SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8709
CANAL CAPITAL CORPORATION
(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 Number)
717 Fifth Avenue
New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 826-6040
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) or the Act:
Common Stock, $.01 par value
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. Yes X No
The aggregate market value of the voting stock held by nonaffiliates of
the registrant at January 15, 1999, was approximately $240,000. The number
of shares of Common Stock, $.01 par value, outstanding at January 15, 1999
was 4,326,929.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
Description Page
PART I
ITEM 1. Business............................................ 1
ITEM 2 Properties.......................................... 6
ITEM 3. Legal Proceedings................................... 7
ITEM 4. Submission of Matters to a Vote of Stockholders..... 8
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters................................. 9
ITEM 6. Selected Financial Data............................. 10
ITEM 7. Management's Discussion and Analysis of the
Results of Operations and Financial Condition....... 12
ITEM 8. Financial Statements and Supplementary Data......... 20
ITEM 9. Disagreements on Accounting and Financial
Disclosure.......................................... 20
PART III
ITEM 10. Directors and Executive Officers of the Registrant.. 21
ITEM 11. Executive Compensation.............................. 22
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 25
ITEM 13. Certain Relationships and Related Transactions...... 27
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 28
i
PART I
Item 1. Business
A. General
The Registrant, Canal Capital Corporation ("Canal" or the "Company"),
incorporated in the state of Delaware in 1964, commenced business
operations through a predecessor in 1936.
Canal is engaged in two distinct businesses -- the management and
further development of its agribusiness related real estate properties and
its art operations.
Canal's real estate properties located in six midwest states are
primarily associated with its former agribusiness related operations. Each
property is adjacent to a stockyards operations (five of which operate on
land leased from the company) and consist, for the most part, of an
Exchange Building (commercial office space), land and structures leased to
third parties (meat packing facilities, rail car repair shops, truck stops,
lumber yards and various other commercial and retail businesses) as well as
vacant land available for development or resale. In connection with the
1989 sale of its stockyards operations, Canal entered into a master lease
(the "Lease") with the purchaser covering approximately 139 acres of land
and certain facilities used by the stockyards operations. The Lease is a
ten year lease renewable at the purchaser's option for an additional ten
year period, with escalating annual rentals. In September, 1998 Canal sold
approximately a 60 acre parcel of land to the City of Omaha, Nebraska.
This sale included the Exchange Building, the seventeen acres of land
leased to the stockyards operator as well as a number of abandoned former
stockyards structures. As part of this transaction, Canal will continue to
receive the stockyards rental payment under the lease for as long as the
stockyards continue to operate on the subject property. We anticipate that
this rental income will continue throughout fiscal 1999. In addition,
Canal retained the right to receive income from certain volume based rental
income leases with two meat packing companies located near the stockyards.
See "Agribusiness".
Its principal real estate operating revenues are derived from the
Lease, income from the volume based rental lease with a meat packing
company located near the stockyards in Fargo, North Dakota, rental income
from its Exchange Buildings (commercial office space), lease income from
land and structures leased to various commercial and retail enterprises and
proceeds from the sale of real estate properties. Canal has continued its
program of developing what was excess stockyard property. See "Real Estate
Operations".
1
Canal's art dealing operations consist primarily of inventories held
for resale of antiquities primarily from ancient Mediterranean cultures and
contemporary art primarily of one artist. See "Art Operations".
B. Factors That May Affect Future Results
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended. The Company s actual results of operations and future
financial condition may differ materially from those expressed in any such
forward-looking statements as a result of many factors that may be beyond
the Company s control. Such factors include, without limitation: overall
economic conditions; competition for tenants in the agribusiness; the
ability of the Company s tenants to compete in their respective businesses;
the effect of fluctuations in supply, demand, international monetary
conditions and inflation on the Company s art operations; the effects of
forgery and counterfeiting on the Company s art operations; securities
risks associated with collections of antiquities and art; and the effect of
fluctuations in interest rates and inflation on the Company s indebtedness.
These risks and uncertainties are beyond the ability of the Company to
control, and in many cases, the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. When used in this
Annual Report on Form 10-K, the words believes, estimates, plans,
expects, and anticipates and similar expressions as they relate to the
Company or its management are intended to identify forward-looking
statements.
C. Real Estate Operations
General
Real estate operations, which relate primarily to Canal's former
agribusiness operations, resulted in operating income of $1.8 million,
while contributing $4.2 million to Canal's revenues for fiscal 1998. Canal
is involved in the management, development or sale of its agribusiness
related real estate properties (as described above) at its former stockyard
locations, the lease of certain property underlying the stockyards
operations sold by Canal in 1989 and the revenue from a volume based rental
agreement with a meat packing company located near the Fargo, North Dakota
stockyards.
In May, 1998 Canal s Exchange Building in Sioux City, Iowa was
substantially damaged by a fire. The original building as well as one of
the two subsequent additions had to be demolished. The remaining structure
(three story - approximately 25,000 square feet) suffered no structural
damage, but will require an extensive renovation before it can be occupied.
2
During fiscal 1998, Canal continued to encounter difficulties in
increasing the occupancy rate in its St. Paul, Minnesota Exchange Building.
Despite our efforts, the occupancy of this building continues to hover at
the 50% rate. We will continue to aggressively pursue replacement tenants
for this building in fiscal 1999.
As of October 31, 1998, there are approximately 237 acres of
undeveloped land owned by Canal adjacent to its former stockyards. Canal
is continuing the program, which it started several years ago, to develop
or sell this property.
Agribusiness
Under the Lease, Canal has net leased 139 acres of land as well as
certain stockyard facilities at five of its former stockyard locations to
the group which purchased the stockyard operations. This lease is a 10
year lease, renewable at the purchaser's option for an additional ten year
period,
with annual rentals of $750,000 per year for the first year escalating to
$1.0 million per year for the fourth through the tenth years and $1.0
million per year adjusted for CPI increases thereafter. Canal has
renegotiated this lease as it relates to the Omaha, Nebraska property, and
accordingly, Canal s fiscal 1997 revenue from this lease was $924,000. In
September, 1998 Canal sold approximately a 60 acre parcel of land to the
City of Omaha, Nebraska. This sale included the Exchange Building, the
seventeen acres of land leased to the stockyards operator as well as a
number of abandoned former stockyards structures. As part of this
transaction, Canal will continue to receive the stockyards rental payment
under the lease for as long as the stockyards continue to operate on the
subject property. We anticipate that this rental income will continue
throughout fiscal 1999. Canal is entitled to receive additional rent if
the stockyard's livestock volume or cash flow (as defined) exceeds certain
levels.
Canal retained the right to receive income from certain volume based
rental income leases with two meat packing companies located near the
stockyards in Sioux City, Iowa and Fargo, North Dakota. The Sioux City,
Iowa lease was terminated and the property sold to the meat packer in
fiscal 1996. The Fargo, North Dakota lease is a fifty year lease expiring
in 2028 with B&H Investment Company ("B&H"). This lease calls for B&H to
pay Canal a per head fee for all cattle slaughtered at B&H s plant that
were not purchased at the Fargo stockyards. For information on the
revenues generated by this lease see Note 3 to the Consolidated Financial
Statements. The Fargo, North Dakota lease is the subject of ongoing
litigation. For further information about this litigation (see - Item 3
Legal Proceedings and Note 17).
Risk
Real estate activities in general may involve various degrees of risk,
such as competition for tenants, general market conditions and interest
rates. Furthermore, there can be no assurance that Canal will be
successful in the development, lease or sale of its agribusiness related
real estate properties.
3
Competition
Canal competes in the area of agribusiness related real estate
development with other regional developers, some of which are substantially
larger and have significantly greater financial resources than Canal. To a
certain extent, Canal's agribusiness revenues are dependent on the ability
of the stockyard operations purchaser and the various meat packers with
whom Canal has yardage agreements to successfully compete in their
respective businesses.
D. Art Operations
General
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 $700,000 at October 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 49% ($713,862) and 51% ($735,263) and 63%
($1,775,594) and 37% ($1,035,263) of total art inventory at October 31,
1998 and 1997, respectively.
Canal sells its art primarily through two sources, in galleries and at
art auctions. In the case of sales in galleries, the Company has
consignment arrangements with various art galleries in the United States.
In these arrangements Canal consigns its pieces at specific prices to the
gallery. In the case of auctions, the Company primarily consigns its art
pieces to the two largest auction houses for their spring and fall art
auctions. The Company assigns a minimum acceptable price on the pieces
consigned. The auction house negotiates a commission on the sale of major
pieces. The pieces can be withdrawn at any time before or during the
auction. There are no significant differences between the prices obtained
in galleries and those obtained at auction.
Art operations resulted in an operating loss of approximately
$1,184,000 while contributing approximately $221,000 to Canal's revenues
for fiscal 1998. Included in this loss is a $550,000 increase in the art
inventory valuation allowance.
4
Risk
Dealing in art in general involves various degrees of risk. There can
be no assurance that the operations will be profitable. The success of a
program of this nature is dependent at least in part, on general economic
conditions, including supply, demand, international monetary conditions and
inflation. There can be no assurance that Canal will be able to sell its
art
inventory at a price greater than or equal to its acquisition costs or be
able to turn over its art inventory at a desirable rate. In addition,
forgery and counterfeiting are risks inherent in the art industry.
However, Canal and its associates, through their experience and certain
precautionary
measures taken in the purchasing process, are confident that this risk has
been minimized. Moreover, there are security risks associated with
collections of antiquities and art, including problems of security in their
storage, transportation and exhibition. Canal has procured insurance to
cover such risks.
Competition
Canal competes in its art operations with investment groups and other
dealers, some of whom are substantially larger and have greater financial
resources and staff than Canal. There may be a number of institutions and
private collectors and dealers who may attempt to acquire the same pieces
of art at the same time as Canal, particularly at auction. Similarly,
there may be a number of dealers offering similar pieces of art, thereby
exerting a downward pressure on prices.
E. Investments Available for Sale
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
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 officer 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.
F. Employees
At December 31, 1998, Canal had 7 employees.
5
ITEM 2. Properties
Canal's real estate properties located in six Midwest states are
primarily associated with its former agribusiness related operations. Each
property is adjacent to a stockyard operation (five of which operate on
land leased from the company) and consist, for the most part, of an
Exchange Building (commercial office space), land and structures leased to
third parties (meat packing facilities, rail car repair shops, truck stops,
lumber yards and various other commercial and retail businesses) as well as
vacant land available for development or resale. As landlord, Canal's
m a n a gement responsibilities include leasing, billing, repairs and
maintenance and overseeing the day to day operations of its properties.
Canal's properties at October 31, 1998 include:
Stockyard Leased Held for
Year Total Exchange Master to Third
Develop-
Location Acquired Site(2) Bldgs. Lease(1) Parties ment (3)
St. Joseph, MO 1942 137 2 37 0 98
West Fargo, ND 1937 81 2 0 17 62
S. St. Paul, MN 1937 119 5 30 22 62
Sioux City, IA 1937 64 2 24 24 14
Omaha, NE 1976 11 0 0 11 0
Sioux Falls, SD 1937 36 0 31 4 1
Total 448 11 122 78 237
The following schedule shows the average occupancy rate and average rental
rate at each of Canal's five Exchange Buildings:
1998 1997
Occupancy Average(5) Occupancy Average(5)
Location Rate Rental Rate Rate Rental Rate
St. Joseph, MO 75% $ 4.75 75% $ 4.75
West Fargo, ND(4) N/A N/A N/A N/A
S. St. Paul, MN 50% $12.29 50% $12.29
Sioux City, IA(6) N/A $ N/A 46% $ 4.14
Omaha, NE(7) N/A $ N/A 51% $ 4.80
NOTES
(1) Leased to the purchaser of Canal's stockyard operations.
(2) For information with respect to mortgages and pledges see Note 7.
(3) For information related to this see Note 2(c).
(4) Canal has closed this building and is offering it for sale.
(5) Per square foot.
(6) Building closed in fiscal 1998 due to fire damage.
(7) Building sold in September, 1998.
6
ITEM 3. Legal Proceedings
Canal and its subsidiaries are from time to time involved in
litigation incidental to their normal business activities, none of which,
in the opinion of management, will have a material adverse effect on the
consolidated financial condition and operations of the Company. Canal or
its subsidiaries are party to the following litigation:
Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo
This action involves Union Stockyards Company of Fargo ( Union ), a
wholly owned subsidiary of Canal. It is an action which involves claims
which are similar to some of the claims brought by B&H Investment Co.
( B&H ) against Union several years ago which was dismissed in 1994
following a decision by the Minnesota Court of Appeals in favor of Union.
The dispute involves a Lease Agreement relating to certain real estate
owned by Union and leased to Federal Beef Processors, Inc. ( Federal
Beef ). Federal Beef operates a meat packing plant on the leased premises,
and it is a related entity to B&H, which previously operated the packing
plant. By the terms of the Lease Agreement, Federal Beef s obligation to
pay additional rent is suspended during any period that Union fails to
provide adequate yardage service (under the terms of a separate Yardage
Agreement between the parties) that materially affects the business of
Federal Beef.
Federal Beef filed a Complaint on June 2, 1995 in the District Court
for Cass County, North Dakota, for damages claimed to be suffered as a
result of Union s alleged failure to provide adequate maintenance and
cleaning services for the livestock pens used by Federal Beef under the
Yardage Agreement. The damages sought by Federal Beef include $227,452 in
additional rent paid by Federal Beef during the time Union allegedly was in
breach of the Lease Agreement and the Yardage Agreement. Federal Beef also
seeks all direct and consequential damages allegedly suffered by Federal
Beef because of the claimed breach, including loss of profits from animals
allegedly damaged by reason of the condition of the pens, and alleged
reduction in the number of animals processed at the plant, in an amount
calculated by Federal Beef s expert witness to be $1,116,900.
Union has filed an Answer and Complaint denying the allegations in the
Amended Complaint, seeking a determination that Federal Beef s claims are
frivolous, and asking for an award of Union s reasonable attorneys fees
and
costs in connection with the defense of the action. In July 1995, Union
successfully defeated a motion by Federal Beef for an order which would
have allowed Federal Beef to deposit into Court all rent payments due from
Federal Beef to Union pending the outcome of the litigation. As a result,
Federal Beef has continued to make all rent payments due under the Lease
Agreement while reserving its alleged claims against Union.
7
In April 1996, Federal Beef served a Second Amended Complaint in which
it alleged that Union has also breached an obligation under the Yardage
Agreement to provide certain additional yardage services with respect to
cattle received at the stockyards for delivery to Federal Beef. Damages in
an unspecified amount are sought by Federal Beef against Union for this
alleged breach. Canal has also denied this additional claim.
The Company is unable at this time to estimate a possible loss or
range of loss associated with this suit. However, Management does not
believe that any possible loss associated with this suit would be material
to the operations of the Company nor does Management believe that the
revenues generated under the lease will be materially affected in resolving
this dispute.
Canal Capital Corporation v. Valley Pride Pack, Inc.
Canal commenced an action in U.S. District Court in Minnesota on
October 25, 1996, as the assignee of United Market Services Company,
against Valley Pride Pack, Inc. (formerly known as Pine Valley Meats, Inc.
and referred to herein as Pine Valley ) for the unpaid livestock fees and
charges due under the 1936 Agreement between the predecessors of Pine
Valley and Canal. Pine Valley filed a motion to dismiss Canal s complaint
on the grounds that the complaint was barred on principles of issue
preclusion and the Rooker-Feldman doctrine, or, that the action should be
stayed pending the appeal before the Minnesota Court of Appeals in a state
court suit which involved the same parties. Canal agreed to dismiss the
action without prejudice to its right to reinstitute the action following
the Minnesota Court of Appeals decision. On September 18, 1997, the
Minnesota Court of Appeals affirmed in part and reversed in part a
judgement against Canal and Canal paid Pine Valley damages and interest of
$388,000 in connection with the state court suit. On September 23, 1997,
Canal reinstituted its lawsuit in federal court against Pine Valley for the
recovery of livestock fees. Pine Valley has since brought a motion to
dismiss this second federal court lawsuit on the same grounds as its motion
to dismiss the first federal court lawsuit. There has been no claim
asserted by Pine Valley against Canal in this second federal court lawsuit.
Upon Pine Valley s motion, the Court entered an order dated February
23, 1998 granting summary judgement and dismissing Canal s complaint.
Canal has appealed the dismissal to the U.S. Court of Appeals for the
Eighth Circuit. Oral arguments were heard on this appeal in mid December.
A decision has not yet been rendered by the Court.
ITEM 4. Submission of Matters to a Vote of Shareholders
None.
8
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stock Matters
Canal's stock is traded over-the-counter through the "pink sheets". The
high and low price ranges of Canal's common stock for the eight quarters
ended October 31, 1998 as reported on the "pink sheets" were:
Fiscal 1998 Fiscal 1997
Quarter Ended High Low High Low
October 31 ................. $ 1/4 -- $ 3/16 $ 5/16 -- $ 1/4
July 31 .................... 1/4 -- 3/16 5/16 -- 1/4
April 30 ................... 1/4 -- 3/16 5/16 -- 1/4
January 31 ................. 1/4 -- 3/16 5/16 -- 1/4
There were no cash dividends paid during fiscal 1998 or 1997. Canal
is subject to restrictions on the payment of cash dividends under certain
debt agreements. As of January 20, 1999, Canal had approximately 1,500
holders of record of its common stock, par value $.01 per share.
9
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE FOLLOWING DATA HAVE BEEN DERIVED FROM CONSOLIDATED FINANCIAL
STATEMENTS THAT HAVE BEEN AUDITED BY TODMAN & CO., CPAs, P.C., INDEPENDENT
ACCOUNTANTS. THE INFORMATION SET FORTH BELOW IS NOT NECESSARILY INDICATIVE
OF THE RESULTS OF FUTURE OPERATIONS AND SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS ANNUAL REPORT ON FORM 10-K.
(000'S OMITTED, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31, 1998 1997 1996 1995 1994
OPERATING DATA:
REVENUES FROM
CONTINUING OPERATIONS $4,457(2) $5,311(3) $9,049(4) $4,854(5) $8,460
NET (LOSS) INCOME ($1,413) ($1,001) $ 842(6)($1,518)(7) $1,362(8)
(LOSS) INCOME PER SHARE:
BASIC ($0.37) ($0.27) $ O.16 ($0.40) $0.23
DILUTED ($0.37) ($0.27) $ 0.13 ($0.40) $0.20
CASH DIVIDENDS PAID $0.00 $0.00 $ 0.00 $0.00 $0.00
WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC 4,327 4,327 4,327 4,352 4,476
- DILUTED(9) 4,327 5,327 5,327 5,352 5,170
11
AT OCTOBER 31, 1998 1997 1996 1995 1994
BALANCE SHEET DATA:
CURRENT ASSETS $1,197 $2,151 $2,015 $1,443 $1,416
PROPERTY ON OPERATING
LEASES, NET 5,861 5,323 7,106 8,385 8,708
ART INVENTORY NON-CURRENT 949 2,311 3,089 4,901 5,744
OTHER ASSETS 1,500 3,175 3,279 3,474 4,260
TOTAL ASSETS $ 9,507 $12,960 $15,489 $18,203 $20,128
CURRENT LIABILITIES $2,186 $2,068 $3,426 $ 2,710 $ 6,122
LONG-TERM DEBT 5,167 6,050 6,980 11,379 8,062
STOCKHOLDERS' EQUITY 2,154 4,842 5,083 4,114 5,944
TOTAL LIAB. &
STOCKHOLDERS'EQUITY $ 9,507 $12,960 $15,489 $18,203 $20,128
COMMON SHARES OUTSTANDING
AT YEAR-END 4,327 4,327 4,327 4,327 4,327
10
ITEM 6. Selected Financial Data (continued..)
NOTES:
(1) For discussion of material uncertainties and commitments, see Notes 12
and 17 to the Consolidated Financial Statement.
(2) The revenue decrease was due primarily to a $1.1 million decrease in
sales of real estate.
(3) The revenue decrease was due primarily to a $2.7 million decrease in
sales of real estate.
(4) The revenue increase was due primarily to a $4.4 million increase in
sales of real estate which was attributable to the Sioux City, Iowa
lease termination and property sale.
(5) The revenue decrease is due primarily to a decrease of $2.1 million in
real estate sales and the absence of a $1.5 million judgment reversal
taken in fiscal 1994.
(6) Includes a $3.8 million gain on the sale of real estate offset by a
$1.7 million loss from art operations which included a $1.5 million
increase in the art inventory valuation allowance.
(7) Includes the absence of a judgment reversal of $1.5 million in 1994
against the Company, a $0.5 million increase in the art inventory
valuation reserve, absence of $0.3 million gain on sale of
investments, a $0.2 million increase in interest expense partially
offset by a $0.6 million gain on real estate sales.
(8) Includes the reversal of a $1.5 million loss provision established in
fiscal 1992 in connection with a judgment against the Company, a $0.6
million gain on property sales and a $0.3 million gain on the sale of
investments offset by a $0.3 million loss on the write down of
investments and $0.2 million increase in the art inventory valuation
reserve.
(9) Weighted average number of diluted shares have been calculated to give
effect to certain convertible notes issued in March 1994.
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
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 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 uncertainties (See Notes 1, 5 and 17). 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 $1.4 million for 1998 as compared to
the 1997 net loss of $1.0 million and the 1996 net income of $0.8 million.
After recognition of preferred stock dividend payments of $200,000 in 1998,
$182,000 in 1997 and $162,000 in 1996, the results attributable to common
stockholders were a net loss of $1.6 million in 1998, a net loss of $1.2 in
1997 and net income of $0.7 million in 1996. Canal s 1998 net loss of $1.4
million is due primarily to a $1.2 million loss on its art operations and a
$0.3 million reduction in its gain on sales of real estate (due to a $1.1
million decrease in real estate sales) in the current year. These were
offset to a certain extent by moderate decreases in both interest and
general and administrative expenses. Canal s 1997 net loss of $1.0 million
was due primarily to a $3.4 million decrease in income from real estate
operations (due to a $2.7 million reduction in real estate sales and a $0.9
million write-down in value of certain property located in Omaha, Nebraska)
offset by a $1.0 million reduction in the loss from art operations, a $0.1
million increase in other income and a $0.6 million decrease in interest
expense.
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 in 1998 decreased by
$0.8 million to $4.5 million as compared with 1997 revenues which had
decreased by $3.7 million to $5.3 million from 1996 revenues of $9.0
million. The 1998 decrease is due primarily to a $1.1 million decrease in
sales of real estate offset to a certain extent by a gain on insurance
proceeds of $0.4 million related to a fire in Sioux City, Iowa. The 1997
decrease was due primarily to a $2.7 million decrease in sales of real
estate.
12
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 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 uncertainties (See Notes 1, 5 and 17). 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. The notes carry interest
at the highest of four variable rates, determined on a quarterly basis.
These notes, among other things, prohibit Canal from becoming an investment
company as defined by the Investment Company Act of 1940; require Canal to
maintain minimum net worth; restrict Canal s ability to pay cash dividends
or repurchase stock; require principal prepayments to be made only out of
the proceeds from the sale of certain assets, and require the accrual of
additional interest (to be paid at maturity) of approximately three percent
per annum. At October 31, 1998 the Company was in technical default of this
mortgage note agreement as it relates to minimum net worth. The Company
requested and has received a waiver of this default from the note holders.
As of October 31, 1998 the balance due under these notes was $2,846,000 all
of which is classified as long-term debt-related party.
Cash and cash equivalents of $34,000 at October 31, 1998 increased
$6,000 or 18.8% from $28,000 at October 31, 1997. Net cash used by
operations in fiscal 1998 was $0.5 million. Substantially all of the 1998
net proceeds from the sale of real estate of $1.4 million and the proceeds
from the sale of art of $0.2 million less the cash used in operations was
used to reduce outstanding debt and accrued expenses.
During 1998 Canal reduced its variable rate mortgage notes by $0.8
million and other long-term debt by $0.1 million for a net 1998 debt
reduction of $0.9 million.
13
At October 31, 1998 the Company s current liabilities exceed current
assets by $1.0 million as compared to October 31, 1997 when the Company's
current assets exceeded current liabilities by $0.1 million, which
represented an increase of $1.5 million from 1996. The 1998 decrease in
current assets is due primarily to a decrease in the market value of
Canal s investments available for sale of $0.9 million. 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.
1998 COMPARED TO 1997
Real Estate Revenues
Real estate revenues for 1998 of $4.2 million accounted for 95.1% of
the 1998 revenues as compared to revenues of $5.2 million or 97.8% for
1997. 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 (32.5% and 30.6%), Ground
lease income (21.8% and 17.8%), volume based rental income (3.0% and 2.1%)
and sale of real estate and other income (42.7% and 49.5%) for 1998 and
1997, respectively. The 1998 decrease is due primarily to the $1.1 million
decrease in sales of real estate. The percentage variations in the year to
year comparisons are due to the significant decrease in real estate sales
for fiscal 1998.
Real Estate Expenses
Real estate expenses for 1998 of $2.5 million decreased by $0.9
million (25.8%) from $3.3 million in 1997. Real estate expenses are
comprised of labor, operating and maintenance (36.2% and 25.2%),
depreciation and amortization (8.8% and 10.4%), taxes other than
income taxes (9.9% and
7.8%), cost of real estate sold (41.5% and 27.1%),and general and
administrative and other expenses (3.6% and 29.5%) for 1998 and 1997,
respectively. The 1998 decrease in real estate expenses is due primarily
to the $0.9 million write down in value of the Omaha property. The
decrease in
14
general and administrative and other expenses also reflects the elimination
of the 1997 $0.9 million write down in value of the Omaha property. The
percentage variations in year to year comparisons is due to the decrease
in the real estate expenses for fiscal 1998.
Art Operations
Management estimates it may take approximately 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 independent appraisers
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 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.
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 minimum 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
15
realizable value. The Company will continually monitor the market for its
art inventory and will make adjustments to the carrying 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 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 real estate, sales of investments available
for sale, raising of new capital and further restructuring of debt. Some
of these measures were successfully implemented in fiscal 1998.
Art Revenues
Art revenues for 1998 of $221,000 increased $104,000 or 88.2% from
$117,000 in 1997. Art revenues are comprised of proceeds from the sale of
antiquities and contemporary art (100.0% and 97.5%) and commission income
on sale of art owned by third parties (0.0% and 2.5%) for 1998 and 1997,
respectively. The Company's art inventory was reduced through sales by
$0.8 million and $0.4 in fiscal years 1998 and 1997, respectively.
Art Expenses
Art expenses for 1998 of $1.4 million increased by $0.6 million
(69.9%) from $0.8 million in 1997. Art expenses (excluding valuation
allowances) consisted of the cost of art sold (95.3% and 90.7%) and
selling, general and administrative expenses (4.7% and 9.3%) for 1998 and
1997, respectively. Included in art expenses is a $0.6 million and a $0.4
million valuation allowance against the Company's art inventory (see Note 8
to the Consolidated Financial Statements) for fiscal years 1998 and 1997,
respectively.
General and Administrative
General and administrative expenses for 1998 of $1.2 million decreased
$0.1 million (3.1%) from $1.3 million in 1997. The major components of
general and administrative expenses are officers salaries (35.4% and
34.3%), rent (7.8% and 8.9%), legal and professional fees (9.9% and 10.0%),
insurance (12.9% and 11.9%) and office salaries (9.2% and 10.0%) for 1998
and 1997, respectively. The percentage increases in officers salaries,
legal and professional fees and insurance is a result of the aggregate
decrease in total general and administrative expenses.
16
Interest and Other Income
Interest and other income of $148,000 for 1998 decreased $89,000
(37.5%) from $236,000 in fiscal 1997. Interest and other income amounts
are comprised primarily of dividend income, interest income and other
income.
Interest Expense
Interest expense for 1998 of $0.8 million decreased by $0.2 million
(16.4%) from $1.0 million in 1997. The 1998 decrease is due primarily to
the aggregate reduction in the outstanding debt. Interest rates on Canal's
variable rate mortgage notes averaged 12.00% in 1998 as compared to an
average of 12.00% in 1997 and an average of 11.94% in 1996. At October 31,
1998 the outstanding balance of these notes was $2,846,000.
Other Expense
Other expense of $139,000 for 1998 decreased $61,000 (30.3%) from
$200,000 in fiscal 1997.
1997 COMPARED TO 1996
Real Estate Revenues
Real estate revenues for 1997 of $5.2 million accounted for 97.8% of
the 1997 revenues as compared to revenues of $8.9 million or 97.8% for
1996. Real estate revenues are comprised of rental income from Exchange
Building (commercial office space) rentals and other lease income from the
rental of vacant land and certain structures (30.6% and 23.4%), Ground
lease income (17.8% and 10.6%), volume based rental income (2.1% and 7.4%)
and sale of real estate and other income (49.5% and 58.6%) for 1997 and
1996, respectively. The 1997 decrease is due primarily to the $2.7 million
decrease in sales of real estate and the $0.9 million write down in value
of the Omaha property. The percentage variations in the year to year
comparisons are due to the significant decrease in real estate sales for
fiscal 1997.
Real Estate Expenses
Real estate expenses for 1997 of $3.3 million decreased by $0.3
million (8.3%) from $3.6 million in 1996. Real estate expenses are
comprised of labor, operating and maintenance (25.2% and 26.7%),
depreciation and amortization (10.4% and 10.0%), taxes other than
income taxes (7.8% and
17
10.0%), cost of real estate sold (27.1% and 38.3%), provision for
litigation settlement (0.0% and 12.0%) and general and administrative and
other expenses (29.5% and 3.0%) for 1997 and 1996, respectively. The 1997
decrease in real estate expenses is due primarily to the $0.05 million
reduction in cost of real estate sold, a $0.4 million reduction in the
provision for litigation settlement offset by the $0.9 million write down
in value of the Omaha property. The increase in general and administrative
and other expenses reflects the 1997 $0.9 million write down in value of
the Omaha property. The percentage variations in year to year comparisons
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 independent appraisers
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.
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 minimum 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 art inventory and will make adjustments to the carrying
value of its art inventory as such adjustments become necessary.
18
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 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 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 real estate, sales of investments available
for sale, raising of new capital and further restructuring of debt. Some
of these measures were successfully implemented in fiscal 1997.
Art Revenues
Art revenues for 1997 of $117,000 decreased $78,000 or 40.0% from
$195,000 in 1996. Art revenues are comprised of proceeds from the sale of
antiquities and contemporary art (97.5% and 100.0%) and commission income
on sale of art owned by third parties (2.5% and 0.0%) for 1997 and 1996,
respectively. The Company's art inventory was reduced through sales by
$0.4 million and $0.3 in fiscal years 1997 and 1996, respectively.
Art Expenses
Art expenses for 1997 of $0.08 million decreased by $1.1 million
(55.9%) from $1.9 million in 1996. Art expenses (excluding valuation
allowances) consisted of the cost of art sold (90.7% and 86.9%) and
selling, general and administrative expenses (9.3% and 13.1%) for 1997 and
1996, respectively. Included in art expenses is a $0.4 million and a $1.5
million valuation allowance against the Company's art inventory (see Note
10 to the Consolidated Financial Statements) for fiscal years 1997 and
1996, respectively.
General and Administrative
General and administrative expenses for 1997 of $1.3 million decreased
$0.1 million (6.8%) from $1.3 million in 1996. The major components of
general and administrative expenses are officers salaries (34.3% and
32.0%), rent (8.9% and 9.1%), legal and professional fees (10.0% and 9.4%),
insurance (11.9% and 11.3%) and office salaries (10.0% and 10.1%) for 1997
and 1996, respectively. The percentage increases in officers salaries,
legal and professional fees and insurance is a result of the aggregate
decrease in total general and administrative expenses.
19
Interest and Other Income
Interest and other income of $236,000 for 1997 increased $91,000
(62.2%) from $145,000 in fiscal 1996. The 1997 amounts are comprised
primarily of dividend income, interest income and other income.
Interest Expense
Interest expense for 1997 of $1.0 million decreased by $0.6 million
(37.1%) from $1.5 million in 1996. The 1997 decrease is due primarily to
the aggregate reduction in the outstanding debt. Interest rates on Canal's
variable rate mortgage notes increased to an average of 12.00% in 1997 as
compared to an average of 11.94% in 1996 and an average of 11.78% in
1995. At October 31, 1996 Canal had reduced the outstanding face value of
these notes from the original $20.0 million to $2.7 million.
Other Expense
In fiscal 1997 and 1995 Canal incurred other expenses of approximately
$200,000 and $286,000, respectively. The 1997 expense was associated with
the settlement of a state tax audit while the 1995 expense was due
primarily to the write down of Canal s investments.
ITEM 8. Financial Statements and Supplemental Data
The response to this item is included in Item 14(A) of the report.
ITEM 9. Disagreements on Accounting and Financial Disclosure
None.
20
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Board of Directors has designated an Executive Committee
consisting of Messrs. Edelman and Schultz. The Board of Directors has
delegated to the Executive Committee general authority with respect to most
matters that would otherwise be considered by the full Board. During
fiscal 1998 the Board of Directors held one meeting, and the Executive
Committee held three meetings, all of which were attended by both Mr.
Edelman and Mr. Schultz.
The following information with respect to the principal occupation or
employment of each director and executive officer and the name and
principal business of the Company or other organization in which such
occupation or employment is carried on, and in regard to other affiliations
and business experience during the past five years, has been furnished to
the Company by the respective directors.
Asher B. Edelman, age 59, has been Chairman of the Board since
September 1991 and prior thereto Vice Chairman of the Board and Chairman of
the Executive Committee since February, 1985. Mr. Edelman has been a
Director, Chairman of the Board, and Chairman of the Executive Committee of
Datapoint Corporation ("Datapoint") since March 1985 and has been
Datapoint s Chief Executive Officer since February 1993. Mr. Edelman has
served as General Partner of Asco Partners, a general partner of Edelman
Securities Company L.P. (formerly Arbitrage Securities Company) since June
1984 and is a General Partner and Manager of various investment
partnerships and funds.
Michael E. Schultz, age 62, has been President and Chief Executive
Officer since September 1991 and a Director since 1985; and had been a
partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz until December
31, 1994.
Gerald N. Agranoff, age 52, has been a Director since 1984. Mr.
Agranoff is currently Vice President, General Counsel and Corporate
Secretary of Datapoint and has been a Director of Datapoint since 1991.
Mr. Agranoff has been a General Partner of Edelman Securities Company L.P.
(formerly Arbitrage Securities Company) and Plaza Securities Company for
more than five years. Mr. Agranoff is a director of Bull Run Corporation,
Atlantic Gulf Communities and The American Energy Group, Ltd.. Mr.
Agranoff has also been the General Counsel to Edelman Securities Company
L.P. and Plaza Securities Company for more than five years.
Reginald Schauder, age 49, has been Vice President, Chief Financial
Officer and Treasurer since January 1989 and assumed responsibility as
Secretary of the Company in September 1995. Mr. Schauder was corporate
controller from July 1985 to January 1989.
21
There are no family relationships between any of the aforementioned
executive officers of the Registrant and such executive officers were
elected to serve for a term of one year or until the election and
qualification of their respective successors.
ITEM 11. Executive Compensation
The following table summarizes the compensation of the Company's Chief
Executive Officer and the other two executive officers of the Company whose
salary for fiscal 1998 exceeded $100,000.
SUMMARY COMPENSATION TABLE - Annual Compensation
Name and Principal
Position Year Salary
Michael E. Schultz 1998 $ 165,000
President and Chief 1997 $ 165,000
Executive Officer 1996 $ 165,000
Asher B. Edelman 1998 $ 165,000
Chairman of the Board 1997 $ 165,000
and Executive Committee 1996 $ 165,000
Reginald Schauder 1998 $ 101,200
Vice President, Chief 1997 $ 101,200
Financial Officer 1996 $ 101,200
Treasurer and Secretary
The Company pays certain expenses related to Mr. Edelman's European
offices as well as his travel expenses between Europe and the U.S. These
expenses totaled $42,000, $52,000 and $68,000 for fiscal years 1998, 1997
and 1996, respectively.
Retirement Plans
The Canal Capital Corporation Retirement Plan (the "Retirement Plan")
provides benefits to eligible employees of the Company and its subsidiaries
and affiliates. Directors who are not employees are not eligible to
participate in the Retirement Plan. The Retirement Plan is administered by
the Company. All Company contributions under the Retirement Plan were
deposited with an insurance company and invested in a group annuity
contract through May 30, 1985. Thereafter, all Company contributions have
been held in trust under a Trust Agreement between the Company and the
Executive Committee of the Board of Directors, as trustee. Contributions
to the Retirement Plan are determined on an actuarial basis, without
individual allocation.
22
In October 1991, each of three executive officers of the Company
voluntarily withdrew from participation in the Retirement Plan. As a
result of prior service, Messrs. Edelman and Schauder have deferred annual
accumulated benefits of approximately $1,300 and $600, respectively, as of
October 31, 1998. Mr. Schultz has no benefit under the Retirement Plan.
For further information on the Retirement Plan see Note 9.
Aggregate Option Exercises in Last
Fiscal Year and Fiscal Year End Option Value
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Name Options at Fiscal Year End At Fiscal Year End
Michael E. Schultz 255,500* $ 17,500
Asher B. Edelman 20,000* $ -0-
Reginald Schauder 19,600* $ -0-
* All options were exercisable at October 31, 1998.
COMPENSATION OF DIRECTORS
Fees and Expenses; Other Benefits
Directors who are not officers of the Company do not receive cash
compensation for service as Directors. Mr. Agranoff was granted 25,000
options of the Company under the 1985 Directors Stock Option Plan, as
amended, in lieu of an annual retainer and per meeting fees. The options
were granted December 1991. Directors are reimbursed for expenses incurred
in attending Board and Committee meetings, including those for travel, food
and lodging.
Stock Options for Directors
The Company maintains an option plan for the benefit of directors of
the Company -- the 1985 Directors' Stock Option Plan (the "1985 Plan"),
which was approved by the stockholders of the Company on March 12, 1986.
Pursuant to the 1985 Plan, a maximum of 264,000 shares of common stock,
$0.01 par value per share, of the Company have been reserved for issuance
to directors and members of the Executive Committee of the Company and its
subsidiaries.
23
Options granted under the 1985 Plan are nonqualified stock options and
have an exercise price equal to 100% of fair market value of the shares on
the date of grant. The options may be exercised no earlier than one year
from the date of grant and no later than ten years after the date of grant.
Under the 1985 Plan, options covering 22,000 shares are automatically
granted to each new director upon the effective date of his election to
office and options covering 5,500 shares are automatically granted to each
new member of the Executive Committee upon the effective date of his
appointment to office. In addition, the 1985 Plan was amended on December
18, 1991 to provide an automatic grant of options covering 25,000 shares to
each current and new director who is not an employee of the Company
including Mr. Agranoff. The 1985 Plan is administered by the Board of
Directors of the Company.
During the 1998 fiscal year, no options under the 1985 plan were
granted and no options previously granted were exercised. At October 31,
1998, options covering an aggregate of 30,500 shares were outstanding under
the 1985 Plan and were held by members of the Board of Directors and
Executive Committee. The exercise price per share of all outstanding
options under the 1985 Plan ranges from $0.13 to $0.25. The expiration
dates for outstanding options under the 1985 Plan range from December 2001
to January 2003.
Compensation Committee - Interlocks and Insider Participation
The Board of Directors (comprised of Asher B. Edelman, Chairman of the
Board and Chairman of the Executive Committee, Michael E. Schultz,
President and Chief Executive Officer and Gerald N. Agranoff) determines
the compensation of the Chief Executive Officer and the Company's other
executive
officers and administers the Company's 1984 Stock Option Plan and 1985
Stock Option Plan for Directors.
In connection with the Company's investment activities, the Executive
Committee of the Board of Directors, through Mr. Edelman, has the authority
to invest funds of the Company in securities of other companies. Certain
funds of the Company have been invested in the securities of other
companies in which Mr. Edelman, other directors of the Company or their
affiliates are
directors or officers, or in which one or more of such persons may also
have invested. Since November 1, 1993, such companies included Datapoint
Corporation. The Company has filed with the SEC Schedules 13D jointly with
Plaza, Mr. Edelman, Edelman Management, Edelman Limited Partnership,
certain investment partnerships of which Mr. Edelman is sole or controlling
general partner, certain of the companies referred to in the preceding
sentence and other persons, indicating that the filing parties constitute
groups for purposes of such filings with respect to the acquisition of
securities in the companies referred to in the preceding sentence.
24
ITEM 12. Securities Ownership of Certain Beneficial Owners and Management
To the knowledge of the Company, the only beneficial owners of 5% or
more of the voting stock of the Company (other than those listed below
under "Securities Owned by Management") as of January 15, 1999 were:
SECURITIES BENEFICIALLY OWNED
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
Asher B. Edelman 2,446,075 (c) 56.27
Michael E. Schultz 314,335 (c) 6.86
William G. Walters 234,440 (b) 5.42
(a) Under applicable regulations of the Securities and Exchange
Commission (the "SEC"), a person who has or shares the power to direct the
voting or disposition of stock is considered a "beneficial owner". Each
individual referred to in the above table has the sole power to direct the
voting and disposition of the shares shown.
(b) The number reported herein for Mr. Walters includes 117,220
shares owned by Mr. Walters, 117,220 shares owned by Whale Securities Co.,
L.P., of which Mr. Walters is Chief Executive Officer. Mr. Walters has
sole power to vote and dispose of the shares described herein.
(c) For additional information about beneficial ownership see
"Securities Owned by Management" below.
25
SECURITIES OWNED BY MANAGEMENT
The following table sets forth certain information as of January 15,
1999, with respect to the beneficial ownership of the Company's Common
Stock with respect to all persons who are directors, each of the executives
named in the Executive Compensation Table and by all directors and officers
as of the most practical date. Unless otherwise indicated, the percentage
of stock owned constitutes less than one percent of the outstanding Common
Stock and the beneficial ownership for each person consists of sole voting
and sole
investment power.
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
Gerald Agranoff 25,000 (b) 0.57
Asher B. Edelman 2,446,075 (c)(d) 56.27
Reginald Schauder 19,600 (e) 0.45
Michael E. Schultz 314,335 (f)(g) 6.86
All Directors and Officers
as a group (4 persons) 2,805,010 60.04
(a) Under applicable regulations of the Securities and Exchange
Commission (the "SEC"), a person who has or shares the power to direct the
voting or disposition of stock is considered a "beneficial owner". Each
director and officer referred to in the above table has the sole power to
direct the voting and disposition of the shares shown, except as otherwise
set forth in footnotes (c), (d) and (f) below.
(b) Includes 25,000 shares subject to options which are presently
exercisable.
(c) The number reported herein for Mr. Edelman includes 31,300 shares
held in Mr. Edelman's retirement plan, 20,000 shares subject to options
granted to Mr. Edelman which are presently exercisable, 1,017,220 shares
owned by A.B. Edelman Limited Partnership ("Edelman Limited Partnership"),
of which Mr. Edelman is the sole general partner, 590,186 shares of common
stock owned by the Edelman Family Partnership, L.P. ( Edelman Family
Partnership ), of which Mr. Edelman is the general partner, 385,250 shares
of common stock owned by the Edelman Value Fund Ltd. (the Fund ) of which
Mr. Edelman is the investment manager, 30,000 shares of common stock owned
by Edelman Value Partners, L.P. ( Value Partners ), of which Mr. Edelman is
the sole stockholder of the general partner, 26,620 shares of common stock
held by Canal Capital Corporation Retirement Plan ( Canal Retirement
Plan ), of which
26
Mr. Edelman serves as a trustee, 8,400 shares owned by Aile Blanche, Inc.,
of which Mr. Edelman is the sole stockholder and 3,399 shares owned by
Felicitas Partners, L.P. ("Felicitas"), the general partner of which is
Citas Partners ("Citas") of which Mr. Edelman is the controlling general
partner. Edelman Limited Partnership has the sole power to vote and dispose
of the shares owned by it, which power is exercisable by Mr. Edelman as the
sole general partner of Edelman Limited Partnership. Edelman Family
Partnership has the sole power to vote and dispose of the shares owned by
it, which power is exercisable by Mr. Edelman as the general partner. Mr.
Edelman as the investment manager of the Fund directs the voting and
disposition of the Fund s securities. Value Partners has shared power to
vote and dispose of the shares owned by it. The power to dispose of such
shares is exercisable by A. B. Edelman Management Company, Inc., a
corporation controlled by Mr. Edelman as the sole stockholder. Canal
Retirement Plan has the sole power to vote and dispose of the shares owned
by it, which power is exercisable by Mr. Edelman as trustee. Aile Blanche,
Inc. has the sole power to vote and dispose of the shares owned by it,
which power is exercisable by Mr. Edelman as President. Felicitas has the
sole power to vote and dispose of the shares owned by it, which power is
exercisable by Mr. Edelman as the controlling general partner of Citas.
Additionally, the number reported herein for Mr. Edelman includes 142,150
shares of common stock owned by Mr. Edelman's wife, 2,900 shares held in
his wife's retirement plan and 188,650 shares of common stock held in three
Uniform Gifts to Minors Act accounts for the benefit of Mr. Edelman's
children of which Mr. Edelman is the custodian.
(d) The number reported herein for Mr. Edelman excludes 39,865 shares
of common stock owned by Mr. Edelman's former wife and 22,510 shares of
common stock held in three Uniform Gifts to Minors Act accounts for the
benefit of Mr. Edelman's children, of which Mr. Edelman's former wife is
the custodian, as to which Mr. Edelman expressly disclaims beneficial
ownership.
(e) Includes 100 shares owned directly and 19,500 shares subject to
options which are presently exercisable.
(f) Includes 58,835 shares owned directly and 255,500 shares subject
to options which are presently exercisable.
(g) The number reported herein for Mr. Schultz excludes 590,186
shares of common stock held in three trusts for the benefit of Mr.
Edelman's children of which Mr. Schultz serves as the trustee for each of
the trusts and 26,620 shares of common stock held by the Canal Capital
Corporation Retirement Plan of which Mr. Schultz serves as a trustee, as to
which Mr. Schultz expresses disclaims beneficial ownership.
ITEM 13. Certain Relationships and Related Transactions
See: "Compensation Committee Interlocks and Insider
Participation"
27
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a) 1. Financial Statements and Notes
See accompanying index to consolidated financial statements.
(a) 2. Schedules and Supplementary Note
None
(a) 3. Exhibits
See accompanying index to exhibits.
(b) Reports on Form 8-K
During the quarter ended October 31, 1998 the Company filed
no reports on Form 8-K.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
25th day of January, 1999.
CANAL CAPITAL CORPORATION
By: /S/ Michael E. Schultz
Michael E. Schultz
President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
President and Chief
/S/ Michael E. Schultz Executive Officer and Director
Michael E. Schultz (Principal Executive Officer) January 25, 1999
Vice President-Finance
Secretary and Treasurer
/S/ Reginald Schauder (Principal Financial and
Reginald Schauder Accounting Officer) January 25, 1999
/S/ Asher B. Edelman Chairman of the Board
Asher B. Edelman and Director January 25, 1999
/S/ Gerald N. Agranoff
Gerald N. Agranoff Director January 25,
1999
29
FORM 10-K -- ITEM 14(a)(1) and (2)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
The following documents are filed as part of this report:
(a) 1. Financial Statements --
Independent Accountants Report.......................... F-2
Consolidated Balance Sheets October 31, 1998 and 1997... F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended October 31, 1998, 1997
and 1996............................................. F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended October 31, 1998, 1997
and 1996............................................. F-7
Consolidated Statements of Cash Flows for the
years ended October 31, 1998, 1997 and 1996.......... F-8
Notes to Consolidated Financial Statements.............. F-9
F-1
INDEPENDENT ACCOUNTANTS REPORT
To the Stockholders of Canal Capital Corporation:
We have audited the accompanying consolidated balance sheets of Canal
Capital Corporation (a Delaware corporation) and Subsidiaries as of October
31, 1998 and 1997 and the related consolidated statements of operations &
comprehensive income, changes in stockholders' equity and cash flows for
each of the years in the three year period ended October 31, 1998. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Canal Capital
Corporation and Subsidiaries as of October 31, 1998 and 1997, and the
results of their operations and cash flows for each of the years in the
three year period ended October 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 1, 5
and 17 to the financial statements, the Company has suffered recurring
losses from operations in eight of the last ten years and is involved in
various litigations. All of these matters raise substantial doubt about
the company s ability to continue as a going concern. Management's plans
in regard to these matters are also described in Notes 1, 5 and 17. 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.
/S/ Todman & Co., CPA s,P.C.
New York, N.Y.
TODMAN & CO., CPAs, P.C.
December 23 , 1998
Certified Public Accountants (N.Y.)
F-2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
1998 1997
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 33,538 $ 28,225
RESTRICTED CASH AND
CASH EQUIVALENTS 0 0
NOTES AND ACCOUNTS RECEIVABLE, NET 211,070 271,891
ART INVENTORY (NET OF A
VALUATION ALLOWANCE OF $ 1,500,000
AND $500,000 AT OCTOBER 31,
1998 AND 1997, RESPECTIVELY) 500,000 500,000
INVESTMENTS 278,175 1,151,358
PREPAID EXPENSES 173,938 199,888
TOTAL CURRENT ASSETS 1,196,721 2,151,362
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 1,671,222
AND $ 2,407,533 FOR 1998 AND 1997,
RESPECTIVELY 5,861,064 5,323,177
ART INVENTORY NON-CURRENT (NET OF
VALUATION ALLOWANCE OF $ 1,900,000
AND $2,350,000) AT OCTOBER 31, 1998 AND
1997, RESPECTIVELY 949,125 2,310,857
OTHER ASSETS:
PROPERTY HELD FOR
DEVELOPMENT OR RESALE 1,318,095 2,843,305
DEFERRED LEASING AND
FINANCING COSTS 12,866 39,655
DEPOSITS AND OTHER 169,578 291,787
1,500,539 3,174,747
$ 9,507,449 $12,960,143
============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1998 AND 1997
LIABILITIES & STOCKHOLDERS' EQUITY 1998 1997
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT-
RELATED PARTY $ 0 $ 0
CURRENT PORTION OF LONG-TERM DEBT 110,000 98,000
ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 2,061,210 1,871,963
ACCRUED LITIGATION SETTLEMENT 0 0
INCOME TAXES PAYABLE 14,314 97,995
TOTAL CURRENT LIABILITIES 2,185,524 2,067,958
LONG-TERM DEBT, LESS
CURRENT PORTION 2,321,433 2,375,496
LONG-TERM DEBT, RELATED
PARTY 2,846,000 3,675,000
5,167,433 6,050,496
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 3,411,681 AND
2,997,900 SHARES ISSUED AND OUTSTANDING AND
AGGREGATE LIQUIDATION PREFERENCE OF $10.00
PER SHARE FOR $ 34,116,810 AND $ 29,979,000
AT OCTOBER 31, 1998 AND 1997,
RESPECTIVELY 34,117 29,979
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED; 4,326,929 SHARES OUTSTANDING
AT OCTOBER 31, 1998 AND 1997,
RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 7,033,046 26,826,293
ACCUMULATED DEFICIT (11,808,043) (10,194,335)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
PENSION VALUATION RESERVE (1,896,838) (1,485,641)
UNREALIZED GAIN ON INVESTMENTS
AVAILABLE FOR SALE (257,383) 615,800
2,154,492 4,841,689
$ 9,507,449 $12,960,143
============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
1998 1997 1996
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $1,434,439 $2,496,943 $5,170,872
RENTAL INCOME 1,376,714 1,591,005 2,072,593
GROUND LEASE INCOME 924,000 924,000 936,000
VOLUME BASED
RENTAL INCOME 125,617 110,414 657,184
OTHER INCOME 375,000 71,109 17,091
4,235,770 5,193,471 8,853,740
REAL ESTATE EXPENSES:
COST OF REAL
ESTATE SOLD 1,019,509 896,698 1,386,029
LABOR, OPERATING
AND MAINTENANCE 891,809 833,181 964,918
DEPRECIATION
AND AMORTIZATION 216,572 343,741 359,263
TAXES OTHER THAN
INCOME TAXES 240,415 256,800 360,000
PROVISION FOR
LITIGATION SETTLEMENT 0 (60,359) 434,918
WRITE DOWN OF REAL
ESTATE PROPERTY 0 936,689 0
GENERAL AND
ADMINISTRATIVE 89,352 104,606 107,239
2,457,657 3,311,356 3,612,367
INCOME FROM REAL
ESTATE OPERATIONS 1,778,113 1,882,115 5,241,373
ART OPERATIONS:
ART REVENUES:
SALES 220,800 114,350 195,400
OTHER REVENUES 0 2,982 0
220,800 117,332 195,400
ART EXPENSES:
COST OF ART SOLD 814,936 432,286 326,399
VALUATION RESERVE 550,000 350,000 1,500,000
SELLING, GENERAL AND
ADMINISTRATIVE 39,920 44,541 49,010
1,404,856 826,827 1,875,409
LOSS FROM ART
OPERATIONS (1,184,056) (709,495) (1,680,009)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
Continued ...
1998 1997 1996
GENERAL AND
ADMINISTRATIVE EXPENSE(1,218,239) (1,256,854) (1,348,179)
(LOSS) INCOME FROM
OPERATIONS (624,182) (84,234) 2,213,185
OTHER INCOME (EXPENSE):
INTEREST AND OTHER
INCOME 147,744 236,470 145,819
INTEREST EXPENSE (333,424) (804,719) (1,494,271)
INTEREST EXPENSE-
RELATED PARTY (464,300) (149,000) (23,000)
OTHER EXPENSE (139,308) (200,000) 0
(789,288) (917,249) (1,371,452)
(LOSS) INCOME BEFORE
PROVISION FOR INCOME
TAXES (1,413,470) (1,001,483) 841,733
PROVISION FOR INCOME TAXES 0 0 0
NET (LOSS) INCOME ($1,413,470) $(1,001,483) $ 841,733
OTHER COMPREHENSIVE (LOSS) INCOME:
MINIMUM PENSION
LIABILITY ADJUSTMENT (411,197) 134,055 116,975
UNREALIZED GAIN
ON INVESTMENTS
AVAILABLE FOR SALE (873,183) 615,800 0
COMPREHENSIVE
(LOSS) INCOME ($2,697,850) ($251,628) $ 958,708
(LOSS) INCOME PER COMMON SHARE:
- BASIC ($0.37) ($0.27) $ 0.16
- DILUTED ($0.37) ($0.27) $ 0.13
WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC 4,326,929 4,326,929 4,326,929
- DILUTED 4,326,929 5,326,929 5,326,929
SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1998, 1997, AND 1996
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, NOV 1, 1995 5,313,794 $53,138 2,358,542 $23,585
NET INCOME 0 0 0 0
PFD STOCK DIVIDEND 0 0 344,757 3,448
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
----------------- ---------------------
BALANCE, OCT 31, 1996 5,313,794 $53,138 2,703,299 $27,033
NET INCOME 0 0 0 0
PFD STOCK DIVIDEND 0 0 294,601 2,946
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED GAIN ON INVEST. 0 0 0 0
------------------- ---------------------
BALANCE, OCT 31, 1997 5,313,794 $53,138 2,997,900 $29,979
NET LOSS 0 0 0 0
PFD STOCK DIVIDEND 0 0 413,781 4,138
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED LOSS ON INVEST. 0 0 0 0
-------------------- ---------------------
BALANCE, OCT 31, 1998 5,313,794 $53,138 3,411,681 $34,117
=================== =====================
ADDITIONAL TREASURY
PAID-IN ACCUMULATED COMPREHENSIVE STOCK,
CAPITAL DEFICIT (LOSS)INCOME AT COST
BAL, NOV 1, 1995 $26,468,008($9,690,693)($1,736,671)($11,003,545)
NET INCOME 0 841,733 0 0
PFD STOCK DIVIDEND 168,931 (162,039) 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 116,975 0
UNREALIZED GAIN ON INVEST. 0 0 0 0
--------- -------------- ------------ ------------
BAL, OCT 31, 1996 $26,636,939($9,010,999)($1,619,696)($11,003,545)
NET INCOME 0 (1,001,483) 0 0
PFD STOCK DIVIDEND 189,354 (181,853) 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 134,055 0
UNREALIZED GAIN ON INVEST. 0 0 615,800 0
------------ ----------- ------------ ---------
BAL, OCT 31, 1997 $26,826,293($10,194,335)($ 869,841)($11,003,545)
NET INCOME 0 (1,413,470) 0 0
PFD STOCK DIVIDEND 206,753 (200,238) 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 (411,197) 0
UNREALIZED LOSS ON INVEST. 0 0 (873,183) 0
----------- ----------- ---------- ----------
BAL, OCT 31, 1998 $27,033,046($11,808,043)($2, 154,221)($11,003,545)
============= =========== =========== =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1998, 1997 AND 1996
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) ($1,413,470) ($1,001,483) $841,733
ADJUSTMENTS TO RECONCILE
NET (LOSS) INCOME
TO NET CASH PROVIDED
(USED) BY OPERATING
ACTIVITIES:
(CREDIT)PROV. FOR
LITIGATION SETTLEMENT 0 (60,359) 434,918
DEPRECIATION AND
AMORTIZATION 265,659 419,897 434,532
GAIN ON SALES
OF REAL ESTATE (414,930) (1,600,245) (3,784,843)
VALUATION RESERVE -
ART INVENTORY 550,000 350,000 1,500,000
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS
RECEIVABLES, NET 60,821 23,311 (53,424)
ART INVENTORY, NET 811,732 428,231 311,507
PREPAID EXPENSES
AND OTHER, NET (503,286) 826,419 (677,535)
PAYABLES AND
ACCRUED EXPENSES, NET 105,566 (892,611) 203,221
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (537,908) (1,506,840) (789,891)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES
OF REAL ESTATE 1,434,439 2,496,943 5,170,872
CAPITAL EXPENDITURES (60,155) (47,237) (128,626)
NET CASH PROVIDED BY
INVESTING ACTIVITIES 1,374,284 2,449,706 5,042,246
CASH FLOWS FROM
FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM
DEBT-RELATED PARTIES 3,740,000 0 0
REPAYMENT OF SHORT-TERM
BORROWINGS 0 (466,000) 0
REPAYMENT OF LONG-TERM
DEBT OBLIGATIONS (4,571,063) (929,273) (3,886,473)
NET CASH USED BY
FINANCING ACTIVITIES (831,063) (1,395,273) (3,886,473)
DECREASE (INCREASE) IN
RESTRICTED CASH AND
CASH EQUIVALENTS 0 470,000 (470,000)
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS 5,313 17,593 (104,118)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 28,225 10,632 114,750
CASH AND CASH EQUIVALENTS
AT END OF YEAR $33,538 $ 28,225 $ 10,632
========== ========== ==========
NOTE: IN FISCAL 1998, 1997 AND 1996,$ 200,238, $ 181,853 AND $ 162,039,
RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE
ISSUANCE OF 413,781, 294,601 AND 344,757 , RESPECTIVELY, OF SHARES OF
PREFERRED STOCK.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
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 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 uncertainties (See Notes 1, 6 and 17). 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.
F-9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Principles of Consolidation -- The consolidated financial
statements include the accounts of Canal Capital Corporation ("Canal") and
its subsidiaries ( the Company ). Investments in which ownership interest
range from 20% to 50% or less owned joint ventures are accounted for under
the equity method. These joint ventures are not, in the aggregate,
material in relation to the financial position or results of operations of
Canal. The carrying amount of such investments was $101,000 and $208,000
at October 31, 1998 and 1997, respectively, and is included in other
assets. The operating results of joint ventures accounted for on the
equity method, for fiscal year 1998, 1997 and 1996 were not material to
financial statement presentation and were therefore included in other
income from real estate operations. All significant intercompany balances
and transactions have been eliminated in consolidation.
B) Investments Available for Sale -- 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 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.
C) Properties and Related Depreciation -- Properties are stated at
cost less accumulated depreciation. Depreciation is provided on the
straight-line method over the estimated useful lives of the properties.
Such lives are estimated from 35 to 40 years for buildings and from 5 to 20
years for improvements and equipment.
Property held for Development or Resale -- Property held for
development or resale consist of approximately 237 acres located in the
midwest of undeveloped land not currently utilized for corporate purposes
nor included in any of the present operating leases. The Company
constantly evaluates proposals received for the purchase, leasing or
development of this asset. The land is valued at cost which does not
exceed the net realizable value.
F-10
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Impairment of Long-Lived Assets The Company adopted Statement of
Financial Accounting Standards No. 121 Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets to be Disposed of ( SFAS No.
121") as of November 1, 1996. SFAS No. 121 prescribes that an impairment
loss is recognized in the event that facts and circumstances indicate that
the carrying amount of an asset may not be recoverable and an estimate of
future undiscounted cash flows is less than the carrying amount of the
asset. Assets are grouped and evaluated at the lowest level for which
there are identifiable cash flows that are largely independent of the cash
flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the
estimated future cash flows expected to result from the use of the asset.
An impairment loss is recognized whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. (See Note 20).
D) Expenditures for maintenance and repairs are charged to operations
as incurred. Significant renewals and betterments are capitalized. When
properties are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss
is reflected in current income.
E) Art Inventory - Inventory of art is valued at the lower of cost,
including direct acquisition and restoration expenses, or net realizable
value on a specific identification basis. Net realizable value is
determined in part by independent appraisal. Independent appraisals
covered approximately 50% and 49% of the inventory value at October 31,
1998 and 1997, respectively. The remaining 50% and 51% at October 31, 1998
and 1997, respectively was estimated by management based in part on the
independent appraisals done. However, because of the nature of art
inventory, such determination is very subjective and, therefore, the
estimated values could differ significantly from the amount ultimately
realized.
The cost of art is generally specified on the purchase invoice.
When individual art is purchased as part of a group or collection of art,
cost is allocated to individual pieces by management using the information
available to it. A significant portion of the art inventory remains in
inventory longer than a year. Consequently, for financial statement
purposes, Canal has classified a portion of its inventory as non-current
assets (see Note 8). Antiquities and contemporary art represented 49%
($713,862) and 51% ($735,263) and 63% ($1,775,594) and 37% ($1,035,263) of
total art inventory at October 31, 1998 and 1997, respectively.
Substantially all of the contemporary art inventory held for resale is
comprised of the work of Jules Olitski.
F-11
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
F) Deferred Leasing and Financing Costs -- Costs incurred in
obtaining new leases and long-term financing are deferred and amortized
over the terms of the related leases or debt agreements, as applicable.
G) Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
H) Revenue Recognition -- Revenues from art sales are recognized
using the specific identification method, when the piece is shipped to the
purchaser. Art owned by Canal which is on consignment, joint venture, or
being examined in contemplation of sale is not removed from inventory and
not recorded as a sale until notice of sale or acceptance has been
received. Lease and rental revenues are recognized ratably over the period
covered. All real estate leases are accounted for as operating leases.
Revenues from
real estate sales are recognized generally when title to the property
passes. Revenues from the sale of investments available for sale, if any,
are recognized, on a specific identification method, on a trade date basis.
I) Income Taxes -- Canal and its subsidiaries file a consolidated
Federal income tax return. Deferred income taxes, if any, are provided for
temporary differences between financial reporting and taxable basis of
assets and liabilities.
J) Statements of Cash Flows -- The company considers all short-term
investments with a maturity of three months or less to be cash equivalents.
Cash equivalents primarily include bank, broker and time deposits with an
original maturity of less than three months. These investments are carried
at cost, which approximates market value. Canal made federal and state
income tax payments of $30,000, $40,000 and $38,000 and interest payments
of $798,000, $954,000 and $1,297,000 in 1998, 1997 and 1996, respectively.
K) Earnings Per Share -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 128 Earnings Per Share, which requires companies to present basic
earnings per share (EPS) and diluted earnings per share, instead of the
primary and
F-12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
fully diluted EPS that is currently required. The new standard requires
additional information disclosure, and also makes certain modifications to
the currently applicable EPS calculations defined in Accounting Principles
Board No. 15. The new standard was required to be adopted by all public
companies for reporting periods ending after December 15, 1997, and
requires restatement of EPS for all prior periods reported. The Company
adopted SFAS No. 128, for the years ended October 31, 1997 and 1996,
respectively.
L) Comprehensive Income -- Effective for fiscal years beginning after
December 15, 1997, Statement of Financial Accounting Standards No. 130
requires that comprehensive income and its components, as defined in the
statement, be reported in a financial statement. The Company elected
early adoption of SFAS No. 130 as of October 31, 1997. The only
adjustments for each classification of the comprehensive income was for
minimum pension liability and unrealized (loss) gain on investments
available for sale.
M) Reclassification -- Certain prior year amounts have been
reclassified to conform to the current year's presentation.
3. INVESTMENTS AVAILABLE FOR SALE
At October 31, the investments available for sale consisted of the
following:
($ 000's Omitted) 1998 1997
Aggregate market value..................... $ 278 $1,151
Aggregate carrying value................... $ 278 $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
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.
Canal recognized an unrealized (loss) and an unrealized gain on
investments of ($873,000) and $616,000 for the years ended October 31, 1998
and 1997, respectively, which are shown as a separate component of
Stockholders Equity.
F-13
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. STOCKYARD OPERATIONS SALE
On October 31, 1989, Canal sold most of its stockyards assets to a
group formed by a former Executive Vice President and Director of the
Company. Not included in the sale was certain land and some facilities
previously used by the stockyards operations. Canal entered into a master
lease (the "Lease")
with the purchaser covering this land and facilities at five locations.
The lease is a ten year lease, renewable at the purchaser s option
for an
additional ten years, with annual rentals of $750,000 per year for the
first year escalating to $1 million per year for the fourth through the
tenth years
and $1 million adjusted for CPI increases thereafter. Canal has
renegotiated the lease as it relates to the Omaha, Nebraska property, and
accordingly, Canal s fiscal 1997 revenue from this lease was $924,000. In
September, 1998 Canal sold approximately a 60 acre parcel of land to the
City of Omaha, Nebraska. This sale included the Exchange Building, the
seventeen acres of land leased to the stockyard operator as well as a
number of abandoned former stockyards structures. As part of this
transaction, Canal continues to receive the stockyards rental payment under
the lease for as long as the stockyards continue to operate on the subject
property. The Company anticipates that this rental income will continue
throughout fiscal 1999. Canal could be entitled to receive additional rent
if the stockyards livestock value or cash flow (as defined) exceeds certain
levels. In addition, Canal retained the right to receive income from
certain volume based rental income agreements with various meat packing
companies located near the stockyards. The income from the ground lease is
included in Canal's operating results as Real Estate operations.
Revenues from the volume based rental agreements for the three years
ended October 31, 1998 were:
($ 000's Omitted) 1998 1997 1996
Sioux City, Iowa (1) $ 0 $ 0 $ 537
Fargo, North Dakota (2) 126 110 120
$ 126 $ 110 $ 657
(1) On September 20, 1996 Canal entered into a Mutual Release and
Settlement Agreement with the Sioux City, Iowa meat packer which
terminated the lease. Accordingly, the 1996 revenues are for
eleven months only and there were no such revenues in fiscal 1997
or 1998.
(2) Canal is involved in litigation with the operator under this
lease.(see Note 15).
F-14
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. BORROWINGS
At October 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 for the following
obligations:
October 31,
($ 000's Omitted) 1998 1997
Variable rate mortgage notes
due May 15, 2001 - related party ................ $ 2,846 $ 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....... 1,210 1,266
9.5% mortgage note; original principal amount
$472; due November 1, 2012; payable in monthly
installments (including interest) of $4........ 393 405
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........ 466 477
Other Note - related party....................... 0 320
Other Note ...................................... 362 325
Total ........................................... 5,277 6,148
Less -- current maturities ...................... 110 98
Long-term debt $ 5,167 $ 6,050
F-15
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. At October 31, 1998 the Company was
in technical default of this mortgage note agreement as it relates to
minimum net worth. The Company requested and has received a waiver of this
default from the note holders. As of October 31, 1998 the balance due
under these notes was $2,846,000 all of which is classified as long-term
debt-related party.
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 extended these notes to May 15, 1998 under essentially the
same terms and conditions. In fiscal 1996, this agreement was further
amended to provide for the forgiveness of all additional interest accrued
in the event that the Company meets on a timely basis all its obligations
under the Note, including the payment of all other principal and accrued
interest on or before May 15, 1998. As discussed above, these notes were
repaid on January 8, 1998.
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 had essentially the same terms and conditions as the notes discussed
above. As discussed above, these notes were repaid On January 8, 1998.
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. Both these notes were
subsequently extended to December 31, 1998. The $150,000 note was
convertible at the holder s option into one million (1,000,000) shares of
the
F-16
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Company's common stock. The notes paid quarterly interest at the prime
rate
per annum (which was 8.5% at October 31, 1997) and were secured by 125,000
shares of Datapoint Corporation common stock owned by the Company. The
proceeds from this loan were used by the Company to meet its obligations
under its then secured credit line. As discussed above, these notes were
repaid in full in fiscal 1998.
On December 1, 1997 the Company issued a $325,000 promissory note due
December 1, 2001 as the result of a settlement agreement with the buyer of
a parcel of land located in Portland, Oregon which Canal sold in 1988. The
note carries interest at the prime rate (8.5% at October 31, 1998) adjusted
semi-annually and requires principal and interest payments in each of the
first four years (based on a 30 year amortization schedule) commencing
December 1, 1997. The balance is payable in full on December 1, 2001. The
balance outstanding on this note at October 31, 1998 was $322,000.
The scheduled maturities and sinking fund requirements of long-term
debt during the next five years are as follows ($ 000's Omitted):
Year Ending Amount
1999 $ 110
2000 133
2001 3,833
2002 446
2003 120
Thereafter 635
$ 5,277
6. INCOME TAXES
Statement of Financial Accounting Standard No. 109 - Accounting for
income taxes, which establishes accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during
the current year and preceding years became effective for the Company for
its fiscal year ended October 31, 1994. Its implementation had no
material
effect on the financial statements of the Company. Under FAS 109, the
utilization of the net operating loss carryforwards are not presented as
extraordinary items. For the year ended October 31, 1997 approximately
$760,000 of net operating loss carryforwards have been utilized to
eliminate the Company s taxable income.
F-17
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In addition, the Company has carryforward losses which are available
to offset future federal and state taxable income. For federal income tax
reporting purposes, such losses expire as follows:
Year Ending Amount
2006 $3,633,545
2008 1,750,455
2010 1,379,952
2011 283,972
2012 1,267,839
2018 1,063,000
$9,378,763
Deferred income tax assets as of October 31, 1998, 1997 and 1996, due
primarily to net operating losses, have been reduced to zero by valuation
reserves of approximately $1,300,000, $1,200,000 and $2,700,000,
respectively due to uncertainties concerning their realization.
7. PENSION PLANS
Canal has a defined benefit pension plan covering substantially all of
its salaried employees (the "Plan"). The benefits are based on years of
service and the employee's compensation earned each year. The Company's
funding policy is to contribute the amount that can be deducted for federal
income tax purposes. Accordingly, the Company will make a contribution of
approximately $150,000 for fiscal 1998 and has made contributions of
approximately $162,000 for fiscal 1997 and $164,000 for fiscal 1996.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
Assets of the plan were invested in U.S. Government securities, common
stocks and antiquities.
Assumptions used in computing the 1998, 1997 and 1996 pension cost
were:
1998 1997 1996
Discount rate ...................... 7.00% 7.25% 7.75%
Rate of increase in compensation
level ........................... 5.50% 5.75% 6.25%
Expected long-term rate of return
on assets ....................... 10.00% 10.00% 10.00%
F-18
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated balance sheets at October 31, 1998
and 1997.
Plan Year
($ 000's Omitted) 1998 1997
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $1,449 and $1,487 in
1998 and 1997, respectively ............. $ 1,449 $ 1,490
Additional benefit due to assumed future
compensation levels ......................... 26 25
Projected benefit obligation (1) .............. 1,475 1,515
Plan assets at fair value ..................... 707 1,105
Projected benefit obligation in excess
of plan assets ............................. 768 410
Unrecognized net obligation ................... 101 126
Unrecognized net loss ......................... (2,024) (1,636)
Valuation reserve to recognize accrued pension
costs in the consolidated balance sheets .... 1,897 1,486
Accrued pension cost included among accrued
expenses in the consolidated balance sheets.. $ 742 $ 386
(1) The vast majority of the projected benefit obligation is related
to the Company's former stockyard employees.
Net periodic pension cost for plan years ended October 31, 1998, 1997
and 1996 included the following components:
Plan Year
($ 000's Omitted) 1998 1997 1996
Service costs - benefits earned during
the period ..................... $ 9 $ 8 $ 8
Interest cost on projected benefit
obligation ..................... 101 106 104
(Return) loss on assets ............ 359 (250) (95)
Net amortization and deferral .... (408) 193 35
Net period pension cost .......... $ (61) $ 57 $ 52
F-19
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. ART OPERATIONS
Canal's art dealing operations consist primarily of inventories held
for resale of antiquities primarily from ancient Mediterranean cultures and
contemporary art primarily of one artist. Canal carries on its art dealing
operations through various consignment agreements relating to its
antiquities and contemporary art inventories.
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 $700,000 at October 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 49% ($713,862) and 51% ($735,263) and 63%
($1,775,594) and 37% ($1,035,263) of total art inventory at October 31,
1998 and 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 approximately 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 and public auction sales. The net realizable value of the
remaining 50% of
F-20
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
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. Canal will continue to closely monitor the market for
its art inventory and will make adjustments to the carrying value of its
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 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.
Canal's art operations have generated operating losses of
approximately $1,184,000, $709,000 and $1,680,000 on revenues of
approximately $221,000, $117,000 and $195,000 for the years ended October
31, 1998, 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 the orderly
reduction of its antiquities and contemporary art.
The Company had approximately $2,140,000 and $1,683,000 of art
inventory on consignment with third party dealers at October 31, 1998 and
1997, respectively.
F-21
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ART INVENTORY - The Company classified its art inventory for the two
years ended October 31, 1998 and 1997 as follows ($ 000's Omitted):
Current Portion Non-Current Portion Total
1998 1997 1998 1997 1998 1997
Antiquities $1,000 $ 900 $ 1,114 $2,026 $ 2,114 $ 2,926
Contemporary 1,000 100 1,735 2,635 2,735 2,735
Valuation
Allowance (1,500) (500) (1,900) (2,350) ( 3,400) (2,850)
Net Value $ 500 $ 500 $ 949 $2,311 $ 1,449 $ 2,811
The amount recorded as the current portion of art inventory represents
management's estimate of the inventory expected to be sold during the next
twelve months. The Company recorded a valuation allowance against the
current portion of its inventory to reduce it to its estimated net
realizable value based on the history of losses sustained on inventory
items sold in the current and previous years.
Art sales for the three years ended October 31, 1998, 1997, and 1996
were as follows:
($ 000's Omitted) 1998 1997 1996
Antiquities $ 221 $ 77 $ 195
Contemporary 0 40 0
$ 221 $ 117 $ 195
9. NOTES AND ACCOUNTS RECEIVABLE
Included in notes and accounts receivable at October 31, 1998 and 1997
were the current portion of notes receivable in the amount of $15,000 and
$25,000, respectively, which were generated by real estate and other sales.
Notes and accounts receivable is shown net of a provision for doubtful
accounts in the amount of $0 and $20,000 for fiscal 1998 and 1997,
respectively.
F-22
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. LEASE COMMITMENTS
Canal currently occupies 4,200 square feet of commercial office space
in New York City for its headquarters operation. This space is under a
five year lease expiring December 31, 1998. Canal is exploring its options
for future space and will remain at its current location on a month-to-
month basis for the time being.
The following is a schedule of future minimum payments required under
operating leases that have initial or remaining noncancellable terms in
excess of one year as of October 31, 1998:
Year ended October 31, ($ 000's Omitted)
1999 Minimum payments required .................. $ 26
Rental income under subleases ................... (10)
Net minimum payments required ................... $ 16
Rent expense under these and other operating leases for the years
ended October 31, 1998, 1997 and 1996 were as follows:
($ 000's Omitted) 1998 1997 1996
Minimum rentals ................... $ 26 $ 159 $ 160
Less: sublease rentals ........... (10) (47) (39)
$ 16 $ 112 $ 121
11. IMPAIRMENT LOSS ON LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No.
121 Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of ( SFAS No. 121") as of November 1, 1996. The
Company recognized an impairment loss of $0.9 million in fiscal 1997 on the
write-down of its Omaha, Nebraska property. This was the result of the
Company entering into two agreements to sell a substantial portion of its
holdings in Omaha, Nebraska for approximately $1.0 million in November
1997. As a result, the anticipated undiscounted future cash flow of this
group of assets exceeded their carrying values as of October 31, 1997
requiring an impairment loss in long-lived assets to be recognized in
fiscal 1997. There was no similar loss to be recognized in fiscal 1998.
F-23
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK OPTION PLAN
Under Canal's 1984 Employee and 1985 Directors Stock Option Plans,
$550,000 and 264,000 shares, respectively, of Canal's common stock have
been reserved for option grants. The purchase price of shares subject to
each option granted, under the Employee and Directors Plans, will not be
less than 85% and 100%, respectively, of their fair market value at the
date of grant. At October 31, 1998 the purchase price of shares subject to
each option granted equaled 100% of the fair market value on the date of
grant. Options granted under both plans are exercisable for 10 years from
the date of grant, but no option will be exercisable earlier than one year
from the date of grant. Under the Employee Plan, stock appreciation rights
may be granted in connection with stock options, either at the time of
grant of the options or at any time thereafter. No stock appreciation
rights have been granted under this plan. At October 31, 1998, there were
323,000 exercisable options outstanding under these plans.
Transactions under these plans are summarized as follows:
Shares Option Price Range
Balance outstanding October 31, 1996.... 327,000 $0.125-$8.625
Options granted ........................ 0 - -
Options expired ........................ (4,000) $8.625-$8.625
Balance outstanding October 31, 1997.... 323,000 $0.125-$5.375
Options granted 0 - -
Options expired 0 $ - -
Balance outstanding October 31, 1998.... 323,000 $0.125-$5.375
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost
has been recognized for the years ended October 31, 1998, 1997 and 1996.
In October, 1995, the Financial Accounting Standards Board issued
Statement (SFAS) No. 123, Accounting for Stock Based Compensation, which
becomes effective for transactions entered into in fiscal years beginning
after December 15, 1995. This statement permits an entity to apply the
fair value based method to stock options awarded during 1995 and thereafter
in order to measure the compensation cost at the grant date and recognize
it over its vesting period. This statement also allows an entity to
continue to measure compensation costs for these plans pursuant to APB
Opinion 25. Entities electing to remain with the accounting treatment
under APB Opinion 25 must make proforma disclosures of net income and
earnings per share to include the effects of all awards granted in fiscal
years beginning after December 31, 1994, as if the fair value based method
of accounting pursuant to SFAS No. 123 has been applied.
F-24
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company adopted the disclosure requirements for this statement
effective for the year ending October 31, 1996, while continuing to
measure compensation cost using APB 25. Had compensation cost been
determined on the basis of SFAS No. 123, the proforma effect on the
Company s net income and earnings per share for the years ended October 31,
1998 and 1997 would have been deminimus.
13. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID
During the fiscal years ended October 31, 1998, 1997 and 1996, the
Company had 323,000, 323,000 and 327,000 options outstanding, respectively.
The options were not included in the computation of diluted earnings (loss)
per share because the effect of exercisable price conversion would be
antidilutive. There were no dividends declared on common stock during the
years ended October 31, 1998, 1997 and 1996. Dividends declared on
preferred stock during the years ended October 31, 1998, 1997 and 1996 were
approximately $200,000, $182,000 and $162,000.
Basic earnings (loss) per share are computed by dividing earnings
(loss) available to common stockholders by the weighted average number of
common share outstanding during the period. Diluted earnings (loss) per
share reflect per share amounts that would have resulted if dilutive
potential common stock had been reported in the financial statements.
For the Year Ended October 31, 1998
Income Shares Per-share
(Numerator) (Denominator) Amount
Net loss $(1,413,000)
Less preferred stock dividends (200,000)
Loss available to common stock-
holders-basic earnings per share(1,613,000) 4,327,000 $(0.37)
Effect of dilutive securities:
Options (antidilutive) N/A N/A N/A
Loss available to common stock-
holders-diluted earnings
per share $(1,613,000) 4,327,000 $(0.37)
F-25
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended October 31, 1997
Income Shares Per-share
(Numerator) (Denominator) Amount
Net loss (1,001,000)
Less pfd stock dividends(182,000)
Loss available to common stock-
holders-basic earnings
per share (1,183,000) 4,327,000 $ (0.27)
Effect of dilutive securities:
Options (antidilutive) - -
7% convertible note
(antidilutive) 13,000 1,000,000
Net loss available to common stock-
holders-diluted earnings
per share $(1,170,000) 5,327,000 $ (0.27)
For the Year Ended October 31, 1996
Income Shares Per-share
(Numerator) (Denominator) Amount
Net income $ (842,000)
Less pfd stock dividends (162,000)
Income available to common stock-
holders-basic earnings
per share 680,000 4,327,000 $ 0.16
Effect of dilutive securities:
Options (antidilutive) - -
7% convertible note 11,000 1,000,000
Income available to common stock-
holders-diluted earnings
per share $ 691,000 5,327,000 $ 0.13
F-26
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. PREFERRED STOCK ISSUANCE
On October 15, 1986 Canal exchanged 986,865 shares of its $1.30
Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of
its outstanding common stock. Since the exchange, the Company has issued
an additional 2,426,930 shares in the form of stock dividends for a total
outstanding at October 31, 1998 of 3,411,681. All of the Preferred Stock
has a par value of $0.01 per share and a liquidation preference of $10 per
share. The Preferred Stock is subject to optional redemption, in exchange
for Canal's 13% Subordinated Notes, by Canal, in whole or in part at any
time on or after September 30, 1988 at the redemption price of $10 per
share. Dividends on the Preferred Stock accrue at an annual rate of $1.30
per share and are cumulative. Dividends are payable quarterly in cash or
in Preferred Stock at Canal's option. Payment commenced December 31, 1986.
To date, thirty-six of the forty-eight quarterly payments have been paid in
additional stock resulting in the issuance of 2,426,930 shares recorded at
their fair value at the time of issuance.
Canal is restricted from paying cash dividends by certain of its debt
agreements (See Note 6). The last cash dividend paid on Canal's preferred
stock was in September 1989. The quarterly dividends payable September 30,
1998 and December 31, 1998 were passed by the Board of Directors. It is
the Company s intention to pay its next dividend on the preferred stock on
June 30, 1999 at which time a one year dividend will have accumulated. The
dividend planned for June 30, 1999 will also be paid in additional stock.
VOTING RIGHTS - The holders of the Preferred Stock shall not have any
voting rights except that the following actions must be approved by holders
of 66 2/3% of the shares of Preferred Stock, voting as a class: (I) any
amendment to the Certificate of Incorporation of Canal which would
materially alter the relative rights and preferences of the Preferred Stock
so as to adversely affect the holders thereof; and (ii) issuance of
securities of any class of Canal's capital stock ranking prior (as to
dividends or upon liquidation, dissolution or winding up) to the Preferred
Stock. The holders of the Preferred Stock shall be entitled to specific
enforcement of the foregoing covenants and to injunctive relief against any
violation thereof.
Whenever quarterly dividends payable on the Preferred Stock are in arrears
in the aggregate amount at least equal to six full quarterly dividends
(which need not be consecutive), the number of directors constituting the
Board of Directors of Canal shall be increased by two and the holders of
the Preferred Stock shall have, in addition to the rights set forth above,
the special right, voting separately as a single class, to elect two
directors of Canal to fill such newly created directorships at the next
succeeding annual meeting of shareholders (and at each succeeding annual
meeting of shareholders thereafter until such cumulative dividends have
been paid in full).
F-27
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. VALUATION RESERVE
The Valuation Reserve represents the excess of 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 pension benefits of former employees, which benefits were
frozen at the time the stockyard operations were sold in 1989. The excess
will be expensed as actuarial computations of annual pension cost (made in
accordance with SFAS No. 87) recognize the deficiency that exists.
16. FINANCIAL INFORMATION FOR BUSINESS SEGMENTS
As a result of the sale of the Stockyard Operations and curtailment of
the securities trading and investing program, Canal is engaged in two lines
of business: Art operations and real estate.
The following summary presents segment information relating to these
lines of business except for the respective revenues, operating income and
the reconciliation of operating income with pre-tax income which
information is presented on Canal's income statement.
October 31,
($ 000's Omitted) 1998 1997 1996
Identifiable assets:
Art ........................... $ 1,463 $ 2,818 $ 3,833
Real estate ................... 7,490 8,630 10,478
Corporate ... ................. 554 1,512 1,178
$ 9,507 $ 12,960 $ 15,489
($ 000's Omitted) 1998 1997 1996
Capital expenditures:
Art ........................... $ 0 $ 0 $ 0
Real estate .................... 46 41 125
Corporate ...................... 14 6 4
$ 60 $ 47 $ 129
Income from real estate operations includes gains (losses) on sales of
real estate of $0.3 million, $1.6 million and $3.8 million in 1998, 1997
and 1996, respectively. Art identifiable assets include approximately $1.3
million and $1.0 million of art inventory in galleries or on consignment
abroad as of October 31, 1998 and 1997, respectively.
F-28
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. LITIGATION
Canal and its subsidiaries are from time to time involved in
litigation incidental to their normal business activities, none of which,
in the opinion of management, will have a material adverse effect on the
consolidated financial condition of the Company. Canal or its subsidiaries
are party to the following litigations:
Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo
This action involves Union Stockyards Company of Fargo ( Union ), a
wholly owned subsidiary of Canal. It is an action which involves claims
which are similar to some of the claims brought by B&H Investment Co.
( B&H ) against Union several years ago which was dismissed in 1994
following a decision by the Minnesota Court of Appeals in favor of Union.
The dispute involves a Lease Agreement relating to certain real estate
owned by Union and leased to Federal Beef Processors, Inc. ( Federal
Beef ). Federal Beef operates a meat packing plant on the leased premises,
and it is a related entity to B&H, which previously operated the packing
plant. By the terms of the Lease Agreement, Federal Beef s obligation to
pay additional rent is suspended during any period that Union fails to
provide adequate yardage service (under the terms of a separate Yardage
Agreement between the parties) that materially affects the business of
Federal Beef.
Federal Beef filed a Complaint on June 2, 1995 in the District Court
for Cass County, North Dakota, for damages claimed to be suffered as a
result of Union s alleged failure to provide adequate maintenance and
cleaning services for the livestock pens used by Federal Beef under the
Yardage Agreement. The damages sought by Federal Beef are in an
unspecified amount consisting of the additional rent paid by Federal Beef
during the time Union allegedly was in breach of the Lease Agreement and
the Yardage Agreement. The damages sought by Federal Beef include $227,452
in additional rent paid by Federal Beef during the time Union allegedly was
in breach of the Lease Agreement and the Yardage Agreement. Federal Beef
also seeks all direct and consequential damages allegedly suffered by
Federal Beef because of the claimed breach, including loss of profits from
animals allegedly damaged by reason of the condition of the pens, and
alleged reduction in the number of animals processed at the plant, in an
amount calculated by Federal Beef s expert witness to be $1,116,900.
Union has filed an Answer and Counterclaim denying the allegations in
the Amended Complaint, seeking a determination that Federal Beef s claims
are frivolous, and asking for an award of Union s reasonable attorneys
fees and costs in connection with the defense of the action. In July 1995,
Union
F-29
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
successfully defeated a motion by Federal Beef for an order which would
have allowed Federal Beef to deposit into Court all rent payments due from
Federal Beef to Union pending the outcome of the litigation. As a result,
Federal Beef has continued to make all rent payments due under the Lease
Agreement while reserving its alleged claims against Union.
In April 1996, Federal Beef served a Second Amended Complaint in which
is alleged that Union has also breached an obligation under the Yardage
Agreement to provide certain additional yardage services with respect to
cattle received at the stockyards for delivery to Federal Beef. Damages in
an unspecified amount are sought by Federal Beef against Union for this
alleged breach. Canal has also denied this additional claim.
The Company is unable at this time to estimate a possible loss or
range of loss associated with this suit. However, Management does not
believe that any possible loss associated with this suit would be material
to the operations of the Company nor does Management believe that the
revenues generated under the lease will be materially affected in resolving
this dispute.
Canal Capital Corporation v. Valley Pride Pack, Inc.
Canal commenced an action in the U.S. District Court in Minnesota on
October 25, 1996, as the assignee of United Market Services Company against
Valley Pride Pack, Inc. (formerly known as Pine Valley Meats, Inc. and
referred to herein as Pine Valley ) for the unpaid livestock fees and
charges due under the 1936 Agreement between the predecessors of Pine
Valley and Canal. Pine Valley filed a motion to dismiss Canal s complaint
on the grounds that the complaint was barred on principles of issue
preclusion and the Rooker-Feldman doctrine, or, that the action should be
stayed pending the appeal before the Minnesota Court of Appeals in a state
court suit which involved the same parties. Canal agreed to dismiss the
action without prejudice to its right to reinstitute the action following
the Minnesota Court of Appeals decision. On September 18, 1997, the
Minnesota Court of Appeals affirmed in part and reversed in part a
judgement against Canal and Canal paid Pine Valley damages and interest of
$388,000 in connection with the state court suit. On September 23, 1997,
Canal reinstituted its lawsuit in federal court against Pine Valley for
the recovery of livestock fees. Pine Valley has since brought a motion to
dismiss this second federal court lawsuit on the same grounds as its motion
to dismiss the first federal court lawsuit. There has been no claim
asserted by Pine Valley against Canal in this second federal court lawsuit.
Upon Pine Valley s motion, the Court entered an order dated February
23, 1998 granting summary judgement and dismissing Canal s complaint.
Canal has appealed the dismissal to the U.S. Court of Appeals for the
Eighth Circuit. Oral arguments were head on this appeal in mid December.
A decision has not yet been rendered by the Court.
F-30
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards No.
121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of (SFAS No. 121") as of November 1, 1996.
Pronouncements issued by the Financial Accounting Standards Board with
future effective dates are either not applicable or not material to the
consolidated financial statements of the Company.
19. PROPERTY ON OPERATING LEASES
The following schedule provides an analysis of the Company's
investment in property on operating leases by location as of October 31,
1998:
($ 000's Omitted)
Accumulated
Location Land Improvements Depreciation Value
St. Joseph, MO $ 862 $ 304 $ (188) $ 978
West Fargo, ND 2 292 (227) 67
S. St. Paul, MN 663 2,815 (1,028) 2,450
Sioux City, IA 997 0 0 997
Omaha, NE 1,200 0 0 1,200
Sioux Falls, SD 117 98 (80) 135
Corporate Office 0 182 (148) 34
$ 3,841 $ 3,691 $ (1,671) $ 5,861
F-31
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is a schedule by years of minimum future rentals on
operating leases as of October 31, 1998: (5)
($ 000's Omitted)
Volume
Year Ending Rental Ground Based
October 31, Income (1) Lease(2) Income(3) Total
1999 $ 1,000 $ 924 $ 0 $ 1,924
2000(4) 1,100 0 0 1,100
2001 1,200 0 0 1,200
2002 1,300 0 0 1,300
2003 1,400 0 0 1,400
$ 6,000 $ 924 $ 0 $ 6,924
(1) Consists of rental income from Exchange Building (commercial office
space), lease income from land and structures and other rental
income.
(2) Ground Lease covers approximately 122 acres leased to the purchaser
of Canal's former stockyard operations.
(3) Excludes any estimate of volume based income from the Fargo, ND lease
due to the uncertainty of these future revenues. However, Canal s
volume based income from this lease has averaged in excess of $100,000
annually for the past five years.
(4) The stockyard ground lease has a ten year renewal option (adjusted for
CPI increases) which can be exercised November 1, 1999 on essentially
the same terms that currently exist. Canal anticipates that the option
will be exercised or the properties sold to the operators. Should
this not be the case, it is management s intention that the stockyards
will continue to operate after the expiration of the ground
lease.
(5) All real estate leases are accounted for as operating leases.
F-32
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments (all of which are held for
non-trading purposes) for which it is practicable to estimate that value.
October 31,
1998 1997
($ 000's Omitted)
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and
cash equivalents $ 34 $ 34 $ 28 $ 28
Current Portion of Long-
Term Debt - related party 0 (d) 0 (d)
Current Portion of Long-
Term Debt 110 110 98 98
Long-Term Debt 2,321 2,321 2,375 2,375
Long-Term Debt - Related
Party 2,846 (d) 3,675 (d)
a) Cash and cash equivalents: The carrying amount approximates fair
market value because of the short maturities of such instruments.
b) Accrued Litigation: The carrying amount approximates the fair
value.
c) Long-Term Debt (See Note 5): The fair value of the Company s
long- term debt, including the current portion thereof, is estimated based
on the quoted market price for the same or similar issues.
d) Long-Term Debt Related Party (see Note 5): It is not practicable
to estimate the fair value of the related party debt.
F-33
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(21) Property Held for Development or Resale
Property held for development or resale consist of approximately 237
acres located in the midwest of undeveloped land not currently utilized for
corporate purposes and not included in any of the present operating leases.
The Company constantly evaluates proposals received for the purchase,
leasing or development of this asset. The land is valued at cost which
does not exceed the net realizable value.
A schedule of the Company s property held for development or resale is
as follows:
Date Number Carrying
Location Acquired Of Acres Cost Encumbrances
St. Joseph, MO 1942 98 $ 248,000 (1)
West Fargo, ND 1937 62 5,000 (1)
South St. Paul, MN 1937 62 737,845 (1)
Sioux City, IA 1937 14 325,000 (1)
Omaha, NE 1976 0 0 (1)
Sioux Falls, SD 1937 1 2,250 (1)
237 $1,318,095
(1) Substantially all of Canal s real property is pledged as collateral for
its debt obligations (see Note 5).
22. Year 2000 Compliance
The financial impact to the Company has not been and is not
anticipated to be material to its financial position or results of
operations in any given year.
F-34
CANAL CAPITAL CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
23. QUARTERLY INFORMATION (UNAUDITED)
FINANCIAL INFORMATION FOR THE INTERIM PERIODS FISCAL 1998 AND 1997 IS
PRESENTED BELOW:
(000'S OMITTED, EXCEPT PER SHARE DATA)
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
1998 1998 1998 1998
REVENUES $803 $911 $1,268 $1,475
========= ========= ========= =========
NET (LOSS)
INCOME ($326) ($103) $296 ($1,282)
======== ========= ========= =========
NET (LOSS) INCOME
PER COMMON SHARE:
- BASIC ($0.09) ($0.03) $0.06 ($0.31)
========= ========= ========= =========
- DILUTED ($0.09) ($0.03) $0.06 ($0.31)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES:
- - BASIC 4,327 4,327 4,327 4,327
========= ========= ========= =========
- - DILUTED 4,327 4,327 4,327 4,327
========= ========= ========= =========
(000'S OMITTED, EXCEPT PER SHARE DATA)
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
1997 1997 1997 1997
REVENUES $1,000 $2,640 $887 $784
========= ========= ========= =========
NET (LOSS)
INCOME ($197) $927 ($98) ($1,633)
========= ========= ========= =========
NET (LOSS) INCOME
PER COMMON SHARE:
- BASIC ($0.06) $0.20 ($0.03) ($0.39)
========= ========= ========= =========
- DILUTED ($0.06) $0.17 ($0.03) ($0.39)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC 4,327 4,327 4,327 4,327
======= ========= ========= =========
- DILUTED 5,327 5,327 5,327 5,327
====== ========= ========= =========
F-35
FORM 10-K - ITEM 14(a)(3)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
(a) 3. Exhibits -
The following exhibits required by Item 601 of Regulations S-K are
filed as part of this report. For convenience of reference, the exhibits
are listed according to the numbers appearing in Table I to Item 601 of
Regulation S-K. Each exhibit which is incorporated by reference and the
document in which such exhibit was originally filed are indicated in
parentheses immediately following the description of such exhibit.
Exhibit No.
3(a) Restated Certificate of Incorporation (filed as Exhibit 3(a)
to the Registrant's Registration Statement on Form 10 filed
with the Securities and Exchange Commission on May 3, 1984
(the "Form 10") and incorporated herein by reference).
3(b) Bylaws (filed as Exhibit 3(b) to the Registrant's
Registration Statement on Form 10 and incorporated herein
by reference).
3(c) Certificate of Amendment of the Restated Certificate of
Incorporation dated September 22, 1988 (filed as Exhibit
3(c) to the Registrant's Form 10-K filed January 29, 1989
and incorporated herein by reference).
10(a) 1984 Stock Option Plan (1) (see Exhibit A included in the
Registrant's Proxy Statement dated January 31, 1985,
relating to the annual meeting of stockholders held March
18, 1985, which exhibit is incorporated herein by
reference).
10(b) Form of Incentive Stock Option Agreement (filed as Exhibit
10(b) to the Registrant's Form 10-K filed January 31, 1986
and incorporated herein by reference).
10(c) Form of Nonstatutory Stock Option Agreement (filed as
Exhibit 10(c) to the Registrant's Form 10-K filed January
31, 1986 and incorporated herein by reference).
10(d) 1985 Directors' Stock Option Plan (1) (See Exhibit A
included in the Registrant's Proxy Statement dated January
31, 1986, relating to the annual meeting of stockholders
held March 12, 1986, which exhibit is incorporated herein by
reference).
E-1
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(e) Form of Directors' Stock Option Agreement (filed as Exhibit
10(ab) to the Registrant's Form 10-K filed January 29, 1986
and incorporated herein by reference).
10(f) Master Ground Lease, dated October 27, 1989 by and between
USK Acquisition Corporation, Canal Capital Corporation,
Omaha Livestock Market, Inc. and Sioux Falls Stock Yards
Company (filed as Exhibit 10(am) to the Registrant's Form 8-
K filed November 9, 1989 and incorporated herein by
reference).
10(g) Agreement of Lease dated January 14, 1994 by and between The
Equitable Life Assurance Society of the United States,
Intelogic Trace Incorporated, Datapoint Corporation and
Canal Capital Corporation (filed as Exhibit 10 (bp) to the
Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
10(h) General Release dated December 19, 1996 by and between Waste
Management Disposal Services of Oregon, Inc. and Canal
Capital Corporation (filed as Exhibit 10 (by) to the
Registrant s Form 10-K filed January 24, 1997 and
incorporated herein by reference).
10(i) $325,000 Promissory Note dated December 19, 1996 by and
between Waste Management Disposal Services of Oregon, Inc.
and Canal Capital Corporation (filed as Exhibit 10 (bz) to
the Registrant s Form 10-K filed January 24, 1997 and
incorporated herein by reference).
10(j) Stock Pledge and Security Agreement dated January 8, 1998 by
and between Canal Capital Corporation, SY Trading
Corporation and CCC Lending Corporation (filed as Exhibit 10
(ai) to the Registrant s Form 10-K filed January 30, 1998
and incorporated herein by reference).
10(k) Note Exchange and Loan Agreement dated January 8, 1998 by
and between Canal Capital Corporation, Michael E. Schultz,
Michael E. Schultz Defined Benefit Trust, Lora K. Schultz,
Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A.
Schultz, Edelman Value Partners, L.P., Edelman Value Fund,
LTD, Maria Regina Mayall Edelman and SES Trust (filed as
Exhibit 10 (aj) to the Registrant s Form 10-K filed January
30, 1998 and incorporated herein by reference).
E-2
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(l) Collateral Agency Agreement dated January 8, 1998 by and
between Canal Capital Corporation, CCC Lending Corporation,
Michael E. Schultz, Michael E. Schultz Defined Benefit
Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz
Pension Plan, Richard A. Schultz, Edelman Value Partners,
L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman
and SES Trust (filed as Exhibit 10 (ak) to the Registrant s
Form 10-K filed January 30, 1998 and incorporated herein by
reference).
10(m) Assignment Agreement dated January 8, 1998 by and between
Deltec Asset Management Corporation, Hanseatic Corporation,
Michael E. Schultz, Michael E. Schultz Defined Benefit
Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz
Pension Plan, Richard A. Schultz, Edelman Value Partners,
L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman
and SES Trust (filed as Exhibit 10 (al) to the Registrant s
Form 10-K filed January 30, 1998 and incorporated herein by
reference).
10(n) Assignment Agreement dated January 8, 1998 by and between
Guaranty Reassurance Company, Michael E. Schultz, Michael E.
Schultz Defined Benefit Trust, Lora K. Schultz, Roger A.
Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz,
Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria
Regina Mayall Edelman and SES Trust (filed as Exhibit 10
(am) to the Registrant s Form 10-K filed January 30, 1998
and incorporated herein by reference).
10(o) Security Agreement dated January 8, 1998 by and between
Canal Capital Corporation, Canal Galleries Corporation,
Canal Arts Corporation and CCC Lending Corporation (filed as
Exhibit 10 (an) to the Registrant s Form 10-K filed January
30, 1998 and incorporated herein by reference).
10(p) $1,000,000 Promissory Note dated January 8, 1998 by and
between Michael E. Schultz and Canal Capital Corporation
(filed as Exhibit 10 (ao) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
10(q) $242,000 Promissory Note dated January 8, 1998 by and
between Michael E. Schultz Defined Benefit Trust and Canal
Capital Corporation (filed as Exhibit 10 (ap) to the
Registrant s Form 10-K filed January 30, 1998 and
incorporated herein by reference).
E-3
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(r) $229,000 Promissory Note dated January 8, 1998 by and
between Lora K. Schultz and Canal Capital Corporation (filed
as Exhibit 10 (aq) to the Registrant s Form 10-K filed
January 30, 1998 and incorporated herein by reference).
10(s) $186,000 Promissory Note dated January 8, 1998 by and
between Roger A. Schultz Pension Plan and Canal Capital
Corporation(filed as Exhibit 10 (ar) to the Registrant s
Form 10-K filed January 30, 1998 and incorporated herein by
reference).
10(t) $143,000 Promissory Note dated January 8, 1998 by and
between Richard A. Schultz and Canal Capital Corporation
(filed as Exhibit 10 (as) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
10(u) $350,000 Promissory Note dated January 8, 1998 by and
between Edelman Value Partners, L.P. and Canal Capital
Corporation (filed as Exhibit 10 (at) to the Registrant s
Form 10-K filed January 30, 1998 and incorporated herein by
reference).
10(v) $550,000 Promissory Note dated January 8, 1998 by and
between Edelman Value Fund, LTD and Canal Capital
Corporation (filed as Exhibit 10 (au) to the Registrant s
Form 10-K filed January 30, 1998 and incorporated herein by
reference).
10(w) $300,000 Promissory Note dated January 8, 1998 by and
between Maria Regina Mayall Edelman and Canal Capital
Corporation (filed as Exhibit 10 (av) to the Registrant s
Form 10-K filed January 30, 1998 and incorporated herein by
reference).
10(x) $200,000 Promissory Note dated January 8, 1998 by and
between SES Trust and Canal Capital Corporation (filed as
Exhibit 10 (aw) to the Registrant s Form 10-K filed January
30, 1998 and incorporated herein by reference).
10(y) $500,000 Promissory Note dated January 8, 1998 by and
between Roger A. Schultz and Canal Capital Corporation
(filed as Exhibit 10 (ax) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
22 Subsidiaries of the registrant.
E-4
INVESTOR INFORMATION
Annual Meeting Corporate Headquarters
The Annual Meeting of Shareholders 7l7 Fifth Avenue
of Canal Capital Corporation will New York, NY 10022
be held in our offices at 717
Fifth Avenue, 4th floor, New York,
NY, on a date to be announced.
Stock Certificates
The Board of Directors of Canal Inquiries regarding change of
Capital Corporation urges all name or address, or to replace
shareholders to vote their shares lost certificates should be made
in person or by proxy and thus directly to American Stock
participate in the decisions that Transfer and Trust Co., 40 Wall
will be made at the annual meeting. Street, New York, NY 10005 or
telephone (718) 921-8200
Stock Listing
Canal Capital Corporation common stock Auditors
is traded on the over-the-counter
market through the "pink sheets".
Todman & Co., CPAs, P.C.
120 Broadway
New York, NY 10271
Investment Analyst Inquiries General Counsel
Analyst inquiries are welcome. Proskauer Rose LLP
1585 Broadway
Phone or write: Michael E. Schultz, New York, NY 10036
President at (212) 826-6040 (212) 969-3000
ii
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 33,538
<SECURITIES> 278,175
<RECEIVABLES> 211,070
<ALLOWANCES> 0
<INVENTORY> 500,000
<CURRENT-ASSETS> 1,196,721
<PP&E> 7,532,286
<DEPRECIATION> 1,671,222
<TOTAL-ASSETS> 9,507,449
<CURRENT-LIABILITIES> 2,185,524
<BONDS> 0
0
34,117
<COMMON> 53,138
<OTHER-SE> 2,067,237
<TOTAL-LIABILITY-AND-EQUITY> 9,507,449
<SALES> 0
<TOTAL-REVENUES> 4,456,570
<CGS> 0
<TOTAL-COSTS> 3,862,513
<OTHER-EXPENSES> 1,218,239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 937,032
<INCOME-PRETAX> (1,413,470)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,413,470)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,284,380)
<CHANGES> 0
<NET-INCOME> (2,697,850)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
INDEX TO EXHIBITS
Exhibit No.
22 Subsidiaries of the Registrant.
CANAL CAPITAL CORPORATION
717 FIFTH AVENUE
NEW YORK, NY 10022
SUBSIDIARIES IDENTIFICATION #
SY Trading Corp. 13-3244066
Omaha Livestock Market, Inc. 47-0582031
Union Stockyards Co. of Fargo 45-0205040
Sioux Falls Stockyards Company 46-0189565
Wheeling Industrial Corporation 36-2545924
Canal Galleries Corporation 13-3492920
Canal Arts Corporation 13-3492921
DIVISIONS
Canal Capital Corporation (parent) 51-0102492
St. Joseph Stockyards
St. Paul Union Stockyards
Sioux City Stockyards
Note: All subsidiaries are 100% owned
