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, 1997
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, 1997
Common stock, $0.01 par value 4,326,930
(This document contains 27 pages)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND OCTOBER 31, 1996
JULY 31, OCTOBER 31,
1997 1996
(UNAUDITED) (AUDITED)
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ (36,150) $ 10,632
RESTRICTED CASH AND CASH EQUIVALENTS 470,000 470,000
NOTES AND ACCOUNTS RECEIVABLE 262,419 295,202
ART INVENTORY, NET OF A VALUATION
ALLOWANCE OF $ 500,000 AT JULY 31,
1997 AND OCTOBER 31, 1996, RESPECTIVELY 500,000 500,000
INVESTMENTS 858,009 535,558
PREPAID EXPENSES 217,171 203,238
TOTAL CURRENT ASSETS 2,271,449 2,014,630
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 4,046,937
AND $ 5,753,088 AT JULY 31, 1997 AND
OCTOBER 31, 1996, RESPECTIVELY 6,542,454 7,105,534
ART INVENTORY NON-CURRENT, NET OF
VALUATION ALLOWANCE OF $ 2,000,000
AT JULY 31, 1997 AND OCTOBER 31,
1996, RESPECTIVELY 2,714,352 3,089,088
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 2,640,805 2,938,905
DEFERRED LEASING AND FINANCING COSTS 53,884 92,919
DEPOSITS AND OTHER 232,500 248,132
2,927,189 3,279,956
$14,455,444 $15,489,208
============ ===========
2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND OCTOBER 31, 1996
JULY 31, OCTOBER 31,
1997 1996
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM
DEBT RELATED PARTY $ 360,000 $ 500,000
CURRENT PORTION OF LONG-TERM DEBT 2,719,000 64,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,848,808 1,984,692
ACCRUED LITIGATION SETTLEMENT 450,000 850,000
INCOME TAXES PAYABLE 211,621 27,877
TOTAL CURRENT LIABILITIES 5,589,429 3,426,569
LONG-TERM DEBT, LESS CURRENT PORTION 2,429,610 6,130,769
LONG-TERM DEBT, LESS CURRENT PORTION
-RELATED PARTY 710,000 849,000
3,139,610 6,979,769
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 2,997,900 AND
2,703,299 SHARES ISSUED AND OUTSTANDING
AT JULY 31, 1997 AND OCTOBER 31, 1996,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $ 29,979,000 AND $ 27,032,990
AT JULY 31, 1997 AND OCTOBER 31, 1996
RESPECTIVELY 29,979 27,033
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND OUTSTANDING AT
JULY 31, 1997 AND OCTOBER 31, 1996,
RESPECTIVELY 53,138 53,138
PAID-IN CAPITAL 26,781,294 26,636,939
RETAINED EARNINGS (DEFICIT) (8,514,765) (9,010,999)
LESS-VALUATION RESERVE (1,619,696) (1,619,696)
LESS-986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
5,726,405 5,082,870
$ 14,455,444 $ 15,489,208
============= =============
3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 2,407,000 $ 612,872
RENTAL INCOME 1,224,675 1,581,164
GROUND LEASE INCOME 693,000 702,000
VOLUME BASED RENTAL INCOME 80,750 538,115
OTHER INCOME 12,274 4,609
4,417,699 3,438,760
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 845,661 232,760
LABOR, OPERATING AND MAINTENANCE 628,342 733,586
DEPRECIATION AND AMORTIZATION 277,089 273,670
TAXES OTHER THAN INCOME TAXES 203,100 270,000
PROVISION FOR LITIGATION SETTLEMENT 0 400,000
GENERAL AND ADMINISTRATIVE 81,722 82,648
2,035,914 1,992,664
INCOME FROM REAL ESTATE OPERATIONS 2,381,785 1,446,096
ART OPERATIONS:
ART REVENUES:
SALES 107,850 108,900
OTHER REVENUES 2,982 0
110,832 108,900
ART EXPENSES:
COST OF ART SOLD 378,791 226,581
VALUATION RESERVE 0 0
SELLING, GENERAL AND ADMINISTRATIVE 29,771 36,965
408,562 263,546
LOSS FROM ART OPERATIONS (297,730) (154,646)
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996
Continued ...
1997 1996
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (916,612) $ (948,831)
INCOME (LOSS) FROM OPERATIONS 1,167,443 342,619
OTHER INCOME (EXPENSE):
GAIN (LOSS) ON SALE OF INVESTMENTS 0 0
GAIN (LOSS) ON MARK-TO-MARKET OF
INVESTMENTS 322,451 0
INTEREST & OTHER INCOME 80,491 9,912
INTEREST EXPENSE (624,297) (1,048,955)
INTEREST EXPENSE-RELATED PARTY (113,000) (129,000)
(334,355) (1,168,043)
GAIN (LOSS) BEFORE PROVISION FOR INCOME
TAXES 833,088 (825,424)
PROVISION (BENEFIT) FOR INCOME TAXES (200,000) 0
NET INCOME (LOSS) 633,088 (825,424)
PREFERRED STOCK DIVIDEND (136,854) (119,494)
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES $ 496,234 $ (944,918)
============= ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.11 $ (0.22)
============= ============
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 145,000 $ 136,245
RENTAL INCOME 389,915 507,834
GROUND LEASE INCOME 231,000 234,000
VOLUME BASED RENTAL INCOME 28,341 171,590
OTHER INCOME 3,802 1,059
798,058 1,050,728
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 49,530 73,027
LABOR, OPERATING AND MAINTENANCE 190,544 250,923
DEPRECIATION AND AMORTIZATION 92,643 90,478
TAXES OTHER THAN INCOME TAXES 53,700 90,000
PROVISION FOR LITIGATION SETTLEMENT 0 400,000
GENERAL AND ADMINISTRATIVE 28,065 28,398
414,482 932,826
INCOME FROM REAL ESTATE OPERATIONS 383,576 117,902
ART OPERATIONS:
ART REVENUES:
SALES 90,550 0
OTHER REVENUES 0 0
90,550 0
ART EXPENSES:
COST OF ART SOLD 352,233 0
VALUATION RESERVE 0 0
SELLING, GENERAL AND ADMINISTRATIVE 9,280 11,954
361,513 11,954
LOSS FROM ART OPERATIONS (270,963) (11,954)
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1997 AND 1996
Continued ...
1997 1996
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (296,858) $ (311,688)
INCOME (LOSS) FROM OPERATIONS (184,245) (205,740)
OTHER INCOME (EXPENSE):
GAIN (LOSS) ON SALE OF INVESTMENTS 0 0
GAIN (LOSS) ON MARK-TO-MARKET OF
INVESTMENTS 496,742 0
INTEREST & OTHER INCOME 1,633 2,113
INTEREST EXPENSE (175,864) (352,943)
INTEREST EXPENSE-RELATED PARTY (36,000) (42,000)
286,511 (392,830)
GAIN (LOSS) BEFORE PROVISION FOR INCOME
TAXES 102,266 (598,570)
PROVISION (BENEFIT) FOR INCOME TAXES (200,000) 0
NET INCOME (LOSS) (97,734) (598,570)
PREFERRED STOCK DIVIDEND (47,197) (41,229)
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES $ (144,931) $ (639,799)
============= ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.03) $ (0.15)
============= ============
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 833,088 $ (825,424)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
PROVISION FOR LITIGATION SETTLEMENT (75,000) 400,000
DEPRECIATION AND AMORTIZATION 294,926 290,915
GAIN ON SALES OF REAL ESTATE (1,561,339) (380,112)
GAIN FROM SALE OF INVESTMENTS 0 0
VALUATION RESERVE - ART INVENTORY 0 0
(GAIN )LOSS ON MARK-TO-MARKET OF
INVESTMENTS (322,451) 0
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET 32,783 (16,493)
ART INVENTORY, NET 374,736 214,164
PREPAID EXPENSES AND OTHER, NET (309,857) 413,816
PAYABLES AND ACCRUED EXPENSES, NET (352,140) (427,708)
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (1,085,254) (330,842)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 2,407,000 612,872
PROCEEDS FROM SALE OF INVESTMENTS 0 0
CAPITAL EXPENDITURES (43,369) (75,630)
NET CASH PROVIDED BY INVESTING ACTIVITIES2,363,631 537,242
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 0 0
TRANSFERS TO LONG-TERM 325,000 0
REPAYMENT OF LONG-TERM DEBT OBLI4GATIONS(1,650,159) (341,725)
NET CASH USED BY FINANCING ACTIVITIES (1,325,159) (341,725)
(INCREASE) IN RESTRICTED CASH AND
CASH EQUIVALENTS 0 0
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (46,782) (135,325)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,632 114,750
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ (36,150) $ (20,575)
============ ============
NOTE: Canal made federal and state income tax payments of $16,000 and
$33,000 and interest payments of $737,000 and $1,100,000 in the nine month
periods ended July 31, 1997 and 1996, respectively.
8
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1996 (AUDITED) AND
FOR THE NINE MONTHS ENDED JULY 31, 1997 (UNAUDITED)
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, OCTOBER 31, 1995 5,313,794 $53,138 2,358,542 $23,585
NET INCOME (LOSS) 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 344,757 3,448
RESERVE 0 0 0 0
-------------------- ---------------------
BALANCE, OCTOBER 31, 1996 5,313,794 $53,138 2,703,299 $27,033
NET INCOME (LOSS) 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 294,601 2,946
RESERVE 0 0 0 0
-------------------- ---------------------
BALANCE, JULY 31, 1997 5,313,794 $53,138 2,997,900 $29,979
==================== =====================
RETAINED TREASURY
PAID-IN EARNINGS VALUATION STOCK
CAPITAL DEFICIT RESERVE AT COST
BAL.,OCT.31,1995$26,468,008 ($9,690,693) ($1,736,671) ($11,003,545)
NET INCOME(LOSS) 0 841,733 0 0
PREFERRED STOCK DIV 168,931 (162,039) 0 0
RESERVE 0 0 116,975 0
--------------- ------------- ------------ ------------
BAL.,OCT.31,1996$26,636,939 ($9,010,999) ($1,619,696) ($11,003,545)
NET INCOME(LOSS) 0 633,088 0 0
PREFERRED STOCK DIV 144,355 (136,854) 0 0
RESERVE 0 0 0 0
------------- -------------- ------------ ------------
BAL.,JUL 31,1997$26,781,294 ($8,514,765) ($1,619,696) ($11,003,545)
============= ============== ============= =============
9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 31, 1997
(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 of its
agribusiness related real estate properties located in the Midwest and art
operations.
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. The Company has suffered recurring losses
from operations in six of the last eight years, has a working capital
deficit at July 31, 1997 of approximately $3.4 million, and is involved in
various litigations. A reserve has been provided in the amount of $450,000
associated with the litigation in Minnesota. However, the financial
statements do not include any adjustments that might result from the
resolution of these other uncertainties. The accompanying financial
statements do not include any adjustments relating to the recoverability
a n d classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
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 and its real estate sales 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, sell real estate or that its cost cutting program in itself
will be sufficient to fund operating cash requirements.
10
2. Interim Financial Statements
The interim consolidated financial statements included herein have
been prepared by Canal without audit. In the opinion of Management, the
a c c o mpanying unaudited financial statements of Canal contain all
adjustments necessary to present fairly its financial position as of July
31, 1997 and the results of its operations and its cash flows for the nine
month period ended July 31, 1997. 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, 1996 and the notes thereto which are contained in Canal s
1996 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 1997.
3. Reclassification
Certain prior year amounts have been reclassified to conform to the
current year s presentation.
4. Notes Receivable
Included in the notes and accounts receivable were the current portion
of notes from real estate sales in the amount of $25,000 at July 31, 1997
and October 31, 1996.
5. INVESTMENTS
Canal s investments consisted of the following:
(Thousands of Dollars) July 31, 1997 October 31, 1996
Aggregate market value.......... $ 858 $ 535
Aggregate carrying value........ $ 858 $ 535
Canal recognized unrealized gains on investments of $323,000 and
$55,000 for the nine months ended July 31, 1997 and the year ended October
31, 1996, respectively. Additionally, Canal has investments in the equity
securities
11
of a company in which other entities affiliated with Canal also have made
investments, and which entities together comprise a group for regulatory
reporting purposes. At July 31, 1997, 100% of the market value of
Canal s investments was invested in equity securities of this company 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 this company.
6. ART OPERATIONS
Canal established its art operations in October 1988 by acquiring a
significant inventory for resale of antiquities primarily from the ancient
Mediterranean cultures. In November 1989, Canal expanded its art
operations by entering into a cost and revenue sharing agreement with a New
York City gallery for the exclusive representation of Jules Olitski, a
world renowned artist of contemporary paintings. As part of this agreement
Canal purchased a number of Olitski paintings which it holds for resale.
The representation agreement expired December 1, 1994 and Canal now
operates independently in the marketing of its contemporary art inventory.
Due to general economic conditions and the softness of the art
markets, Canal has not purchased inventory in several years. However,
Canal continues its marketing efforts to sell its existing art inventory
through various consignment agreements and at public auctions. Antiquities
and contemporary art represented 68% ($2,179,089) and 32% ($1,035,263) and
64% ($2,311,825) and 36% ($1,277,263) of total art inventory at July 31,
1997 and October 31, 1996, respectively. Substantially all of the
contemporary art inventory held for resale is comprised of the work of
Jules Olitski.
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 1996 appraisal covered approximately 66% 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 34% 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 1996
12
C a nal recognized a $1,500,000 valuation allowance against its art
inventory, thereby, increasing the total valuation allowance to $2,500,000
as of October 31, 1996 as compared to $1,000,000 and $500,000 at October
31, 1995 and 1994, 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
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 1997.
Canal s art operations have generated operating losses of $298,000 and
$155,000 on revenues of $111,000 and $109,000 for the nine months ended
July 31, 1997 and 1996, respectively. Art sales have resulted primarily
through activities in conjunction with sales of antiquities. Canal s
management believes that through its consignment agreements as well as
other potential distribution outlets Canal will continue to deal in
antiquities and contemporary art.
Inventory on Consignment - The Company had $2,000,000 and $1,268,000
of art inventory on consignment with third party dealers at July 31, 1997
and October 31, 1996, respectively.
7. Property and Equipment
Included in property and equipment were the cost of buildings of
approximately $5 million at July 31, 1997 and October 31, 1996.
13
8. VALUATION RESERVE
The valuation reserve represents the excess of the additional minimum
pension liability required under the provisions of SFAS No. 87 over the
unrecognized prior service costs of former stockyard employees. Such
excess arose due to the decline in the market value of pension assets
available for the pension benefits of the former employees, which benefits
were frozen at
the time the stockyard operations were sold in 1989. The excess will
effectively be expensed over time as actuarial computations of annual
pension cost (made in accordance with SFAS No. 87) recognize the
deficiency that exists.
9. BORROWINGS
At July 31, 1997, substantially all of Canal s real properties, the
stock of certain subsidiaries, the investments and a substantial portion of
its art inventories are pledged as collateral to secure the following
obligations:
July 31, October 31,
1997 1996
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 1998............................. $ 2,655 $ 3,960
Variable rate mortgage notes due
September 15, 1998 - related party....... 710 849
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $17.............. 1,286 1,336
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $4............... 408 414
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.. 475 485
Other Note - Related Party................ 360 500
Other..................................... 325 0
Total .................................... 6,219 7,544
Less -- current maturities ............... 3,079 564
Long-term debt ........................... $ 3,140 $ 6,980
14
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 fiscal 1996, this agreement was
amended to provide for the forgiveness of all additional interest accrued
in the event that the Company meets on a timely basis all of its
obligations under the Note, including the payment of all other principal
and accrued interest on or before May 15, 1998. 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. At July 31, 1997 the
balance due under these notes was $2,655,000 which is classified as a
current liability.
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. At July 31,
1997 the balance due under these notes was $710,000 which is classified as
a long term liability.
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
15
Company to meet its obligations under its secured credit line. On February
14, 1997, these notes were extended to December 31, 1997. The Company
agreed to increase the interest rate to prime (8.50% at July 31, 1997) and
pay down $100,000 no later than March 31, 1997. At July 31, 1997 the
balance due under these notes was $360,000 which is classified as a current
liability.
16
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Nine Months Ended July 31, 1997
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. The Company has suffered recurring losses
from operations in six of the last eight years, has a working capital
deficit at July 31, 1997 of approximately $3.4 million, and is involved in
various litigations. A reserve has been provided in the amount of $450,000
associated with the litigation in Minnesota. However, the financial
statements do not include any adjustments that might result from the
resolution of these other uncertainties. Furthermore, the accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
Canal recognized net income of $633,000 and a net loss of $98,000 for
the nine and three month periods ended July 31, 1997 as compared to net
losses of $825,000 and $599,000 for the same periods in fiscal 1996,
respectively. After recognition of preferred stock dividend payments of
$137,000 and $47,000 for the nine and three month periods ended July 31,
1997 and $119,000 and $41,000 for the same periods in fiscal 1996,
respectively, the results attributable to common stockholders were net
income of $496,000, and a net loss of $145,000 for the nine and three
month periods ended July 31, 1997 as compared to net losses of $950,000 and
$640,000 for the same periods in fiscal 1996, respectively. Included in
the current year results are gains on the sales of real estate of
$1,561,000, a $497,000 gain on the mark-to-market of investments and other
income of $75,000 representing a reduction in the provision for litigation
settlement.
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 $981,000 or
27.7% to $4,529,000 and decreased by $162,000 or 15.4% to $889,000 for the
nine and three month periods ended July 31, 1997, respectively, as compared
to the revenues for the same periods in fiscal 1996. The 1997 increase is
due primarily to a $1,632,000 increase in revenues from the sale of real
estate, offset to a certain extent by a $457,000 reduction in volume based
rental income and a $346,000 decrease in rental income.
17
Real Estate Revenues
Real estate revenues for the nine months ended July 31, 1997 of
$4,418,000 accounted for 97.6% of the year to date revenues as compared to
real estate revenues of $3,439,000 or 96.9% for the same period in 1996.
Real estate revenues are comprised of rental income from Exchange Building
(commercial office space) rentals and other lease income from the rental of
vacant land and certain structures (27.7% and 46.0%), Ground lease income
(15.7% and 20.4%), volume based rental income (1.8% and 15.7%) and sale of
real estate and other income (54.8% and 17.9%) for the nine months ended
July 31, 1997 and 1996, respectively. The 1997 revenue increase is due
primarily to a $1,794,000 increase in revenues from the sale of real
estate, offset to a certain extent by reductions in rental income
($457,000) and volume based rental income ($346,000). The decrease in
rental income is due to the December 1996 loss of the largest tenant (State
of Minnesota) in Canal s South St. Paul, Minnesota Exchange Building as
well as the continued consolidation of other stockyards related tenants.
The decrease in volume based rental income is the result of Canal s
September 1996 sale of the John Morrell property located in Sioux City,
Iowa. The changes in percentages in the year to year comparisons are due
primarily to the significant increase in real estate sales for fiscal 1997.
Real estate revenues for the three months ended July 31, 1997 of
$798,000 accounted for 89.8% of the third quarter revenues as compared to
real estate revenues of $1,051,000 or 100.0% for the same period in 1996.
Real estate revenues are comprised of rental income from Exchange Building
(commercial office space) rentals and other lease income from the rental of
vacant land and certain structures (48.9% and 48.3%), Ground lease income
(28.9% and 22.3%), volume based rental income (3.6% and 16.3%) and sale of
real estate and other income (18.6% and 13.1%) for the three months ended
July 31, 1997 and 1996, respectively.
Real Estate Expenses
Real estate expenses for the nine months ended July 31, 1997 of
$2,036,000 increased by $43,000 (2.2%) from $1,993,000 for the same period
in 1996. Real estate expenses were comprised of labor, operating and
maintenance (30.9% and 36.8%), depreciation and amortization (13.6% and
13.7%), taxes other than income taxes (10.0% and 13.6%), cost of real
estate sold (41.5% and 11.7%) and general and administrative expenses (4.0%
and 23.2%) for the nine months ended July 31, 1997 and 1996, respectively.
The 1997 increase in real estate expenses is due primarily to the $613,000
increase in cost of real estate sales offset by a $400,000 reduction in
provision for litigation settlement. The percentage variations in year to
year comparison is also due primarily to the increase in the cost of real
estate sold for fiscal 1997.
18
Real estate expenses for the three months ended July 31, 1997 of
$414,000 decreased by $518,000 (55.6%) from $933,000 for the same period in
1996. Real estate expenses were comprised of labor, operating and
maintenance (46.0% and 26.9%), depreciation and amortization (22.3% and
9.7%), taxes other than income taxes (13.0% and 9.7%), cost of real estate
sold (11.9% and 7.8%) and general and administrative expenses (6.8% and
45.9%) for the three months ended July 31, 1997 and 1996, respectively.
Included in the 1996 general and administrative expenses is a $400,000
provision for litigation settlement.
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 1996 appraisal covered approximately 66% 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 34% 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 1996 Canal recognized a $1,500,000 valuation
allowance against its art inventory, thereby, increasing the total value
allowance to $2,500,000 as of October 31, 1996 compared to $1,000,000 and
$500,000 at October 31, 1995 and 1994, 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
19
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
from these sales are used to reduce the Company s outstanding debt and
finance current operations. 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 further rescheduling of debt. Some of
these measures were successfully implemented in fiscal 1996. Because of
t h e available alternatives, the Company does not anticipate any
extraordinary losses associated with the art inventory in fiscal 1997.
Art Revenues
Art revenues for the nine months ended July 31, 1997 of $111,000
decreased $2,000 or 1.8% from $109,000 for the same period in 1996. Art
revenues are comprised of proceeds from the sale of antiquities and
contemporary art (97.3% and 100.0%) and commission income on sale of art
owned by third parties (2.7% and 0.0%) for the nine month periods ended
July 31, 1997 and 1996, respectively. The Company s art inventory was
reduced through sales by $375,000 in the first nine months of fiscal 1997.
Art revenues for the three months ended July 31, 1997 of $91,000
increased $91,000 or 100.0% as compared to the same period in 1996. Art
revenues are comprised of proceeds from the sale of antiquities and
contemporary art (100.0% and 0.0%) and commission income on the sale of art
owned by third parties (0.0% and 0.0%) for the three month periods ended
July 31, 1997 and 1996, respectively.
Art Expenses
Art expenses for the nine months ended July 31, 1997 of $409,000
increased by $145,000 (55.0%) from $264,000 for the same period in 1996.
Art expenses (excluding valuation allowances) consisted of the cost of art
sold (92.7% and 86.0%) and selling, general and administrative expenses
(7.3% and 14.0%) for the nine month periods ended July 31, 1997 and 1996,
respectively.
20
Art expenses for the three months ended July 31, 1997 of $362,000
increased by $350,000 from $12,000 for the same period in 1996. Art
expenses (excluding valuation allowances) consisted of the cost of art sold
(97.4% and 0.0%) and selling, general and administrative expenses (2.6% and
100.0%) for the three month periods ended July 31, 1997 and 1996,
respectively.
General and Administrative
General and administrative expenses for the nine months ended July 31,
1997 of $917,000 decreased $32,000 (3.4%) from $949,000 for the same period
in 1996. The major components of general and administrative expenses are
officers salaries (35.3% and 34.1%), rent (9.5% and 9.7%), legal and
professional fees (10.3% and 10.0%), insurance (11.8% and 11.2%) and office
salaries (10.6 and 10.7%) for the nine month periods ended July 31, 1997
and 1996, respectively. The percentage changes in the year to year
comparisons are due primarily to the aggregate decrease in general and
administrative expenses in fiscal 1997.
General and administrative expenses for the three months ended July
31, 1997 of $297,000 decreased $15,000 (4.8%) from $312,000 for the same
period in 1996. The major components of general and administrative
expenses are officers salaries (36.3% and 34.6%), rent (8.8% and 10.4%),
legal and professional fees (10.6% and 10.4%), insurance (12.1% and 11.3%)
and office salaries (10.1% and 10.9%) for the three month periods ended
July 31, 1997 and 1996, respectively.
Gain (loss) on Mark-to-Market of Investments
Canal recognized gains of $322,000 and $497,000 for the nine and three
month periods ended July 31, 1997, respectively, on the mark-to-market of
its investments. There was no similar activity recorded in fiscal 1996.
Interest and Other Income
Interest and other income for the nine months ended July 31, 1997
increased to $80,000 from $10,000 for the same period in 1996. The 1997
results included a $75,000 reversal of an amount previously accrued to
settle certain litigation related to Canal s 1988 sale of property located
in Portland, Oregon.
Interest and other income of $2,000 for the three months ended July
31, 1997 approximated the amount for the same period in 1996.
21
Interest Expense
Interest expense for the nine months ended July 31, 1997 decreased
37.4% to $737,000 as compared to $1,178,000 for the same period in 1996.
The 1997 decrease is due primarily to a $4.8 million reduction in aggregate
debt outstanding at July 31, 1997 as compared to the same period in 1996.
For the most part interest rates on Canal s debt have remained unchanged
for the past 12 months.
Interest expense for the three months ended July 31, 1997 decreased
46.4% to $212,000 as compared to $395,000 for the same period in 1996.
22
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. The Company has suffered recurring losses
from operations in six of the last eight years, has a working capital
deficit at July 31, 1997 of approximately $3.4 million and is involved in
various litigations. A reserve has been provided in the amount of $450,000
associated with the litigation in Minnesota. However, the financial
statements do not include any adjustments that might result from the
resolution of these other uncertainties. Furthermore, the accompanying
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
On May 22, 1995 Canal completed the sale of $20 million face value of
Variable Rate Mortgage Notes, due May 15, 1993. 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 form 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 1996, respectively. In fiscal 1996, this
agreement was amended to provide for the forgiveness of all additional
interest accrued in the event that the Company meets on a timely basis all
of its obligations under the Note, including the payment of all other
principal and accrued interest on or before May 15, 1998. 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.
At July 31, 1997 the balance due under these notes was $2,655,000 which is
classified as a current liability.
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
23
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. At July 31, 1997 the balance due under these notes was
$710,000 which is classified as a long term liability.
Cash and cash equivalents of a negative $36,000 at July 31, 1997
decreased $47,000 from $11,000 at October 31, 1996. Net cash used by
operations in fiscal 1997 was $1,085,000. Substantially all of the 1997
net proceeds from the sale of real estate of $2,407,000 and the proceeds
from the sale of art of $110,000 was used to reduce outstanding debt and
accrued expenses.
During fiscal 1997 Canal reduced its variable rate mortgage notes by
$1,305,000 and other long-term debt by $345,000 for a net 1997 debt
reduction of $1,650,000. This was offset by a transfer to long-term debt
from accounts payable and accrued expenses in the amount of $325,000.
At July 31, 1997 the Company s current liabilities exceeded current
assets by $3.4 million, an increase of $2.0 million from October 31, 1996.
The 1997 increase is due primarily to the reclassification to a current
liability of the variable rate mortgage notes due May 15, 1998 in the
amount of $1.7 million. The only required principal repayments under
Canal s debt agreements for fiscal 1997 will be from the proceeds of the
sale of certain assets (if any) and approximately $0.1 million on various
fixed mortgages.
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 under the Lease is currently
experiencing financial difficulties related primarily to a cattle feeding
and financing business the lessee entered into after purchasing Canal s
stockyard operations. While the payments under the Lease are current, the
lessee was in default under the terms of certain other 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. The Company has reached agreement
with the stockyard operator for repayment of all arrears over the balance
of the lease term. Currently, all payments due under the revised agreement
have been made by the stockyard operator.
Management believes that the 1997 cash flow from operations combined
with the proceeds from the sales of real estate and art will be sufficient
to support its ongoing operations.
24
PART II
OTHER INFORMATION
25
Item 1: Legal Proceedings:
See Item 3 of Canal s October 31, 1996 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.
26
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Canal Capital Corporation
Registrant
Reginald Schauder
Reginald Schauder
Vice President-Finance &
Chief Financial Officer
Date: September 12, 1997
27
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