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, 1999
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, 1999
Common stock, $0.01 par value 4,326,929
(This document contains 24 pages)
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1999 AND OCTOBER 31, 1998
JULY 31, OCTOBER 31,
1999 1998
(UNAUDITED) (AUDITED)
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 476,922 $ 33,538
NOTES AND ACCOUNTS RECEIVABLE 211,353 211,070
ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
$ 1,500,000 AT JULY 31, 1999 AND
OCTOBER 31, 1998, RESPECTIVELY 500,000 500,000
INVESTMENTS 270,950 278,175
PREPAID EXPENSES 226,387 173,938
TOTAL CURRENT ASSETS 1,685,612 1,196,721
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $1,417,251
AND $ 1,671,222 AT JULY 31, 1999 AND
OCTOBER 31, 1998, RESPECTIVELY 4,814,515 5,861,064
ART INVENTORY NON-CURRENT, NET OF
VALUATION ALLOWANCE OF $ 1,278,700
AT JULY 31, 1999 AND $1,900,000 AT
OCTOBER 31, 1998, RESPECTIVELY 734,907 949,125
OTHER ASSETS:
PROPERTY HELD FOR DEV.OR RESALE 1,044,695 1,318,095
DEFERRED LEASING AND FINANCING COSTS 12,102 12,866
DEPOSITS AND OTHER 120,402 169,578
1,177,199 1,500,539
$ 8,412,233 $ 9,507,449
============ ===========
2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1999 AND OCTOBER 31, 1998
JULY 31, OCTOBER 31,
1999 1998
(UNAUDITED) (AUDITED)
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT 110,000 110,000
ACCOUNTS PAYABLE AND ACCRUED EXP 1,310,338 2,061,210
INCOME TAXES PAYABLE 10,444 14,314
TOTAL CURRENT LIABILITIES 1,430,782 2,185,524
LONG-TERM DEBT, LESS CURRENT PORTION 2,217,937 2,321,433
LONG-TERM DEBT, LESS
CURRENT PORTION-RELATED PARTY 1,199,082 2,846,000
3,417,019 5,167,433
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 3,878,758 AND
3,411,681 SHARES ISSUED AND OUTSTANDING
AT JULY 31, 1999 AND OCTOBER 31, 1998,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $ 38,787,580 AND $ 34,116,810
AT JULY 31, 1999 AND OCTOBER 31, 1998
RESPECTIVELY 38,793 34,117
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, 1999 AND OCTOBER 31, 1998,
RESPECTIVELY 53,138 53,138
PAID-IN CAPITAL 27,217,159 27,033,046
RETAINED EARNINGS (DEFICIT) (10,579,667) (11,808,043)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
VALUATION RESERVE (1,896,838) (1,896,838)
UNREALIZED LOSS ON
INVESTMENTS AVAILABLE
FOR SALE (264,608) (257,383)
3,564,432 2,154,492
$ 8,412,233 $ 9,507,449
============= =============
3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 1998
1999 1998
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 423,000 $ 283,439
RENTAL INCOME 231,775 346,025
GROUND LEASE INCOME 161,600 231,000
VOLUME BASED RENTAL INCOME 0 30,903
OTHER INCOME 4,983 376,794
821,358 1,268,161
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 200,694 150,680
LABOR, OPERATING AND MAINTENANCE 122,147 208,927
DEPRECIATION AND AMORTIZATION 29,590 53,087
TAXES OTHER THAN INCOME TAXES 46,800 50,400
GENERAL AND ADMINISTRATIVE 20,919 22,191
420,150 485,285
INCOME FROM REAL ESTATE OPERATIONS 401,208 782,876
ART OPERATIONS:
ART REVENUES:
SALES 0 0
OTHER REVENUES 0 0
0 0
ART EXPENSES:
COST OF ART SOLD 740 0
VALUATION RESERVE 0 0
SELLING, GENERAL AND ADMINISTRATIVE 10,529 9,770
11,269 9,770
LOSS FROM ART OPERATIONS (11,269) (9,770)
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 1998
Continued ...
1999 1998
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (244,132) $ (283,281)
INCOME (LOSS) FROM OPERATIONS 145,807 489,825
OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 1,010 2
INTEREST EXPENSE (60,212) (64,571)
INTEREST EXPENSE-RELATED PARTY (14,000) (129,000)
OTHER EXPENSE 0 0
(73,202) (193,569)
(LOSS) GAIN BEFORE PROVISION FOR INCOME
TAXES 72,605 296,256
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET (LOSS) 72,605 296,256
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED LOSS ON INVESTMENTS
AVAILABLE FOR SALE (90,317) (361,267)
COMPREHENSIVE INCOME (LOSS) $ (17,712) $ (65,011)
============= ============
INCOME (LOSS) PER COMMON SHARE $ (0.02) $ (0.03)
============= ============
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JULY 31, 1999 AND 1998
1999 1998
(UNAUDITED) (UNAUDITED)
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 3,568,000 $ 534,439
RENTAL INCOME 751,780 1,071,870
GROUND LEASE INCOME 600,400 693,000
VOLUME BASED RENTAL INCOME 21,645 96,394
OTHER INCOME 10,391 380,532
4,952,216 2,776,235
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 1,690,796 210,751
LABOR, OPERATING AND MAINTENANCE 327,200 647,663
DEPRECIATION AND AMORTIZATION 126,242 164,406
TAXES OTHER THAN INCOME TAXES 141,193 151,200
GENERAL AND ADMINISTRATIVE 59,459 67,703
2,344,890 1,241,723
INCOME FROM REAL ESTATE OPERATIONS 2,607,326 1,534,512
ART OPERATIONS:
ART REVENUES:
SALES 186,400 206,200
OTHER REVENUES 0 0
186,400 206,200
ART EXPENSES:
COST OF ART SOLD 839,986 761,453
VALUATION RESERVE (621,300) (380,000)
SELLING, GENERAL AND ADMINISTRATIVE 32,762 29,884
251,448 411,337
LOSS FROM ART OPERATIONS (65,048) (205,137)
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JULY 31, 1999 AND 1998
Continued ...
1999 1998
(UNAUDITED) (UNAUDITED)
GENERAL AND ADMINISTRATIVE EXPENSE $ (760,119) $ (846,310)
INCOME (LOSS) FROM OPERATIONS 1,782,159 483,065
OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 10,514 933
INTEREST EXPENSE (184,148) (285,634)
INTEREST EXPENSE-RELATED PARTY (202,000) (331,000)
OTHER EXPENSE 0 0
(375,634) (615,701)
(LOSS) GAIN BEFORE PROVISION FOR INCOME
TAXES 1,406,525 (132,636)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET (LOSS) 1,406,525 (132,636)
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED LOSS ON INVESTMENTS
AVAILABLE FOR SALE (7,225) (699,774)
COMPREHENSIVE INCOME (LOSS) $ 1,399,300 $ (832,410)
============= ============
INCOME (LOSS) PER COMMON SHARE $ 0.28 $ (0.23)
============= ============
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 1999 AND 1998
1999 1998
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 1,406,525 $ (132,636)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
PROVISION FOR LITIGATION SETTLEMENT 0 0
DEPRECIATION AND AMORTIZATION 137,289 182,127
GAIN ON SALES OF REAL ESTATE (1,877,204) (323,688)
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET (283) (451,354)
ART INVENTORY, NET 214,218 380,294
PREPAID EXPENSES AND OTHER, NET (268,590) 20,623
PAYABLES AND ACCRUED EXPENSES, NET (754,742) 74,758
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (1,142,787) (249,876)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 3,568,000 534,439
PROCEEDS FROM SALE OF INVESTMENTS 0 0
CAPITAL EXPENDITURES (231,235) (51,531)
NET CASH PROVIDED BY
INVESTING ACTIVITIES 3,336,765 482,908
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 525,000 75,000
TRANSFERS TO LONG-TERM 337,082 0
REPAYMENT OF LONG-TERM
DEBT OBLIGATIONS (2,612,496) (352,558)
NET CASH USED BY
FINANCING ACTIVITIES (1,750,414) (277,558)
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 443,564 (44,526)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 33,358 28,225
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 476,922 $ (16,301)
============ ============
NOTE: Canal made federal and state income tax payments of $20,000 and
$17,000 and interest payments of $386,000 and $617,000 in the nine month
periods ended July 31, 1999 and 1998, respectively.
8
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1998 (AUDITED) AND
FOR THE NINE MONTHS ENDED JULY 31, 1999 (UNAUDITED)
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
BALANCE,10/31/97 5,313,794 $53,138 2,997,900 $29,979 $26,826,293
NET INCOME (LOSS) 0 0 0 0 0
PREFERRED STOCK DIV 0 0 413,781 4,138 206,753
MINIMUM PEN. LIAB. ADJ 0 0 0 0 0
UNREALIZED GAIN ON INV 0 0 0 0 0
-------------------- --------------------- -----------
BALANCE,10/31/98 5,313,794 53,138 3,411,681 34,117 27,033,046
NET INCOME (LOSS) 0 0 0 0 0
PREFERRED STOCK DIV 0 0 467,077 4,676 184,113
MINIMUM PEN. LIAB. ADJ 0 0 0 0 0
UNREALIZED GAIN ON INV 0 0 0 0 0
-------------------- --------------------- ----------
BALANCE,07/31/99 5,313,794 $53,138 3,878,758 $38,793 $27,217,159
==================== ===================== ============
RETAINED -COMPREHENSIVE (LOSS) INCOME- TREASURY
EARNINGS VALUATION UNREALIZED STOCK
DEFICIT RESERVE GAIN ON INV. AT COST
BALANCE,10/31/97($10,194,335) ($1,485,641) $ 615,800 ($11,003,545)
NET INCOME (LOSS) (1,413,470) 0 0 0
PREFERRED STOCK DIV (200,238) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 (411,197) 0 0
UNREALIZED GAIN ON INV. 0 0 (873,183) 0
------------- ------------- ------------ ------------
BALANCE,10/31/98 (11,808,043) ($1,896,838) (257,383) (11,003,545)
NET INCOME (LOSS) 1,406,525 0 0 0
PREFERRED STOCK DIV (178,149) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED GAIN ON INV. 0 0 (7,225) 0
------------- -------------- ------------ ------------
BALANCE,07/31/99($10,579,667) ($1,896,838) $ (264,608) ($11,003,545)
============= ============== ============= =============
9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED JULY 31, 1999
(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 eight of the last ten years. 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 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, 1999 and the results of its operations and its cash flows for the nine
month period ended July 31, 1999. 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, 1998 and the notes thereto which are contained in Canal s
1998 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 1999.
4. Property and Equipment
Included in property and equipment were the cost of buildings of
approximately $2.5 million at July 31, 1999 and October 31, 1998.
5. Notes Receivable
Included in the notes and accounts receivable were the current portion
of notes from real estate sales in the amount of $15,000 at July 31, 1999
and October 31, 1998.
6. INVESTMENTS AVAILABLE FOR SALE
At July 31, 1999 the investments available for sale consisted of the
following:
July 31, October 31,
($ 000's Omitted) 1999 1998
Aggregate market value................. $ 271 $ 278
Aggregate carrying value............... $ 271 $ 278
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, 1999 Canal recognized an unrealized
loss on investments available for sale of $7,000. Additionally, in fiscal
1998 Canal recognized an unrealized loss on investments available for sale
of $700,000, 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 $692,000 at July 31, 1999. 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 44% ($542,758) and 56% ($692,149) and 49%
($713,862) and 51% ($735,263) of total art inventory at July 31, 1999 and
October 31, 1998, 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 1998 appraisal covered approximately 50% 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
12
and public auction sales. The net realizable value of the remaining 50% 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 1998 Canal recognized a $550,000 valuation allowance against its art
inventory, thereby, increasing the total valuation allowance to $3,400,000
as of October 31, 1998 as compared to $2,850,000 and $2,500,000 at October
31, 1997 and 1996, respectively. These estimates were based in part on the
Company s history of losses sustained on art sales in the current and
previous years.
As of October 31, 1998 the valuation allowance of $3,400,000
represented a 70% 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 $621,000 on sales of art with an
historic cost of $840,000 in the first nine months of fiscal 1999.
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 1998.
Canal s art operations have generated operating losses of $65,000 and
$205,000 (net of decreases in the valuation allowance of $621,000 and
$380,000 for the nine month periods ended July 31, 1999 and 1998,
respectively) on revenues of $186,000 and $206,000 for the nine months
ended July 31, 1999 and 1998, 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 approximately $214,000 of
art inventory on consignment with third party dealers at July 31, 1999 and
October 31, 1998, respectively.
13
8. BORROWINGS
At July 31, 1999, 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,
1999 1998
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 2003 - related party............ $ 1,199 $ 2,846
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $14.............. 1,170 1,210
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $5............... 381 393
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.. 458 466
Other Note................................ 319 362
Total .................................... 3,527 5,277
Less -- current maturities ............... 110 110
Long-term debt ........................... $ 3,417 $ 5,167
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 discussed below, the balance due
these notes has been repaid in full as of July 31, 1999.
On July 29, 1999, the Company issued 1,199,082 of variable rate
mortgage notes due May 15, 2003, the proceeds of which were used to repay
in full the Company s variable rate mortgage notes due May 15, 2001
(including all additional and accrued interest thereon) and to provide the
working capital for the Company s reentry into the stockyard business. The
purchasers of these notes included the Company s Chief Executive Officer
and members of his family. The variable rate mortgage notes issued carry
interest at a rate of 10% per annum. 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. At July 31, 1999, the balance due under these
notes was $1,199,082.
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, 1999
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 eight of the last ten years. 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 net income of $1,407,000 and $73,000 for the nine and
three month periods ended July 31, 1999 as compared to net losses of
$133,000 and net income of $296,000 for the same periods in fiscal 1998.
After recognition of unrealized losses on investments held for sale of
$7,000 and $90,000 for the nine and three month periods ended July 31, 1999
t h e Company recognized comprehensive income of $1,399,000 and a
comprehensive loss of $18,000 for the nine and three month periods ended
July 31, 1999 as compared to comprehensive losses of $832,000 and $65,000
for the same periods in fiscal 1998. Further, after recognition of
preferred stock dividend payments of $178,000 and $82,000 for the nine and
three month periods ended July 31, 1999, the Company recognized income
applicable to common stockholders of $1,221,000 ($0.28 per common share)
and a loss available to common shares of $100,000 ($0.02 per common
share)for the nine and three month periods ended July 31, 1999 as compared
to losses applicable to common stockholders of $985,000 ($0.23 per common
share)and $121,000 ($0.03 per common share) for the same periods in fiscal
1998. Included in the 1999 results are gains of approximately $1,877,000 on
sales from real estate offset to a certain extent by a $65,000 loss from
real estate operations. The 1998 results included a $700,000 unrealized
loss on investments held for sale and a $205,000 loss from art operations.
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 $2,156,000 or
72.3% to $5,139,000 and decreased by $447,000 or 35.2% to $821,000 for the
nine and three month periods ended July 31, 1999, as compared to the
revenues for the same periods in fiscal 1998. The 1999 nine month increase
is due primarily to a $3,034,000 increase from the sale of real estate
which included Canal s sale of the St. Paul, Minnesota stockyard property
which had been part of the stockyards master lease. The 1999 three month
decrease is due primarily to the inclusion in the 1998 revenues of a
$375,000 gain on insurance proceeds to the fire at the Sioux City Exchange
Building.
16
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 eight of the last ten years. 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 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 discussed below, the balance due
under these notes has been repaid in full as of July 31, 1999.
On July 29, 1999, the Company issued 1,199,082 of variable rate
mortgage notes due May 15, 2003, the proceeds of which were used to repay
in full the Company s variable rate mortgage notes due May 15, 2001
(including all additional and accrued interest thereon) and to provide the
working capital for the Company s reentry into the stockyard business. The
purchasers of these notes included the Company s Chief Executive Officer
and members of his family. The variable rate mortgage notes issued carry
interest at a rate of 10% per annum. 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. At July 31, 1999, the balance due under these
notes was $1,199,082.
Cash and cash equivalents of $477,000 at July 31, 1999 increased
$443,000 from $34,000 at October 31, 1998. Net cash used by operations so
far in fiscal 1999 was $1,143,000. Substantially all of the 1999 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. During fiscal
1999 Canal reduced its long-term debt by $1,750,000.
17
At July 31, 1999 the Company s current assets exceeded current
liabilities by $0.2 million, as compared to current liabilities exceeding
current assets by $1.0 million at October 31, 1998. The only required
principal repayments under Canal s debt agreements for fiscal 1999 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, 1999 of
$4,952,000 accounted for 96.4% of the year to date revenues as compared to
real estate revenues of $2,776,000 or 93.1% for the same period in 1998.
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 (15.7% and 38.6%), ground lease income
(12.1% and 25.0%), volume based rental income (0.1% and 3.5%) and sale of
real estate and other income (72.2% and 32.9%) for the nine months ended
July 31, 1999 and 1998, respectively. The 1999 revenue increase is due
primarily to a $2,034,000 increase in revenues from the sale of real estate
offset by a reduction in rental incomes of $487,000. The decrease in
rental income is due primarily to the closing of the Fargo, North Dakota
packing plant, 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 increase in real estate
sales for fiscal 1999.
Real estate revenues for the three months ended July 31, 1999 of
$821,000 accounted for 100.0% of the third quarter revenues as compared to
real estate revenues of $1,268,000 or 100.0% for the same period in 1998.
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 (28.2% and 27.3%), ground lease income
(19.7% and 18.2%), volume based rental income (0.0% and 2.4%) and sale of
real estate and other income (52.1% and 52.1%) for the three months ended
July 31, 1999 and 1998, respectively. The percentage variations in the year
to year comparisons are due primarily to the increase in real estate sales
for fiscal 1999.
18
Real Estate Expenses
Real estate expenses for the nine months ended July 31, 1999 of
$2,345,000 increased by $1,103,000 (88.8%) from $1,242,000 for the same
period in 1998. Real estate expenses were comprised of labor, operating
and maintenance (14.0% and 52.2%), depreciation and amortization (5.4%
and
13.2%), taxes other than income taxes (6.0% and 12.2%), cost of real estate
sold (72.1% and 17.0%) and general and administrative expenses (2.5% and
5.4%) for the nine months ended July 31, 1999 and 1998, respectively. The
1999 increase in real estate expenses is due primarily to the $1,480,000
increase 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 1999.
Real estate expenses for the three months ended July 31, 1999 of
$420,000 decreased by $65,000 (13.4%) from $485,000 for the same period in
1999. Real estate expenses were comprised of labor, operating and
maintenance (29.1% and 43.1%), depreciation and amortization (7.0% and
10.9%), taxes other than income taxes (11.1% and 10.4%), cost of real
estate sold (47.8% and 31.1%) and general and administrative expenses (5.0%
and 4.5%) for the three months ended July 31, 1999 and 1998, respectively.
The percentage variations in year to year comparisons are also due to the
increase in the cost of real estate sold for fiscal 1999.
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 1998 appraisal covered approximately 50% 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 50% 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 1998 Canal recognized a $550,000 valuation
allowance against its art inventory, thereby, increasing the total value
allowance to $3,400,000 as of October 31, 1998 compared to $2,850,000 and
$2,500,000 at October 31, 1997 and 1996, respectively. These estimates are
based in part on the Company s history of losses sustained on art sales in
the current and previous years.
19
As of October 31, 1998 the valuation allowance of $3,400,000
represented a 70% 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 half reduction in the valuation allowance of $621,000
on sales of art with an historic cost of $840,000.
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 1998.
Art Revenues
Art revenues for the nine months ended July 31, 1999 of $186,000
decreased $20,000 from $206,000 for the same period in 1998. Art revenues
are comprised of proceeds from the sale of antiquities and contemporary art
(100.0% and 100.0%) and commission income on sale of art owned by third
parties (0.0% and 0.0%) for the nine month periods ended July 31, 1999 and
1998, respectively. The Company s art inventory was reduced through sales
by $840,000 in the first half of fiscal 1999.
There were no art revenues for the three month periods ended July 31,
1999 and 1998.
Art Expenses
Art expenses for the nine months ended July 31, 1999 of $251,000
decreased by $160,000 from $411,000 for the same period in 1998. Art
expenses (net of a valuation allowance of $621,000 in fiscal 1999 and
$380,000 in fiscal 1998) consisted of the cost of art sold (96.2% and
96.3%) and selling, general and administrative expenses (3.8% and 3.9%) for
the nine month periods ended July 31, 1999 and 1998, 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 expenses for the three months ended July 31, 1999 of $11,000
increased by $1,000 from $10,000 for the same period in 1998. Art expenses
consisted of the cost of art sold (93.4% and 00.0%) and selling, general
and administrative expenses (6.6% and 100.0%) for the three month periods
ended July 31, 1999 and 1998, respectively.
20
General and Administrative
General and administrative expenses for the nine months ended July 31,
1999 of $760,000 decreased $86,000 (10.2%) from $846,000 for the same
period in 1998. The major components of general and administrative
expenses are officers salaries (42.6% and 38.2%) rent (4.0% and 8.7%),
legal and professional fees (7.1% and 8.5%), insurance (11.8% and 12.2%),
and office salaries (11.0% and 9.9%) for the nine month periods ended July
31, 1999 and 1998, 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, 1999 of $244,000 decreased $39,000 (13.8%) from $283,000 for the same
period in 1999. The major components of general and administrative
expenses are officers salaries (42.9% and 38.1%), rent (0.1% and 9.0%),
legal and professional fees (7.1% and 8.5%), insurance (12.0% and 12.2%)
and office salaries (11.2% and 9.9%) for the three month periods ended July
31, 1999 and 1998, respectively. The decrease in rent expense is due to
the Company relocating its New York office space in a deal that provided
for a period of eight months free rent.
Interest and Other Income
Interest and other income for the nine months ended July 31, 1999
increased to $11,000 from $1,000 for the same period in 1998. Interest and
other income for the three months ended July 31, 1999 of $1,000 increased
$1,000 from zero for the same period in 1998. Interest and other income is
comprised primarily of interest income.
Interest Expense
Interest expense for the nine months ended July 31, 1999 decreased
37.4% to $386,000 as compared to $617,000 for the same period in 1998. The
1999 decrease is due primarily to a reduction in aggregate debt outstanding
at July 31, 1999 as compared to the same period in 1998. 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, 1999 decreased
61.7% to $74,000 as compared to $194,000 for the same period in 1998. The
1999 decrease is due primarily to the decrease in aggregate debt
outstanding.
21
PART II
OTHER INFORMATION
22
Item 1: Legal Proceedings:
See Item 3 of Canal s October 31, 1998 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
/s/ Reginald Schauder
Reginald Schauder
Vice President-Finance &
Chief Financial Officer
Date: September 10, 1999
24
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