living adjustments. The

Company anticipates painting the new tank in the fall of 2005 at an
estimated cost of $92,000. The Company has obtained all the necessary
approvals from the City of East Providence and State of Rhode Island to
construct two additional 152,000 barrel tanks at the Petroleum Facilities
but has no present plans to construct same.

Regulations of the Department of Homeland Security require the Company to
secure the Petroleum Facilities (including the Wilkesbarre Pier) against
possible threats by the installation of fences, barricades and similar
items. During 2004, the Company incurred costs of $322,000 to comply with
these regulations, which costs have been capitalized. The Company cannot
predict what additional expenses it may incur in the future to maintain
the required security levels.

As discussed in Note 6 of Notes to Consolidated Financial Statements in
Item 7 hereof, in 2003, the remaining non-jury claims were tried and in
September 2003 the Court ordered Getty Properties Corp. to install a new
sixteen-inch pipeline on the Pier for the Company's use and benefit.
Pursuant to an agreement with Getty Properties Corp. in the fall of 2004,
the Company installed the pipeline at a cost of $394,000. The Company
received payment from Getty Properties Corp. in February 2005.

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

The Company did not pay any dividends from February 2002 to September
2003. In October 2003, 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.
In 2004, the Company paid a dividend of $99,000 each quarter to holders of
Class A and Class B Common Stock at the rate of $.03 per share per
quarter. In addition, in December 2004, the Company paid a special
dividend of $594,000 to holders of Class A and Class B Common Stock at the
rate of $.18 per share. In January 2005, the Company paid a quarterly
dividend of $99,000 to holders of both classes of stock. The declaration
of future dividends and the amount thereof will depend on the Company's
future earnings, financial factors and other events.

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

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, 2004, and the related
consolidated statements of income and retained earnings, and cash flows for each
of the two years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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, 2004, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2004, in conformity with U. S. generally accepted accounting
principles.

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

March 21, 2005

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004

ASSETS

Properties and equipment (net of accumulated depreciation)............ $ 16,527,000
Cash and cash equivalents............................................. 1,835,000
Receivables, tenant and other......................................... 413,000
Accrued rental income................................................. 326,000
Prepaid and other..................................................... 430,000
--------------
$ 19,531,000
==============
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
Accounts payable and accrued expenses:
Property taxes................................................... $ 621,000
Environmental remediation........................................ 170,000
Other............................................................ 284,000
Income taxes:
Current.......................................................... 35,000
Deferred, net.................................................... 4,528,000
--------------
5,638,000
--------------
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.................................................. 2,065,000
--------------
13,893,000
--------------
$ 19,531,000
==============

See notes to consolidated financial statements.

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2004 AND 2003

2004 2003
------------- -------------

Income:
Revenues:
Leasing, including attorneys fees judgment of
$258,000 in 2004 and property tax settlement of
$1,700,000 in 2003............................... $ 3,307,000 $ 4,890,000
Petroleum storage facilities........................ 2,074,000 2,021,000
------------- -------------
5,381,000 6,911,000
Condemnation proceeds, permanent, including
interest of $244,000.............................. 1,672,000 --
Interest............................................. 22,000 7,000
------------- -------------
7,075,000 6,918,000
------------- -------------
Expenses:
Expenses applicable to:
Leasing............................................. 1,590,000 2,329,000
Petroleum storage facilities........................ 1,876,000 2,036,000
General and administrative........................... 1,038,000 1,093,000
------------- -------------
4,504,000 5,458,000
------------- -------------
Income before income taxes.............................. 2,571,000 1,460,000
------------- -------------
Income tax expense:
Current.............................................. 149,000 428,000
Deferred............................................. 861,000 148,000
------------- -------------
1,010,000 576,000
------------- -------------
Net income.............................................. 1,561,000 884,000

Retained earnings, beginning............................ 1,494,000 709,000

Dividends on common stock ($.30 and $.03 per share
in 2004 and 2003, respectively)....................... (990,000) (99,000)
------------- -------------
Retained earnings, ending............................... $ 2,065,000 $ 1,494,000
============= =============
Basic income per share.................................. $ .47 $ .27
============= =============

See notes to consolidated financial statements.

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2004 AND 2003

2004 2003
----------- -----------

Cash flows from operating activities:
Net income............................................. $ 1,561,000 $ 884,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Condemnation proceeds, permanent..................... (1,672,000) --
Depreciation......................................... 410,000 413,000
Accrued rental income................................ 91,000 63,000
Deferred income taxes ............................... 861,000 148,000
Changes in assets and liabilities:
Increase in:
Receivables ....................................... (213,000) --
Prepaid and other.................................. (156,000) (6,000)
Current income taxes payable....................... -- 98,000
Decrease in:
Receivables........................................ -- 255,000
Accounts payables and accrued expenses............. (250,000) (484,000)
Current income taxes payable....................... (63,000) --
----------- -----------
Net cash provided by operating activities.............. 569,000 1,371,000
----------- -----------

Cash provided by (used in) investing activities:
Condemnation proceeds, permanent....................... 1,672,000 --
Payments for properties and equipment.................. (2,057,000) (264,000)
----------- -----------
Net cash used in investing activities.................. (385,000) (264,000)
----------- -----------

Cash used in financing activities, payment of dividends (990,000) (99,000)
----------- -----------

Increase (decrease) in cash and cash equivalents.......... (806,000) 1,008,000
Cash and cash equivalents, beginning...................... 2,641,000 1,633,000
----------- -----------
Cash and cash equivalents, ending......................... $ 1,835,000 $ 2,641,000
=========== ===========

Supplemental disclosures:
Cash paid or received for income taxes:
Cash paid............................................. $ 378,000 $ 343,000
=========== ===========
Refunds received...................................... $ -- $ 381,000
=========== ===========
Cash paid for interest (Note 4)........................ $ -- $ 65,000
=========== ===========

See notes to consolidated financial statements.

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003

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, 2004, cash equivalents consisted of a short-term uninsured repurchase
agreement which the Company routinely purchases from its principal bank,
totaling $1,667,000.

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.

Petroleum storage facilities revenue:

The Company reports revenue from the operations of the petroleum storage
facilities 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 reports revenue resulting from litigation and from permanent
condemnations in the period in which the cash is received.

Environmental remediation:

The Company accrues a liability when the environmental remediation is
probable and the costs are estimable. The Company charges to expense those
costs that do not extend the life, increase the capacity or improve the
safety or efficiency of the property owned by the Company.

Income taxes:

The Company and its subsidiaries file consolidated income tax returns.

The Company provides for income taxes 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 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 the 2004 real property tax bills
reflected.

3. LITIGATION JUDGMENTS:

Disputes with Amtrak regarding condemnations:

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.

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 1999, Amtrak condemned a three-year temporary easement of all the air
rights owned by the Company retroactive to August 1998 for which 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 United States District Court for the District of Rhode
Island (U.S. District Court) against Amtrak seeking additional
compensation.

In 2002, the 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 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 $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 received the
payment from the City in March 2004. No interest was awarded on the
judgment.

4. PROPERTIES AND EQUIPMENT:

At December 31, 2004, properties and equipment consists of:

Properties on lease or held for lease:
Land and land improvements.............. $ 3,956,000
Parking garage.......................... 2,500,000
-------------
6,456,000
-------------
Petroleum storage facilities:
Land and land improvements.............. 5,163,000
Buildings and structures................ 995,000
Tanks and equipment..................... 10,567,000
-------------
16,725,000
-------------

Office equipment......................... 96,000
-------------
23,277,000
-------------
Less accumulated depreciation:
Properties on lease or held for lease... 1,055,000
Petroleum storage facilities............ 5,612,000
Office equipment........................ 83,000
-------------
6,750,000
-------------
$ 16,527,000
=============

In December 2004, the Company entered into a Letter of Intent to sell the
Parking Garage to the current tenant for $2,500,000 in cash and to lease
the underlying land to the tenant for 99 years at a current annual
contractual rental of $100,000. At December 31, 2004, the accumulated
depreciation on the Parking Garage was $1,044,000. At the end of the lease
period or any extension thereof, the tenant will surrender the Parking
Garage to the Company, in good order, condition and repair, ordinary wear
and tear and damage by fire or unavoidable casualty excepted. Consistent
with other long-term land leases (see Note 5), effective on the date of
closing, the tenant assumes the payment of the real property taxes on the
land which were $52,000 for 2004. The lease further provides for future
cost-of-living rental adjustments and periodic appraisals. At the closing
on March 17, 2005, the Company received the cash proceeds and the land
lease commenced.

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.

5. DESCRIPTION OF LEASING ARRANGEMENTS:

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

The Company also leases parcels of land for outdoor advertising purposes
for the remaining term of 27 years and parcels of land (and, including at
yearend, a parking garage) for public parking purposes under short-term
cancellable leases.

For those leases with presently known scheduled rent increases, the
cumulative excess of straight-line over contractual rentals (considering
scheduled rent increases over the 30 to 149 year terms of the leases)
amounted to $18,005,000 through December 31, 2004. Management has
concluded that a portion of the excess of straight-line over contractual
rentals ($326,000 at December 31, 2004) 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, 2004 are:

Year ending December 31,
2005................................... $ 1,808,000
2006................................... 1,766,000
2007................................... 1,740,000
2008................................... 1,740,000
2009................................... 1,740,000
2010 to 2153........................... 549,434,000
----------------
$ 558,228,000
================

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

The four land leases, which commenced prior to December 31, 2004, 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 and retained
earnings. The real property taxes attributable to the Company's land under
these leases totaled $488,000 (four leases) for the year ended December
31, 2004, and $352,000 (three leases) for the year ended December 31,
2003.

Under one of the four long-term land leases, effective April 1, 2003, the
Company receives contingent rentals (based upon a fixed percentage of
gross revenue received by the tenant) which totaled $58,000 and $43,000
for the years ended December 31, 2004 and 2003, respectively.

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 $98,000 and
$47,000 for the years ended December 31, 2004 and 2003, respectively.

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

6. PETROLEUM STORAGE FACILITIES:

Current operations:

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

Effective May 1, 2003, the Company and Global entered into an amended and
restated lease agreement (Amended Agreement) which, among other things,
provides as follows: (1) the Amended Agreement will expire April 30, 2013,
but will continue thereafter on a year-to-year basis unless terminated by
either party upon ninety days' written notice; (2) Global may terminate
the Amended Agreement on or after April 30, 2008, upon one year's written
notice; (3) Global will pay a monthly fee of $150,000 effective May 1,
2004, subject to annual cost-of-living adjustments; (4) Global will
reimburse the Company for any increase in real property taxes over the
2002 level; and (5) the Company will receive an additional $.10 per barrel
for every barrel in excess of 4,000,000 barrels of throughput in any
agreement year. For the agreement year ended April 30, 2004, throughput
exceeded 4,000,000 barrels in February 2004. For the agreement year ending
April 30, 2005, throughput exceeded 4,000,000 barrels in February 2005.

For the years ended December 31, 2004 and 2003, the Company earned
contingent revenues of $140,000 and $265,000, respectively.

On October 15, 2004, the Company completed construction of a 152,000
barrel tank. Effective October 15, 2004, Global commenced using the new
tank at a monthly cost of $35,000, which increased Global's monthly fee to
$185,000, subject to annual cost-of-living adjustments.

Also effective May 1, 2003, Global was granted the option to purchase the
Petroleum Facilities at any time during the term of the Amended Agreement
under the terms and conditions set forth in an option agreement. In a
separate but related agreement, Global agreed to make certain improvements
at the Wilkesbarre Pier which, for 2004, totaled approximately $300,000.
[See Wilkesbarre Pier below].

Environmental remediation:

The Company has recorded the estimated cost of $200,000, which amount is
included in expenses applicable to petroleum storage facilities on the
accompanying consolidated statement of income and retained earnings for
the year ended December 31, 2004.

Environmental incident:

Since January 2003, the Company has not incurred significant costs in
connection with this matter and is unable to determine the costs it might
incur to remedy the situation as well as any costs to investigate, defend,
and seek reimbursement from the responsible party with respect to this
contamination.

Wilkesbarre Pier (the Pier):

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 Getty Petroleum Marketing, Inc.,
which used the Pier to off-load primarily gasoline from ships to its
terminal, entered into an agreement (the Agreement) whereby Getty
Petroleum Marketing, Inc. agreed to pay annual fees for five years. 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, Getty Petroleum Marketing, Inc. and
Getty Properties Corp. 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 Getty Properties Corp. take steps to commence
and complete the performance of all work and to supply all material
required to satisfy the Fire Department. The Company incurred costs
totaling $372,000 to install the required system, which were capitalized
as properties and equipment in 2002.

In 2000, Getty Petroleum Marketing, Inc. and Getty Properties Corp.
(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
Getty Properties Corp., including one for damages based on Getty
Properties Corp.'s failure to comply with the order and direction of the
Fire Department as well as the failure of Getty Properties Corp. to comply
with certain other agreements. Plaintiffs amended their complaint in 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 and the jury returned a
verdict against the Company in the amount of $100,000. 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 Getty Petroleum Marketing, Inc.
agreed to settle this claim for $80,000, which amount the Company paid to
Getty Petroleum Marketing, Inc. in November 2003 and was included in
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 Getty
Petroleum Marketing, Inc.

The Court entered judgment as a matter of law against the Company on the
Company's claim that Getty Properties Corp. 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
a 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 Getty Properties Corp.to install a new sixteen-inch
pipeline on the Pier for the Company's use and benefit. Pursuant to an
agreement with Getty Properties Corp. in the fall of 2004, the Company
installed the pipeline at a cost of $394,000, which amount is included in
receivables, tenant and other on the accompanying consolidated balance
sheet. The Company received payment from Getty Properties Corp. in
February 2005.

The Court also held that Getty Petroleum Marketing, Inc. and Getty
Properties Corp. 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 Getty Petroleum Marketing, Inc. nor
Getty Properties Corp. filed an appeal. In December 2004, the Company's
appeal was denied.

For the years ended December 31, 2004 and 2003, the Company incurred legal
fees in connection with this litigation of $129,000 and $315,000,
respectively, which amounts are included in expenses applicable to
petroleum storage facilities on the accompanying consolidated statements
of income and retained earnings.

Pursuant to a 1986 Guaranty and Indemnity Agreement, the Company filed a
lawsuit in September 2002 against Getty Properties Corp. and its parent,
Getty Realty Corp., 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. Getty Properties Corp. filed a counterclaim seeking
reimbursement for all reasonable legal fees it incurred in connection with
certain claims filed in the Wilksbarre Pier litigation. Both sides moved
for summary judgment. In February 2005, the Judge-Magistrate issued a
report and recommendation recommending that the Court deny and dismiss all
of the claims asserted by both the Company and Getty Properties Corp. in
this action. Both parties have appealed that recommendation and the matter
is now pending before the U.S. District Court Judge.

7. SHAREHOLDERS' EQUITY:

In December 2001, the Company amended its Articles of Incorporation to
create three classes of $.01 par value stock -- Class A Common Stock,
Class B Common Stock, and Excess Stock. The Company converted the then
outstanding 3,000,000 shares of $1.00 par value common shares into
3,000,000 shares of Class A Common Stock. In addition, the Company issued
(in the form of a stock dividend) 299,956 shares of Class B Common Stock
(one share for each ten shares of Class A Common Stock held). No
fractional Class B shares were issued.

The 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 amendment provides that if the Company did not make an election to be
taxed as a REIT on or before March 31, 2005, the restrictions on share
ownership 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.

In July 2004, the Company wrote to the American Stock Exchange asking for
its consent to extend the outside date for making the REIT election from
March 2005 to March 2011. In August 2004, the American Stock Exchange
denied the Company's request.

In January 2005, the Board of Directors determined that the election will
not be made, and the Company is taking the necessary steps to effect the
conversion of the Class B Common Stock to Class A Common Stock on April 1,
2005, at which time the provisions of the Company's Articles of
Incorporation authorizing Class B Common Stock, Excess Stock and limiting
share ownership will lapse.

8. INCOME TAXES:

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. With this carryback, the
Company utilized all available tax losses.

In 2004, the Company received permanent condemnation proceeds from Amtrak
which qualify for deferred reinvestment for income tax reporting purposes
whereby the Company may elect to reduce the income tax basis of qualifying
subsequent acquisitions, which results in the Company's not currently
paying income taxes on the proceeds, subject to certain restrictions.
During 2004, the Company made qualifying acquisitions totaling $216,000.
The Company filed its 2004 income tax returns in March 2005, making such
election; accordingly, the income tax provision for the year ended
December 31, 2004 reflects such election.

A reconciliation of the income tax provision as computed by applying the
United States income tax rate (34%) to income before income taxes is as
follows:

2004 2003
------------- ------------

Computed "expected" tax................................ $ 874,000 $ 496,000
Increase (decrease) in "expected" tax
resulting from:
State income tax, net of Federal income tax
benefit............................................ 160,000 88,000
Statutory and other.................................. (24,000) (8,000)
------------- -------------
$ 1,010,000 $ 576,000
============= =============

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, 2004 were as follows:

Gross deferred tax liabilities:
Property having a financial statement basis
in excess of tax basis........................... $ 4,244,000
Condemnation proceeds.............................. 484,000
Accrued rental income.............................. 130,000
-------------
4,858,000
Gross deferred tax assets............................ (330,000)
-------------
$ 4,528,000
=============

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
Global which stores and distributes petroleum products. The Amended
Agreement includes provisions to extend and additional payments based upon
throughput. (See Note 6).

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

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

Inter-segment revenues are immaterial in amount. The Company did not incur
interest expense during the years ended December 31, 2004 and 2003.

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, 2004:

Revenues:
Contractual............................ $ 2,579,000 $ 1,934,000 $ 4,513,000
Contingent............................. 156,000 140,000 296,000
Option................................. 405,000 -- 405,000
Attorneys fees judgment ............... 258,000 -- 258,000
Non-cash, excess of contractual over
straight-line rentals................ (91,000) -- (91,000)
------------ ------------ ------------
Total revenues..................... $ 3,307,000 $ 2,074,000 $ 5,381,000
============ ============ ============
Property tax expense.................... $ 1,326,000 $ 76,000 $ 1,402,000
============ ============ ============
Depreciation............................ $ 64,000 $ 342,000 $ 406,000
============ ============ ============
Income before income taxes.............. $ 1,717,000 $ 198,000 $ 1,915,000
============ ============ ============
Assets.................................. $ 6,036,000 $ 11,814,000 $ 17,850,000
============ ============ ============
Properties and equipment, additions..... $ 216,000 $ 1,830,000 $ 2,046,000
============ ============ ============

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
============ ============ ============
Properties and equipment, additions...... $ -- $ 108,000 $ 108,000
============ ============ ============

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

2004 2003
----------- -----------

Income:
Revenues for operating segments........................ $ 5,381,000 $ 6,911,000
Condemnation proceeds, permanent, including interest... 1,672,000 --
Interest income........................................ 22,000 7,000
----------- -----------
Total consolidated income............................ $ 7,075,000 $ 6,918,000
=========== ===========
Property tax expense:
Property tax expense for operating segments............ $ 1,402,000 $ 2,091,000
Unallocated corporate property tax expense............. 1,000 1,000
----------- -----------
Total consolidated property tax expense.............. $ 1,403,000 $ 2,092,000
=========== ===========
Depreciation:
Depreciation for operating segments.................... $ 406,000 $ 403,000
Unallocated corporate depreciation..................... 4,000 10,000
----------- -----------
Total consolidated depreciation...................... $ 410,000 $ 413,000
=========== ===========
Income before income taxes:
Income for operating segments.......................... $ 1,915,000 $ 2,546,000
Condemnation proceeds, permanent....................... 1,672,000 --
Interest income........................................ 22,000 7,000
Unallocated corporate expenses......................... (1,038,000) (1,093,000)
----------- -----------
Total consolidated income before income taxes........ $ 2,571,000 $ 1,460,000
=========== ===========

2004 2003
--------------- --------------

Assets:
Assets for operating segments.......... $ 17,850,000 $ 16,294,000
Corporate cash and cash equivalents.... 1,667,000 2,112,000
Other unallocated amounts.............. 14,000 5,000
--------------- --------------
Total consolidated assets............ $ 19,531,000 $ 18,411,000
=============== ==============
Additions to properties and equipment:
Operating segments..................... $ 2,046,000 $ 108,000
Unallocated corporate additions........ 12,000 --
--------------- --------------
Total consolidated additions......... $ 2,058,000 $ 108,000
=============== ==============

The following table sets forth those customers whose revenues exceed 10%
of the Company's segment revenue, exclusive of the attorneys fee judgment
in 2004 and the property tax settlement in 2003.

2004 2003
--------------- --------------

Leasing segment:
A....................................... $ 874,000 $ 826,000
B....................................... 717,000 659,000
C....................................... 403,000 388,000
D....................................... 392,000 367,000
E....................................... -- 449,000
--------------- --------------
$ 2,386,000 $ 2,689,000
=============== ==============
Petroleum storage facilities segment
(one customer).......................... $ 2,074,000 $ 1,976,000
=============== ==============

10. FAIR VALUE OF FINANCIAL INSTRUMENTS:

The carrying amounts of the Company's financial instruments approximate
their fair values at December 31, 2004, 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 8B. 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 the end of the period covered by this report. Based upon this
evaluation, the principal executive officer and principal financial officer have
concluded that, as of such date, the Company's disclosure controls and
procedures were effective in making them aware on a timely basis of the material
information relating to the Company required to be included in the Company's
periodic filings with the Securities and Exchange Commission.

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 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 2005 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 72 Chairman, Capital Properties, Inc. 1995
Ronald P. Chrzanowski 62 President, Capital Properties, Inc. 1997
Barbara J. Dreyer 66 Treasurer, Capital Properties, Inc. 1997
Stephen J. Carlotti 62 Secretary, Capital Properties, Inc. 1998
Avery L. Noe 61 President, Capital Terminal Company 1996

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
Principal Executive Officer and the Treasurer (who is both the principal
accounting and financial officer), which meets the requirement of a "code of
ethics" as defined in Item 406 of Regulation S-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 Principal
Executive Officer or Treasurer, or any person performing similar functions.

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 2005 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 2005 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 January 1, 2005

(ii) 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).

(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 Chairman of the Board and Principal
Executive Officer

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

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

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

(b) For the quarter ended December 31, 2004, 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/ Robert H. Eder
-------------------------------
Robert H. Eder
Chairman of the Board and
Principal Executive Officer

DATED: March 21, 2005

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 21, 2005
--------------------------------------
Robert H. Eder
Chairman and Director
Principal Executive Officer

/s/ Ronald P. Chrzanowski March 21, 2005
------------------------------------
Ronald P. Chrzanowski
President and Director

/s/ Barbara J. Dreyer March 21, 2005
--------------------------------------
Barbara J. Dreyer
Treasurer, Principal Financial Officer
And Principal Accounting Officer

/s/ Harold J. Harris March 21, 2005
--------------------------------------
Harold J. Harris, Director