UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
   
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007March 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.
(Exact name of registrant as specified in its charter)
   
Rhode Island 05-0386287
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
100 Dexter Road
East Providence, Rhode Island 02914
(Address of principal executive offices)      (Zip Code)
(401) 435-7171
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Class A Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.
Largesmaller reporting company. See the definitions of “large accelerated filer,o     Accelerated filero” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated fileroAccelerated fileroNon-accelerated fileroSmaller reporting companyþ
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of October 30, 2007,April 29, 2008, the Company had 3,299,956 shares of Class A Common Stock outstanding.
 
 

 

CAPITAL PROPERTIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2008
TABLE OF CONTENTS

PART IPage
PART I — FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
3
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
Item 3. Quantitative and Qualitative Disclosures About Market Securities
13
Item 4. Controls and Procedures
13
PART II — OTHER INFORMATION
Item 6. Exhibits
14
SIGNATURESignatures
15
EX-31.1 RULE 13A-14(A) CERTIFICATION OF CHAIRMAN OF THE BOARD AND PRINCIPAL EXECUTIVE OFFICERSection 302 Certification of CEO
EX-31.2 RULE 13A-14 (A) CERTIFICATION OF TREASURER AND PRINCIPAL FINANCIAL OFFICERSection 302 Certification of CFO
EX-32.1 CERTIFICATION OF CHAIRMAN OF THE BOARD AND PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTIONSection 906 Certification of CEO
EX-32.2 CERTIFICATION OF TREASURER AND PRINCIPAL FINANCIAL OFFICER PURSUANT TO SECTIONSection 906 Certification of CFO

2

PART I
Item 1. Consolidated Financial Statements
CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
         
  September 30,  December 31, 
  2007  2006 
  (unaudited)     
         
ASSETS        
         
Properties and equipment (net of accumulated depreciation) $18,399,000  $18,471,000 
Cash and cash equivalents  4,113,000   2,992,000 
Prepaid and other  365,000   395,000 
       
  $22,877,000  $21,858,000 
       
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
         
Liabilities:        
Accounts payable and accrued expenses:        
Property taxes $266,000  $298,000 
Environmental remediation  81,000   82,000 
Other  149,000   137,000 
Deferred leasing revenues  520,000   448,000 
Income taxes:        
Current  107,000   18,000 
Deferred, net  5,063,000   4,858,000 
       
   6,186,000   5,841,000 
       
         
Shareholders’ equity:        
Class A common stock, $.01 par; authorized 6,000,000 shares; issued and outstanding 3,299,956 shares  33,000   33,000 
Capital in excess of par  11,795,000   11,795,000 
Retained earnings  4,863,000   4,189,000 
       
   16,691,000   16,017,000 
       
  $22,877,000  $21,858,000 
       
See notes to consolidated financial statements.

2

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
                 
  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2007  2006  2007  2006 
                 
Revenues and other income:                
Revenues:                
Leasing $676,000  $653,000  $2,167,000  $1,839,000 
Petroleum storage facility  860,000   792,000   2,745,000   2,338,000 
             
   1,536,000   1,445,000   4,912,000   4,177,000 
Other income, interest  29,000   26,000   94,000   83,000 
             
   1,565,000   1,471,000   5,006,000   4,260,000 
             
                 
Expenses:                
Expenses applicable to:                
Leasing  169,000   164,000   430,000   521,000 
Petroleum storage facility  516,000   434,000   1,619,000   1,318,000 
General and administrative  308,000   248,000   931,000   835,000 
             
   993,000   846,000   2,980,000   2,674,000 
             
                 
Income before income taxes  572,000   625,000   2,026,000   1,586,000 
             
                 
Income tax expense:                
Current  125,000   125,000   619,000   495,000 
Deferred  114,000   127,000   205,000   145,000 
             
   239,000   252,000   824,000   640,000 
             
                 
Net income $333,000  $373,000  $1,202,000  $946,000 
             
                 
Basic income per common share $.10  $.11  $.36  $.28 
             
                 
Dividends on common stock $.06  $.04  $.16  $.10 
             
         
  March 31,  December 31, 
  2008
(unaudited)		  2007 
ASSETS        
Properties and equipment (net of accumulated depreciation) $20,552,000  $20,717,000 
Cash and cash equivalents  2,296,000   1,974,000 
Income taxes receivable  —   12,000 
Prepaid and other  369,000   334,000 
       
  $23,217,000  $23,037,000 
       
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
         
Liabilities:        
Accounts payable and accrued expenses:        
Property taxes $279,000  $276,000 
Environmental remediation  81,000   81,000 
Other  99,000   333,000 
Deferred leasing revenues  520,000   520,000 
Income taxes:        
Current  189,000   — 
Deferred, net  5,167,000   5,151,000 
       
   6,335,000   6,361,000 
       
         
Shareholders’ equity:        
Class A common stock, $.01 par; authorized 6,000,000 shares; issued and outstanding 3,299,956 shares  33,000   33,000 
Capital in excess of par  11,795,000   11,795,000 
Retained earnings  5,054,000   4,848,000 
       
   16,882,000   16,676,000 
       
  $23,217,000  $23,037,000 
       
See notes to consolidated financial statements.

3

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWSINCOME

NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2008 AND 2007 AND 2006
(Unaudited)
         
  2007  2006 
         
Cash flows from operating activities:        
Net income $1,202,000  $946,000 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Depreciation  515,000   398,000 
Deferred income taxes  205,000   145,000 
Other, principally net changes in receivables, prepaids, accounts payable, accrued expenses, deferred leasing revenues and current income taxes  170,000   (846,000)
       
Net cash provided by operating activities  2,092,000   643,000 
         
Cash used in investing activities, payments for properties and equipment  (443,000)  (2,210,000)
         
Cash used in financing activities, payment of dividends  (528,000)  (330,000)
       
         
Increase (decrease) in cash and cash equivalents  1,121,000   (1,897,000)
Cash and cash equivalents, beginning  2,992,000   4,311,000 
       
Cash and cash equivalents, ending $4,113,000  $2,414,000 
       
         
Supplemental disclosure, cash paid for income taxes $518,000  $1,257,000 
       
         
  2008  2007 
Revenues and other income:        
Revenues:        
Leasing $715,000  $659,000 
Petroleum storage facility  951,000   975,000 
       
   1,666,000   1,634,000 
Other income, interest  7,000   31,000 
       
   1,673,000   1,665,000 
       
         
Expenses:        
Leasing  190,000   138,000 
Petroleum storage facility  515,000   555,000 
General and administrative  291,000   335,000 
       
   996,000   1,028,000 
       
         
Income before income taxes  677,000   637,000 
       
         
Income tax expense:        
Current  257,000   200,000 
Deferred  16,000   57,000 
       
   273,000   257,000 
       
         
Net income $404,000  $380,000 
       
         
Basic income per share $.12  $.12 
       
         
Dividends per share on common stock $.06  $.05 
       
See notes to consolidated financial statements.

4

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Unaudited)
         
  2008  2007 
Cash flows from operating activities:        
Net income $404,000  $380,000 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  179,000   160,000 
Deferred income taxes  16,000   57,000 
Other, principally net changes in receivables, prepaids, accounts payable, accrued expenses, deferred leasing revenues and current income taxes  51,000   122,000 
       
Net cash provided by operating activities  650,000   719,000 
         
Cash used in investing activities, payments for properties and equipment, including $116,000 relating to 2007 purchases  (130,000)  (19,000)
         
Cash used in financing activities, payment of dividends  (198,000)  (165,000)
       
         
Increase in cash and cash equivalents  322,000   535,000 
Cash and cash equivalents, beginning  1,974,000   2,992,000 
       
Cash and cash equivalents, ending $2,296,000  $3,527,000 
       
         
Supplemental disclosure, cash paid for income taxes $56,000  $56,000 
       
See notes to consolidated financial statements.

5

CAPITAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINETHREE MONTHS ENDED SEPTEMBER 30,MARCH 31, 2008 AND 2007 AND 2006
(Unaudited)
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 principally 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 various tenants,construct buildings thereon, with the exception of a parking garage), the leasing of a portion of the building acquired in November 2007 (“Steeple Street Building”) 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 inunder the leasing segmentlong-term land leases 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 real property taxes, as well as capital improvements at the Facility.
 
2. Principles of consolidation and basis of presentation:
 
 ��The accompanying condensed 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.
 
  The accompanying condensed consolidated balance sheet as of December 31, 2006,2007, has been derived from audited financial statements and the unaudited interim condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Form 10-K. In the opinion of management, the accompanying condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2007,March 31, 2008 and the results of operations for the three and nine months ended September 30, 2007 and 2006, and the cash flows for the ninethree months ended September 30, 2007March 31, 2008 and 2006.2007.
 
  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
 
3. 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.

56

4. Properties and equipment:
 
  Properties and equipment consists of the following:
                
 September 30, December 31,  March 31, December 31, 
 2007 2006  2008 2007 
Properties on lease or held for lease: 
Land and land improvements $4,621,000 $4,621,000 
Building 1,699,000 1,699,000 
      
Properties on lease or held for lease, land and land improvements $3,991,000 $3,991,000 
 6,320,000 6,320,000 
          
  
Petroleum storage facility, on lease:  
Land and land improvements 5,561,000 5,398,000  5,561,000 5,561,000 
Buildings and structures 1,387,000 1,338,000  1,415,000 1,406,000 
Tanks and equipment 14,465,000 14,322,000  14,569,000 14,569,000 
          
 21,413,000 21,058,000  21,545,000 21,536,000 
          
  
Office equipment 112,000 97,000  131,000 126,000 
          
 25,516,000 25,146,000  27,996,000 27,982,000 
          
  
Less accumulated depreciation:  
Properties on lease or held for lease 12,000 12,000  34,000 16,000 
Petroleum storage facility, on lease 7,017,000 6,576,000  7,320,000 7,160,000 
Office equipment 88,000 87,000  90,000 89,000 
          
 7,117,000 6,675,000  7,444,000 7,265,000 
          
 $18,399,000 $18,471,000  $20,552,000 $20,717,000 
          
5. Description of leasing arrangements:
 
  As of September 30, 2007,March 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 which have commenced, 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 whichassessed under these arrangements. Accordingly, the amounts paid by the tenants are excluded from leasing revenues and leasing expense on the accompanying consolidated statements of income. TheFor the three months ended March 31, 2008 and 2007, the real property taxes attributable to the Company’s land under these seven leases totaled $417,000are $365,000 and $1,084,000, respectively, for the three and nine months ended September 30, 2007, and $327,000 and $982,000, respectively, for the three and nine months ended September 30, 2006.$361,000 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. For real estate taxes prior to 2007, the Company reported the portion of the real property taxes subject to the future credit as property tax expense on the accompanying consolidated statement of income and as accrued property taxes on its consolidated balance sheet.sheets. As the tenant made the tax payment, the amount of the payment was reclassified from accrued property taxes to deferred leasing revenues which totaled $520,000 and $448,000 at September 30, 2007 and December 31, 2006, respectively.revenues. 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.
In September 2007, the Company received the 2007 real property tax bills from the City of Providence totaling $466,000. The Company had recorded property tax expense of $205,000 through June 30, 2007, based upon the 2006 tax level adjusted for an estimated inflation increase of 2 percent of the tax rate. As a result of the 2007 property tax increase, the Company recorded property tax expense of $145,000 for the quarter ended September 30, 2007.
 
6. Petroleum storage facility:
 
  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

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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.

7

  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 included in petroleum storage facility expenseaccrued in 2004. Through September 30, 2007,March 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. Preliminary laboratory analysis indicated that the product was gasoline, which is not a product the Company ever stored at the Company’s 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 Company’s Terminal. The Company notified RIDEM. The Company will continue to monitor RIDEM’s investigation.
 
  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.
 
7. Income taxes:
 
  In 2004, the Company received condemnation proceeds from the National Railroad Passenger Corporation (“Amtrak”) totaling $1,428,000 which qualify for deferred reinvestment for income tax reporting purposes whereby the Company elected to reduce the income tax basis of qualifying subsequent acquisitions, which resulted in the Company’s not then paying income taxes on the proceeds, subject to certain restrictions. The Company filed its 2004 income tax returns, making such election, thereby reducing its cash outlay for income taxes for 2004 by approximately $570,000. Through September 30, 2007, the Company has made qualifying acquisitions totaling $250,000. However, the Company will be required to reinvest the remaining condemnation proceeds in qualifying assets by December 31, 2007, unless this date is extended by the Internal Revenue Service (“IRS”). The Company has applied to the IRS for an extension of the reinvestment period to December 31, 2008 and is awaiting the IRS’s determination. The Company will be required to pay the income tax and interest on any unexpended proceeds.
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:
        
 September 30, December 31,         
 2007 2006  March 31, December 31, 
  2008 2007 
Gross deferred tax liabilities:  
Property having a financial statement basis in excess of tax basis $4,935,000 $4,728,000  $5,418,000 $5,391,000 
Condemnation proceeds 470,000 470,000 
Insurance premiums 93,000 92,000  56,000 80,000 
          
 5,498,000 5,290,000  5,474,000 5,471,000 
Gross deferred tax assets  (435,000)  (432,000)  (307,000)  (320,000)
          
 $5,063,000 $4,858,000  $5,167,000 $5,151,000 
          
The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 (Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109) on January 1, 2007. Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in the consolidated financial statements. The evaluation was performed for the tax periods ended December 31, 2004 through September 30, 2007, the tax periods which remain subject to examination by major tax jurisdictions as of September 30, 2007. The Company may from time to time be assessed interest or penalties by

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major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company receives an assessment for interest and/or penalties, such amounts would be classified in the consolidated financial statements as general and administrative expense.
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 ninethree months ended September 30, 2007March 31, 2008 and 2006.2007.

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  The following financial information is used for making operating decisions and assessing performance of each of the Company’s segments:segments for the three months ended March 31, 2008 and 2007:
         
  Nine Months Ended 
  September 30, 
  2007  2006 
         
Leasing:
        
Revenues:        
Long-term leases:        
Contractual $1,532,000  $1,505,000 
Contingent  116,000   123,000 
Option  100,000   — 
Excess of contractual over straight-line rentals  —   (187,000)
Short-term leases  419,000   398,000 
       
Total revenues $2,167,000  $1,839,000 
       
         
Property tax expense $350,000  $410,000 
       
         
Income before income taxes $1,737,000  $1,318,000 
       
         
Assets $4,114,000  $4,219,000 
       
         
Properties and equipment, additions $—  $35,000 
       
         
Petroleum storage:
        
Revenues:        
Contractual $2,574,000  $2,198,000 
Contingent  171,000   140,000 
       
Total revenues $2,745,000  $2,338,000 
       
         
Property tax expense $80,000  $79,000 
       
         
Depreciation $514,000  $397,000 
       
         
Income before income taxes $1,126,000  $1,020,000 
       
         
Assets $14,627,000  $15,055,000 
       
         
Properties and equipment:        
Additions $428,000  $2,192,000 
Deletions  (73,000)  — 
       
  $355,000  $2,192,000 
       

8

The following is a reconciliation of the segment information to the amounts reported in the accompanying consolidated financial statements for the nine months ended September 30, 2007 and 2006:
         
  2008  2007 
Leasing:
        
Revenues:        
Long-term leases:        
Contractual $521,000  $505,000 
Contingent  14,000   15,000 
Short-term leases  180,000   139,000 
       
Total revenues $715,000  $659,000 
       
         
Property tax expense $134,000  $103,000 
       
         
Depreciation $18,000  $— 
       
         
Income before income taxes $525,000  $521,000 
       
         
Assets $6,446,000  $4,150,000 
       
         
Petroleum storage:
        
Revenues:        
Contractual $901,000  $853,000 
Contingent  50,000   122,000 
       
Total revenues $951,000  $975,000 
       
         
Property tax expense $52,000  $27,000 
       
         
Depreciation $160,000  $159,000 
       
         
Income before income taxes $436,000  $420,000 
       
         
Assets $14,559,000  $14,653,000 
       
         
Properties and equipment, additions $9,000  $19,000 
       
         
  2007  2006 
Revenues and other income:        
Revenues for operating segments:        
Leasing $2,167,000  $1,839,000 
Petroleum storage  2,745,000   2,338,000 
       
   4,912,000   4,177,000 
Interest income  94,000   83,000 
       
Total consolidated revenues and other income $5,006,000  $4,260,000 
       
         
Property tax expense:        
Property tax expense for operating segments        
Leasing $350,000  $410,000 
Petroleum storage  80,000   79,000 
       
   430,000   489,000 
Unallocated corporate property tax expense  1,000   1,000 
       
Total consolidated property tax expense $431,000  $490,000 
       
         
Depreciation:        
Depreciation for petroleum storage segment: $514,000  $397,000 
Unallocated corporate depreciation  1,000   1,000 
       
Total consolidated depreciation $515,000  $398,000 
       
         
Income before income taxes:        
Income before income taxes for operating segments:        
Leasing $1,737,000  $1,318,000 
Petroleum storage  1,126,000   1,020,000 
       
   2,863,000   2,338,000 
Interest income  94,000   83,000 
Unallocated corporate expenses  (931,000)  (835,000)
       
Total consolidated income before income taxes $2,026,000  $1,586,000 
       
         
Assets:        
Assets for operating segments:        
Leasing $4,114,000  $4,219,000 
Petroleum storage  14,627,000   15,055,000 
       
   18,741,000   19,274,000 
Corporate cash and cash equivalents  4,113,000   2,262,000 
Other unallocated amounts  23,000   92,000 
       
Total consolidated assets $22,877,000  $21,628,000 
       
         
Additions and deletions to properties and equipment:        
Additions and deletions to properties and equipment for operating segments:        
Leasing $—  $35,000 
Petroleum storage  355,000   2,192,000 
       
   355,000   2,227,000 
Unallocated corporate additions to properties and equipment  15,000   — 
       
Total consolidated additions $370,000  $2,227,000 
       
The following is a reconciliation of the segment information to the amounts reported in the accompanying consolidated financial statements for the three months ended March 31, 2008 and 2007:
         
  2008  2007 
Revenues and other income:        
Revenues for operating segments:        
Leasing $715,000  $659,000 
Petroleum storage  951,000   975,000 
       
   1,666,000   1,634,000 
Interest income  7,000   31,000 
       
Total consolidated revenues and other income $1,673,000  $1,665,000 
       
         
Property tax expense:        
Property tax expense for operating segments:        
Leasing $134,000  $103,000 
Petroleum storage  52,000   27,000 
       
   186,000   130,000 
Unallocated corporate property tax expense  1,000   1,000 
       
Total consolidated property tax expense $187,000  $131,000 
       
         
Depreciation:        
Depreciation for operating segments:        
Leasing $18,000  $— 
Petroleum storage segment:  160,000   159,000 
Unallocated corporate depreciation  1,000   1,000 
       
Total consolidated depreciation $179,000  $160,000 
       

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  2008  2007 
Income before income taxes:        
Income before income taxes for operating segments:        
Leasing $525,000  $521,000 
Petroleum storage  436,000   420,000 
       
   961,000   941,000 
Interest income  7,000   31,000 
Unallocated corporate expenses  (291,000)  (335,000)
       
Total consolidated income before income taxes $677,000  $637,000 
       
         
Assets:        
Assets for operating segments:        
Leasing $6,446,000  $4,150,000 
Petroleum storage  14,559,000   14,653,000 
       
   21,005,000   18,803,000 
Corporate cash and cash equivalents  2,172,000   3,424,000 
Other unallocated amounts  40,000   9,000 
       
Total consolidated assets $23,217,000  $22,236,000 
       
         
Additions to properties and equipment:        
Additions to petroleum storage segment $9,000  $19,000 
Unallocated corporate additions to properties and equipment  5,000   — 
       
Total consolidated additions $14,000  $19,000 
       

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
1.1. Overview:
 
  Critical accounting policies:
 
  The Company believes that its revenue recognition policy for long-term leases with scheduled rent increases (leasing segment) meets the definition of a critical accounting policy which is discussed in the Company’s Form 10-K for the year ended December 31, 2006.2007. There have been no changes to the application of this accounting policy since December 31, 2006.2007.
 
  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 beenare required to construct buildings thereon, with the exception of a parking garage, and to pay real property taxes)garage), the leasing of a portion of the Steeple Street 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 purposes under short-term cancellable leasing arrangements.
 
  The petroleum storage segment consists of the operating of the Facilitypetroleum storage terminal (the “Terminal”) and the Wilkesbarre Pier (the “Pier”), collectively referred to as the “Facility,” located in East Providence, Rhode Island, for Global.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 inunder the leasing segmentlong-term land leases 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 expensesexpenditures, including real property taxes, as well as capital improvements at the Facility.
2.2. Results of operations:
Three months ended September 30, 2007 compared to three months ended September 30, 2006:
Leasing segment:
             
  2007  2006  Difference 
             
Revenues $676,000  $653,000  $23,000 
Expense  169,000   164,000  $5,000 
           
  $507,000  $489,000     
           
Three months ended March 31, 2008 compared to three months ended March 31, 2007:
Leasing revenue increased due to scheduled increases in contractual rentals and the commencement of Phase II of the long-term lease on Parcel 6.

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Leasing expense remained approximately at the 2006 level. However, an increase in real property taxes was offset in part by a decrease in professional fees.
Petroleum storage segment:
             
  2007  2006  Difference 
             
Revenues $860,000  $792,000  $68,000 
Expense  516,000   434,000  $82,000 
           
  $344,000  $358,000     
           
Petroleum storage facility revenue increased due principally to rent for the new 175,000 barrel tank effective August 2006 and higher monthly rent resulting from the annual cost-of-living adjustments.
Petroleum storage facility expense increased due principally to higher depreciation related to the new tank and the hiring of a new employee.
General:
General and administrative expense increased $60,000 from 2006 due principally to costs incurred in complying with Section 404 of the Sarbanes-Oxley Act of 2002.
Nine months ended September 30, 2007 compared to nine months ended September 30, 2006:
Leasing segment:
             
  2007  2006  Difference 
Revenues $2,167,000  $1,839,000  $328,000 
Expense  430,000   521,000  $(91,000)
           
  $1,737,000  $1,318,000     
           
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.
Effective June 1, 2006, the Company entered into an Amended and Restated Agreement of Lease with Lamar, which changed the contractual rental payments thereby extending the turnaround date until 2022. As a result, the Company concluded that it should not presently record a receivable resulting from reporting leasing revenue on a straight-line basis. However, prior to June 1, 2006, the Company had been recognizing revenue on this lease on a straight-line basis and, accordingly, had recorded a reduction in leasing revenue of $187,000 for the nine months ended September 30, 2006.
Leasing expense decreased principally due to lower real property taxes due to an existing tenant’s assumption of all real property taxes on its parcel as of January 1, 2007 (offset in part by an increase in the 2007 real property taxes) and a decrease professional fees.
Petroleum storage segment:
             
  2007  2006  Difference 
             
Revenues $2,745,000  $2,338,000  $407,000 
Expense  1,619,000   1,318,000  $301,000 
           
  $1,126,000  $1,020,000     
           
Petroleum storage facility revenue increased due principally to rent for the new 175,000 barrel tank effective August 2006, higher monthly rent resulting from the annual cost-of-living adjustments and higher contingent revenue.
Petroleum storage facility expense increased due principally to higher depreciation related to the new tank and the hiring of a new employee.
General:
General and administrative expense increased $96,000 from 2006 due principally to higher professional fees incurred in connection with the Company’s filing status changing from a small business issuer to a non-accelerated
             
  2008  2007  Difference 
Leasing revenues $715,000  $659,000  $56,000 
Leasing expense  190,000   138,000  $52,000 
           
  $525,000  $521,000     
           

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Leasing revenue increased principally due to increases in rentals under short-term leases, including rentals from the Steeple Street Building purchased in November 2007. Leasing expense increased principally due to higher real property taxes and expenses associated with the Steeple Street Building.
Petroleum storage segment:
             
  2008  2007  Difference 
Petroleum storage facility revenues $951,000  $975,000  $(24,000)
Petroleum storage facility expense  515,000   555,000  $(40,000)
           
  $436,000  $420,000     
           
Petroleum storage facility revenue decreased principally due to lower contingent revenue due to lower throughput offset in part by higher monthly rent resulting from the annual cost-of-living adjustment May 1, 2007 and rental of $25,000 resulting from the increase in property taxes as required by the lease, which amount resulted principally from an increase in the assessment on the petroleum storage facility. Petroleum storage facility expense decreased principally due to lower legal and professional engineering fees offset in part by higher payroll and related costs resulting from the hiring of a new employee and higher real estate taxes resulting principally from an increased assessment on the petroleum storage facility, which amount was reimbursed by the tenant.
The May 1, 2008 annual cost-of-living adjustment under the lease for the petroleum storage facility is $136,000 annually.
General:
For the three months ended March 31, 2008, general and administrative expense decreased $44,000 from 2007 due
principally to a decrease in payroll and related costs due to the non-replacement of a retired employee offset in part by higher professional fees incurred in complying with Section 404(a) of the Sarbanes-Oxley Act of 2002.
Other income, interest:
Interest income decreased due to lower levels of cash available for investment resulting in part from the cash purchase of the Steeple Street Building and lower interest rates.
filer for the year ended December 31, 2006 and the costs incurred in complying with Section 404 of the Sarbanes-Oxley Act of 2002.
3. Liquidity and capital resources:
 
  Historically, the Company has had adequate liquidity to fund its operations.
 
  During the nine months ended September 30, 2007,first quarter of 2008, the Company’s operating activities produced $2,092,000$650,000 of cash, of which $100,000 was received under a settlement agreement with a former tenant.cash. Cash and cash equivalents increased by $1,121,000$322,000 for the period.quarter. The principal utilization of cash during this periodthe quarter was for paymentsthe payment of (1) dividends of $528,000, (2) income taxes of $518,000$198,000 and (3)the payment for properties and equipment of $443,000.$130,000.
Currently, approximately 50 percent of the Steeple Street Building is rented under short-term arrangements. The Company is evaluating available alternatives for the remaining space, including the possibility of historic renovation.
 
  In management’s opinion, operations will continue to generate sufficient cash to enable the Company to meet its operating expenses, capital expenditures and dividend payments, if declared.
 
  Cash and cash equivalents and cash commitments:
At September 30, 2007,March 31, 2008, the Company had cash and cash equivalents of $4,113,000.$2,296,000. The Company anticipates making $300,000 in improvements at the Pier during 2008.
 
  In October 2007,April 2008, the Company will paint the most recently constructed tank at an estimated cost of $125,000.
The Company does not anticipate making any substantial improvements at the Pier before year end.
In 2004, the Company received condemnation proceeds from Amtrak of $1,428,000, excluding interest, which qualify for deferred reinvestment for income tax reporting purposes pursuant to which the Company may elect to reduce the income tax basis of qualifying subsequent acquisitions, thereby avoiding currently paying income taxes on the proceeds, subject to certain restrictions. The Company’s 2004 income tax returns made such election, thereby reducing its cash outlay for income taxes for 2004 by approximately $570,000. At September 30, 2007, the Company had purchased qualifying assets totaling $250,000. The Company will be required to reinvest the remaining condemnation proceeds in qualifying assets by December 31, 2007, unless this date is extended by the IRS. The Company has applied to the IRS for an extension of the reinvestment period to December 31, 2008 and is awaiting the IRS’s determination. Assuming the Company does not reinvest any of the remaining condemnation proceeds which total $1,178,000, the liability for income tax and interest would total approximately $590,000 at September 30, 2007.
In October 2007, the Company declared and paid a quarterly dividend of $198,000 ($.06 per common share). The declaration of future dividends and the amount thereof will depend on the Company’s future earnings, financial factors and other events.
 
  In management’s opinion, the Company should be able to generate adequate amounts of cash to meet all of its anticipated obligations. In the event temporary additional liquidity is required, the Company believes that a line of credit or other arrangements could be obtained by pledging some or all of its unencumbered assets as collateral.

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  Item 3. Quantitative and Qualitative Disclosures About Market Securities
The Company’s cash and cash equivalent balances are exposed to risk of changes in short-term interest rates. Reductions in short-term interest rates could result in a reduction in interest income; however, the impact on income would not be material in amount.
  Item 4. Controls and Procedures
Under the supervision of the Company’s management, including its principal executive officer and principal financial officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15 under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and principal financial officer have concluded that, as of such date, the Company’s disclosure controls and procedures were effective in making them aware on a timely basis of the material information relating to the Company required to be included in the Company’s periodic filings with the Securities and Exchange Commission.
There were no significant changes made in the Company’s internal controls during the period covered by this report or, to the Company’s knowledge, in the factors that could significantly affect these controls subsequent to the date of their evaluation.
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and the Company’s principal financial officer. Based upon that evaluation, the principal executive officer and the principal financial officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
There was no significant change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to affect, the Company’s internal control over financial reporting. The Company continues to enhance its internal controls over financial reporting, primarily by evaluating and enhancing process and control documentation. Management discusses with and discloses these matters to the Audit Committee of the Board of Directors and the Company’s auditors.

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PART II — OTHER INFORMATION
Item 6. Exhibits
(b) Exhibits:
 
(b)Exhibits:
3.1 Amended Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the registrant’s report on Form 8-K filed December 10, 2001).
 
 3.2 By-laws, as amended (incorporated by reference to Exhibit 3(b)3.2 to the registrant’s quarterlyannual report on Form 10-QSB10-K for the quarteryear ended September 30, 1999)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.
 
31.1 Rule 13a-14(a) Certification of Chairman of the BoardPresident and Principal Executive Officer
 
 31.2 Rule 13a-14(a) Certification of Treasurer and Principal Financial Officer
 
 32.1 Certification of Chairman of the BoardPresident and Principal Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 32.2 Certification of Treasurer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE
     In accordance with the requirements of the Exchange Act, the Issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
     
 CAPITAL PROPERTIES, INC.
By /s/ Robert H. Eder   
 By/s/ Robert H. Eder 
President and Principal Executive Officer 
 
   
By /s/ Barbara J. Dreyer   
 Robert H. Eder
Chairman of the Board and
   .Principal Executive Officer
Barbara J. Dreyer  
By/s/ Barbara J. Dreyer
Barbara J. Dreyer
 Treasurer and Principal Financial Officer
DATED: October 30, 2007April 29, 2008

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