FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the quarterly period ended January 31, 2000
----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
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OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______ to ________
Commission File No. 1-8709
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Canal Capital Corporation and Subsidiaries
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(Exact name of registrant as specified in its charter)
Delaware 51-0102492
- ------------------------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Fifth Avenue, New York, NY 10022
- ---------------------------------------- -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 826-6040
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NONE
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practical date:
Title of each class Shares outstanding at February 29, 2000
- ------------------------------
Common stock, $0.01 par value 4,326,929
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(This document contains 23 pages)
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
2000 1999
(UNAUDITED) (AUDITED)
----------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 225,381 $ 416,191
NOTES AND ACCOUNTS RECEIVABLE, NET 450,762 321,065
ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
$ 1,500,000 AT BOTH JANUARY 31,
2000 AND OCTOBER 31, 1999 500,000 500,000
STOCKYARDS INVENTORY 28,704 13,189
INVESTMENTS 203,393 191,833
PREPAID EXPENSES 151,957 218,645
----------- -----------
TOTAL CURRENT ASSETS 1,560,197 1,660,923
----------- -----------
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF
$1,336,279 AND $1,307,638 AT
JANUARY 31, 2000 AND
OCTOBER 31, 1999, RESPECTIVELY 3,096,553 3,088,550
----------- -----------
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $6,250 AND
$2,500 AT JANUARY 31, 2000 AND OCTOBER
31, 1999, RESPECTIVELY 1,243,750 1,247,500
----------- -----------
ART INVENTORY NON-CURRENT, NET OF A
VALUATION ALLOWANCE OF $ 1,227,950
AND $1,278,700 AT JANUARY 31, 2000
AND OCTOBER 31, 1999, RESPECTIVELY 713,157 734,907
----------- -----------
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 977,695 977,695
DEFERRED LEASING AND FINANCING COSTS 14,564 16,337
DEPOSITS AND OTHER 236,124 207,973
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1,228,383 1,202,005
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$ 7,842,040 $ 7,933,885
=========== ===========
</TABLE>
2
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
2000 1999
(UNAUDITED) (AUDITED)
----------- ----------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT 0 75,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,802,448 1,879,611
INCOME TAXES PAYABLE 2,636 10,108
------------ ------------
TOTAL CURRENT LIABILITIES 1,805,084 1,964,719
------------ ------------
LONG-TERM DEBT, LESS CURRENT PORTION 0 1,778,710
LONG-TERM DEBT, RELATED PARTY 2,540,000 833,000
------------ ------------
2,540,000 2,611,710
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 3,879,258 AND
3,879,258 SHARES ISSUED AND OUTSTANDING
AT JANUARY 31, 2000 AND OCTOBER 31, 1999,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $10 PER SHARE FOR $ 38,792,580
AND $38,792,580 AT JANUARY 31, 2000 AND
OCTOBER 31, 1999, RESPECTIVELY 38,793 38,793
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND 4,326,929 SHARES OUTSTANDING
AT JANUARY 31, 2000 AND OCTOBER 31, 1999,
RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 27,334,159 27,274,159
ACCUMULATED DEFICIT (10,690,248) (10,758,188)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
PENSION VALUATION RESERVE (1,903,176) (1,903,176)
UNREALIZED LOSS ON INVESTMENTS AVAILABLE
FOR SALE (332,165) (343,725)
------------ ------------
3,496,956 3,357,456
------------ ------------
$ 7,842,040 $ 7,933,885
============ ============
</TABLE>
3
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 0 $ 60,000
RENTAL INCOME 254,158 256,620
GROUND LEASE INCOME 0 231,000
VOLUME BASED RENTAL INCOME 0 21,645
OTHER INCOME 75 1,924
----------- -----------
254,233 571,189
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 0 40,897
LABOR, OPERATING AND MAINTENANCE 117,782 98,759
DEPRECIATION AND AMORTIZATION 25,819 52,291
TAXES OTHER THAN INCOME TAXES 35,000 47,593
GENERAL AND ADMINISTRATIVE 18,328 17,709
----------- -----------
196,929 257,249
INCOME FROM REAL ESTATE OPERATIONS 57,304 313,940
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STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 1,154,267 $ 0
FEED AND BEDDING INCOME 85,862 0
RENTAL INCOME 1,396 0
OTHER INCOME 62,063 0
----------- -----------
1,303,588 0
----------- -----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 462,943 0
OTHER OPERATING AND MAINTENANCE 245,383 0
FEED AND BEDDING EXPENSE 64,462 0
DEPRECIATION AND AMORTIZATION 3,750 0
TAXES OTHER THAN INCOME TAXES 75,680 0
GENERAL AND ADMINISTRATIVE 179,527 0
----------- -----------
1,031,745 0
----------- -----------
INCOME FROM STOCKYARD OPERATIONS 271,843 0
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4
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
Continued ...
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
ART OPERATIONS:
ART REVENUES:
SALES 27,500 162,400
OTHER REVENUES 0 0
----------- -----------
27,500 162,400
ART EXPENSES:
COST OF ART SOLD 72,500 713,652
VALUATION RESERVE (50,750) (533,300)
SELLING, GENERAL AND ADMINISTRATIVE 7,681 11,139
----------- -----------
29,431 191,491
LOSS FROM ART OPERATIONS (1,931) (29,091)
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GENERAL AND ADMINISTRATIVE EXPENSE $ (267,344) $ (262,526)
----------- -----------
INCOME (LOSS) FROM OPERATIONS 59,872 22,323
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OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 134,084 5,974
INTEREST EXPENSE (43,676) (60,475)
INTEREST EXPENSE-RELATED PARTY (22,340) (108,000)
OTHER EXPENSE 0 0
----------- -----------
68,068 (162,501)
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES 127,940 (140,178)
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
----------- -----------
NET INCOME (LOSS) 127,940 (140,178)
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED LOSS ON INVESTMENTS
AVAILABLE FOR SALE 11,560 (57,802)
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 139,500 $ (197,980)
============ ===========
INCOME (LOSS) PER COMMON SHARE $ 0.02 $ (0.06)
============ ===========
5
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 127,940 $ (140,178)
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
PROVISION FOR LITIGATION SETTLEMENT 0 0
DEPRECIATION AND AMORTIZATION 30,398 57,519
GAIN ON SALES OF REAL ESTATE 0 (19,103)
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET (129,697) (16,396)
ART INVENTORY, NET 21,750 177,104
PREPAID EXPENSES AND OTHER, NET 26,787 10,510
PAYABLES AND ACCRUED EXPENSES, NET (84,635) 19,017
----------- -----------
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (7,457) 88,473
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 0 60,000
PROCEEDS FROM SALE OF INVESTMENTS 0 0
CAPITAL EXPENDITURES (36,643) 0
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES (36,643) 60,000
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 1,725,000 0
REPAYMENT OF CURRENT PORTION OF LONG-TERM (75,000) 0
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (1,796,710) (164,620)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (146,710) (164,620)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (190,810) (16,147)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 416,191 33,358
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 225,381 $ 17,211
=========== ============
NOTE: Canal made federal and state income tax payments of $6,000 and $7,000
and interest payments of $66,000 and $168,000 in the nine month periods
ended January 31, 2000 and 1999, respectively.
6
<PAGE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1999 (AUDITED) AND
FOR THE THREE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----- ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1998 5,313,794 $53,138 3,411,681 $34,117 $27,033,046
NET INCOME (LOSS) 0 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 467,577 4,676 241,113
MINIMUM PEN. LIAB. ADJUSTMENT 0 0 0 0 0
UNREALIZED GAIN ON INVESTMENTS 0 0 0 0 0
-------------------- --------------------- -----------
BALANCE, OCTOBER 31, 1999 5,313,794 53,138 3,879,258 38,793 27,274,159
NET INCOME (LOSS) 0 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 0 0 60,000
MINIMUM PEN. LIAB. ADJUSTMENT 0 0 0 0 0
UNREALIZED GAIN ON INVESTMENTS 0 0 0 0 0
-------------------- --------------------- ----------
BALANCE, JANUARY 31, 2000 5,313,794 $53,138 3,879,258 $38,793 $27,334,159
==================== ===================== ============
</TABLE>
<TABLE>
<CAPTION>
RETAINED -COMPREHENSIVE (LOSS) INCOME- TREASURY
EARNINGS VALUATION UNREALIZED STOCK
DEFICIT RESERVE GAIN ON INV. AT COST
------- ------- ------------ -------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1998 ($11,808,043) ($1,896,838) $ (257,383) ($11,003,545)
NET INCOME (LOSS) 1,285,004 0 0 0
PREFERRED STOCK DIVIDEND (235,149) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 (6,338) 0 0
UNREALIZED GAIN ON INV. 0 0 (86,342) 0
------------- ------------- ------------ ------------
BALANCE, OCTOBER 31, 1999 (10,758,188) ($1,903,176) (343,725) (11,003,545)
NET INCOME (LOSS) 127,940 0 0 0
PREFERRED STOCK DIVIDEND (60,000) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED GAIN ON INV. 0 0 11,560 0
------------- -------------- ------------ ------------
BALANCE, JANUARY 31, 2000 ($10,690,248) ($1,903,176) $ (332,165) ($11,003,545)
============= ============== ============= =============
</TABLE>
7
<PAGE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JANUARY 31, 2000
(UNAUDITED)
1. General
Canal Capital Corporation ("Canal"), incorporated in the state of
Delaware in 1964, commenced business operations through a predecessor in 1936.
Canal was a wholly owned subsidiary of Canal-Randolph Corporation until June 1,
1984, when Canal-Randolph Corporation distributed to its stockholders all of the
outstanding shares of Canal's common stock, under a plan of complete
liquidation.
Canal is engaged in three distinct businesses - the management and
further development of its agribusiness related real estate properties located
in the Midwest, stockyard operations which are also located in the Midwest and
its art operations, consisting mainly of the acquisition of art for resale.
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses from
operations in seven of the last ten years and is involved in litigation with a
meat packer located in South St. Paul, Minnesota. The financial statements do
not include any adjustments that might result from the resolution of these
uncertainties. Additionally, the accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
Canal continues to closely monitor and reduce where possible its
overhead expenses and plans to continue to reduce the level of its art
inventories to enhance current cash flows. Management believes that its income
from operations combined with its cost cutting program and planned reduction of
its art inventory will enable it to finance its current business activities.
There can, however, be no assurance that Canal will be able to effectuate its
planned art inventory reductions or that its income from operations combined
with its cost cutting program in itself will be sufficient to fund operating
cash requirements.
2. Reclassification
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
8
<PAGE>
3. Interim Financial Statements
The interim consolidated financial statements included herein have been
prepared by Canal without audit. In the opinion of Management, the accompanying
unaudited financial statements of Canal contain all adjustments necessary to
present fairly its financial position as of January 31, 2000 and the results of
its operations and its cash flows for the three month period ended January 31,
2000. All of the above referenced adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the consolidated financial statements for the three years ended
October 31, 1999 and the notes thereto which are contained in Canal's 1999
Annual Report on Form 10-K. The results of operations for the period presented
is not necessarily indicative of the results to be expected for the remainder of
fiscal 2000.
4. Real Estate Operations
Canal's real estate properties located in six Midwest states are
primarily associated with its current and former agribusiness related
operations. Each property is adjacent to a stockyards operation (three of which
are operated by 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. Its principal real estate operating revenues are
derived from rental income from its Exchange Buildings, lease income from land
and structures leased to various commercial and retail enterprises and proceeds
from the sale of real estate properties.
Real estate operations resulted in operating income of $57,000 and
$314,000, while contributing $254,000 and $571,000 to Canal's revenues for the
three month periods ended January 31, 2000 and 1999, respectively.
As of January 31, 2000, there are approximately 250 acres of
undeveloped land owned by Canal adjacent to its stockyard properties. Canal is
continuing the program, which it started several years ago, to develop or sell
this property.
5. Stockyard Operations
On August 1, 1999, Canal purchased the operating assets of three public
stockyards (formerly subject to the Master Lease between the Company and United
Market Services) located in Sioux City, Iowa, St. Joseph, Missouri and Sioux
Falls, South Dakota.
9
<PAGE>
Public stockyards act much like a securities exchange, providing
markets for all categories of livestock and fulfilling the economic functions of
assembly, grading, and price discovery. The livestock handled by the Company's
stockyards include cattle, hogs and sheep. Cattle and hogs may come through the
stockyard facilities at different stages, either as feeder livestock or
slaughter livestock. The Company's stockyards provide all services and
facilities required to operate an independent market for the sale of livestock,
including veterinary facilities, auction arenas, auctioneer, weigh masters and
scales, feed and bedding, and security personnel. In addition, the stockyard
provide other services including pure bred and other specialty sales for
producer organizations. The Company promotes its stockyard business through
public relations efforts, advertising and personal solicitation or producers.
Stockyard operations resulted in operating income of $272,000 while
contributing $1,304,000 to Canal's revenues for the three month period ended
January 31, 2000. As discussed above Canal had no similar operations in fiscal
1999.
7. Art Operations
Canal established its art operations in October 1988 by acquiring a
significant inventory for resale of antiquities primarily from the ancient
Mediterranean cultures. In November 1989, Canal expanded its art operations by
entering into a cost and revenue sharing agreement with a New York City gallery
for the exclusive representation of Jules Olitski, a world renowned artist of
contemporary paintings. As part of this agreement Canal purchased a number of
Olitski paintings which it holds for resale with a book value of approximately
$670,000 at January 31, 2000. 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
45% ($542,758) and 55% ($670,399) and 44% ($542,758) and 56% ($692,149) of total
art inventory at January 31, 2000 and October 31, 1999, respectively.
Substantially all of the contemporary art inventory held for resale is comprised
of the work of Jules Olitski.
Management estimates it may take two to five years to dispose of its
current art inventory. The Company's ability to dispose of its art inventory is
dependent at least in part, on general economic conditions, including supply,
demand, international monetary conditions and inflation. Additionally, the art
market itself is very competitive. Accordingly, there can be no assurance that
Canal will be successful in disposing of its art inventory within the time frame
discussed above.
10
<PAGE>
Canal has its art inventory appraised by an independent appraiser
annually. The 1999 appraisal covered approximately 57% 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 43% 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 the first three
months of fiscal 2000 Canal applied against sales $51,000 of the valuation
allowance against its art inventory, thereby, decreasing the total valuation
allowance to $2,728,000 as of January 31, 2000. Additionally, in fiscal 1999
Canal applied against sales $621,000 of the valuation allowance against its art
inventory, thereby, decreasing the total valuation allowance to $2,779,000 as of
October 31, 1999.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual channels
used for disposal of its art inventory. The proceeds from these sales will be
used to reduce the Company's outstanding debt. If these sales are not made, the
Company has alternate means of raising cash such as sales of investments, sale
of real estate, raising of new capital and rescheduling of debt. Some of these
measures were successfully implemented in fiscal 1999.
Canal's art operations have generated operating losses of $2,000 and
$29,000 (net of decreases in the valuation allowance of $51,000 and $533,000 for
the three month periods ended January 31, 2000 and 1999, respectively) on
revenues of $28,000 and $162,000 for the three months ended January 31, 2000 and
1999, respectively. Art sales have resulted primarily through activities in
conjunction with sales of antiquities. Canal's management believes that through
its consignment agreements as well as other potential distribution outlets Canal
will continue to deal in antiquities and contemporary art.
Inventory on Consignment - The Company had approximately $1,358,000 of
art inventory on consignment with third party dealers at January 31, 2000 and
October 31, 1999, respectively.
8. Property and Equipment
Included in property and equipment were the cost of buildings of
approximately $2.5 million at January 31, 2000 and October 31, 1999.
11
<PAGE>
9. Notes Receivable
Included in the notes and accounts receivable were the current portion
of notes from real estate sales in the amount of $158,000 at January 31, 2000
and October 31, 1999.
10. Investments Available For Sale
At January 31, 2000 the investments available for sale consisted of the
following:
January 31, October 31,
($ 000's Omitted) 2000 1999
----------- -------
Aggregate market value................. $ 203 $ 192
------ ------
Aggregate carrying value............... $ 203 $ 192
------ ------
Canal has an investment in a company in which it, together with other
affiliated entities, comprises 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. The realized gains or losses, if any, are recognized in operating
results.
For the three months ended January 31, 2000 Canal recognized an
unrealized gain on investments available for sale of $12,000. Additionally, in
fiscal 1999 Canal recognized an unrealized loss on investments available for
sale of $7,000, both of which are shown in a separate component of Stockholders
Equity.
12
<PAGE>
11. Borrowings
At January 31, 2000, substantially all of Canal's real properties, the
stock of certain subsidiaries, the investments and a substantial portion of its
art inventories are pledged as collateral to secure the following obligations:
January 31, October 31,
2000 1999
(Unaudited) (Audited)
(Thousands of Dollars)
Variable rate mortgage notes due
May 15, 2003 - related party............ $ 2,540 $ 833
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $14.............. 0 1,153
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $5............... 0 381
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.. 0 0
Other Note................................ 0 320
------- -------
Total .................................... 2,540 2,687
Less -- current maturities ............... 0 75
------- -------
Long-term debt ........................... $ 2,540 $ 2,612
------- -------
13
<PAGE>
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.
On July 29, 1999 the above Notes were amended to extend the maturity
date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that
the additional interest due to the holders of the notes shall become current and
be treated as principal due under the notes; and to have certain of the holders
loan the Company $525,000 in additional financing, the proceeds of which was
used to repay in full certain of the other holders of the notes. As a result,
the notes are now held in total by the Company's Chief Executive Officer and
members of his family.
On January 10, 2000, the above Notes were further amended to have
holders loan the Company $1,725,000 in additional financing, the proceeds of
which was used to repay in full all of the Company's outstanding non related
party long-term debt. As of January 31, 2000, the balance due under these notes
was $2,540,000 all of which is classified as long-term debt-related party.
12. Valuation Reserve
The valuation reserve represents the excess of the additional minimum
pension liability required under the provisions of SFAS No. 87 over the
unrecognized prior service costs of former stockyard employees. Such excess
arose due to the decline in the market value of pension assets available for the
pension benefits of the former employees, which benefits were frozen at the time
the stockyard operations were sold in 1989. The excess will effectively be
expensed over time as actuarial computations of annual pension cost (made in
accordance with SFAS No. 87) recognize the deficiency that exists.
14
<PAGE>
Management's Discussion and Analysis
Of Results of Operations and Financial Condition
For the Three Months Ended January 31, 2000
Results of Operations - General
- -------------------------------
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses from
operations in seven of the last ten years and is involved in litigation with a
meat packer located in South St. Paul, Minnesota. The financial statements do
not include any adjustments that might result from the resolution of these
uncertainties. Additionally, the accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
Canal recognized net income of $127,000 for the three month period
ended January 31, 2000 as compared to a net loss of $140,000 for the same period
in fiscal 1999. After recognition of an unrealized gain on investments held for
sale of $12,000 for the three month period ended January 31, 2000 the Company
recognized comprehensive income of $140,000 for the three month period ended
January 31, 2000 as compared to a comprehensive loss of $198,000 for the same
period in fiscal 1999. Further, after recognition of preferred stock dividend
payments of $60,000 for the three month period ended January 31, 2000, the
Company recognized income applicable to common stockholders of $80,000 ($0.02
per common share) for the three month period ended January 31, 2000 as compared
to a loss applicable to common stockholders of $246,000 ($0.06 per common share)
for the same period in fiscal 1999. Included in the 2000 results is other income
of approximately $134,000 comprised primarily of a discount earned on the early
retirement of the Company's non related party debt.
Canal's revenues from continuing operations consist of revenues from
its real estate, stockyards (fiscal 2000 only) and art operations. Due to
general economic conditions and more specifically a depressed national art
market, Canal's aggregate revenues from art sales and the prices at which sales
were made have significantly declined in recent years. Revenues increased by
$852,000 or 116.1% to $1,585,000 for the three month period ended January 31,
2000, as compared to the revenues for the same period in fiscal 1999. The fiscal
2000 increase is due primarily to the inclusion of the Company's new stockyard
operations which contributed $1,304,000 (82.3%) to first quarter revenues. This
new contribution to revenues was offset to a certain extent by a decrease in
ground lease income ($231,000) which the Company had received from the former
stockyard operator and a decrease in sales of real estate of $60,000 in the
current quarter as compared to the first quarter of 1999.
15
<PAGE>
Capital Resources and Liquidity
- -------------------------------
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses from
operations in seven of the last ten years and is involved in litigation with a
meat packer located in South St. Paul, Minnesota. The financial statements do
not include any adjustments that might result from the resolution of these
uncertainties. Additionally, the accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay in
full the Company's variable rate mortgage notes due May 15, 1998 ($2,605,000),
its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes
which were due December 31, 1997 ($320,000) plus accrued interest thereon. The
purchasers of these notes included certain entities controlled by the Company's
Chairman, the Company's Chief Executive Officer and members of their families.
The variable rate mortgage notes issued have essentially the same terms and
conditions as the variable rate mortgage notes which were repaid. These notes
carry interest at the highest of four variable rates, determined on a quarterly
basis. These notes, among other things, prohibits Canal from becoming an
investment company as defined by the Investment Company Act of 1940; requires
Canal to maintain minimum net worth; restricts Canal's ability to pay cash
dividends or repurchase stock; requires principal prepayments to be made only
out of the proceeds from the sale of certain assets and requires the accrual of
additional interest (to be paid at maturity) of approximately three percent per
annum.
On July 29, 1999 the above Notes were amended to extend the maturity
date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that
the additional interest due to the holders of the notes shall become current and
be treated as principal due under the notes; and to have certain of the holders
loan the Company $525,000 in additional financing, the proceeds of which was
used to repay in full certain of the other holders of the notes. As a result,
the notes are now held in total by the Company's Chief Executive Officer and
members of his family.
On January 10, 2000, the above Notes were further amended to have
holders loan the Company $1,725,000 in additional financing, the proceeds of
which was used to repay in full all of the Company's outstanding non related
party long-term debt. As of January 31, 2000, the balance due under these notes
was $2,540,000 all of which is classified as long-term debt related party.
Cash and cash equivalents of $225,000 at January 31, 2000 decreased
$191,000 from $416,000 at October 31, 1999. Net cash used by operations so far
in fiscal 2000 was $7,000. Substantially all of the fiscal 2000 net
16
<PAGE>
proceeds from related party loans and the proceeds from the sale of art was used
to reduce outstanding debt and accrued expenses. During fiscal 2000 Canal
reduced its long-term debt by $147,000.
At January 31, 2000 the Company's current liabilities exceeded current
assets by $0.2 million, as compared to current liabilities exceeding current
assets by $0.3 million at October 31, 1999. The only required principal
repayments under Canal's debt agreements for fiscal 2000 will be from the
proceeds (if any) of the sale of certain assets.
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.
2000 Compared to 1999
- ---------------------
Real Estate Revenues
- --------------------
Real estate revenues for the three months ended January 31, 2000 of
$254,000 accounted for 16.0% of the first quarter revenues as compared to real
estate revenues of $571,000 or 77.9% for the same period in 1999. 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 (99.9% and 44.9%), ground lease income (0.0% and 40.4%),
volume based rental income (0.0% and 3.8%) and sale of real estate and other
income (0.1% and 10.9%) for the three months ended January 31, 2000 and 1999,
respectively. The percentage variations in the year to year comparisons are due
primarily to the Company's re-entry into the stockyard business which eliminated
the ground lease income received from the former stockyard operator.
Additionally, the January 1999 permanent closing of the Fargo meat packing plant
eliminated the volume based rental income which the Company had been receiving.
Real Estate Expenses
- --------------------
Real estate expenses for the three months ended January 31, 2000 of
$197,000 decreased by $60,000 (23.5%) from $257,000 for the same period in 1999.
Real estate expenses were comprised of labor, operating and maintenance (59.8%
and 38.4%), depreciation and amortization (13.1% and 20.3%), taxes other than
income taxes (17.8% and 18.5%), cost of real estate
17
<PAGE>
sold (0.0% and 15.9%) and general and administrative expenses (9.3% and 6.9%)
for the three months ended January 31, 2000 and 1999, respectively. The
percentage variations in year to year comparisons are also due to the changes in
the nature of the Company's operations as discussed above.
Stockyard Operations
- --------------------
On August 1, 1999, Canal purchased the operating assets of three public
stockyards (formerly subject to the Master Lease between the Company and United
Market Services) located in Sioux City, Iowa, St. Joseph, Missouri and Sioux
Falls, South Dakota.
Stockyard operations resulted in operating income of $272,000 while
contributing $1,304,000 to Canal's revenues for the three month period ended
January 31, 2000. As discussed above Canal had no similar operations in fiscal
1999 for comparison purposes.
Art Operations - General
- ------------------------
Management estimates it may take two to five years to dispose of its
current art inventory. The Company's ability to dispose of its art inventory is
dependent at least in part, on general economic conditions, including supply,
demand, international monetary conditions and inflation. Additionally, the art
market itself is a very competitive market. Accordingly, there can be no
assurance that Canal will be successful in disposing of its art inventory within
the time frame discussed above.
Canal has its art inventory appraised by an independent appraiser
annually. The fiscal 1999 appraisal covered approximately 57% 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 43% 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 the first three
months of fiscal 2000 Canal applied against sales $51,000 of the valuation
allowance against its art inventory, thereby, decreasing the total valuation
allowance to $2,728,000 as of January 31, 2000. Additionally, in fiscal 1999
Canal applied against sales $621,000 of the valuation allowance against its art
inventory, thereby, decreasing the total valuation allowance to $2,779,000 as of
October 31, 1999.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual channels
used by the Company for disposal of its art inventory. The proceeds from these
sales are used to reduce the Company's outstanding debt and
18
<PAGE>
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 1999.
Art Revenues
- ------------
Art revenues for the three months ended January 31, 2000 of $28,000
decreased $134,000 from $162,000 for the same period in 1999. Art revenues are
comprised of proceeds from the sale of antiquities and contemporary art (100.0%
and 100.0%) and commission income on sale of art owned by third parties (0.0%
and 0.0%) for the three month period ended January 31, 2000 and 1999,
respectively. The Company's art inventory was reduced through sales by $22,000
in the first quarter of fiscal 2000.
Art Expenses
- ------------
Art expenses for the three months ended January 31, 2000 of $29,000
decreased by $162,000 from $191,000 for the same period in 1999. Art expenses
(net of a valuation allowance of $51,000 in fiscal 2000 and $533,000 in fiscal
1999) consisted of the cost of art sold (73.9% and 94.2%) and selling, general
and administrative expenses (26.1% and 5.8%) for the three month period ended
January 31, 2000 and 1999, respectively. It is the Company's policy to use the
adjusted carrying value for sales, thereby reducing the valuation reserve
proportionately as the inventory is sold.
General and Administrative
- --------------------------
General and administrative expenses for the three months ended January
31, 2000 of $267,000 increased $5,000 (1.8%) from $262,000 for the same period
in 1999. The major components of general and administrative expenses are
officers salaries (41.2% and 41.1%), rent (8.3% and 9.3%), legal and
professional fees (6.9% and 6.9%), insurance (10.1% and 11.4%) and office
salaries (10.8% and 10.6%) for the three month period ended January 31, 2000 and
1999, respectively.
Interest and Other Income
- -------------------------
Interest and other income for the three months ended January 31, 2000
increased to $134,000 from $6,000 for the same period in 1999. Included in
fiscal 2000 results is a $125,000 discount earned on the early retirement of the
Company's non related party debt.
19
<PAGE>
Interest Expense
- ----------------
Interest expense for the three months ended January 31, 2000 decreased
60.7% to $66,000 as compared to $168,000 for the same period in 1999. The fiscal
2000 decrease is due primarily to a reduction in aggregate debt outstanding at
January 31, 2000 as compared to the same period in 1999. For the most part
interest rates on Canal's debt have remained unchanged for the past 12 months.
20
<PAGE>
PART II
-------
OTHER INFORMATION
-----------------
21
<PAGE>
Item 1: Legal Proceedings:
- ------
See Item 3 of Canal's October 31, 1999 Form 10-K.
Item 2 and 3:
- ------------
Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
- ------
None.
Item 5: Other Information:
- ------
None.
Item 6: Exhibits and Reports on Form 8-K:
- ------
(A) Not applicable.
(B) No reports on Form 8-K have been filed during the
quarter for which the report is filed.
22
<PAGE>
SIGNATURES
----------
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Canal Capital Corporation
-------------------------
Registrant
/s/ Reginald Schauder
-------------------------
Reginald Schauder
Vice President-Finance &
Chief Financial Officer
Date: March 9, 2000
23
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