##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-9380
 CAPITAL PROPERTIES, INC.
  Rhode Island
    
    05-0386287(State or other jurisdiction of
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 100 Dexter Road
East Providence, Rhode Island 02914
 (401) 435-7171
  Title of each class
    
    Name of each exchange on which registeredClass A Common Stock, $.01 par value
    
    OTCQX (Pink Sheets)
 
 o þ
 o þ
 þ o
 þ
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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##### 



CAPITAL PROPERTIES, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008
 TABLE OF CONTENTS
 PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    7Item 3.
    
    Legal Proceedings
    
    
    7Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    8PART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    
    9Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 8.
    
    Consolidated Financial Statements
    
    
    14Item 9.
    
    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    29Item 9A.
    
    Controls and Procedures
    
    
    29Part IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance of the Registrant
    
    
    30Item 11.
    
    Executive Compensation
    
    
    30Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    30Item 13.
    
    Certain Relationships and Related Transactions and Director Independence
    
    
    30Item 14.
    
    Principal Accountant Fees and Services
    
    
    30PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    31Signatures
    
    
    32EX-3.1 Restated Articles of Incorporation (Effective November 22, 2008)EX-20.1 Map of the Company's parcels in Downtown Providence, Rhode IslandEX-20.2 Map of the Company's petroleum storage facility in East Providence, Rhode IslandEX-21 Subsidiaries of the CompanyEX-31.1 Rule 13a-14(a) Certification of President and Principal Executive OfficerEX-31.2 Rule 13a-14(a) Certification of Treasurer and Principal Financial OfficerEX-32.1 Certification of President and Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002EX-32.2 Certification of Treasurer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  2




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##### Table of Contents



PART I
 FORWARD LOOKING STATEMENTS
 Certain portions of this report, and particularly 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 leasing revenues when due over the terms of the long-term land leases;
the commencement of additional long-term land leases; changes in economic conditions
that may affect either the current or future development on the Companys parcels;
and exposure to contamination, remediation or similar costs associated with the
operation of the petroleum storage facility.
 
 Item 1 Business
 Business Development
  General Economic Condition
  Segments
  Leasing
 Capital Center
   3




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##### Table of Contents




    
    On the southerly portion of one of the parcels, an underground parking garage and
two buildings containing 193 condominiums were completed in 2008. On the northerly
portion of the same parcel, a 10-story, 307,000 gross square foot building is under
construction with an expected completion date of late 2009 and will be the headquarters
of Blue Cross and Blue Shield of Rhode Island.
 
    
    On the other undeveloped parcel, two residential buildings are planned. One
building containing 96 condominiums is expected to be completed in the spring of 2009.
The other building has not progressed beyond the early stages of foundation preparation
construction, and the timing of construction and completion is uncertain.
  Parcel 20 Adjacent to the Capital Center
   Lamar Lease
   4




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##### Table of Contents



Parcels in Capital Center Area2
    
    3S
    
    5
    
    6, Phase I
    
    6, Phase II
    
    7A
    
    8
    
    9
    
    LamarDescription of Usage
    
    Residential/ Office
    
    Office
    
    Residential
    
    Residential
    
    Residential
    
    Garage
    
    Office
    
    Office
    
    BillboardTerm of Lease
    
    103 Yrs.
    
    99 Yrs.
    
    149 Yrs.
    
    99 Yrs.
    
    99 Yrs.
    
    99 Yrs.
    
    99 Yrs.
    
    149 Yrs.
    
    27 Yrs.Termination Date
    
    
    2108
    
    
    
    2087
    
    
    
    2142
    
    
    
    2103
    
    
    
    2103
    
    
    
    2104
    
    
    
    2090
    
    
    
    2153
    
    
    
    2033Options to Extend Lease
    
    Two 75-Year
    
    None
    
    None
    
    Two 50-Year
    
    Two 50-Year
    
    Two 75-Year
    
    None
    
    None
    
    See Lamar LeaseaboveCurrent Annual 
Contractual Rental
    
    $
    72,000
    
    
    $
    468,000
    
    
    $
    345,000
    
    
    $
    48,000
    
    
    $
    24,000
    
    
    $
    100,000
    
    
    $
    223,000
    
    
    $
    100,000
    
    
    $
    763,000Contingent Rent
    
    None
    
    None
    
    1% Gross
Revenues
    
    None
    
    None
    
    None
    
    None
    
    None
    
    See Lamar Lease
aboveNext Periodic 
Rental Adjustment
    
    
    2011
    
    
    
    2009
    
    
    
    2013
    
    
    
    2010
    
    
    
    2009
    
    
    
    2010
    
    
    
    2010
    
    
    
    2011
    
    
    
    2009Amount and/or Type
of Next Adjustment
    
    $
    384,000
    
    
    Appraisal
    
    Appraisal
    
    $
    252,000
    
    
    $
    24,000
    
    
    Cost of Living
Adjustment
    
    Appraisal and 1%
Gross Receipts Rent
    
    $
    260,000
    
    
    $
    4,000
  5




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Major tenants:
  2008
    
    
    2007Lamar Outdoor Advertising, LLC
    
    $
    842,000
    
    
    $
    805,000Metropark, Ltd
    
    
    587,000
    
    
    
    558,000Gramercy Capital Corp
    
    
    468,000
    
    
    
    468,000AvalonBay Communities, Inc.
    
    
    401,000
    
    
    
    404,000$
    2,298,000
    
    
    $
    2,235,000
 Competition
  Employees
  Petroleum Storage
 Terminal and Pier Facility
  Environmental
    6




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##### Table of Contents



Insurance
  Competition
  Employees
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  7




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Item 4. Submission of Matters to a Vote of Security Holders
    8




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PART II
 
 Item 5. Market for Registrants Common Equity and Related Stockholder Matters
   Trading Prices
    
    
    DividendsHigh
    
    
    Low
    
    
    Paid20081st Quarter
    
    
    11.75
    
    
    
    8.875
    
    
    
    .032nd Quarter
    
    
    11.00
    
    
    
    8.75
    
    
    
    .033rd Quarter
    
    
    13.175
    
    
    
    11.00
    
    
    
    .034th Quarter
    
    
    11.75
    
    
    
    6.50
    
    
    
    .0320071st Quarter
    
    
    12.105
    
    
    
    10.905
    
    
    
    .0252nd Quarter
    
    
    12.10
    
    
    
    10.50
    
    
    
    .0253rd Quarter
    
    
    16.425
    
    
    
    11.75
    
    
    
    .034th Quarter
    
    
    12.775
    
    
    
    11.525
    
    
    
    .03
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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 1.
    
    Overview:Critical accounting policies:The Securities and Exchange Commission (SEC) has issued guidance for the disclosure of critical
accounting policies. The SEC defines such policies as those that require application of
managements most difficult, subjective or complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain and may change in subsequent
periods.The Companys significant accounting policies are described in Note 2 of Notes to Consolidated
Financial Statements in Item 8. Not all of these significant accounting policies require
management to make difficult, subjective or complex judgments or estimates. Management believes
that the Companys revenue recognition policy for long-term leases with scheduled rent increases
(leasing segment) meets the SEC definition of critical.Certain of the Companys long-term land leases have original terms of 30 to 149 years and contain
scheduled rent increases where the future dollar increases are known at the time of the
commencement of the lease or at a subsequent date.The first such lease commenced in 1988, had an original term of 99 years and provides for fixed
percentage increases at specified intervals (as well as reappraisal increases). In accordance with
the provisions of Statement of Financial Accounting Standards (FAS) No. 13 (Accounting for Leases)
and certain of its interpretations, rental income related to the fixed percentage increases that
are presently known should be recognized on a straight-line basis. To calculate the annual
straight-line amount, the 99 known annual rental amounts are totaled and this total is divided by
99.For this lease, the calculated annual straight-line amount for 1988 was eight times (multiple) the
amount paid by the tenant under the terms of the lease (the contractual amount). In subsequent
years, as the tenant pays higher rents, the multiple gradually decreases until the 57th
year of the lease, at which time the contractual amount paid by the tenant will exceed the
calculated straight-line amount. If the Company were to report annual revenue for this lease using
the straight-line amount, it would record a significant receivable for each of the first 56 years,
which receivable would grow to approximately $33,000,000. Management does not believe that the
Company should record a receivable that would not begin to be collected until the 56th
year (the turnaround date) since management could not be assured of collection.In 1988, management met with the SEC accounting staff to discuss its concerns over the provisions
of FAS No. 13 as they related to a lease of this length which results in the recording of such a
significant receivable that would remain on the Companys balance sheet and continue to grow on an
annual basis with a turnaround date so far in the future. The Company presented the SEC accounting
staff with an application of the accounting policy whereby management would evaluate the
collectibility of the receivable on an annual basis and report as leasing revenue only that portion
of the receivable that management could presently conclude would be collectible. The SEC
accounting staff did not object to this application by the Company.Through December 31, 2008, the receivable on this lease has grown to $17,840,000 (cumulative excess
of straight-line over contractual rentals) and management has not been able to conclude that any
portion is collectible as the turnaround date is still 37 years away.In 2004, a second such lease commenced with an original term of 149 years and provides for fixed
minimum percentage increases at specified intervals (as well as reappraisal increases). For this
lease, the contractual amount paid by the tenant will not exceed the calculated straight-line
amount until the 94th year of the lease. Through December 31, 2008, the receivable on
this lease is $11,272,000 (cumulative excess of straight-line over contractual rentals) and
management has not been able to conclude that any portion is collectible as the turnaround date is
90 years away.In 2006, the Company entered into an Amended and Restated Agreement of its lease with Lamar Outdoor
Advertising LLC (Lamar) with a current remaining term of 26 years which provides for fixed
percentage increases annually. For this lease, the contractual amount paid by Lamar will not
exceed the calculated straight-line amount until the 16th year of the lease. Through
December 31, 2008, the receivable on this lease is $568,000 (cumulative excess of straight-line
over contractual rentals) and management has not been able to conclude that any portion is
collectible as the turnaround date is 14 years away.Accordingly, the Company has not reported any portion of these amounts as leasing revenue in its
consolidated financial statements and does not anticipate that it can reach such a conclusion until
the turnaround dates are closer.
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Although the Companys other long-term land leases provide for scheduled rent increases, the
provisions of the leases are such that certain future dollar amounts could not be calculated either
at the time of the commencement of the lease or now, as such amounts are based on factors that are
not presently known, i.e., future cost-of-living adjustments or future appraised values. The
Company is reporting the annual rental revenues under these leases using the contractual amounts in
accordance with the provisions of FAS No. 13. The Company has recorded excess of straight-line
over contractual revenues on these leases totaling $5,551,000 at December 31, 2008. The Company
continues to recognize accrued leasing revenue from two leases which were recorded in prior years.Segments:The Company operates in two segments, leasing and petroleum storage.The leasing segment consists of the long-term leasing of certain of its real estate interests in
downtown Providence, Rhode Island (upon the commencement of which the tenants have been required to
construct buildings thereon, with the exception of a parking garage), the leasing of a portion of
the building acquired in November 2007 under short-term leasing arrangements and the leasing of
locations along interstate and primary highways in Rhode Island and Massachusetts to Lamar which
has constructed outdoor advertising boards thereon. The Company anticipates that the future
development of its remaining properties in and adjacent to the Capital Center area will consist
primarily of long-term ground leases. Pending this development, the Company leases these parcels
for public parking under short-term leasing arrangements.The petroleum storage segment consists of operating the Facility in East Providence, Rhode Island,
for Global Companies, LLC (Global).The principal difference between the two segments relates to the nature of the operations. The
tenants in the leasing segment incur substantially all of the development and operating costs of
the assets constructed on the Companys land, including the payment of real property taxes on both
the land and any improvements constructed thereon; whereas the Company is responsible for the
operating and maintenance expenses, including a portion of the real property taxes, as well as
capital improvements at the Facility.Changes in capital structure:In November 2008, the Company restated its Articles of Incorporation:
 
    
    To create a new class of common stock of the Company to be designated Class B Common
Stock consisting of 3,500,000 shares, $.01 par value per share;
    
    To increase the number of authorized shares of Class A Common Stock from 6,000,000 to
10,000,000 shares; and
    
    To provide for certain transfer and ownership restrictions as set forth therein.
 In December 2008, the Company issued (in the form of a stock dividend) 3,299,956 shares of Class B
Common Stock on a one-for-one basis for each share of Class A Common Stock held.The holders of Class A and Class B Common Stock share equally in dividends declared by the Company.The holders of Class A and the Class B Common Stock vote together as a single class on all matters
submitted to the shareholders of the Company except for the election of the Board of Directors and
except in connection with certain major corporate actions, including a sale of the Company. The
holders of Class A Common Stock, voting as a separate class, elect one-third of the Board of
Directors. The holders of Class B Common Stock, voting as a separate class, will elect the
remainder of the Board of Directors.Class B Common Stock is convertible by the record owner thereof into the same number of shares of
Class A Common Stock at anytime.The Class A Common Stock is listed on the Premier QX Tier of the OTCQX (Pink Sheets). The Class B
Common Stock is not listed on any national or regional stock exchange, or on the National
Association of Securities Dealers Automated Quotation National Market System or on the OTCQX (Pink
Sheets).The Companys Restated Articles of Incorporation prohibits any shareholder from acquiring more than
a 5% interest in the Companys classes of common stock and prohibits any shareholder or any
beneficial owner who, at the time of the filing of the Restated Articles of Incorporation owned 5%
or more of the Companys classes of common stock from increasing their percentage ownership of
either class of common stock.
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Should a shareholder acquire a number of shares that results in the
limitation being exceeded, shares in excess of the limitation would
be automatically converted into an equal number of shares of Excess Stock, which class was authorized pursuant to
the 2001 Amendment to the Companys Articles of Incorporation. Excess Stock is non-voting and is
not entitled to dividends. However, the shareholder may designate a qualifying transferee for
shares of Excess Stock, at which time such shares would be converted and reissued as Class A or
Class B Common shares as the case may be.The purpose for creating the Class B Common Stock was to put the Company in the position to qualify
to be taxed as a real estate investment trust (REIT). One of the qualifications to be taxed as a
REIT is that no more than 50% of the shares of a company can be held by five or fewer individuals
during the last half of each taxable year. Currently, the majority shareholder controls 52.3% of
the Companys outstanding common stock and three other shareholders each own more than 5% of the
Companys outstanding common stock. In order for the Company to qualify to be taxed as a REIT, the
major shareholders ownership of the Companys issued and outstanding common stock would need to be
reduced below the 50% level.2.
    
    Results of operations:Year Ended December 31, 2008 Compared to Year Ended December 31, 2007Leasing segment:
 2008
    
    
    2007
    
    
    IncreaseLeasing revenues
    
    $
    2,980,000
    
    
    $
    2,853,000
    
    
    $
    127,000Leasing expense
    
    
    696,000
    
    
    
    566,000
    
    
    $
    130,000$
    2,284,000
    
    
    $
    2,287,000
 In June 2007, the Company received a one-time payment of $100,000 in settlement of a former
tenants premature termination of its lease with the Company, which amount was included in 2007
leasing revenues. Exclusive of this one-time payment, leasing revenues increased $227,000 in 2008
due to increases in rentals under short-term leases, including rentals from the Steeple Street
Building purchased in November 2007, and scheduled increases in rentals under long-term land
leases. Leasing expense increased principally due to expenses associated with the Steeple Street
Building.Petroleum storage segment:
 Increase2008
    
    
    2007
    
    
    (Decrease)Petroleum storage facility revenues
    
    $
    3,777,000
    
    
    $
    3,714,000
    
    
    $
    63,000Petroleum storage facility expense
    
    
    2,187,000
    
    
    
    2,451,000
    
    
    $
    (264,000
    )$
    1,590,000
    
    
    $
    1,263,000
 Petroleum storage facility revenue increased in 2008 due to higher monthly rent resulting from the
annual cost-of-living adjustment May 1, 2008 offset by lower contingent revenue due to lower
throughput. Petroleum storage facility expense decreased principally due to:
 
    
    Lower payroll and related costs; in December 2007, the retiring president of the
petroleum storage facility was paid a bonus; and
    
    Lower legal fees associated with a Wilkesbarre Pier litigation.
 General:General and administrative expense decreased $159,000 from 2007 due principally to lower payroll
and related costs due to a reduction in personnel; in addition, in December 2007 the retiring
president of the Company was paid a bonus. This decrease was offset by costs of $232,000 incurred
by the Company in 2008 in connection with the proposed reverse stock split and the amendment to its
Articles of Incorporation, including legal, consulting and printing.Other income:Other income decreased $107,000 from 2007 due to lower interest rates and lower levels of cash
available for investment resulting in part from the cash purchase of the Steeple Street Building.
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3.
    
    Liquidity and capital resources:Historically, the Company has had adequate liquidity to fund its operations. A summary of cash
flows by year is as follows:
 2008
    
    
    2007Operating activities
    
    $
    2,654,000
    
    
    $
    2,502,000Investing activities
    
    $
    (441,000
    )
    
    $
    (2,794,000
    )Financing activities
    
    $
    (792,000
    )
    
    $
    (726,000
    )
 Operating activities:The cash provided by operating activities results from increased revenues
and lower expenses.Investing activities:The cash used in investing activities was to acquire properties and
equipment, including $2,329,000 in 2007 for the Steeple Street Building.Financing activities:The cash used in financing activities was for the payment of dividends.Cash and cash equivalents and cash commitments:At December 31, 2008, the Company had cash and cash equivalents of $3,395,000. Effective February
2009, the Company maintains all of its cash in a non-interest bearing checking account which is
fully insured by the Federal Deposit Insurance Corporation.Under the terms of the Companys long-term land leases, appraisals of the premises are periodically
required at various stated intervals to provide the basis for recalculating the annual rent.
However, if as a result of such appraisal the annual rent is calculated to be less than the then
current rent, the annual rent will remain at the current level. The first of such scheduled
appraisals occurs in 2009 for Parcel 3S to determine what amount, if any, the annual rent will be
increased October 1, 2009. The current annual rent is $468,000.In 2009, the Company anticipates expending $1,750,000 from available cash for the historic
restoration and improvements to the Steeple Street Building. We anticipate that the expenditures
will qualify for Federal historic tax credits.In January 2009, the Company declared a quarterly dividend of $198,000 ($.03 per common share,
which is the equivalent of the $.06 per common share paid prior to the stock dividend in December
2008) which dividend was paid in February 2009. The declaration of future dividends and the amount
thereof will depend on the Companys future earnings, financial factors and other events.The current financial crisis has had limited impact on the Companys results of operations to date.
At the request of the short-term parking tenant, the Company agreed not to increase the rent for
the period January 1 to June 30, 2009. The Company has agreed to meet with the tenant prior to June
30, 2009 to discuss the rent for the balance of the year. Another tenant under a long-term land
lease has requested temporary rent relief, which request is under consideration. As none of the
Companys leases require the tenant to provide financial information, the Company has no
information concerning the impact of the financial crisis on its major tenants and, therefore,
cannot predict whether any other tenants will request such relief or concessions.Under the Companys lease with Global, in previous years, the Company has earned contingent revenue
based upon petroleum throughput in excess of 4,000,000 barrels in any contract year. In 2008, the
contingent revenue earned was $88,000. For the contract year ending April 30, 2009, the Company
does not anticipate reaching 4,000,000 barrels of throughput and therefore will not earn any
contingent revenue for the current contract year.In 2004, the Company received condemnation proceeds from Amtrak of $1,428,000 which qualified for
deferred reinvestment for income tax reporting purposes pursuant to which the Company elected to
reduce the income tax basis of qualifying subsequent acquisitions, thereby avoiding paying income
taxes on the proceeds, subject to certain restrictions. Through December 31, 2006, the Company had
made qualifying acquisitions totaling $250,000 and in November 2007 purchased a building and
related land for $2,329,000 which were qualifying assets, thereby reinvesting the remaining
proceeds from the condemnation.In managements opinion, the Company should be able to generate adequate amounts of cash to meet
all of its anticipated obligations. In the event temporary additional liquidity is required, the
Company believes that a line of credit or other arrangements could be obtained by pledging some or
all of its unencumbered assets as collateral.At December 31, 2008, the Company has no noncancellable contract obligations other than three
operating leases for billboard locations for which the rent expense is not material in amount.
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Item 8. Consolidated Financial Statements
 CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReport of Independent Registered Public Accounting Firm
    
    
    15Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    
    16Consolidated Statements of Income and Retained Earnings for the
Years Ended December 31, 2008 and 2007
    
    
    17Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008 and 2007
    
    
    18Notes to Consolidated Financial Statements
    
    
    19
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(LGCD LOGO)
    
    Lefkowitz, Garfinkel, Champi & DeRienzo P.C.
Certified Public Accountants/Business Consultants
 
 
 
    
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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES  CONSOLIDATED BALANCE SHEETS
 December 31,2008
    
    
    2007ASSETSProperties and equipment (net of accumulated depreciation)
    
    $
    20,447,000
    
    
    $
    20,717,000Cash and cash equivalents
    
    
    3,395,000
    
    
    
    1,974,000Income taxes receivable
    
    
    
    
    
    
    12,000Prepaid and other
    
    
    485,000
    
    
    
    334,000$
    24,327,000
    
    
    $
    23,037,000LIABILITIES AND SHAREHOLDERS EQUITYLiabilities:Accounts payable and accrued expenses:Property taxes
    
    $
    238,000
    
    
    $
    276,000Environmental remediation
    
    
    81,000
    
    
    
    81,000Other
    
    
    416,000
    
    
    
    333,000Deferred leasing revenues
    
    
    520,000
    
    
    
    520,000Income taxes:Current
    
    
    346,000
    
    
    
    Deferred, net
    
    
    5,269,000
    
    
    
    5,151,0006,870,000
    
    
    
    6,361,000Commitment (Note 3)Shareholders equity (Note 7):Class A common stock, $.01 par; authorized 10,000,000
shares in 2008 and 6,000,000 shares in 2007; issued and
outstanding 3,299,956 shares
    
    
    33,000
    
    
    
    33,000Class B common stock, $.01 par; authorized 3,500,000 shares;
issued and outstanding 3,299,956 shares
    
    
    33,000
    
    
    
    Excess stock, $.01 par; authorized 1,000,000 shares; none
issued and outstanding
    
    
    
    
    
    
    Capital in excess of par
    
    
    11,762,000
    
    
    
    11,795,000Retained earnings
    
    
    5,629,000
    
    
    
    4,848,00017,457,000
    
    
    
    16,676,000$
    24,327,000
    
    
    $
    23,037,000
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CAPITAL PROPERTIES, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
 Years Ended December 31,2008
    
    
    2007Revenues and other income:Revenues:Leasing
    
    $
    2,980,000
    
    
    $
    2,853,000Petroleum storage facility
    
    
    3,777,000
    
    
    
    3,714,0006,757,000
    
    
    
    6,567,000Other income, interest
    
    
    21,000
    
    
    
    128,0006,778,000
    
    
    
    6,695,000Expenses:Leasing
    
    
    696,000
    
    
    
    566,000Petroleum storage facility
    
    
    2,187,000
    
    
    
    2,451,000General and administrative
    
    
    1,212,000
    
    
    
    1,371,0004,095,000
    
    
    
    4,388,000Income before income taxes
    
    
    2,683,000
    
    
    
    2,307,000Income tax expense:Current
    
    
    992,000
    
    
    
    629,000Deferred
    
    
    118,000
    
    
    
    293,0001,110,000
    
    
    
    922,000Net income
    
    
    1,573,000
    
    
    
    1,385,000Retained earnings, beginning
    
    
    4,848,000
    
    
    
    4,189,000Dividends on common stock ($.12 and $.11 per share in
2008 and 2007, respectively), based upon 6,599,912
shares outstanding (Note 7)
    
    
    (792,000
    )
    
    
    (726,000
    )Retained earnings, ending
    
    $
    5,629,000
    
    
    $
    4,848,000Basic income per share, based upon 6,599,912
shares outstanding (Note 7)
    
    $
    .24
    
    
    $
    .21
  17




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##### Table of Contents



CAPITAL PROPERTIES, INC. AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    1,573,000
    
    
    $
    1,385,000Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    680,000
    
    
    
    664,000Deferred income taxes
    
    
    118,000
    
    
    
    293,000Changes in assets and liabilities:Increase in:Income taxes receivable
    
    
    
    
    
    
    (12,000
    )Prepaid and other
    
    
    (151,000
    )
    
    
    Accounts payable and accrued expenses
    
    
    76,000
    
    
    
    Current income taxes payable
    
    
    346,000
    
    
    
    Deferred leasing revenues
    
    
    
    
    
    
    72,000Decrease in:Prepaid and other
    
    
    
    
    
    
    61,000Income taxes receivable
    
    
    12,000
    
    
    
    Accounts payable and accrued expenses
    
    
    
    
    
    
    57,000Current income taxes payable
    
    
    
    
    
    
    (18,000
    )Net cash provided by operating activities
    
    
    2,654,000
    
    
    
    2,502,000Cash used in investing activities, payments for properties
and equipment
    
    
    (441,000
    )
    
    
    (2,794,000
    )Cash used in financing activities, payment of dividends
    
    
    (792,000
    )
    
    
    (726,000
    )Increase (decrease) in cash and cash equivalents
    
    
    1,421,000
    
    
    
    (1,018,000
    )Cash and cash equivalents, beginning
    
    
    1,974,000
    
    
    
    2,992,000Cash and cash equivalents, ending
    
    $
    3,395,000
    
    
    $
    1,974,000Supplemental disclosure:Cash paid for income taxes
    
    $
    634,000
    
    
    $
    647,000Non-cash investing and financing activities:Capital expenditures financed through accounts payable
    
    $
    85,000
    
    
    $
    116,000Issuance in the form of a stock dividend of 3,299,956
shares of Class B Common Stock on a one-for-one
basis for each share of Class A Common Stock held
    
    $
    
    
    
    $
    
  18




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##### Table of Contents



CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2008 AND 2007
 1.
    
    Description of business:Capital Properties, Inc. and its wholly-owned subsidiaries, Tri-State Displays, Inc., Capital
Terminal Company and Dunellen, LLC (collectively referred to as the Company), operate in two
segments: (1) Leasing and (2) Petroleum Storage.The leasing segment consists of the long-term leasing of certain of its real estate interests in
downtown Providence, Rhode Island (upon the commencement of which the tenants are required to
construct buildings thereon, with the exception of a parking garage), the leasing of a portion of
the building acquired in November 2007 under short-term leasing arrangements and the leasing of
locations along interstate and primary highways in Rhode Island and Massachusetts to Lamar Outdoor
Advertising, LLC (Lamar) which has constructed outdoor advertising boards thereon. The Company
anticipates that the future development of its remaining properties in and adjacent to the Capital
Center area will consist primarily of long-term ground leases. Pending this development, the
Company leases these parcels for public parking under short-term leasing arrangements.The petroleum storage segment consists of the operating of the petroleum storage terminal (the
Terminal) and the Wilkesbarre Pier (the Pier), collectively referred to as the Facility,
located in East Providence, Rhode Island, for Global Companies, LLC (Global) which stores and
distributes petroleum products.The principal difference between the two segments relates to the nature of the operations. The
tenants in the leasing segment incur substantially all of the development and operating costs of
the assets constructed on the Companys land, including the payment of real property taxes on both
the land and any improvements constructed thereon; whereas the Company is responsible for the
operating and maintenance expenditures, including a portion of the real property taxes, as well as
capital improvements at the Facility.2.
    
    Summary of significant accounting policies:Principles of consolidation:The accompanying consolidated financial statements include the accounts and transactions of the
Company and its subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.Use of estimates:The preparation of consolidated 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.Fair value of financial instruments:As of January 1, 2008, the Company adopted Statement of Financial Accounting Standards (FAS) No.
157 (Fair Value Measurements) for items that are recognized or disclosed at fair value in the
financial statements on a recurring basis and is utilizing Level 1 inputs to measure their fair
market value. The Financial Accounting Standards Board (FASB) issued FASB Staff Bulletin (FSP)
157-2, which permitted a delay in the effective date of FAS No. 157 to fiscal years beginning after
November 15, 2008, for nonfinancial assets and liabilities measured or disclosed on a non-recurring
basis. The effect of the adoption of this Statement is not material.The Company believes that the fair value of financial instruments, including cash and cash
equivalents and accounts payable and accrued expenses, approximate their respective book values at
December 31, 2008 and 2007.Cash and cash equivalents:The Company considers all highly liquid investments with a maturity of three months or less when
purchased to be cash equivalents. At December 31, 2008 and 2007, cash equivalents consisted of an
overnight uninsured sweep with the Companys principal bank totaling $3,188,000 and $1,866,000,
respectively.
 19




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##### Table of Contents



Properties and equipment:Properties and equipment are stated at cost. Acquisitions and additions are capitalized while
routine maintenance and repairs, which do not improve the asset or extend its life, are charged to
expense when incurred. Depreciation is being provided by the straight-line method over the
estimated useful lives of the respective assets.The Company follows the provisions of FAS No. 144 (Accounting for the Impairment or Disposal of
Long-Lived Assets) which requires that properties and equipment held and used by the Company be
reviewed for impairment whenever events or changes in circumstances indicate that the net book
value of the asset may not be recoverable. An impairment loss will be recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of the asset is less
than the net book value of the asset. Generally, the amount of the impairment loss is measured as
the difference between the net book value and the estimated fair value of the asset.Environmental remediation:The Company accrues a liability when the environmental remediation is probable and the costs are
estimable. The Company charges to expense those costs that do not extend the life, increase the
capacity or improve the safety or efficiency of the property owned by the Company.Revenues and other income:Leasing  The Companys properties leased to others are under operating leases. The Company
reports leasing revenue when earned under the operating method.Certain of the Companys long-term land leases, including the outdoor advertising locations,
provide for presently known scheduled rent increases over the remaining terms (26 to 146 years).
In accordance with the provisions of FAS No. 13 (Accounting for Leases) and certain of its
interpretations, the Company recognizes leasing revenue on the straight-line basis over the terms
of the leases; however, the Company does not report as revenue that portion of such straight-line
rentals which management is unable to conclude is realizable (collectible) due to the length of the
lease terms and other related uncertainties.Options  The Company reports option revenue when earned.Petroleum storage facility  The Company reports revenue from the operations of the Facility when
earned and reports as revenue the tenants portion of the real property taxes as required by the
lease.Contingent  The Company reports contingent revenue in the period in which the factors occur on
which the contingent payments are predicated.Litigation and condemnation  The Company reports income resulting from litigation and
condemnations in the period in which the cash is received.Income taxes:The Company and its subsidiaries file consolidated income tax returns.The Company provides for income taxes based on income reported for financial reporting purposes.
The provision for income taxes differs from the amounts currently payable because of temporary
differences associated with the recognition of certain income and expense items for financial
reporting and tax reporting purposes.The Company adopted the provisions of FASB Interpretation No. 48 (Accounting for Uncertainty in
Income Taxes) on January 1, 2007. The interpretation clarifies the accounting for uncertainty in
income taxes recognized in financial statements in accordance with FAS No. 109 (Accounting for
Income Taxes). Based on its evaluation, the Company has concluded that there are no significant
uncertain tax positions requiring recognition in the consolidated financial statements.New accounting standards:The Company reviews new accounting standards as issued. Although some of these accounting
standards may be applicable to the Company, the Company has not identified any standards that it
believes merit further discussion. The Company expects that none of the new standards would have a
significant impact on its consolidated financial statements.
 20




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##### Table of Contents



3.
    
    Properties and equipment:Properties and equipment consists of the following:
 EstimatedUseful Life
    
    
    December 31,in Years
    
    
    2008
    
    
    2007Properties on lease or held for lease:Land and land improvements
    
    
    
    
    
    $
    4,621,000
    
    
    $
    4,621,000Building
    
    
    39
    
    
    
    1,772,000
    
    
    
    1,699,0006,393,000
    
    
    
    6,320,000Petroleum storage facility, on lease:Land and land improvements
    
    
    
    
    
    
    5,591,000
    
    
    
    5,561,000Buildings and structures
    
    
    33
    
    
    
    1,684,000
    
    
    
    1,406,000Tanks and equipment
    
    
    15-20
    
    
    
    14,593,000
    
    
    
    14,569,00021,868,000
    
    
    
    21,536,000Equipment
    
    
    5-10
    
    
    
    131,000
    
    
    
    126,00028,392,000
    
    
    
    27,982,000Less accumulated depreciation:Properties on lease or held for lease
    
    
    
    
    
    
    60,000
    
    
    
    16,000Petroleum storage facility, on lease
    
    
    
    
    
    
    7,789,000
    
    
    
    7,160,000Equipment
    
    
    
    
    
    
    96,000
    
    
    
    89,0007,945,000
    
    
    
    7,265,000$
    20,447,000
    
    
    $
    20,717,000
 In November 2007, the Company purchased a building and accompanying land for $2,329,000, which is
contiguous on the north and east with Parcel 20 already owned by the Company. The Company is
leasing a portion of the building to three tenants under short-term leasing arrangements. In
February 2009, the Company entered into a contract for the historic restoration of the building and
utility infrastructure at a cost of $1,750,000. Construction will commence in the spring of 2009
and should be completed by year-end.4.
    
    Description of leasing arrangements:Long-term land leases:As of December 31, 2008, the Company had entered into five long-term land leases for five separate
parcels upon which the improvements have been completed (developed parcels). In 2005, two
additional long-term land leases commenced (undeveloped parcels) and construction of the
improvements is in process on both parcels.Under the seven land leases, the tenants are required to negotiate any tax stabilization treaty or
other arrangements, appeal any changes in real property assessments, and pay real property taxes
assessed under these arrangements. Accordingly, the amounts paid by the tenants are excluded from
leasing revenues and leasing expenses on the accompanying consolidated statements of income and
retained earnings. For the years ended December 31, 2008 and 2007, the real property taxes
attributable to the Companys land under these seven leases are $1,437,000 and $1,434,000,
respectively.Under one of the leases which commenced in 2005, the tenant is entitled to a credit for future
rents equal to a portion of the real property taxes paid by the tenant through April 2007, which
credit now totals $520,000, the maximum amount, and is reported as deferred leasing revenues on the
accompanying consolidated balance sheets. During the periods that the tenant is entitled to the
credit (commencing in 2010), the Company will reclassify deferred leasing revenues to leasing
revenues.In June 2007, the Company entered into a settlement agreement with a former tenant concerning
amounts due the Company resulting from the tenants prematurely terminating its lease with the
Company in 2003. The Company received $100,000 in settlement, which amount is included in leasing
revenues on the accompanying consolidated statement of income and retained earnings for the year
ended December 31, 2007.Under one of the long-term land leases, the Company receives contingent rentals (based upon a fixed
percentage of gross revenue received by the tenant) which totaled $56,000 and $59,000 for the years
ended December 31, 2008 and 2007, respectively.
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##### Table of Contents



The Company also leases various parcels of land for outdoor advertising purposes to Lamar under a
lease having a remaining term of 26 years. Effective June 1, 2006, the Company entered into an
Amended and Restated Agreement with Lamar which among other things provides the following: (1) the
base rent will increase annually in fixed increases of 2.75% for each leased billboard location
commencing June 1, 2006 and on each June 1 thereafter; and (2) in addition to base rent, for each
12-month period commencing each June 1, Lamar must pay to the Company the difference between 30% of
the gross revenues from each standard billboard and 20% of the gross revenues from each electronic
billboard for such 12-month period reduced by the sum of (a) commissions paid to third parties and
(b) the base monthly rent for each leased billboard display for such 12-month period (contingent
revenue). For the years ended December 31, 2008 and 2007, contingent revenues totaled $88,000 and
$71,000, respectively. In all other respects, the lease remains substantially unchanged.At December 31, 2008, there are 25 locations under lease with 48 billboard faces. Of these
locations, 22 are controlled through easements and 3 are leased from third parties under operating
leases with remaining terms of one to seven years.Minimum future contractual rental payments to be received from noncancellable long-term leases as
of December 31, 2008 are:
 Year ending December 31,2009
    
    $
    2,137,0002010
    
    
    2,278,0002011
    
    
    2,858,0002012
    
    
    3,135,0002013
    
    
    3,220,0002014 to 2153
    
    
    711,459,000$
    725,087,000
 For those leases with presently known scheduled rent increases at December 31, 2008 and 2007, the
cumulative excess of straight-line over contractual rentals (considering scheduled rent increases
over the 30 to 149 year terms of the leases) and the portion of the excess of straight-line over
contractual rentals which management has concluded is realizable when payable over the terms of the
leases is as follows:
 2008
    
    
    2007Cumulative excess of straight-line over contractual rentals
    
    $
    35,231,000
    
    
    $
    30,539,000Amount management has not been able to conclude is collectible
    
    
    35,189,000
    
    
    
    30,496,000Accrued leasing revenues, which are included in prepaid and
other on the accompanying consolidated balance sheets
    
    $
    42,000
    
    
    $
    43,000
 In the event of tenant default, the Company has the right to reclaim its leased land together with
any improvements thereon, subject to the right of any leasehold mortgagee to enter into a new lease
with the Company with the same terms and conditions as the lease in default.Short-term leases:The Company leases the undeveloped parcels of land in or adjacent to the Capital Center area for
public parking purposes to one tenant under short-term cancellable leases.In November 2007, the Company purchased a building and underlying land, which is part of Parcel 20
owned by the Company. The Company is leasing a portion of the building to three tenants under
short-term leases (one year or less) at a current annual rental of $120,000.5.
    
    Petroleum storage facility:Current operations:The Company and Global are parties to a lease agreement whereby the Company operates the entire
Facility for Global. The Company is responsible for labor, insurance, property taxes and other
operating expenses, as well as capital improvements.
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The lease provides as follows:
 
    
    The lease expires April 30, 2013, but will continue thereafter on a year-to-year
basis unless terminated by either party upon ninety days written notice;
    
    Global may terminate the lease on the anniversary date (April 30) provided it gives
at lease one years written notice;
    
    Global will pay a monthly rent subject to annual cost-of-living adjustments;
    
    Global will reimburse the Company for real property taxes in excess of $106,000
annually; and
    
    The Company will receive an additional $.10 per barrel for every barrel in excess
of 4,000,000 barrels of throughput in any lease year (contingent revenue).
 For the years ended December 31, 2008 and 2007, the Company earned contingent revenue of $86,000
and $171,000, respectively.The monthly rent at January 1, 2007 was $277,000 and increased to $285,000 in May 2007 and $296,000
in May 2008 as a result of the scheduled annual cost-of-living adjustments in May of each year.Effective May 2003, Global has an option to purchase the Facility at any time during the term of
the lease (other than the last year thereof) on the terms and conditions set forth in a separate
option agreement. Under a companion agreement, Global agreed to make certain improvements at the
Pier which totaled approximately $300,000 in 2008. No improvements were made in 2007. [See
Wilkesbarre Pierbelow].Environmental remediation:In 1994, a leak was discovered in a 25,000 barrel storage tank at the Terminal which allowed the
escape of a small amount of fuel oil. All required notices were made to the State of Rhode Island
Department of Environmental Management (RIDEM). In 2000, the tank was demolished and testing of
the groundwater indicated that there was no large pooling of contaminants. In 2001, RIDEM approved
a plan pursuant to which the Company installed a passive system consisting of three wells and
commenced monitoring the wells.In 2003, RIDEM decided that the passive monitoring system previously approved was not sufficient
and required the Company to design an active remediation system for the removal of product from the
contaminated site. The Company and its consulting engineers began the pre-design testing of the
site in the fourth quarter of 2004. The consulting engineers estimated a total cost of $200,000 to
design, install and operate the system, which amount was accrued in 2004. Through December 31,
2008, the Company has expended $119,000. RIDEM has not taken any action on the Companys proposed
plan. As designed, the system will pump out the contaminants which will be disposed of in
compliance with applicable regulations. After a period of time, the groundwater will be tested to
determine if sufficient contaminants have been removed. While the Company and its consulting
engineers believe that the proposed active remediation system will correct the situation, it is
possible that RIDEM could require the Company to expand remediation efforts, which could result in
the Company incurring additional costs.Environmental incident:In 2002, during testing of monitoring wells at the Terminal, the Companys consulting engineer
discovered free floating phase product in a groundwater monitoring well located on that portion of
the Terminal purchased in 2000. Laboratory analysis indicated that the product was gasoline, which
is not a product the Company ever stored at the Terminal. However, in the 1950s gasoline was
stored on the Companys property by a predecessor owner. The Company commenced an environmental
investigation and analysis, the results of which indicate that the gasoline did not come from the
Terminal. The Company notified RIDEM. RIDEM subsequently identified Power Test Realty Partnership
(Power Test), the owner of an adjacent parcel, as a potentially responsible party for the
contamination. Power Test challenged that determination and, after an administrative hearing, on
October 20, 2008, a RIDEM Hearing Officer determined that Power Test is responsible for the
discharge of the petroleum product under the Rhode Island Oil Pollution Control Act, R.I.G.L.
Section 46-12.5.1-3 and Rule 6(a) and 12(b) of the Oil Pollution Control Regulations. The RIDEM
Decision and Order requires Power Test to remediate the contamination as directed by RIDEM. Getty
Properties Corp. is the general partner of Power Test. On November 18, 2008, Power Test appealed
the decision to the Rhode Island Superior Court. In addition, on November 26, 2008, Power Test
sought, and received, a stay of the Decision and Order of the Hearing Officer pending a
clarification by RIDEM of the amount of the proposed fine. There can be no assurance that the
Superior Court will affirm the decision of the Administrative Hearing Officer.Since January 2003, the Company has not incurred significant costs in connection with this matter
and is unable to determine the costs it might incur to remedy the situation as well as any costs to
investigate, defend, and seek reimbursement from the responsible party with respect to this
contamination.
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##### Table of Contents



Wilkesbarre Pier:The Pier is a deep-water pier in East Providence, Rhode Island owned by the Company which is
integral to the operation of the Terminal. The Pier and the Terminal are connected by two
petroleum pipelines which the Company has a permanent right to use. In 1995, the Company and
Providence and Worcester Railroad Company (the Railroad) (the then owner of the Pier) entered
into an agreement which, among other things, gave the Company the right to acquire the Pier for One
Dollar ($1.00). The Company acquired the Pier from the Railroad in 1998. The Company and the
Railroad have a common controlling shareholder.6.
    
    Income taxes:In 2004, the Company received condemnation proceeds from Amtrak totaling $1,428,000 which qualified
for deferred reinvestment for income tax reporting purposes pursuant to which the Company elected
to reduce the income tax basis of qualifying subsequent acquisitions, thereby avoiding paying
income taxes on the proceeds, subject to certain restrictions. Through December 31, 2006, the
Company had made qualifying acquisitions totaling $250,000, and in November 2007 purchased a
building and related land for $2,329,000 which were qualifying assets, thereby reinvesting the
remaining proceeds from the condemnation.Income tax expense is comprised of the following components:
 2008
    
    
    2007Current:Federal
    
    $
    770,000
    
    
    $
    519,000State
    
    
    222,000
    
    
    
    110,000992,000
    
    
    
    629,000Deferred:Federal
    
    
    85,000
    
    
    
    218,000State
    
    
    33,000
    
    
    
    75,000118,000
    
    
    
    293,000$
    1,110,000
    
    
    $
    922,000
 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:
 2008
    
    
    2007Computed expected tax
    
    $
    913,000
    
    
    $
    784,000Increase (decrease) in expected tax resulting from:State income tax, net of Federal income tax benefit
    
    
    164,000
    
    
    
    140,000Non-deductible expenses
    
    
    33,000
    
    
    
    (2,000
    )$
    1,110,000
    
    
    $
    922,000
 Deferred income taxes are recorded based upon differences between financial statement and tax basis
amounts of assets and liabilities. The tax effects of temporary differences which give rise to
deferred tax assets and liabilities were as follows:
 December 31,2008
    
    
    2007Gross deferred tax liabilities:Property having a financial statement basis in excess of tax basis:Cost differences
    
    $
    3,517,000
    
    
    $
    3,517,000Depreciation differences
    
    
    1,996,000
    
    
    
    1,874,0005,513,000
    
    
    
    5,391,000Insurance premiums
    
    
    75,000
    
    
    
    80,0005,588,000
    
    
    
    5,471,000Gross deferred tax assets
    
    
    (319,000
    )
    
    
    (320,000
    )$
    5,269,000
    
    
    $
    5,151,000
 The Companys Federal and State (Rhode Island and Massachusetts) income tax returns for the years
2005, 2006 and 2007 remain subject to examination.
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##### Table of Contents



7.
    
    Shareholders equity:In November 2008, the Company restated its Articles of Incorporation:
 
    
    To create a new class of common stock of the Company to be designated Class B Common
Stock consisting of 3,500,000 shares, $.01 par value per share;
    
    To increase the number of authorized shares of Class A Common Stock from 6,000,000 to
10,000,000 shares; and
    
    To provide for certain transfer and ownership restrictions as set forth therein.
 In December 2008, the Company issued (in the form of a stock dividend) 3,299,956 shares of Class B
Common Stock on a one-for-one basis for each share of Class A Common Stock held. The Company
accounted for the stock split effective in the form of a dividend by transferring $33,000 from
capital in excess of par to Class B Common Stock on December 11, 2008.The holders of Class A and the Class B Common Stock vote together as a single class on all matters
submitted to the shareholders of the Company except for the election of the Board of Directors and
except in connection with certain major corporate actions, including a sale of the Company. The
holders of Class A Common Stock, voting as a separate class, elect one-third of the Board of
Directors. The holders of Class B Common Stock, voting as a separate class, will elect the
remainder of the Board of Directors.Class B Common Stock is convertible by the record owner thereof into the same number of shares of
Class A Common Stock at anytime.The Class A Common Stock is listed on the Premier QX Tier of the OTCQX (Pink Sheets). The Class B
Common Stock is not listed on any national or regional stock exchange, or on the National
Association of Securities Dealers Automated Quotation National Market System or on the OTCQX (Pink
Sheets).The holders of Class A and Class B Common Stock share equally in the earnings of the Company.The holders of Class A and Class B Common Stock share equally in dividends declared by the Company.
Dividends on common stock for periods prior to December 2008 and basic income per share on the
accompanying consolidated statements of income and retained earnings have been restated to give
effect to the additional shares outstanding.The Companys Restated Articles of Incorporation prohibits any shareholder from acquiring more than
a 5% interest in the Companys classes of common stock and prohibits any shareholder or any
beneficial owner who, at the time of the filing of the Restated Articles of Incorporation owned 5%
or more of the Companys classes of common stock from increasing their percentage ownership of
either class of common stock. Should a shareholder acquire a number of shares that results in the
limitation being exceeded, shares in excess of the limitation would be automatically converted into
an equal number of shares of Excess Stock, which class was authorized pursuant to the 2001
Amendment to the Companys Articles of Incorporation. Excess Stock is non-voting and is not
entitled to dividends. However, the shareholder may designate a qualifying transferee for shares
of Excess Stock, at which time such shares would be converted and reissued as Class A or Class B
Common shares as the case may be.The purpose for creating the Class B Common Stock was to put the Company in the position to qualify
to be taxed as a real estate investment trust (REIT). One of the qualifications to be taxed as a
REIT is that no more than 50% of the shares of a company can be held by five or fewer individuals
during the last half of each taxable year. Currently, the majority shareholder controls 52.3% of
the Companys outstanding common stock and three other shareholders each own more than 5% of the
Companys outstanding common stock. In order for the Company to qualify to be taxed as a REIT, the
major shareholders ownership of the Companys issued and outstanding common stock would need to be
reduced below the 50% level.
 8.
    
    Operating segment disclosures:The Company operates in two segments: (1) Leasing and (2) Petroleum Storage.The Company makes decisions relative to the allocation of resources and evaluates performance based
on each segments respective income before income taxes, excluding interest income, and certain
corporate expenses.Inter-segment revenues are immaterial in amount. The Company did not incur interest expense during
the years ended December 31, 2008 and 2007.
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##### Table of Contents



The following financial information is used for making operating decisions and assessing
performance of the Companys segments:
 December 31,2008
    
    
    2007Leasing:Revenues:Long-term leases:Contractual
    
    $
    2,122,000
    
    
    $
    2,053,000Contingent
    
    
    144,000
    
    
    
    130,000Option
    
    
    
    
    
    
    100,000Excess of contractual over straight-line rentals
    
    
    (1,000
    )
    
    
    (1,000
    )Short-term leases
    
    
    715,000
    
    
    
    571,000$
    2,980,000
    
    
    $
    2,853,000Property tax expense
    
    $
    476,000
    
    
    $
    447,000Depreciation
    
    $
    44,000
    
    
    $
    4,000Income before income taxes
    
    $
    2,284,000
    
    
    $
    2,287,000Assets
    
    $
    6,521,000
    
    
    $
    6,498,000Properties and equipment, additions
    
    $
    73,000
    
    
    $
    2,329,000Petroleum storage:Revenues:Contractual
    
    $
    3,691,000
    
    
    $
    3,543,000Contingent
    
    
    86,000
    
    
    
    171,000Total revenues
    
    $
    3,777,000
    
    
    $
    3,714,000Property tax expense
    
    $
    205,000
    
    
    $
    204,000Depreciation
    
    $
    629,000
    
    
    $
    657,000Income before income taxes
    
    $
    1,590,000
    
    
    $
    1,263,000Assets
    
    $
    14,582,000
    
    
    $
    14,625,000Properties and equipment:Additions
    
    $
    332,000
    
    
    $
    551,000Deletion
    
    
    
    
    
    
    (73,000
    )$
    332,000
    
    
    $
    478,000
 The following is a reconciliation of the segment information to the amounts reported in the
accompanying consolidated financial statements:
 2008
    
    
    2007Revenues and other income:Revenues for operating segments:Leasing
    
    $
    2,980,000
    
    
    $
    2,853,000Petroleum storage
    
    
    3,777,000
    
    
    
    3,714,0006,757,000
    
    
    
    6,567,000Other income, income
    
    
    21,000
    
    
    
    128,000Total consolidated revenues and other income
    
    $
    6,778,000
    
    
    $
    6,695,000
 26




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##### Table of Contents



2008
    
    
    2007Property tax expense:Property tax expense for operating segments:Leasing
    
    $
    476,000
    
    
    $
    447,000Petroleum storage
    
    
    205,000
    
    
    
    204,000681,000
    
    
    
    651,000Unallocated corporate property tax expense
    
    
    1,000
    
    
    
    1,000Total consolidated property tax expense
    
    $
    682,000
    
    
    $
    652,000Depreciation:Depreciation for operating segments:Leasing
    
    $
    44,000
    
    
    $
    4,000Petroleum storage
    
    
    629,000
    
    
    
    657,000673,000
    
    
    
    661,000Unallocated corporate depreciation
    
    
    7,000
    
    
    
    3,000Total consolidated depreciation
    
    $
    680,000
    
    
    $
    664,000Income before income taxes:Income for operating segments:Leasing
    
    $
    2,284,000
    
    
    $
    2,287,000Petroleum storage
    
    
    1,590,000
    
    
    
    1,263,0003,874,000
    
    
    
    3,550,000Interest income
    
    
    21,000
    
    
    
    128,000Unallocated corporate expenses
    
    
    (1,212,000
    )
    
    
    (1,371,000
    )Total consolidated income before income taxes
    
    $
    2,683,000
    
    
    $
    2,307,000Assets:Assets for operating segments:Leasing
    
    $
    6,521,000
    
    
    $
    6,498,000Petroleum storage
    
    
    14,582,000
    
    
    
    14,625,00021,103,000
    
    
    
    21,123,000Corporate cash and cash equivalents
    
    
    3,189,000
    
    
    
    1,866,000Other unallocated amounts
    
    
    35,000
    
    
    
    48,000Total consolidated assets
    
    $
    24,327,000
    
    
    $
    23,037,000Additions and deletions to properties and equipment:Leasing
    
    $
    73,000
    
    
    $
    2,329,000Petroleum storage
    
    
    332,000
    
    
    
    478,000405,000
    
    
    
    2,807,000Unallocated corporate additions to properties and equipment
    
    
    5,000
    
    
    
    29,000Total consolidated additions (deletions)
    
    $
    410,000
    
    
    $
    2,836,000
 The following table sets forth those customers whose revenues exceed 10% of the Companys segment
revenues:
 2008
    
    
    2007Leasing segment:Lamar Outdoor Advertising, LLC
    
    $
    842,000
    
    
    $
    805,000Metropark, Ltd
    
    
    587,000
    
    
    
    558,000Gramercy Capital Corp
    
    
    468,000
    
    
    
    468,000AvalonBay Communities, Inc.
    
    
    401,000
    
    
    
    404,000$
    2,298,000
    
    
    $
    2,235,000Petroleum storage segment: Global Companies, LLC
    
    $
    3,777,000
    
    
    $
    3,714,000
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##### Table of Contents



9.
    
    Fourth quarter transactions:For 2008:In July 2008, the Companys Board of Directors unanimously approved recommending to
shareholders, among other items, a reverse stock split of 75 to 1 with respect to the Companys
outstanding common stock. In addition, the Directors also unanimously approved an amendment to the
Companys Articles of Incorporation to create a Class B common stock (see Note 7). The Board
originally anticipated that the reverse stock split would result in the Company having less than
300 shareholders which would permit the Company to suspend the registration of its common stock
under the Securities Exchange Act of 1934. As a result of an increase in the number of
shareholders following the public announcement of the Boards recommendations, at a special
shareholder meeting held November 21, 2008, the shareholders were asked to approve the reverse
stock split and approve granting to the Board of Directors for a period of ninety (90) days
following the approval of the reverse stock split, the right to determine whether the reverse stock
split should proceed even if it would result in the Company not having less than 300 shareholders.
Following the special shareholders meeting, the Board of Directors decided not to implement the
reverse stock split, given the cost to the Company and the relatively small benefit to be derived.At September 30, 2008, the Company had incurred costs of $160,000, which were included in prepaid
and other on the consolidated balance sheet at September 30, 2008 pending the final decision
concerning the reverse stock split. Total costs of $232,000 (including the $160,000) were included
in general and administrative expense in the fourth quarter.For 2007:In December 2007, the president of Capital Properties, Inc. retired and was paid a bonus
totaling $125,000, which amount is recorded in general and administrative expense on the
accompanying statement of income and retained earnings for the year ended December 31, 2007. In
December 2007, the president of Capital Terminal Company also retired and was paid a bonus totaling
$109,000, which amount is recorded in petroleum storage facility expense on the accompanying
statement of income and retained earnings for the year ended December 31, 2007.
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##### Table of Contents



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
  Managements Annual Report on Internal Control over Financial Reporting.
      Changes in Internal Control Over Financial Reporting.
  29




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance of the Registrant
   Date of FirstName
    
    Age
    
    Office Held
    
    Election to OfficeRobert H. Eder
    
    
    76
    
    
    President, Capital Properties, Inc.
    
    
    1995Barbara J. Dreyer
    
    
    70
    
    
    Treasurer, Capital Properties, Inc.
    
    
    1997Stephen J. Carlotti
    
    
    66
    
    
    Secretary, Capital Properties, Inc.
    
    
    1998Todd D. Turcotte
    
    
    37
    
    
    President, Capital Terminal Company
    
    
    2008and Vice President, Capital Properties, Inc.
  Code of Ethics:
   
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13. Certain Relationships and Related Transactions and Director Independence
  
 Item 14. Principal Accountant Fees and Services
  30




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a) and (c)
    
    The consolidated financial statements are included in Item 8.(b)
    
    Exhibits:3.1
    
    
    Restated Articles of Incorporation (Effective November 22, 2008)3.2
    
    
    By-laws, as amended December 10, 2007 (incorporated by reference to Exhibit 3.2
to the registrants annual report on Form 10-K for the year ended December 31, 2007).10
    
    
    Material contracts:(a)
    Lease between Metropark, Ltd. and Company:(i)
    Dated January 1, 2005 (incorporated by reference to Exhibit 10(a)
to the registrants annual report on Form 10-KSB for the year ended December 31,
2004), as amended.(b)
    Miscellaneous contract:(i)
    Option Agreement to Purchase Real Property and Related Assets, dated June
9, 2003, by and between Dunellen, LLC and Global Companies, LLC
(incorporated by reference to Exhibit 10(b)(i) to the registrants Report on Form
10-QSB/A for the quarterly period ended June 30, 2003), as amended.20.1
    
    
    Map of the Companys parcels in Downtown Providence, Rhode Island20.2
    
    
    Map of the Companys petroleum storage facility in East Providence, Rhode Island21
    
    
    Subsidiaries of the Company31.1
    
    
    Rule 13a-14(a) Certification of President and Principal Executive Officer31.2
    
    
    Rule 13a-14(a) Certification of Treasurer and Principal Financial Officer32.1
    
    
    Certification of President and Principal Executive Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Treasurer and Principal Financial Officer pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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##### Table of Contents



SIGNATURES
  CAPITAL PROPERTIES, INC.By
    /s/ Robert H. EderRobert H. EderPresident and Principal Executive Officer   /s/ Robert H. Eder

Robert H. Eder
    
    
    
    March 16, 2009President and DirectorPrincipal Executive Officer/s/ Barbara J. Dreyer
    
    
    
    March 18, 2009Barbara J. DreyerTreasurer, Principal Financial Officerand Principal Accounting Officer/s/ Alfred J. Corso
    
    
    
    March 16, 2009Alfred J. Corso, Director/s/ Harris N. Rosen
    
    
    
    March 16, 2009Harris N. Rosen, Director
 32