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, 1998
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, 1998
Common stock, $0.01 par value 4,326,929
(This document contains 25 pages)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND OCTOBER 31, 1997
JULY 31, OCTOBER 31,
1998 1997
(UNAUDITED) (AUDITED)
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ (16,301) $ 28,225
NOTES AND ACCOUNTS RECEIVABLE 723,245 271,891
ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
$ 500,000 AT JULY 31, 1998 AND
OCTOBER 31, 1997, RESPECTIVELY 500,000 500,000
INVESTMENTS 451,584 1,151,358
PREPAID EXPENSES 193,989 199,888
TOTAL CURRENT ASSETS 1,852,517 2,151,362
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $1,615,294
AND $ 2,407,533 AT JULY 31, 1998 AND
OCTOBER 31, 1997, RESPECTIVELY 5,157,808 5,323,177
ART INVENTORY NON-CURRENT, NET OF
VALUATION ALLOWANCE OF $ 1,970,000
AT JULY 31, 1998 AND $2,350,000 AT
OCTOBER 31, 1997, RESPECTIVELY 1,930,608 2,310,857
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 2,728,655 2,843,305
DEFERRED LEASING AND FINANCING COSTS 16,148 39,655
DEPOSITS AND OTHER 174,850 291,787
2,919,653 3,174,747
$11,860,586 $12,960,143
============ ===========
2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND OCTOBER 31, 1997
JULY 31, OCTOBER 31,
1998 1997
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT 98,000 98,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,964,219 1,871,963
INCOME TAXES PAYABLE 80,497 97,995
TOTAL CURRENT LIABILITIES 2,142,716 2,067,958
LONG-TERM DEBT, LESS CURRENT PORTION 2,301,938 2,375,496
LONG-TERM DEBT, LESS CURRENT PORTION-
RELATED PARTY 3,396,000 3,675,000
5,697,938 6,050,496
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 3,411,681 AND
2,977,900 SHARES ISSUED AND OUTSTANDING
AT JULY 31, 1998 AND OCTOBER 31, 1997,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $ 34,116,810 AND $ 29,979,000
AT JULY 31, 1998 AND OCTOBER 31, 1997
RESPECTIVELY 34,117 29,979
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND 4,326,929 SHARES OUTSTANDING
AT JULY 31, 1998 AND OCTOBER 31, 1997,
RESPECTIVELY 53,138 53,138
PAID-IN CAPITAL 26,985,046 26,826,293
RETAINED EARNINGS (DEFICIT) (10,479,209) (10,194,335)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
VALUATION RESERVE (1,485,641) (1,485,641)
UNREALIZED GAIN ON INVESTMENTS AVAILABLE
FOR SALE (83,974) 615,800
4,019,932 4,841,689
$ 11,860,586 $ 12,960,143
============= =============
3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
1998 1997
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 534,439 $ 2,407,000
RENTAL INCOME 1,071,870 1,224,675
GROUND LEASE INCOME 693,000 693,000
VOLUME BASED RENTAL INCOME 96,394 80,750
OTHER INCOME 380,532 12,274
2,776,235 4,417,699
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 210,751 845,661
LABOR, OPERATING AND MAINTENANCE 647,663 628,342
DEPRECIATION AND AMORTIZATION 164,406 277,089
TAXES OTHER THAN INCOME TAXES 151,200 203,100
GENERAL AND ADMINISTRATIVE 67,703 81,722
1,241,723 2,035,914
INCOME FROM REAL ESTATE OPERATIONS 1,534,512 2,381,785
ART OPERATIONS:
ART REVENUES:
SALES 206,200 107,850
OTHER REVENUES 0 2,982
206,200 110,832
ART EXPENSES:
COST OF ART SOLD 761,453 378,791
VALUATION RESERVE (380,000) 0
SELLING, GENERAL AND ADMINISTRATIVE 29,884 29,771
411,337 408,562
LOSS FROM ART OPERATIONS (205,137) (297,730)
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
Continued ...
1998 1997
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (846,310) $ (916,612)
INCOME (LOSS) FROM OPERATIONS 483,065 1,167,443
OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 933 80,491
INTEREST EXPENSE (285,634) (624,297)
INTEREST EXPENSE-RELATED PARTY (331,000) (113,000)
OTHER EXPENSE 0 (200,000)
(615,701) (856,806)
GAIN (LOSS) BEFORE PROVISION FOR INCOME
TAXES (132,636) 310,637
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET INCOME (LOSS) (132,636) 310,637
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED LOSS ON INVESTMENTS
AVAILABLE FOR SALE (699,774) 322,451
COMPREHENSIVE (LOSS) INCOME $ (832,410) $ 633,088
============= ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.23) $ 0.11
============= ============
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JULY 31, 1998 AND 1997
1998 1997
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 283,439 $ 145,000
RENTAL INCOME 346,025 389,915
GROUND LEASE INCOME 231,000 231,000
VOLUME BASED RENTAL INCOME 30,903 28,341
OTHER INCOME 376,794 3,802
1,268,161 798,058
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 150,680 49,530
LABOR, OPERATING AND MAINTENANCE 208,927 190,544
DEPRECIATION AND AMORTIZATION 53,087 92,643
TAXES OTHER THAN INCOME TAXES 50,400 53,700
GENERAL AND ADMINISTRATIVE 22,191 28,065
485,285 414,482
INCOME FROM REAL ESTATE OPERATIONS 782,876 383,576
ART OPERATIONS:
ART REVENUES:
SALES 0 90,550
OTHER REVENUES 0 0
0 90,550
ART EXPENSES:
COST OF ART SOLD 0 352,233
VALUATION RESERVE 0 0
SELLING, GENERAL AND ADMINISTRATIVE 9,770 9,280
9,770 361,513
LOSS FROM ART OPERATIONS (9,770) (270,963)
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JULY 31, 1998 AND 1997
Continued ...
1998 1997
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (283,281) $ (296,858)
INCOME (LOSS) FROM OPERATIONS 489,825 (184,245)
OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 2 1,633
INTEREST EXPENSE (64,571) (175,864)
INTEREST EXPENSE-RELATED PARTY (129,000) (36,000)
OTHER EXPENSE 0 (200,000)
(193,569) (410,231)
GAIN (LOSS) BEFORE PROVISION FOR INCOME
TAXES 296,256 (594,476)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET INCOME (LOSS) 296,256 (594,476)
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED LOSS ON INVESTMENTS
AVAILABLE FOR SALE (361,267) 496,742
COMPREHENSIVE LOSS $ (65,011) $ (97,734)
============= ============
NET INCOME (LOSS) PER COMMON SHARE $ (0.03) $ (0.03)
============= ============
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1998 AND 1997
1998 1997
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ (132,636) $ 310,637
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
PROVISION FOR LITIGATION SETTLEMENT 0 (75,000)
DEPRECIATION AND AMORTIZATION 182,127 294,926
GAIN ON SALES OF REAL ESTATE (323,688) (1,561,339)
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET (451,354) 32,783
ART INVENTORY, NET 380,294 374,736
PREPAID EXPENSES AND OTHER, NET 20,623 (109,857)
PAYABLES AND ACCRUED EXPENSES, NET 74,758 (352,140)
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (249,876) (1,085,254)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 534,439 2,407,000
PROCEEDS FROM SALE OF INVESTMENTS 0 0
CAPITAL EXPENDITURES (51,531) (43,369)
NET CASH PROVIDED
BY INVESTING ACTIVITIES 482,908 2,363,631
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 75,000 0
TRANSFERS TO LONG-TERM 0 325,000
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (352,558) (1,650,159)
NET CASH USED BY FINANCING ACTIVITIES (277,558) (1,325,159)
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (44,526) (46,782)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 28,225 10,632
CASH AND CASH EQUIVALENTS AT END OF YEAR $ (16,301) $ (36,150)
============ ============
NOTE: Canal made federal and state income tax payments of $17,000 and
$16,000 and interest payments of $617,000 and $737,000 in the nine month
periods ended July 31, 1998 and 1997, respectively.
8
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1997 (AUDITED) AND
FOR THE NINE MONTHS ENDED JULY 31, 1998 (UNAUDITED)
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
BAL., OCT 31,1996 5,313,794 $53,138 2,703,299 $27,033 $26,636,939
NET INCOME (LOSS) 0 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 294,601 2,946 189,354
MINIMUM PEN. LIAB. ADJ. 0 0 0 0 0
UNREALIZED GAIN ON
INVESTMENTS 0 0 0 0 0
-------------------- --------------------- -----------
BAL., OCT 31,1997 5,313,794 53,138 2,997,900 29,979 26,826,293
NET INCOME (LOSS) 0 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 413,781 4,138 158,753
MINIMUM PEN. LIAB. ADJ 0 0 0 0 0
UNREALIZED GAIN ON
INVESTMENTS 0 0 0 0 0
-------------------- --------------------- ----------
BAL., JUL 31,1998 5,313,794 $53,138 3,411,681 $34,117 $26,985,046
==================== ===================== ============
RETAINED -COMPREHENSIVE (LOSS) INCOME- TREASURY
EARNINGS VALUATION UNREALIZED STOCK
DEFICIT RESERVE GAIN ON INV. AT COST
BAL., OCT 31,1996($9,010,999) ($1,619,696) $ 0 ($11,003,545)
NET INCOME (LOSS)(1,001,483) 0 0 0
PFD STOCK DIV. (181,853) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 134,055 0 0
UNREALIZED GAIN ON INV. 0 0 615,800 0
------------- ------------- ------------ ------------
BAL., OCT 31,1997(10,194,335) ($1,485,641) 615,800 (11,003,545)
NET INCOME (LOSS) (132,636) 0 0 0
PFD STOCK DIV. (152,238) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED GAIN ON INV. 0 0 (699,774) 0
------------- -------------- ------------ ------------
BAL.,JUL 31,1998($10,479,209) ($1,485,641) $ (83,974) ($11,003,545)
============= ============== ============= =============
9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 31, 1998
(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, consisting mainly of the acquisition of art for resale.
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 seven of the last nine years and is involved in
litigation with a major tenant in Fargo, North Dakota. The financial
statements do not include any adjustments that might result from the
resolution of these other uncertainties. Additionally, 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 continues to closely monitor and reduce where possible its
overhead expenses and plans to continue to reduce the level of its art
inventories to enhance current cash flows. Management believes that its
income from operations combined with 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
income from operations combined with its cost cutting program in itself
will be sufficient to fund operating cash requirements.
2. Reclassification
Certain prior year amounts have been reclassified to conform to the
current year s presentation.
10
3. 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, 1998 and the results of its operations and its cash flows for the nine
month period ended July 31, 1998. 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, 1997 and the notes thereto which are contained in Canal s
1997 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 1998.
4. Property and Equipment
Included in property and equipment were the cost of buildings of
approximately $3 million at July 31, 1998 and October 31, 1997.
5. Notes Receivable
Included in the notes and accounts receivable were the current portion
of notes from real estate sales in the amount of $25,000 at July 31, 1998
and October 31, 1997.
6. INVESTMENTS AVAILABLE FOR SALE
At July 31, 1998 the investments available for sale consisted of the
following:
July 31, October 31,
($ 000's Omitted) 1998 1997
Aggregate market value................. $ 452 $1,151
Aggregate carrying value............... $ 452 $1,151
Canal has an investment in a company in which it, together with other
affiliated entities, comprise a reporting group for regulatory purposes.
It is important to note that it is the group (as defined) that can
exercise
11
influence over this company, not Canal. Accordingly, this investment does
not qualify for consolidation as a method of reporting. Certain of Canal s
officers and directors also serve as officers and/or directors of this
company. This investment (in which Canal s ownership interest is
approximately 2%) is carried at market value and the realized gains or
losses, if any, are recognized in operating results. Any unrealized gains
or losses are reflected in Stockholders Equity.
For the nine months ended July 31, 1998 Canal recognized an unrealized
loss on investments available for sale of $700,000. Additionally, in
fiscal 1997 Canal recognized an unrealized gain on investments available
for sale of $616,000, both of which are shown in a separate component of
Stockholders Equity.
7. 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
with a book value of approximately $1,000,000 at July 31, 1998. 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 57% ($1,395,345) and 43% ($1,035,263) and
63% ($1,775,594) and 37% ($1,035,263) of total art inventory at July 31,
1998 and October 31, 1997, 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. The amount classified
as current represents management s best estimate of the amount of
inventory that will be sold in this market.
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. Canal has its art inventory appraised by an independent
appraiser
12
annually. The 1997 appraisal covered approximately 49% 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 51% 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 1997 Canal recognized a $350,000 valuation allowance against
its art inventory, thereby, increasing the total valuation allowance to
$2,850,000 as of October 31, 1997 as compared to $2,500,000 and $1,000,000
at October 31, 1996 and 1995, respectively. These estimates were based in
part on the Company s history of losses sustained on art sales in the
current and previous years. Management believes that the provision
discussed above has effectively reduced inventory to its estimated net
realizable value.
As of October 31, 1997 the valuation allowance of $2,850,000
represented a 50% reduction in the carrying value of the Company s art
inventory which management believes approximates its net realizable
value. Accordingly, the Company will, on a prospective basis, use the
adjusted carrying value for sales, thereby, reducing the valuation reserve
(proportionately) as the inventory is sold. This policy resulted in a
reduction in the valuation allowance of $380,000 on sales of art with an
historic cost of $761,000 in the first nine months of fiscal 1998.
Canal s art operations have generated operating losses of $205,000 and
$298,000 (net of a fiscal 1998 decrease in the valuation allowance of
$380,000) on revenues of $206,000 and $111,000 for the nine months ended
July 31, 1998 and 1997, respectively. It is the Company s policy to use
the adjusted carrying value for sales, thereby reducing the valuation
reserve (proportionately) as the inventory is sold. 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.
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. Some of these measures were successfully implemented
in fiscal 1997.
Inventory on Consignment - The Company had $1,500,000 and $1,683,000
of art inventory on consignment with third party dealers at July 31, 1998
and October 31, 1997, respectively. The price at which pieces are consigned
is usually in line with appraisals and above the cost of the piece.
13
8. BORROWINGS
At July 31, 1998, 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,
1998 1997
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 2001 - related party............ $ 3,396 $ 0
Variable rate mortgage notes due
May 15, 1998............................. 0 $ 2,655
Variable rate mortgage notes due
September 15, 1998 - related party....... 0 700
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $17.............. 1,213 1,266
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $5............... 398 405
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.. 467 477
Other Note - Related Party................ 0 320
Other Note................................ 322 325
Total .................................... 5,796 6,148
Less -- current maturities ............... 98 98
Long-term debt ........................... $ 5,698 $ 6,050
14
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay
in full the Company s variable rate mortgage notes due May 15, 1998
($2,605,000), its variable rate mortgage notes due September 15, 1998
($700,000) and two notes which were due December 31, 1997 ($320,000) plus
accrued interest thereon. The purchasers of these notes included certain
entities controlled by the Company s Chairman, the Company s Chief
Executive Officer and members of their families. The variable rate
mortgage notes issued have essentially the same terms and conditions as the
variable rate mortgage notes which were repaid. These notes carry interest
at the highest of four variable rates, determined on a quarterly basis.
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
approximately three percent per annum. As a result of the refinancing all
of the debt that was repaid on January 8, 1998 is classified as long term
debt-related party. At July 31, 1998 the balance due under these notes was
$3,396,000.
9. 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.
15
Management s Discussion and Analysis
Of Results of Operations and Financial Condition
For the Nine Months Ended July 31, 1998
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 seven of the last nine years and is involved in
litigation with a major tenant in Fargo, North Dakota. The financial
statements do not include any adjustments that might result from the
resolution of these other uncertainties. Additionally, 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 a net loss of $133,000 and net income of $296,000 for
the nine and three month periods ended July 31, 1998 as compared to net
income of $311,000 and a net loss of $594,000 for the same periods in
fiscal 1997, respectively. After recognition of unrealized losses on
investments held for sale of $700,000 and $361,000 for the nine and three
month periods ended July 31, 1998 and unrealized gains on investments held
for sale of $322,000 and $497,000 for the same periods in fiscal 1997,
respectively, the Company recognized comprehensive losses of $832,000 and
$65,000 for the nine and three month periods ended July 31, 1998 as
compared to comprehensive income of $633,000 and a comprehensive loss of
$98,000 for the same periods in fiscal 1997, respectively. Further, after
recognition of preferred stock dividend payments of $152,000 and $48,000
for the nine and three month periods ended July 31, 1998 and $137,000 and
$47,000 for the same periods in fiscal 1997, respectively, the Company
recognized losses applicable to common stockholders of $984,000 ($0.23 per
common share) and $113,000 ($0.03 per common share) for the nine and three
month periods ended July 31, 1998 as compared to income applicable to
common stockholders of $496,000 ($0.11 per common share) and a loss
applicable to common stockholders of $145,000 ($0.03 per common share) for
the same periods in fiscal 1997, respectively. Included in the 1998
results was the $700,000 unrealized loss on investments held for sale and a
$205,000 loss from art operations, while the 1997 results included gains on
t h e sales of real estate of $1,561,000, other income of $75,000
representing a reduction in the provision for litigation settlement and a
$322,000 unrealized gain on investments held for sale.
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 $1,546,000 or
34.1% to $2,982,000 and increased by $380,000 or 42.7% to $1,268,000 for
the nine and three month periods ended July 31, 1998, respectively, as
compared to the revenues for
16
the same periods in fiscal 1997. The 1998 decrease is due primarily to a
$1,873,000 decrease in revenues from the sale of real estate, offset to a
certain extent by a gain on insurance proceeds of $375,000 related to a
fire in Sioux City, Iowa and by a $195,000 increase in art revenues.
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 seven of the last nine years, and is involved in
litigation with a major tenant in Fargo, North Dakota. The financial
statements do not include any adjustments that might result from the
resolution of these other uncertainties. Additionally, 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 January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay
in full the Company s variable rate mortgage notes due May 15, 1998
($2,605,000), its variable rate mortgage notes due September 15, 1998
($700,000) and two notes which were due December 31, 1997 ($320,000) plus
accrued interest thereon. The purchasers of these notes included certain
entities controlled by the Company s Chairman, the Company s Chief
Executive Officer and members of their families. The variable rate
mortgage notes issued have essentially the same terms and conditions as the
variable rate mortgage notes which were repaid. These notes carry interest
at the highest of four variable rates, determined on a quarterly basis.
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
approximately three percent per annum. As a result of the refinancing all
of the debt that was repaid on January 8, 1998 is classified as long term
debt-related party. At July 31, 1998 the balance due under these notes was
$3,396,000.
Cash and cash equivalents of a negative $16,000 at July 31, 1998
decreased $44,000 from $28,000 at October 31, 1997. Net cash used by
operations in fiscal 1998 was $250,000. Substantially all of the 1998 net
proceeds from the sale of real estate and the proceeds from the sale of art
was used to reduce outstanding debt and accrued expenses.
17
During fiscal 1998 Canal reduced its variable rate mortgage notes by
$279,000 and other long-term debt by $74,000 for a net 1998 debt reduction
of $353,000.
At July 31, 1998 the Company s current liabilities exceeded current
assets by $0.3 million, as compared to current assets exceeding current
liabilities by $0.1 million at October 31, 1997. The only required
principal repayments under Canal s debt agreements for fiscal 1998 will be
from the proceeds of the sale of certain assets (if any) and approximately
$0.1 million on various fixed mortgages.
Canal continues to closely monitor and reduce where possible its
overhead expenses and plans to continue to reduce the level of its art
inventories to enhance current cash flows. Management believes that its
income from operations combined with 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
income from operations combined with its cost cutting program in itself
will be sufficient to fund operating cash requirements.
Real Estate Revenues
Real estate revenues for the nine months ended July 31, 1998 of
$2,776,000 accounted for 93.1% of the year to date revenues as compared to
real estate revenues of $4,418,000 or 97.6% for the same period in 1997.
Real estate revenues are comprised of rental income from Exchange Building
(commercial office space) rentals and other lease income form the rental of
vacant land and certain structures (38.6% and 27.7%), ground lease income
(25.0% and 15.7%), volume based rental income (3.5% and 1.8%) and sale of
real estate and other income (32.9% and 54.8%) for the nine months ended
July 31, 1998 and 1997, respectively. The 1998 revenue decrease is due
primarily to a $1,873,000 decrease in revenues from the sale of real estate
and a reduction in rental income of $153,000. 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
changes in percentages in the year to year comparisons are due primarily to
the significant decrease in real estate sales for fiscal 1998.
Real estate revenues for the three months ended July 31, 1998 of
1,268,000 accounted for 100.0% of the second quarter revenues as compared
to real estate revenues of $798,000 or 89.8% for the same period in 1997.
Real estate revenues are comprised of rental income from Exchange Building
(commercial office space) rentals and other lease income from the rental of
18
vacant land and certain structures (27.3% and 48.9%), ground lease income
(18.2% and 28.9%), volume based rental income (2.4% and 3.6%) and sale of
real estate and other income (52.1% and 18.6%) for the three months ended
July 31, 1998 and 1997, respectively. The percentage variations in the year
to year comparisons are due primarily to the decrease in real estate sales
for fiscal 1998.
Real Estate Expenses
Real estate expenses for the nine months ended July 31, 1998 of
$1,242,000 decreased by $794,000 (39.0%) from $2,036,000 for the same
period in 1997. Real estate expenses were comprised of labor, operating
and maintenance (52.2% and 30.9%), depreciation and amortization (13.2% and
13.6%), taxes other than income taxes (12.2% and 10.0%), cost of real
estate sold (17.0% and 41.5%) and general and administrative expenses (5.4%
and 4.0%) for the nine months ended July 31, 1998 and 1997, respectively.
The 1998 decrease in real estate expenses is due primarily to the $635,000
decrease in cost of real estate sales. The percentage variations in year
to year comparison is also due primarily to the decrease in the cost of
real estate sold for fiscal 1998.
Real estate expenses for the three months ended July 31, 1998 of
$485,000 increased by $71,000 (17.1%) from $414,000 for the same period in
1997. Real estate expenses were comprised of labor, operating and
maintenance (43.1% and 46.0%), depreciation and amortization (10.9% and
22.3%), taxes other than income taxes (10.4% and 13.0%), cost of real
estate sold (31.1% and 11.9%) and general and administrative expenses (4.5%
and 6.8%) for the three months ended July 31, 1998 and 1997, respectively.
The percentage variations in year to year comparisons are also due to the
decrease in the cost of real estate sold for fiscal 1998.
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. The
amount classified as current represents management s best estimate of the
amount of inventory that will be sold in this market.
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. Canal has its art inventory appraised by an independent
appraiser annually. The fiscal 1997 appraisal covered approximately
49% of the
19
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 51% of the inventory was estimated by management based in
part on operating history and in part on the results of the independent
appraisals done. The price at which pieces are consigned is usually in line
with appraisals and above the cost of the piece.
In fiscal 1997 Canal recognized a $350,000 valuation allowance against
its art inventory, thereby, increasing the total value allowance to
$2,850,000 as of October 31, 1997 compared to $2,500,000 and $1,000,000 at
October 31, 1996 and 1995, 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. 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.
As of October 31, 1997 the valuation allowance of $2,850,000
represented a 50% reduction in the carrying value of the Company s art
inventory which management believes approximates its net realizable
value. Accordingly, the Company will, on a prospective basis, use the
adjusted carrying value for the cost of sales, thereby, reducing the
valuation reserve (proportionately) as the inventory is sold. This policy
resulted in a first quarter reduction in the valuation allowance of
$380,000 on sales of art with an historic cost of $761,000.
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 1997.
Art Revenues
Art revenues for the nine months ended July 31, 1998 of $206,000
increased $95,000 from $111,000 for the same period in 1997. Art revenues
are comprised of proceeds from the sale of antiquities and contemporary art
20
(100.0% and 97.3%) and commission income on sale of art owned by third
parties (0.0% and 2.7%) for the nine month periods ended July 31, 1998 and
1997, respectively. The Company s art inventory was reduced through sales
by $381,000 in the first nine months of fiscal 1998.
Art revenues for the three months ended July 31, 1998 of zero
decreased $91,000 from $91,000 for the same period in 1997. Art revenues
are comprised of proceeds from the sale of antiquities and contemporary art
(0.0% 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 July 31, 1998 and
1997, respectively.
Art Expenses
Art expenses for the nine months ended July 31, 1998 of $411,000
increased by $2,000 from $409,000 for the same period in 1997. Art
expenses (net of a valuation allowance of $380,000 in fiscal 1998)
consisted of the cost of art sold (92.7% and 92.7%) and selling, general
and administrative expenses (7.3% and 7.3%) for the nine month periods
ended July 31, 1998 and 1997, respectively.
Art expenses for the three months ended July 31, 1998 of $10,000
decreased by $352,000 from $362,000 for the same period in 1997. Art
expenses consisted of the cost of art sold (net of valuation allowance of
z e r o in fiscal 1998) (0.0% and 97.4%) and selling, general and
administrative expenses (100.0% and 2.6%) for the three month periods ended
July 31, 1998 and 1997, respectively. It is the Company s policy to use
the adjusted carrying value for sales, thereby reducing the valuation
reserve proportionately as the inventory is sold.
General and Administrative
General and administrative expenses for the nine months ended July 31,
1998 of $846,000 decreased $70,000 (7.7%) from $916,000 for the same period
in 1997. The major components of general and administrative expenses are
officers salaries (38.2% and 35.3%), rent (8.7% and 9.5%), legal and
professional fees (8.5% and 10.3%), insurance (12.2% and 11.8%), and office
salaries (9.9% and 10.6%) for the nine month periods ended July 31, 1998
and 1997, respectively. The percentage changes in the year to year
comparisons are due primarily to the aggregate decrease in general and
administrative expenses in fiscal 1998.
General and administrative expenses for the three months ended July
31, 1998 of $283,000 decreased $14,000 (4.6%) from $297,000 for the same
period in 1997. The major components of general and administrative
expenses are officers salaries (38.1% and 36.3%), rent (9.0% and 8.8%),
legal and professional fees (8.5% and 10.6%), insurance (12.2% and 12.1%)
and office salaries (9.9% and 10.1%) for the three month periods ended July
31, 1998 and 1997, respectively.
21
Interest and Other Income
Interest and other income for the nine months ended July 31, 1998
decreased to $1,000 from $80,000 for the same period in 1997. 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 July 31, 1998
decreased to zero from $1,600 for the same period in 1997. Interest and
other income is comprised primarily of interest income.
Interest Expense
Interest expense for the nine months ended July 31, 1998 decreased
16.4% to $617,000 as compared to $737,000 for the same period in 1997. The
1998 decrease is due primarily to a reduction in aggregate debt outstanding
at July 31, 1998 as compared to the same period in 1997. 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, 1998 decreased
8.6% to $194,000 as compared to $212,000 for the same period in 1997. The
1998 decrease is due primarily to the decrease in aggregate debt
outstanding.
22
PART II
OTHER INFORMATION
23
Item 1: Legal Proceedings:
See Item 3 of Canal s October 31, 1997 Form 10-K.
Item 2 and 3:
Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
None.
Item 5: Other Information:
None.
Item 6: Exhibits and Reports on Form 8-K:
(A) Not applicable.
(b) No reports on Form 8-K have been filed during the
quarter
for which the report is filed.
24
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Canal Capital Corporation
Registrant
Reginald Schauder
Vice President-Finance &
Chief Financial Officer
Date: September 11, 1998
25
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