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 April 30, 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 May 31, 1995
Common stock, $0.01 par value 4,326,930
(This document contains 26 pages)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1995 AND OCTOBER 31, 1994
APRIL 30, OCTOBER 31,
1995 1994
(UNAUDITED) (AUDITED)
ASSETS :
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 44,732 $ 33,595
NOTES AND ACCOUNTS RECEIVABLE 483,666 675,927
ART INVENTORY (NET OF A VALUATION
OF $ 500,000) AT APRIL 30,1995 AND
OCTOBER 31, 1994 , RESPECTIVELY 500,000 500,000
PREPAID EXPENSES AND OTHER 203,823 206,363
TOTAL CURRENT ASSETS 1,232,221 1,415,885
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 5,884,032
AND $ 5,594,754 AT APRIL 30,1995 AND
OCTOBER 31, 1994 , RESPECTIVELY 8,526,873 8,707,662
ART INVENTORY NON-CURRENT 5,629,328 5,744,132
OTHER ASSETS:
PROPERTY HELD FOR DEV. OR RESALE 3,291,160 3,304,000
LONG-TERM INVESTMENTS 765,962 765,962
DEFERRED LEASING AND FINANCING COSTS 20,659 23,989
DEPOSITS AND OTHER 165,884 165,883
4,243,665 4,259,834
$ 19,632,087 $ 20,127,513
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1995 AND OCTOBER 31, 1994
April 30, October 31,
1995 1994
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY :
CURRENT LIABILITIES:
SHORT-TERM BORROWINGS $ 637,305 $ 787,305
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,890,408 1,918,384
ACCRUED LITIGATION SETTLEMENT 0 0
INCOME TAXES PAYABLE 41,255 50,000
CURRENT PORTION OF LONG-TERM DEBT 686,000 3,366,000
TOTAL CURRENT LIABILITIES 3,254,968 6,121,689
LONG-TERM DEBT, LESS CURRENT PORTION 10,587,477 8,061,407
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 2,212,767
AND 1,783,364 SHARES ISSUED AND OUT-
STANDING AT APRIL 30, 1995 AND
OCTOBER 31, 1994, RESPECTIVELY AND
AGGREGATE LIQUIDATION PREFERENCE OF
$ 22,127,670 AND $ 17,833,640 AT APR 30,
1995 & OCT 31, 1994, RESPECTIVELY 21,218 20,552
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND OUTSTANDING AT APR 30,
1995 & OCT 31,1994, RESPECTIVELY 53,138 53,138
PAID-IN CAPITAL 26,387,254 26,262,346
RETAINED EARNINGS (DEFICIT) (8,260,590) (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)
5,789,642 5,944,417
$ 19,632,087 $ 20,127,513
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1994
1995 1994
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 77,613 $ 0
RENTAL INCOME 1,050,605 1,089,768
GROUND LEASE INCOME 489,500 482,600
VOLUME BASED RENTAL INCOME 389,262 309,626
OTHER INCOME 14,599 11,803
2,021,579 1,893,797
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 47,644 0
LABOR, OPERATING AND MAINTENANCE 433,118 442,157
DEPRECIATION AND AMORTIZATION 182,198 236,293
TAXES OTHER THAN INCOME TAXES 192,602 216,600
PROVISION FOR LITIGATION SET. 0 0
BAD DEBT EXPENSE 0 0
GENERAL AND ADMINISTRATIVE 45,376 40,883
900,938 935,933
INCOME FROM REAL ESTATE OPERATIONS 1,120,641 957,864
ART OPERATIONS:
ART REVENUES:
SALES 101,750 139,900
OTHER REVENUES 6,540 0
108,290 139,900
ART EXPENSES:
COST OF ART SOLD 117,834 143,838
VALUATION RESERVE 0 0
DEPRECIATION AND AMORTIZATION 0 0
SELLING, GENERAL AND ADMIN. 36,709 38,194
154,543 182,032
LOSS FROM ART OPERATIONS (46,253) (42,132)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1994
Continued ...
1995 1994
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE (596,674) (580,919)
WRITE-OFF DUE TO LEASE TERMINATION 0 0
INCOME (LOSS) FROM OPERATIONS 477,624 334,813
OTHER INCOME (EXPENSE):
GAIN ON SALE OF L-T INVESTMENTS 0 333,278
LOSS ON WRITE-DOWN OF L-T INVESTMENTS 0 0
INTEREST & OTHER INCOME 16,616 20,055
INTEREST EXPENSE (664,868) (618,292)
(648,252) (264,959)
GAIN (LOSS) BEFORE PROVISION FOR (170,538) 69,854
INCOME TAXES AND EXTRAORDINARY GAIN
(PROVISION) BENEFIT FOR INCOME TAXES 0 0
NET INCOME (LOSS) BEFORE (170,538) 69,854
EXTRAORDINARY GAIN
EXTRAORDINARY GAIN ON RETIREMENT OF
DEBT,(NET OF TAXES OF $ 0) 0 0
NET INCOME (LOSS) (170,538) 69,054
PREFERRED STOCK DIVIDEND (110,721) (80,392)
NET INCOME (LOSS) APPLICABLE TO $ (281,259) $ (10,538)
COMMON SHARES
PER COMMON SHARE AMOUNTS:
GAIN (LOSS) FROM OPERATIONS $ (0.07) $ (0.01)
EXTRAORDINARY GAIN ON RET. OF DEBT 0.00 0.00
NET INCOME (LOSS) PER COMMON SHARE $ (0.07) $ (0.01)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1995 AND 1994
1995 1994
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 28,268 $ 0
RENTAL INCOME 536,875 559,089
GROUND LEASE INCOME 241,500 231,300
VOLUME BASED RENTAL INCOME 166,093 137,525
OTHER INCOME 7,352 5,260
980,088 933,174
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 22,766 0
LABOR, OPERATING AND MAINTENANCE 232,943 234,991
DEPRECIATION AND AMORTIZATION 91,125 118,146
TAXES OTHER THAN INCOME TAXES 96,302 108,300
PROVISION FOR LITIGATION SET. 0 0
BAD DEBT EXPENSE 0 0
GENERAL AND ADMINISTRATIVE 22,811 20,045
465,947 481,482
INCOME FROM REAL ESTATE OPERATIONS 514,141 451,692
ART OPERATIONS:
ART REVENUES:
SALES 0 33,500
OTHER REVENUES 6,540 0
6,540 33,500
ART EXPENSES:
COST OF ART SOLD 0 28,795
VALUATION RESERVE 0 0
DEPRECIATION AND AMORTIZATION 0 0
SELLING, GENERAL AND ADMIN. 4,031 22,863
4,031 51,658
LOSS FROM ART OPERATIONS 2,509 (18,158)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1995 AND 1994
Continued ...
1995 1994
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE (297,730) (281,285)
WRITE-OFF DUE TO LEASE TERMINATION 0 0
INCOME (LOSS) FROM OPERATIONS 477,624 334,813
OTHER INCOME (EXPENSE):
GAIN ON SALE OF L-T INVESTMENTS 0 0
LOSS ON WRITE-DOWN OF L-T INVESTMENTS 0 0
INTEREST & OTHER INCOME 9,816 9,616
INTEREST EXPENSE (337,238) (306,203)
(327,422) (296,587)
GAIN (LOSS) BEFORE PROVISION FOR (108,502) (144,338)
INCOME TAXES AND EXTRAORDINARY GAIN
(PROVISION) BENEFIT FOR INCOME TAXES 0 0
NET INCOME (LOSS) BEFORE (108,502) (144,338)
EXTRAORDINARY GAIN
EXTRAORDINARY GAIN ON RETIREMENT OF
DEBT,(NET OF TAXES OF $ 0) 0 0
NET INCOME (LOSS) (108,502) (144,338)
PREFERRED STOCK DIVIDEND (42,243) (50,912)
NET INCOME (LOSS) APPLICABLE TO $ (150,745) $ (195,250)
COMMON SHARES
PER COMMON SHARE AMOUNTS:
GAIN (LOSS) FROM OPERATIONS $ (0.03) $ (0.05)
EXTRAORDINARY GAIN ON RET. OF DEBT 0.00 0.00
NET INCOME (LOSS) PER COMMON SHARE $ (0.03) $ (0.05)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1995 AND 1994
1995 1994
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (170,538) $ 69,854
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 192,608 239,407
GAIN ON SALE OF REAL ESTATE (29,969) 0
DEFERRED TAX PROVISION 0 0
ADJUSTMENTS TO NOTES RECEIVABLE 0 0
GAIN FROM SALE OF LONG-TERM INVESTMENTS 0 0
VALUATION RESERVE - ART INVENTORY 0 0
CHANGES IN ASSETS AND LIABILITIES:
RECEIVABLES, NET 192,261 (99,280)
ART INVENTORY, NET 114,804 263,720
PREPAID EXPENSES AND OTHER, NET (303) 129,416
PAYABLES AND ACCRUED EXPENSES, NET (36,721) (86,015)
NET CASH PROVIDED BY OPERATING ACTIVITIES 262,142 517,102
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF L-T INVESTMENTS 0 0
PROCEEDS FROM SALES OF REAL ESTATE 77,613 0
CAPITAL EXPENDITURES (24,688) (44,575)
NET CASH PROVIDED (USED) IN INVESTING ACTIVIT 52,925 (44,575)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM THE ISSUANCE OF L-T DEBT 0 500,000
PROCEEDS (REPAYMENT) OF S-T BORROWINGS (150,000) (75,000)
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (153,930) (43,560)
NET CASH USED BY FINANCING ACTIVITIES (303,930) 381,440
NET INCREASE (DECREASE) IN CASH 11,137 (46,033)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 33,595 23,750
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,732 $ (22,283)
NOTE: CANAL MADE FEDERAL AND STATE INCOME TAX PAYMENTS OF $9,000 AND
$5,000,AND INTEREST PAYMENTS OF $660,000 AND $610,000 IN THE SIX MONTH
PERIODS ENDED APRIL 30, 1995 AND 1994, RESPECTIVELY.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1994 (AUDITED) AND
FOR THE SIX MONTHS ENDED APRIL 30, 1995 (UNAUDITED)
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, OCT. 31, 1993 5,313,794 $53,138 1,783,364 $17,834
NET INCOME (LOSS) - - - -
PREF. STOCK DIVIDEND - - 271,830 2,718
RESERVE - - - -
BALANCE, OCT. 31, 1994 5,313,794 53,138 2,055,194 20,552
NET INCOME (LOSS) - - - -
PREF. STOCK DIVIDEND - - 162,573 1,576
RESERVE - - - -
BALANCE, APR. 30, 1995 5,313,794 $53,138 2,217,767 $22,128
RETAINED TREASURY
PAID-IN EARNINGS VALUATION STOCK,
CAPITAL (DEFICIT) RESERVE AT COST
BALANCE, OCT. 31, 1993 $25,930,799 ($9,028,106) ($1,015,535) ($11,003,545)
NET INCOME (LOSS) - 1,362,331 - -
PREF. STOCK DIVIDEND 331,547 (313,556) - -
RESERVE - - (393,208) -
BALANCE, OCT. 31, 1994 26,262,346 (7,979,331) (1,408,743) (11,003,545)
NET INCOME (LOSS) - (170,538) - -
PREF. STOCK DIVIDEND 124,908 (110,721) - -
RESERVE - - - -
BALANCE, APR. 30, 1995 $26,387,254 ($8,260,590) ($1,408,743) ($11,003,545)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED APRIL 30, 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 1994.
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
n o t ified the Company of its intentions to commence foreclosure
proceedings in accordance with the provisions of the mortgage securing
the debt. 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
a c companying unaudited financial statements of Canal contain all
adjustments necessary to present fairly its financial position as of
April 30, 1995 and the results of its operations and its cash flows for
the six month period ended April 30, 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 April 30, 1995 and October 31,
1994.
5. LONG TERM INVESTMENTS
At April 30, 1995, the long-term investments consisted of the
following:
(Thousands of Dollars) April 30, 1995 October 31, 1994
Aggregate market value.......... $ 516 $ 969
Aggregate carrying value........ $ 766 $ 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 April 30, 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 some of these companies.
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
p i ece 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 currentrepresents 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.
12
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 $46,000
and $42,000 on revenues of $108,000 and $140,000 for the six months ended
April 30, 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 April 30,
1995 and October 31, 1994, respectively. Antiquities and contemporary
art represented 56% ($3,402,000) and 44% ($2,727,000), 56% ($3,517,000)
and 44% ($2,727,000) of total art inventory at April 30, 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 April 30, 1995 and October 31, 1994.
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
13
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 April 30, 1995, substantially all of Canal s real properties, the
s t o ck 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:
April 30, October 31,
1995 1994
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 1998............................. $ 7,835 $ 7,960
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $17.............. 1,369 1,391
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $4............... 422 425
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.. 497 501
Other .................................... 1,150 1,150
Total .................................... 11,273 11,427
Less -- current maturities ............... 686 3,366
Long-term debt ........................... $10,587 $ 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 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 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 April 30, 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.
15
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Six Months Ended April 30, 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
n o t ified the Company of its intentions to commence foreclosure
proceedings in accordance with the provisions of the mortgage securing
the debt. 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 increased by $96,000 or
5% to $2,130,000 and by $20,000 or 2% to $987,000 for the six and three
month periods ended April 30, 1995 and 1994, respectively. The 1995
revenue increases were due primarily to increases in the proceeds from
the sale of real estate.
1995 vs. 1994
Canal s operations generated a net loss of $171,000 as compared to
net income of $70,000 for the six month period ended April 30, 1995 and a
net loss of $109,000 as compared to a net loss of $144,000 for the three
month period ended April 30, 1995. Included in the fiscal 1994 results
was a $333,000 gain on the sale of long-term investments. There was no
similar transaction in 1995.
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 six months ended April 30, 1995 of $2.0
million accounted for 94.9% of the 1995 revenues as compared to revenues
of $1.9 million or 93.1% 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 (52.0% and 57.5%), ground lease income (24.2% and 26.5%),
volume based rental income (19.3% and 16.3%) and sale of real estate and
other income (4.5% and 0.7%) for the 1995 and 1994 periods, respectively.
Real estate revenues for the three months ended April 30, 1995 of
$980,000 accounted for 99.3% of the 1995 revenues as compared to revenues
of $933,000 or 96.5% 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 (54.8%
and 59.9%), ground lease income (24.6% and 24.8%) volume based rental
income (16.9% and 14.7%) and sale of real estate and other income (3.7%
and 0.6%) for the 1995 and 1994 periods, respectively.
17
Real Estate Expenses
Real estate expenses for the six months ended April 30, 1995 of
$901,000 decreased by $35,000 (3.7%) from $936,000 for the same period in
1994. Real estate expenses are comprised of labor, operating and
maintenance (48.1% and 47.2%), depreciation and amortization (20.2% and
25.2%) taxes other than income taxes (21.4% and 23.1%), cost of real
estate sold (5.3% and 0.0%) and general and administrative expenses (5.0%
and 4.5%) for the 1995 and 1994 periods, respectively. The 1995 decrease
in expenses is due 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 April 30, 1995 of
$466,000 decreased by $16,000 or 3.2% from $481,000 for the same period
in 1994. Real estate expenses are comprised of labor, operating and
maintenance (50.0% and 48.8%), depreciation and amortization (19.6% and
24.5%), taxes other than income taxes (20.7% and 22.5%), cost of real
estate sold (4.9% and 0.0%) and general and administrative expenses (4.8%
and 4.2%) 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
s p eculative 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 capital 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 $108,000 for the six months ended April 30, 1995
decreased $32,000 (22.6%) from $140,000 for the same period in 1994. Art
revenues are comprised of proceeds from the sale of antiquities and
contemporary art (93.7% and 100.0%) and commission on sale of art owned
by third parties (6.3% and 0.0%) for the 1995 and 1994 periods,
respectively.
Art revenues of $7,000 for the three months ended April 30, 1995
decreased $27,000 (80.5%) from $34,000 for the same period in 1994. Art
revenues are comprised of proceeds from the sale of antiquities and
contemporary art (0.00% and 100.0%) and commissions on sale of art owned
by third parties (100.0%) and 0.0%) for the 1995 and 1994 periods,
respectively.
19
Art Expenses
Art expenses for the six months ended April 30, 1995 of $155,000
decreased by $27,000 (84.5%) from $182,000 for the same period in 1994.
Art expenses consisted of cost of art sold (76.2% and 79.0%) and selling,
general and administrative expenses (23.8% and 31.0%) for the 1995 and
1994 periods, respectively.
Art expenses for the three months ended April 30, 1995 of $4,000
decreased by $48,000 (92.2%) from $52,000 for the same period in 1994.
Art expenses consisted of cost of art sold (0.0% and 55.7%) and selling,
general and administrative expenses (100.0% and 44.3%) for the 1995 and
1994 periods, respectively.
General and Administrative
General and administrative expenses for the six months ended April
30, 1995 of $597,000 increased somewhat from the $581,000 for the same
period in 1994. The major components of general and administrative
expenses are officers salaries (34.5% and 33.7%), 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 April
30, 1995 of $298,000 increased somewhat from the $281,000 for the same
period in 1994. The major components of general and administrative
expenses are officers salaries (36.2% and 34.8%), rent (0.0% and 4.3%),
legal and professional fees (12.6% and 13.2%), insurance (11.6% and
11.7%) and office salaries (12.7% and 10.8%) 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
will resume 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
Interest Expense
Interest expense for the six months ended April 30, 1995 of $665,000
increased by $47,000 (7.5%) from $618,000 for the same period in 1994.
Interest expense for the three months ended April 30, 1995 also increased
by $31,000 (10.1%) from $306,000 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
n o t ified the Company of its intentions to commence foreclosure
proceedings in accordance with the provisions of the mortgage securing
the debt. 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.
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
21
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 April 30, 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.
Net cash generated by operations in the first six months of fiscal
1995 was $262,000. Cash and cash equivalents increased by $11,000 in
1995. Substantially all of the 1995 cash generated coupled with the
proceeds from the sale of real estate of $78,000 and a reduction of the
art inventory of $115,000 was used to reduce short term borrowings,
accrued expenses and outstanding debt.
During the first six months of fiscal 1995 Canal reduced short term
borrowings by $150,000, accrued expenses by $37,000, its variable rate
mortgage notes by $125,000 and other long-term debt by $29,000. The net
debt reduction for the first six months of fiscal 1995 was $341,000.
At April 30, 1995 the Company s current liabilities exceeded current
assets by $2.2 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.
22
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: June 1, 1995
26
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