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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-KSB
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-9380
 CAPITAL PROPERTIES, INC.
  Rhode Island
    
    05-0386287(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 100 Dexter Road
East Providence, Rhode Island 02914
 (401) 435-7171
 Class A Common Stock, $.01 par value
American Stock Exchange
 
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TABLE OF CONTENTS  PART IItem 1. Description of BusinessItem 2.    Description of PropertyItem 3. Legal ProceedingsItem 4. Submission of Matters to a Vote of Security HoldersPART IIItem 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity SecuritiesItem 6. Managements Discussion and Analysis or Plan of OperationsItem 7. Consolidated Financial StatementsItem 8. Changes in and Disagreements With Accountants on Accounting and Financial DisclosurePART IIIItem 8A. Controls and ProceduresItem 9. Directors, Executive Officers, Promoters and Control Persons of the IssuerItem 10. Executive CompensationItem 11. Security Ownership of Certain Beneficial Owners and ManagementItem 12. Certain Relationships and Related TransactionsItem 13. Exhibits and Reports on Form 8-KItem 14. Principal Accountant Fees and ServicesSIGNATUREEX-20.1 Map of Company's Parcels in DowntownEX-20.2 Map of Petroleum Storage FacilityEX-21 Capital Properties, Inc. and SubsidiariesEX-31.1 Section 302 Certification of PEOEX-31.2 Section 302 Certification of PFOEX-32.1 Section 906 Certification of PEOEX-32.2 Section 906 Certification of PFO    Table of Contents  
 PART I
 
 Item 1. Description of Business
 Business Development
  Business of Company
 Properties Under
Long-Term Leases Properties Under Short-Term Lease
   
    
    Tri-State Displays, Inc. (through which the Company leases land for billboards
along interstate and primary highways for outdoor advertising purposes) (see Outdoor
Advertising Lease in Item 2 below);
    
    Dunellen, LLC (through which the Company owns the petroleum storage facility in
East Providence, Rhode Island) (see Petroleum Storage Facility in Item 2 below); and
    
    Capital Terminal Company (through which the Company operates its petroleum storage
facility).
  Miscellaneous
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Employees
  
 Item 2.    Description of Property
 Principal Facilities
  Investment Policies and Investments in Real Estate
  Description of Real Estate and Operating Data
    Properties Under Long-Term Leases
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
    
    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 7A  A 330 car 2-story underground parking garage, which lease terminates
in 2104.
    
    Parcel 8  A 4-story office building containing approximately 114,000 square
feet, which lease terminates in 2090.
  
    
    Parcel 9  In April 2004, the Companys lease with GTECH Corporation for 149 years
commenced This lease has now been assigned to U. S. Real Estate Limited Partnership. In
November 2004, construction of an office building which will contain approximately 210,000
square feet of office space and a parking garage with approximately 250 public parking
spaces commenced on the parcel. This office building will house the American headquarters
of GTECH.
    
    Parcel 2  In May 2005, the Company entered into a lease for 103 years with an affiliate
of Intercontinental Real Estate Corporation (Intercontinental). Construction of an
underground 2-story 480-car garage covering the entire parcel commenced shortly thereafter.
In addition, Intercontinental intends to construct two condominium towers containing 193
units. The parcel has sufficient space for two additional buildings for residential, 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. The lease
commenced January 1, 2005 and the developer anticipates breaking ground in March 2006.
 Properties Under Short-Term Lease 
 Outdoor Advertising Lease
 Petroleum storage facility
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LandImprovements
    
    Buildings
    
    Tanks
    
    EquipmentFederal income
tax basis (cost)
    
    $
    1,898,620
    
    
    $
    126,562
    
    
    $
    7,805,219
    
    
    $
    2,732,152Rate per year
    
    
    6.67
    %
    
    
    2.56
    %
    
    
    20
    %
    
    
    20
    %Method
    
    150% DB
    
    
    S/L
    
    
    200% DB
    
    200% DBLife (Years)
    
    
    15
    
    
    
    39
    
    
    
    5
    
    
    
    5
   
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
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PART II
 
 Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases
of Equity Securities
  Trading Prices
    
    DividendsHigh
    
    Low
    
    Paid20041st Quarter
    
    
    13.72
    
    
    
    11.95
    
    
    
    .032nd Quarter
    
    
    17.45
    
    
    
    12.85
    
    
    
    .033rd Quarter
    
    
    17.50
    
    
    
    14.80
    
    
    
    .034th Quarter
    
    
    18.10
    
    
    
    14.81
    
    
    
    .2120051st Quarter
    
    
    22.00
    
    
    
    18.00
    
    
    
    .032nd Quarter
    
    
    24.60
    
    
    
    18.10
    
    
    
    .033rd Quarter
    
    
    24.20
    
    
    
    23.23
    
    
    
    .034th Quarter
    
    
    27.95
    
    
    
    23.75
    
    
    
    .03
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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 leasing revenues when due over the terms
of the long-term land leases; the commencement of additional long-term land leases;
changes in economic conditions that may affect either the current or future
development on the Companys parcels; and exposure to contamination, remediation or
similar costs associated with the operation of the petroleum storage facility.
 1 Overview:
 Critical accounting policies:
     th
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th
  th
   Segments:
  Leasing:
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Petroleum storage facility:
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Changes in capital structure:
    2 Results of operations:
 Leasing segment:
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Petroleum storage facility segment:
   General:
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Liquidity:
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Item 7. Consolidated Financial Statements
 
 
 
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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2005
 ASSETSProperties and equipment (net of accumulated depreciation)
    
    $
    16,756,000Cash and cash equivalents
    
    
    4,311,000Accrued leasing revenues
    
    
    232,000Prepaid and other
    
    
    193,000$
    21,492,000LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable and accrued expenses:Property taxes
    
    $
    294,000Environmental remediation
    
    
    110,000Other, including $106,000 relating to tank under construction
    
    
    295,000Deferred leasing revenues
    
    
    306,000Income taxes:Current
    
    
    682,000Deferred, net
    
    
    4,645,0006,332,000Commitment (Note 2)Shareholders equity (Note 6):Class A common stock, $.01 par; authorized 6,000,000 shares;
issued and outstanding 3,299,956 shares
    
    
    33,000Capital in excess of par
    
    
    11,795,000Retained earnings
    
    
    3,332,00015,160,000$
    21,492,000
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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004Revenues and other income:Revenues:Leasing
    
    $
    2,663,000
    
    
    $
    3,049,000Petroleum storage facility
    
    
    2,549,000
    
    
    
    2,074,0005,212,000
    
    
    
    5,123,000Other income:Gain on sale of parking garage
    
    
    1,057,000
    
    
    
    Gain on sale of billboard permit
    
    
    100,000
    
    
    
    Attorneys fee judgment
    
    
    
    
    
    
    258,000Condemnation proceeds, including interest of $244,000
    
    
    
    
    
    
    1,672,000Interest
    
    
    94,000
    
    
    
    22,0006,463,000
    
    
    
    7,075,000Expenses:Expenses applicable to:Leasing
    
    
    778,000
    
    
    
    1,590,000Petroleum storage facility
    
    
    1,713,000
    
    
    
    1,876,000General and administrative
    
    
    1,216,000
    
    
    
    1,038,0003,707,000
    
    
    
    4,504,000Income before income taxes
    
    
    2,756,000
    
    
    
    2,571,000Income tax expense:Current
    
    
    976,000
    
    
    
    149,000Deferred
    
    
    117,000
    
    
    
    861,0001,093,000
    
    
    
    1,010,000Net income
    
    
    1,663,000
    
    
    
    1,561,000Retained earnings, beginning
    
    
    2,065,000
    
    
    
    1,494,000Dividends on common stock ($.12 and $.30 per share
in 2005 and 2004, respectively)
    
    
    (396,000
    )
    
    
    (990,000
    )Retained earnings, ending
    
    $
    3,332,000
    
    
    $
    2,065,000Basic income per share
    
    $
    .50
    
    
    $
    .47
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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    1,663,000
    
    
    $
    1,561,000Adjustments to reconcile net income to net cash
provided by operating activities:Gain on sale of parking garage
    
    
    (1,057,000
    )
    
    
    Gain on sale of billboard permit
    
    
    (100,000
    )
    
    
    Condemnation proceeds
    
    
    
    
    
    
    (1,672,000
    )Depreciation
    
    
    431,000
    
    
    
    410,000Accrued leasing revenues
    
    
    94,000
    
    
    
    91,000Deferred income taxes
    
    
    117,000
    
    
    
    861,000Changes in assets and liabilities:Increase in:Receivables
    
    
    
    
    
    
    (213,000
    )Prepaid and other
    
    
    
    
    
    
    (156,000
    )Current income taxes payable
    
    
    647,000
    
    
    
    Deferred leasing revenues
    
    
    306,000
    
    
    
    Decrease in:Receivables
    
    
    413,000
    
    
    
    Prepaid and other
    
    
    237,000
    
    
    
    Accounts payable and accrued expenses
    
    
    (506,000
    )
    
    
    (250,000
    )Current income taxes payable
    
    
    
    
    
    
    (63,000
    )Net cash provided by operating activities
    
    
    2,245,000
    
    
    
    569,000Cash flows from investing activities:Proceeds from:Sale of parking garage
    
    
    2,500,000
    
    
    
    Sale of billboard permit
    
    
    100,000
    
    
    
    Condemnation
    
    
    
    
    
    
    1,672,000Payments for properties and equipment
    
    
    (1,973,000
    )
    
    
    (2,057,000
    )Net cash provided by (used in) investing activities
    
    
    627,000
    
    
    
    (385,000
    )Cash used in financing activities, payment of dividends
    
    
    (396,000
    )
    
    
    (990,000
    )Increase (decrease) in cash and cash equivalents
    
    
    2,476,000
    
    
    
    (806,000
    )Cash and cash equivalents, beginning
    
    
    1,835,000
    
    
    
    2,641,000Cash and cash equivalents, ending
    
    $
    4,311,000
    
    
    $
    1,835,000Supplemental disclosures, cash paid for income taxes
    
    $
    152,000
    
    
    $
    378,000
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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 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. Certain amounts on the accompanying
consolidated statement of income and retained earnings for the year ended December 31, 2004 have
been reclassified to conform to the current year presentation.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 facility (the Petroleum Facility) 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, 2005, cash equivalents consisted of an overnight
uninsured sweep with the Companys principal bank totaling $3,936,000.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.
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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 revenue that portion of such
straight-line rentals which management is unable to conclude is realizable (collectible) due to the
length of the lease terms and other related uncertainties.The Company reports option revenue when earned.Petroleum storage facility revenue:The Company reports revenue from the operations of the petroleum storage facility 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 income:The Company reports income resulting from litigation and 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.
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2.
    
    Properties and equipment:At December 31, 2005, properties and equipment consists of:
 Properties on lease or held for lease, land and land improvements
    
    $
    3,956,000Petroleum storage facility :Land and land improvements
    
    
    5,262,000Buildings and structures
    
    
    1,120,000Tanks and equipment, including $106,000 relating to
tank under construction
    
    
    12,446,00018,828,000Office equipment
    
    
    96,00022,880,000Less accumulated depreciation:Properties on lease or held for lease
    
    
    11,000Petroleum storage facility
    
    
    6,027,000Office equipment
    
    
    86,0006,124,000$
    16,756,000
 The Company was the owner of a parking garage located on Parcel 7A in the Capital Center area,
which was leased for several years. In March 2005, the Company sold the parking garage with a
carrying value of $1,443,000 for $2,500,000 in cash but retained ownership of the underlying land
which is leased for 99 years at a current annual contractual rental of $100,000. Consistent with
other Company long-term land leases, the tenant pays the real property taxes on the land. The
lease further provides for future cost-of-living rental adjustments and periodic appraisals.In November 2005, the Company entered into a contract to construct a 175,000 barrel tank at a
remaining cost of $2,000,000. Construction will commence in the first quarter of 2006. The
Company anticipates that the tank will be completed in the third quarter of 2006.3.
    
    Litigation judgments:Disputes with Amtrak regarding condemnations:In 1998, as part of the electrification of the Northeast Corridor, National Railroad Passenger
Corporation (Amtrak) erected towers and a signal bridge within the air rights owned by the Company.
In 1999, Amtrak condemned a three-year temporary easement of all the air rights owned by the
Company and the Company received $335,000 from Amtrak. In 2001, Amtrak permanently condemned the
air rights and a parcel of land adjacent to the air rights (with a carrying value of $625,000) and
the Company received $925,000 from Amtrak. The Company believed that the condemnation amounts paid
by Amtrak were inadequate and accordingly brought suit against Amtrak in the United States District
Court for the District of Rhode Island (U. S. District Court) seeking additional compensation. In
2002, the U. S. District Court awarded the Company $1,378,000 plus interest for additional damages
resulting from the aforementioned condemnations. In 2003, Amtrak appealed the decision to the U.S.
Court of Appeals for the First Circuit. The First Circuit affirmed the judgment of the U.S.
District Court, and in 2004 the Company received $1,622,000.
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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 2004.Claim against City of Providence for attorneys fees:In 1997, the City of Providence (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 which affirmed the judgment
against the City, and the Company received the payment from the City in 2004. No interest was
awarded on the judgment.4.
    
    Description of leasing arrangements:As of December 31, 2005, the Company had entered into four long-term land leases for four separate
parcels upon which the improvements have been completed (developed parcels), including the lease
for the land under the parking garage discussed in Note 2. The Company has entered into three
additional long-term land leases (undeveloped parcels) with commencement dates of April 1, 2004,
January 1, 2005, and May 1, 2005, respectively. Construction of the improvements has commenced on
two of the three parcels.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 $21,918,000 through December 31, 2005. Management has
concluded that a portion of the excess of straight-line over contractual rentals ($232,000 at
December 31, 2005) is realizable when payable over the terms of the leases.Under the seven land leases which have commenced, the tenants are required to pay the City 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 $1,277,000
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(seven leases) for the year ended December 31, 2005, and $488,000 (four leases) for the year ended
December 31, 2004.Under the lease which commenced January 1, 2005, the tenant is entitled to a credit for future
rents equal to a portion of the real property tax expense currently being paid by the tenant. For
the years ended December 31, 2005 and 2004, the Company reported the portion of the real property
taxes subject to the future credit ($143,000 and $234,000, respectively) as property tax expense on
the accompanying consolidated statements of income and retained earnings and as accrued property
taxes on its consolidated balance sheet. As the tenant makes the tax payment, the amount of the
payment is reclassified from accrued property taxes to deferred leasing revenues which totaled
$306,000 at December 31, 2005. During the periods that the tenant is entitled to the credit
(commencing in 2010), the Company will reclassify deferred leasing revenues to leasing revenues.Prior to the commencement of the May 1, 2005 lease, the Company received option payments pursuant
to a month-to-month arrangement.Under one of the long-term land leases, the Company receives contingent rentals (based upon a fixed
percentage of gross revenue received by the tenant) which totaled approximately $58,000 for each of
the years ended December 31, 2005 and 2004.The Company also leases various parcels of land for outdoor advertising purposes to Lamar Outdoor
Advertising (Lamar) under a lease having a remaining term of 28 years. Presently, there are 25
locations under lease with 48 billboard faces. Of these locations, 22 are owned by the Company and
3 are leased by the Company from third parties under operating leases with original terms of 1 to
11 years. In July 2005, another of the Companys operating leases with a third party terminated
since the Company had been unable to negotiate a renewal, and the Company sold the permit for this
billboard to the former lessor for $100,000 in cash.The Lamar lease also provides that the Company receive contingent rentals based upon a fixed
percentage of the total annual revenue received by Lamar provided such revenue exceeds the
contractual base payment. Contingent rental revenues totaled $87,000 and $98,000 for the years
ended December 31, 2005 and 2004, respectively.Minimum future contractual rental payments to be received from noncancellable long-term leases as
of December 31, 2005 are:
  2006
    
    $
    1,992,0002007
    
    
    1,972,0002008
    
    
    2,020,0002009
    
    
    2,032,0002010
    
    
    2,119,0002011 to 2153
    
    
    673,719,000$
    683,854,000
 In the event of tenant default, the Company has the right to reclaim its leased land together with
any improvements thereon.The Company leases the undeveloped parcels of land in or adjacent to the Capital Center area for
public parking purposes under short-term cancellable leases.
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5.
    
    Petroleum storage facility:Current operations:The Company and Global Companies, L.L.C. (Global) are parties to an agreement whereby the Company
operates the entire Petroleum Facility for Global. The Company is responsible for labor,
insurance, property taxes and other operating expenses, as well as capital improvements.In May 2003, the Company and Global entered into an amended and restated lease agreement (Amended
Agreement) which, among other things, provides as follows: (1) the Amended Agreement will expire
April 30, 2013, but will continue thereafter on a year-to-year basis unless terminated by either
party upon ninety days written notice; (2) Global may terminate the Amended Agreement on or after
April 30, 2008, upon one years written notice; (3) Global will pay a monthly fee of $150,000
effective May 1, 2004, subject to annual cost-of-living adjustments; (4) Global will reimburse the
Company for certain increases 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 years ended December 31, 2005 and 2004, the Company earned contingent revenues of $123,000
and $140,000, respectively.In October 2004, the Company completed construction of a 152,000 barrel tank which Global
immediately leased at a monthly fee of $35,000, increasing Globals monthly fee to $185,000. On
May 1, 2005, the scheduled cost-of-living adjustment resulted in an increased monthly fee of
$191,000. In December 2005, the Company completed the construction of another 152,000 barrel tank
which Global immediately leased at a monthly fee of $36,000, increasing Globals total present
monthly fee to $227,000.In October 2005, the Company and Global entered into the First Amendment to the Amended Agreement
whereby Global agreed to include the 175,000 barrel tank to be constructed in 2006 (see Note 2)
under the existing Amended Agreement at a monthly fee of approximately $42,000.Also effective May 2003, Global was granted the option to purchase the Petroleum Facility 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 totaled approximately $110,000 and $300,000 for the years ended December 31,
2005 and 2004, respectively. [See Wilkesbarre Pierbelow].Environmental remediation:In 1994, a leak was discovered in a 25,000 barrel storage tank at the Petroleum Facility which
allowed the escape of a small amount of fuel oil. All required notices were made to the State of
Rhode Island Department of Environmental Management (RIDEM). In 2000, the tank was demolished and
testing of the groundwater indicated that there was no large pooling of contaminants. In 2001,
RIDEM approved a plan whereby the Company installed a passive system consisting of three wells and
commenced monitoring the wells.In 2003, RIDEM decided that the passive monitoring system previously approved was not sufficient
and required the Company to design an active remediation system for the removal of product from the
contaminated site. The Company and its consulting engineers began the pre-design testing of the
site in the fourth quarter of 2004, and the Company continues to work with RIDEM to design an
acceptable system. The consulting engineers estimated a total cost of
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$200,000 to design, install and operate the system, which amount was included in expenses
applicable to petroleum storage facility on the accompanying consolidated statement of income and
retained earnings for the year ended December 31, 2004. Through December 31, 2005, the Company has
expended $90,000. The Company expects the system to be installed during the second quarter of
2006. The system will pump out the contaminants which will be disposed of in compliance with
applicable regulations. After a period of time, the groundwater will be tested to determine if
sufficient contaminants have been removed. The Company anticipates that the remediation process
will be completed by the second quarter of 2007. While the Company and its consulting engineers
believe that the proposed active remediation system will correct the situation, it is possible that
RIDEM could require the Company to expand remediation efforts, which could result in the Company
incurring additional costs.Environmental incident:In 2002, during testing of monitoring wells at the Petroleum Facility, the Companys consultant
discovered free floating phase product in a groundwater monitoring well located on that portion of
the Petroleum Facility purchased in 2000. Preliminary laboratory analysis indicated that the
product was gasoline, which is not a product the Company ever stored at its Petroleum Facility.
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 Facility. The Company notified RIDEM. The
Company will continue to monitor RIDEMs investigation of this contamination to ensure that the
responsible party addresses this contamination.Since 2003, the Company has not incurred significant costs in connection with this matter and is
unable to determine the costs it might incur to remedy the situation as well as any costs to
investigate, defend, and seek reimbursement from the responsible party with respect to this
contamination.Wilkesbarre Pier (the Pier):The Pier is a deep-water pier in East Providence, Rhode Island owned by the Company which is
integral to the operation of the Petroleum Facility. The Pier and the Petroleum Facility are
connected by two petroleum pipelines. In 1995, the Company and Providence and Worcester Railroad
Company (the Railroad) (the then owner of the Pier) entered into an agreement which, among other
things, gave the Company the right to acquire the Pier for One Dollar ($1.00). The Company
acquired the Pier from the Railroad in 1998. The Company and the Railroad have a common
controlling shareholder.Since 2000, the Company has been involved in litigation with Getty Properties Corp. (Properties),
the owner of an adjacent petroleum storage facility and a party with a claimed interest in the
Pier, and Getty Petroleum Marketing, Inc. (Marketing), the lessee of Properties with respect to the
interest of Properties in the Pier and the obligations attendant thereto and concerning certain
obligations under agreements entered into between the Company, Properties and Marketing in 1997.
Among the issues litigated between the parties was the question of whether or not Properties and/or
Marketing was under an obligation to participate in the cost of the installation of certain fire
suppression equipment required by the Fire Department of the City of East Providence. It was the
position of the Company that Properties was obligated under certain agreements with the Railroad to
which the Company succeeded to participate in the payment. In December 2004, the United States
Court of Appeals for the First Circuit determined that Properties had no such obligation. In
another aspect of the litigation, the United States District Court determined that Properties had
the obligation to install an additional 16-inch pipeline on the Pier. The Company undertook the
installation in 2004 and in February 2005, Properties paid $394,000 for the installation.
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The Company was engaged in litigation with Properties over the question of whether either party had
the obligation to indemnify the other for litigation expenses incurred in the underlying litigation
with respect to the Pier pursuant to a 1986 Guaranty and Indemnity Agreement. In February 2005,
the Judge Magistrate of the United States District Court for the District of Rhode Island
recommended that the Court deny and dismiss all of the claims asserted by the parties in the
action. Both parties appealed that recommendation, and in September 2005, the Court denied and
dismissed all claims. Neither party appealed the Courts decision.6.
    
    Shareholders equity:In December 2001, the Company amended its Articles of Incorporation to create three classes of $.01
par value stockClass A Common Stock, Class B Common Stock, and Excess Stock. The Company
converted the then outstanding 3,000,000 shares of $1.00 par value common shares into 3,000,000
shares of Class A Common Stock. In addition, the Company issued (in the form of a stock dividend)
299,956 shares of Class B Common Stock (one share for each ten shares of Class A Common Stock
held). No fractional Class B shares were issued.The amended Articles of Incorporation prohibited any shareholder from acquiring more than a 5%
interest in the Companys classes of common stock and prohibited the two shareholders who each
beneficially then owned in excess of 5% of the Companys classes of common stock from increasing
their percentage ownership of each class of common stock. The purpose of the amendment of the
Articles of Incorporation was to provide the Company with the necessary flexibility to qualify to
be taxed as a real estate investment trust (REIT). The amendment provided that if the Company did
not make an election to be taxed as a REIT on or before March 31, 2005, the restrictions on share
ownership would automatically lapse and shares of Class B Common Stock would automatically be
converted into shares of Class A Common Stock on a one for one basis.The Company did not make the election and on March 31, 2005, the shares of Class B Common Stock
were converted into shares of Class A Common Stock, resulting in the Company having 3,299,956
shares of Class A Common Stock outstanding, and the Excess Stock
is no longer authorized.7.
    
    Income taxes:In 2004, the Company received condemnation proceeds from Amtrak which qualify for deferred
reinvestment for income tax reporting purposes whereby the Company elected to reduce the income tax
basis of qualifying subsequent acquisitions, which resulted in the Companys not then paying income
taxes on the proceeds, subject to certain restrictions. During 2004, the Company made qualifying
acquisitions totaling $216,000. Accordingly, the income tax provision for the year ended December
31, 2004 reflected 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:
 2005
    
    
    2004Computed expected tax
    
    $
    937,000
    
    
    $
    874,000Increase (decrease) in expected tax
resulting from:State income tax, net of Federal income tax
benefit
    
    
    165,000
    
    
    
    160,000Statutory and other
    
    
    (9,000
    )
    
    
    (24,000
    )$
    1,093,000
    
    
    $
    1,010,000
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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, 2005 were as follows:
 Gross deferred tax liabilities:Property having a financial statement basis
in excess of tax basis
    
    $
    4,373,000Condemnation proceeds
    
    
    484,000Accrued leasing revenues
    
    
    93,000Insurance premiums
    
    
    62,0005,012,000Gross deferred tax assets
    
    
    (367,000
    )$
    4,645,000
 8.
    
    Operating segment disclosures:The Company operates in two segments: (1) Leasing and (2) Petroleum storage facility.The Leasing segment consists of the long-term leasing of certain of its real estate interests in
downtown Providence, Rhode Island (upon the commencement of which the tenants are required to
construct buildings thereon, with the exception of the parking garage, and to pay real property
taxes) and locations along interstate and primary highways in Rhode Island and Massachusetts (to
Lamar which has constructed outdoor advertising boards thereon). The Company anticipates that the
future development of its remaining properties in and adjacent to the Capital Center area will
consist primarily of long-term ground leases. Pending this development, the Company leases these
parcels for public parking purposes under short-term cancellable leasing arrangements.The Petroleum Storage Facility segment consists of the operating of the Petroleum Facility 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 5).The principal difference between the two segments relates to the nature of the operations. The
tenants in the leasing segment incur substantially all of the development and operating costs of
the assets constructed on the Companys land, whereas the Company is responsible for the operating
and maintenance expenditures as well as capital improvements at the Petroleum Facility.The Company makes decisions relative to the allocation of resources and evaluates performance based
on income before income taxes, excluding interest income, 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, 2005 and 2004.The following financial information is used for making operating decisions and assessing
performance of the Companys segments:
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##### Table of Contents



PetroleumStorageLeasing
    
    
    Facility
    
    
    TotalYear ended December 31, 2005:Revenues and other income:Revenues:Long-term leases:Contractual
    
    $
    1,983,000
    
    
    $
    2,426,000
    
    
    $
    4,409,000Contingent
    
    
    145,000
    
    
    
    123,000
    
    
    
    268,000Option
    
    
    81,000
    
    
    
    
    
    
    
    81,000Non-cash, excess of contractual over
straight-line rentals
    
    
    (94,000
    )
    
    
    
    
    
    
    (94,000
    )Short-term lease
    
    
    548,000
    
    
    
    
    
    
    
    548,0002,663,000
    
    
    
    2,549,000
    
    
    
    5,212,000Other income:Gain on sale of parking garage
    
    
    1,057,000
    
    
    
    
    
    
    
    1,057,000Gain on sale of billboard permit
    
    
    100,000
    
    
    
    
    
    
    
    100,000Total revenues and other income
    
    $
    3,820,000
    
    
    $
    2,549,000
    
    
    $
    6,369,000Property tax expense
    
    $
    574,000
    
    
    $
    95,000
    
    
    $
    669,000Depreciation
    
    $
    14,000
    
    
    $
    415,000
    
    
    $
    429,000Income before income taxes
    
    $
    3,042,000
    
    
    $
    836,000
    
    
    $
    3,878,000Assets
    
    $
    4,271,000
    
    
    $
    13,273,000
    
    
    $
    17,544,000Properties and equipment:Additions
    
    $
    
    
    
    $
    2,103,000
    
    
    $
    2,103,000Deletion
    
    $
    (2,500,000
    )
    
    $
    
    
    
    $
    (2,500,000
    )Year ended December 31, 2004:Revenues and other income:Revenues:Long-term leases:Contractual
    
    $
    1,705,000
    
    
    $
    1,934,000
    
    
    $
    3,639,000Contingent
    
    
    156,000
    
    
    
    140,000
    
    
    
    296,000Option
    
    
    405,000
    
    
    
    
    
    
    
    405,000Non-cash, excess of contractual over
straight-line rentals
    
    
    (91,000
    )
    
    
    
    
    
    
    (91,000
    )Short-term lease
    
    
    874,000
    
    
    
    
    
    
    
    874,0003,049,000
    
    
    
    2,074,000
    
    
    
    5,123,000Other income, attorneys fees judgment
    
    
    258,000
    
    
    
    
    
    
    
    258,000Total revenues and other income
    
    $
    3,307,000
    
    
    $
    2,074,000
    
    
    $
    5,381,000Property tax expense
    
    $
    1,326,000
    
    
    $
    76,000
    
    
    $
    1,402,000Depreciation
    
    $
    64,000
    
    
    $
    342,000
    
    
    $
    406,000Income before income taxes
    
    $
    1,717,000
    
    
    $
    198,000
    
    
    $
    1,915,000Assets
    
    $
    6,036,000
    
    
    $
    11,814,000
    
    
    $
    17,850,000Properties and equipment, additions
    
    $
    216,000
    
    
    $
    1,830,000
    
    
    $
    2,046,000
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The following is a reconciliation of the segment information to the amounts reported in the
accompanying consolidated financial statements:
 2005
    
    
    2004Revenues and other income:Revenues and other income for operating segments
    
    $
    6,369,000
    
    
    $
    5,381,000Condemnation proceeds, including interest
    
    
    
    
    
    
    1,672,000Interest income
    
    
    94,000
    
    
    
    22,000Total consolidated revenues and other income
    
    $
    6,463,000
    
    
    $
    7,075,000Property tax expense:Property tax expense for operating segments
    
    $
    669,000
    
    
    $
    1,402,000Unallocated corporate property tax expense
    
    
    1,000
    
    
    
    1,000Total consolidated property tax expense
    
    $
    670,000
    
    
    $
    1,403,000Depreciation:Depreciation for operating segments
    
    $
    429,000
    
    
    $
    406,000Unallocated corporate depreciation
    
    
    2,000
    
    
    
    4,000Total consolidated depreciation
    
    $
    431,000
    
    
    $
    410,000Income before income taxes:Income for operating segments
    
    $
    3,878,000
    
    
    $
    1,915,000Condemnation proceeds
    
    
    
    
    
    
    1,672,000Interest income
    
    
    94,000
    
    
    
    22,000Unallocated corporate expenses
    
    
    (1,216,000
    )
    
    
    (1,038,000
    )Total consolidated income before income taxes
    
    $
    2,756,000
    
    
    $
    2,571,000Assets:Assets for operating segments
    
    $
    17,544,000
    
    
    $
    17,850,000Corporate cash and cash equivalents
    
    
    3,936,000
    
    
    
    1,667,000Other unallocated amounts
    
    
    12,000
    
    
    
    14,000Total consolidated assets
    
    $
    21,492,000
    
    
    $
    19,531,000Additions to properties and equipment:Operating segments
    
    $
    2,103,000
    
    
    $
    2,046,000Unallocated corporate additions
    
    
    
    
    
    
    12,000Total consolidated additions
    
    $
    2,103,000
    
    
    $
    2,058,000Deletion to properties and equipment, parking garage,
operating segment and total consolidated deletion
    
    $
    (2,500,000
    )
    
    $
    
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The following table sets forth those customers whose revenues exceed 10% of the Companys segment
revenues.
 2005
    
    
    2004Leasing segment:A
    
    $
    718,000
    
    
    $
    717,000B
    
    
    548,000
    
    
    
    874,000C
    
    
    468,000
    
    
    
    392,000D
    
    
    403,000
    
    
    
    403,000$
    2,137,000
    
    
    $
    2,386,000Petroleum storage facility segment (one customer)
    
    $
    2,549,000
    
    
    $
    2,074,000
 9.
    
    Fair value of financial instruments:The carrying amounts of the Companys financial instruments approximate their fair values at
December 31, 2005, due to the short maturities of cash and cash equivalents, and accounts payable
and accrued expenses.
 
 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial DisclosureThere were no changes in, or disagreements with, accountants on accounting or financial disclosure
as defined by Item 304 of Regulation S-B.
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##### Table of Contents



PART III
 
 Item 8A. Controls and ProceduresUnder 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 IssuerThe 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 2006 Annual Meeting of the Shareholders
to be filed with the SEC.The following are the executive officers of the Issuer:
 Date of FirstName
    
    Age
    
    Office Held
    
    Election to OfficeRobert H. Eder
    
    73
    
    Chairman, Capital Properties, Inc.
    
    1995Ronald P. Chrzanowski
    
    63
    
    President, Capital Properties, Inc.
    
    1997Barbara J. Dreyer
    
    67
    
    Treasurer, Capital Properties, Inc.
    
    1997Stephen J. Carlotti
    
    63
    
    Secretary, Capital Properties, Inc.
    
    1998Avery L. Noe
    
    62
    
    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.
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##### Table of Contents



Item 10. Executive CompensationThe information required by this item is incorporated by reference to the Section entitled
Executive Compensation in the Companys Definitive Proxy Statement for the 2006 Annual Meeting of
Shareholders to be filed with the SEC.
 
 Item 11. Security Ownership of Certain Beneficial Owners and ManagementThe 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 2006 Annual Meeting of Shareholders to be filed with the SEC.
 
 Item 12. Certain Relationships and Related TransactionsNot applicable.
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##### Table of Contents



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)
    
    Lease between Metropark, Ltd. and Company:(i)
    
    Dated January 1, 2005 (incorporated by reference to
Exhibit 10(a) to the Issuers annual report on Form 10-KSB for the year ended December 31,
2004), as amended.(b)
    
    Miscellaneous contract:(i)
    
    Option Agreement to Purchase Real Property and Related Assets, dated June
9, 2003, by and between Dunellen, LLC and Global Companies, LLC
(incorporated by reference to Exhibit 10(b)(i) to the Issuers Report on Form
10-QSB/A for the quarterly period ended June 30, 2003), as amended.
 20.1
    
    Map of the Companys parcels in Downtown Providence, Rhode Island20.2
    
    Map of the Companys petroleum storage facility in East Providence, Rhode Island21
    
    Subsidiaries of the Company31.1
    
    Rule 13a-14(a) Certification of Chairman of the Board and Principal Executive Officer31.2
    
    Rule 13a-14(a) Certification of Treasurer and Principal Financial Officer32.1
    
    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
200232.2
    
    Certification of Treasurer and Principal Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 (b)
    
    A report on Form 8-K was filed October 28, 2005, reporting the election of a director and the
entering into a First Amendment to the Amended and Restated Lease Agreement with Global
Companies, LLC.
 
 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 2006 Annual
Meeting of the Shareholders to be filed with the SEC.
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SIGNATURE
  CAPITAL PROPERTIES, INC.By
    
    /s/ Robert H. EderRobert H. EderChairman of the Board andPrincipal Executive Officer
  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 17, 2006Robert H. EderChairman and DirectorPrincipal Executive Officer/s/ Ronald P. Chrzanowski
    
    March 17, 2006Ronald P. ChrzanowskiPresident and Director/s/ Barbara J. Dreyer
    
    March 17, 2006Barbara J. DreyerTreasurer, Principal Financial OfficerAnd Principal Accounting Officer/s/ Harris N. Rosen
    
    March 17, 2006Harris N. Rosen, Director
 34