FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the quarterly period ended July 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File No. 1-8709
Canal Capital Corporation and Subsidiaries
(Exact name of registrant as specified in its charter)
Delaware 51-0102492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Fifth Avenue, New York, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 826-6040
NONE
Former name, former address and former fiscal year, if changed since
last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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. YES X
NO
Indicate the number of shares outstanding for each of the issuer's
classes of common stock, as of the latest practical date:
Title of each class Shares outstanding at August 31, 1995
Common stock, $0.01 par value 4,326,930
(This document contains 26 pages)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1995 AND OCTOBER 31, 1994
JULY 31, OCTOBER 31,
1995 1994
(UNAUDITED) (AUDITED)
ASSETS :
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 57,827 $ 33,595
NOTES AND ACCOUNTS RECEIVABLE 400,927 675,927
ART INVENTORY (NET OF A VALUATION
OF $ 500,000) AT JULY 31,1995 AND
OCTOBER 31, 1994 , RESPECTIVELY 500,000 500,000
PREPAID EXPENSES AND OTHER 223,249 206,363
TOTAL CURRENT ASSETS 1,182,003 1,415,885
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 5,982,817
AND $ 5,594,754 AT JULY 31,1995 AND
OCTOBER 31, 1994 , RESPECTIVELY 8,440,065 8,707,662
ART INVENTORY NON-CURRENT 5,409,595 5,744,132
OTHER ASSETS:
PROPERTY HELD FOR DEV. OR RESALE 3,003,660 3,304,000
LONG-TERM INVESTMENTS 652,397 765,962
DEFERRED LEASING AND FINANCING COSTS 162,636 23,989
DEPOSITS AND OTHER 165,884 165,883
3,984,577 4,259,834
$ 19,016,240 $ 20,127,513
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1995 AND OCTOBER 31, 1994
JULY 31, OCTOBER 31,
1995 1994
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY :
CURRENT LIABILITIES:
SHORT-TERM BORROWINGS $ 289,305 $ 787,305
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,981,565 1,918,384
ACCRUED LITIGATION SETTLEMENT 0 0
INCOME TAXES PAYABLE 33,923 50,000
CURRENT PORTION OF LONG-TERM DEBT 686,000 3,366,000
TOTAL CURRENT LIABILITIES 2,990,793 6,121,689
LONG-TERM DEBT, LESS CURRENT PORTION 10,371,877 8,061,407
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 2,284,487
AND 2,055,194 SHARES ISSUED AND OUT-
STANDING AT JULY 31, 1995 AND
OCTOBER 31, 1994, RESPECTIVELY AND
AGGREGATE LIQUIDATION PREFERENCE OF
$ 22,844,870 AND $ 20,551,940 AT JULY
31, 1995 & OCT 31, 1994, RESPECTIVELY 22,845 20,552
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND OUTSTANDING AT JULY
31, 1995 & OCT 31,1994, RESPECTIVELY 53,138 53,138
PAID-IN CAPITAL 26,431,720 26,262,346
RETAINED EARNINGS (DEFICIT) (8,441,845) (7,979,331)
LESS-VALUATION RESERVE (1,408,743) (1,408,743)
LESS-986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
5,653,570 5,944,417
$ 19,016,240 $ 20,127,513
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1994
1995 1994
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 702,512 $ 1,509,044
RENTAL INCOME 1,564,690 1,602,659
GROUND LEASE INCOME 731,000 713,900
VOLUME BASED RENTAL INCOME 553,533 446,673
OTHER INCOME 29,438 1,518,891
3,581,173 5,791,167
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 399,549 1,035,099
LABOR, OPERATING AND MAINTENANCE 666,169 691,481
DEPRECIATION AND AMORTIZATION 273,368 327,215
TAXES OTHER THAN INCOME TAXES 288,902 320,900
PROVISION FOR LITIGATION SET. 0 0
BAD DEBT EXPENSE 0 0
GENERAL AND ADMINISTRATIVE 68,686 62,472
1,696,674 2,437,167
INCOME FROM REAL ESTATE OPERATIONS 1,884,499 3,354,000
ART OPERATIONS:
ART REVENUES:
SALES 241,550 140,300
OTHER REVENUES 13,740 0
255,290 140,300
ART EXPENSES:
COST OF ART SOLD 347,207 144,189
VALUATION RESERVE 0 0
DEPRECIATION AND AMORTIZATION 0 0
SELLING, GENERAL AND ADMIN. 50,320 54,211
397,527 198,400
LOSS FROM ART OPERATIONS (142,237) (58,100)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1994
Continued ...
1995 1994
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE (893,493) (880,871)
WRITE-OFF DUE TO LEASE TERMINATION 0 0
INCOME (LOSS) FROM OPERATIONS 848,769 2,415,029
OTHER INCOME (EXPENSE):
GAIN ON SALE OF L-T INVESTMENTS 0 333,278
LOSS ON WRITE-DOWN OF L-T INVESTMENTS (113,565) 0
INTEREST & OTHER INCOME 21,457 25,980
INTEREST EXPENSE (1,063,149) (958,189)
(1,155,257) (598,931)
GAIN (LOSS) BEFORE PROVISION FOR (306,488) 1,816,098
INCOME TAXES AND EXTRAORDINARY GAIN
(PROVISION) BENEFIT FOR INCOME TAXES 0 0
NET INCOME (LOSS) BEFORE (306,488) 1,816,098
EXTRAORDINARY GAIN
EXTRAORDINARY GAIN ON RETIREMENT OF
DEBT,(NET OF TAXES OF $ 0) 0 0
NET INCOME (LOSS) (306,488) 1,816,098
PREFERRED STOCK DIVIDEND (156,026) (127,354)
NET INCOME (LOSS) APPLICABLE TO $ (462,514) $ 1,688,744
COMMON SHARES
PER COMMON SHARE AMOUNTS:
GAIN (LOSS) FROM OPERATIONS $ (0.11) $ 0.39
EXTRAORDINARY GAIN ON RET. OF DEBT 0.00 0.00
NET INCOME (LOSS) PER COMMON SHARE $ (0.11) $ 0.39
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1994
1995 1994
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 624,899 $ 1,509,044
RENTAL INCOME 514,085 512,891
GROUND LEASE INCOME 241,500 231,300
VOLUME BASED RENTAL INCOME 164,271 137,047
OTHER INCOME 14,839 1,507,087
1,559,594 3,897,369
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 351,905 1,035,099
LABOR, OPERATING AND MAINTENANCE 233,051 249,324
DEPRECIATION AND AMORTIZATION 91,170 90,921
TAXES OTHER THAN INCOME TAXES 96,300 104,300
PROVISION FOR LITIGATION SET. 0 0
BAD DEBT EXPENSE 0 0
GENERAL AND ADMINISTRATIVE 23,310 21,590
795,736 1,501,234
INCOME FROM REAL ESTATE OPERATIONS 763,858 2,396,135
ART OPERATIONS:
ART REVENUES:
SALES 139,800 400
OTHER REVENUES 7,200 0
147,000 400
ART EXPENSES:
COST OF ART SOLD 229,373 350
VALUATION RESERVE 0 0
DEPRECIATION AND AMORTIZATION 0 0
SELLING, GENERAL AND ADMIN. 13,611 16,018
242,984 16,368
LOSS FROM ART OPERATIONS (95,984) (15,968)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1995 AND 1994
Continued ...
1995 1994
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE (296,819) (299,951)
WRITE-OFF DUE TO LEASE TERMINATION 0 0
INCOME (LOSS) FROM OPERATIONS 371,055 2,080,216
OTHER INCOME (EXPENSE):
GAIN ON SALE OF L-T INVESTMENTS 0 0
LOSS ON WRITE-DOWN OF L-T INVESTMENTS (113,565) 0
INTEREST & OTHER INCOME 4,841 5,926
INTEREST EXPENSE (398,281) (339,898)
(507,005) (333,972)
GAIN (LOSS) BEFORE PROVISION FOR (135,950) 1,746,244
INCOME TAXES AND EXTRAORDINARY GAIN
(PROVISION) BENEFIT FOR INCOME TAXES 0 0
NET INCOME (LOSS) BEFORE (135,950) 1,746,244
EXTRAORDINARY GAIN
EXTRAORDINARY GAIN ON RETIREMENT OF
DEBT,(NET OF TAXES OF $ 0) 0 0
NET INCOME (LOSS) (135,950) 1,746,244
PREFERRED STOCK DIVIDEND (45,305) (46,962)
NET INCOME (LOSS) APPLICABLE TO $ (181,255) $ 1,699,282
COMMON SHARES
PER COMMON SHARE AMOUNTS:
GAIN (LOSS) FROM OPERATIONS $ (0.04) $ 0.39
EXTRAORDINARY GAIN ON RET. OF DEBT 0.00 0.00
NET INCOME (LOSS) PER COMMON SHARE $ (0.04) $ 0.39
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1995 AND 1994
1995 1994
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (306,488) $1,816,098
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
WRITE-OFF IN CONNECTION WITH LEASE TERM. 0 0
PROVISION FOR LITIGATION SETTLEMENT 0 0
EXTRAORDINARY GAIN ON RET. OF DEBT 0 0
DEPRECIATION AND AMORTIZATION 289,458 334,574
GAIN ON SALE OF REAL ESTATE (302,963) (473,945)
DEFERRED TAX PROVISION 0 0
ADJUSTMENTS TO NOTES RECEIVABLE 113,565 0
GAIN FROM SALE OF LONG-TERM INVESTMENTS 0 0
VALUATION RESERVE - ART INVENTORY 0 (328,164)
CHANGES IN ASSETS AND LIABILITIES:
RECEIVABLES, NET 275,000 (177,776)
ART INVENTORY, NET 265,597 264,070
PREPAID EXPENSES AND OTHER, NET (129,357) (394,928)
PAYABLES AND ACCRUED EXPENSES, NET 47,104 (1,735,569)
NET CASH PROVIDED BY OPERATING ACTIVITIES 251,916 (695,640)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF L-T INVESTMENTS 0 549,144
PROCEEDS FROM SALES OF REAL ESTATE 702,512 1,509,044
CAPITAL EXPENDITURES (36,666) (82,000)
NET CASH PROVIDED (USED) IN INVESTING 665,846 1,976,188
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM THE ISSUANCE OF L-T DEBT 0 650,000
PROCEEDS (REPAYMENT) OF S-T BORROWINGS (498,000)(1,629,000)
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (395,530) (420,340)
NET CASH USED BY FINANCING ACTIVITIES (893,530)(1,399,340)
NET INCREASE (DECREASE) IN CASH 24,232 (118,792)
CASH AND CASH EQUIVALENTS AT BEG. OF PERIOD 33,595 23,750
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 57,827 $ (95,042)
NOTE:
CANAL MADE FEDERAL AND STATE INCOME TAX PAYMENTS OF $16,000 AND
$36,000, AND INTEREST PAYMENTS OF $1,060,000 AND $960,000 IN THE NINE
MONTH PERIODS ENDED JULY 31, 1995 AND 1994, RESPECTIVELY.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 31, 1995
(UNAUDITED)
1. GENERAL
Canal Capital Corporation ( Canal ), incorporated in the state of
Delaware in 1964, commenced business operations through a predecessor in
1936. Canal was a wholly owned subsidiary of Canal-Randolph Corporation
until June 1, 1984, when Canal-Randolph Corporation distributed to its
stockholders all of the outstanding shares of Canal s common stock,
under a plan of complete liquidation.
Canal is engaged in two distinct businesses - the management and
further development of its agribusiness related real estate properties
and art operations, consisting mainly of the acquisition of art for
resale. In the past Canal engaged in the trading of and investing in
securities. Canal s trading activities were severely curtailed in
fiscal 1991 and not engaged in at all in fiscal years 1992 through 1995.
While the Company is currently operating as a going concern,
certain significant factors raise substantial doubt about the Company s
ability to continue as a going concern. First, the Company has suffered
significant losses from operations in five of the last six years.
Second, the Company is currently in technical default of a $650,000
promissory note which was payable May 31, 1994. The holder of this note
has notified the Company of its intentions to commence foreclosure
proceedings in accordance with the provisions of the mortgage securing
the debt. The Company is currently negotiating for the private
refinancing of this note as well as its short-term borrowings.
Management anticipates this refinancing to take place in the fourth
quarter of fiscal 1995. Third, the Company is involved in litigation
with a major tenant in Sioux City, Iowa. Fourth, and last, the Company
has a continuing environmental liability associated with a 1988 sale of
property located in Portland, Oregon. The financial statements include
a reserve of $400,000 associated with the environmental liability, but
does not include any adjustments that might result from the resolution
of these other uncertainties.
In the past three years, Canal has made significant reductions in
operating expenditures. Furthermore, Canal plans to reduce the level of
its art inventories to enhance current cash flows.
Management believes that its cost cutting program and planned
reduction of its art inventory will enable it to finance its current
business activities. There can, however, be no assurance that Canal
will be able to effectuate its planned art inventory reductions or that
its cost cutting program in itself will be sufficient to fund operating
cash requirements.
10
2. Interim Financial Statements
The interim consolidated financial statements included herein have
been prepared by Canal without audit. In the opinion of Management, the
accompanying unaudited financial statements of Canal contain all
adjustments necessary to present fairly its financial position as of
July 31, 1995 and the results of its operations and its cash flows for
the nine month period ended July 31, 1995. All of the above referenced
adjustments were of a normal recurring nature. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted. These financial statements for the three years
ended October 31, 1994 and the notes thereto are contained in Canal s
1994 Annual Report on Form 10-K. The results of operations for the
period presented is not necessarily indicative of the results to be
expected for the remainder of fiscal 1995.
3. Reclassification
Certain amounts have been reclassified to conform to the current
year s presentation.
4. Notes Receivable
Included in the notes and accounts receivable were notes from real
estate sales in the amount of $170,000 at July 31, 1995 and October 31,
1994.
5. LONG TERM INVESTMENTS
At July 31, 1995, the long-term investments consisted of the
following:
(Thousands of Dollars) July 31, 1995 October 31, 1994
Aggregate market value.......... $ 471 $ 969
Aggregate carrying value........ $ 652 $ 766
At various times, Canal has investments in the equity securities of
companies in which other entities affiliated with Canal also have made
investments, and which entities together comprise a group for regulatory
reporting purposes. At July 31, 1995, 100% of the market value of
Canal s long-term investments was invested in equity securities of
companies in which
11
such parties held 5% or more of the outstanding equity securities of the
issuer. Certain of Canal s officers and directors also serve as
officers and/or directors of one of these companies.
In the third quarter of fiscal 1995, Canal recognized an $114,000
loss
on the write-down of one of its long-term investments. The write-down
reduces the carrying value of this investment to zero reflecting its
current value.
6. ART OPERATIONS
Canal s art dealing operations are carried on through various
consignment and joint venture agreements relating to its antiquities and
contemporary art inventories.
In November 1989, Canal entered into a cost and revenue sharing
agreement with the Salander-O Reilly Galleries in New York City, in
connection with their exclusive representation of Jules Olitski, a world
renowned artist in contemporary paintings. Canal purchased a number of
Olitski paintings for resale. This agreement expired December 1, 1994.
Canal currently operates independently of Salander-O Reilly Galleries in
its marketing efforts.
The Company s ability to dispose of its art inventory is dependent
at least in part, on general economic conditions, including supply,
demand, international monetary conditions and inflation. Additionally,
the art market itself is very competitive.
Canal has its art inventory appraised by an independent appraiser
annually. The 1994 appraisal covered approximately 80% of the inventory
value. The appraised values estimate the current market value of each
piece giving consideration to Canal s practices of engaging in
consignment, private and public auction sales. The net realizable value
of the remaining 20% of the inventory was estimated by management based
in part on operating history and in part on the results of the
independent appraisals done. In fiscal 1993 the Company recognized a
$300,000 valuation allowance against its art inventory to reduce the
inventory value to its estimated net realizable values. This valuation
reserve was increased to $500,000 in fiscal 1994. These estimates were
based in part on the Company s history of losses sustained on art sales
in the current and previous years.
The nature of art makes it difficult to determine a replacement
value. The most compelling evidence of a value in most cases is an
independent appraisal. The price at which pieces are consigned is
usually in line with appraisals and above the cost of the piece. The
amount classified as current
12
represents management s best estimate of the minimum amount of inventory
that will be sold in this market. Management believes that the
valuation reserve on the current portion of the inventory has
effectively reduced inventory to
its estimated net realizable value.
The Company s plan to sell inventory at auction is contemplated in
the normal course of business. Auction in this context is one of the
usual channels used for disposal of its art inventory. The proceeds
from these sales will be used to reduce the Company s outstanding debt.
If these sales are not made, the Company has alternate means of raising
cash such as sales of investments, sale of real estate, raising of new
capital and rescheduling of debt. Because of the alternatives in
raising cash to meet its debt requirements available to the Company, it
does not anticipate any extraordinary losses associated with the sale of
its art inventory in fiscal 1995.
Canal s art operations have generated operating losses of $142,000
and $58,000 on revenues of $255,000 and $140,000 for the nine months
ended July 31, 1995 and 1994, respectively. Art sales have resulted
primarily through activities in conjunction with sales of antiquities.
Canal s management believes that through its consignment and joint
venture agreements as well as other potential distribution outlets Canal
will continue to deal in antiquities and contemporary art.
Inventory on Consignment - The Company had $1,275,000 and $568,000
of art inventory on consignment with third party dealers at July 31,
1995 and October 31, 1994, respectively. Antiquities and contemporary
art represented 54% ($3,182,000) and 46% ($2,727,000), 56% ($3,517,000)
and 44% ($2,727,000) of total art inventory at July 31, 1995 and October
31, 1994, respectively.
The amount recorded as the current portion of art inventory
represents management s estimate of the inventory expected to be sold
during the next twelve months. The Company recorded a $500,000
valuation allowance against the current portion of its inventory to
reduce it to its estimated net realizable value based on the history of
losses sustained on inventory items sold in the current and previous
years.
7. Property and Equipment
Included in buildings and equipment were the cost of buildings of
approximately $5 million at July 31, 1995 and October 31, 1994.
13
8. VALUATION RESERVE
The Valuation Reserve represents the excess of the additional
minimum pension liability required under the provisions of SFAS No. 87
over the
unrecognized prior service costs of former stockyard employees. Such
excess arose due to the decline in the market value of pension assets
available for the pension benefits of the former employees, which
benefits were frozen at the time the stockyard operations were sold in
1989. The excess will effectively be expensed over time as actuarial
computations of annual pension cost (made in accordance with SFAS No.
87) recognize the deficiency that exists.
9. BORROWINGS
At July 31, 1995, substantially all of Canal s real properties, the
s t ock of certain subsidiaries, the long-term investments and a
substantial portion of its antiquities inventories are pledged as
collateral to secure its short-term borrowings and the following long-
term obligations:
July 31, October 31,
1995 1994
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 1998............................. $ 7,635 $ 7,960
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $17.............. 1,358 1,391
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $4............... 420 425
10 1/2% mortgage note (adjusted
periodically to prime plus 1 3/4%);
original principal amount $556 due
January 15, 2013; payable in monthly
installments (including interest) of $6.. 495 501
Other .................................... 1,150 1,150
Total .................................... 11,058 11,427
Less -- current maturities ............... 686 3,366
Long-term debt ........................... $10,372 $ 8,061
14
On May 15, 1995 Canal renegotiated its variable rate mortgage notes
with the two remaining noteholders. The new agreement, among other
things, extends the maturity date by two years to May 15, 1998, requires
prepayments to be made only out of the proceeds from the sale of assets,
requires the accrual of additional interest (to be paid at maturity) of
two, three and four percent per annum for the fiscal years commencing
May 15, 1995, 1996 and 1997, respectively, prohibits Canal from becoming
an investment company as defined by the Investment Company Act of 1940;
requires Canal to maintain minimum net worth, restricts Canal s ability
to pay cash dividends or repurchase stock. In consideration for the new
agreement, Canal paid a fee to the noteholders of 2% of the principal
amount outstanding as of May 15, 1995.
In July, 1993, Canal completed the renegotiation of its secured
line of credit with Rabobank Nederland for an additional three year
period ending March 31, 1996. Among other things the revised terms
required the Company to maintain a minimum net worth of $5 million, pay
interest at the rate of prime plus 1.5% (increasing to 2.0% and 2.5% in
the second and third years of the agreement, respectively) on an
o u tstanding borrowings and repay the line of credit through a
combination of scheduled repayments and participation by the bank in the
proceeds from sale of certain assets by March 13, 1996. At January 31,
1995 the balance due under this secured line of credit was $652,000. In
addition, Rabobank has issued a letter of credit on Canal s behalf in
the amount of approximately $95,000. Canal has classified the entire
credit line as a current liability. To date, Canal has met all of its
obligations under the renegotiated secured line of credit.
As part of the Company s 1993 repurchase of $1.5 million of its
outstanding variable rate mortgage notes, Canal executed a $650,000 note
payable due May 31, 1994. As of July 31, 1995 the payment has not been
made. The holder of this note has notified the Company of its
intentions to commence foreclosure proceedings in accordance with the
provisions of the mortgage securing the debt. To date, no further
action has been taken by the noteholder in this matter. The Company is
currently negotiating for the private refinancing of this note as well
as its short-term borrowings. Management anticipates this refinancing
to take place in the fourth quarter of fiscal 1995.
15
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Nine Months Ended July 31, 1995
Results of Operations - General
While the Company is currently operating as a going concern,
certain significant factors raise substantial doubt about the Company s
ability to continue as a going concern. First, the Company has suffered
significant losses from operations in five of the last six years.
Second, the Company is currently in technical default of a $650,000
promissory note which was payable May 31, 1994. The holder of this note
has notified the Company of its intentions to commence foreclosure
proceedings in accordance with the provisions of the mortgage securing
the debt. The Company is currently negotiating for the private
refinancing of this note as well as its short-term borrowings.
Management anticipates this refinancing to take place in the fourth
quarter of fiscal 1995. Third, the Company is involved in litigation
with a major tenant in Sioux City, Iowa. Fourth, and last, the Company
has a continuing environmental liability associated with a 1988 sale of
property located in Portland, Oregon. The financial statements include
a reserve of $400,000 associated with the environmental liability, but
does not include any adjustments that might result from the resolution
of these other uncertainties.
Canal s revenues from continuing operations consist of revenues
from its real estate and art operations. Due to general economic
conditions and more specifically a depressed national art market Canal s
aggregate revenues from art sales and the prices at which sales were
made have significantly declined in recent years. Revenues decreased by
$2,095,000 or 35% to $3,836,000 and by $2,191,000 or 56% to $1,707,000
for the nine and three month periods ended July 31, 1995 and 1994,
respectively. The 1994 revenues included the reversal of a litigation
accrual ($1.5 million) associated with a 1992 judgement against a
subsidiary of Canal and the May 1994 sale ($1.5 million) of Canal s Fort
Worth, Texas property. The 1995 revenues included $703,000 in proceeds
from the sale of real estate.
1995 vs. 1994
Canal s operations generated a net loss of $306,000 as compared to
net income of $1,816,000 for the nine month period ended July 31, 1995
and a net loss of $136,000 as compared to net income of $1,746,000 for
the three month period ended July 31, 1995. Included in the fiscal 1994
results was the reversal of the $1.5 million litigation settlement
accrual, a $440,000 gain on the sale of the Fort Worth, Texas property
and a $328,000 gain on the sale of long-term investments. The 1995
results included a $114,000 loss on the write-down of long-term
investments.
16
Real Estate Operations
Canal s real estate properties located in six Midwest states are
primarily associated with its former agribusiness related operations.
Each property is adjacent to a stockyard operations (which operates on
land leased from the Company) and consists of an Exchange Building
(commercial office space), land and structures leased to third parties
(meat packing facilities, rail car repair shops, truck stops, lumber
yards and various other commercial and retail businesses) as well as
vacant land available for development or resale. In connection with the
1989 sale of its stockyards operations, Canal entered into a master
lease (the Lease ) with the purchaser covering approximately 139 acres
of land and certain facilities used by the stockyards operations. The
Lease is a ten year lease renewable at the purchaser s option for an
additional ten year period, with escalating annual rentals. In
addition, Canal retained the right to receive income from certain volume
based rental income leases with two meat packing companies located near
the stockyards.
Real Estate Revenues
Canal s principal real estate operating revenues are derived from
the Lease, income from the volume based rental leases with meat packing
companies located near the stockyards, rental income from its five
Exchange Building, lease income from land and structures leased to
various commercial and retail enterprises and proceeds from the sale of
real estate properties. Canal has continued its program of developing
what was excess stockyard property.
Real estate revenues for the nine months ended July 31, 1995 of
$3,581,000 accounted for 93.4% of the 1995 revenues as compared to
revenues of $5,791,000 or 97.6% for the same period in 1994. Real
estate revenues are comprised of rental income from Exchange Building
rentals and other lease income from the rental of vacant land and
certain structures (43.7% and 27.7%), ground lease income (20.4% and
12.3%), volume based rental income (15.5% and 7.7%) and sale of real
estate and other income (20.4% and 52.3%) for the 1995 and 1994 periods,
respectively.
Real estate revenues for the three months ended July 31, 1995 of
$1.6 million accounted for 91.4% of the 1995 revenues as compared to
revenues of $3.9 million or 99.9% for the same period in 1994. Real
estate revenues are comprised of rental income from Exchange Building
rentals and other lease income from the rental of vacant land and
certain structures (33.0% and 13.2%), ground lease income (15.5% and
5.9%) volume based rental income (10.5% and 3.5%) and sale of real
estate and other income (41.0% and 77.4%) for the 1995 and 1994 periods,
respectively.
17
Real Estate Expenses
Real estate expenses for the nine months ended July 31, 1995 of
$1,697,000 decreased by $740,000 (30.4%) from $2,437,000 for the same
period in 1994. Real estate expenses are comprised of labor, operating
and maintenance (39.3% and 28.4%), depreciation and amortization (16.1%
and 13.4%) taxes other than income taxes (17.0% and 13.2%), cost of real
estate sold (23.6% and 42.5%) and general and administrative expenses
(4.0% and 2.5%) for the 1995 and 1994 periods, respectively. The 1995
decrease in expenses is due to a reduction in the cost of real estate
sold as well as to reductions of both depreciation expenses and real
estate taxes primarily due to the sales of real estate in fiscal 1994.
Real estate expenses for the three months ended July 31, 1995 of
$796,000 decreased by $705,000 or 47.0% from $1,501,000 for the same
period in 1994. Real estate expenses are comprised of labor, operating
and maintenance (29.3% and 16.6%), depreciation and amortization (11.5%
and 6.1%), taxes other than income taxes (12.1% and 7.0%), cost of real
estate sold (44.2% and 69.0%) and general and administrative expenses
(2.9% and 1.3%) for the 1995 and 1994 periods, respectively. The 1995
decrease is due to a decrease in the cost of real estate sold as well as
reductions in both depreciation expenses and real estate taxes primarily
due to the sales of real estate in fiscal 1994.
Art Operations
The Company s ability to dispose of its art inventory is dependent
at least in part, on general economic conditions, including supply,
demand, international monetary conditions and inflation.
Canal has its art inventory appraised by an independent appraiser
annually. The fiscal 1994 appraisal covered approximately 80% of the
inventory value. The appraised values estimate the current market value
of each piece giving consideration to Canal s practices of engaging in
consignment, private and public auction sales. The net realizable value
of the remaining 20% of the inventory was estimated by management based
in part on operating history and in part on the results of the
independent appraisals done. In fiscal 1993 the Company recognized a
$300,000 valuation allowance against its art inventory to reduce the
inventory value to its estimated net realizable value. This valuation
reserve was increased to $500,000 in fiscal 1994. These estimates were
based in part on the Company s history of losses sustained on art sales
in the current and previous years.
18
The valuation allowance represents management s best estimate of
the loss that will be incurred by the Company in the normal course of
business. The estimate is predicted on past history and the information
that was available at the time that the financial statements were
prepared. The provision contemplates the loss that could result if the
level of sale anticipated was achieved. The Company does not believe
that it is possible to calculate a provision on the long-term portion of
the inventory as such a calculation would involve assumptions of a
highly speculative nature including estimates of future market and net
realizable values. The Company will continually monitor the market for
its product and will make adjustments to the value of its art inventory
as such adjustments become necessary.
The nature of art makes it difficult to determine a replacement
value. The most compelling evidence of a value in most cases is an
independent appraisal. The price at which pieces are consigned is
usually in line with appraisals and above the cost of the piece. The
amount classified as current represents management s best estimate of
the minimum amount of inventory that will be sold in this market.
Management believes that the provision on the current portion of the
inventory has effectively reduced inventory to its estimated net
realizable value.
The Company s plan to sell inventory at auction is contemplated in
the normal course of business. Auction in this context is one of the
usual channels used for disposal of its art inventory. The proceeds
from these sales will go to reduce the Company s outstanding debt. If
these sales are not made the Company has alternate means of raising cash
such as sales of investments, sale of real estate, raising of new
c a p i tal and rescheduling of debt. Because of the available
alternatives, the Company does not anticipate any extraordinary losses
associated with the art inventory in fiscal 1995.
Art Revenues
Art revenues of $255,000 for the nine months ended July 31, 1995
increased $115,000 (82.0%) from $140,000 for the same period in 1994.
Art revenues are comprised of proceeds from the sale of antiquities and
contemporary art (94.6% and 100.0%) and commission on sale of art owned
by third parties (5.4% and 0.0%) for the 1995 and 1994 periods,
respectively.
Art revenues of $147,000 for the three months ended July 31, 1995
increased $146,000 from $1,000 for the same period in 1994. Art
revenues are comprised of proceeds from the sale of antiquities and
contemporary art (95.1% and 100.0%) and commissions on sale of art owned
by third parties (4.9%) and 0.0%) for the 1995 and 1994 periods,
respectively.
19
Art Expenses
Art expenses for the nine months ended July 31, 1995 of $398,000
increased by $200,000 (100.4%) from $198,000 for the same period in
1994. Art expenses consisted of cost of art sold (87.3% and 72.7%) and
selling, general and administrative expenses (12.7% and 27.3%) for the
1995 and 1994 periods, respectively.
Art expenses for the three months ended July 31, 1995 of $243,000
increased by $227,000 from $16,000 for the same period in 1994. Art
expenses consisted of cost of art sold (94.4% and 2.1%) and selling,
general and administrative expenses (5.0% and 97.9%) for the 1995 and
1994 periods, respectively.
General and Administrative
General and administrative expenses for the nine months ended July
31, 1995 of $893,000 increased somewhat from the $881,000 for the same
period in 1994. The major components of general and administrative
expenses are officers salaries (35.1% and 33.4%), rent (4.7% and 7.6%),
legal and professional fees (12.8% and 16.3%), insurance (11.6% and
11.4%) and office salaries (11.5% and 10.3%) for the 1995 and 1994
periods, respectively.
General and administrative expenses for the three months ended July
31, 1995 of $297,000 decreased somewhat from the $300,000 for the same
period in 1994. The major components of general and administrative
expenses are officers salaries (35.1% and 33.4%), rent (0.0% and 4.3%),
legal and professional fees (3.3% and 7.7%), insurance (11.6% and 11.2%)
and office salaries (12.0% and 10.2%) for the 1995 and 1994 periods,
respectively. Canal s New York office space lease provided for four
months without rent commencing February 1, 1995. Rental expense resumed
June 1, 1995.
Gain on Sale of Long-Term Investments
For the three month period ended January 31, 1994 Canal recognized
gains on the sale of long-term investments of $333,000. The proceeds
from the 1994 sale of long-term investments (approximately $500,000)
were used to reduce the outstanding balance of short-term borrowings.
There were no similar transactions in fiscal 1995.
20
Loss on Write-down of Long-Term Investments
In the third quarter of fiscal 1995, Canal recognized a $114,000
loss on the write-down of one of its long-term investments. The write-
down reduces
the carrying value of this investment to zero reflecting its current
value. There were no similar transactions in fiscal 1994.
Interest Expense
Interest expense for the nine months ended July 31, 1995 of
$1,003,000 increased by $105,000 (11.0%) from $958,000 for the same
period in 1994. Interest expense for the three months ended July 31,
1995 also increased by $58,000 (17.2%) from $340,000 for the same period
in 1994. This reflects the rising average interest rates charged to
Canal by its lenders offset to a certain extent by reductions in the
average balance of long-term debt outstanding.
Inflation
With the sale of its stockyard operations, Canal s operations are
less subject to inflation than previously. Its chief area of exposure
is now the impact inflation brings to interest rates since most of
Canal s debt agreements carry variable interest rates.
Capital Resources and Liquidity
While the Company is currently operating as a going concern,
certain significant factors raise substantial doubt about the Company s
ability to continue as a going concern. First, the Company has suffered
significant losses from operations in five of the last six years.
Second, the Company is currently in technical default of a $650,000
promissory note which was payable May 31, 1994. The holder of this note
has notified the Company of its intentions to commence foreclosure
proceedings in accordance with the provisions of the mortgage securing
the debt. The Company is currently negotiating for the private
refinancing of this note as well as its short-term borrrowings.
Management anticipates this refinancing to take place in the fourth
quarter of fiscal 1995. Third, the Company is involved in litigation
with a major tenant in Sioux City, Iowa. Fourth, and last, the Company
has a continuing environmental liability associated with a 1988 sale of
property located in Portland, Oregon. The financial statements include
a reserve of $400,000 associated with the environmental liability, but
does not include any adjustments that might result from the resolution
of these other uncertainties.
21
On May 15, 1995 Canal renegotiated its variable rate mortgage note
with the two remaining noteholders. The new agreement, among other
things, extends the maturity date by two years to May 15, 1998, requires
prepayments to be made only out of the proceeds from the sale of assets,
requires the accrual of additional interest (to be paid at maturity) of
two, three and four percent per annum for the fiscal years commencing
May 15, 1995, 1996 and 1997, respectively, prohibits Canal from becoming
an investment company as defined by the Investment Company Act of 1940;
requires Canal to maintain
minimum net worth; restricts Canal s ability to pay cash dividends or
repurchase stock. In consideration for the new agreement, Canal paid a
fee to the noteholders of 2% of the principal amount outstanding as of
May 15, 1995.
In July 1993, Canal completed the renegotiation of its secured line
of credit with Rabobank Nederland for an additional three year period
ending March 31, 1996. Among other things the revised terms require the
Company to maintain a minimum net worth of $5 million, pay interest at
the rate of prime plus 1.5% (increasing to 2.0% and 2.5% in the second
and third years of the agreement, respectively) on any outstanding
borrowings and repay the line of credit through a combination of
scheduled repayments and participation by the bank in the proceeds from
sale of certain assets by March 31, 1996. At January 31, 1995 the
balance due under this secured line of credit was $652,000. In
addition, Rabobank has issued a letter of credit on Canal s behalf in
the amount of approximately $95,000. Canal has classified the entire
credit line as a current liability. To date, Canal has met all of its
obligations under the renegotiated secured line of credit.
As part of the Company s 1993 repurchase of $1.5 million of its
outstanding variable rate mortgage notes, Canal executed a $650,000 note
payable due May 31, 1994. As of July 31, 1995 the payment has not been
made. The holder of this note has notified the Company of its
intentions to commence foreclosure proceedings in accordance with the
provisions of the mortgage securing the debt. To date, no further
action has been taken by the noteholder in this matter. The Company is
currently negotiating for the private refinancing of this note as well
as its short-term borrrowings. Management anticipates this refinancing
to take place in the fourth quarter of fiscal 1995.
Net cash generated by operations in the first nine months of fiscal
1995 was $252,000. Cash and cash equivalents increased by $24,000 in
1995. Substantially all of the 1995 cash generated coupled with the
proceeds from the sale of real estate of $703,000 and a reduction of the
art inventory of $268,000 was used to reduce short term borrowings,
accrued expenses and outstanding debt.
During the first nine months of fiscal 1995 Canal reduced short
term borrowings by $498,000, accrued expenses increased by $63,000, its
variable rate mortgage notes by $325,000 and other long-term debt by
$44,000. The net debt reduction for the first nine months of fiscal
1995 was $804,000.
22
At July 31, 1995 the Company s current liabilities exceeded current
assets by $1.8 million as compared to $4.7 million at October 31, 1994.
The decrease is due primarily to the reclassification of the entire
variable rate mortgage note debt to long-term as a result of the
renegotiated agreement.
The Company leases 139 acres of land (at five locations) to a
stockyard operator. This lease represents approximately 25% of the
Company s annual revenues. To date, the stockyard operator has met all
of its obligations under the lease. Management does not anticipate any
changes in this situation for the remainder of the lease.
Management believes that the cash flow from operations will be
sufficient to support its ongoing operations, but not its required
principal repayments, in the next twelve months. Management believes
that the required principal repayments can be met by a combination of
sales of long-term investments, sales of art, sales of real estate and
by incurring new debt. However, there can be no assurance that the
Company s efforts in this regard will be successful. If these funds are
not raised, the creditors could hold the Company in default and demand
immediate payment of the outstanding balances. In which case, the
Company would not have the available cash to meet this obligation.
23
PART II
OTHER INFORMATION
24
Item 1: Legal Proceedings:
See Item 3 of Canal s October 31, 1994 Form 10-K.
Item 2 and 3:
Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
None.
Item 5: Other Information:
None.
Item 6: Exhibits and Reports on Form 8-K:
(A) Not applicable.
(b) No reports on Form 8-K have been filed during the
quarter
for which the report is filed.
25
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Canal Capital Corporation
Registrant
Reginald Schauder
Reginald Schauder
Vice President-Finance &
Chief Financial Officer
Date: September 14, 1995
26
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