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, 1996
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 29, 1996
Common stock, $0.01 par value 4,326,930
(This document contains 25 pages)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND OCTOBER 31, 1995
JANUARY 31, OCTOBER 31,
1996 1995
(UNAUDITED) (AUDITED)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ (11,197) $ 114,750
Notes and accounts receivable 316,055 241,778
Art inventory (net of a valuation
allowance of $500,000) at January 31,
1996 and October 31, 1995, respectively 500,000 500,000
Prepaid expenses and other 173,151 201,188
Total Current Assets 978,009 1,057,716
NON-CURRENT ASSETS:
Property on operating leases, net of
accumulated depreciation of $5,969,934
and $6,074,482 at January 31, 1996 and
October 31, 1995, respectively 8,289,614 8,384,975
Art inventory non-current (net of
valuation allowance of $500,000 at
January 31, 1996 and October 31, 1995,
respectively 4,693,931 4,900,595
Other Assets:
Property held for development or resale 2,922,960 3,000,060
Long-term investments 480,091 480,091
Deferred leasing and financing costs 133,189 147,913
Deposits and other 238,558 232,062
3,774,798 3,860,126
$17,736,352 $18,203,412
2
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND OCTOBER 31, 1995
JANUARY 31, OCTOBER 31,
1996 1995
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS EQUITY:
CURRENT LIABILITIES:
Short-term borrowings $ 0 $ 0
Accounts payable and accrued expenses 2,413,482 2,618,467
Accrued litigation settlement 0 0
Income taxes payable 19,408 40,881
Current portion of long-term debt 551,000 51,000
Total Current Liabilities 2,983,890 2,710,348
Long-term debt, less current portion 10,642,817 11,379,242
Commitments and contingencies
Stockholders Equity:
Preferred stock $0.01 par value:
5,000,000 shares authorized; 2,434,998
and 2,358,542 shares issued and out-
standing at January 31, 1996 and
October 31, 1995, respectively and
aggregate liquidation preference of
$24,349,980 and $23,585,420 at
January 31, 1996 and October 31, 1995,
respectively 24,350 23,585
Common stock, $0.01 par value:
10,000,000 shares authorized; 5,313,794
shares issued and outstanding at
January 31, 1996 and October 31, 1995,
respectively 53,138 53,138
Paid-in capital 26,505,471 26,468,008
3
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1996 AND OCTOBER 31, 1995 (cont d)
JANUARY 31, OCTOBER 31,
1996 1995
(UNAUDITED) (AUDITED)
Retained earnings (deficit) $ (9,733,098) $(9,690,693)
Less-Valuation Reserve (1,736,671) (1,736,671)
Less-986,865 shares of common
stock held in treasury, at cost (11,003,545) (11,003,545)
4,109,645 4,113,822
$ 17,736,352 $ 18,203,412
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1995
1996 1995
(UNAUDITED) (UNAUDITED)
Real Estate Operations:
Real Estate Revenues:
Sale of real estate $ 476,621 $ 49,345
Rental income 536,418 513,730
Ground lease income 234,000 248,000
Volume based rental income 204,002 223,169
Other income 1,613 7,247
1,452,654 1,041,491
Real Estate Expenses:
Cost of real estate sold 159,733 24,878
Labor, operating and maintenance 238,724 200,175
Depreciation and amortization 91,413 91,073
Taxes other than income taxes 90,000 96,300
Provision for litigation settlement 0 0
Bad debt expense 0 0
General and administrative 28,310 22,565
608,180 434,991
Income From Real Estate Operations 844,474 606,500
Art Operations:
Art Revenues:
Sales 104,400 101,750
Other revenues 0 0
104,400 101,750
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1995 (Cont d)
1996 1995
(UNAUDITED) (UNAUDITED)
Art Expenses:
Cost of art sold 219,633 117,834
Valuation reserve 0 0
Depreciation and amortization 0 0
Selling, general and administrative 11,168 32,678
230,801 150,512
Loss From Art Operations (126,401) (48,762)
General and administrative expense (328,640) (298,944)
Write-off due to lease termination 0 0
Income (loss) from operations 389,433 258,794
Other income (Expense):
Gain on sale of long-term investments 0 0
Loss on write-down of long-term
investments 0 0
Interest and other income 3,561 6,800
Interest expense (397,058) (327,630)
(393,497) (320,830)
Gain (Loss) Before Provision for Income
Taxes and Extraordinary Gain (4,064) (62,036)
(Provision) Benefit for Income Taxes 0 0
Net Income (Loss) Before Extraordinary
Gain (4,064) (62,036)
Extraordinary Gain on Retirement of Debt,
(Net of taxes of $0) 0 0
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1995 (Cont d)
1996 1995
(UNAUDITED) (UNAUDITED)
Net Income (Loss) (4,064) (62,036)
Preferred Stock Dividend (38,341) (68,478)
Net Income (Loss) Applicable to Common
Shares $ (42,405) $ (130,514)
Per Common Share Amounts:
Gain (Loss) from operations $ (0.01) $ (0.03)
Extraordinary gain on retirement
of debt 0.00 0.00
Net Income (Loss) Per Common Share $ (0.01) $ (0.03)
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1995
1996 1995
(UNAUDITED) (UNAUDITED)
Cash Flows from Operating Activities:
Net income (loss) $ (4,064) $ (62,036)
Adjustments to Reconcile Net Loss to
Net Cash Provided (Used) by Operating
Activities:
Write-off in connection with lease
termination 0 0
Provision for litigation settlement 0 0
Extraordinary gain on retirement of
debt 0 0
Depreciation and amortization 110,175 96,076
Gain on sale of real estate (316,888) (24,467)
Deferred tax provision 0 0
Loss on write-down of long-term
investments 0 0
Gain from sale of long-term investments 0 0
Valuation reserve-art inventory 0 0
Changes in Assets and Liabilities:
Receivables, net (74,277) 71,842
Art inventory, net 206,664 114,804
Prepaid expenses and other, net (226,458) 27,255
Payables and accrued expenses, net (61,295) (61,043)
Net Cash Provided (Used) by Operating
Activities (366,143) 162,431
8
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1996 AND 1995 (Cont d)
1996 1995
(UNAUDITED) (UNAUDITED)
Cash Flows from Investing Activities:
Proceeds from sale of long-term
investments 0 0
Proceeds from sales of real estate 476,621 49,345
Capital expenditures 0 (20,485)
Net Cash Provided (Used) in Investing
Activities 476,621 28,860
Cash Flows from Financing Activities:
Proceeds from the issuance of long-term
debt $ 0 $ 0
Proceeds (repayment) of short-term
borrowings 0 (135,000)
Repayment of long-term debt obligations (236,425) (138,330)
Net Cash Used by Financing Activities (236,425) (273,330)
Net Increase (Decrease) in Cash (125,947) (82,039)
Cash and Cash Equivalents at Beginning of
Period 114,750 33,595
Cash and Cash Equivalents at End of Period $ (11,197) $ (48,444)
Note: Canal made federal and state income tax payments of $21,000 and
$19,000, and interest payments of $397,000 and $328,000 in the three
month periods ended January 31, 1996 and 1995, respectively.
9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1995 (AUDITED) AND
FOR THE THREE MONTHS ENDED JANUARY 31, 1996 (UNAUDITED)
Common Stock Preferred Stock
Number Number
of of
Shares Amount Shares Amount
Balance, Oct. 31, 1994 5,313,794 $53,138 2,055,194 $20,552
Net Income (Loss) 0 0 0 0
Preferred Stock Dividen 0 0 303,348 3,033
Reserve 0 0 0 0
Balance, Oct. 31, 1995 5,313,794 53,138 2,358,542 23,585
Net Income (Loss) 0 0 0 0
Preferred Stock Dividend 0 0 76,456 765
Reserve 0 0 0 0
Balance, January 31, 1996 5,313,794 $53,138 2,434,998 $24,350
Retained Treasury
Paid-in Earnings Valuation Stock
Capital (Deficit) Reserve At Cost
Balance,Oct.31,1994 $26,262,346 ($7,979,331) ($1,408,743) ($11,003,545)
Net Income(Loss) 0 (1,518,214) 0 0
Preferred StockDividend 205,662 (193,148) 0 0
Reserve 0 0 (327,928) 0
Balance,Oct.31,1995 26,468,008 (9,690,693) (1,736,671) (11,003,545)
Net Income (Loss) 0 (4,064) 0 0
Preferred Stock Dividend 37,463 (38,341) 0 0
Reserve 0 0 0 0
Balance,Jan.31,1996 $26,505,471 ($9,733,098) ($1,736,671) $(11,003,545)
10
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JANUARY 31, 1996
(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 1996.
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 six of the last seven years.
Second, the Company is involved in litigation with major tenants in
Sioux City, Iowa and Fargo, North Dakota. Third, 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.
I n the past three years, Canal has made significant cuts in
expenditures, primarily in salaries and other overhead expenses and
plans to continue 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.
11
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
January 31, 1996 and the results of its operations and its cash flows
for the three month period ended January 31, 1996. 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
should be read in conjunction with the consolidated financial statements
for the three years ended October 31, 1995 and the notes thereto which
are contained in Canal s 1995 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 1996.
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 $150,000 at January 31, 1996 and October
31, 1995.
5. LONG TERM INVESTMENTS
At January 31, 1996, the long-term investments consisted of the
following:
(Thousands of Dollars) January 31, 1996 October 31, 1995
Aggregate market value.......... $ 395 $ 481
Aggregate carrying value........ $ 480 $ 480
Canal has investments in the equity securities of a company in which
other entities affiliated with Canal also have made investments, and
which
12
entities together comprise a group for regulatory reporting purposes.
It is important to note that it is the group (as defined) that can
exercise influence over the company, not Canal. Accordingly, this
situation does not qualify for consolidation as a method of reporting.
At July 31, 1995, 100% of the market value of Canal s long-term
investments was invested in equity securities of this company. The
group held 5% or more of the outstanding equity securities of this
issuer. Certain of Canal s officers and directors also serve as
officers and/or directors of this company.
6. ART OPERATIONS
Canal s art dealing operations consist primarily of the purchase for
resale of contemporary art and purchase for resale of antiquities
primarily from ancient Mediterranean cultures. Canal s art dealing
operations are carried on through various consignment agreements
relating to its antiquities and contemporary art inventories.
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,
i n c luding 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.
Canal has its art inventory appraised by an independent appraiser
annually. The 1995 appraisal covered approximately 78% 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 22% 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 1995 Canal recognized a $500,000
valuation allowance against its art inventory, thereby, increasing the
total valuation allowance to $1,000,000 as of October 31, 1995 as
compared to $500,000 and $300,000 at October 31, 1994 and 1993,
respectively. 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
13
represents management s best estimate of the amount of inventory that
will be sold in this market. Management believes that the provision
discussed above 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 1996.
Canal s art operations have generated operating losses of $126,000
and $49,000 on revenues of $104,000 and $102,000 for the three months
ended January 31, 1996 and 1995, 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 $809,000 and $1,600,000 of
art inventory on consignment with third party dealers at January 31,
1996 and October 31, 1995, respectively. Antiquities and contemporary
art represented 52% ($2,717,000) and 48% ($2,477,000), as compared to
54% ($2,923,000) and 46% ($2,477,000) of total art inventory at January
31, 1996 and October 31, 1995, respectively.
7. Property and Equipment
Included in buildings and equipment were the cost of buildings of
approximately $5 million at January 31, 1996 and October 31, 1995.
14
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 January 31, 1996, substantially all of Canal s real properties, the
s t ock of certain subsidiaries, the long-term investments and a
substantial portion of its art inventories are pledged as collateral to
secure the following obligations:
January 31, October 31,
1996 1995
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 1998............................. $ 7,555 $ 7,635
Variable rate mortgage notes due
September 15, 1998....................... 888 1,032
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $17.............. 1,348 1,356
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $4............... 414 416
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.. 489 491
Other .................................... 500 500
Total .................................... 11,194 11,430
Less -- current maturities ............... 551 51
Long-term debt ........................... $10,643 $11,379
15
On May 22, 1985, Canal completed the sale of $20 million face value
of Variable Rate Mortgage Notes, due May 15, 1993. As discussed more
fully below, Canal has extended these notes to May 15, 1998 under
essentially the same terms and conditions. The notes carry interest at
the highest of four variable rates, determined on a quarterly basis.
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
t o pay cash dividends or repurchase stock; requires principal
prepayments to be made only out of the proceeds from the sale of certain
assets; and 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. In consideration
for the new agreement, Canal agreed to pay a fee to the noteholders of
2% of the principal amount outstanding as of May 15, 1995.
On September 20, 1995, the Company issued $1,032,000 of variable rate
mortgage notes due September 15, 1998 to a group which includes an
investment partnership controlled by the Company s Chairman and the
Company s Chief Executive Officer and members of his family. The notes
issued have essentially the same terms and conditions as the notes
discussed above. These notes, 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; requires principal
prepayments to be made only out of the proceeds from the sale of certain
assets, and requires the accrual of additional interest (to be paid at
maturity) of two, three or four percent per annum for the fiscal years
commencing September 15, 1995, 1996 and 1997, respectively.
In March 1994 the Company borrowed $500,000 from an individual. The
Company executed a $350,000 note due December 31, 1996 and a $150,000
convertible note also due December 31, 1996. The $150,000 note is
convertible at the holder s option into one million (1,000,000) shares
of the Company s common stock. The notes pay quarterly interest at the
rate of 7% per annum and are secured by 125,000 shares of Datapoint
Corporation common stock owned by the Company. The proceeds from this
loan were used by the Company to meet its obligations under its secured
credit line. At January 31, 1996, this note is classified as a current
liability.
16
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Three Months Ended January 31, 1996
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 six of the last seven years.
Second, the Company is involved in litigation with major tenants in
Sioux City, Iowa and Fargo, North Dakota. Third, 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. Revenues increased by $414,000 or 36%
to $1,557,000 for the three month periods ended January 31, 1996 and
1995, respectively. The 1996 increase is due primarily to an increase
in the sale of real estate during the first quarter of fiscal 1996 of
$477,000 as compared to $49,000 for the same period in fiscal 1995.
1996 vs. 1995
Canal s operations generated a net loss of $4,000 as compared to a net
loss of $62,000 for the three month periods ended January 31, 1996 and
1995, respectively. Included in the 1996 results are a gain on the sale
of real estate of $317,000 which was offset to a certain extent by a
$126,000 loss from art operations and a $69,000 increase in interest
expense due to the increased rates being charged to Canal on its
outstanding debt.
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
17
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. Additionally, Canal has continued its program
of developing what was excess stockyard property.
Real estate revenues for the three months ended January 31, 1996 of
$1,453,000 accounted for 93.3% of the 1996 revenues as compared to
revenues of $1,041,000 or 91.1% for the same period in 1995. 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 (36.9% and 49.3%), ground lease income (16.1% and
23.8%), volume based rental income (14.0% and 21.5%) and sale of real
estate and other income (33.0% and 5.4%) for the 1996 and 1995 periods,
respectively.
Real Estate Expenses
Real estate expenses for the three months ended January 31, 1996 of
$608,000 increased by $173,000 (39.8%) from $435,000 for the same period
in 1995. Real estate expenses are comprised of labor, operating and
maintenance (39.3% and 46.0%), depreciation and amortization (15.0% and
20.9%) taxes other than income taxes (14.8% and 22.1%), cost of real
estate sold (26.3% and 5.7%) and general and administrative expenses
(4.6% and 5.3%) for the 1996 and 1995 periods, respectively. The 1996
increase is due primarily to a $135,000 increase in the cost of real
estate sold associated with the increase in real estate sales discussed
above.
18
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,
i n c luding supply, demand, international monetary conditions and
inflation. Additionally, the art market itself is a very competitive
market. Accordingly, 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 1995 appraisal covered approximately 78% 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 22% 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 1995 Canal recognized a $500,000
valuation allowance against its art inventory, thereby, increasing the
total value allowance to $1,000,000 as of October 31, 1995 compared to
$500,000 and $300,000 at October 31, 1994 and 1993, respectively. These
estimates are 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 predicated 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 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 amount of inventory that will be sold in this market. Management
believes that the provision discussed above has effectively reduced
inventory to its estimated net realizable value. 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 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 by the Company for disposal of its art inventory.
The proceeds
19
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 a forced sale of its art inventory in fiscal 1996.
Art Revenues
Art revenues of $104,000 for the three months ended January 31, 1996
represented a modest increase (2.6%) over the same period in 1995. 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 1996 and 1995 periods,
respectively.
Art Expenses
Art expenses for the three months ended January 31, 1996 of $231,000
increased by $80,000 (53.3%) from $151,000 for the same period in 1995.
The 1996 increase is due primarily to the continued softness of the
current art market resulting in lower prices for goods sold at auction.
Art expenses consisted of cost of art sold (95.2% and 78.3%) and
selling, general and administrative expenses (4.8% and 21.7%) for the
1996 and 1995 periods, respectively.
General and Administrative
General and administrative expenses for the three months ended January
31, 1996 of $329,000 increased somewhat from the $299,000 for the same
period in 1995. The major components of general and administrative
expenses are officers salaries (32.8% and 32.8%), rent (8.9% and 9.3%),
legal and professional fees (9.6% and 19.0%), insurance (10.7% and
11.5%) and office salaries (10.3% and 10.1%) for the 1996 and 1995
periods, respectively.
Interest Expense
Interest expense for the three months ended January 31, 1996 of $397,000
increased by $69,000 (21.2%) from $328,000 for the same period in 1995.
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.
20
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 six of the last seven years.
Second, the Company is involved in litigation with major tenants in
Sioux City, Iowa and Fargo, North Dakota. Third, 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
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.
On September 20, 1995, the Company issued $1,032,000 of variable rate
mortgage notes due September 15, 1998, the proceeds of which were used
to repay in full the Company s secured credit line and a $650,000 note
the Company issued in 1993. The purchasers of these notes included an
investment partnership controlled by the Company s Chairman and the
Company s Chief Executive Officer and members of his family. The notes
issued have essentially the same terms and conditions as the notes
discussed above. These notes, 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; requires principal
prepayments to be made only out of
21
the proceeds from the sale of certain assets, and requires the accrual
of additional interest (to be paid at maturity) of two, three or four
percent per annum for the fiscal years commencing September 15, 1995,
1996 and 1997, respectively.
Net cash generated by operations in the first three months of fiscal
1996 was a negative $366,000. Cash and cash equivalents increased by
$37,000 in 1996. Substantially all of the proceeds from the sale of
real estate of $477,000 and the reduction of the art inventory of
$207,000 was used to reduce accrued expenses and outstanding debt.
At January 31, 1996 the Company s current liabilities exceeded current
assets by $2.0 million as compared to $1.7 million at October 31, 1995.
The increase is due primarily to the reclassification of a $500,000 note
payable due December 31, 1996 to current liabilities.
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 1996 cash flow from operations will be
sufficient to support its ongoing operations.
22
PART II
OTHER INFORMATION
23
Item 1: Legal Proceedings:
See Item 3 of Canal s October 31, 1995 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.
24
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
Vice President-Finance &
Chief Financial Officer
Date: March 8, 1996
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> JAN-31-1996
<CASH> (11,197)
<SECURITIES> 0
<RECEIVABLES> 316,055
<ALLOWANCES> 0
<INVENTORY> 500,000
<CURRENT-ASSETS> 978,009
<PP&E> 14,259,548
<DEPRECIATION> (5,969,934)
<TOTAL-ASSETS> 17,736,352
<CURRENT-LIABILITIES> 2,983,890
<BONDS> 0
0
24,350
<COMMON> 53,138
<OTHER-SE> 4,032,157
<TOTAL-LIABILITY-AND-EQUITY> 17,736,352
<SALES> 0
<TOTAL-REVENUES> 1,557,054
<CGS> 0
<TOTAL-COSTS> 1,167,621
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 393,497
<INCOME-PRETAX> (4,064)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,064)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,405)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
