FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the quarterly period ended July 31, 2000
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _____ to _____
Commission File No. 1-8709
------
Canal Capital Corporation and Subsidiaries
(Exact name of registrant as specified in its charter)
Delaware 51-0102492
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 Fifth Avenue, New York, NY 10022
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 826-6040
----------------
NONE
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practical date:
Title of each class Shares outstanding at August 31, 2000
--------------------------- 4,326,929
Common stock, $0.01 par value -----------
(This document contains 31 pages)
<PAGE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
FORM 10-Q JULY 31, 2000
INDEX
The following documents are filed as part of this report:
Accountants' Review Report ........................... 3
Part I - Financial Information ....................... 4
Item I. Condensed Financial Statements:
Consolidated Balance Sheets - July 31, 2000
and October 31, 1999 .......................... 5
Statements of Consolidated Operations and
Comprehensive Income for the Nine and Three
Month Periods ended July 31, 2000 and 1999..... 7
Statements of Consolidated Changes in
Stockholders' Equity for the Nine Month and
One Year Periods ended July 31, 2000 and
October 31, 1999 .............................. 11
Statements of Consolidated Cash Flows for the
Nine Month Periods ended July 31, 2000 and
1999 .......................................... 12
Notes to Consolidated Financial Statements ...... 13
Item II. Management's Discussion and Analysis of
Financial Condition ........................ 21
Capital Resources and Liquidity ................. 26
Other Factors ................................... 27
Item III. Quantitative and Qualitative Disclosures
About Market Risk ......................... 28
Part II - Other Information .......................... 29
Items 1 through 6 ............................... 30
Signatures ...................................... 31
2
<PAGE>
ACCOUNTANTS' REVIEW REPORT
To the Stockholders of Canal Capital Corporation:
We have reviewed the consolidated balance sheet of Canal Capital Corporation and
subsidiaries as of July 31, 2000, the related consolidated statements of
operations and comprehensive income for the nine and three month periods ended
July 31, 2000 and the consolidated statements of changes in stockholders' equity
and cash flows for the nine month period ended July 31, 2000. These consolidated
financial statements are the responsibility of the company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the consolidated financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered recurring losses from operations in seven 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 Note 1. The
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.
New York, N.Y. /s/ Todman & Co., CPA's,P.C.
------------------------------------
September 7, 2000 TODMAN & CO., CPA's,P.C.
Certified Public Accountants (N.Y.)
3
<PAGE>
PART I
FINANCIAL INFORMATION
4
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
2000 1999
(UNAUDITED (AUDITED)
----------- ------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 29,739 $ 416,191
NOTES AND ACCOUNTS RECEIVABLE, NET 173,717 321,065
ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
$ 1,500,000 AT BOTH JULY 31, 2000 AND
OCTOBER 31, 1999 500,000 500,000
STOCKYARDS INVENTORY 24,993 13,189
INVESTMENTS 90,317 191,833
PREPAID EXPENSES 71,594 218,645
----------- ------------
TOTAL CURRENT ASSETS 890,360 1,660,923
----------- ------------
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $1,395,461
AND $ 1,307,638 AT JULY 31, 2000 AND
OCTOBER 31, 1999, RESPECTIVELY 3,128,999 3,088,550
----------- ------------
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $13,902 AND
$2,500 AT JULY 31, 2000 AND OCTOBER
31, 1999, RESPECTIVELY 1,236,098 1,247,500
----------- ------------
ART INVENTORY NON-CURRENT, NET OF A
VALUATION ALLOWANCE OF $ 1,227,950
AND $1,278,700 AT JULY 31, 2000
AND OCTOBER 31, 1999, RESPECTIVELY 696,657 734,907
----------- ------------
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 977,695 977,695
DEFERRED LEASING AND FINANCING COSTS 13,394 16,337
DEPOSITS AND OTHER 229,173 207,973
1,220,262 1,202,005
$ 7,172,376 $ 7,933,885
=========== ===========
</TABLE>
5
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
JULY 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 1,616,323 1,879,611
INCOME TAXES PAYABLE 479 10,108
----------- ------------
TOTAL CURRENT LIABILITIES 1,616,802 1,964,719
----------- ------------
LONG-TERM DEBT, LESS CURRENT PORTION 0 1,778,710
LONG-TERM DEBT, RELATED PARTY 2,522,000 833,000
----------- ------------
2,522,000 2,611,710
----------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 4,407,614 AND
3,879,258 SHARES ISSUED AND OUTSTANDING
AT JULY 31, 2000 AND OCTOBER 31, 1999,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $10 PER SHARE FOR $ 40,076,140
AND $38,792,580 AT JULY 31, 2000 AND
OCTOBER 31, 1999, RESPECTIVELY 44,076 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 JULY 31, 2000 AND OCTOBER 31, 1999,
RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 27,481,053 27,274,159
ACCUMULATED DEFICIT (11,192,731) (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 (445,241) (343,725)
3,033,574 3,357,456
$ 7,172,376 $ 7,933,885
============ ============
</TABLE>
6
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 0 $3,568,000
RENTAL INCOME 736,787 751,780
GROUND LEASE INCOME 0 600,400
VOLUME BASED RENTAL INCOME 0 21,645
OTHER INCOME 75 10,391
---------- ----------
736,862 4,952,216
---------- ----------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 0 1,690,796
LABOR, OPERATING AND MAINTENANCE 324,946 327,200
DEPRECIATION AND AMORTIZATION 79,963 126,242
TAXES OTHER THAN INCOME TAXES 103,400 141,193
GENERAL AND ADMINISTRATIVE 66,092 59,459
---------- ----------
574,401 2,344,890
---------- ----------
INCOME FROM REAL ESTATE OPERATIONS 162,461 2,607,326
---------- ----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION 2,833,211 0
FEED AND BEDDING INCOME 207,768 0
RENTAL INCOME 2,746 0
OTHER INCOME 164,793 0
---------- ----------
3,208,518 0
---------- ----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 1,307,659 0
OTHER OPERATING AND MAINTENANCE 641,655 0
FEED AND BEDDING EXPENSE 153,186 0
DEPRECIATION AND AMORTIZATION 11,402 0
TAXES OTHER THAN INCOME TAXES 200,767 0
GENERAL AND ADMINISTRATIVE 411,993 0
---------- ----------
2,726,662 0
---------- ----------
INCOME FROM STOCKYARD OPERATIONS 481,856 0
---------- ----------
</TABLE>
7
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999
Continued ...
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
ART OPERATIONS:
ART REVENUES:
SALES 51,500 186,400
OTHER REVENUES 0 0
51,500 186,400
ART EXPENSES:
COST OF ART SOLD 89,000 839,986
VALUATION RESERVE (50,750) (621,300)
SELLING, GENERAL AND ADMINISTRATIVE 21,752 32,762
60,002 251,448
LOSS FROM ART OPERATIONS (8,502) (65,048)
GENERAL AND ADMINISTRATIVE EXPENSE (814,879) (760,119)
(LOSS) INCOME FROM OPERATIONS (179,064) 1,782,159
OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 139,075 10,514
INTEREST EXPENSE (43,676) (184,148)
INTEREST EXPENSE-RELATED PARTY (149,341) (202,000)
OTHER EXPENSE 0 0
(53,942) (375,634)
(LOSS) INCOME BEFORE PROVISION FOR INCOME
TAXES (233,006) 1,406,525
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
NET (LOSS) INCOME (233,006) 1,406,525
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED (LOSS) ON INVESTMENTS
AVAILABLE FOR SALE (101,516) (7,225)
COMPREHENSIVE (LOSS) INCOME $ (334,522) $ 1,399,300
=========== ===========
(LOSS) INCOME PER COMMON SHARE - BASIC
AND DILUTED $ (0.10) $ 0.28
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 4,327,000 4,327,000
=========== ===========
</TABLE>
8
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 0 $ 423,000
RENTAL INCOME 239,773 231,775
GROUND LEASE INCOME 0 161,600
VOLUME BASED RENTAL INCOME 0 0
OTHER INCOME 0 4,983
--------- ---------
239,773 821,358
--------- ---------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 0 200,694
LABOR, OPERATING AND MAINTENANCE 90,118 122,147
DEPRECIATION AND AMORTIZATION 27,737 29,590
TAXES OTHER THAN INCOME TAXES 34,200 46,800
GENERAL AND ADMINISTRATIVE 23,404 20,919
--------- ---------
175,459 420,150
--------- ---------
INCOME FROM REAL ESTATE OPERATIONS 64,314 401,208
--------- ---------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION 652,737 0
FEED AND BEDDING INCOME 49,771 0
RENTAL INCOME 990 0
OTHER INCOME 41,876 0
--------- ---------
745,374 0
--------- ---------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 399,680 0
OTHER OPERATING AND MAINTENANCE 181,640 0
FEED AND BEDDING EXPENSE 30,507 0
DEPRECIATION AND AMORTIZATION 3,826 0
TAXES OTHER THAN INCOME TAXES 62,225 0
GENERAL AND ADMINISTRATIVE 85,717 0
--------- ---------
763,595 0
--------- ---------
(LOSS) FROM STOCKYARD OPERATIONS (18,221) 0
--------- ---------
</TABLE>
9
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JULY 31, 2000 AND 1999
Continued ...
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
ART OPERATIONS:
ART REVENUES:
SALES 24,000 0
OTHER REVENUES 0 0
----------- -----------
24,000 0
----------- -----------
ART EXPENSES:
COST OF ART SOLD 16,500 740
VALUATION RESERVE 0 0
SELLING, GENERAL AND ADMINISTRATIVE 7,114 10,529
----------- -----------
23,614 11,269
----------- -----------
INCOME (LOSS) FROM ART OPERATIONS 386 (11,269)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (272,963) (244,132)
----------- -----------
(LOSS) INCOME FROM OPERATIONS (226,484) 145,807
----------- -----------
OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 112 1,010
INTEREST EXPENSE 0 (60,212)
INTEREST EXPENSE-RELATED PARTY (63,501) (14,000)
OTHER EXPENSE 0 0
----------- -----------
(63,389) (73,202)
----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME
TAXES (289,873) 72,605
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
----------- -----------
NET (LOSS) INCOME (289,873) 72,605
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED (LOSS) ON INVESTMENTS
AVAILABLE FOR SALE (113,076) (90,317)
----------- -----------
COMPREHENSIVE (LOSS) INCOME $ (402,949) $ (17,712)
=========== ===========
(LOSS) INCOME PER COMMON SHARE - BASIC
AND DILUTED $ (0.09) $ 0.00
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 4,327,000 4,327,000
=========== ===========
</TABLE>
10
<PAGE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1999 (AUDITED) AND
FOR THE NINE MONTHS ENDED JULY 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 LOSS 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 21,500 6,283 206,894
MINIMUM PEN. LIAB. ADJUSTMENT 0 0 0 0 0
UNREALIZED LOSS ON INVESTMENTS 0 0 0 0 0
--------- ----------- --------- ----------- -----------
BALANCE, JULY 31, 2000 5,313,794 $ 53,138 3,900,758 $ 44,076 $27,481,053
========= =========== ========= =========== ===========
</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) ($11,003,545)
NET INCOME (LOSS) 1,285,004 0 0 0
PREFERRED STOCK DIVIDEND (235,149) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 (6,338) 0 0
UNREALIZED LOSS ON INV. 0 0 (86,342) 0
------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 1999 (10,758,188) ($ 1,903,176) (343,725) (11,003,545)
NET INCOME (LOSS) (233,006) 0 0 0
PREFERRED STOCK DIVIDEND (201,537) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED LOSS ON INV. 0 0 (101,516) 0
------------ ------------ ------------ ------------
BALANCE, JULY 31, 2000 ($11,192,731) ($ 1,903,176) $ (445,241) ($11,003,545)
============ ============ ============ ============
</TABLE>
11
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME $ (233,006) $ 1,406,525
ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 99,587 137,289
GAIN ON SALES OF REAL ESTATE 0 (1,877,204)
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET 147,348 (283)
ART INVENTORY, NET 38,250 214,218
PREPAID EXPENSES AND OTHER, NET 127,267 (268,590)
PAYABLES AND ACCRUED EXPENSES, NET (272,917) (754,742)
----------- -----------
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (93,471) (1,142,787)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 0 3,568,000
PROCEEDS FROM SALE OF INVESTMENTS 0 0
CAPITAL EXPENDITURES (128,271) (231,235)
----------- -----------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (128,271) 3,336,765
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 1,725,000 525,000
TRANSFERS TO LONG-TERM DEBT 0 337,082
REPAYMENT OF CURRENT PORTION OF LONG-TERM (75,000) 0
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (1,814,710) (2,612,496)
----------- -----------
NET CASH (USED) BY FINANCING ACTIVITIES (164,710) (1,750,414)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (386,452) 443,564
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 416,191 33,358
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,739 $ 476,922
=========== ===========
</TABLE>
NOTE: Canal made federal and state income tax payments of $12,000 and $20,000
and interest payments of $193,000 and $386,000 in the nine month periods
ended July 31, 2000 and 1999, respectively.
12
<PAGE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NINE AND THREE MONTHS ENDED JULY 31, 2000
(UNAUDITED)
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 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, development and/or sale of its
non-income producing properties 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.
13
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Principles of Consolidation The consolidated financial statements
include the accounts of Canal Capital Corporation ("Canal") and its wholly-owned
subsidiaries (the "Company"). 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) 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 amount 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.
D) Comprehensive Income -- Effective for fiscal years beginning after
December 15, 1997, Statement of Accounting Standards No. 130 requires that
comprehensive income and its components, as defined in the statement, be
reported in a financial statement. The only adjustments for each classification
of the comprehensive income was for minimum pension liability and unrealized
(loss) gain on investments available for sale.
E) Reclassification -- Certain prior year amounts have been reclassified to
conform to the current year's presentation.
14
<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 July 31, 2000 and the results of its
operations and its cash flows for the nine month period ended July 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 $162,000 and $64,000
for the nine and three month periods ended July 31, 2000, respectively, as
compared to $2,607,000 and $401,000 for the same periods in fiscal 1999.
Additionally, real estate operations contributed $737,000 and $240,000 to
Canal's revenues for the nine and three month periods ended July 31, 2000,
respectively, as compared to $4,952,000 and $821,000 for the same periods in
fiscal 1999.
As of July 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.
15
<PAGE>
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.
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 $482,000 and an
operating loss of $18,000 while contributing $3,209,000 and $745,000 to Canal's
revenues for the nine and three month periods ended July 31, 2000, respectively.
The summer months traditionally produce the lowest level of receipts in the
stockyard operations. As discussed above Canal had no similar operations in
fiscal 1999.
6. ART OPERATIONS
Canal established its art operations in October 1988 by acquiring a
significant inventory for resale of antiquities primarily from the ancient
Mediterranean cultures. In November 1989, Canal expanded its art operations by
entering into a cost and revenue sharing agreement with a New York City gallery
for the exclusive representation of Jules Olitski, a world renowned artist of
contemporary paintings. As part of this agreement Canal purchased a number of
Olitski paintings which it holds for resale with a book value of approximately
$650,000 at July 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
44% ($526,258) and 56% ($670,399) and 44% ($542,758) and 56% ($692,149) of total
art inventory at July 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.
16
<PAGE>
Management estimates it may take two to five years to dispose of its
current art inventory. The Company's ability to dispose of its art inventory is
dependent at least in part, on general economic conditions, including supply,
demand, international monetary conditions and inflation. Additionally, the art
market itself is very competitive. Accordingly, there can be no assurance that
Canal will be successful in disposing of its art inventory within the time frame
discussed above.
Canal has its art inventory appraised by an independent appraiser annually.
The 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 nine 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 July 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 $9,000 and
operating income of $1,000 (net of decreases in the valuation allowance of
$51,000 and $ zero for the nine and three month periods ended July 31, 2000,
respectively) on revenues of $52,000 and $24,000 for the nine and three months
ended July 31, 2000, respectively, as compared to operating losses of $65,000
and $11,000 (net of decreases in the valuation allowance of $621,000 and zero
for the nine and three month periods ended July 31, 1999, respectively) on
revenues of $186,000 and zero for the same periods in fiscal 1999. 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 $1,273,000 and
$1,358,000 of art inventory on consignment with third party dealers at July 31,
2000 and October 31, 1999, respectively.
17
<PAGE>
7. PROPERTY AND EQUIPMENT
Included in property and equipment were the cost of buildings of
approximately $2.5 million at July 31, 2000 and October 31, 1999.
8. NOTES RECEIVABLE
Included in the notes and accounts receivable were the current portion of
notes from real estate sales in the amount of $80,000 and $158,000 at July 31,
2000 and October 31, 1999, respectively.
9. INVESTMENTS AVAILABLE FOR SALE
At July 31, 2000 the investments available for sale consisted of the
following:
<TABLE>
<CAPTION>
July 31, October 31,
($ 000's Omitted) 2000 1999
---------- -----------
<S> <C> <C>
Aggregate market value................. $ 90 $ 192
Aggregate carrying value............... $ 90 $ 192
</TABLE>
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.
On May 3, 2000 this company filed for reorganization under Chapter 11 of
the Bankruptcy Code. Management is closely monitoring this situation, however,
it does not have sufficient information at this time to determine if the decline
in market value is other than temporary.
For the nine months ended July 31, 2000 Canal recognized an unrealized loss
on investments available for sale of $102,000. 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.
18
<PAGE>
10. BORROWINGS
At July 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:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
----------- -----------
(Unaudited) (Audited)
(Thousands of Dollars)
<S> <C> <C>
Variable rate mortgage notes due
May 15, 2003 - related party............ $ 2,522 $ 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 .................................... 2,522 2,687
Less -- current maturities ............... 0 75
------- -------
Long-term debt ........................... $ 2,522 $ 2,612
------- -------
</TABLE>
19
<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 July 31, 2000, the balance due under these notes was
$2,522,000 all of which is classified as long-term debt-related party.
11. PENSION 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.
20
<PAGE>
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE NINE AND THREE MONTHS ENDED JULY 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.
2000 COMPARED TO 1999
Canal recognized a net loss of $233,000 for the nine month period ended
July 31, 2000 as compared to net income of $1,407,000 for the same period in
fiscal 1999. After recognition of an unrealized loss on investments held for
sale of $102,000 for the nine month period ended July 31, 2000 the Company
recognized a comprehensive loss of $335,000 for the nine month period ended July
31, 2000 as compared to comprehensive income of $1,399,000 for the same period
in fiscal 1999. Further, after recognition of preferred stock dividend payments
of $202,000 for the nine month period ended July 31, 2000, the Company
recognized a loss applicable to common stockholders of $537,000 ($0.12 per
common share) for the nine month period ended July 31, 2000 as compared to net
income applicable to common stockholders of $1,221,000 ($0.28 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. Included in the 1999 results
are gains on the sales of real estate of approximately $1,877,000. There have
been no sales of real estate to date in fiscal 2000.
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. Total revenues decreased by
$1,142,000 or 22.2% to $3,997,000 and increased by $188,000 to $1,009,000 or
22.9% for the nine and three month periods ended July 31, 2000, as compared to
the revenues for the same period in fiscal 1999. The fiscal 2000 decrease is due
primarily to a decrease in sales of real estate of approximately $3,568,000
which was offset to a certain extent by the inclusion of the Company's new
stockyard operations which contributed $3,209,000 (80.3%) to
21
<PAGE>
the fiscal 2000 year to date revenues. This new contribution to revenues was
offset by a decrease in ground lease income ($600,000) which the Company had
received from the former stockyard operator.
REAL ESTATE REVENUES
Real estate revenues for the nine months ended July 31, 2000 of $737,000
accounted for 18.4% of the nine month revenues as compared to real estate
revenues of $4,952,000 or 96.4% 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 (100.0% and 15.7%), ground lease income (0.0% and 12.0%),
volume based rental income (0.0% and 0.1%) and sale of real estate and other
income (0.0% and 72.2%) for the nine months ended July 31, 2000 and 1999,
respectively. The percentage variations in the year to year comparisons are due
primarily to the significant decrease in sales of real estate during fiscal 2000
and 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 revenues for the three months ended July 31, 2000 of $240,000
accounted for 23.8% of the third quarter revenues as compared to real estate
revenues of $821,000 or 100.0% 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 (100.0% and 28.2%), ground lease income (0.0% and 19.7%), volume
based rental income (0.0% and 0.0%) and sale of real estate and other income
(0.0% and 52.1%) 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 significant decrease in sales of real estate during fiscal 2000
and 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 nine months ended July 31, 2000 of $574,000
decreased by $1,771,000 (75.5%) from $2,345,000 for the same period in 1999.
Real estate expenses were comprised of labor, operating and maintenance (56.7%
and 14.0%), depreciation and amortization (13.8% and 5.4%), taxes other than
income taxes (18.0% and 6.0%), cost of real estate sold (0.0% and 72.1%) and
general and administrative expenses (11.5% and 2.5%) for the three months ended
July 31, 2000 and 1999, respectively. The percentage variations
22
<PAGE>
in year to year comparisons are also due to the decreased real estate sales in
fiscal 2000 combined with the changes in the nature of the Company's operations
as discussed above.
Real estate expenses for the three months ended July 31, 2000 of $175,000
decreased by $245,000 (58.3%) from $420,000 for the same period in 1999. Real
estate expenses were comprised of labor, operating and maintenance (51.4% and
14.0%), depreciation and amortization (15.8% and 5.4%), taxes other than income
taxes (19.5% and 6.0%), cost of real estate sold (0.0% and 72.1%) and general
and administrative expenses (13.3% and 2.5%) for the three months ended July 31,
2000 and 1999, respectively. The percentage variations in year to year
comparisons are also due to the decreased real estate sales in fiscal 2000
combined with 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. As discussed above, Canal had no similar operations in
fiscal 1999 for comparison purposes.
STOCKYARD REVENUES
Stockyard revenues for the nine and three months ended July 31, 2000 were
$3,209,000 and $745,000, respectively. Stockyard revenues are comprised of yard
handling and auction (88.3% and 87.6%), feed and bedding income (6.5% and 6.7%),
rental income (0.1% and 0.1%) and other income (5.1% and 5.6%) for the nine and
three month periods ended July 31, 2000. The summer months traditionally produce
the lowest level of receipts in the stockyard operations. There were no similar
operations in fiscal 1999.
STOCKYARD EXPENSES
Stockyard expenses for the nine and three months ended July 31, 2000 were
$2,727,000 and $764,000, respectively. Stockyard expenses are comprised of labor
and related costs (48.0% and 52.3%), other operating and maintenance (23.5% and
23.8%), feed and bedding expense (5.6% and 4.0%), depreciation and amortization
(0.4% and 0.5%), taxes other than income taxes (7.4% and 8.2%) and general and
administrative (15.1% and 11.2%) for the nine and three month periods ended July
31, 2000. There were no similar operations in fiscal 1999.
23
<PAGE>
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 July 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 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 nine months ended July 31, 2000 of $52,000 decreased
$134,000 from $186,000 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 nine month period ended July 31, 2000 and 1999, respectively. The
Company's art inventory was reduced through sales by $38,000 in the first nine
months of fiscal 2000.
Art revenues for the three months ended July 31, 2000 of $24,000 increased
$24,000 from $ zero for the same period in 1999. Art revenues are comprised of
proceeds from the sale of antiquities and contemporary art (100.0% and 0.0%) and
commission income on sale of art owned by third parties (0.0% and 0.0%) for the
three month period ended July 31, 2000 and 1999, respectively. The Company's art
inventory was reduced through sales by $17,000 in the third quarter of fiscal
2000.
24
<PAGE>
ART EXPENSES
Art expenses for the nine months ended July 31, 2000 of $60,000 decreased
by $191,000 from $251,000 for the same period in 1999. Art expenses (net of a
valuation allowance of $51,000 in fiscal 2000 and $621,000 in fiscal 1999)
consisted of the cost of art sold (80.4% and 96.2%) and selling, general and
administrative expenses (19.6% and 3.8%) for the nine month period ended July
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.
Art expenses for the three months ended July 31, 2000 of $24,000 increased
by $13,000 from $11,000 for the same period in 1999. Art expenses (net of a
valuation allowance of $ zero in fiscal 2000 and $ zero in fiscal 1999)
consisted of the cost of art sold (69.9% and 93.4%) and selling, general and
administrative expenses (30.1% and 6.6%) for the three month period ended July
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 nine months ended July 31, 2000
of $815,000 increased $55,000 (7.2%) from $760,000 for the same period in 1999.
The major components of general and administrative expenses are officers
salaries (41.7% and 42.6%), rent (8.3% and 4.0%), legal and professional fees
(6.7% and 7.1%), insurance (9.9% and 11.8%) and office salaries (11.1% and
11.0%) for the nine month periods ended July 31, 2000 and 1999, respectively.
General and administrative expenses for the three months ended July 31,
2000 of $273,000 increased $29,000 (11.8%) from $244,000 for the same period in
1999. The major components of general and administrative expenses are officers
salaries (42.0% and 42.9%), rent (8.2% and 0.1%), legal and professional fees
(6.7% and 7.1%), insurance (9.9% and 12.0%) and office salaries (11.3% and
11.2%) for the three month period ended July 31, 2000 and 1999, respectively.
INTEREST AND OTHER INCOME
Interest and other income for the nine months ended July 31, 2000 increased
by $129,000 to $139,000 from $10,000 for the same period in 1999. Included in
the fiscal 2000 results is a $125,000 discount earned on the early retirement of
the Company's non related party debt. Interest and other income for the three
months ended July 31, 2000 decreased by $1,000 to $ zero from $1,000 for the
same period in 1999.
25
<PAGE>
INTEREST EXPENSE
Interest expense for the nine months ended July 31, 2000 decreased 50.0% to
$193,000 as compared to $386,000 for the same period in 1999. Interest expense
for the three months ended July 31, 2000 decreased 14.4% to $64,000 as compared
to $74,000 for the same period in 1999. The fiscal 2000 decrease is due
primarily to a reduction in aggregate debt outstanding at July 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.
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.
26
<PAGE>
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 July 31, 2000, the balance due under these notes was
$2,522,000 all of which is classified as long-term debt related party.
Cash and cash equivalents of $30,000 at July 31, 2000 decreased $386,000
from $416,000 at October 31, 1999. Net cash used by operations so far in fiscal
2000 was $93,000. Substantially all of the fiscal 2000 net 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 $165,000.
At July 31, 2000 and October 31, 1999, the Company's current liabilities
exceeded current assets by $0.7 million and $0.3 million, respectively. 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.
OTHER FACTORS
Some of the statements in this Form 10-Q, as well as statements by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and stockholders in the course of presentations about the
Company and conference calls following earning releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements.
27
<PAGE>
ITEM III - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any derivative financial instruments in our marketable
securities portfolio as of July 31, 2000. We employ established policies and
procedures to manage our exposure to changes in the market risk of our
marketable securities which are classified as available-for-sale as of July 31,
2000. Canal's related party mortgage notes have fixed interest rates therefore,
the fair value of these instruments is not affected by changes in market
interest rates. Canal believes that the market risk arising from holding its
financial instruments is not material.
Information relating to quantitative and qualitative disclosure about
market risk is set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Resources".
28
<PAGE>
PART II
OTHER INFORMATION
-----------------
29
<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.
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<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: September 12, 2000
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