FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the quarterly period ended April 30, 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 May 31, 1997
Common stock, $0.01 par value 4,326,930
(This document contains 27 pages)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND OCTOBER 31, 1996
APRIL 30, OCTOBER 31,
1997 1996
(UNAUDITED) (AUDITED)
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 1,475,580 $ 10,632
RESTRICTED CASH AND CASH EQUIVALENTS470,000 470,000
NOTES AND ACCOUNTS RECEIVABLE 195,803 295,202
ART INVENTORY, NET OF A VALUATION
ALLOWANCE OF $ 500,000 AT
APRIL 30, 1997 AND
OCTOBER 31, 1996, RESPECTIVELY 500,000 500,000
INVESTMENTS 361,267 535,558
PREPAID EXPENSES 201,507 203,238
TOTAL CURRENT ASSETS 3,204,157 2,014,630
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 5,948,644
AND $ 5,753,088 AT APRIL 30, 1997 AND
OCTOBER 31, 1996,
RESPECTIVELY 6,632,945 7,105,534
ART INVENTORY NON-CURRENT, NET OF
VALUATION ALLOWANCE OF $ 2,000,000
AT APRIL 30, 1997 AND OCTOBER 31,
1996, RESPECTIVELY 3,063,888 3,089,088
OTHER ASSETS:
PROPERTY HELD FOR
DEVELOPMENT OR RESALE 2,660,604 2,938,905
DEFERRED LEASING AND
FINANCING COSTS 68,112 92,919
DEPOSITS AND OTHER 233,625 248,132
2,962,341 3,279,956
$15,863,331 $15,489,208
============ ===========
2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 1997 AND OCTOBER 31, 1996
APRIL 30, OCTOBER 31,
1997 1996
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM
DEBT RELATED PARTY $ 400,000 $ 500,000
CURRENT PORTION OF LONG-TERM DEBT 64,000 64,000
ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 1,950,975 1,984,692
ACCRUED LITIGATION SETTLEMENT 450,000 850,000
INCOME TAXES PAYABLE 15,457 27,877
TOTAL CURRENT LIABILITIES 2,880,432 3,426,569
LONG-TERM DEBT, LESS
CURRENT PORTION 6,411,663 6,130,769
LONG-TERM DEBT, LESS
CURRENT PORTION-RELATED PARTY 747,000 849,000
7,158,663 6,979,769
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 2,903,702 AND
2,703,299 SHARES ISSUED AND OUTSTANDING
AT APRIL 30, 1997 AND OCTOBER 31, 1996,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $ 29,037,020 AND $ 27,032,990
AT APRIL 30, 1997 AND OCTOBER 31, 1996
RESPECTIVELY 29,037 27,033
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND OUTSTANDING AT
APRIL 30, 1997 AND OCTOBER 31, 1996,
RESPECTIVELY 53,138 53,138
PAID-IN CAPITAL 26,735,136 26,636,939
RETAINED EARNINGS (DEFICIT) (8,369,834) (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)
5,824,236 5,082,870
$ 15,863,331 $ 15,489,208
============= =============
3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 2,262,000 $ 476,627
RENTAL INCOME 834,760 1,073,330
GROUND LEASE INCOME 462,000 468,000
VOLUME BASED RENTAL INCOME 52,409 366,525
OTHER INCOME 8,472 3,550
3,619,641 2,388,032
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 796,131 159,733
LABOR, OPERATING AND MAINTENANCE 437,798 482,663
DEPRECIATION AND AMORTIZATION 184,446 183,192
TAXES OTHER THAN INCOME TAXES 149,400 180,000
PROVISION FOR LITIGATION SETTLEMENT 0 0
GENERAL AND ADMINISTRATIVE 53,657 54,250
1,621,432 1,059,838
INCOME FROM REAL ESTATE OPERATIONS 1,998,209 1,328,194
ART OPERATIONS:
ART REVENUES:
SALES 17,300 108,900
OTHER REVENUES 2,982 0
20,282 108,900
ART EXPENSES:
COST OF ART SOLD 26,558 226,581
VALUATION RESERVE 0 0
SELLING, GENERAL AND ADMINISTRATIVE 20,491 25,011
47,049 251,592
LOSS FROM ART OPERATIONS (26,767) (142,692)
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND 1996
Continued ...
1997 1996
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (619,754) $ (637,143)
INCOME (LOSS) FROM OPERATIONS 1,351,688 548,359
OTHER INCOME (EXPENSE):
GAIN (LOSS) ON SALE OF INVESTMENTS 0 0
GAIN (LOSS) ON MARK-TO-MARKET OF
INVESTMENTS (174,291) 0
INTEREST & OTHER INCOME 78,858 7,799
INTEREST EXPENSE (448,433) (696,012)
INTEREST EXPENSE-RELATED PARTY (77,000) (87,000)
(620,866) (775,213)
GAIN (LOSS) BEFORE PROVISION FOR INCOME
TAXES 730,822 (226,854)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET INCOME (LOSS) 730,822 (226,854)
PREFERRED STOCK DIVIDEND (89,657) (78,265)
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES $ 641,165 $ (305,119)
============= ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.15 $ (0.07)
============= ============
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 1,983,000 $ 0
RENTAL INCOME 397,404 536,912
GROUND LEASE INCOME 231,000 234,000
VOLUME BASED RENTAL INCOME 21,974 162,523
OTHER INCOME 4,378 1,943
2,637,756 935,378
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 676,059 0
LABOR, OPERATING AND MAINTENANCE 220,580 243,939
DEPRECIATION AND AMORTIZATION 92,401 91,779
TAXES OTHER THAN INCOME TAXES 74,700 90,000
PROVISION FOR LITIGATION SETTLEMENT 0 0
GENERAL AND ADMINISTRATIVE 25,963 25,940
1,089,703 451,658
INCOME FROM REAL ESTATE OPERATIONS 1,548,053 483,720
ART OPERATIONS:
ART REVENUES:
SALES 2,200 4,500
OTHER REVENUES 0 0
2,200 4,500
ART EXPENSES:
COST OF ART SOLD 2,200 6,948
VALUATION RESERVE 0 0
SELLING, GENERAL AND ADMINISTRATIVE 10,541 13,843
12,741 20,791
LOSS FROM ART OPERATIONS (10,541) (16,291)
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND 1996
Continued ...
1997 1996
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (306,986) $ (308,503)
INCOME (LOSS) FROM OPERATIONS 1,230,526 158,926
OTHER INCOME (EXPENSE):
GAIN (LOSS) ON SALE OF INVESTMENTS 0 0
GAIN (LOSS) ON MARK-TO-MARKET OF
INVESTMENTS (45,158) 0
INTEREST & OTHER INCOME 1,775 4,238
INTEREST EXPENSE (223,770) (343,954)
INTEREST EXPENSE-RELATED PARTY (36,000) (42,000)
(303,153) (381,716)
GAIN (LOSS) BEFORE PROVISION FOR INCOME
TAXES 927,373 (222,790)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET INCOME (LOSS) 927,373 (222,790)
PREFERRED STOCK DIVIDEND (45,715) (39,924)
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES $ 881,658 $ (262,714)
============= ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.20 $ (0.06)
============= ============
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 730,822 $ (226,854)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
PROVISION FOR LITIGATION SETTLEMENT (75,000) 0
DEPRECIATION AND AMORTIZATION 195,555 194,647
GAIN ON SALES OF REAL ESTATE (1,465,869) (316,894)
GAIN FROM SALE OF INVESTMENTS 0 0
VALUATION RESERVE - ART INVENTORY 0 0
(GAIN )LOSS ON MARK-TO-MARKET OF
INVESTMENTS 174,291 0
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET 99,399 (71,086)
ART INVENTORY, NET 25,200 148,189
PREPAID EXPENSES AND OTHER, NET (78,640) 53,387
PAYABLES AND ACCRUED EXPENSES, NET (446,137) (108,994)
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (840,379) (327,605)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 2,262,000 476,627
PROCEEDS FROM SALE OF INVESTMENTS 0 0
CAPITAL EXPENDITURES (35,567) (43,129)
NET CASH PROVIDED BY
INVESTING ACTIVITIES 2,226,433 433,498
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 OBLIGATIONS (246,106) (250,075)
NET CASH USED BY FINANCING ACTIVITIES 78,894 (250,075)
(INCREASE) IN RESTRICTED CASH AND
CASH EQUIVALENTS 0 0
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 1,464,948 (144,182)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,632 114,750
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 1,475,580 $ (29,432)
============ ============
NOTE: Canal made federal and state income tax payments of $12,000 and
$24,000 and interest payments of $525,000 and $780,000 in the six month
periods ended April 30, 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 SIX MONTHS ENDED APRIL 30, 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 0 200,403 2,004
RESERVE 0 0 0 0
-------------------- ---------------------
BALANCE, APRIL 30, 1997 5,313,794 $53,138 2,903,702 $29,037
==================== =====================
RETAINED TREASURY
PAID-IN EARNINGS VALUATION STOCK
CAPITAL DEFICIT RESERVE AT COST
BALANCE,OCT 31,1995$26,468,008($9,690,693) ($1,736,671) ($11,003,545)
NET INCOME (LOSS) 0 41,733 0 0
PFD STOCK DIVIDEND 168,931 (162,039) 0 0
RESERVE 0 0 116,975 0
---------- ------------ ------------ -----------
BALANCE,OCT31,1996$26,636,939 ($9,010,999) ($1,619,696) ($11,003,545)
NET INCOME (LOSS) 0 730,822 0 0
PFD STOCK DIVIDEND 98,197 (89,657) 0 0
RESERVE 0 0 0 0
---------- ------------- ------------ ----------
BALANCE,APR30,1997$26,735,136 $8,369,834) ($1,619,696) ($11,003,545)
=========== ============= ============= =============
9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED APRIL 30, 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 April 30, 1997 (after reflecting a $1.2
million debt repayment made on May 1, 1997) of approximately $876,000,
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 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.
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
accompanying unaudited financial statements of Canal contain all
adjustments necessary to present fairly its financial position as of
April 30, 1997 and the results of its operations and its cash flows for
the six month period ended April 30, 1997. 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, 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
April 30, 1997 and October 31, 1996.
5. INVESTMENTS
Canal s investments consisted of the following:
(Thousands of Dollars) April 30, 1997 October 31, 1996
Aggregate market value.......... $ 361 $ 535
Aggregate carrying value........ $ 361 $ 535
Canal has investments in the equity securities of a company in which
other entities affiliated with Canal also have made investments, and
which
11
entities together comprise a group for regulatory reporting purposes.
At April 30, 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
a n d 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
t h r ough various consignment agreements and at public auctions.
Antiquities and contemporary art represented 64% ($2,286,625) and 36%
($1,277,263) and 64% ($2,311,825) and 36% ($1,277,263) of total art
inventory at April 30, 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,
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 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
Canal recognized a $1,500,000 valuation allowance against its art
i n ventory, 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 $27,000
and $143,000 on revenues of $20,000 and $109,000 for the six months
ended April 30, 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.
I n ventory on Consignment - The Company had $2,023,000 and
$1,268,000 of art inventory on consignment with third party dealers at
April 30, 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 April 30, 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 April 30, 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:
April 30, October 31,
1997 1996
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 1998............................. $ 3,960 $ 3,960
Variable rate mortgage notes due
September 15, 1998 - related party....... 747 849
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $17.............. 1,303 1,336
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $4............... 410 414
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.. 478 485
Other Note - Related Party................ 400 500
Other..................................... 325 0
Total .................................... 7,623 7,544
Less -- current maturities ............... 464 564
Long-term debt ........................... $ 7,159 $ 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. On May 1, 1997, the Company repaid $1.2 million of these
notes from the proceeds of an April 30, 1997 real estate sale.
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
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 April
30, 1997) and pay down $100,000 no later than March 31, 1997.
16
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Six Months Ended April 30, 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 April 30, 1997 (after reflecting a $1.2
million debt repayment made on May 1, 1997) of approximately $876,000,
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
m i ght 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 $731,000 and $927,000 for the six
and three month periods ended April 30, 1997 as compared to net losses
of $227,000 and $223,000 for the same periods in fiscal 1996,
respectively. After recognition of preferred stock dividend payments of
$90,000 and $46,000 for the six and three month periods ended April 30,
1997 and $78,000 and $40,000 for the same periods in fiscal 1996,
respectively, the results attributable to common stockholders were net
income of $641,000 and $882,000 for the six and three month periods
ended April 30, 1997 as compared to net losses of $305,000 and $263,000
for the same periods in fiscal 1996, respectively. Included in the
current year results are gains on the sales of real estate of
$1,466,000, other income of $75,000 representing a reduction in the
provision for litigation settlement and a $174,000 loss on the mark-to-
market of investments.
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 $1,143,000 or 45.8% to $3,640,000 and by $1,700,000 or
180.9% to $2,640,000 for the six and three month periods ended April 30,
1997, respectively, as compared to the revenues for the same periods in
fiscal 1996. The 1997 increase is due primarily to a $1,785,000
increase in revenues from the sale of real estate, offset to a certain
extent by a $314,000 reduction in volume based rental income, a $239,000
decrease in rental income and a $89,000 reduction in art revenues.
17
Real Estate Revenues
Real estate revenues for the six months ended April 30, 1997 of
$3,620,000 accounted for 99.4% of the year to date revenues as compared
to real estate revenues of $2,388,000 or 95.6% 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 (23.1%
and 45.0%), Ground lease income (12.8% and 19.6%), volume based rental
income (1.4% and 15.4%) and sale of real estate and other income (62.7%
and 20.0%) for the three months ended April 30, 1997 and 1996,
respectively. The 1997 revenue increase is due primarily to a $1,785,000
increase in revenues from the sale of real estate, offset to a certain
extent by reductions in rental income ($239,000) and volume based
rental income ($314,000). 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 April 30, 1997 of
$2,638,000 accounted for 99.9% of the second quarter revenues as
compared to real estate revenues of $935,000 or 99.5% 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 (15.1% and
57.4%), Ground lease income (8.8% and 25.0%), volume based rental income
(0.8% and 17.4%) and sale of real estate and other income (75.3% and
0.2%) for the three months ended April 30, 1997 and 1996, respectively.
Real Estate Expenses
Real estate expenses for the six months ended April 30, 1997 of
$1,621,000 increased by $561,000 (53.0%) from $1,060,000 for the same
period in 1996. Real estate expenses were comprised of labor, operating
and maintenance (27.0% and 45.5%), depreciation and amortization (11.4%
and 17.3%), taxes other than income taxes (9,2% and 17.0%), cost of real
estate sold (49.1% and 15.1%) and general and administrative expenses
(3.3% and 5.1%) for the six months ended April 30, 1997 and 1996,
respectively. The 1997 increase in real estate expenses is due
primarily to the $636,000 increase in cost of real estate sales. 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 April 30, 1997 of
$1,090,000 increased by $638,000 (141.3%) from $452,000 for the same
period in 1996. Real estate expenses were comprised of labor, operating
and maintenance (20.2% and 54.1%), depreciation and amortization (8.5%
and 20.3%), taxes other than income taxes (6.9% and 19.9%), cost of real
estate sold (62.0% and 0.0%) and general and administrative expenses
(2.4% and 5.7%) for the three months ended April 30, 1997 and 1996,
respectively.
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 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 the available alternatives, the Company does not anticipate
any extraordinary losses associated with the art inventory in fiscal
1997.
Art Revenues
Art revenues for the six months ended April 30, 1997 of $20,000
decreased $89,000 or 81.4% from $109,000 for the same period in 1996.
Art revenues are comprised of proceeds from the sale of antiquities and
contemporary art (85.3% and 100.0%) and commission income on sale of art
owned by third parties (14.7% and 0.0%) for the six month periods ended
April 30, 1997 and 1996, respectively. The Company s art inventory was
reduced through sales by $27,000 in the first half of fiscal 1997.
Art revenues for the three months ended April 30, 1997 of $2,000
decreased $2,000 or 51.1% from $5,000 for the same period in 1996. Art
revenues are comprised of proceeds from the sale of antiquities and
contemporary art (100.0% and 100.0%) and commission income on the sale
of art owned by third parties (0.0% and 0.0%) for the three month
periods ended April 30, 1997 and 1996, respectively.
Art Expenses
Art expenses for the six months ended April 30, 1997 of $47,000
decreased by $205,000 (81.3%) from $252,000 for the same period in 1996.
Art expenses (excluding valuation allowances) consisted of the cost of
art sold (56.5% and 90.1%) and selling, general and administrative
expenses (43.5% and 9.9%) for the six month periods ended April 30, 1997
and 1996, respectively.
20
Art expenses for the three months ended April 30, 1997 of $13,000
decreased by $8,000 (38.7%) from $21,000 for the same period in 1996.
Art expenses (excluding valuation allowances) consisted of the cost of
art sold (17.3% and 33.4%) and selling, general and administrative
expenses (82.7% and 66.6%) for the three month periods ended April 30,
1997 and 1996, respectively.
General and Administrative
General and administrative expenses for the six months ended April
30, 1997 of $620,000 decreased $17,000 (2.7%) from $637,000 for the same
period in 1996. The major components of general and administrative
expenses are officers salaries (34.8% and 33.8%), rent (9.8% and 9.3%),
legal and professional fees (10.2% and 9.9%), insurance (11.6% and
11.1%) and office salaries (10.9% and 10.7%) for the six month periods
ended April 30, 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
April 30, 1997 of $307,000 decreased $2,000 (0.5%) from $309,000 for the
same period in 1996. The major components of general and administrative
expenses are officers salaries (35.1% and 34.9%), rent (9.9% and 9.8%),
legal and professional fees (10.3% and 10.2%), insurance (11.7% and
11.4%) and office salaries (10.9% and 11.0%) for the three month periods
ended April 30, 1997 and 1996, respectively.
Gain (loss) on Mark-to-Market of Investments
Canal recognized a losses of $174,000 and $45,000 for the six and
three month periods ended April 30, 1997, respectively, on the mark-to-
market of its investments. There was no similar loss recorded in fiscal
1996.
Interest and Other Income
Interest and other income for the six months ended April 30, 1997
increased to $79,000 from $8,000 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 for the three months ended April 30, 1997
decreased to $2,000 from $4,000 for the same period in 1996.
21
Interest Expense
Interest expense for the six months ended April 30, 1997 decreased
32.9% to $525,000 as compared to $783,000 for the same period in 1996.
The 1997 decrease is due primarily to a $3,558,000 reduction in
aggregate debt outstanding at April 30, 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 April 30, 1997
decreased 32.7% to $260,000 as compared to $386,000 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 April 30, 1997 (after giving effect to a $1.2
million debt repayment made on May 1, 1997) of approximately $826,000
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
m i ght 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.
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.
Cash and cash equivalents of $1,476,000 at April 30, 1997 increased
$1,465,000 from $11,000 at October 31, 1996. The cash balance at April
30, 1997 is a result of closing a $1.9 million dollar real estate sale
on April 30, 1997. As required under its debt agreements, Canal made
principal repayments of $1,240,000 and paid down accounts payable and
accrued expenses by approximately $250,000 in the first week of May
1997. Net cash used by operations in fiscal 1997 was $840,000.
Substantially all of the 1997 net proceeds from the sale of real estate
of $2,262,000 and the proceeds from the sale of art of $20,000 was used
to reduce outstanding debt and accrued expenses.
During fiscal 1997 Canal (excluding the May 1997 payments discussed
above) reduced its variable rate mortgage notes by $100,000 and other
long-term debt by $144,000 for a net 1997 debt reduction of $244,000.
This was offset by a transfer to long-term debt from accounts payable
and accrued expenses in the amount of $325,000.
At April 30, 1997 (after giving effect to a $1.2 million debt
repayment made on May 1, 1997) the Company s current liabilities
exceeded current assets by $876,000, a decrease of $0.5 million from
October 31, 1996. The 1997 decrease is due primarily to a net decrease
in aggregate outstanding debt. 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.
24
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.
25
PART II
OTHER INFORMATION
26
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.
27
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: June 11, 1997
28
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<CASH> 1945580
<SECURITIES> 361267
<RECEIVABLES> 195803
<ALLOWANCES> 0
<INVENTORY> 500000
<CURRENT-ASSETS> 3204157
<PP&E> 12581589
<DEPRECIATION> 5948644
<TOTAL-ASSETS> 15863331
<CURRENT-LIABILITIES> 2880432
<BONDS> 0
0
29037
<COMMON> 53138
<OTHER-SE> 5742061
<TOTAL-LIABILITY-AND-EQUITY> 15863331
<SALES> 0
<TOTAL-REVENUES> 3639923
<CGS> 0
<TOTAL-COSTS> 1668481
<OTHER-EXPENSES> 619754
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 525433
<INCOME-PRETAX> 730822
<INCOME-TAX> 0
<INCOME-CONTINUING> 730822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 730822
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
