FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the quarterly period ended January 31, 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 March 31, 1997
Common stock, $0.01 par value 4,326,930
(This document contains 24 pages)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1997 AND OCTOBER 31, 1996
JANUARY 31, OCTOBER 31,
1997 1996
(UNAUDITED) (AUDITED)
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 4,132 $ 10,632
RESTRICTED CASH AND CASH EQUIVALENTS 470,000 470,000
NOTES AND ACCOUNTS RECEIVABLE 214,094 295,202
ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
$ 500,000 AT JANUARY 31, 1997 AND
OCTOBER 31, 1996, RESPECTIVELY 500,000 500,000
INVESTMENTS 406,425 535,558
PREPAID EXPENSES 165,760 203,238
TOTAL CURRENT ASSETS 1,760,411 2,014,630
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 5,850,632
AND $ 5,753,088 AT JANUARY 31, 1997 AND
OCTOBER 31, 1996, RESPECTIVELY 7,025,299 7,105,534
ART INVENTORY NON-CURRENT, NET OF
VALUATION ALLOWANCE OF $ 2,000,000
AT JANUARY 31, 1997 AND OCTOBER 31,
1996, RESPECTIVELY 3,066,088 3,089,088
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 2,923,605 2,938,905
DEFERRED LEASING AND FINANCING COSTS 78,798 92,919
DEPOSITS AND OTHER 240,879 248,132
3,243,282 3,279,956
$15,095,080 $15,489,208
============ ===========
2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 1997 AND OCTOBER 31, 1996
JANUARY 31, OCTOBER 31,
1997 1996
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM
DEBT RELATED PARTY $ 500,000 $ 500,000
CURRENT PORTION OF LONG-TERM DEBT 64,000 64,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,659,161 1,984,692
ACCRUED LITIGATION SETTLEMENT 775,000 850,000
INCOME TAXES PAYABLE 19,233 27,877
TOTAL CURRENT LIABILITIES 3,017,394 3,426,569
LONG-TERM DEBT, LESS CURRENT PORTION 6,433,716 6,130,769
LONG-TERM DEBT, LESS CURRENT PORTION
-RELATED PARTY 747,000 849,000
7,180,716 6,979,769
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 2,812,484 AND
2,703,299 SHARES ISSUED AND OUTSTANDING
AT JANUARY 31, 1997 AND OCTOBER 31, 1996,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $ 28,124,840 AND $ 27,032,990
AT JANUARY 31, 1997 AND OCTOBER 31, 1996
RESPECTIVELY 28,125 27,033
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND OUTSTANDING AT
JANUARY 31, 1997 AND OCTOBER 31, 1996,
RESPECTIVELY 53,138 53,138
PAID-IN CAPITAL 26,690,440 26,636,939
RETAINED EARNINGS (DEFICIT) (9,251,492) (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)
4,896,970 5,082,870
$ 15,095,080 $ 15,489,208
============= =============
3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 279,000 $ 476,621
RENTAL INCOME 437,356 536,418
GROUND LEASE INCOME 231,000 234,000
VOLUME BASED RENTAL INCOME 30,435 204,002
OTHER INCOME 4,094 1,613
981,885 1,452,654
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 120,072 159,733
LABOR, OPERATING AND MAINTENANCE 217,218 238,724
DEPRECIATION AND AMORTIZATION 92,045 91,413
TAXES OTHER THAN INCOME TAXES 74,700 90,000
PROVISION FOR LITIGATION SETTLEMENT 0 0
GENERAL AND ADMINISTRATIVE 27,694 28,310
531,729 608,180
INCOME FROM REAL ESTATE OPERATIONS 450,156 844,474
ART OPERATIONS:
ART REVENUES:
SALES 15,100 104,400
OTHER REVENUES 2,982 0
18,082 104,400
ART EXPENSES:
COST OF ART SOLD 24,358 219,633
VALUATION RESERVE 0 0
SELLING, GENERAL AND ADMINISTRATIVE 9,950 11,168
34,308 230,801
LOSS FROM ART OPERATIONS (16,226) (126,401)
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1996
Continued ...
1997 1996
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (312,768) $ (328,640)
INCOME (LOSS) FROM OPERATIONS 121,162 389,433
OTHER INCOME (EXPENSE):
GAIN (LOSS) ON SALE OF INVESTMENTS 0 0
GAIN (LOSS) ON MARK-TO-MARKET OF
INVESTMENTS (129,133) 0
INTEREST & OTHER INCOME 77,083 3,561
INTEREST EXPENSE (224,663) (352,058)
INTEREST EXPENSE-RELATED PARTY (41,000) (45,000)
(317,713) (393,497)
GAIN (LOSS) BEFORE PROVISION FOR INCOME
TAXES (196,551) (4,064)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET INCOME (LOSS) (196,551) (4,064)
PREFERRED STOCK DIVIDEND (43,942) (38,341)
NET INCOME (LOSS) APPLICABLE TO COMMON
SHARES $ (240,493) $ (42,405)
============= ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.06) $ (0.01)
============= ============
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 1997 AND 1996
1997 1996
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (195,551) $ (4,064)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
PROVISION FOR LITIGATION SETTLEMENT (75,000) 0
DEPRECIATION AND AMORTIZATION 97,543 110,175
GAIN ON SALES OF REAL ESTATE (158,928) (316,888)
GAIN FROM SALE OF INVESTMENTS 0 0
VALUATION RESERVE - ART INVENTORY 0 0
(GAIN )LOSS ON MARK-TO-MARKET OF
INVESTMENTS 129,133 0
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET 81,108 (74,277)
ART INVENTORY, NET 80,235 206,664
PREPAID EXPENSES AND OTHER, NET (27,957) (226,458)
PAYABLES AND ACCRUED EXPENSES, NET (409,175) (61,295)
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (478,592) (366,143)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 279,000 476,621
PROCEEDS FROM SALE OF INVESTMENTS 0 0
CAPITAL EXPENDITURES (29,908) 0
NET CASH PROVIDED BY INVESTING ACTIVITIES 249,092 476,621
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 (102,000) (236,425)
NET CASH USED BY FINANCING ACTIVITIES 223,000 (236,425)
(INCREASE) IN RESTRICTED CASH AND
CASH EQUIVALENTS 0 0
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (6,500) (125,947)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 10,632 114,750
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 4,132 $ (11,197)
============ ============
NOTE: Canal made federal and state income tax payments of $8,600 and
$21,000 and interest payments of $265,000 and $397,000 in the three month
periods ended January 31, 1997 and 1996, respectively.
6
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1996 (AUDITED) AND
FOR THE THREE MONTHS ENDED JANUARY 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 0 109,185 1,092
RESERVE 0 0 0 0
-------------------- ---------------------
BALANCE, JANUARY 31, 1997 5,313,794 $53,138 2,812,484 $28,125
==================== =====================
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) 0 841,733 0 0
PREFERRED STOCK DIVIDEND168,931 (162,039) 0 0
RESERVE 0 0 116,975 0
------------ ------------- ------------ ------------
BALANCE,OCT.31,1996 $26,636,939 ($9,010,999) ($1,619,696) ($11,003,545)
NET INCOME (LOSS) 0 (196,551) 0 0
PREFERRED STOCK DIVIDEND 53,501 (43,942) 0 0
RESERVE 0 0 0 0
---------- ------------- ------------ ------------
BALANCE,JAN.31,1997$26,690,440 ($9,251,492) ($1,619,696) ($11,003,545)
============= ============== ============= =============
7
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JANUARY 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 January 31, 1997 of approximately $1.3 million, is involved in
various litigations and on December 31, 1996 defaulted on its obligation to
repay a $500,000 note. A reserve has been provided in the amount of
$450,000 associated with the litigation in Minnesota. 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 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.
8
2. Interim Financial Statements
The interim consolidated financial statements included herein have
been prepared by Canal without audit. In the opinion of Management, the
a c c o mpanying unaudited financial statements of Canal contain all
adjustments necessary to present fairly its financial position as of
January 31, 1997 and the results of its operations and its cash flows for
the three month period ended January 31, 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
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 January 31,
1997 and October 31, 1996.
5. INVESTMENTS
Canal s investments consisted of the following:
(Thousands of Dollars) January 31, 1997 October 31, 1996
Aggregate market value.......... $ 406 $ 535
Aggregate carrying value........ $ 406 $ 535
Canal has investments in the equity securities of a company in which
other entities affiliated with Canal also have made investments, and which
9
entities together comprise a group for regulatory reporting purposes. At
January 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 64% ($2,288,825) and 36% ($1,277,263) and
64% ($2,311,825) and 36% ($1,277,263) of total art inventory at January 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
10
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 $16,000 and
$126,000 on revenues of $18,000 and $104,000 for the three months ended
January 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 $1,268,000 of art inventory
on consignment with third party dealers at January 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 January 31, 1997 and October 31, 1996.
11
8. VALUATION RESERVE
The valuation reserve represents the excess of the additional minimum
pension liability required under the provisions of SFAS No. 87 over the
unrecognized prior service costs of former stockyard employees. Such
excess arose due to the decline in the market value of pension assets
available for the pension benefits of the former employees, which benefits
were frozen at the time the stockyard operations were sold in 1989.
The excess will effectively be expensed over time as actuarial
computations of annual pension cost (made in accordance with SFAS
No. 87) recognize the deficiency that exists.
9. BORROWINGS
At January 31, 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:
January 31, 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.............. 1,319 1,336
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $4............... 412 414
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.. 482 485
Other Note - Related Party................ 500 500
Other..................................... 325 0
Total .................................... 7,745 7,544
Less -- current maturities ............... 564 564
Long-term debt ........................... $ 7,181 $ 6,980
12
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 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
13
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 (8.25% at January 31, 1997)
and pay down $100,000 no later than March 31, 1997.
14
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Three Months Ended January 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 January 31, 1997 of approximately $1.3 million, is involved in
various litigations and on December 31, 1996 defaulted on its obligation to
repay a $500,000 note. A reserve has been provided in the amount of
$450,000 associated with the litigation in Minnesota. 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.
Canal recognized a net loss of $197,000 for the three months ended
January 31, 1997 as compared to a net loss of $4,000 for the same period in
1996. After recognition of preferred stock dividend payments of $43,000 in
1997 and $38,000 in 1996, the results attributable to common stockholders
were net losses of $240,000 and $42,000 for the three month periods ended
January 31, 1997 and 1996, respectively.
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 decreased by $557,000 or
35.8% to $1,000,000 for the three month period ended January 31, 1997 as
compared to the same period in 1996. The 1997 decrease is due primarily to
a $198,000 reduction in revenues from the sale of real estate, a $174,000
reduction in volume based rental income, a $99,000 decrease in rental
income and a $86,000 reduction in art revenues.
Real Estate Revenues
Real estate revenues for the three months ended January 31, 1997 of
$982,000 accounted for 98.2% of the first quarter revenues as campared to
real estate revenues of $1,453,000 or 93.3% 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
15
vacant land and certain structures (44.5% and 36.9%), Ground lease income
(23.5% and 16.1%), volume based rental income (3.1% and 14.0%) and sale of
real estate and other income (28.9% and 33.0%) for the three months ended
January 31, 1997 and 1996, respectively. The 1997 revenue decrease is due
primarily to reductions in rental income ($99,000), volume based rental
income ($174,000) and sales of real estate ($198,000). 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 our stockyards related tenants. The
decease 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
percentage valuation in the year to year comparisons are due primarily to
the significant decrease in real estate sales for fiscal 1997.
Real Estate Expenses
Real estate expenses for the three months ended January 31, 1997 of
$532,000 decreased by $76,000 (12.6%) from $608,000 for the same period in
1996. Real estate expenses were comprised of labor, operating and
maintenance (40.9% and 39.3%), depreciation and amortization (17.3% and
15.0%), taxes other than income taxes (14.1% and 14.8%), cost of real
estate sold (22.6% and 26.3%) and general and administrative expenses (5.1%
and 4.6%) for the three months ended January 31, 1997 and 1996,
respectively. The 1997 decrease in real estate expenses is due primarily
to the $40,000 decrease in cost of real estate sales coupled with a
decrease of $15,000 in real estate taxes. The percentage variations in
year to year comparison is also due to the decrease in the cost of real
estate sold for fiscal 1997.
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
16
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 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 three months ended January 31, 1997 of $18,000
decreased $86,000 or 82.7% from $104,000 for the same period in 1996. Art
revenues are comprised of proceeds from the sale of antiquities and
contemporary art (83.5% and 100.0%) and commission income on sale of art
17
owned by third parties (16.5% and 0.0%) for the three month periods ended
January 31, 1997 and 1996, respectively. The Company s art inventory was
reduced through sales by $24,000 in the first quarter of fiscal 1997.
Art Expenses
Art expenses for the three months ended January 31, 1997 of $34,000
decreased by $196,000 (85.1%) from $231,000 for the same period in 1996.
Art expenses (excluding valuation allowances) consisted of the cost of art
sold (71.0% and 95.2%) and selling, general and administrative expenses
(29.0% and 4.8%) for the three month periods ended January 31, 1997 and
1996, respectively.
General and Administrative
General and administrative expenses for the three months ended January
31, 1997 of $313,000 decreased $16,000 (4.8%) from $329,000 for the same
period in 1996. The major components of general and administrative
expenses are officers salaries (34.5% and 32.8%), rent (9.7% and 8.9%),
legal and professional fees (10.1% and 9.6%), insurance (11.5% and 10.7%)
and office salaries (10.8% and 10.3%) for the three month periods ended
January 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.
Gain (loss) on Mark-to-Market of Investments
Canal recognized a loss of $129,000 for the three month period ended
January 31, 1997 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 three months ended January 31, 1997
increased to $77,000 from $4,000 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.
18
Interest Expense
Interest expense for the three months ended January 31, 1997 decreased
33.1% to $266,000 as compared to $397,000 for the same period in 1996. The
1997 decrease is due primarily to a $3,449,000 reduction in aggregate debt
outstanding at January 31, 1997 as compared to January 31, 1996. For the
most part interest rates on Canal s debt have remained unchanged for the
past 12 months.
19
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 January 31, 1997 of approximately $1.3 million, is involved in
various litigations and on December 31, 1996 defaulted on its obligation to
repay a $500,000 note. A reserve has been provided in the amount of
$450,000 associated with the litigation in Minnesota. The financial
statements doe 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.
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
maintain minimum net worth; restricts Canal s ability to pay cash dividends
or repurchase stock; requires principal prepayments to be made only out of
20
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 $4,000 at January 31, 1997 decreased
$7,000 or 63.6% from $11,000 at October 31, 1996. Net cash used by
operations in fiscal 1997 was $479,000. Substantially all of the 1997 net
proceeds from the sale of real estate of $279,000 and the proceeds from the
sale of art of $18,000 was used to reduce outstanding debt and accrued
expenses.
During fiscal 1997 Canal reduced its variable rate mortgage notes by
$102,000 and other long-term debt by $50,000 for a net 1997 debt reduction
of $152,000. This was offset by a transfer to long-term debt from accounts
payable and accrued expenses in the amount of $325,000.
At January 31, 1997 the Company s current liabilities exceeded current
assets by $1.3 million, a decrease of $0.1 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 is 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. 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 explored the availability of alternative tenants for the
stockyard properties covered by the Lease and its confident that should
the need arise thee are adequate alternatives available to the Company
which will protect a substantial portion of the revenue stream from the
Lease.
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.
21
PART II
OTHER INFORMATION
22
Item 1: Legal Proceedings:
See Item 3 of Canal s October 31, 1995 Form 10-K.
Item 2 and 3:
Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
None.
Item 5: Other Information:
None.
Item 6: Exhibits and Reports on Form 8-K:
(A) Not applicable.
(b) No reports on Form 8-K have been filed during the
quarter for which the report is filed.
23
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Canal Capital Corporation
Registrant
Reginald Schauder
Reginald Schauder
Vice President-Finance &
Chief Financial Officer
Date: March 10, 1997
24
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