FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the quarterly period ended July 31, 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 August 31, 1996
Common stock, $0.01 par value 4,326,930
(This document contains 30 pages)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND OCTOBER 31, 1995
JULY 31, October 31,
1996 1995
(UNAUDITED) (AUDITED)
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ (20,575) $ 114,750
Notes and accounts receivable 258,271 241,778
Art inventory (net of a valuation
allowance of $500,000) at July 31,
1996 and October 31, 1995, respectively 500,000 500,000
Prepaid expenses and other 229,669 201,188
Total Current Assets 967,365 1,057,716
NON-CURRENT ASSETS:
Property on operating leases, net of
accumulated depreciation of $5,662,065
and $6,074,482 at July 31, 1996 and
October 31, 1995, respectively 8,128,561 8,384,975
Art inventory non-current (net of
valuation allowance of $500,000) at
July 31, 1996 and October 31, 1995,
respectively 4,686,431 4,900,595
Other Assets:
Property held for development or resale 2,945,620 3,000,060
Long-term investments 480,091 480,091
Deferred leasing and financing costs 107,039 147,913
Deposits and other 159,293 232,062
3,692,043 3,860,126
$17,474,400 $18,203,412
2
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND OCTOBER 31, 1995
JULY 31, OCTOBER 31,
1996 1995
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS EQUITY:
CURRENT LIABILITIES:
Short-term borrowings $ 0 $ 0
Accounts payable and accrued expenses 3,079,081 2,618,467
Accrued litigation settlement 0 0
Income taxes payable 7,975 40,881
Current portion of long-term debt 551,000 51,000
Total Current Liabilities 3,638,056 2,710,348
Long-term debt, less current portion 10,537,517 11,379,242
Commitments and contingencies
Stockholders Equity:
Preferred stock $0.01 par value:
5,000,000 shares authorized; 2,618,387
and 2,358,542 shares issued and out-
standing at July 31, 1996 and
October 31, 1995, respectively and
aggregate liquidation preference of
$26,183,870 and $23,585,420 at
July 31, 1996 and October 31, 1995,
respectively 26,184 23,585
Common stock, $0.01 par value:
10,000,000 shares authorized; 5,313,794
shares issued and outstanding at
July 31, 1996 and October 31, 1995,
respectively 53,138 53,138
Paid-in capital 26,595,332 26,468,008
3
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND OCTOBER 31, 1995 (cont d)
JULY 31, OCTOBER 31,
1996 1995
(UNAUDITED) (AUDITED)
Retained earnings (deficit) $(10,635,611) $ (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)
3,298,827 4,113,822
$ 17,474,400 $ 18,203,412
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1996 AND 1995
1996 1995
(UNAUDITED) (UNAUDITED)
Real Estate Operations:
Real Estate Revenues:
Sale of real estate $ 612,872 $ 702,512
Rental income 1,581,164 1,564,690
Ground lease income 702,000 731,000
Volume based rental income 538,115 553,533
Other income 4,609 29,438
3,438,760 3,581,173
Real Estate Expenses:
Cost of real estate sold 232,760 399,549
Labor, operating and maintenance 733,586 666,169
Depreciation and amortization 273,670 273,368
Taxes other than income taxes 270,000 288,902
Provision for litigation settlement 400,000 0
Bad debt expense 0 0
General and administrative 82,648 68,686
1,992,664 1,696,674
Income From Real Estate Operations 1,446,096 1,884,499
Art Operations:
Art Revenues:
Sales 108,900 241,550
Other revenues 0 13,740
108,900 255,290
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1996 AND 1995 (Cont d)
1996 1995
(UNAUDITED) (UNAUDITED)
Art Expenses:
Cost of art sold 226,581 347,207
Valuation reserve 0 0
Depreciation and amortization 0 0
Selling, general and administrative 36,965 50,320
263,546 397,527
Loss From Art Operations (154,646) (142,237)
General and Administrative Expense (948,831) (893,493)
Write-off due to lease termination 0 0
Income (loss) from operations 342,619 848,769
Other Income (Expense):
Gain on sale of long-term investments 0 0
Loss on write-down of long-term
investments 0 (113,565)
Interest and other income 9,912 21,457
Interest expense (1,177,955) (1,063,149)
(1,168,043) (1,155,257)
Gain (Loss) Before Provision for Income
Taxes and Extraordinary Gain (825,424) (306,488)
(Provision) Benefit for Income Taxes 0 0
Net Income (Loss) Before Extraordinary
Gain (825,424) (306,488)
Extraordinary Gain on Retirement of Debt,
(Net of taxes of $0) 0 0
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1996 AND 1995 (Cont d)
1996 1995
(UNAUDITED) (UNAUDITED)
Net Income (Loss) (825,424) (306,488)
Preferred Stock Dividend (119,494) (156,026)
Net Income (Loss) Applicable to Common
Shares $ (944,918) $ (462,514)
Per Common Share Amounts:
Gain (Loss) from operations $ (0.22) $ (0.11)
Extraordinary gain on retirement
of debt 0.00 0.00
Net Income (Loss) Per Common Share $ (0.22) $ (0.11)
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1996 AND 1995
1996 1995
(UNAUDITED) (UNAUDITED)
Real Estate Operations:
Real Estate Revenues:
Sale of real estate $ 136,245 $ 624,899
Rental income 507,834 514,085
Ground lease income 234,000 241,500
Volume based rental income 171,590 164,271
Other income 1,059 14,839
1,050,728 1,559,594
Real Estate Expenses:
Cost of real estate sold 73,027 351,905
Labor, operating and maintenance 250,923 233,051
Depreciation and amortization 90,478 91,170
Taxes other than income taxes 90,000 96,300
Provision for litigation settlement 400,000 0
Bad debt expense 0 0
General and administrative 28,398 23,310
932,826 795,736
Income From Real Estate Operations 117,902 763,858
Art Operations:
Art Revenues:
Sales 0 139,800
Other revenues 0 7,200
0 147,000
8
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1996 AND 1995 (Cont d)
1996 1995
(UNAUDITED) (UNAUDITED)
Art Expenses:
Cost of art sold 0 229,373
Valuation reserve 0 0
Depreciation and amortization 0 0
Selling, general and administrative 11,954 13,611
11,954 242,984
Loss From Art Operations (11,954) (95,984)
General and Administrative Expense (311,688) (296,819)
Write-off due to lease termination 0 0
Income (loss) from operations (205,740) 371,055
Other Income (Expense):
Gain on sale of long-term investments 0 0
Loss on write-down of long-term
investments 0 (113,565)
Interest and other income 2,113 4,841
Interest expense (394,943) (398,281)
(392,830) (507,005)
Gain (Loss) Before Provision for Income
Taxes and Extraordinary Gain (598,570) (135,950)
(Provision) Benefit for Income Taxes 0 0
Net Income (Loss) Before Extraordinary
Gain (598,570) (135,950)
Extraordinary Gain on Retirement of Debt,
(Net of taxes of $0) 0 0
9
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1996 AND 1995 (Cont d)
1996 1995
(UNAUDITED) (UNAUDITED)
Net Income (Loss) (598,570) (135,950)
Preferred Stock Dividend (41,229) (45,305)
Net Income (Loss) Applicable to Common
Shares $ (639,799) $ (181,255)
Per Common Share Amounts:
Gain (Loss) from operations $ (0.15) $ (0.04)
Extraordinary gain on retirement
of debt 0.00 0.00
Net Income (Loss) Per Common Share $ (0.15) $ (0.04)
10
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1996 AND 1995
1996 1995
(UNAUDITED) (UNAUDITED)
Cash Flows from Operating Activities:
Net income (loss) $ (825,424) $ (306,488)
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 400,000 0
Extraordinary gain on retirement of
debt 0 0
Depreciation and amortization 290,915 289,458
Gain on sale of real estate (380,112) (302,963)
Deferred tax provision 0 0
Loss on write-down of long-term
investments 0 113,565
Gain from sale of long-term investments 0 0
Valuation reserve-art inventory 0 0
Changes in Assets and Liabilities:
Receivables, net (16,493) 275,000
Art inventory, net 214,164 265,597
Prepaid expenses and other, net 413,816 (129,357)
Payables and accrued expenses, net (427,708) (47,104)
Net Cash Provided (Used) by Operating
Activities (330,842) 251,916
11
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 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 612,872 702,512
Capital expenditures (75,630) (36,666)
Net Cash Provided (Used) in Investing
Activities 537,242 665,846
Cash Flows from Financing Activities:
Proceeds from the issuance of long-term
debt $ 0 $ 0
Proceeds (repayment) of short-term
borrowings 0 (498,000)
Repayment of long-term debt obligations (341,725) (395,530)
Net Cash Used by Financing Activities (341,725) (893,530)
Net Increase (Decrease) in Cash (135,325) 24,232
Cash and Cash Equivalents at Beginning of
Period 114,750 33,595
Cash and Cash Equivalents at End of Period $ (20,575) $ 57,827
Note: Canal made federal and state income tax payments of $33,000 and
$16,000, and interest payments of $1,100,000 and $1,020,000 in the
nine month periods ended July 31, 1996 and 1995, respectively.
12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1995 (AUDITED) AND
FOR THE NINE MONTHS ENDED JULY 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 Dividend 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 0 259,845 2,599
Reserve 0 0 0 0
Balance, July 31, 1996 5,313,794 $53,138 2,618,387 $26,184
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 Stock
Dividend 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 (825,424) 0 0
Preferred Stock
Dividend 127,324 (119,494) 0 0
Reserve 0 0 0 0
Balance,July 31, 1996 $26,595,332 ($10,635,611)($1,736,671) ($11,003,545)
13
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 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
J u n e 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, the Company has a judgement in the amount of $400,000
against it associated with recent litigation in Minnesota. 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 two reserves of $400,000 each associated with the
Minnesota judgement and 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 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.
14
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 July
31, 1996 and the results of its operations and its cash flows for the nine
month period ended July 31, 1996. All of the above referenced adjustments
were of a normal recurring nature. Certain information and footnote
d i s closures normally included in financial statements prepared in
a c cordance 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 July 31, 1996 and October 31, 1995.
5. LONG TERM INVESTMENTS
At July 31, 1996, the long-term investments consisted of the
following:
(Thousands of Dollars) July 31, 1996 October 31, 1995
Aggregate market value.......... $ 406 $ 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
15
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, 1996,
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,
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.
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
16
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 $155,000 and
$142,000 on revenues of $109,000 and $255,000 for the nine months ended
July 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 $1,400,000 and $1,600,000 of art
inventory on consignment with third party dealers at July 31, 1996 and
O c tober 31, 1995, respectively. Antiquities and contemporary art
represented 52% ($2,709,000) and 48% ($2,477,000), as compared to 54%
($2,923,000) and 46% ($2,477,000) of total art inventory at April 30, 1996
and October 31, 1995, respectively.
7. Property and Equipment
Included in property and equipment were the cost of buildings of
approximately $5 million at July 31, 1996 and October 31, 1995.
17
8. VALUATION RESERVE
The valuation reserve represents the excess of the additional minimum
pension liability required under the provisions of SFAS No. 87 over the
unrecognized prior service costs of former stockyard employees. Such
excess arose due to the decline in the market value of pension assets
available for the pension benefits of the former employees, which benefits
were frozen at the time the stockyard operations were sold in 1989. The
excess will effectively be expensed over time as actuarial computations of
annual pension cost (made in accordance with SFAS No. 87) recognize the
deficiency that exists.
9. BORROWINGS
At July 31, 1996, substantially all of Canal s real properties, the stock
of certain subsidiaries, the long-term investments and a substantial
portion of its art inventories are pledged as collateral to secure the
following obligations:
July 31, October 31,
1996 1995
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 1998............................. $ 7,480 $ 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.............. 1,327 1,356
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $4............... 409 416
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.. 485 491
Other .................................... 500 500
Total .................................... 11,089 11,430
Less -- current maturities ............... 551 51
Long-term debt ........................... $10,538 $11,379
18
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 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 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
July 31, 1996, this note is classified as a current liability.
19
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Nine Months Ended July 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, the Company has a judgement in the amount of $400,000
against it associated with recent litigation in Minnesota. 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 two reserves of $400,000 each associated with the
Minnesota judgement and 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 decreased by $289,000 or 7% to
$3,548,000 and decreased by $656, 000 or 38% to $1,051,000 for the nine and
three month periods ended July 31, 1996 and 1995, respectively. The 1996
decrease is due primarily to a modest decrease in the sales of real estate
and art during the first nine months of fiscal 1996.
1996 vs. 1995
Canal s operations generated a net loss of $825,000 as compared to a net
loss of $306,000 for the nine month periods ended July 31, 1996 and 1995,
respectively, and a net loss of $599,000 as compared to a net loss of
$136,000 for the three month periods ended July 31, 1996 and 1995,
respectively. Included in the 1996 results are a litigation settlement
accrual in the amount of $400,000 associated with a recent judgement
against the Company in Minnesota, a $155,000 loss from art operations, a
$115,000 increase in interest expense due to the increased rates being
charged to Canal on its outstanding debt and a $55,000 increase in general
and administrative expenses, which were offset to a certain extent by a
$380,000 gain on the sale of real estate.
20
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. Additionally, Canal has continued its program of developing
what was excess stockyard property.
The lessee under the Lease is currently experiencing financial difficulties
and is in default of certain leases it has with the Company for office
space at various locations. The cross default provisions of these leases
puts the lessee in technical default of the Lease. However, the Company is
working with the lessee and expects all arrears due to the Company to be
paid in the coming months.
The Company has been notified by the largest tenant (State of Minnesota) in
its South St. Paul, Minnesota Exchange Building of their intention to
relocate by years end. This tenant represents 50% (approximately $250,000)
of the rental income from this building. While Canal s agents are actively
pursuing replacement tenants for this space, it could take an extended
period to fully release this space which, in the interim, will put
additional stress on Canal s cash flow.
21
Real estate revenues for the nine months ended July 31, 1996 of $3,439,000
accounted for 96.9% of the 1996 revenues as compared to revenues of
$3,581,000 or 93.4% 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 (46.0% and
43.7%), ground lease income (20.4% and 20.4%), volume based rental income
(15.7% and 15.5%) and sale of real estate and other income (17.9% and
20.4%) for the 1996 and 1995 periods, respectively.
Real estate revenues for the three months ended July 31, 1996 of $935,000
accounted for 99.5% of the 1996 revenues as compared to revenues of
$1,600,000 or 91.4% 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 (48.3% and
33.0%), ground lease income (22.3% and 15.5%), volume based rental income
(16.3% and 10.5%) and sale of real estate and other income (13.1% and
41.0%) for the 1996 and 1995 periods, respectively.
Real Estate Expenses
Real estate expenses for the nine months ended July 31, 1996 of $1,933,000
increased by $296,000 (17.5%) from $1,697,000 for the same period in 1995.
Real estate expenses are comprised of labor, operating and maintenance
(36.8% and 39.3%), depreciation and amortization (13.7% and 16.1%) taxes
other than income taxes (13.6% and 17.0%), cost of real estate sold (11.7%
and 23.6%) and general and administrative expenses (23.2% and 4.0%) for the
1996 and 1995 periods, respectively. The 1996 increase is due primarily to
a litigation settlement accrual of $400,000 associated with a recent
judgement against the Company in Minnesota. This was offset to a certain
extent by a $167,000 decrease in the cost of real estate sold as a result
of decreased land sales.
Real estate expenses for the three months ended July 31, 1996 of $933,000
increased by $137,000 (17.2%) from $796,000 for the same period in 1995.
Real estate expenses are comprised of labor, operating and maintenance
(26.9% and 29.3%), depreciation and amortization (9.7% and 11.5%) taxes
other than income taxes (9.7% and 12.1%), cost of real estate sold (7.8%
and 44.2%) and general and administrative expenses (45.9% and 2.9%) for the
1996 and 1995 periods, respectively.
22
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, 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.
23
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 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 a
forced sale of its art inventory in fiscal 1996.
Art Revenues
Art revenues of $109,000 for the nine months ended July 31, 1996
represented a 57.3% decrease from the same period in 1995. Art revenues
are comprised of proceeds from the sale of antiquities and contemporary art
(100.0% and 94.6%) and commission on sale of art owned by third parties
(0.0% and 5.4%) for the 1996 and 1995 periods, respectively.
There were no art sales for the three months ended July 31, 1996 as
compared to sales of $147,000 for the same period in 1995. Art revenues
are comprised of proceeds from the sale of antiquities and contemporary art
(0.0% and 95.1%) and commission on sale of art owned by third parties (0.0%
and 4.9%) for the 1996 and 1995 periods, respectively.
Art Expenses
Art expenses for the nine months ended July 31, 1996 of $264,000 decreased
by $134,000 (33.7%) from $398,000 for the same period in 1995. The 1996
decrease 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 (86.0% and 87.3%) and selling, general and
administrative expenses (14.0% and 12.7%) for the 1996 and 1995 periods,
respectively.
Art expenses for the three months ended July 31, 1996 of $12,000 decreased
by $231,000 from $243,000 for the same period in 1995. The 1996 decrease
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 (0.0% and 94.4%) and selling, general and
administrative expenses (100.0% and 5.6%) for the 1996 and 1995 periods,
respectively.
24
General and Administrative
General and administrative expenses for the nine months ended July 31, 1996
of $949,000 increased somewhat from the $893,000 for the same period in
1995. The major components of general and administrative expenses are
officers salaries (34.1% and 35.1%), rent (9.7% and 4.7%), legal and
professional fees (10.0% and 12.8%), insurance (11.2% and 11.6%) and office
salaries (10.7% and 11.5%) for the 1996 and 1995 periods, respectively.
Canal s New York office space lease provided for four months without rent
commencing February 1, 1995.
General and administrative expenses for the three months ended July 31,
1996 of $312,000 increased somewhat from the $297,000 for the same period
in 1995. The major components of general and administrative expenses are
officers salaries (34.6% and 35.1%), rent (10.4% and 0.0%), legal and
professional fees (10.4% and 3.3%), insurance (11.3% and 11.6%) and office
salaries (10.9% and 12.0%) for the 1996 and 1995 periods, respectively.
Canal s New York office space lease provided for four months without rent
commencing February 1, 1995.
Interest Expense
Interest expense for the nine months ended July 31, 1996 of $1,178,000
increased by $115,000 (10.8%) from $1,063,000 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.
Interest expense for the three months ended July 31, 1996 of $395,000
decreased by $3,000 (0.8%) from $398,000 for the same period in 1995. This
r e flects the reductions in the average balance of long-term debt
outstanding offset to a certain extent by the rising average interest rates
charged to Canal by its lenders.
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.
25
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, the Company has a judgement in the amount of $400,000
against it associated with recent litigation in Minnesota. 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 two reserves of $400,000 each associated with the
Minnesota judgement and 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
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.
26
Net cash generated by operations in the first nine months of fiscal 1996
was a negative $331,000. Cash and cash equivalents decreased by $78,000 in
1996. Substantially all of the proceeds from the sale of real estate of
$613,000 and the reduction of the art inventory of $227,000 was used to
reduce accrued expenses and outstanding debt.
At July 31, 1996 the Company s current liabilities exceeded current assets
by $2.7 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 and a litigation
settlement accrual in the amount of $400,000 associated with a recent
judgement against the Company in Minnesota.
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. The lessee has met all of its obligations under the lease
through July 31, 1996. The lessee under the Lease is currently experiencing
financial difficulties and is in default of certain leases it has with the
Company for office space at various locations. The cross default
provisions of these leases puts the lessee in technical default of the
Lease. However, the Company is working with the lessee and expects all
arrears due to the Company to be paid in the coming months.
The Company has been notified by the largest tenant (State of Minnesota) in
its South St. Paul, Minnesota Exchange Building of their intention to
relocate by years end. This tenant represents 50% (approximately $250,000)
of the rental income from this building. While Canal s agents are actively
pursuing replacement tenants for this space, it could take an extended
period to fully release this space which, in the interim, will put
additional stress on Canal s cash flow.
Management believes that the 1996 cash flow from operations will be
sufficient to support its ongoing operations.
27
PART II
OTHER INFORMATION
28
Item 1: Legal Proceedings:
Pine Valley Meats, Inc. v. Canal Capital Corporation
As more fully discussed in Item 3 of Canal s October 31, 1995 Form 10-K, on
May 5, 1995 an action was commenced against Canal by Pine Valley Meats,
Inc. ( Plaintiff ) in the County Court for Dakota County, Sate of
Minnesota. The lawsuit arises out of the alleged breach by Canal of a
certain cattle walkway agreement (the walkway agreement ) relating to the
passage of cattle over land owned by Canal in South St. Paul, Minnesota.
On May 30 and 31, 1996, damages in favor of the Plaintiff in the amount of
$400,000 (including $50,000 in punitive damages) was awarded in the County
Court of Dakota County, Sate of Minnesota.
Canal is currently reviewing the merits of an appeal in this case.
Additionally, 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.
29
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: September 12, 1996
30
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