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 January 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 February 28, 1995
Common stock, $0.01 par value 4,326,930
(This document contains 24 pages)<PAGE>
<TABLE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1995 AND OCTOBER 31, 1994
<CAPTION>
JANUARY OCTOBER
1995 1994
(UNAUDITED (AUDITED)
ASSETS :
CURRENT ASSETS:
<S> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ (48,444) $ 33,595
NOTES AND ACCOUNTS RECEIVABLE 604,085 675,927
ART INVENTORY (NET OF A VALUATION
OF $ 500,000) AT JANUARY 31, 1995 AND
OCTOBER 31, 1994, RESPECTIVELY 500,000 500,000
PREPAID EXPENSES AND OTHER 170,212 206,363
TOTAL CURRENT ASSETS 1,225,853 1,415,885
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 5,789,166
AND $ 5,594,754 AT JANUARY 31,1995 AND
OCTOBER 31, 1994, RESPECTIVELY 8,617,536 8,707,662
ART INVENTORY NON-CURRENT 5,629,328 5,744,132
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 3,304,000 3,304,000
LONG-TERM INVESTMENTS 765,962 765,962
DEFERRED LEASING AND FINANCING COSTS 22,325 23,989
DEPOSITS AND OTHER 165,883 165,883
4,258,170 4,259,834
$19,730,887 $20,127,513<PAGE>
</TABLE>
<TABLE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1995 AND OCTOBER 31, 1994
<CAPTION>
January October
1995 1994
(UNAUDITED (AUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY :
CURRENT LIABILITIES:
<S> <C> <C> <C> <C>
SHORT-TERM BORROWINGS $ 652,305 $ 787,305
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,876,534 1,918,384
ACCRUED LITIGATION SETTLEMENT 0 0
INCOME TAXES PAYABLE 30,807 50,000
CURRENT PORTION OF LONG-TERM DEBT 3,366,000 3,366,000
TOTAL CURRENT LIABILITIES 5,925,646 6,121,689
LONG-TERM DEBT, LESS CURRENT PORTION 7,923,077 8,061,407
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 2,121,803
AND 1,783,364 SHARES ISSUED AND OUT-
STANDING AT JANUARY 31, 1995 AND
OCTOBER 31, 1994, RESPECTIVELY AND
AGGREGATE LIQUIDATION PREFERENCE OF
$ 21,218,030 AND $ 17,833,640 AT
JANUARY 31, & OCTOBER 31, 1994, 21,218 20,552
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND OUTSTANDING AT
OCTOBER 31, 1994, RESPECTIVELY 53,138 53,138
PAID-IN CAPITAL 26,329,941 26,262,346
RETAINED EARNINGS (DEFICIT) (8,109,845) (7,979,331)
LESS-VALUATION RESERVE (1,408,743) (1,408,743)
LESS-986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,54) (11,003,54)
5,882,164 5,944,417
$19,730,887 $20,127,513 <PAGE>
</TABLE>
<TABLE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1995 AND 1994
<CAPTION>
JANUARY 31, JANUARY 31,
1995 1994
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
<S> <C> <C> <C> <C>
SALE OF REAL ESTATE $ 49,345 $ 0
RENTAL INCOME 513,730 530,679
GROUND LEASE INCOME 248,000 251,300
VOLUME BASED RENTAL INCOME 223,169 172,101
OTHER INCOME 7,247 6,543
1,041,491 960,623
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 24,878 0
LABOR, OPERATING AND MAINTENANCE 200,175 207,166
DEPRECIATION AND AMORTIZATION 91,073 118,147
TAXES OTHER THAN INCOME TAXES 96,300 108,300
PROVISION FOR LITIGATION SET. 0 0
BAD DEBT EXPENSE 0 0
GENERAL AND ADMINISTRATIVE 22,565 20,838
434,991 454,451
INCOME FROM REAL ESTATE OPERATIONS 606,500 506,172
ART OPERATIONS:
ART REVENUES:
SALES 101,750 106,400
OTHER REVENUES 0 0
101,750 106,400
ART EXPENSES:
COST OF ART SOLD 117,834 115,043
VALUATION RESERVE 0 0
DEPRECIATION AND AMORTIZATION 0 0
SELLING, GENERAL AND ADMIN. 32,678 15,331
150,512 130,374
LOSS FROM ART OPERATIONS (48,762) (23,974) <PAGE>
</TABLE>
<TABLE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1995 AND 1994
Continued ...
<CAPTION>
JANUARY 31, JANUARY 31,
1995 1994
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSE (298,944) (299,634)
WRITE-OFF DUE TO LEASE TERMINATION 0 0
INCOME (LOSS) FROM OPERATIONS 258,794 182,564
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 6,800 10,439
INTEREST EXPENSE (327,630) (312,089)
(320,830) 31,628
GAIN (LOSS) BEFORE PROVISION FOR (62,036) 214,192
INCOME TAXES AND EXTRAORDINARY GAIN
(PROVISION) BENEFIT FOR INCOME TAXES 0 0
NET INCOME (LOSS) BEFORE (62,036) 214,192
EXTRAORDINARY GAIN
EXTRAORDINARY GAIN ON RETIREMENT OF
DEBT,(NET OF TAXES OF $ 0) 0 0
NET INCOME (LOSS) (62,036) 214,192
PREFERRED STOCK DIVIDEND (68,478) (29,480)
NET INCOME (LOSS) APPLICABLE TO $ (130,514) $ 184,712
COMMON SHARES
PER COMMON SHARE AMOUNTS:
GAIN (LOSS) FROM OPERATIONS $ (0.03) $ 0.04
EXTRAORDINARY GAIN ON RET. OF DEBT 0.00 0.00
NET INCOME (LOSS) PER COMMON SHARE $ (0.03) $ 0.04 <PAGE>
</TABLE>
<TABLE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1995 AND 1994
<CAPTION>
1995 1994
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) $ (62,036) $ 214,192
ADJUSTMENTS TO RECONCILE NET LOSS TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
WRITE-OFF IN CONNECTION WITH LEASE TERM. - -
PROVISION FOR LITIGATION SETTLEMENT - -
EXTRAORDINARY GAIN ON RET. OF DEBT - -
DEPRECIATION AND AMORTIZATION 96,076 119,704
GAIN ON SALE OF REAL ESTATE (24,467) -
DEFERRED TAX PROVISION - -
ADJUSTMENTS TO NOTES RECEIVABLE - -
GAIN FROM SALE OF LONG-TERM INVESTMENTS - -
VALUATION RESERVE - ART INVENTORY - -
CHANGES IN ASSETS AND LIABILITIES:
RECEIVABLES, NET 71,842 (5,878)
ART INVENTORY, NET 114,804 239,674
PREPAID EXPENSES AND OTHER, NET 27,255 159,907
PAYABLES AND ACCRUED EXPENSES, NET (61,043) (216,045)
NET CASH PROVIDED BY OPERATING
ACTIVITIES 162,431 511,554
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALE OF L-T INVESTMENTS - -
PROCEEDS FROM SALES OF REAL ESTATE 49,345 -
CAPITAL EXPENDITURES (20,485) (3,770)
NET CASH PROVIDED (USED) IN INVESTING
ACTIVITIES 28,860 (3,770)
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS (REPAYMENT) OF S-T BORROWINGS (135,000) 475,000
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (138,330) (21,780)
NET CASH USED BY FINANCING ACTIVITIES (273,330) (496,780)
NET INCREASE (DECREASE) IN CASH (82,039) 11,004
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 33,595 23,750
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ (48,444) $ 34,754
<PAGE>
</TABLE>
NOTE: CANAL MADE FEDERAL AND STATE INCOME TAX PAYMENTS OF $ 19,000 AND
$ 26,000, AND INTEREST PAYMENTS OF $ 328,000 AND $ 300,000 IN THE
THREE MONTH PERIODS ENDED JANUARY 31, 1995 AND 1994, RESPECTIVELY.
<TABLE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1994 (AUDITED) AND
FOR THE THREE MONTHS ENDED JANUARY 31, 1995 (UNAUDITED)
<CAPTION>
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
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 - - 66,609 666
RESERVE - - - -
BALANCE, JAN. 31, 1995 5,313,794 $53,138 2,121,803 $21,218
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) - (62,036) - -
PREF. STOCK DIVIDEND 67,595 (68,478) - -
RESERVE - - - -
BALANCE, JAN. 31, 1995 $26,329,941 ($8,109,845) ($1,408,743) ($11,003,545) <PAGE>
</TABLE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JANUARY 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 I 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 the renegotiated agreement with its
variable rate mortgage noteholders. Of the required sinking fund payment
of $1,760,000 due on May 15, 1994, $795,000 remains outstanding. The
noteholders had extended the due date of this payment to February 15, 1995.
Management is currently negotiating a new agreement with the noteholders
which will revise the repayment schedule and extend the maturity of the
notes at least two additional years. While management believes that this
agreement will be renegotiated, there can be no assurance that these
efforts will be successful. The noteholders could hold the Company in
default and demand immediate payment of the outstanding balance. In which
case, the Company would not have available cash to meet this obligation.
Third, 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. Fourth, the Company is involved in litigation with a major tenant in
Sioux City, Iowa. Fifth, 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
a d justments that might result from the resolution of these other
uncertainties.
8 <PAGE>
In the past three years, Canal has made significant cuts in
expenditures and plans to further 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.
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 c o mpanying unaudited financial statements of Canal contain all
adjustments necessary to present fairly its financial position as of
January 31, 1995 and the results of its operations and its cash flows for
the three month period ended January 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
a c cordance 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 $175,000 at January 31, 1995 and October 31,
1994.
9 <PAGE>
5. LONG TERM INVESTMENTS
At January 31, 1995, the long-term investments consisted of the
following:
(Thousands of Dollars) January 31, 1995 October 31, 1994
Aggregate market value.......... $ 740 $ 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 January 31, 1995, 100% of the market value of
Canal s long-term investments was invested in equity securities of
companies in which 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 Slander-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 owns 62 Olitski paintings which it holds for resale.
Management estimates it may take two to five years to dispose of its
current art inventory. The Company s ability to dispose of its art
inventory is dependent at least in part, in general economic conditions,
including supply, demand, international monetary conditions and inflation.
Additionally, the art market itself is very competitive. Accordingly,
there can be no assurance that Canal will be successful in disposing of its
art inventory within the time frame discussed above.
10<PAGE>
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 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 $49,000 and
$24,000 on revenues of $102,000 and $106,000 for the three months ended
January 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.
11<PAGE>
Inventory on Consignment - The Company had $500,000 and $568,000 of
art inventory on consignment with third party dealers at January 31, 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 January 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 January 31, 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
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 expenses over time as actuarial computations of
annual pension cost (made in accordance with SFAS No. 87) recognize the
deficiency that exists.
12<PAGE>
9. BORROWINGS
At January 31, 1995, substantially all of Canal s real properties, the
stock 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:
January 31, October 31,
1995 1994
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 1996............................. $ 7,835 $ 7,960
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $17.............. 1,381 1,391
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $4............... 424 425
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.. 499 501
Other .................................... 1,150 1,150
Total .................................... 11,289 11,427
Less -- current maturities ............... 3,366 3,366
Long-term debt ........................... $ 7,923 $ 8,061
Canal s variable rate mortgage notes matured May 15, 1993. The
remaining two noteholders have extended the notes, under essentially the
same terms, for a period of three years. The new agreement, among other
things, 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
and required certain sinking fund payments in the first and second years of
the agreement. At January 31, 1995 the Company was in technical default of
the renegotiated agreement with its variable rate mortgage noteholders. Of
13 <PAGE>
the required sinking fund payment of $1,760,000 due on May 15, 1994, $795,000
remains outstanding. The noteholders had extended the due date of this
payment to February 15, 1995. Management is currently negotiating a new
agreement with the noteholders which will revise the repayment schedule and
extend the maturity of the notes at least two additional years. While
management believes that the noteholders will continue to extend the due
date of this payment and ultimately renegotiate the current agreement,
there is no assurance that this will occur. Absent such extensions or
agreement, the noteholders could hold the Company in default and demand
immediate payment of the outstanding balance. In which case, the Company
would note have the available cash to meet this obligation. On May 15,
1995 an additional sinking fund payment of $1.8 million will be due under
this agreement.
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.
14 <PAGE>
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Three Months Ended January 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 the renegotiated agreement with its
variable rate mortgage noteholders. Of the required sinking fund payment
of $1,760,000 due on May 15, 1994, $795,000 remains outstanding. The
noteholders had extended the due date of this payment to February 15, 1995.
Management is currently negotiating a new agreement with the noteholders
which will revise the repayment schedule and extend the maturity of the
notes at least an additional two years. While management believes that
this agreement will be renegotiated, there can be no assurance that these
efforts will be successful. The noteholders could hold the Company in
default and demand immediate payment of the outstanding balance. In which
case, the Company would not have available cash to meet this obligation.
Third, 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. Fourth, the Company is involved in litigation with a major tenant in
Sioux City, Iowa. Fifth, 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
a d justments 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 $76,000 or
7% to $1,143,000 for the three month period ended January 31, 1995. The
1995 revenue increase is due primarily to an increase in the proceeds from
the sale of real estate.
15 <PAGE>
1995 vs. 1994
Canal s operations generated a net loss of $62,000 as compared to net
income of $214,000 for the three month period ended January 31, 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.
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 three months ended January 31, 1995 of
$1.0 million accounted for 91.1% of the 1995 revenues as compared to
revenues of $1.0 million or 90.0% 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
(49.3% and 55.2%), Ground lease income (23.8% and 26.2%), volume based
rental income (21.5% and 17.9%) and sale of real estate and other income
(5.4% and 0.7%) for the 1995 and 1994 periods, respectively.
16 <PAGE>
Real Estate Expenses
Real estate expenses for the three months ended January 31, 1995 of
$435,000 decreased by $20,000 (4.3%) from $455,000 for the same period in
1994. Real estate expenses are comprised of labor, operating and
maintenance (46.0% and 45.6%), depreciation and amortization (20.9% and
26.0%) taxes other than income taxes (22.1% and 23.8%), cost of real estate
sold (5.7% and 0.0%) and general and administrative expenses (5.3% and
4.6%) 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 the result of the property sales in fiscal 1994.
Art Operations
Management estimates it may take two to five years to dispose of its
current art inventory. 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, there can be no assurance that Canal will be successful in
disposing of its art inventory within the time frame discussed above.
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.
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.
17 <PAGE>
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 $102,000 for the three months ended January 31, 1995
decreased $4,000 (4.4%) from $106,000 for the same period in 1994. Art
revenues are comprised of proceeds from the sale of antiquities and
contemporary art (100.0% and 100.0%) and commission on sale of art owned by
third parties (0.0% and 0.0%) for the 1995 and 1994 periods, respectively.
Art Expenses
Art expenses for the three months ended January 31, 1995 of $151,000
increased by $21,000 (15.4%) from $130,000 for the same period in 1994.
Art expenses consisted of cost of art sold (78.3% and 88.2%) and selling,
general and administrative expenses (21.7% and 11.8%) for the 1995 and 1994
periods, respectively.
General and Administrative
General and administrative expenses for the three months ended January
31, 1995 of $299,000 was virtually unchanged from the $300,000 for the same
period in 1994. The major components of general and administrative
expenses are officers salaries (32.8% and 32.7%), rent (9.3% and 10.7%),
legal and professional fees (19.0% and 12.5%), insurance (11.5% and 11.0%)
and office salaries (10.1% and 9.9%) for the 1995 and 1994 periods,
respectively.
18 <PAGE>
Gain on Sale of Long-term Investments
For the three month periods 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.
Interest Expense
Interest expense for the three months ended January 31, 1995 of
$328,000 increased by $16,000 (5.0%) from $312,000 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 the renegotiated agreement with its
variable rate mortgage noteholders. Of the required sinking fund payment
of $1,760,000 due on May 15, 1994, $795,000 remains outstanding. The
noteholders had extended the due date of this payment to February 15, 1995.
Management is currently negotiating a new agreement with the noteholders
which will revise the repayment schedule and extend the maturity of the
notes at least an additional two years. While management believes that
this agreement will be renegotiated, there can be no assurance that these
efforts will be successful. The noteholders could hold the Company in
default and demand immediate payment of the outstanding balance. In which
case, the Company would not have available cash to meet this obligation.
Third, 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
19 <PAGE>
the Company of its intentions to commence foreclosure proceedings in
accordance with the provisions of the mortgage securing the debt. Fourth,
the Company is is involved in litigation with a major tenant in Sioux City,
Iowa. Fifth, 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 variable rate mortgage notes matured May 15, 1993. The
remaining two noteholders have extended the notes, under essentially the
same terms, for a period of three years. The new agreement, among other
things, 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
and requires certain sinking fund payments in the first and second years of
the agreement. At January 31, 1995 the Company was in technical default of
the renegotiated agreement with its variable rate mortgage noteholders. Of
the required sinking fund payment of $1,760,000 due on may 15, 1994,
$795,000 remains outstanding. The noteholders had extended the due date of
this payment to February 15, 1995. Management is currently negotiating a
new agreement with the noteholders which will revise the repayment schedule
and extend the maturity of the notes at least two additional years. While
management believes that the noteholders will continue to extend the due
date of this payment and ultimately renegotiate the current agreement,
there is no assurance that this will occur. Absent such extensions or
agreement, the noteholders could hold the Company in default and demand
immediate payment of the outstanding balance. In which case, the Company
would not have the available cash to meet this obligation. On May 15, 1995
an additional sinking fund payment of $1.8 million will be due under this
agreement.
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
l i ne 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.
20 <PAGE>
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 January 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.
Net cash generated by operations in the first three months of fiscal
1995 was $162,000. Cash and cash equivalents decreased by $82,000 in 1995.
Substantially all of the 1994 cash generated coupled with the proceeds from
the sale of real estate of $50,000 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 three months of fiscal 1995 Canal reduced short term
borrowings by $135,000, accrued expenses by $42,000, its variable rate
mortgage notes by $125,000 and other long-term debt by $13,000. The net
debt reduction for the first three months of fiscal 1995 was $315,000.
At January 31, 1995 the Company s current liabilities exceeded current
assets by $4.7 million which was virtually unchanged from October 31, 1994.
Required principal repayments under Canal s current debt agreements for the
next twelve months total $3.5 million.
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. Additionally, management may seek to raise new capital for the
Company through private placement sales of its securities. 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.
21 <PAGE>
PART II
OTHER INFORMATION
22<PAGE>
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.
23 <PAGE>
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: March 14, 1995
24<PAGE>
