<PAGE>   1


                                   EXHIBIT 13


                               ANNUAL REPORT 2000

                            CAPITAL PROPERTIES, INC.







                                      III-5


<PAGE>   2


BRIEF DESCRIPTION OF
THE COMPANY'S BUSINESS


The Company's business consists of the leasing of certain of its real estate
interests in downtown Providence, Rhode Island. Through its wholly-owned
subsidiary, Tri-State Displays, Inc., the Company leases locations along
interstate and primary highways in Rhode Island and Massachusetts for outdoor
advertising purposes. Through its wholly-owned subsidiary, Capital Terminal
Company, the Company operates its petroleum storage facilities in East
Providence, Rhode Island. Through its wholly-owned subsidiary, CTC, LLC, the
Company owns land adjacent to the petroleum storage facilities.















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

                           FORWARD LOOKING STATEMENTS

Certain portions of this Annual Report to Shareholders, and particularly the
President's Report, the Management's Discussion and Analysis of Financial
Condition and Results of Operations and the Notes to Consolidated Financial
Statements, contain forward-looking statements which represent the Company's
expectations or beliefs concerning future events. The Company cautions that
these statements are further qualified by important factors that could cause
actual results to differ materially from those in the forward-looking
statements, including, without limitation, the following: the ability of the
Company to generate adequate amounts of cash; the collectibility of the accrued
rental income when due over the terms of the 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 City of Providence and Amtrak
litigations; and exposure to contamination, cleanup or similar costs associated
with the operation of the petroleum storage facilities.


<PAGE>   3


PRESIDENT'S REPORT

In the accompanying financial statements, the Company is reporting net income of
$174,000 for the calendar year 2000, resulting in earnings per share of $.06.

The Company's common stock is listed on the American Stock Exchange under the
symbol "CPI." During 2000, the Company paid a dividend of $.62 per share on the
Company's outstanding stock, including a special dividend of $.50 per share
representing a portion of the interest received from the State of Rhode Island
in connection with the condemnation award paid in December 1999.


DOWNTOWN PROVIDENCE REAL ESTATE

The Company owns approximately 20.5 acres of land within the Capital Center
Project area (Capital Center) in downtown Providence, Rhode Island, including
1.9 acres of air rights over Amtrak's Northeast Corridor (Boston to New York
City) railroad right of way, which air rights Amtrak has indicated it will
permanently condemn. (See "Litigation" below for a discussion of the
condemnation.) These properties, shown on the plan which appears on page 8 of
this Report, are Parcels 2, 3S, 3W, 3E, 4W, 4E, 5, 6, 7A, 8 and 9. The Company
also owns a 15,000 square foot parcel (Parcel 22) and a 3,000 square foot parcel
(Parcel 21) located outside of, but immediately adjacent to, Capital Center.

The Company has entered into long-term land leases on several of its parcels 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 owns a below-grade parking garage on Parcel 7A containing 360 public
parking spaces adjacent to the Amtrak rail passenger station.

In December 1998, the Company entered into a long-term lease for 149 years on
Parcel 9 for the construction of a building that will contain 200,000 square
feet of office space, 67,000 square feet of retail space and a parking garage
which will include a minimum of 250 public parking spaces. This building design
has been approved by the Capital Center Commission, and the developer is
finalizing the project. The term of this lease will not commence until
construction begins.

In August 2000, the Company entered into a long-term lease for 97 years (after
the end of the initial operating period) on Parcel 2 for the construction of a
200-225 room luxury hotel, a building containing 200-225 condominium units, a
100,000 square foot corporate office building and a below-grade parking garage
containing 450-500 public parking spaces. The lease provides a period of time
within which the developer may perform its due diligence, seek the approval of
the plans for

<PAGE>   4


the project from the Capital Center Commission and enter into a tax
stabilization agreement with the City of Providence. The term of this lease will
not commence until construction begins.

In December 2000, the Company entered into a long-term lease for 250 years
(after the end of the initial operating period) on Parcels 3E and 4E for the
construction of a 23-story apartment tower containing 190 units on Parcel 3E and
a 6-story parking garage containing 350 public parking spaces on Parcel 4E. The
developer has entered into a tax stabilization agreement with the City of
Providence. The lease provides a period of time within which the developer may
perform its due diligence and seek the approval of the plans for the project
from the Capital Center Commission. The term of this lease will not commence
until construction begins. The Company has also entered into an option agreement
with this same developer for the future development of Parcels 3W and 4W.

The parking garage on Parcel 7A and Parcels 3E, 3W, 4E, 4W, 6, 21 and 22 have
been leased to a firm experienced in parking operations. These leases can be
terminated on short notice as developments proceed to construction.

Providence Place Mall, a regional shopping mall containing 1.2 million square
feet of retail space and a 4,000 car garage, opened in 1999 on a site to the
west of the Company's Parcel 9 in Capital Center (marked "PPM" on the plan). The
Mall's anchor stores include Nordstrom, Filene's and Lord and Taylor.


CAPITAL TERMINAL COMPANY

Capital Terminal Company, a wholly-owned subsidiary, operates the Company's
petroleum storage facilities (the Facilities). The plan of the Facilities is
shown on page 7 of this Report.

The Company has an agreement with Global Companies, L.L.C. (Global) of Waltham,
Massachusetts (which is an affiliate of Repsol YPF, the Spanish oil company)
under which the Company operates the Facilities for Global. The agreement
expires April 30, 2004 with options to extend on an annual basis. The agreement
further provides that the Company will receive an additional $.10 per barrel for
every barrel in excess of 2,000,000 barrels of throughput in an agreement year.
For the current agreement year, the Company exceeded the 2,000,000 barrels in
December 2000 and will receive additional revenue for each barrel of throughput
until April 30, 2001, when the current agreement year ends.

In April 2000, the Company purchased real estate consisting of 2.275 acres of
land and a building (which property abuts the petroleum storage facilities). The
building was demolished to provide additional acreage for future expansion and
all environmental cleanup was completed.

During 2000, the Company extended the tank farm dikes to all property lines
(including the newly-acquired property) and constructed certain other
enhancements, some of which were required by environmental regulators. The
Company constructed three additional petroleum storage tanks. The Facilities now
has six petroleum storage tanks with a total capacity of 524,500 barrels.


<PAGE>   5

There is sufficient land within the newly-expanded dike areas to construct three
additional 152,000 barrel tanks which would increase the capacity of the
Facilities, if built, by an additional 456,000 barrels, bringing the total
capacity to 980,500 barrels. The Company has obtained all the necessary
approvals from the City of East Providence and the State of Rhode Island to
construct these additional tanks; however, the Company has no present plan to
construct any new tanks.

During 2000, the Company completed the construction of a state-of-the-art 8-bay
truck rack, which has both top and bottom loading capabilities, replacing a
4-bay truck rack, which only had top-loading capabilities. The new truck rack is
fully automated and has nineteen different positions for truck loading.

During the past decade, the distillate storage capacity in the State of Rhode
Island has been reduced from 300 million gallons to 100 million gallons; the
Company now has 22% of that total capacity. This reduction in the State's total
storage results from the closing of terminals. The Company believes that the
demand for petroleum storage in Rhode Island and the adjacent service area,
coupled with the decline in storage capacity, justifies its expansion of the
Facilities.


TRI-STATE DISPLAYS, INC.

Tri-State Displays, Inc., another wholly-owned subsidiary, owns or controls
various locations along interstate and primary highways in Rhode Island and
Massachusetts which are leased for commercial advertising purposes to Lamar
Advertising Company of Baton Rouge, Louisiana. At December 31, 2000, these
locations contained a total of 45 billboard faces.


LITIGATION

During 2000, the Company was party to several lawsuits involving various
governmental and quasi-governmental entities.

In 1997, the City of Providence (the City) revalued the Company's properties
within Capital Center (with the exception of Parcels 7A and 8) and reached back
six years to assess over $13,000,000 in back taxes, interest and penalties on
the properties. The Company contended that this action by the City was both
unprecedented and illegal. In July 1999, the Rhode Island Superior Court
(Superior Court) ruled in favor of the Company and found that both the City's
new tax assessments and back taxes were illegal and void. The City appealed the
judgment to the Rhode Island Supreme Court (Supreme Court). In December 1999,
the Supreme Court denied and dismissed the City's appeal. In July 2000, the City
filed a motion to vacate the Superior Court judgments entered in favor of the
Company. In October 2000, the Superior Court denied the motion to vacate and
awarded attorneys fees to the Company in an amount to be determined by the Court
after a hearing thereon. The City appealed the decision to the Supreme Court.
The Company has filed a motion to dismiss the appeal and is awaiting a hearing
thereon.

In January 1987, the Company entered into an agreement with the State of Rhode
Island (the State) relating to the State's obligation with respect to the
condemnation of a portion of the property owned by the Company in the Capital
Center Project area in downtown Providence, Rhode Island (the Agreement). In
November 1987, the State condemned the property and paid the Company a


<PAGE>   6


condemnation award of $2,600,000. Under the Agreement, the Company acquired
Parcel 9 in the Capital Center Project area from the State and was required to
return to the State a portion of the condemnation award. In 1988, the Company
filed a petition in the Superior Court for an increased condemnation award
alleging that the 1987 award paid by the State was inadequate. After years of
litigation, in 1997 the Superior Court entered final judgment in favor of the
Company, awarding an additional $6,101,000 in condemnation proceeds as well as
interest on the judgment of $4,552,000. The State filed an appeal with the
Supreme Court; in 1998 the Supreme Court affirmed the Superior Court decision.
The State then filed several motions in the Superior Court. In July 1999, the
Superior Court ruled in favor of the Company and found that the State must pay
the entire judgment and sent the case to the Supreme Court for review. In
December 1999, the Supreme Court ordered the State to pay to the Company 50% of
the additional condemnation award together with pre-judgment and post-judgment
interest at the U. S. Treasury Bill rate. On December 22, 1999, the State paid
the Company $5,977,000.

Following that opinion, the Company and the State raised several issues relative
to the interest rate and which party was entitled to receive the interest. In
January 2001, the Supreme Court issued its final ruling that the Company is not
entitled to any further payments with respect to the 1987 condemnation.

The Company is also in dispute with the National Railroad Passenger Corporation
(Amtrak) concerning various trespasses by Amtrak. As part of the Capital Center
Project, during the 1980's the Company, State, City and 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 begin 19.3 feet above the top of rail within
what is now designated as Parcel 6. Following that conveyance, the railroad
station and the Company's adjacent parking garage were constructed and partially
financed by the Federal Railroad Administration (FRA).

Many of the facilities needed to service the railroad station were built within
the confines of Parcel 7A (the parking garage parcel). Over the years, the
Company did not charge Amtrak for this intrusion on its property; and over the
years Amtrak assumed the cost of electricity provided to the parking garage. In
1997, Amtrak unilaterally refused to pay for the electricity, and the Company
brought suit in the United States District Court for the District of Rhode
Island (U. S. District Court) seeking an order requiring Amtrak to remove its
facilities from Parcel 7A.

In the fall of 1998, as part of Amtrak's electrification of the Northeast
Corridor, Amtrak erected towers within the air rights over Parcel 6 (the tops of
which vary in height between 27 and 31 feet above the tracks) and a signal
bridge. The Company amended its complaint against Amtrak to include the air
rights trespasses.

In July 1999, Amtrak condemned a three-year temporary easement of all the air
rights owned by the Company retroactive to August 1998. In October 1999, the
Company received from Amtrak $335,000, the sum estimated by Amtrak to be just
compensation for the property taken. In July 1999, Amtrak also condemned a
permanent easement within a portion of the parking garage parcel upon which
Amtrak had placed improvements. In October 1999, the Company received from
Amtrak $60,000, the sum estimated by Amtrak to be just compensation for the
property taken.

<PAGE>   7

Following the receipt of the condemnation proceeds, the trespass litigation
between Amtrak and the Company and the Amtrak condemnation cases were
consolidated for trial. In December 2000, Amtrak offered to purchase the air
rights and a portion of Parcel 6 for $863,000, which offer the Company refused.
Amtrak has indicated it will permanently condemn both properties. The Company
expects the matter to be heard in 2001.

The Company is also in dispute with the FRA. During 1999, the State of Rhode
Island sued the Company to block an increase of commuter parking rates charged
by its lessee in its parking garage. A preliminary injunction was entered, which
was affirmed by the United States Court of Appeals for the First Circuit. A
consent judgment was also entered restraining the Company from increasing the
rates without prior approval of the FRA. The Company requested approval from the
FRA to increase the rates, which request was denied. The Company then filed suit
against the FRA in the United States Court of Claims seeking unspecified money
damages. The FRA subsequently approved an increase in rates in an amount less
than the increase sought by the Company. Discovery is ongoing.


                                     * * * *

James H. Dodge, a director for four years, has decided not to stand for
reelection in April of this year. Mr. Dodge's outstanding business acumen was an
invaluable asset to management. We thank him for his valued contributions.

On behalf of the officers and directors, I wish to express our appreciation to
the shareholders for your continued confidence and support.

                                         Sincerely,

                                         /s/ Ronald P. Chrzanowski

                                         Ronald P. Chrzanowski
                                         President
March 3, 2001


<PAGE>   8


                              MAP IN ANNUAL REPORT

     The map in the Annual Report to Shareholders is a plan of the petroleum
storage facilities in East Providence, Rhode Island, indicating the tanks, truck
loading rack, and buildings owned by the Issuer.





















(See President's Report, pages 3 and 4, for discussion of the petroleum storage
facilities.)


                                        7


<PAGE>   9


                              MAP IN ANNUAL REPORT

     The map in the Annual Report to Shareholders is a plan of a portion of
downtown Providence, Rhode Island, which indicates those parcels owned by the
Issuer in that area known as "Capital Center" and immediately adjacent thereto.
A legend contains the Parcel Number, the Parcel Size and the Development on the
Parcels as follows:

<TABLE>
<CAPTION>

Parcel No.    Square Feet
 CAPITAL      PARCEL SIZE                      DEVELOPMENT ON PARCELS
 CENTER
<S>           <C>                              <C>
    2         92,000
    3S        48,000.....................      13 Story Office Building -
                                                235,000 gross square feet
    3W        35,000
    3E        24,000
    4W        46,000
    4E        22,000
    5         54,000.....................      8 Story Luxury Apartment Building -
                                                454,000 gross square feet
    6         386,000 (Land, 303,000; Air Rights, 83,000)
    7A        76,000.....................      360 Car Public Parking Garage
    8         36,000.....................      4 Story Office Building - 114,000 gross
                                                 square feet
    9         72,000
</TABLE>

OUTSIDE
CAPITAL
CENTER
   21         3,000
   22        15,000


(See President's Report, pages 2 and 3, for discussion of the development on the
parcels.)


                                        8


<PAGE>   10


CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Financial condition:

The Company's principal assets consist of land, a public parking garage,
petroleum storage facilities (the Facilities) and locations for outdoor
advertising purposes. A significant portion of the land consists of
approximately 20.5 acres, including 1.9 acres of air rights, in downtown
Providence, Rhode Island, held for development. At December 31, 2000, the
Company is earning revenue from long-term land leases for three separate land
parcels. The tenants of each parcel have constructed buildings which are
substantially occupied.

In December 1998, the Company entered into a long-term lease for 149 years on
Parcel 9 for the construction of a building that will contain 200,000 square
feet of office space, 67,000 square feet of retail space and a parking garage
which will include a minimum of 250 public parking spaces. This building design
has been approved by the Capital Center Commission, and the developer is
finalizing the project. The term of lease will not commence until construction
begins.

In August 2000, the Company entered into a another long-term lease for 97 years
(after the end of the initial operating period) on Parcel 2 for the construction
of a 200-225 room luxury hotel, a building containing 200-225 condominium units,
a 100,000 square foot corporate office building and a below-grade parking garage
containing 450-500 public parking spaces. The lease provides a period of time
within which the developer may perform its due diligence, seek the approval of
the plans for the project from the Capital Center Commission and enter into a
tax stabilization agreement with the City of Providence. The term of this lease
will not commence until construction begins.

In December 2000, the Company entered into a third long-term lease for 250 years
(after the end of the initial operating period) on Parcels 3E and 4E for the
construction of a 23-story apartment tower containing 190 units on Parcel 3E and
a 6-story parking garage containing 350 public parking spaces on Parcel 4E. The
developer has entered into a tax stabilization agreement with the City of
Providence. The lease provides a period of time within which the developer may
perform its due diligence and seek the approval of the plans for the project
from the Capital Center Commission. The term of this lease will not commence
until construction begins. The Company has also entered into an option agreement
with this same developer for the future development of Parcels 3W and 4W.

The Company leases to one tenant locations along interstate and primary highways
in Massachusetts and Rhode Island for outdoor advertising purposes. At December
31, 2000, these locations contained a total of 45 billboard faces. The lease
currently expires in 2025; however, the term of the lease is extended two years
for each additional location added. The Company has not added any locations
since 1998, and no future additions are scheduled.

Certain of the Company's long-term land leases, including the outdoor
advertising locations, provide for scheduled rent increases over their terms. In
accordance with the provisions of Statement of Financial Accounting Standards
(FAS) No. 13 (Accounting for Leases) and certain of its interpretations, the
Company recognizes the rental income on the straight-line basis over the term of
each lease; 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. At December 31, 2000, the cumulative amount not reported as
income is $12,783,000.

<PAGE>   11


In 1997, the City of Providence (the City) revalued the Company's properties
within Capital Center (with the exception of Parcels 7A and 8) and reached back
six years to assess over $13,000,000 in back taxes, interest and penalties on
the properties. The Company contended that this action by the City was both
unprecedented and illegal. In July 1999, the Rhode Island Superior Court
(Superior Court) ruled in favor of the Company and found that both the City's
new tax assessments and back taxes were illegal and void. The City appealed the
judgment to the Rhode Island Supreme Court (Supreme Court). In December 1999,
the Supreme Court denied and dismissed the City's appeal. In July 2000, the City
filed a motion to vacate the Superior Court judgments entered in favor of the
Company. In October 2000, the Superior Court denied the motion to vacate and
awarded attorneys fees to the Company in an amount to be determined by the Court
after a hearing thereon. The City appealed the decision to the Supreme Court.
The Company has filed a motion to dismiss the appeal and is awaiting a hearing
thereon.

In January 1987, the Company entered into an agreement with the State of Rhode
Island (the State) relating to the State's obligation with respect to the
condemnation of a portion of the property owned by the Company in the Capital
Center Project area in downtown Providence, Rhode Island (the Agreement). In
November 1987, the State condemned the property and paid the Company a
condemnation award of $2,600,000. Under the Agreement, the Company acquired
Parcel 9 in the Capital Center Project area from the State and was required to
return to the State a portion of the condemnation award. In 1988, the Company
filed a petition in the Superior Court for an increased condemnation award
alleging that the 1987 award paid by the State was inadequate. After years of
litigation, in 1997 the Superior Court entered final judgment in favor of the
Company, awarding an additional $6,101,000 in condemnation proceeds as well as
interest on the judgment of $4,552,000. The State filed an appeal with the
Supreme Court; in 1998 the Supreme Court affirmed the Superior Court decision.
The State then filed several motions in the Superior Court. In July 1999, the
Superior Court ruled in favor of the Company and found that the State must pay
the entire judgment and sent the case to the Supreme Court for review. In
December 1999, the Supreme Court ordered the State to pay to the Company 50% of
the additional condemnation award together with pre-judgment and post-judgment
interest at the U. S. Treasury Bill rate. On December 22, 1999, the State paid
the Company $5,977,000.

Following that opinion, the Company and the State raised several issues relative
to the interest rate and which party was entitled to receive the interest. In
January 2001, the Supreme Court issued its final ruling that the Company is not
entitled to any further payments with respect to the 1987 condemnation.

The Company is also in dispute with the National Railroad Passenger Corporation
(Amtrak) concerning various trespasses by Amtrak. As part of the Capital Center
Project, during the 1980's the Company, State, City and 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 begin 19.3 feet above the top of rail within
what is now designated as Parcel 6. Following that conveyance, the railroad
station and the Company's adjacent parking garage were constructed and partially
financed by the Federal Railroad Administration (FRA).

Many of the facilities needed to service the railroad station were built within
the confines of Parcel 7A (the parking garage parcel). Over the years, the
Company did not charge Amtrak for this intrusion on its property; and over the
years Amtrak assumed the cost of electricity provided to the parking garage. In
1997, Amtrak unilaterally refused to pay for the electricity, and the Company
brought suit in the United States District Court for the District of Rhode
Island (U. S. District Court) seeking an order requiring Amtrak to remove its
facilities from Parcel 7A.

<PAGE>   12


In the fall of 1998, as part of Amtrak's electrification of the Northeast
Corridor, Amtrak erected towers within the air rights over Parcel 6 (the tops of
which vary in height between 27 and 31 feet above the tracks) and a signal
bridge. The Company amended its complaint against Amtrak to include the air
rights trespasses.

In July 1999, Amtrak condemned a three-year temporary easement of all the air
rights owned by the Company retroactive to August 1998. In October 1999, the
Company received from Amtrak $335,000, the sum estimated by Amtrak to be just
compensation for the property taken. In July 1999, Amtrak also condemned a
permanent easement within a portion of the parking garage parcel upon which
Amtrak had placed improvements. In October 1999, the Company received from
Amtrak $60,000, the sum estimated by Amtrak to be just compensation for the
property taken.

Following the receipt of the condemnation proceeds, the trespass litigation
between Amtrak and the Company and the Amtrak condemnation cases were
consolidated for trial. In December 2000, Amtrak offered to purchase the air
rights and a portion of Parcel 6 for $863,000, which offer the Company refused.
Amtrak has indicated it will permanently condemn both properties. The Company
expects the matter to be heard in 2001.

The Company constructed in two phases a new expanded truck rack at the
Facilities which is fully automated and has both top and bottom loading
capabilities. The first phase was completed in December 1999 and the second
phase in May 2000 at a total cost of $2,356,000.

In April 2000, the Company purchased real estate consisting of 2.275 acres of
land and a building for $533,000, which property abuts the Facilities. The
Company conducted an environmental study of the property, demolished the
building (to provide additional acreage for future expansion) and completed the
cleanup of the property at a cost of $479,000.

During 2000, the Company constructed three new tanks at the Facilities (which
increased the total capacity of the Facilities to 524,500 barrels) together with
certain enhancements within the Facilities, some of which are required by
environmental regulators. Costs incurred through December 31, 2000 total
$3,788,000. The tanks were placed in service during the fourth quarter of 2000;
however, certain of the enhancements totaling approximately $566,000 will not be
completed until the summer of 2001.

At December 31, 2000, the Company is reporting accounts payable of $1,109,000
related to the construction of the tanks and the enhancements.

The Company has obtained all the necessary approvals from the City of East
Providence and the State of Rhode Island to construct three additional 152,000
barrel tanks; however, the Company has no present plans to construct any new
tanks.

The Company and a petroleum company entered into an agreement which will expire
April 30, 2004, unless options to extend on an annual basis are exercised,
whereby the Company operates the entire Facilities for the petroleum company.
The Company is responsible for labor, insurance, property taxes and other
operating expenses, as well as capital improvements. The agreement further
provides for annual fee increases of 4.5%. The minimum monthly fee was $70,000
which increased to $108,000 when the new tanks were placed in service.

The agreement also provides that the Company will receive an additional $.10 per
barrel for every barrel in excess of 2,000,000 barrels of throughput in an
agreement year. For the agreement year ended April 30, 2000, the throughput
exceeded 2,000,000 barrels in February 2000, and the Company earned $88,000 in
contingent revenues. For the agreement year ending April 30, 2001, throughput
exceeded 2,000,000 barrels in December 2000, and the Company earned $20,000 in

<PAGE>   13


contingent revenues through December 31, 2000. The Company will continue to earn
$.10 per barrel for each barrel of throughput for the remainder of this current
agreement year.

In 1994, a leak was discovered in a 25,000 barrel storage tank at the Facilities
which allowed the escape of a small amount of fuel oil. All required notices
were made to the appropriate environmental agency (the Agency). During 2000, the
tank was demolished. The Company presented a plan to the Agency whereby the
Company would install three wells to monitor the groundwater until the end of
the first quarter of 2001. The Agency approved the plan on a temporary basis,
indicating that they would review the results of the monitoring. Testing of the
groundwater in 2000 indicated that there was no large pooling of contaminants.
Although the Company has not yet received final approval of its plan from the
Agency, it is the opinion of management that the Company will not incur
significant costs in implementing the plan.

The Company manages its exposure to contamination, cleanup or similar costs
associated with the Facilities through its adherence to established procedures
for operations and equipment maintenance. In addition, the Company maintains
what it believes to be adequate levels of insurance.

The permanent condemnation proceeds received in 1999 qualifies for deferred
reinvestment for income tax reporting purposes, whereby the Company may elect to
reduce the income tax basis of qualifying subsequent acquisitions, subject to
certain restrictions. The Company's acquisition of real estate and certain of
the enhancements at the Facilities during 2000 constitute qualifying
acquisitions. The Company has amended its 1999 income tax returns to claim a
refund of $194,000 of the income taxes originally paid for 1999. The Company is
reporting for income tax reporting purposes a loss for 2000 which can be carried
back to 1999, resulting in a refund of $190,000 of income taxes previously paid
and $50,000 of estimated payments made for the 2000 tax year. At December 31,
2000, the Company is reporting income taxes receivable totaling $434,000.

The Company paid dividends of $.62 (including a special dividend of $.50) and
$.11 per share in 2000 and 1999, respectively, on the Company's outstanding
common stock. The special dividend represented a portion of the interest
received from the State of Rhode Island in connection with a condemnation award
affirmed in December 1999 by the Rhode Island Supreme Court after deducting
therefrom the expenses and income taxes related thereto. The Company expects to
be in a position to continue dividend payments on a quarterly basis; however,
the declaration of any dividend and the amount thereof will depend on the
Company's future earnings, financial condition and other relevant factors.

In management's opinion, the Company will continue to be able to generate
adequate amounts of cash to meet substantially all of its obligations.


RESULTS OF OPERATIONS:

Exclusive of permanent condemnation proceeds, the Company's total income is
$3,896,000 and $3,551,000 for 2000 and 1999, respectively.

Leasing revenue for 2000 increased 6% from the 1999 level principally due to
revenue from scheduled increases in long-term land leases and the renewals of
short-term leases. Expenses applicable to leasing remained approximately at the
1999 level.

Revenue from petroleum storage facilities for 2000 increased 11% from the 1999
level resulting principally from contingent revenues earned. Expenses applicable
to petroleum storage facilities for 2000 increased 64% from the 1999 level
principally due to an increase in maintenance and repairs done primarily in the
fourth quarter which were timed to occur during construction to minimize the

<PAGE>   14


cost of such repairs as well as to minimize the interruption of terminal
operations; depreciation expense in connection with the construction of the
tanks, truck rack and related enhancements; and professional fees associated
with litigation related to the Wilkesbarre Pier.

The increase in interest income in 2000 over the 1999 level results from higher
levels of temporary cash investments. Interest income in 2001 will be
substantially lower due to the Company's investment in properties and equipment
and payment of the special dividend in 2000.

The general and administrative expenses for 2000 decreased 6% from the 1999
level due principally to lower professional fees in connection with certain
litigation matters.

Interest expense for 2000 relates to a payment to the State of Rhode Island
relating to a prior year agreement.



<PAGE>   15


Lefkowitz, Garfinkel, Champi & DeRienzo P.C.
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, 2000, and the related
consolidated statements of income and retained earnings and cash flows for the
years ended December 31, 2000 and 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Properties, Inc. and
subsidiaries as of December 31, 2000, and the results of their operations and
their cash flows for the years ended December 31, 2000 and 1999, in conformity
with accounting principles generally accepted in the United States.

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




March 3, 2001


                                       14


<PAGE>   16


CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2000

<TABLE>
<CAPTION>
ASSETS

<S>                                                               <C>
Properties and equipment (net of accumulated depreciation)......  $15,692,000
Cash and cash equivalents.......................................    1,609,000
Receivables:
   Income taxes.................................................      434,000
   Tenant property tax reimbursements...........................      170,000
   Other........................................................      326,000
Accrued rental income...........................................      471,000
Prepaid and other...............................................      203,000
                                                                  -----------
                                                                  $18,905,000
                                                                  ===========
LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities:
   Accounts payable and accrued expenses:
     Property taxes.............................................  $   652,000
    Petroleum storage facilities construction...................    1,109,000
    Other.......................................................      506,000
   Deferred:
    Income taxes, net...........................................    2,339,000
Condemnation proceeds...........................................       74,000
                                                                  -----------
                                                                    4,680,000
                                                                  -----------
Commitment (Note 6)

Shareholders' equity:
   Common stock, $1 par; authorized, issued
     and outstanding 3,000,000 shares...........................    3,000,000
   Capital in excess of par.....................................    8,828,000
   Retained earnings............................................    2,397,000
                                                                  -----------
                                                                   14,225,000
                                                                  -----------
                                                                  $18,905,000
                                                                  ===========
</TABLE>


See notes to consolidated financial statements.


                                       15
<PAGE>   17

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                               2000                1999
                                                                           -----------          -----------
<S>                                                                        <C>                  <C>
Income:
   Revenues:
    Leasing, including temporary condemnation
     of  $112,000 and $149,000 in 2000 and 1999,
     respectively................................................          $ 2,336,000          $ 2,196,000
    Petroleum storage facilities.................................            1,294,000            1,162,000
                                                                           -----------          -----------
                                                                             3,630,000            3,358,000
   Condemnation proceeds, permanent, including
      interest of $2,928,000 in 1999.............................               23,000            6,037,000
   Interest......................................................              266,000              193,000
                                                                           -----------          -----------
                                                                             3,919,000            9,588,000
                                                                           -----------          -----------
Expenses:
   Expenses applicable to:
    Leasing .....................................................            1,249,000            1,220,000
    Petroleum storage facilities.................................            1,486,000              905,000
   General and administrative....................................              869,000              923,000
   Interest......................................................               65,000
                                                                           -----------          -----------
                                                                             3,669,000            3,048,000
                                                                           -----------          -----------

Income before income taxes.......................................              250,000            6,540,000
                                                                           -----------          -----------

Income tax expense (benefit):
   Current.......................................................             (395,000)           1,987,000
   Deferred......................................................              471,000              695,000
                                                                           -----------          -----------
                                                                                76,000            2,682,000
                                                                           -----------          -----------

Net income.......................................................              174,000            3,858,000

Retained earnings, beginning.....................................            4,083,000              555,000

Dividends on common stock (2000, $.62; 1999, $.11)...............           (1,860,000)            (330,000)
                                                                           -----------          -----------

Retained earnings, ending........................................          $ 2,397,000          $ 4,083,000
                                                                           ===========          ===========

Basic earnings per share.........................................                 $.06                $1.29
                                                                                  ====                =====
</TABLE>


See notes to consolidated financial statements.


                                       16

<PAGE>   18

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999

<TABLE>
<CAPTION>
                                                                              2000                  1999
                                                                           -----------           -----------
<S>                                                                        <C>                   <C>
Cash flows from operating activities:
   Net income......................................................        $   174,000           $ 3,858,000
   Adjustments to reconcile net income to net cash
    provided by  (used in) operating activities:
     Condemnation proceeds, permanent..............................            (23,000)           (6,037,000)
     Depreciation..................................................            240,000                78,000
     Accrued rental income.........................................             12,000                16,000
     Deferred income taxes.........................................            471,000               695,000
     Deferred condemnation proceeds................................           (112,000)              186,000
     Changes in assets and liabilities:
      Increase in:
       Receivables.................................................           (727,000)
       Prepaid and other...........................................            (20,000)
       Accounts payable and accrued expenses.......................            313,000               120,000
       Income taxes payable........................................                                1,817,000
      Decrease in:
       Receivables.................................................                                  186,000
       Prepaid and other...........................................                                    6,000
       Income taxes payable........................................         (1,817,000)
                                                                           -----------           -----------
   Net cash provided by (used in) operating activities.............         (1,489,000)              925,000
                                                                           -----------           -----------
Cash flows from investing activities:
   Condemnation proceeds, permanent................................             23,000             6,037,000
   Purchase of properties and equipment............................         (4,460,000)           (1,980,000)
                                                                            ----------           -----------
   Net cash provided by (used in) investing activities.............         (4,437,000)            4,057,000
                                                                           -----------           -----------

Cash used in financing activities, payment of dividends............         (1,860,000)             (330,000)
                                                                           -----------           -----------

Increase (decrease) in cash and cash equivalents..................          (7,786,000)            4,652,000
Cash and cash equivalents, beginning...............................          9,395,000             4,743,000
                                                                           -----------           -----------
Cash and cash equivalents, ending..................................        $ 1,609,000           $ 9,395,000
                                                                           ===========           ===========

Supplemental disclosures, cash paid for:
   Income taxes....................................................        $ 1,934,000           $   148,000
                                                                           ===========           ===========
   Interest........................................................            -0-                   -0-
                                                                           ==============        ===========
</TABLE>



See notes to consolidated financial statements.


                                       17

<PAGE>   19


CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999


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. (the Company) and its wholly-owned subsidiaries,
     Tri-State Displays, Inc., Capital Terminal Company and CTC, LLC. 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 (the 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. Cash
     equivalents, which consist of U. S. Treasury bills and a short-term
     uninsured repurchase agreement which the Company routinely purchases,
     totaled $1,472,000 at December 31, 2000.

     Properties and equipment:

     Properties and equipment are stated at cost. Acquisitions and additions are
     capitalized while routine maintenance and repairs, which do not improve or
     extend asset lives, 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. 121 (Accounting for the Impairment of Long-Lived Assets
     and for Long-Lived Assets to be Disposed of) which requires that property
     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

<PAGE>   20


     is measured as the difference between the net book value and the estimated
     fair value of the asset.

     Income taxes:

     The Company and its subsidiaries file consolidated income tax returns.

     Income taxes are provided based on income reported for financial statement
     purposes. The provision for income taxes differs from the amounts currently
     payable because of temporary differences in the recognition of certain
     income and expense items for financial reporting and tax reporting
     purposes.

     Leasing 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 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.

     Contingent revenue:

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

     Condemnation proceeds:

     The Company recognizes revenue from a permanent condemnation in the period
     in which the cash is received and recognizes revenue from a temporary
     condemnation on a straight-line basis over its term. Deferred condemnation
     proceeds represent the portion of the temporary condemnation applicable to
     future periods.


2.   Litigation with the State of Rhode Island and the City of Providence:

     Condemnation case:

     In January 1987, the Company entered into an Agreement with the State of
     Rhode Island (the State) relating to the State's obligation with respect to
     the condemnation of a portion of the Company's property in connection with
     the proposed River Relocation in Providence, Rhode

<PAGE>   21

     CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     YEARS ENDED DECEMBER 31, 2000 AND 1999


2.   Litigation with the State of Rhode Island and the City of Providence
     (continued):

     Condemnation case (continued):

     Island (CPI/State Agreement). In November 1987, the State condemned the
     property and paid the Company a condemnation award of $2,600,000. Under the
     CPI/State Agreement, the Company acquired Parcel 9 in the Capital Center
     Project area (Disputed Parcel) from the State and was required to return to
     the State a portion of the condemnation award.

     In April 1988, the Company filed a petition in the Rhode Island Superior
     Court (Superior Court) for an increased condemnation award alleging that
     the award paid in 1987 was inadequate. In January 1992, the Superior Court
     awarded the Company an additional condemnation award of $401,000 plus
     interest from the date of the condemnation. The Company had asserted in the
     Superior Court that it was entitled to an additional condemnation award in
     excess of $6,000,000 plus interest, and accordingly, in February 1992, the
     Company appealed the decision of the Superior Court to the Rhode Island
     Supreme Court (Supreme Court). In January 1994, the Supreme Court
     overturned the Superior Court decision and returned the matter to the
     Superior Court for a retrial of the case. The case was retried in 1995.

     In May 1997, the Superior Court entered final judgment awarding
     condemnation proceeds of $6,101,000 in favor of the Company and interest on
     the judgment through that date of $4,552,000 (the Condemnation Judgment).
     The State filed an appeal with the Supreme Court. In April 1998, the
     Supreme Court entered an order affirming the Condemnation Judgment of the
     Superior Court. Interest continued to accrue on the judgment.

     The State filed several motions and a separate action to prevent the
     Company from collecting the Condemnation Judgment. The Superior Court
     denied the State's motions and ordered the State to pay the Condemnation
     Judgment by August 14, 1998. The State then filed an appeal with the
     Supreme Court. In December 1998, the Supreme Court directed that the
     separate action filed by the State, together with other disputes between
     the Company, the State and the City of Providence, be consolidated before
     and decided by a single justice of the Superior Court on an expedited
     basis. Each of the four consolidated cases decided by the single justice in
     July 1999 is described below.

     Property tax disputes with the City of Providence:

     In August 1997, the Company received from the City of Providence (the City)
     real property tax bills for taxes assessed as of December 31, 1996
     reflecting an unexpected 200% increase in the assessed values of a majority
     of the Company's parcels within Capital Center. In addition, the Company
     received from the City real property tax bills purporting to assess taxes
     for assessment years ending December 31, 1990 through December 31, 1995,
     based upon a $42,000,000 retroactive increase in the assessed values of
     these same properties. These increases were not part of a city-wide
     revaluation. The aggregate amount of such taxes as billed was approximately
     $7,100,000, which amount did not include any interest. Subsequent real
     property tax bills for taxes assessed as of December 31, 1997 and 1998
     continued to reflect the higher assessments.

<PAGE>   22


     The Company believed that the changes in the assessed values were related
     to the May 1997 Condemnation Judgment and that the increase in the assessed
     values for 1997 and prior periods was illegal. In August 1997, the Company
     filed a lawsuit against the City in the Superior Court.

     During the period of litigation, the Company reported and paid property
     taxes based on the assessed valuations prior to the commencement of the
     suit.

     In July 1999, the Superior Court ruled in favor of the Company and found
     that both the City's new tax assessments for assessment years 1997 and 1998
     and back taxes for assessment years 1990-1996 are illegal and void. The
     Superior Court entered judgment in favor of the Company and sent the case
     to the Supreme Court for review.

     Dispute over ownership of Disputed Parcel:

     Pursuant to the terms of an agreement dated January 1987 between the City
     and the State (City/State Agreement), the City was obligated to convey the
     Disputed Parcel to the State. As discussed above under the heading
     "Condemnation Case," pursuant to the CPI/State Agreement, the State was
     obligated to reconvey the Disputed Parcel to the Company. In 1989, the City
     conveyed the Disputed Parcel to the State, and the State reconveyed the
     Disputed Parcel to the Company.

     The City claimed that its execution of the City/State Agreement was
     invalid, that its conveyance of the Disputed Parcel to the State was void,
     and hence the City was the true owner of the Disputed Parcel. Moreover, in
     December 1998, the City adopted an ordinance authorizing the Providence
     Redevelopment Agency 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. This dispute with the City was included in the matters
     heard by the single justice of the Superior Court as directed by the
     Supreme Court. In July 1999, the Superior Court ruled in favor of the
     Company and found that the Company is the rightful owner of the Disputed
     Parcel and that the City has no right to condemn the Disputed Parcel and
     therefore the ordinance authorizing the condemnation is invalid. The
     Superior Court entered judgment in favor of the Company and sent the case
     to the Supreme Court for review.

     Dispute regarding the payment of the Condemnation Award:

     In May 1998, the State filed an action in the Superior Court in which it
     maintained that it was not responsible for paying any portion of the
     Condemnation Judgment to the Company. The Supreme Court ordered the
     Superior Court to determine these claims. The State alleged, among other
     things, that (1) its conveyance of the Disputed Parcel to the Company
     relieved it from the obligation to pay one-half of the Condemnation
     Judgment and (2) the City, not the State, was obligated to pay the other
     half of the Condemnation Judgment.

     In July 1999, the Superior Court ruled in favor of the Company and found
     that the State must pay the entire Condemnation Judgment to the Company.
     The Superior Court left open the possibility that the Company would have to
     return some portion of the Condemnation Judgment to the State following the
     State's payment of the entire amount. The Superior Court entered judgment
     in favor of the Company and sent the case to the Supreme Court for review.

<PAGE>   23

     CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     YEARS ENDED DECEMBER 31, 2000 AND 1999


2.   Litigation with the State of Rhode Island and the City of Providence
     (continued):

     Appeal of the consolidated cases:

     The Superior Court's decisions in each of the four consolidated cases were
     appealed by the State and City and reviewed by the Rhode Island Supreme
     Court. In December 1999, the Supreme Court issued an opinion denying and
     dismissing the appeals of the State and the City, and adopting as their own
     the opinion of the Rhode Island Superior Court in its entirety, as it
     concerned the Providence tax dispute and the Disputed Parcel, and with
     certain modifications, as it concerned the condemnation by the State. The
     Supreme Court ordered the State to pay an additional condemnation award to
     the Company together with pre-judgment and post-judgment interest at the U.
     S. Treasury bill rate. On December 22, 1999, the State paid $5,977,000,
     which amount is reported as condemnation proceeds, permanent on the
     accompanying consolidated statement of income and retained earnings for the
     year ended December 31, 1999.

     Following that opinion, the parties raised several issues. The first issue
     was whether the Company was entitled to pre-judgment interest at the rate
     of 12% (the interest rate in effect when the Company entered into the 1987
     Agreement with the State) or the U. S. Treasury Bill rate (which is the
     interest rate now required by State statute). The second issue was the
     Company's claim that, under its agreement with the State, it was not
     obligated to return interest on 50% of the condemnation proceeds. The third
     issue was whether the Company was entitled to post-judgment interest at the
     rate of 12% as opposed to the U. S. Treasury bill rate. In December 1999,
     the Supreme Court entered an order directing these issues be presented to
     the Superior Court for determination. In March 2000, the Superior Court
     ruled that the Company was only entitled to pre-judgment interest at the U.
     S. Treasury Bill rate, that the Company was entitled to retain interest on
     the portion of the condemnation award to be returned to the State, and that
     the Company was entitled to post-judgment interest at the rate of 12% as
     opposed to the U. S. Treasury Bill rate. A formal judgment was entered in
     June 2000, and the State filed a notice of appeal. In January 2001, the
     Supreme Court reversed the judgment of the Superior Court. Accordingly, the
     Company is not entitled to any further payments with respect to the 1987
     condemnation.


3.   Claim against City of Providence for attorneys fees:

     In connection with the litigation against the City of Providence discussed
     in Note 2, the Company has pursued its claim against the City for attorneys
     fees totaling approximately $258,000. In July 2000, the City filed a motion
     to vacate the Superior Court judgments entered in favor of the Company that
     relate to the property tax dispute and the ownership of the Disputed Parcel
     in the Capital Center Project area. In October 2000, the Superior Court
     denied the motion to vacate and awarded attorneys fees to the Company in an
     amount to be determined by the Court after a hearing thereon. The City
     appealed the decision to the Supreme Court. The Company has filed a motion
     to dismiss the appeal and is awaiting a hearing thereon. The Company cannot
     presently determine what amount will be finally awarded by the Court.

<PAGE>   24

4.   Dispute with Amtrak:

     The Company is in dispute with the National Railroad Passenger Corporation
     (Amtrak) concerning various trespasses by Amtrak. As part of the Capital
     Center Project, during the 1980's the Company, State, City and 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 begin 19.3 feet above
     the top of rail within what is now designated as Parcel 6. Following that
     conveyance, the railroad station and the Company's adjacent parking garage
     were constructed and partially financed by the Federal Railroad
     Administration (FRA).

     Many of the facilities needed to service the railroad station were built
     within the confines of Parcel 7A (the parking garage parcel). Over the
     years, the Company did not charge Amtrak for this intrusion on its
     property; and over the years Amtrak assumed the cost of electricity
     provided to the parking garage. In 1997, Amtrak unilaterally refused to pay
     for the electricity, and the Company brought suit in the United States
     District Court for the District of Rhode Island (U. S. District Court)
     seeking an order requiring Amtrak to remove its facilities from Parcel 7A.

     In the fall of 1998, as part of Amtrak's electrification of the Northeast
     Corridor, Amtrak erected towers within the air rights over Parcel 6 (the
     tops of which vary in height between 27 and 31 feet above the tracks) and a
     signal bridge. The Company amended its complaint against Amtrak to include
     the air rights trespasses.

     In July 1999, Amtrak condemned a three-year temporary easement of all the
     air rights owned by the Company retroactive to August 1998. In October
     1999, the Company received from Amtrak $335,000, the sum estimated by
     Amtrak to be just compensation for the property taken. In July 1999, Amtrak
     also condemned a permanent easement within a portion of the parking garage
     parcel upon which Amtrak had placed improvements. In October 1999, the
     Company received from Amtrak $60,000, the sum estimated by Amtrak to be
     just compensation for the property taken.

     Following the receipt of the condemnation proceeds, the trespass litigation
     between Amtrak and the Company and the Amtrak condemnation cases were
     consolidated for trial. In December 2000, Amtrak offered to purchase the
     air rights and a portion of Parcel 6 for $863,000, which offer the Company
     refused. Amtrak has indicated it will permanently condemn both properties.
     The Company expects the matter to be heard in 2001.

<PAGE>   25


     CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     YEARS ENDED DECEMBER 31, 2000 AND 1999


5.   Dispute with Federal Railroad Administration:

     During 1999, the State of Rhode Island sued the Company to block an
     increase of commuter parking rates charged by its lessee in its parking
     garage. A preliminary injunction was entered, which was affirmed by the
     United State Court of Appeals for the First Circuit. A consent judgment was
     also entered restraining the Company from increasing the rates without
     prior approval of the FRA. The Company requested approval from the FRA to
     increase the rates, which request was denied. The Company then filed suit
     against the FRA in the United States Court of Claims seeking unspecified
     money damages. The FRA subsequently approved an increase in rates in an
     amount less than the increase sought by the Company. Discovery is ongoing.


6.   Properties and equipment:

        Properties on lease or held for lease:
          Land and land improvements..........................  $ 4,365,000
          Parking garage......................................    2,500,000
                                                                -----------
                                                                  6,865,000
                                                                -----------
        Petroleum storage facilities:
           Land and land improvements.........................    4,830,000
           Buildings and structures...........................      324,000
           Tanks and equipment................................    8,704,000
                                                                -----------
                                                                 13,858,000
                                                                -----------

        Office equipment......................................       76,000
                                                                -----------
                                                                 20,799,000
                                                                -----------
        Less accumulated depreciation:
           Properties on lease or held for lease..............      802,000
           Petroleum storage facilities.......................    4,245,000
           Office equipment...................................       60,000
                                                                -----------
                                                                  5,107,000
                                                                -----------
                                                                $15,692,000
                                                                ===========


     The Company constructed in two phases a new expanded truck rack at the
     Facilities which is fully automated and has both top and bottom loading
     capabilities. The first phase was completed in December 1999 and the second
     phase in May 2000 at a total cost of $2,356,000.

     In April 2000, the Company purchased real estate consisting of 2.275 acres
     of land and a building for $533,000, which property abuts the Facilities.
     The Company conducted an environmental study of the property, demolished
     the building (to provide additional acreage for future expansion) and
     completed the cleanup of the property at a cost of $479,000.

<PAGE>   26

     During 2000, the Company constructed three new tanks at the Facilities
     (which increased the total capacity of the Facilities to 524,500 barrels)
     together with certain enhancements within the Facilities, some of which are
     required by environmental regulators. Costs incurred through December 31,
     2000 total $3,788,000. The tanks were placed in service during the fourth
     quarter of 2000; however, certain of the enhancements totaling
     approximately $566,000 will not be completed until the summer of 2001.

     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 affecting one of the Company's parcels located in the Capital
     Center Project area. Since the Company had an agreement with the developer
     of the parcel to reimburse the Company for the amount owed to the State,
     the Company did not record this liability on its balance sheet. The
     agreement between the developer and the Company terminated in 1999. 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. 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 has agreed to pay a total of $65,000 in interest, which amount is
     reported as interest expense on the accompanying statement of income and
     retained earnings for the year ended December 31, 2000. The State is unable
     to locate the original note and to deliver a discharge of the mortgage held
     by it with respect to this property. In November 2000, the Company
     commenced proceedings against the State in the Rhode Island Superior Court
     seeking an order from the Superior Court decreeing, upon the deposit of the
     $223,000 with the Court, that the Company shall be discharged from all
     responsibility under the note and that the note is paid in full. The
     Company expects that the matter will be heard in the spring of 2001. At
     December 31, 2000, the Company is reporting this amount in accounts payable
     and accrued expenses, other on the accompanying consolidated balance sheet.


7.   Description of leasing arrangements:

     As lessor:

     At December 31, 2000, the Company had entered into long-term land leases
     for six separate land parcels, three of which will not commence until
     construction begins. The Company also leases various parcels of land for
     outdoor advertising purposes for remaining terms of up to 25 years and for
     public parking purposes under short-term cancellable leases.

     For those leases with 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
     $13,254,000 through December 31, 2000. Management has concluded that a
     portion of the excess of straight-line over contractual rentals ($471,000
     at December 31, 2000) is realizable when payable over the terms of the
     leases.

<PAGE>   27


     CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     YEARS ENDED DECEMBER 31, 2000 AND 1999


7.   Description of leasing arrangements (continued):

     As lessor (continued):

     Minimum future contractual rental payments to be received from
     noncancellable leases as of December 31, 2000 are:

           Year ending December 31,
                  2001..........................................  $  1,433,000
                  2002..........................................     1,464,000
                  2003..........................................     1,486,000
                  2004..........................................     1,541,000
                  2005..........................................     1,595,000
                  2006 to 2142..................................   182,565,000
                                                                  ------------
                                                                  $190,084,000
                                                                  ------------

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

     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 from the leased asset. The contingent
     rentals totaled $71,000 and $50,000 for the years ended December 31, 2000
     and 1999, respectively.

     Several leases provide that the tenants reimburse the Company for property
     taxes, which amounts are excluded from leasing revenues and expenses
     applicable to leasing on the accompanying consolidated statements of income
     and retained earnings. These reimbursements totaled $341,000 and $369,000
     in 2000 and 1999, respectively.

     As lessee:

     The Company leases certain properties for outdoor advertising purposes
     under noncancellable leases which expire at various dates to 2006. In most
     cases, management expects that in the normal course of business, leases
     that expire will be renewed or replaced by other leases. Rent expense
     amounted to $43,000 and $40,000 in 2000 and 1999, respectively. Future
     minimum lease payments under noncancellable leases at December 31, 2000 are
     as follows: 2001, $42,000; 2002, $37,000; 2003, $37,000; 2004, $38,000;
     2005, $22,000 and 2006, $3,000.


8.   Petroleum storage facilities:

     Current operations:

     The Company and a petroleum company (Petroleum Company) entered into an
     agreement which will expire April 30, 2004, unless options to extend on an
     annual basis are exercised, whereby the Company operates the entire
     Facilities for the Petroleum Company. The Company

<PAGE>   28

     is responsible for labor, insurance, property taxes and other operating
     expenses, as well as capital improvements. The agreement further provides
     for annual fee increases of 4.5%. The minimum monthly fee was $70,000 which
     increased to $108,000 when the new tanks were placed in service. (See Note
     6.)

     The agreement also provides that the Company will receive an additional
     $.10 per barrel for every barrel in excess of 2,000,000 barrels of
     throughput in an agreement year. For the agreement year ended April 30,
     2000, the throughput exceeded 2,000,000 barrels in February 2000, and the
     Company earned $88,000 in contingent revenues. For the agreement year
     ending April 30, 2001, throughput exceeded 2,000,000 barrels in December
     2000, and the Company earned $20,000 in contingent revenues through
     December 31, 2000. Such amounts are reported in revenues, petroleum storage
     facilities on the accompanying statement of income and retained earnings
     for the year ended December 31, 2000. The Company will continue to earn
     $.10 per barrel for each barrel of throughput for the remainder of this
     current agreement year.

     Environmental incident:

     In 1994, a leak was discovered in a 25,000 barrel storage tank at the
     Facilities which allowed the escape of a small amount of fuel oil. All
     required notices were made to the appropriate environmental agency (the
     Agency).

     During 2000, the tank was demolished. The company presented a plan to the
     Agency whereby the Company would install three wells to monitor the
     groundwater until the end of the first quarter of 2001. The Agency approved
     the plan on a temporary basis, indicating that they would review the
     results of the monitoring. Testing of the groundwater in 2000 indicated
     that there was no large pooling of contaminants. Although the Company has
     not yet received final approval of its plan from the Agency, it is the
     opinion of management that the Company will not incur significant costs in
     implementing the plan.

     Wilkesbarre Pier:

     Wilkesbarre Pier (the Pier) is a deep-water pier in East Providence, Rhode
     Island, now owned by the Company, which is integral to the operation of the
     Facilities. The Pier and the Facilities are connected by two petroleum
     pipelines. In 1995, the Company and Providence and Worcester Railroad
     Company (Railroad) (the owner of the Pier) entered into an agreement which,
     among other provisions, gave the Company the right to acquire the Pier for
     $1. The Company and Railroad have a common controlling shareholder.

     Effective January 1, 1998, Railroad and a company which uses the Pier to
     off-load product (Oil Company) entered into an agreement (the Agreement)
     whereby Oil Company agreed to pay annual fees for five years (1998,
     $185,000; 1999 and 2000, $235,000; and 2001 and 2002, $185,000), plus a
     throughput fee based upon usage which amounted to $50,000 in 2000 and 1999.
     Under the terms of the Agreement, the owner of the Pier is not required to
     make any repairs to the Pier. The Agreement may be terminated by Oil
     Company upon ninety (90) days notice only in the event of a failure of a
     component of the Pier that the owner does not repair.

<PAGE>   29

     CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     YEARS ENDED DECEMBER 31, 2000 AND 1999


8.   Petroleum storage facilities (continued):

     Wilkesbarre Pier (continued):

     In January 1998, the Company exercised its right and acquired the Pier, and
     Railroad assigned its rights under the Agreement to the Company.

     In April 2000, the Company advised Oil Company of its intent to exercise
     its right to terminate the Agreement on December 31, 2002. In May 2000, the
     City of East Providence notified the parties utilizing the Pier that there
     was a lack of adequate fire protection at the Pier. The Company demanded
     that Oil Company take steps to commence and complete the performance of all
     work and to supply all material required to satisfy the City.

     In August 2000, Oil Company filed a lawsuit in the United States District
     Court for the District of Rhode Island claiming fraud and misrepresentation
     on the part of the Company and sought rescission of the Agreement and other
     agreements between the companies. The Company has filed counterclaims
     against Oil Company, including Oil Company's failure to comply with the
     order and direction of the City. Through December 31, 2000, the Company has
     incurred costs totaling $135,000 in connection with the fire protection at
     the Pier, which amount is recorded in accounts receivable, other on the
     accompanying consolidated balance sheet.

     This litigation is in the early stages of discovery.


9.   Income taxes:

     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:
<TABLE>
<CAPTION>
                                                                     2000          1999
                                                                   --------     ----------
<S>                                                                <C>          <C>
        Computed "expected" tax expense ........................   $ 85,000     $2,224,000
        Increase (decrease) in taxes resulting from:
          State income tax, net of Federal income tax
            benefit.............................................      5,000        379,000
          Statutory and other...................................    (14,000)        79,000
                                                                   --------     ----------
                                                                   $ 76,000     $2,682,000
                                                                   ========     ==========
</TABLE>

     The permanent condemnation proceeds received in 1999 (see Note 2) qualifies
     for deferred reinvestment for income tax reporting purposes, whereby the
     Company may elect to reduce the income tax basis of qualifying subsequent
     acquisitions, subject to certain restrictions. The Company's acquisition of
     real estate and certain of the enhancements at the Facilities during 2000
     (see Note 6) constitute qualifying acquisitions. The Company has amended
     its 1999 income tax returns to claim a refund of a portion of the income
     taxes originally paid for 1999. The refunds, totaling $194,000 are included
     in receivables, income taxes on the accompanying balance sheet.
<PAGE>   30

     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, 2000 were as follows:

     Gross deferred tax liabilities:
       Property having a financial statement basis
         in excess of its tax basis.............................  $2,210,000
       Accrued rental income....................................     188,000
                                                                  ----------
                                                                   2,398,000
     Gross deferred tax assets..................................     (59,000)
                                                                  ----------
                                                                  $2,339,000
                                                                  ==========

10.  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 (to tenants that
     have constructed buildings thereon) 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 parcels suitable for parking 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
     Facilities in East Providence under an agreement at a fixed monthly rate
     for a company which stores and distributes petroleum products. The
     Agreement includes options to extend on an annual basis and contingent
     payments based upon throughput.

     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 capital,
     operating and maintenance expenditures of the Facilities.

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

     There are no inter-segment revenues.

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

<PAGE>   31

     CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     YEARS ENDED DECEMBER 31, 2000 AND 1999


10.  Operating segment disclosures (continued):

<TABLE>
<CAPTION>
                                                                   Petroleum
                                                                    Storage
                                                   Leasing        Facilities        Total
                                                   -------        ----------        -----
<S>                                              <C>            <C>              <C>
Year ended December 31, 2000:
 Revenues:
   Contractual ..............................    $2,165,000     $  1,186,000     $  3,351,000
   Contingent ...............................        71,000          108,000          179,000
   Noncash:
     Condemnation, temporary ................       112,000                           112,000
     Excess of contractual over straight-line
       rentals ..............................       (12,000)                          (12,000)
                                                 ----------     ------------     ------------
                                                 $2,336,000     $  1,294,000     $  3,630,000
                                                 ==========     ============     ============

Depreciation ................................    $   64,000     $    170,000     $    234,000
                                                 ==========     ============     ============

Income (loss) before income taxes ...........    $1,087,000     $   (192,000)    $    895,000
                                                 ==========     ============     ============

Assets ......................................    $6,878,000     $ 10,064,000     $ 16,942,000
                                                 ==========     ============     ============

Additions to properties and equipment .......    $   -0-        $  5,317,000     $  5,317,000
                                                 ==========     ============     ============

Year ended December 31, 1999:
 Revenues:
   Contractual ..............................    $2,013,000     $  1,162,000     $  3,175,000
   Contingent ...............................        50,000                            50,000
   Condemnation, temporary ..................       149,000                           149,000
   Noncash, excess of contractual
      over straight-line rentals ............       (16,000)                          (16,000)
                                                 ----------     ------------     ------------
                                                 $2,196,000     $  1,162,000     $  3,358,000
                                                 ==========     ============     ============

Depreciation ................................    $   59,000     $     19,000     $     78,000
                                                 ==========     ============     ============

Income before income taxes ..................    $  976,000     $    257,000     $  1,233,000
                                                 ==========     ============     ============

Assets ......................................    $6,785,000     $  4,725,000     $ 11,510,000
                                                 ==========     ============     ============

Additions to properties and equipment .......    $  158,000     $  2,071,000     $  2,229,000
                                                 ==========     ============     ============
</TABLE>

<PAGE>   32

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

<TABLE>
<CAPTION>
                                                2000                1999
                                            ------------       ------------
<S>                                         <C>                <C>
Income:
  Revenues for operating segments ......    $  3,630,000       $  3,358,000
  Condemnation proceeds, permanent .....          23,000          6,037,000
  Interest income ......................         266,000            193,000
                                            ------------       ------------
   Total consolidated income ...........    $  3,919,000       $  9,588,000
                                            ============       ============

Depreciation:
  Depreciation for operating segments...    $    234,000       $     78,000
  Unallocated corporate depreciation ...           6,000
                                            ------------       ------------
   Total consolidated depreciation .....    $    240,000       $     78,000
                                            ============       ============

Income before income taxes:
  Income for operating segments ........    $    895,000       $  1,233,000
  Condemnation proceeds, permanent .....          23,000          6,037,000
  Interest income ......................         266,000            193,000
  Interest expense .....................         (65,000)
  Unallocated corporate expenses .......        (869,000)          (923,000)
                                            ------------       ------------
   Total consolidated income before
      income taxes .....................    $    250,000       $  6,540,000
                                            ============       ============

Assets:
  Assets for operating segments ........    $ 16,942,000       $ 11,510,000
  Corporate cash and cash equivalents...       1,472,000          9,375,000
  Income tax receivable ................         434,000
  Other unallocated amounts ............          57,000             61,000
                                            ------------       ------------
   Total consolidated assets ...........    $ 18,905,000       $ 20,946,000
                                            ============       ============

Additions to properties and equipment:
  Additions for operating segments .....    $  5,317,000       $  2,229,000
  Unallocated corporate additions ......           3,000
                                            ------------       ------------
   Total consolidated additions ........    $  5,320,000       $  2,229,000
                                            ============       ============
</TABLE>

<PAGE>   33


     CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     YEARS ENDED DECEMBER 31, 2000 AND 1999


10.  Operating segment disclosures (continued):

     The following table sets forth those customers whose revenues exceed 10% of
     the Company's total consolidated revenue:

                                                         2000          1999
                                                      ----------    ----------
      Leasing segment:
         A..........................................  $  657,000    $  630,000
         B..........................................     609,000       587,000
         C..........................................     367,000       307,000
                                                      ----------    ----------
                                                      $1,633,000    $1,524,000
                                                      ==========    ==========
      Petroleum Storage Facilities segment
         (one customer).............................  $1,009,000    $  876,000
                                                      ==========    ==========


11.  Fair value of financial instruments:

     The carrying amounts of the Company's financial instruments approximate
     their fair values at December 31, 2000, due to the short maturities of cash
     and cash equivalents, receivables and accounts payable and accrued
     expenses.

<PAGE>   34

                             DIRECTORS AND OFFICERS

                           OF CAPITAL PROPERTIES, INC.


Robert H. Eder, Director                  Chairman of Capital Properties, Inc.
         Chairman


Ronald P. Chrzanowski, Director           President of Capital Properties, Inc.
         President


Barbara J. Dreyer, Treasurer              Treasurer of Capital Properties, Inc.


Stephen J. Carlotti, Secretary            Attorney, Hinckley, Allen & Snyder
                                          Providence, Rhode Island


James H. Dodge, Director                  Chairman of  Providence Energy
                                          Corporation
                                          Providence, Rhode Island


Harold J. Harris, Director                President of Wm. H. Harris, Inc.
                                          (Retailer)
                                          Providence, Rhode Island


Henry S. Woodbridge, Jr., Director        Consultant
                                          Pomfret, Connecticut




TRANSFER AGENT                            INDEPENDENT AUDITORS

American Stock Transfer                   Lefkowitz, Garfinkel, Champi &
& Trust Company                           DeRienzo P.C.
40 Wall Street                            10 Weybosset Street
New York, New York  10005                 Providence, Rhode Island  02903


                                       33

<PAGE>   35

                      MARKET FOR THE COMPANY'S COMMON STOCK


                                       AND


                         RELATED SECURITY HOLDER MATTERS


The Company's 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 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
                                   ----         ---           ---------
   2000
   1st Quarter................     9            8 1/16           .53
   2nd Quarter................     8 5/8        7.75             .03
   3rd Quarter................     8.06         7.56             .03
   4th Quarter................     7.75         7.375            .03

   1999
   1st Quarter................     7 1/2        5 5/8            .00
   2nd Quarter................     6 3/8        5 1/2            .05
   3rd Quarter................     8 1/8        6                .03
   4th Quarter................     9            7 1/2            .03



At March 1, 2001 there were 427 holders of record of the Company's common stock.