SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8709
CANAL CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0102492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
717 Fifth Avenue
New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 826-6040
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) or the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. Yes X No
The aggregate market value of the voting stock held by non-affiliates of
the registrant at January 15, 2000, was approximately $166,000. The number
of shares of Common Stock, $.01 par value, outstanding at January 15, 2000
was 4,326,929.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
Description Page
PART I
ITEM 1. Business............................................ 1
ITEM 2 Properties.......................................... 8
ITEM 3. Legal Proceedings................................... 9
ITEM 4. Submission of Matters to a Vote of Stockholders..... 10
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters................................. 11
ITEM 6. Selected Financial Data............................. 12
ITEM 7. Management's Discussion and Analysis of the
Results of Operations and Financial Condition....... 14
ITEM 8. Financial Statements and Supplementary Data......... 22
ITEM 9. Disagreements on Accounting and Financial
Disclosure.......................................... 22
PART III
ITEM 10. Directors and Executive Officers of the Registrant.. 23
ITEM 11. Executive Compensation.............................. 24
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 27
ITEM 13. Certain Relationships and Related Transactions...... 29
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 30
i
PART I
Item 1. Business
A. General
The Registrant, Canal Capital Corporation ("Canal" or the "Company"),
incorporated in the state of Delaware in 1964, commenced business
operations through a predecessor in 1936.
Canal is engaged in three distinct businesses -- the management and
further development of its agribusiness related real estate properties,
stockyard operations and art operations.
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 once again 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
f r om land and structures leased to various commercial and retail
enterprises and proceeds from the sale of real estate properties. Canal
has continued its program of development or sale of what was excess
stockyard property. See "Real Estate Operations".
Stockyard Operations - As a result of an August 1, 1999 asset purchase
agreement, Canal now operates three central public stockyards located in
Sioux City, Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota
(collectively the Stockyards ). Public stockyards act much like a
securities exchange, providing markets for all categories of livestock and
f u lfilling the economic functions of assembly, grading, and price
discovery. The Company s principal stockyard revenues are derived from a
per head charge ( yardage charge ) imposed on all livestock and the sale of
feed and bedding. See Stockyard Operations .
Art Operations - Canal's art dealing operations consist primarily of
inventories held for resale of antiquities primarily from ancient
Mediterranean cultures and contemporary art primarily of one artist. See
"Art Operations".
1
B. Factors That May Affect Future Results
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended. The Company s actual results of operations and future
financial condition may differ materially from those expressed in any such
forward-looking statements as a result of many factors that may be beyond
the Company s control. Such factors include, without limitation: overall
economic conditions; competition for tenants in the agribusiness; the
ability of the Company s tenants to compete in their respective businesses;
the effect of fluctuations in supply, demand, international monetary
conditions and inflation on the Company s art operations; the effects of
forgery and counterfeiting on the Company s art operations; securities
risks associated with collections of antiquities and art; and the effect of
fluctuations in interest rates and inflation on the Company s indebtedness.
These risks and uncertainties are beyond the ability of the Company to
control, and in many cases, the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. When used in this
Annual Report on Form 10-K, the words believes, estimates, plans,
expects, and anticipates and similar expressions as they relate to the
Company or its management are intended to identify forward-looking
statements.
C. Real Estate Operations
General
Real estate operations, which relate primarily to Canal's current and
former agribusiness operations, resulted in operating income of $3.0
million, while contributing $6.4 million to Canal's revenues for fiscal
1999. Canal is involved in the management, development or sale of its
agribusiness related real estate properties at its current and former
stockyard locations.
During fiscal 1999, Canal sold approximately 51 acres of land for $4.8
million generating operating income of $2.4 million. Included in the 1999
sales was a 31 acre parcel of land located in South St. Paul, Minnesota
(covered by the Master Lease) which was sold to the stockyard operator and
a 7 acre parcel of land also located in South St. Paul (which was formerly
leased as a commercial truck stop) to a national truck retailer.
During fiscal 1999, Canal continued to encounter difficulties in
increasing the occupancy rate in its St. Paul, Minnesota Exchange Building.
Despite our efforts, the occupancy of this building continues to hover at
the 50% rate. We will continue to aggressively pursue replacement tenants
for this building in fiscal 2000.
2
As of October 31, 1999, there are approximately 250 acres of
undeveloped land owned by Canal adjacent to its current and former
stockyards. During the second half of fiscal 1999 Canal changed building
managers for this property and has made a number of improvements to the
building which management believes will make it more competitive in its
market. Canal is continuing the program, which it started several years
ago, to develop or sell this property.
Former Agribusiness Operations
In connection with the 1989 sale of its stockyard operations, Canal
entered into a master lease (the Lease ) with the purchaser covering
approximately 139 acres of land and certain facilities used by the
stockyard operations. The Lease was a 10 year lease, renewable at the
purchaser's option for an additional ten year period, with annual rentals
of $750,000 per year for the first year escalating to $1.0 million per year
for the fourth through the tenth years and $1.0 million per year adjusted
for CPI increases thereafter. In addition, Canal retained the right to
receive income from certain volume based rental income leases with two meat
packing companies located near the stockyards. As discussed below, all the
obligations of the lessor and the meat packing companies under the Lease
terminated as of October 31, 1999.
In September, 1998 Canal sold a 60 acre parcel of land to the City of
Omaha, Nebraska. This sale included the 17 acres of land leased to the
stockyards operator. As part of this transaction, Canal received the
stockyards rental payments under the Lease through October 31, 1999 at
which time the operator moved the stockyards to a new location. In April
1999, Canal sold to the stockyard operator the 31 acres located in South
St. Paul, Minnesota which was subject to the Lease. Finally, in August
1999 Canal bought the operating assets of the remaining three stockyards
subject to the Lease from the operator. The August 1999 transaction
released the operator from any further obligations under the Lease.
As discussed above, as part of the 1989 agreement Canal retained the
right to receive income from certain volume based rental income leases with
two meat packing companies located near the stockyards in Sioux City, Iowa
and Fargo, North Dakota. The Sioux City, Iowa lease was terminated and the
property sold to the meat packer in fiscal 1996. In March 1999 Canal
entered into a Settlement Agreement and Mutual Release (the Settlement )
with Federal Beef Processors, Inc. ( Federal ) the operator of the meat
packing plant in Fargo, North Dakota. Under the terms of the Settlement
the packing plant lease was terminated, all litigation between the parties
was dismissed with prejudice and fee title to the improvements on the
leased property reverted to Canal. For further information about this
lease and associated litigation (see - Item 3 Legal Proceedings and Note
17). The March 1999 Settlement terminated all remaining rights Canal had
to receive volume based rental income under the Lease.
3
Risk
Real estate activities in general may involve various degrees of risk,
such as competition for tenants, general market conditions and interest
rates. Furthermore, there can be no assurance that Canal will be
successful in the development, lease or sale of its agribusiness related
real estate properties.
Competition
Canal competes in the area of agribusiness related real estate
development with other regional developers, some of which are substantially
larger and have significantly greater financial resources than Canal. To a
certain extent, Canal's agribusiness revenues are dependent on the ability
of the stockyard operations purchaser and the various meat packers with
whom Canal has yardage agreements to successfully compete in their
respective businesses.
D. Stockyard Operations
General
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 - See Former Agribusiness Operations ) 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 two 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, auctioneers, weigh masters and scales, feed and bedding, and
security personnel. In addition, the stockyards 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 of producers.
Actual marketing transactions at a stockyard are managed for livestock
producers by market agencies and independent commission sales people to
which the livestock are consigned for sale. These market agencies (some of
which are owned and operated by the Company) and independent sales people
receive commissions from the seller upon settlement of a transaction and
the stockyard receives a yardage fee on all livestock using the facility
which is paid within twenty-four hours of the sale. Yardage fees vary
depending upon the type of animal, the extent of services provided
4
by the stockyard, and local competition. Yardage revenues are not directly
dependent upon market prices, but rather are a function of the volume of
livestock handled. In general, stockyard livestock volume is dependent
upon conditions affecting livestock production and upon the market agencies
and independent commission sales people which operate at the stockyards.
S t o c kyard operations are seasonal, with greater volume generally
experienced during the first and fourth quarters of each fiscal year,
during which periods livestock is generally brought to market.
As discussed above, virtually all of the volume at Canal s Sioux City
and Sioux Falls stockyards is handled through market agencies and
independent commission sales people, while the St. Joseph stockyard has
solicitation operations of its own which accounts for approximately half of
its livestock volume annually.
Canal intends to continue its soliciting efforts at its St. Joseph
stockyards in fiscal 2000 and develop similar operations at its Sioux City
stockyards which has experienced severe reductions in volume in recent
years. Further, Canal tries to balance its dependence on market agencies
and independent commission sales people in various ways, including:
developing solicitation operations of its own; direct public relations;
advertising and personal solicitation of producers on behalf of the
stockyards; providing additional services at the stockyards to attract
sellers and buyers; and providing incentives to market agencies and
independent commission sales people for increased business.
E. Art Operations
General
Canal established its art operations in October 1988 by acquiring a
significant inventory for resale of antiquities primarily from the ancient
Mediterranean cultures. In November 1989, Canal expanded its art
operations by entering into a cost and revenue sharing agreement with a New
York City gallery for the exclusive representation of Jules Olitski, a
world renowned artist of contemporary paintings. As part of this agreement
Canal purchased
a number of Olitski paintings which it holds for resale with a book value
of approximately $308,000 at October 31, 1999. The representation
agreement expired December 1, 1994 and Canal now operates independently in
the marketing of its contemporary art inventory.
Due to general economic conditions and the softness of the art
markets, Canal has not purchased inventory in several years. However,
Canal continues its marketing efforts to sell its existing art inventory
through various
5
c o n s ignment agreements and at public auctions. Antiquities and
contemporary art represented 44% ($542,758) and 56% ($692,149) and 49%
($713,862) and 51% ($735,263) of total art inventory at October 31, 1999
and 1998, respectively.
Canal sells its art primarily through two sources, in galleries and at
art auctions. In the case of sales in galleries, the Company has
consignment arrangements with various art galleries in the United States.
In these arrangements Canal consigns its pieces at specific prices to the
gallery. In the case of auctions, the Company primarily consigns its art
pieces to the two largest auction houses for their spring and fall art
auctions. The Company assigns a minimum acceptable price on the pieces
consigned. The auction house negotiates a commission on the sale of major
pieces. The pieces can be withdrawn at any time before or during the
auction. There are no significant differences between the prices obtained
in galleries and those obtained at auction.
Art operations resulted in an operating loss of approximately $76,000
while contributing approximately $186,000 to Canal's revenues for fiscal
1999.
Risk
Dealing in art in general involves various degrees of risk. There can
be no assurance that the operations will be profitable. The success of a
program of this nature is dependent at least in part, on general economic
conditions, including supply, demand, international monetary conditions and
inflation. There can be no assurance that Canal will be able to sell its
art
inventory at a price greater than or equal to its acquisition costs or be
able to turn over its art inventory at a desirable rate. In addition,
forgery and counterfeiting are risks inherent in the art industry.
However, Canal and its associates, through their experience and certain
precautionary
measures taken in the purchasing process, are confident that this risk has
been minimized. Moreover, there are security risks associated with
collections of antiquities and art, including problems of security in their
storage, transportation and exhibition. Canal has procured insurance to
cover such risks.
Competition
Canal competes in its art operations with investment groups and other
dealers, some of whom are substantially larger and have greater financial
resources and staff than Canal. There may be a number of institutions and
private collectors and dealers who may attempt to acquire the same pieces
of art at the same time as Canal, particularly at auction. Similarly,
there may be a number of dealers offering similar pieces of art, thereby
exerting a downward pressure on prices.
6
F. Investments Available for Sale
Canal has an investment in a company in which it, together with other
affiliated entities, comprise a reporting group for regulatory purposes.
It is important to note that it is the group (as defined) that can exercise
influence over this company, not Canal. Accordingly, this investment does
not qualify for consolidation as a method of reporting. Certain of Canal s
officers and directors also serve as officer and/or directors of this
company. This investment (in which Canal s ownership interest is
approximately 2%) is carried at market value and any unrealized gains or
losses are reflected in Stockholders Equity. The realized gains or losses,
if any, are recognized in operating results.
G. Employees
At December 31, 1999, Canal had 94 employees.
7
ITEM 2. Properties
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 stockyard operation (three of
which are once again 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. As landlord, Canal's management responsibilities include leasing,
billing, repairs and maintenance and overseeing the day to day operations
of its properties. Canal's properties at October 31, 1999 include:
Leased Held for
Year Total Exchange Stkyds to Third Develop-
Location Acquired Site(2) Bldgs. Opertns(1) Parties ment
(3)
St. Joseph, MO 1942 137 2 37 0 98
West Fargo, ND 1937 81 2 0 0 79
S. St. Paul, MN 1937 80 5 0 13 62
Sioux City, IA 1937 53 2 24 17 10
Omaha, NE 1976 11 0 0 11 0
Sioux Falls, SD 1937 33 0 31 1 1
Total 395 11 92 42 250
The following schedule shows the average occupancy rate and average rental
rate at each of Canal's four Exchange Buildings:
1999 1998
Occupancy Average(5) Occupancy Average(5)
Location Rate Rental Rate Rate Rental Rate
St. Joseph, MO 75% $ 4.75 75% $ 4.75
West Fargo, ND(4) N/A N/A N/A N/A
S. St. Paul, MN 50% $12.29 50% $12.29
Sioux City, IA(6) N/A $ N/A N/A N/A
NOTES
(1) As a result of an August 1, 1999 asset purchase agreement, Canal now
operates three central public stockyards.
(2) For information with respect to mortgages and pledges see Note 7.
(3) For information related to this see Note 2(c).
(4) Canal has closed this building and is offering it for sale.
(5) Per square foot.
(6) Building closed in fiscal 1998 due to fire damage.
8
ITEM 3. Legal Proceedings
Canal and its subsidiaries are from time to time involved in
litigation incidental to their normal business activities, none of which,
in the opinion of management, will have a material adverse effect on the
consolidated financial condition and operations of the Company. Canal or
its subsidiaries are party to the following litigation:
Canal Capital Corporation v. Valley Pride Pack, Inc.
Canal commenced an action in U.S. District Court in Minnesota on
September 23, 1997, as the assignee of United Market Services Company,
against Valley Pride Pack, Inc. (formerly Pine Valley Meats, Inc. and
referred to herein as Pine Valley ) to recover unpaid livestock fees and
charges (estimated to be as much as $1,000,000) due from Pine Valley under
a 1936 Agreement between the predecessors of Pine Valley and Canal. Upon
Pine Valley s motion, the Court entered an order dated February 23, 1998
granting summary judgment and dismissing Canal s complaint. Canal appealed
the dismissal to the U.S. District Court of Appeals for the Eighth Circuit,
which reversed the dismissal and reinstated Canal s complaint.
On April 9, 1999, Pine Valley served an answer and counterclaim in
which it denied any liability for livestock fees and alleged that the 1936
Agreement violates Section 1 of the Sherman Antitrust Act and the Minnesota
Antitrust Law. Pine Valley alleges any livestock fee obligation under the
1936 Agreement constitutes an illegal tying arrangement whereby Canal s
predecessor attempted to tie the purchase of land for the operation of the
meat packing plant to the purchase of cattle at the stockyards by assessing
yardage fees on all cattle purchased for slaughter at the packing plant
even if the stockyards provides no services with respect to the cattle.
Pine Valley seeks as relief a declaratory judgment that the 1936 Agreement
is unenforceable, an injunction preventing Canal from enforcing the fee
provisions of the 1936 Agreement, and treble damages for the alleged
violation by Canal and its predecessor of the federal and state antitrust
laws, together with attorneys fees. Pine Valley has not specified a
dollar amount of the alleged antitrust damages which it has stated is the
amount paid by Pine Valley in livestock fees.
The case is still in the discovery state and we are not in a position
to express any opinion as to the ultimate outcome of the matter.
9
Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo
Federal Beef Processors, Inc. ( Federal Beef ) operated a meat packing
plant on leased premises owned by United Stockyards Company of Fargo
( Union ), a wholly-owned subsidiary of Canal Capital Corporation, located
in Fargo, North Dakota. A lawsuit was brought in 1995 by Federal Beef for
damages claimed to be suffered as a result of Union s alleged failure to
provide adequate maintenance and cleaning services for livestock pens used
by Federal Beef under a yardage agreement with Union. That lawsuit was
settled in April of 1999. Under the terms of the settlement agreement, the
lease relating to the packing plant was terminated; Federal Beef vacated
the premises; Federal Beef was required to remove all fixtures, equipment
and personal property situated on the premises by July 31, 1999 and Union
agreed to reimburse Federal for 50 percent of expenses relating to the
premises for the period March through July 1999, up to a maximum of
$15,000.
ITEM 4. Submission of Matters to a Vote of Shareholders
None.
10
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stock Matters
Canal's stock is traded over-the-counter through the "pink sheets". The
high and low price ranges of Canal's common stock for the eight quarters
ended October 31, 1999 as reported on the "pink sheets" were:
Fiscal 1999 Fiscal 1998
Quarter Ended High Low High Low
October 31 ................. $ 1/4 -- $ 1/8 $ 1/4 -- $ 3/16
July 31 .................... 1/4 -- 1/8 1/4 -- 3/16
April 30 ................... 1/4 -- 1/8 1/4 -- 3/16
January 31 ................. 1/4 -- 1/8 1/4 -- 3/16
There were no cash dividends paid during fiscal 1999 or 1998. Canal
is subject to restrictions on the payment of cash dividends under certain
debt agreements. As of January 20, 2000, Canal had approximately 1,500
holders of record of its common stock, par value $.01 per share.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE FOLLOWING DATA HAVE BEEN DERIVED FROM CONSOLIDATED FINANCIAL
STATEMENTS THAT HAVE BEEN AUDITED BY TODMAN & CO., CPAs, P.C., INDEPENDENT
ACCOUNTANTS. THE INFORMATION SET FORTH BELOW IS NOT NECESSARILY INDICATIVE
OF THE RESULTS OF FUTURE OPERATIONS AND SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS ANNUAL REPORT ON FORM 10-K.
(000'S OMITTED, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31, 1999 1998 1997 1996 1995
OPERATING DATA:
REVENUES FROM
CONTINUING OPERATIONS $7,584(1) $4,457(2) $5,311(3) $9,049(4) $4,854(5)
NET (LOSS) INCOME $1,285 ($1,413) ($1,001) $ 842(6) $(1,518)(7)
(LOSS) INCOME PER SHARE:
BASIC $0.24 ($0.37) ($0.27) $ 0.16 $(0.40)
DILUTED $0.24 ($0.37) ($0.27) $ 0.16 $(0.40)
CASH DIVIDENDS PAID $0.00 $0.00 $ 0.00 $0.00 $0.00
WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC 4,327 4,327 4,327 4,327 4,352
- DILUTED(9) 4,327 4,327 5,327 5,327 5,352
AT OCTOBER 31, 1999 1998 1997 1996 1995
BALANCE SHEET DATA:
CURRENT ASSETS $1,661 $1,197 $2,151 $2,015 $1,443
PROPERTY ON OPERATING
LEASES, NET 4,336 5,861 5,323 7,106 8,385
ART INVENTORY
NON-CURRENT 735 949 2,311 3,089 4,901
OTHER ASSETS 1,202 1,500 3,175 3,279 3,474
TOTAL ASSETS $ 7,934 $ 9,507 $12,960 $15,489 $18,203
CURRENT LIABILITIES $1,965 $2,186 $2,068 $ 3,426 $ 2,710
LONG-TERM DEBT 2,612 5,167 6,050 6,980 11,379
STOCKHOLDERS' EQUITY 3,357 2,154 4,842 5,083 4,114
TOTAL LIAB. &
STOCKHOLDERS'EQUITY $ 7,934 $ 9,507 $12,960 $15,489 $18,203
COMMON SHARES OUTSTANDING
AT YEAR-END 4,327 4,327 4,327 4,327 4,327
12
ITEM 6. Selected Financial Data (continued..)
NOTES:
(1) The revenue increase was due primarily to a $3.4 million increase in
sales of real estate coupled with the $1 million of revenue from the
new stockyard operations.
(2) The revenue decrease was due primarily to a $1.1 million decrease in
sales of real estate.
(3) The revenue decrease was due primarily to a $2.7 million decrease in
sales of real estate.
(4) The revenue increase was due primarily to a $4.4 million increase in
sales of real estate which was attributable to the Sioux City, Iowa
lease termination and property sale.
(5) The revenue decrease is due primarily to a decrease of $2.1 million in
real estate sales and the absence of a $1.5 million judgment reversal
taken in fiscal 1994.
(6) Includes a $3.8 million gain on the sale of real estate offset by a
$1.7 million loss from art operations which included a $1.5 million
increase in the art inventory valuation allowance.
(7) Includes the absence of a judgment reversal of $1.5 million in 1994
against the Company, a $0.5 million increase in the art inventory
valuation reserve, absence of $0.3 million gain on sale of
investments, a $0.2 million increase in interest expense partially
offset by a $0.6 million gain on real estate sales.
(8) For discussion of material uncertainties and commitments, see Notes 12
and 17 to the Consolidated Financial Statement.
(9) Weighted average number of diluted shares have been calculated to give
effect to certain convertible notes issued in March 1994.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations - General
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses
from operations in 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 (See Notes 1 and 17). Additionally,
the accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Canal recognized net income of $1.3 million for 1999 as compared to
the 1998 net loss of $1.4 million and the 1997 net loss of $1.0 million.
After recognition of preferred stock dividend payments (paid in additional
shares of preferred stock for each of fiscal 1999, 1998 and 1997) of
$235,000 in 1999, $200,000 in 1998 and $182,000 in 1997, the results
attributable to common stockholders were net income of $1.0 million in
1999, a net loss of $1.6 in 1998 and a net loss of $1.2 million in 1997.
Canal s 1999 net income of $1.3 million is due primarily to a $1.9 million
increase in its gain on sales of real estate (due to a $3.4 million
increase in real estate sales) in the current year. This was offset to a
certain extent by a $0.8 million decrease in Canal s real estate operations
rental income, which was the result of Canal s sale of certain income
producing property including the Omaha, Nebraska property in September 1998
and the 31 acres leased for stockyard operations located in South St. Paul,
Minnesota in April 1999. Canal s 1998 net loss of $1.4 million was due
primarily to a $1.2 million loss on its art operations and a $0.3 million
reduction in its gain on sales of real estate in fiscal 1998. These were
offset by moderate decreases in both interest and general and
administrative expenses.
Canal's revenues from continuing operations consist of revenues from
its real estate operations, stockyard operations (fiscal 1999 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 in 1999 increased by $3.1 million to $7.6 million
as compared with 1998 revenues which had decreased by $0.8 million to $4.5
million from 1997 revenues of $5.3 million. As discussed above, the 1999
increase is due primarily to the $3.4 million increase in sales of real
estate; the inclusion (fiscal 1999 only) of revenues from Canal s newly
acquired stockyard operations of $1.0 million, which were offset by a $0.8
million decrease in rental income from real estate operations. The 1998
decrease is due primarily to a $1.1 million decrease in sales of real
estate offset by a gain on insurance proceeds of $0.4 million related to a
fire in Sioux City, Iowa.
14
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 (See Notes 1 and 17). Additionally,
the accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay
in full the Company s variable rate mortgage notes due May 15, 1998
($2,605,000), its variable rate mortgage notes due September 15, 1998
($700,000) and two notes which were due December 31, 1997 ($320,000) plus
accrued interest thereon. The purchasers of these notes included certain
entities controlled by the Company s Chairman, the Company s Chief
Executive Officer and members of their families. The variable rate
mortgage notes issued have essentially the same terms and conditions as the
variable rate mortgage notes which were repaid. The notes carry interest
at the highest of four variable rates, determined on a quarterly basis.
These notes, among other things, prohibit Canal from becoming an investment
company as defined by the Investment Company Act of 1940; require Canal to
maintain minimum net worth; restrict Canal s ability to pay cash dividends
or repurchase stock; require principal prepayments to be made only out of
the proceeds from the sale of certain assets, and require the accrual of
additional interest (to be paid at maturity) of approximately three percent
per annum. At October 31, 1998 the Company was in technical default of this
mortgage note agreement as it relates to minimum net worth. The Company
received a waiver of this default from the noteholders.
On July 29, 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 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 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. As of October 31, 1999, the balance due
under these notes was $833,000, all of which is classified as long-term
debt-related party.
On January 10, 2000, the above notes were further amended to have the
noteholders 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.
15
Cash and cash equivalents of $416,000 at October 31, 1999 increased
$382,000 or 1,124% from $34,000 at October 31, 1998. Net cash used by
operations in fiscal 1999 was $2.1 million. Substantially all of the 1999
net proceeds from the sale of real estate of $4.8 million and the proceeds
from the sale of art of $0.2 million less the cash used in operations was
used to reduce outstanding debt and accrued expenses.
During 1999 Canal reduced its variable rate mortgage notes by $2.0
million and other long-term debt by $0.6 million for a net 1999 debt
reduction of $2.6 million.
At October 31, 1999 the Company s current liabilities exceed current
assets by $0.3 million (which was a decrease of $0.7 million) as compared
to October 31, 1998 when the Company's current liabilities exceeded current
assets by $1.0 million, which represented an increase of $1.1 million from
1997. The 1999 improvement in the Company s liquidity is due primarily to
strong real estate sales experienced during the year. The proceeds from
these sales not only allowed Canal to significantly pay down its long-term
debt, but also provided the Company with the ability to increase its cash
position by $0.4 million while reducing its current liabilities by $0.2
million. The only required principal repayments under Canal's debt
agreements for fiscal 2000 (after giving consideration to the January 10,
2000 refinancing - see Note 6) 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.
1999 COMPARED TO 1998
Real Estate Revenues
Real estate revenues for 1999 of $6.4 million accounted for 84.9% of
the 1999 revenues as compared to revenues of $4.2 million or 95.1% for
1998. Real estate revenues are comprised of rental income from Exchange
Building (commercial office space) rentals and other lease income from the
rental of vacant land and certain structures (15.8% and 32.5%), Ground
lease income (9.2% and 21.8%), volume based rental income (0.3% and 3.0%)
and sale of real estate and other income (74.7% and 42.7%) for 1999 and
1998, respectively. The 1999 increase is due primarily to the $3.4 million
increase in sales of
16
real estate, offset by the combined $0.8 million decrease in rental ($0.4)
ground lease ($0.3) and volume based ($0.1) income. The decrease in rental
income of $0.4 million is due primarily to Canal s September 1998 sale of
its Omaha, Nebraska property. The decrease in ground lease income of $0.3
million is due to the April 1999 sale of the South St. Paul, Minnesota
stockyard property combined with Canal s August 1, 1999 purchase of the
stockyard assets in Sioux City, Iowa; St. Joseph, Missouri and Sioux Falls,
South Dakota, thereby terminating the ground lease. The decrease in volume
based rental income of $0.1 million is due to the permanent closing of this
plant by its operator in January, 1999. The percentage variations in the
year to year comparisons are due to the significant increase in real estate
sales for fiscal 1999.
Real Estate Expenses
Real estate expenses for 1999 of $3.5 million increased by $1.0
million (41.7%) from $2.5 million in 1998. Real estate expenses are
comprised of labor, operating and maintenance (14.3% and 36.2%),
depreciation and amortization (4.4% and 8.8%), taxes other than income
taxes (9.0% and 9.9%), cost of real estate sold (69.9% and 41.5%),and
general and administrative and other expenses (2.4% and 3.6%) for 1999 and
1998, respectively. The 1999 increase in real estate expenses is due
primarily to
the $1.4 million increase in cost of real estate sold offset by the
combined $0.4 million decrease in other real estate expenses which resulted
primarily from Canal s September 1999 sale of the Omaha, Nebraska property.
The percentage variations in year to year comparisons is due primarily to
the increase in the cost of real estate sold for fiscal 1999.
Art Operations
Management estimates it may take approximately five years to dispose
of its current art inventory. The Company's ability to dispose of its art
inventory is dependent at least in part, on general economic conditions,
including supply, demand, international monetary conditions and inflation.
Additionally, the art market itself is a very competitive market.
Accordingly, there can be no assurance that Canal will be successful in
disposing of its art inventory within the time frame discussed above.
Canal has its art inventory appraised by independent appraisers
annually. The 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
the Company s history of losses sustained on art sales in the current and
previous years
17
and in part on the results of the independent appraisals done. In fiscal
1999 Canal applied against sales $621,300 of the valuation allowance
against its art inventory, thereby, decreasing the total valuation
allowance to $2,778,700 as of October 31, 1999 as compared to $3,400,000
and $2,850,000 at October 31, 1998 and 1997, respectively.
The valuation allowance represents management's best estimate of the
loss that will be incurred by the Company in the normal course of business.
The estimate is predicated on past history and the information that was
available at the time that the financial statements were prepared. The
provision contemplates the loss that could result if the level of sale
anticipated was achieved.
The nature of art makes it difficult to determine a replacement value.
The most compelling evidence of a value in most cases is an independent
appraisal. The price at which pieces are consigned is usually in line with
appraisals and above the cost of the piece. The amount classified as
current represents management's best estimate of the minimum amount of
inventory that will be sold in this market. Management believes that the
provision discussed above has effectively reduced inventory to its
estimated net
realizable value. The Company will continually monitor the market for its
art inventory and will make adjustments to the carrying value of its art
inventory as such adjustments become necessary.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual
channels used for disposal of its art inventory. The proceeds from these
sales are used to reduce the Company's outstanding debt and finance current
operations. If these sales are not made the Company has alternate means of
raising cash such as sales of real estate, sales of investments available
for sale, raising of new capital and further restructuring of debt. Some
of these measures were successfully implemented in fiscal 1999.
Art Revenues
Art revenues for 1999 of $186,000 decreased $35,000 or 15.6% from
$221,000 in 1998. Art revenues are comprised of proceeds from the sale of
antiquities and contemporary art (100.0% and 100.0%) and commission income
on sale of art owned by third parties (0.0% and 0.0%) for 1999 and 1998,
respectively. The Company's art inventory was reduced through sales by
$0.8 million and $0.4 in fiscal years 1999 and 1998, respectively.
Art Expenses
Art expenses for 1999 of $0.3 million decreased by $1.1 million
(81.3%) from $1.4 million in 1998. Art expenses (excluding valuation
allowances) consisted of the cost of art sold (95.1% and 95.3%) and
selling, general and
18
administrative expenses (4.9% and 4.7%) for 1999 and 1998, respectively.
Included in art expenses is a $0.6 million reduction and a $0.6 million
increase in the valuation allowance against the Company's art inventory
(see Note 9 to the Consolidated Financial Statements) for fiscal years 1999
and 1998, respectively.
General and Administrative
General and administrative expenses for 1999 of $1.3 million increased
$0.1 million (5.3%) from $1.2 million in 1998. The major components of
general and administrative expenses are officers salaries (33.6% and
35.4%), rent (8.2% and 7.8%), legal and professional fees (3.4% and 9.9%),
insurance (10.6% and 12.9%) and office salaries (8.7% and 9.2%) for 1999
and 1998, respectively. The percentage increase in legal and professional
fees is due to a sharp increase in legal fees associated with the Pine
Valley lawsuit. The percentage increase in rent reflects the increase in
rent expense for Canal s New York office space. The percentage decreases
in officers salaries, insurance and office salaries is a result of the
aggregate increase in total general and administrative expenses for fiscal
1999.
Interest and Other Income
Interest and other income of $150,000 for 1999 increased $2,000 (1.8%)
from $148,000 in fiscal 1998. Interest and other income amounts are
comprised primarily of dividend and interest income.
Interest Expense
Interest expense for 1999 of $0.5 million decreased by $0.3 million
(41.7%) from $0.8 million in 1998. The 1999 decrease is due primarily to
the aggregate reduction in the outstanding debt. Interest rates on Canal's
variable rate mortgage notes averaged 11.00% in 1999 as compared to an
average of 12.00% in both 1998 and 1997. At October 31, 1999 the
outstanding balance of these notes was $833,000.
Other Expense
Other expense of $139,000 for 1999 was unchanged from fiscal 1998.
19
1998 COMPARED TO 1997
Real Estate Revenues
Real estate revenues for 1998 of $4.2 million accounted for 95.1% of
the 1998 revenues as compared to revenues of $5.2 million or 97.8% for
1997. Real estate revenues are comprised of rental income from Exchange
Building (commercial office space) rentals and other lease income from the
rental of vacant land and certain structures (32.5% and 30.6%), Ground
lease income (21.8% and 17.8%), volume based rental income (3.0% and 2.1%)
and sale of real estate and other income (42.7% and 49.5%) for 1998 and
1997, respectively. The 1998 decrease is due primarily to the $1.1 million
decrease in sales of real estate. The percentage variations in the year to
year comparisons are due to the significant decrease in real estate sales
for fiscal 1998.
Real Estate Expenses
Real estate expenses for 1998 of $2.5 million decreased by $0.9
million (25.8%) from $3.3 million in 1997. Real estate expenses are
comprised of labor, operating and maintenance (36.2% and 25.2%),
depreciation and amortization (8.8% and 10.4%), taxes other than
income taxes (9.9% and
7.8%), cost of real estate sold (41.5% and 27.1%),and general and
administrative and other expenses (3.6% and 29.5%) for 1998 and 1997,
respectively. The 1998 decrease in real estate expenses is due primarily
to the $0.9 million write down in value in 1997 of the Omaha property. The
decrease in
general and administrative and other expenses also reflects the elimination
of the 1997 $0.9 million write down in value of the Omaha property. The
percentage variations in year to year comparisons is due to the decrease
in the cost of real estate sold for fiscal 1998.
Art Operations
Management estimates it may take approximately five years to dispose
of its current art inventory. The Company's ability to dispose of its art
inventory is dependent at least in part, on general economic conditions,
including supply, demand, international monetary conditions and inflation.
Additionally, the art market itself is a very competitive market.
Accordingly, there can be no assurance that Canal will be successful in
disposing of its art inventory within the time frame discussed above.
Canal has its art inventory appraised by independent appraisers
annually. The 1998 appraisal covered approximately 50% of the inventory
value. The appraised values estimate the current market value of each
piece giving consideration to Canal's practices of engaging in consignment,
private
and public auction sales. The net realizable value of the remaining 50% of
the inventory was estimated by management based in part on the Company s
20
history of losses sustained on art sales in the current and previous years
and in part on the results of the independent appraisals done. In fiscal
1998 Canal recognized an additional $550,000 valuation allowance against
its art inventory, thereby, increasing the total valuation allowance to
$3,400,000 as of October 31, 1998 as compared to $2,850,000 and $2,500,000
at October 31, 1997 and 1996, respectively.
The valuation allowance represents management's best estimate of the
loss that will be incurred by the Company in the normal course of business.
The estimate is predicated on past history and the information that was
available at the time that the financial statements were prepared. The
provision contemplates the loss that could result if the level of sale
anticipated was achieved.
The nature of art makes it difficult to determine a replacement value.
The most compelling evidence of a value in most cases is an independent
appraisal. The price at which pieces are consigned is usually in line with
appraisals and above the cost of the piece. The amount classified as
current represents management's best estimate of the minimum amount of
inventory that will be sold in this market. Management believes that the
provision discussed above has effectively reduced inventory to its
estimated net
realizable value. The Company will continually monitor the market for its
art inventory and will make adjustments to the carrying value of its art
inventory as such adjustments become necessary.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual
channels used for disposal of its art inventory. The proceeds from these
sales are used to reduce the Company's outstanding debt and finance current
operations. If these sales are not made the Company has alternate means of
raising cash such as sales of real estate, sales of investments available
for sale, raising of new capital and further restructuring of debt. Some
of these measures were successfully implemented in fiscal 1998.
Art Revenues
Art revenues for 1998 of $221,000 increased $104,000 or 88.2% from
$117,000 in 1997. Art revenues are comprised of proceeds from the sale of
antiquities and contemporary art (100.0% and 97.5%) and commission income
on sale of art owned by third parties (0.0% and 2.5%) for 1998 and 1997,
respectively. The Company's art inventory was reduced through sales by
$0.8 million and $0.4 in fiscal years 1998 and 1997, respectively.
Art Expenses
Art expenses for 1998 of $1.4 million increased by $0.6 million
(69.9%) from $0.8 million in 1997. Art expenses (excluding valuation
allowances)
21
consisted of the cost of art sold (95.3% and 90.7%) and selling, general
and administrative expenses (4.7% and 9.3%) for 1998 and 1997,
respectively. Included in art expenses is a $0.6 million and a $0.4
million valuation allowance against the Company's art inventory (see Note 9
to the Consolidated Financial Statements) for fiscal years 1998 and 1997,
respectively.
General and Administrative
General and administrative expenses for 1998 of $1.2 million decreased
$0.1 million (3.1%) from $1.3 million in 1997. The major components of
general and administrative expenses are officers salaries (35.4% and
34.3%), rent (7.8% and 8.9%), legal and professional fees (9.9% and 10.0%),
insurance (12.9% and 11.9%) and office salaries (9.2% and 10.0%) for 1998
and 1997, respectively. The percentage increases in officers salaries,
legal and professional fees and insurance is a result of the aggregate
decrease in total general and administrative expenses.
Interest and Other Income
Interest and other income of $148,000 for 1998 decreased $89,000
(37.5%) from $236,000 in fiscal 1997. Interest and other income amounts
are comprised primarily of dividend and interest income.
Interest Expense
Interest expense for 1998 of $0.8 million decreased by $0.2 million
(16.4%) from $1.0 million in 1997. The 1998 decrease is due primarily to
the aggregate reduction in the outstanding debt. Interest rates on Canal's
variable rate mortgage notes averaged 12.00% in 1998 as compared to an
average of 12.00% in 1997 and an average of 11.94% in 1996. At October 31,
1998 the outstanding balance of these notes was $2,846,000.
Other Expense
Other expense of $139,000 for 1998 decreased $61,000 (30.3%) from
$200,000 in fiscal 1997.
ITEM 8. Financial Statements and Supplemental Data
The response to this item is included in Item 14(A) of the report.
ITEM 9. Disagreements on Accounting and Financial Disclosure
None.
22
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Board of Directors has designated an Executive Committee
consisting of Messrs. Edelman and Schultz. The Board of Directors has
delegated to the Executive Committee general authority with respect to most
matters that would otherwise be considered by the full Board. During
fiscal 1999 the Board of Directors held one meeting, and the Executive
Committee held four meetings, all of which were attended by both Mr.
Edelman and Mr. Schultz.
The following information with respect to the principal occupation or
employment of each director and executive officer and the name and
principal business of the Company or other organization in which such
occupation or employment is carried on, and in regard to other affiliations
and business experience during the past five years, has been furnished to
the Company by the respective directors.
Asher B. Edelman, age 60, has been Chairman of the Board since
September 1991 and prior thereto Vice Chairman of the Board and Chairman of
the Executive Committee since February, 1985. Mr. Edelman has been a
Director, Chairman of the Board, and Chairman of the Executive Committee of
Datapoint Corporation ("Datapoint") since March 1985 and has been
Datapoint s Chief Executive Officer since February 1993. Mr. Edelman has
served as General Partner of Asco Partners, a general partner of Edelman
Securities Company L.P. (formerly Arbitrage Securities Company) since June
1984 and is a General Partner and Manager of various investment
partnerships and funds.
Michael E. Schultz, age 63, has been President and Chief Executive
Officer since September 1991 and a Director since 1985; and had been a
partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz until December
31, 1994.
Gerald N. Agranoff, age 53, has been a Director since 1984. Mr.
Agranoff is currently Vice President, General Counsel and Corporate
Secretary of Datapoint and has been a Director of Datapoint since 1991.
Mr. Agranoff has been a General Partner of Edelman Securities Company L.P.
(formerly Arbitrage Securities Company) and Plaza Securities Company for
more than five years. Mr. Agranoff is a director of Bull Run Corporation,
Atlantic Gulf Communities and The American Energy Group, Ltd.. Mr.
Agranoff has also been the General Counsel to Edelman Securities Company
L.P. and Plaza Securities Company for more than five years.
Reginald Schauder, age 50, has been Vice President, Chief Financial
Officer and Treasurer since January 1989 and assumed responsibility as
Secretary of the Company in September 1995. Mr. Schauder was corporate
controller from July 1985 to January 1989.
23
There are no family relationships between any of the aforementioned
executive officers of the Registrant and such executive officers were
elected to serve for a term of one year or until the election and
qualification of their respective successors.
ITEM 11. Executive Compensation
The following table summarizes the compensation of the Company's Chief
Executive Officer and the other two executive officers of the Company whose
salary for fiscal 1999 exceeded $100,000.
SUMMARY COMPENSATION TABLE - Annual Compensation
Name and Principal
Position Year Salary
Michael E. Schultz 1999 $ 165,000
President and Chief 1998 $ 165,000
Executive Officer 1997 $ 165,000
Asher B. Edelman 1999 $ 165,000
Chairman of the Board 1998 $ 165,000
and Executive Committee 1997 $ 165,000
Reginald Schauder 1999 $ 101,200
Vice President, Chief 1998 $ 101,200
Financial Officer 1997 $ 101,200
Treasurer and Secretary
The Company pays certain expenses related to Mr. Edelman's European
offices as well as his travel expenses between Europe and the U.S. These
expenses totaled $53,000, $42,000 and $52,000 for fiscal years 1999, 1998
and 1997, respectively.
Retirement Plans
The Canal Capital Corporation Retirement Plan (the "Retirement Plan")
provides benefits to eligible employees of the Company and its subsidiaries
and affiliates. Directors who are not employees are not eligible to
participate in the Retirement Plan. The Retirement Plan is administered by
the Company. All Company contributions under the Retirement Plan were
deposited with an insurance company and invested in a group annuity
contract through May 30, 1985. Thereafter, all Company contributions have
been held in trust under a Trust Agreement between the Company and the
Executive Committee of the Board of Directors, as trustee. Contributions
to the Retirement Plan are determined on an actuarial basis, without
individual allocation.
24
In October 1991, each of three executive officers of the Company
voluntarily withdrew from participation in the Retirement Plan. As a
result of prior service, Messrs. Edelman and Schauder have deferred annual
accumulated benefits of approximately $1,300 and $600, respectively, as of
October 31, 1999. Mr. Schultz has no benefit under the Retirement Plan.
For further information on the Retirement Plan see Note 9.
Aggregate Option Exercises in Last
Fiscal Year and Fiscal Year End Option Value
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Name Options at Fiscal Year End At Fiscal Year End
Michael E. Schultz 255,500* $ -0-
Asher B. Edelman 20,000* $ -0-
Reginald Schauder 15,500* $ -0-
* All options were exercisable at October 31, 1999.
COMPENSATION OF DIRECTORS
Fees and Expenses; Other Benefits
Directors who are not officers of the Company do not receive cash
compensation for service as Directors. Mr. Agranoff was granted 25,000
options of the Company under the 1985 Directors Stock Option Plan, as
amended, in lieu of an annual retainer and per meeting fees. The options
were granted December 1991. Directors are reimbursed for expenses incurred
in attending Board and Committee meetings, including those for travel, food
and lodging.
Stock Options for Directors
The Company maintains an option plan for the benefit of directors of
the Company -- the 1985 Directors' Stock Option Plan (the "1985 Plan"),
which was approved by the stockholders of the Company on March 12, 1986.
Pursuant to the 1985 Plan, a maximum of 264,000 shares of common stock,
$0.01 par value per share, of the Company have been reserved for issuance
to directors and members of the Executive Committee of the Company and its
subsidiaries.
25
Options granted under the 1985 Plan are non-qualified stock options
and have an exercise price equal to 100% of fair market value of the shares
on the date of grant. The options may be exercised no earlier than one
year from the date of grant and no later than ten years after the date of
grant. Under the 1985 Plan, options covering 22,000 shares are
automatically granted to each new director upon the effective date of his
election to office and options covering 5,500 shares are automatically
granted to each new member of the Executive Committee upon the effective
date of his appointment to office. In addition, the 1985 Plan was amended
on December 18, 1991 to provide an automatic grant of options covering
25,000 shares to each current and new director who is not an employee of
the Company including Mr. Agranoff. The 1985 Plan is administered by the
Board of Directors of the Company.
During the 1999 fiscal year, no options under the 1985 plan were
granted and no options previously granted were exercised. At October 31,
1999, options covering an aggregate of 30,500 shares were outstanding under
the 1985 Plan and were held by members of the Board of Directors and
Executive Committee. The exercise price per share of all outstanding
options under the 1985 Plan ranges from $0.13 to $0.25. The expiration
dates for outstanding options under the 1985 Plan range from December 2001
to January 2003.
Compensation Committee - Interlocks and Insider Participation
The Board of Directors (comprised of Asher B. Edelman, Chairman of the
Board and Chairman of the Executive Committee, Michael E. Schultz,
President and Chief Executive Officer and Gerald N. Agranoff) determines
the compensation of the Chief Executive Officer and the Company's other
executive
officers and administers the Company's 1984 Stock Option Plan and 1985
Stock Option Plan for Directors.
In connection with the Company's investment activities, the Executive
Committee of the Board of Directors, through Mr. Edelman, has the authority
to invest funds of the Company in securities of other companies. Certain
funds of the Company have been invested in the securities of other
companies in which Mr. Edelman, other directors of the Company or their
affiliates are
directors or officers, or in which one or more of such persons may also
have invested. Since November 1, 1993, such companies included Datapoint
Corporation. The Company has filed with the SEC Schedules 13D jointly with
Plaza, Mr. Edelman, Edelman Management, Edelman Limited Partnership,
certain investment partnerships of which Mr. Edelman is sole or controlling
general partner, certain of the companies referred to in the preceding
sentence and other persons, indicating that the filing parties constitute
groups for purposes of such filings with respect to the acquisition of
securities in the companies referred to in the preceding sentence.
26
ITEM 12. Securities Ownership of Certain Beneficial Owners and Management
To the knowledge of the Company, the only beneficial owners of 5% or
more of the voting stock of the Company (other than those listed below
under "Securities Owned by Management") as of January 15, 2000 were:
SECURITIES BENEFICIALLY OWNED
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
Asher B. Edelman 2,477,015 (c) 56.98
Michael E. Schultz 314,335 (c) 6.86
William G. Walters 234,440 (b) 5.42
(a) Under applicable regulations of the Securities and Exchange
Commission (the "SEC"), a person who has or shares the power to direct the
voting or disposition of stock is considered a "beneficial owner". Each
individual referred to in the above table has the sole power to direct the
voting and disposition of the shares shown.
(b) The number reported herein for Mr. Walters includes 117,220
shares owned by Mr. Walters, 117,220 shares owned by Whale Securities Co.,
L.P., of which Mr. Walters is Chief Executive Officer. Mr. Walters has
sole power to vote and dispose of the shares described herein.
(c) For additional information about beneficial ownership see
"Securities Owned by Management" below.
27
SECURITIES OWNED BY MANAGEMENT
The following table sets forth certain information as of January 15,
2000, with respect to the beneficial ownership of the Company's Common
Stock with respect to all persons who are directors, each of the executives
named in the Executive Compensation Table and by all directors and officers
as of the most practical date. Unless otherwise indicated, the percentage
of stock owned constitutes less than one percent of the outstanding Common
Stock and the beneficial ownership for each person consists of sole voting
and sole
investment power.
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
Gerald Agranoff 25,000 (b) 0.57
Asher B. Edelman 2,477,015 (c)(d) 56.98
Reginald Schauder 15,600 (e) 0.36
Michael E. Schultz 314,335 (f)(g) 6.86
All Directors and Officers
as a group (4 persons) 2,831,950 60.99
(a) Under applicable regulations of the Securities and Exchange
Commission (the "SEC"), a person who has or shares the power to direct the
voting or disposition of stock is considered a "beneficial owner". Each
director and officer referred to in the above table has the sole power to
direct the voting and disposition of the shares shown, except as otherwise
set forth in footnotes (c), (d) and (f) below.
(b) Includes 25,000 shares subject to options which are presently
exercisable.
(c) The number reported herein for Mr. Edelman includes 31,300 shares
held in Mr. Edelman's retirement plan, 20,000 shares subject to options
granted to Mr. Edelman which are presently exercisable, 1,017,220 shares
owned by A.B. Edelman Limited Partnership ("Edelman Limited Partnership"),
of which Mr. Edelman is the sole general partner, 590,186 shares of common
stock owned by the Edelman Family Partnership, L.P. ( Edelman Family
Partnership ), of which Mr. Edelman is the general partner, 411,750 shares
of common stock owned by the Edelman Value Fund Ltd. (the Fund ) of which
Mr. Edelman is the investment manager, 38,830 shares of common stock owned
by Edelman Value Partners, L.P. ( Value Partners ), of which Mr. Edelman is
the sole stockholder of the general partner, 26,620 shares of common stock
held by Canal Capital Corporation Retirement Plan ( Canal Retirement
Plan ), of which
28
Mr. Edelman serves as a trustee, 8,400 shares owned by Aile Blanche, Inc.,
of which Mr. Edelman is the sole stockholder and 3,399 shares owned by
Felicitas Partners, L.P. ("Felicitas"), the general partner of which is
Citas Partners ("Citas") of which Mr. Edelman is the controlling general
partner. Edelman Limited Partnership has the sole power to vote and dispose
of the shares owned by it, which power is exercisable by Mr. Edelman as the
sole general partner of Edelman Limited Partnership. Edelman Family
Partnership has the sole power to vote and dispose of the shares owned by
it, which power is exercisable by Mr. Edelman as the general partner. Mr.
Edelman as the investment manager of the Fund directs the voting and
disposition of the Fund s securities. Value Partners has shared power to
vote and dispose of the shares owned by it. The power to dispose of such
shares is exercisable by A. B. Edelman Management Company, Inc., a
corporation controlled by Mr. Edelman as the sole stockholder. Canal
Retirement Plan has the sole power to vote and dispose of the shares owned
by it, which power is exercisable by Mr. Edelman as trustee. Aile Blanche,
Inc. has the sole power to vote and dispose of the shares owned by it,
which power is exercisable by Mr. Edelman as President. Felicitas has the
sole power to vote and dispose of the shares owned by it, which power is
exercisable by Mr. Edelman as the controlling general partner of Citas.
Additionally, the number reported herein for Mr. Edelman includes 137,750
shares of common stock owned by Mr. Edelman's wife, 2,900 shares held in
his wife's retirement plan and 188,650 shares of common stock held in three
Uniform Gifts to Minors Act accounts for the benefit of Mr. Edelman's
children of which Mr. Edelman is the custodian.
(d) The number reported herein for Mr. Edelman excludes 232,500
shares of common stock owned by Mr. Edelman s mother, 39,865 shares of
common stock owned by Mr. Edelman's former wife and 29,510 shares of common
stock held in three Uniform Gifts to Minors Act accounts for the benefit of
Mr. Edelman's children, of which Mr. Edelman's former wife is the
custodian, as to which Mr. Edelman expressly disclaims beneficial
ownership.
(e) Includes 100 shares owned directly and 15,500 shares subject to
options which are presently exercisable.
(f) Includes 58,835 shares owned directly and 255,500 shares subject
to options which are presently exercisable.
(g) The number reported herein for Mr. Schultz excludes 26,620 shares
of common stock held by the Canal Capital Corporation Retirement Plan of
which Mr. Schultz serves as a trustee, as to which Mr. Schultz expresses
disclaims beneficial ownership.
ITEM 13. Certain Relationships and Related Transactions
See: "Compensation Committee Interlocks and Insider
Participation"
29
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a) 1. Financial Statements and Notes
See accompanying index to consolidated financial statements.
(a) 2. Schedules and Supplementary Note
None
(a) 3. Exhibits
See accompanying index to exhibits.
(b) Reports on Form 8-K
During the quarter ended October 31, 1999 the Company filed
no reports on Form 8-K.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, on the
26th day of January, 2000.
CANAL CAPITAL CORPORATION
By: /S/ Michael E. Schultz
Michael E. Schultz
President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
President and Chief
/S/ Michael E. Schultz Executive Officer and Director
Michael E. Schultz (Principal Executive Officer) January 26, 2000
Vice President-Finance
Secretary and Treasurer
/S/ Reginald Schauder (Principal Financial and
Reginald Schauder Accounting Officer) January 26, 2000
/S/ Asher B. Edelman Chairman of the Board
Asher B. Edelman and Director January 26, 2000
/S/ Gerald N. Agranoff
Gerald N. Agranoff Director January 26, 2000
31
FORM 10-K -- ITEM 14(a)(1) and (2)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
The following documents are filed as part of this report:
(a) 1. Financial Statements --
Independent Accountants Report.......................... F-2
Consolidated Balance Sheets October 31, 1999 and 1998... F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended October 31, 1999, 1998
and 1997............................................. F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended October 31, 1999, 1998
and 1997............................................. F-7
Consolidated Statements of Cash Flows for the
years ended October 31, 1999, 1998 and 1997.......... F-8
Notes to Consolidated Financial Statements.............. F-9
F-1
INDEPENDENT ACCOUNTANTS REPORT
To the Stockholders of Canal Capital Corporation:
We have audited the accompanying consolidated balance sheets of Canal
Capital Corporation (a Delaware corporation) and Subsidiaries as of October
31, 1999 and 1998 and the related consolidated statements of operations &
comprehensive income, changes in stockholders' equity and cash flows for
each of the years in the three year period ended October 31, 1999. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Canal Capital
Corporation and Subsidiaries as of October 31, 1999 and 1998, and the
results of their operations and cash flows for each of the years in the
three year period ended October 31, 1999, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Notes 1 and
17 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 Notes 1 and 17. The
accompanying financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
/S/ Todman & Co., CPA s,P.C.
New York, N.Y. TODMAN & CO., CPAs, P.C.
January 13, 2000 Certified Public Accountants (N.Y.)
F-2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
1999 1998
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $416,191 $ 33,538
NOTES AND ACCOUNTS RECEIVABLE, NET 321,065 211,070
ART INVENTORY, NET OF A
VALUATION ALLOWANCE
OF $ 1,500,000 AT BOTH OCTOBER 31,
1999 AND 1998 500,000 500,000
STOCKYARDS INVENTORY 13,189 0
INVESTMENTS 191,833 278,175
PREPAID EXPENSES 218,645 173,938
TOTAL CURRENT ASSETS 1,660,923 1,196,721
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 1,307,638
AND $ 1,671,222 FOR 1999 AND 1998,
RESPECTIVELY 3,088,550 5,861,064
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $ 2,500
AND $ ZERO FOR 1999 AND 1998,
RESPECTIVELY 1,247,500 0
ART INVENTORY NON-CURRENT, NET OF A
VALUATION ALLOWANCE OF $ 1,278,700
AND $1,900,000 AT OCTOBER 31, 1999 AND
1998, RESPECTIVELY 734,907 949,125
OTHER ASSETS:
PROPERTY HELD FOR
DEVELOPMENT OR RESALE 977,695 1,318,095
DEFERRED LEASING AND FINANCING COSTS 16,337 12,866
DEPOSITS AND OTHER 207,973 169,578
1,202,005 1,500,539
$ 7,933,885 $ 9,507,449
============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND 1998
1999 1998
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT $ 75,000 $ 110,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,879,611 2,061,210
INCOME TAXES PAYABLE 10,108 14,314
TOTAL CURRENT LIABILITIES 1,964,719 2,185,524
LONG-TERM DEBT, LESS CURRENT PORTION 1,778,710 2,321,433
LONG-TERM DEBT, RELATED PARTY 833,000 2,846,000
2,611,710 5,167,433
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 3,879,258 AND
3,411,681 SHARES ISSUED AND OUTSTANDING AT
OCTOBER 31, 1999 AND 1998, RESPECTIVELY AND
AGGREGATE LIQUIDATION PREFERENCE OF $10.00
PER SHARE FOR $ 38,787,560 AND $ 34,116,810
AT OCTOBER 31, 1999 AND 1998, RESPECTIVELY 38,793 34,117
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED & 4,326,929 SHARES OUTSTANDING
AT OCTOBER 31, 1999 AND 1998, RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 27,274,159 27,033,046
ACCUMULATED DEFICIT (10,758,188) (11,808,043)
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) (1,896,838)
UNREALIZED GAIN ON INVESTMENTS
AVAILABLE FOR SALE (343,725) (257,383)
3,357,456 2,154,492
$ 7,933,885 $ 9,507,449
============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1999 1998 1997
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $4,794,570 $1,434,439 $2,496,943
RENTAL INCOME 1,014,925 1,376,714 1,591,005
GROUND LEASE INCOME 592,011 924,000 924,000
VOLUME BASED RENTAL INCOME 21,645 125,617 110,414
OTHER INCOME 16,364 375,000 71,109
6,439,515 4,235,770 5,193,471
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 2,435,630 1,019,509 896,698
LABOR, OPERATING
AND MAINTENANCE 499,143 891,809 833,181
DEPRECIATION AND AMORTIZATION 153,430 216,572 343,741
TAXES OTHER THAN INCOME TAXES 313,743 240,415 256,800
PROVISION FOR LITIGATION
SETTLEMENT 0 0 (60,359)
WRITE DOWN OF REAL
ESTATE PROPERTY 0 0 936,689
GENERAL AND ADMINISTRATIVE 81,051 89,352 104,606
3,482,997 2,457,657 3,311,356
INCOME FROM REAL
ESTATE OPERATIONS 2,956,518 1,778,113 1,882,115
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 851,014 $ 0 $ 0
FEED AND BEDDING INCOME 64,388 0 0
RENTAL INCOME 758 0 0
OTHER INCOME 41,587 0 0
957,747 0 0
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 402,658 0 0
OTHER OPERATING AND
MAINTENANCE 197,625 0 0
FEED AND BEDDING EXPENSE 50,215 0 0
DEPRECIATION AND AMORTIZATION 2,500 0 0
TAXES OTHER THAN INCOME TAXES 57,533 0 0
GENERAL AND ADMINISTRATIVE 106,428 0 0
816,959 0 0
INCOME FROM STOCKYARD
OPERATIONS 140,788 0 0
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
Continued ...
1999 1998 1997
ART OPERATIONS:
ART REVENUES:
SALES $ 186,400 $ 220,800 $ 114,350
OTHER REVENUES 0 0 2,982
186,400 220,800 117,332
ART EXPENSES:
COST OF ART SOLD 839,986 814,936 432,286
VALUATION RESERVE (621,300) 550,000 350,000
SELLING, GENERAL
AND ADMINISTRATIVE 43,736 39,920 44,541
262,422 1,404,856 826,827
LOSS FROM ART OPERATIONS (76,022) (1,184,056) (709,495)
GENERAL AND ADMINISTRATIVE
EXPENSE (1,283,021) (1,218,239) (1,256,854)
INCOME (LOSS) FROM
OPERATIONS 1,738,263 (624,182) (84,234)
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME 150,385 147,744 236,470
INTEREST EXPENSE (227,685) (333,424) (804,719)
INTEREST EXPENSE-
RELATED PARTY (237,451) (464,300) (149,000)
OTHER EXPENSE (138,508) (139,308) (200,000)
(453,259) (789,288) (917,249)
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 1,285,004 (1,413,470) (1,001,483)
PROVISION FOR INCOME TAXES 0 0 0
NET INCOME (LOSS) 1,285,004 (1,413,470) (1,001,483)
OTHER COMPREHENSIVE INCOME (LOSS):
MINIMUM PENSION
LIABILITY ADJUSTMENT (6,338) (411,197) 134,055
UNREALIZED (LOSS) GAIN ON INVESTMENTS
AVAILABLE FOR SALE (86,342) (873,183) 615,800
COMPREHENSIVE
INCOME (LOSS) $1,192,324 $(2,697,850) $ (251,628)
INCOME (LOSS) PER COMMON SHARE:
- BASIC $ 0.24 $ (0.37) $ (0.27)
- DILUTED $ 0.24 $ (0.37) $ (0.27)
WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC 4,326,929 4,326,929 4,326,929
- DILUTED 4,326,929 4,326,929 5,326,929
SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1999, 1998, AND 1997
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, NOV 1,1996 5,313,794 $53,138 2,703,299 $27,033
NET INCOME 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 294,601 2,946
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
-------------------- ---------------------
BALANCE, OCT 31,1997 5,313,794 $53,138 2,997,900 $29,979
NET INCOME 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 413,781 4,138
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED LOSS ON INVEST. 0 0 0 0
-------------------- ---------------------
BALANCE, OCT 31,1998 5,313,794 $53,138 3,411,681 $34,117
NET LOSS 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 467,577 4,676
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED LOSS ON INVEST. 0 0 0 0
-------------------- ---------------------
BALANCE, OCT 31,1999 5,313,794 $53,138 3,879,258 $38,793
==================== =====================
ADDITIONAL TREASURY
PAID-IN ACCUMULATED COMPREHENSIVE STOCK,
CAPITAL DEFICIT (LOSS)INCOME AT COST
BAL,NOV 1,1996 $26,636,939 ($9,010,999) ($1,619,696) ($11,003,545)
NET INCOME 0 (1,001,483) 0 0
PREFD STOCK DIV 189,354 (181,853) 0 0
MIN PEN LIAB ADJ. 0 0 134,055 0
UNREALIZED GAIN
ON INVEST. 0 0 615,800 0
--------------- -------------- ------------ ------------
BAL,OCT 31,1997$26,828,293 ($10,194,335) ($ 869,841) ($11,003,545)
NET INCOME 0 (1,413,470) 0 0
PREFD STOCK DIV 206,753 (200,238) 0 0
MIN PEN LIAB ADJ. 0 0 (411,197) 0
UNREALIZED LOSS
ON INVEST. 0 0 (873,183) 0
-------------- -------------- ------------ ------------
BAL,OCT 31,1998$27,033,046 ($11,808,043) ($2,154,221) ($11,003,545)
NET INCOME 0 1,285,004 0 0
PREFD STOCK DIV 241,113 (235,149) 0 0
MIN PEN LIAB ADJ. 0 0 (6,338) 0
UNREALIZED LOSS
ON INVEST. 0 0 (86,342) 0
-------------- -------------- ------------ ------------
BAL,OCT 31,1999$27,274,159 ($10,758,188) ($2,246,901) ($11,003,545)
=============== ============== ============== =============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $1,285,004 ($1,413,470) ($1,001,483)
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES:
CREDIT FOR LITIGATION SETTLEMENT 0 0 (60,359)
DEPRECIATION AND AMORT. 174,127 265,659 419,897
GAIN ON SALES OF
REAL ESTATE (2,358,940) (414,930) (1,600,245)
VALUATION RESERVE ON
ART INVENTORY (621,300) 550,000 350,000
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS
RECEIVABLES, NET (109,995) 60,821 23,311
ART INVENTORY, NET (407,082) 811,732 428,231
PREPAID EXPENSES
AND OTHER, NET 91,032 (503,286) 826,419
PAYABLES AND ACCRUED
EXPENSES, NET (185,805) 105,566 (892,611)
NET CASH (USED) PROVIDED BY OPERATING
ACTIVITIES (2,132,959) (537,908) (1,506,840)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES
OF REAL ESTATE 4,794,570 1,434,439 2,496,943
CAPITAL EXPENDITURES (213,235) (60,155) (47,237)
NET CASH PROVIDED BY
INVESTING ACTIVITIES 4,581,335 1,374,284 2,449,706
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM
DEBT-RELATED PARTIES 525,000 3,740,000 0
REPAYMENT OF SHORT-TERM
BORROWINGS 0 0 (466,000)
REPAYMENT OF LONG-TERM
DEBT OBLIGATIONS (2,590,723) (4,571,063) (929,273)
NET CASH USED BY
FINANCING ACTIVITIES (2,065,723) (831,063) (1,395,273)
DECREASE IN RESTRICTED CASH AND CASH
EQUIVALENTS 0 0 470,000
NET INCREASE IN CASH AND CASH
EQUIVALENTS 382,653 5,313 17,593
CASH AND CASH EQUIVALENTS
AT BEGN OF YEAR 33,538 28,225 10,632
CASH AND CASH EQUIVALENTS
AT END OF YEAR $416,191 $ 33,538 $ 28,225
============ ============ ============
NOTE: IN FISCAL 1999, 1998 AND 1997,$ 235,149, $ 200,238 AND $ 181,853,
RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE
ISSUANCE OF 467,577, 413,781 AND 294,601 , RESPECTIVELY, OF SHARES OF
PREFERRED STOCK.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Canal Capital Corporation ("Canal"), incorporated in the state of
Delaware in 1964, commenced business operations through a predecessor in
1936. Canal was a wholly-owned subsidiary of Canal-Randolph Corporation
until June 1, 1984, when Canal-Randolph Corporation distributed to its
stockholders all of the outstanding shares of Canal's common stock, under a
plan of complete liquidation.
Canal is engaged in three distinct businesses - the management and
further development of its agribusiness related real estate properties
located in the midwest, stockyard operations and art operations, consisting
mainly of the acquisition of art for resale.
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses
from operations in seven of the last 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 (See Notes 1 and 17). Additionally,
the accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Canal continues to closely monitor and reduce where possible its
overhead expenses and plans to continue to reduce the level of its art
inventories to enhance current cash flows. Management believes that its
income from operations combined with its cost cutting program and planned
reduction of its art inventory will enable it to finance its current
business activities. There can, however, be no assurance that Canal will
be able to effectuate its planned art inventory reductions or that its
income from operations combined with its cost cutting program in itself
will be sufficient to fund operating cash requirements.
F-9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Principles of Consolidation -- The consolidated financial
statements include the accounts of Canal Capital Corporation ("Canal") and
its wholly-owned subsidiaries ( the Company ). All material 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.
Investments in Joint Ventures - Investments in which ownership
interest range from 20% to 50% or less owned joint ventures are accounted
for under the equity method. These joint ventures are not, in the
aggregate, material in relation to the financial position or results of
operations of Canal. The carrying amount of such investments was $101,000
at both October 31, 1999 and 1998, and is included in other assets. The
operating results of joint ventures accounted for on the equity method, for
fiscal year 1999, 1998 and 1997 were not material to financial statement
presentation and were therefore included in other income from real estate
operations.
C) Deferred Leasing and Financing Costs -- Costs incurred in
obtaining new leases and long-term financing are deferred and amortized
over the terms of the related leases or debt agreements, as applicable.
D) Properties and Related Depreciation -- Properties are stated at
cost less accumulated depreciation. Depreciation is provided on the
straight-line method over the estimated useful lives of the properties.
Such lives are estimated from 35 to 40 years for buildings and from 5 to 20
years for improvements and equipment.
Property held for Development or Resale -- Property held for
development or resale consist of approximately 250 acres located in the
midwest of undeveloped land not currently utilized for corporate purposes
nor included in any of the present operating leases. The Company
constantly evaluates proposals received for the purchase, leasing or
development of this asset. The land is valued at cost which does not
exceed the net realizable value.
F-10
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Impairment of Long-Lived Assets The Company adopted Statement of
Financial Accounting Standards No. 121 Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets to be Disposed of ( SFAS No.
121") as of November 1, 1996. SFAS No. 121 prescribes that an impairment
loss is recognized in the event that facts and circumstances indicate that
the carrying amount of an asset may not be recoverable and an estimate of
future undiscounted cash flows is less than the carrying amount of the
asset. Assets are grouped and evaluated at the lowest level for which
there are identifiable cash flows that are largely independent of the cash
flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the
estimated future cash flows expected to result from the use of the asset.
An impairment loss is recognized whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. (See Note 20).
E) Expenditures for maintenance and repairs are charged to operations
as incurred. Significant renewals and betterments are capitalized. When
properties are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss
is reflected in current income.
F) Art Inventory - Inventory of art is valued at the lower of cost,
including direct acquisition and restoration expenses, or net realizable
value on a specific identification basis. Net realizable value is
determined in part by independent appraisal. Independent appraisals
covered approximately 57% and 50% of the inventory value at October 31,
1999 and 1998, respectively. The remaining 43% and 50% at October 31, 1999
and 1998, respectively was estimated by management based in part on the
independent appraisals done. However, because of the nature of art
inventory, such determination is very subjective and, therefore, the
estimated values could differ significantly from the amount ultimately
realized.
The cost of art is generally specified on the purchase invoice.
When individual art is purchased as part of a group or collection of art,
cost is allocated to individual pieces by management using the information
available to it. A significant portion of the art inventory remains in
inventory longer than a year. Consequently, for financial statement
purposes, Canal has classified a portion of its inventory as non-current
assets (see Note 8). Antiquities and contemporary art represented 44%
($542,758) and 56% ($692,149) and 49% ($713,862) and 51% ($735,263) of
total art inventory at October 31, 1999 and 1998, respectively.
Substantially all of the contemporary art inventory held for resale is
comprised of the work of Jules Olitski.
Stockyard Inventory - Inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
F-11
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
G) Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
H) Revenue Recognition - Lease and rental revenues are recognized
ratably over the period covered. All real estate leases are accounted for
as operating leases. Revenues from real estate sales are recognized
generally when title to the property passes. Revenues from stockyard
operations which consist primarily of yardage fees and sale of feed and
bedding are recognized at the time the service is rendered or the feed and
bedding are delivered. Revenues from art sales are recognized using the
specific identification method, when the piece is shipped to the purchaser.
Art owned by Canal which is on consignment, joint venture, or being
examined in contemplation of sale is not removed from inventory and not
recorded as a sale until notice of sale or acceptance has been received.
Revenues from the sale of investments available for sale, if any, are
recognized, on a specific identification method, on a trade date basis.
I) Income Taxes -- Canal and its subsidiaries file a consolidated
Federal income tax return. The Company accounts for income taxes under the
liability method in accordance with the FASB Statement No. 109. Deferred
income taxes, if any, are provided for temporary differences between
financial reporting and taxable basis of assets and liabilities.
J) Statements of Cash Flows -- The company considers all short-term
investments with a maturity of three months or less to be cash equivalents.
Cash equivalents primarily include bank, broker and time deposits with an
original maturity of less than three months. These investments are carried
at cost, which approximates market value. Canal made federal and state
income tax payments of $20,000, $30,000 and $40,000 and interest payments
of $465,000, $798,000 and $954,000 in 1999, 1998 and 1997, respectively.
K) Comprehensive Income -- Effective for fiscal years beginning after
December 15, 1997, Statement of Financial Accounting Standards No. 130
requires that comprehensive income and its components, as defined in the
statement, be reported in a financial statement. The Company elected
early adoption of SFAS No. 130 as of October 31, 1997. The only
adjustments for each classification of the comprehensive income was for
minimum pension liability and unrealized (loss) gain on investments
available for sale.
L) Earnings Per Share -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 128 Earnings Per Share, which requires companies to present basic
earnings per share (EPS) and diluted earnings per share, instead of the
primary and
F-12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
fully diluted EPS that is currently required. The new standard requires
additional information disclosure, and also makes certain modifications to
the currently applicable EPS calculations defined in Accounting Principles
Board No. 15. The new standard was required to be adopted by all public
companies for reporting periods ending after December 15, 1997, and
requires restatement of EPS for all prior periods reported. The Company
adopted SFAS No. 128, for the years ended October 31, 1997 and 1996,
respectively.
M) Reclassification -- Certain prior year amounts have been
reclassified to conform to the current year's presentation.
3. NOTES AND ACCOUNTS RECEIVABLE
Included in notes and accounts receivable at October 31, 1999 and 1998
were the current portion of notes receivable in the amount of $158,000 and
$15,000, respectively, which were generated by real estate and other sales.
Notes and accounts receivable is shown net of a provision for doubtful
accounts in the amount of $0 for both fiscal 1999 and 1998, respectively.
4. INVESTMENTS AVAILABLE FOR SALE
At October 31, the investments available for sale consisted of the
following:
($ 000's Omitted) 1999 1998
Aggregate market value..................... $ 192 $278
Aggregate carrying value................... $ 192 $278
Canal has an investment in a company in which it, together with other
affiliated entities, comprise a reporting group for regulatory purposes.
It is important to note that it is the group (as defined) that can exercise
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 any unrealized gains or
losses are reflected in Stockholders Equity. The realized gains or losses,
if any, are recognized in operating results.
Canal recognized unrealized losses on investments of $86,000 and
$873,000 for the years ended October 31, 1999 and 1998, respectively, which
are shown as a separate component of Stockholders Equity.
F-13
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. STOCKYARD OPERATIONS SALE AND SUBSEQUENT REPURCHASE
On October 31, 1989 Canal sold most of its stockyards assets to a
group formed by a former Executive Vice President and Director of the
Company. Not included in the sale was certain land and some facilities
previously used by the stockyard operations. Canal entered into a master
lease (the Lease ) with the purchaser covering approximately 139 acres of
land and certain facilities used by the stockyard operations. The Lease
was a 10 year lease, renewable at the purchaser s option for an additional
ten year period, with annual rentals of $750,000 per year for the first
year escalating to $1.0 million per year for the fourth through the tenth
years and $1.0 million per year adjusted for CPI increases thereafter. In
addition, Canal retained the right to receive income from certain volume
based rental income leases with two meat packing companies located near the
stockyards. The income from both the ground lease and the volume based
rental leases are included in Canal's operating results as Real Estate
operations.
In September, 1998 Canal sold a 60 acre parcel of land to the City of
Omaha, Nebraska. This sale included the seventeen acres of land leased to
the stockyards operator. As part of this transaction, Canal received the
stockyards rental payments under the Lease through October 31, 1999 at
which time the operator moved the stockyards to a new location. In April
1999, Canal sold to the stockyard operator the 31 acres located in South
St. Paul, Minnesota which was subject to the Lease. Finally, in August
1999 Canal bought the operating assets of the remaining three stockyards
subject to the Lease from the operator. The August transaction released
the operator from any further obligations under the Lease. The income from
the stockyard operations for the period August 1, 1999 through October 31,
1999 are reflected in Canal s income statements as Stockyard Operations.
As discussed above, as part of the 1989 agreement, Canal retained the
right to receive income from certain volume based rental income leases with
two meat packing companies located near the stockyards in Sioux City, Iowa
and Fargo, North Dakota. The Sioux City, Iowa lease was terminated and the
property sold to the meat packer in fiscal 1996. In March 1999 Canal
entered into a Settlement Agreement and Mutual Release (the Settlement )
with Federal Beef Processors, Inc. ( Federal ) the operator of the meat
packing plant in Fargo, North Dakota. Under the terms of the Settlement
the packing plant lease was terminated, all litigation between the parties
was dismissed with prejudice and fee title to the improvements on the
leased property reverted to Canal. For further information about this
lease and associated litigation (see - Item 3 Legal Proceedings and Note
17). The March 1999 Settlement terminated all remaining rights Canal had
to receive volume based rental income under the Lease.
F-14
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Revenues from the volume based rental agreements for the three years
ended October 31, 1999, 1998 and 1997 were $22,000, $126,000 and $110,000,
respectively, all of which arose from the Fargo, North Dakota lease.
Canal commenced stockyard operations August 1, 1999 in Sioux City,
Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota. 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 stockyards include cattle,
hogs and sheep. Cattle and hogs may come through the stockyard facilities
at two 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, auctioneers, weigh masters and
scales, feed and bedding, and security personnel. In addition, the
stockyards 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 of producers.
Canal maintains an inventory of feed and bedding which is comprised
primarily of hay, corn and straw. The value of this inventory at October
31, 1999 was $13,000.
Actual marketing transactions at a stockyard are managed for livestock
producers by market agencies and independent commission sales people to
which the livestock are consigned for sale. These market agencies (some of
which are owned and operated by the Company) and independent sales people
receive commissions from the seller upon settlement of a transaction and
the stockyard receives a yardage fee on all livestock using the facility
which is paid within twenty-four hours of the sale. Yardage fees vary
depending on the type of animal, the extent of services provided by the
stockyard, and local competition. Yardage revenues are not directly
dependent upon market prices, but rather are a function of the volume of
livestock handled. In general, stockyard livestock volume is dependent
upon conditions affecting livestock production and upon the market agencies
and independent commission sales people which operate at the stockyards.
Stockyard operations are seasonal, with greater volume generally
experienced during the first and fourth quarters of each fiscal year,
during which periods livestock is generally brought to market.
As discussed above, virtually all of the volume at Canal s Sioux City
and Sioux Falls stockyards is handled through market agencies or
independent commission sales people, while the St. Joseph stockyard has
solicitation operations of its own which accounts for approximately half of
its livestock volume annually.
F-15
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Canal intends to continue its soliciting efforts at its St. Joseph
stockyards in fiscal 2000 and develop similar operations at its Sioux City
stockyards which has experienced severe reductions in volume in recent
years. Further, Canal tries to balance its dependence on market agencies
and independent commission sales people in various ways, including
developing solicitation operations of its own; direct public relations
advertising and personal solicitation of producers on behalf of the
stockyards; providing additional services at the stockyards to attract
sellers and buyers; and providing incentives to market agencies and
independent commission sales people for increased business.
6. BORROWINGS
At October 31, 1999, substantially all of Canal's real properties, the
stock of certain subsidiaries, the investments and a substantial portion of
its art inventories are pledged as collateral for the following
obligations:
October 31,
($ 000's Omitted) 1999 1998
Variable rate mortgage notes
due May 15, 2003 - related party ................ $ 833 $ 0
Variable rate mortgage notes
due May 15, 2001 - related party ................ 0 2,846
11% mortgage note; original principal amount
$1,697; due April 1, 2011; payable in monthly
installments (including interest) of $17....... 1,153 1,210
9.5% mortgage note; original principal amount
$472; due November 1, 2012; payable in monthly
installments (including interest) of $4........ 381 393
10 1/2% mortgage note (adjusted periodically to
prime plus 1 3/4%); original principal amount
$556 due January 15, 2013; payable in monthly
installments (including interest) of $6........ 0 466
Other Note ...................................... 320 362
Total ........................................... 2,687 5,277
Less -- current maturities ...................... 75 110
Long-term debt $ 2,612 $ 5,167
F-16
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay
in full the Company s variable rate mortgage notes due May 15, 1998
($2,605,000), its variable rate mortgage notes due September 15, 1998
($700,000) and two notes which were due December 31, 1997 ($320,000) plus
accrued interest thereon. The purchasers of these notes included certain
entities controlled by the Company s Chairman, the Company s Chief
2Executive Officer and members of their families. The variable rate
mortgage notes issued have essentially the same terms and conditions as the
variable rate mortgage notes which were repaid. These notes carry interest
at the highest of four variable rates, determined on a quarterly basis.
These notes, among other things, prohibits Canal from becoming an
investment company as defined by the Investment Company Act of 1940;
requires Canal to maintain minimum net worth; restricts Canal s ability to
pay cash dividends or repurchase stock; requires principal prepayments to
be made only out of the proceeds from the sale of certain assets, and
requires the accrual of additional interest (to be paid at maturity) of
approximately three percent per annum. At October 31, 1998 the Company was
in technical default of this mortgage note agreement as it relates to
minimum net worth. The Company received a waiver of this default from the
note holders.
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. As of October
31, 1999 the balance due under these notes was $833,000 all of which is
classified as long-term debt-related party.
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.
On December 1, 1997 the Company issued a $325,000 promissory note due
December 1, 2001 as the result of a settlement agreement with the buyer of
a parcel of land located in Portland, Oregon which Canal sold in 1988. The
note carries interest at the prime rate (8.5% at October 31, 1998) adjusted
semi-annually and requires principal and interest payments in each of the
first four years (based on a 30 year amortization schedule) commencing
December 1, 1997. The balance is payable in full on December 1, 2001. The
balance outstanding on this note at October 31, 1999 was $320,000. As
discussed above, this note was repaid in full on January 10, 2000.
F-17
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The scheduled maturities and sinking fund requirements of long-term
debt during the next five years are as follows ($ 000's Omitted):
Year Ending Amount
2000 $ 75
2001 & 2002 0
2003 2,612
2004 & Thereafter 0
$ 2,687
7. INCOME TAXES
Significant components of the Company s deferred asset/(liability) as
of October 31, 1999, 1998 and 1997 include property and equipment due to
differences in depreciation, deferred rent, inventory valuation allowance
and net operating loss carryforward ($ 000's Omitted):
1999 1998 1997
Total Gross Deferred Tax assets $ 2,868 $ 3,153 $ 2,911
Less - Valuation Allowance (2,868) (3,153) (2,911)
Net Deferred Tax Assets $ 0 $ 0 $ 0
Total Gross Deferred Tax Liability $ 0 $ 0 $ 0
Net Deferred Tax Asset (Liability) $ 0 $ 0 $ 0
Actual income tax expense (benefit) differs from the expected tax
expense computed by applying the U.S. federal corporate tax rate of 35% to
income(loss) before income taxes as follows (& 000's Omitted):
1999 1998 1997
Computed Expected Tax Expense(Benefit) $ 450 $ (495) $ (350)
Change in Valuation Allowance (285) 242 443
Other (165) 253 (93)
$ 0 $ 0 $ 0
At October 31, 1999, the Company has net operating loss carryforwards
of approximately $8,193,000 that expire through 2013. For financial
statement purposes, a valuation allowance has been provided to offset the
net deferred tax assets due to the cumulative operating losses incurred
during recent years. Such allowance (decreased) increased by approximately
$(285,000), $242,000 and $443,000 during the years ended October 31, 1999,
1998 and 1997,respectivly. The valuation allowance will be reduced when and
if, in the opinion of management, significant positive evidence exists
which indicates that it is more likely than not that the Company will be
able to realize its deferred tax assets.
F-18
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. PENSION PLANS
Canal has a defined benefit pension plan covering substantially all of
its salaried employees (the "Plan"). The benefits are based on years of
service and the employee's compensation earned each year. The Company's
funding policy is to contribute the amount that can be deducted for federal
income tax purposes. Accordingly, the Company will make a contribution of
approximately $243,000 for fiscal 1999 and has made contributions of
approximately $150,000 for fiscal 1998 and $162,000 for fiscal 1997.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
Assets of the plan were invested in U.S. Government securities, common
stocks and antiquities.
Assumptions used in computing the 1999, 1998 and 1997 pension cost
were:
1999 1998 1997
Discount rate ........................... 7.75% 7.00% 7.25%
Rate of increase in compensation
level ................................. 6.25% 5.50%
5.75% Expected long-term rate of return
on assets ............................. 10.00% 10.00% 10.00%
Net periodic pension cost for plan years ended October 31, 1999, 1998
and 1997 included the following components:
Plan Year
($ 000's Omitted) 1999 1998 1997
Service costs - benefits earned during
the period ............................ $ 10 $ 9 $ 8
Interest cost on projected benefit
obligation ............................ 100 101 106
(Return) loss on assets .............. 13 359 (250)
Net amortization and deferral ........... (51) (408) 193
Net period pension cost ................. $ 72 $ 61 $ 57
F-19
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated balance sheets at October 31, 1999
and 1998.
Plan Year
($ 000's Omitted) 1999 1998
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $1,395 and $1,449 in
1999 and 1998, respectively ............. $ 1,395 $ 1,449
Additional benefit due to assumed future
compensation levels ......................... 27 26
Projected benefit obligation (1) .............. 1,422 1,475
Plan assets at fair value ..................... 703 707
Projected benefit obligation in excess
of plan assets .............................. 719 768
Unrecognized net obligation ................... 76 101
Unrecognized net loss ......................... (1,994)
(2,024) Valuation reserve to recognize accrued pension
costs in the consolidated balance sheets .... 1,891 1,897
Accrued pension cost included among accrued
expenses in the consolidated balance sheets.. $ 692 $ 742
(1) The vast majority of the projected benefit obligation is related
to the Company's former stockyard employees.
9. ART OPERATIONS
Canal's art dealing operations consist primarily of inventories held
for resale of antiquities primarily from ancient Mediterranean cultures and
contemporary art primarily of one artist. Canal carries on its art dealing
operations through various consignment agreements relating to its
antiquities and contemporary art inventories.
Canal established its art operations in October 1988 by acquiring a
significant inventory for resale of antiquities primarily from the ancient
Mediterranean cultures. In November 1989, Canal expanded its art
operations by entering into a cost and revenue sharing agreement with a New
York City gallery for the exclusive representation of Jules Olitski, a
world renowned
F-20
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 $308,000 at October 31, 1999. The
representation agreement expired December 1, 1994 and Canal now operates
independently in the marketing of its contemporary art inventory.
Due to general economic conditions and the softness of the art
markets, Canal has not purchased inventory in several years. However,
Canal continues its marketing efforts to sell its existing art inventory
through various consignment agreements and at public auctions. Antiquities
and contemporary art represented 44% ($542,758) and 56% ($692,149) and 49%
($713,862) and 51% ($735,263) of total art inventory at October 31, 1999
and 1998, respectively. Substantially all of the contemporary art
inventory held for resale is comprised of the work of Jules Olitski.
Management estimates it may take approximately five years to dispose
of its current art inventory. The Company's ability to dispose of its art
inventory is dependent at least in part, on general economic conditions,
including supply, demand, international monetary conditions and inflation.
Additionally, the art market itself is very competitive. Accordingly,
there can be no assurance that Canal will be successful in disposing of its
art inventory within the time frame discussed above.
Canal has its art inventory appraised by independent appraisers
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 the Company s
history of losses sustained on art sales in the current and previous years
and in part on the results of the independent appraisals done. In fiscal
1999
Canal applied against sales $621,300 of the valuation allowance against its
art inventory, thereby, decreasing the total valuation allowance to
$2,778,700 as of October 31, 1999 as compared to $3,400,000 and $2,850,000
at October 31, 1998 and 1997, respectively.
The nature of art makes it difficult to determine a replacement value.
The most compelling evidence of a value in most cases is an independent
appraisal. The price at which pieces are consigned is usually in line with
appraisals and above the cost of the piece. The amount classified as
current represents management's best estimate of the amount of inventory
that will be sold in this market. Management believes that the provision
discussed above
F-21
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
has effectively reduced inventory to its estimated net realizable value.
Canal will continue to closely monitor the market for its art inventory and
will make adjustments to the carrying value of its inventory as such
adjustments become necessary.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual
channels used for disposal of its art inventory. The proceeds from these
sales are used to reduce the Company's outstanding debt and finance current
operations. If these sales are not made, the Company has alternate means
of raising cash such as sales of investments, sale of real estate, raising
of new capital and further rescheduling of debt. Some of these measures
were successfully implemented in fiscal 1999.
Canal's art operations have generated operating losses of
approximately $76,000, $1,184,000 and $709,000 on revenues of approximately
$186,000, $221,000 and $117,000 for the years ended October 31, 1999, 1998
and 1997, respectively. Art sales have resulted primarily through
activities in conjunction with sales of antiquities. Canal's management
believes that through its consignment agreements as well as other potential
distribution outlets Canal will continue the orderly reduction of its
antiquities and contemporary art.
The Company had approximately $1,358,000 and $2,140,000 of art
inventory on consignment with third party dealers at October 31, 1999 and
1998, respectively.
ART INVENTORY - The Company classified its art inventory for the two
years ended October 31, 1999 and 1998 as follows ($ 000's Omitted):
Current Portion Non-Current Portion Total
1999 1998 1999 1998 1999 1998
Antiquities $1,000 $1,000 $ 428 $1,114 $ 1,428 $ 2,114
Contemporary 1,000 1,000 1,586 1,735 2,586 2,735
Valuation
Allowance (1,500) (1,500) (1,279) (1,900) ( 2,779) (3,400)
Net Value $ 500 $ 500 $ 735 $ 949 $ 1,235 $ 1,449
F-22
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The amount recorded as the current portion of art inventory represents
management's estimate of the inventory expected to be sold during the next
twelve months. The Company recorded a valuation allowance against the
current portion of its inventory to reduce it to its estimated net
realizable value based on the history of losses sustained on inventory
items sold in the current and previous years.
Art sales for the three years ended October 31, 1999, 1998, and 1997
were as follows:
($ 000's Omitted) 1999 1998 1997
Antiquities $ 186 $ 221 $ 77
Contemporary 0 0 40
$ 186 $ 221 $ 117
10. LEASE COMMITMENTS
In February 1999 Canal, together with two other related entities,
amended its lease for commercial office space in New York City, which space
serves as its headquarters operations. The new lease is for a period of
128 months expiring in October 2009. Canal s portion of the new space is
approximately 1,000 square feet and Canal is responsible for 25% of the
lease expense. Each of the three entities that are parties to this lease
are jointly and severally responsible for the payments required under the
lease.
The following is a schedule of Canal s portion of future minimum
payments required under operating leases that have initial or remaining
noncancellable terms in excess of one year as of October 31, 1999:
Year ended October 31, ($ 000's Omitted)
2000 $ 84,000
2001 84,000
2002 84,000
2003 84,000
2004 84,000
Thereafter 420,000
$840,000
Rent expense under these and other operating leases for the years
ended October 31, 1999, 1998 and 1997 were as follows:
($ 000's Omitted) 1999 1998 1997
Minimum rentals ................... $ 84 $ 26 $ 159
Less: sublease rentals ........... 0 (10) (47)
$ 84 $ 16 $ 112
F-23
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. IMPAIRMENT LOSS ON LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards No.
121 Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of ( SFAS No. 121") as of November 1, 1996. The
Company recognized an impairment loss of $0.9 million in fiscal 1997 on the
write-down of its Omaha, Nebraska property. This was the result of the
Company entering into two agreements to sell a substantial portion of its
holdings in Omaha, Nebraska for approximately $1.0 million in November
1997. As a result, the anticipated undiscounted future cash flow of this
group of assets exceeded their carrying values as of October 31, 1997
requiring an impairment loss in long-lived assets to be recognized in
fiscal 1997. There was no similar loss to be recognized in fiscal 1999 or
1998.
12. STOCK OPTION PLAN
Under Canal's 1984 Employee and 1985 Directors Stock Option Plans,
$550,000 and 264,000 shares, respectively, of Canal's common stock have
been reserved for option grants. The purchase price of shares subject to
each option granted, under the Employee and Directors Plans, will not be
less than 85% and 100%, respectively, of their fair market value at the
date of grant. At October 31, 1999 the purchase price of shares subject to
each option granted equaled 100% of the fair market value on the date of
grant. Options granted under both plans are exercisable for 10 years from
the date of grant, but no option will be exercisable earlier than one year
from the date of grant. Under the Employee Plan, stock appreciation rights
may be granted in connection with stock options, either at the time of
grant of the options or at any time thereafter. No stock appreciation
rights have been granted under this plan. At October 31, 1999, there were
319,000 exercisable options outstanding under these plans.
Transactions under these plans are summarized as follows:
Shares Option Price Range
Balance outstanding October 31, 1997.... 323,000 $0.125-$5.375
Options granted ........................ 0 - -
Options expired ........................ 0 $ - -
Balance outstanding October 31, 1998.... 323,000 $0.125-$5.375
Options granted 0 - -
Options expired 4,000 $5.375-$5.375
Balance outstanding October 31, 1999.... 319,000 $0.125-$2.250
F-24
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company applies APB Opinion 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost
has been recognized for the years ended October 31, 1999, 1998 and 1997.
In October, 1995, the Financial Accounting Standards Board issued
Statement (SFAS) No. 123, Accounting for Stock Based Compensation, which
becomes effective for transactions entered into in fiscal years beginning
after December 15, 1995. This statement permits an entity to apply the
fair value based method to stock options awarded during 1995 and thereafter
in order to measure the compensation cost at the grant date and recognize
it over its vesting period. This statement also allows an entity to
continue to measure compensation costs for these plans pursuant to APB
Opinion 25. Entities electing to remain with the accounting treatment
under APB Opinion 25 must make proforma disclosures of net income and
earnings per share to include the effects of all awards granted in fiscal
years beginning after December 31, 1994, as if the fair value based method
of accounting pursuant to SFAS No. 123 has been applied.
The Company adopted the disclosure requirements for this statement
effective for the year ending October 31, 1996, while continuing to
measure compensation cost using APB 25. Had compensation cost been
determined on the basis of SFAS No. 123, the proforma effect on the
Company s net income and earnings per share for the years ended October 31,
1999 and 1998 would have been deminimus.
13. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID
During each of the fiscal years ended October 31, 1999, 1998 and 1997,
the Company had 319,000, 323,000 and 323,000 options outstanding. The
options were not included in the computation of diluted earnings (loss) per
share because the effect of exercisable price conversion would be
antidilutive. There were no dividends declared on common stock during the
years ended October 31, 1999, 1998 and 1997. Dividends declared on
preferred stock during the years ended October 31, 1999, 1998 and 1997 were
approximately $235,000, $200,000 and $182,000.
Basic earnings (loss) per share are computed by dividing earnings
(loss) available to common stockholders by the weighted average number of
common share outstanding during the period. Diluted earnings (loss) per
share reflect per share amounts that would have resulted if dilutive
potential common stock had been reported in the financial statements.
F-25
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Basic and diluted earnings (losses) available to common stockholders
at October 31, 1999, 1998 and 1997 were:
For the Year Ended October 31, 1999
Income Shares Per-share
(Numerator) (Denominator) Amount
Net income $ 1,285,000
Less preferred stock dividends (235,000)
Income available to common stock-
holders-basic earnings per share 1,050,000 4,327,000 $ 0.24
Effect of dilutive securities:
Options (antidilutive) N/A N/A
Income available to common stock-
holders-diluted earnings per share $ 1,050,000 4,327,000 $ 0.24
For the Year Ended October 31, 1998
Income Shares Per-share
(Numerator) (Denominator) Amount
Net loss (1,413,000)
Less preferred stock dividends (200,000)
Loss available to common stock-
holders-basic earnings per share (1,613,000) 4,327,000 $ (0.37)
Effect of dilutive securities:
Options (antidilutive) N/A N/A
Loss available to common stock-
holders-diluted earnings per share $(1,613,000) 4,327,000 $ (0.37)
F-26
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended October 31, 1997
Income Shares Per-share
(Numerator) (Denominator) Amount
Net loss $(1,001,000)
Less preferred stock dividends (182,000)
Loss available to common stock-
holders-basic earnings per share (1,183,000) 4,327,000 $(0.27)
Effect of dilutive securities:
Options (antidilutive) - -
7% convertible note 13,000 1,000,000
Loss available to common stock-
holders-diluted earnings per share $(1,170,000) 5,327,000 $(0.27)
14. PREFERRED STOCK ISSUANCE
On October 15, 1986 Canal exchanged 986,865 shares of its $1.30
Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of
its outstanding common stock. Since the exchange, the Company has issued
an additional 2,892,393 shares in the form of stock dividends for a total
outstanding at October 31, 1999 of 3,879,258. All of the Preferred Stock
has a par value of $0.01 per share and a liquidation preference of $10 per
share. The Preferred Stock is subject to optional redemption, in exchange
for Canal's 13% Subordinated Notes, by Canal, in whole or in part at any
time on or after September 30, 1988 at the redemption price of $10 per
share. Dividends on the Preferred Stock accrue at an annual rate of $1.30
per share and are cumulative. Dividends are payable quarterly in cash or
in Preferred Stock at Canal's option. Payment commenced December 31, 1986.
To date, forty of the fifty-two quarterly payments have been paid in
additional stock resulting in the issuance of 2,892,393 shares recorded at
their fair value at the time of issuance.
Canal is restricted from paying cash dividends by certain of its debt
agreements (See Note 6). The last cash dividend paid on Canal's preferred
stock was in September 1989. The quarterly dividends payable September 30,
F-27
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1999 and December 31, 1999 were passed by the Board of Directors. It is
the Company s intention to pay its next dividend on the preferred stock on
June 30, 2000 at which time a one year dividend will have accumulated. The
dividend planned for June 30, 2000 will also be paid in additional stock.
VOTING RIGHTS - The holders of the Preferred Stock shall not have any
voting rights except that the following actions must be approved by holders
of 66 2/3% of the shares of Preferred Stock, voting as a class: (I) any
amendment to the Certificate of Incorporation of Canal which would
materially alter the relative rights and preferences of the Preferred Stock
so as to adversely affect the holders thereof; and (ii) issuance of
securities of any class of Canal's capital stock ranking prior (as to
dividends or upon liquidation, dissolution or winding up) to the Preferred
Stock. The holders of the Preferred Stock shall be entitled to specific
enforcement of the foregoing covenants and to injunctive relief against any
violation thereof.
Whenever quarterly dividends payable on the Preferred Stock are in
arrears in the aggregate amount at least equal to six full quarterly
dividends (which need not be consecutive), the number of directors
constituting the Board of Directors of Canal shall be increased by two and
the holders of the Preferred Stock shall have, in addition to the rights
set forth above, the special right, voting separately as a single class, to
elect two directors of Canal to fill such newly created directorships at
the next succeeding annual meeting of shareholders (and at each succeeding
annual meeting of shareholders thereafter until such cumulative dividends
have been paid in full).
15. VALUATION RESERVE
The Valuation Reserve represents the excess of additional minimum
pension liability required under the provisions of SFAS No. 87 over the
unrecognized prior service costs of former stockyard employees. Such
excess arose due to the decline in the market value of pension assets
available for pension benefits of former employees, which benefits were
frozen at the time the stockyard operations were sold in 1989. The excess
will be expensed as actuarial computations of annual pension cost (made in
accordance with SFAS No. 87) recognize the deficiency that exists.
F-28
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FINANCIAL INFORMATION FOR BUSINESS SEGMENTS
Canal is engaged in three distinct businesses - the management and
further development of its agribusiness related real estate operations,
stockyard operation and its art operations.
The following summary presents segment information relating to these
lines of business except for the respective revenues, operating income and
the reconciliation of operating income with pre-tax income which
information is presented on Canal's income statement.
October 31,
($ 000's Omitted) 1999 1998 1997
Identifiable assets:
Art ............................... $ 1,249 $ 1,463 $ 2,818
Real estate ....................... 4,339 7,490 8,630
Stockyard operations .............. 1,613 0 0
Corporate ......................... 733 554 1,512
$ 7,934 $ 9,507 $ 12,960
($ 000's Omitted) 1998 1997 1996
Capital expenditures:
Art ............................... $ 0 $ 0 $ 0
Real estate ....................... 14 46 41
Stockyard operations .............. 150 0 0
Corporate ......................... 25 14 6
$ 189 $ 60 $ 47
Income from real estate operations includes gains (losses) on sales of
real estate of $2.4 million, $0.3 million and $1.6 million in 1999, 1998
and 1997, respectively. Art identifiable assets include approximately $1.4
million and $2.1 million of art inventory in galleries or on consignment
abroad as of October 31, 1999 and 1998, respectively.
17. LITIGATION
Canal and its subsidiaries are from time to time involved in
litigation incidental to their normal business activities, none of which,
in the opinion of management, will have a material adverse effect on the
consolidated financial condition of the Company. Canal or its subsidiaries
are party to the following litigations:
F-29
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Canal Capital Corporation v. Valley Pride Pack, Inc.
Canal commenced an action in U.S. District Court in Minnesota on
September 23, 1997, as the assignee of United Market Services Company,
against Valley Pride Pack, Inc. (formerly Pine Valley Meats, Inc. and
referred to herein as Pine Valley ) to recover unpaid livestock fees and
charges (estimated to be as much as $1,000,000) due from Pine Valley under
a 1936 Agreement between the predecessors of Pine Valley and Canal. Upon
Pine Valley s motion, the Court entered an order dated February 23, 1998
granting summary judgment and dismissing Canal s complaint. Canal appealed
the dismissal to the U.S. District Court of Appeals for the Eighth Circuit,
which reversed the dismissal and reinstated Canal s complaint.
On April 9, 1999, Pine Valley served an answer and counterclaim in
which it denied any liability for livestock fees and alleged that the 1936
Agreement violates Section 1 of the Sherman Antitrust Act and the Minnesota
Antitrust Law. Pine Valley alleges any livestock fee obligation under the
1936 Agreement constitutes an illegal tying arrangement whereby Canal s
predecessor attempted to tie the purchase of land for the operation of the
meat packing plant to the purchase of cattle at the stockyards by assessing
yardage fees on all cattle purchased for slaughter at the packing plant
even if the stockyards provides no services with respect to the cattle.
Pine Valley seeks as relief a declaratory judgment that the 1936 Agreement
is unenforceable, an injunction preventing Canal from enforcing the fee
provisions of the 1936 Agreement and treble damages for the alleged
violation by Canal and its predecessor of the federal and state antitrust
laws, together with attorneys fees. Pine Valley has not specified a
dollar amount of the alleged antitrust damages which it has stated is the
amount paid by Pine Valley in livestock fees.
The case is still in the discovery state and we are not in a position
to express any opinion as to the ultimate outcome of the matter.
Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo
Federal Beef Processors, Inc. ( Federal Beef ) operated a meat packing
plant on leased premises owned by United Stockyards Company of Fargo
( Union ), a wholly owned subsidiary of Canal Capital Corporation, located
in Fargo, North Dakota. A lawsuit was brought in 1995 by Federal Beef for
damages claimed to be suffered as a result of Union s alleged failure to
provide adequate maintenance and cleaning services for livestock pens used
by Federal Beef under a yardage agreement with Union. That lawsuit was
settled in April of 1999. Under the terms of the settlement agreement, the
lease relating to the packing plant was terminated; Federal Beef vacated
the premises; Federal Beef was required to remove all fixtures, equipment
and personal property situated on the premises by July 31, 1999 and Union
agreed to reimburse Federal for 50 percent of expenses relating to the
premises for the period March through July 1999, up to a maximum of
$15,000.
F-30
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. PROPERTY ON OPERATING LEASES AND USED IN STOCKYARD OPERATIONS
The following schedule provides an analysis of the Company's
investment in property on operating leases and stockyard operations by
location as of October 31, 1999:
($ 000's Omitted) Accumulated
Location Land Improvements Depreciation Value
Operating leases:
St. Joseph, MO $ 362 $ 304 $ (198) $ 468
West Fargo, ND 3 292 (237) 58
S. St. Paul, MN 152 1,499 (758) 893
Sioux City, IA 417 0 0 417
Omaha, NE 1,200 0 0 1,200
Sioux Falls, SD 8 6 (6) 8
Corporate Office 0 154 (109) 45
2,142 2,255 (1,308) 3,089
Stkyd Operations:
St. Joseph, MO $ 500 $ 50 $ (1) $ 549
Sioux City, IA 500 50 (1) 549
Sioux Falls, SD 100 50 (1) 149
1,100 150 (3) 1,247
$ 3,242 $ 2,405 $ (1,311) $ 4,336
The following is a schedule by years of minimum future rentals on
operating leases as of October 31, 1999: (5)
($ 000's Omitted) Volume
Year Ending Rental Ground Based
October 31, Income (1) Lease(2) Income(2) Total
2000 $ 1,000 $ 0 $ 0 $ 1,000
2001 1,100 0 0 1,100
2002 1,200 0 0 1,200
2003 1,300 0 0 1,300
2004 1,400 0 0 1,400
$ 6,000 $ 0 $ 0 $ 6,000
(1) Consists of rental income from Exchange Building (commercial office
space), lease income from land and structures and other rental
income. All real estate leases are accounted for as operating leases.
(2) As discussed more fully in Note 4, the ground lease and the associated
rights to receive certain volume based rental income from meat packing
companies located near the stockyards terminated in fiscal 1999.
F-31
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments (all of which are held for
non-trading purposes) for which it is practicable to estimate that value.
October 31,
1999 1998
($ 000's Omitted)
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and
cash equivalents $ 416 $ 416 $ 34 $ 34
Current Portion of Long-
Term Debt 75 75 110 110
Long-Term Debt 1,779 1,779 2,321 2,321
Long-Term Debt - Related
Party 833 (d) 2,846 (d)
a) Cash and cash equivalents: The carrying amount approximates fair
market value because of the short maturities of such instruments.
b) Accrued Litigation: The carrying amount approximates the fair
value.
c) Long-Term Debt (See Note 5): The fair value of the Company s
long- term debt, including the current portion thereof, is
estimated based on the quoted market price for the same or
similar issues.
d) Long-Term Debt Related Party (see Note 5): It is not practicable
to estimate the fair value of the related party debt.
21. Year 2000 Compliance
The financial impact to the Company has not been and is not
anticipated to be material to its financial position or results of
operations in any given year.
F-32
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. Property Held for Development or Resale
Property held for development or resale consist of approximately 250
acres of land located in the midwest of undeveloped land not currently
utilized for corporate purposes and not included in any of the present
operating leases. The Company constantly evaluates proposals received for
the purchase, leasing or development of this asset. The land is valued at
cost which does not exceed the net realizable value.
A schedule of the Company s property held for development or resale at
October 31, 1999 is as follows (000's omitted):
Capitalized Cost
Subsequent to
Initial Cost Acquisition Date Carrying
Bldgs. & Bldgs. & Accum. Value
Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/99
98 acres of land
in St. Joseph, MO $248 N/A N/A N/A N/A $248
Acquired in 1942
79 acres of land
in W. Fargo, ND 5 N/A N/A N/A N/A 5
Acquired in 1937
62 acres of land
in S. St. Paul, MN 521 N/A N/A N/A N/A 521
Acquired in 1937
10 acres of land
in Sioux City, IA 202 N/A N/A N/A N/A 202
Acquired in 1937
1 acre of land
in Sioux Falls, SD 2 N/A N/A N/A N/A 2
Acquired in 1937
$978 $ 0 $ 0 $ 0 $ 0 $978
(1) Substantially all of Canal s real property is pledged as collateral for
its debt obligations (see Note 6).
F-33
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A schedule of the Company s property held for development or resale at
October 31, 1998 is as follows (000's omitted):
Capitalized Cost
Subsequent to
Initial Cost Acquisition Date Carrying
Bldgs. & Bldgs. & Accum. Value
Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/99
98 acres of land
in St. Joseph, MO $248 N/A N/A N/A N/A $248
Acquired in 1942
62 acres of land
in W. Fargo, ND 5 N/A N/A N/A N/A 5
Acquired in 1937
62 acres of land
in S. St. Paul, MN 738 N/A N/A N/A N/A 738
Acquired in 1937
14 acres of land
in Sioux City, IA 325 N/A N/A N/A N/A 325
Acquired in 1937
1 acre of land
in Sioux Falls, SD 2 N/A N/A N/A N/A 2
Acquired in 1937
$1,328 $ 0 $ 0 $ 0 $ 0 $1,328
(1) Substantially all of Canal s real property is pledged as collateral for
its debt obligations (see Note 6).
F-34
CANAL CAPITAL CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
23. QUARTERLY INFORMATION (UNAUDITED)
FINANCIAL INFORMATION FOR THE INTERIM PERIODS FISCAL 1999 AND 1998 IS
PRESENTED BELOW:
(000'S OMITTED, EXCEPT PER SHARE DATA)
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
1999 1999 1999 1999
REVENUES $734 $3,584 $821 $2,445
========= ========= ========= =========
NET (LOSS) INCOME ($140) $1,474 $ 73 ($122)
========= ========= ========= =========
NET (LOSS) INCOME
PER COMMON SHARE:
- BASIC ($0.04) $0.33 $0.00 ($0.04)
========= ========= ========= =========
- DILUTED ($0.04) $0.33 $0.00 ($0.04)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC 4,327 4,327 4,327 4,327
========= ========= ========= =========
- DILUTED 4,327 4,327 4,327 4,327
========= ========= ========= =========
(000'S OMITTED, EXCEPT PER SHARE DATA)
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
1998 1998 1998 1998
REVENUES $803 $911 $1,268 $1,475
========= ========= ========= =========
NET (LOSS) INCOME ($326) ($103) $296 ($1,282)
========= ========= ========= =========
NET (LOSS) INCOME
PER COMMON SHARE:
- BASIC ($0.09) ($0.03) $0.06 ($0.31)
========= ========= ========= =========
- DILUTED ($0.09) ($0.03) $0.06 ($0.31)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC 4,327 4,327 4,327 4,327
========= ========= ========= =========
- DILUTED 4,327 4,327 4,327 4,327
========= ========= ========= =========
F-35
INVESTOR INFORMATION
Annual Meeting Corporate Headquarters
The Annual Meeting of Shareholders 7l7 Fifth Avenue 15th floor
of Canal Capital Corporation will New York, NY 10022
be held in our offices at 717
Fifth Avenue, 15th floor, New York,
NY, on a date to be announced.
Stock Certificates
The Board of Directors of Canal Inquiries regarding change of
Capital Corporation urges all name or address, or to replace
shareholders to vote their shares lost certificates should be made
in person or by proxy and thus directly to American Stock
participate in the decisions that Transfer and Trust Co., 40 Wall
will be made at the annual meeting. Street, New York, NY 10005 or
telephone (718) 921-8200
Stock Listing
Canal Capital Corporation common stock Auditors
is traded on the over-the-counter
market through the "pink sheets".
Todman & Co., CPAs, P.C.
120 Broadway
New York, NY 10271
Investment Analyst Inquiries General Counsel
Analyst inquiries are welcome. Proskauer Rose LLP
1585 Broadway
Phone or write: Michael E. Schultz, New York, NY 10036
President at (212) 826-6040 (212) 969-3000
ii
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> OCT-31-1999
<CASH> 416,191
<SECURITIES> 191,833
<RECEIVABLES> 321,065
<ALLOWANCES> 0
<INVENTORY> 513,189
<CURRENT-ASSETS> 1,660,923
<PP&E> 5,646,188
<DEPRECIATION> 1,310,138
<TOTAL-ASSETS> 7,933,885
<CURRENT-LIABILITIES> 1,964,719
<BONDS> 0
0
38,793
<COMMON> 53,138
<OTHER-SE> 3,265,525
<TOTAL-LIABILITY-AND-EQUITY> 7,933,885
<SALES> 0
<TOTAL-REVENUES> 7,583,885
<CGS> 0
<TOTAL-COSTS> 4,550,501
<OTHER-EXPENSES> 1,283,021
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 465,136
<INCOME-PRETAX> 1,285,004
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,285,004
<DISCONTINUED> 0
<EXTRAORDINARY> 1,285,004
<CHANGES> 0
<NET-INCOME> 1,285,004
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
</TABLE>
INDEX TO EXHIBITS
Exhibit No.
22 Subsidiaries of the Registrant.
CANAL CAPITAL CORPORATION
717 FIFTH AVENUE
NEW YORK, NY 10022
SUBSIDIARIES IDENTIFICATION #
SY Trading Corp. 13-3244066
Omaha Livestock Market, Inc. 47-0582031
Union Stockyards Co. of Fargo 45-0205040
Sioux Falls Stockyards Company 46-0189565
Wheeling Industrial Corporation 36-2545924
Canal Galleries Corporation 13-3492920
Canal Arts Corporation 13-3492921
DIVISIONS
Canal Capital Corporation (parent) 51-0102492
St. Joseph Stockyards
St. Paul Union Stockyards
Sioux City Stockyards
Note: All subsidiaries are 100% owned
FORM 10-K - ITEM 14(a)(3)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
(a) 3. Exhibits -
The following exhibits required by Item 601 of Regulations S-K are
filed as part of this report. For convenience of reference, the exhibits
are listed according to the numbers appearing in Table I to Item 601 of
Regulation S-K. Each exhibit which is incorporated by reference and the
document in which such exhibit was originally filed are indicated in
parentheses immediately following the description of such exhibit.
Exhibit No.
3(a) Restated Certificate of Incorporation (filed as Exhibit
3(a) to the Registrant's Registration Statement on Form
10 filed with the Securities and Exchange Commission on
May 3, 1984 (the "Form 10") and incorporated herein by
reference).
3(b) Bylaws (filed as Exhibit 3(b) to the Registrant's
Registration Statement on Form 10 and incorporated
herein by reference).
3(c) Certificate of Amendment of the Restated Certificate of
Incorporation dated September 22, 1988 (filed as Exhibit
3(c) to the Registrant's Form 10-K filed January 29,
1989 and incorporated herein by reference).
10(a) 1984 Stock Option Plan (1) (see Exhibit A included in
the Registrant's Proxy Statement dated January 31, 1985,
relating to the annual meeting of stockholders held
March 18, 1985, which exhibit is incorporated herein by
reference).
10(b) Form of Incentive Stock Option Agreement (filed as
Exhibit 10(b) to the Registrant's Form 10-K filed
January 31, 1986 and incorporated herein by reference).
10(c) Form of Nonstatutory Stock Option Agreement (filed as
Exhibit 10(c) to the Registrant's Form 10-K filed
January 31, 1986 and incorporated herein by reference).
10(d) 1985 Directors' Stock Option Plan (1) (See Exhibit A
included in the Registrant's Proxy Statement dated
January 31, 1986, relating to the annual meeting of
stockholders held March 12, 1986, which exhibit is
incorporated herein by reference).
E-1
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(e) Form of Directors' Stock Option Agreement (filed as
Exhibit 10(ab) to the Registrant's Form 10-K filed
January 29, 1986 and incorporated herein by reference).
10(f) Master Ground Lease, dated October 27, 1989 by and
between USK Acquisition Corporation, Canal Capital
Corporation, Omaha Livestock Market, Inc. and Sioux
Falls Stock Yards Company (filed as Exhibit 10(am) to
the Registrant's Form 8-K filed November 9, 1989 and
incorporated herein by reference).
10(g) Agreement of Lease dated January 14, 1994 by and between
The Equitable Life Assurance Society of the United
States, Intelogic Trace Incorporated, Datapoint
Corporation and Canal Capital Corporation (filed as
Exhibit 10 (bp) to the Registrant's Form 10-K filed
January 27, 1995 and incorporated herein by reference).
10(h) General Release dated December 19, 1996 by and between
Waste Management Disposal Services of Oregon, Inc. and
Canal Capital Corporation (filed as Exhibit 10 (by) to
the Registrant s Form 10-K filed January 24, 1997 and
incorporated herein by reference).
10(i) $325,000 Promissory Note dated December 19, 1996 by and
between Waste Management Disposal Services of Oregon,
Inc. and Canal Capital Corporation (filed as Exhibit 10
(bz) to the Registrant s Form 10-K filed January 24,
1997 and incorporated herein by reference).
10(j) Stock Pledge and Security Agreement dated January 8,
1998 by and between Canal Capital Corporation, SY
Trading Corporation and CCC Lending Corporation (filed
as Exhibit 10 (ai) to the Registrant s Form 10-K filed
January 30, 1998 and incorporated herein by reference).
10(k) Note Exchange and Loan Agreement dated January 8, 1998
by and between Canal Capital Corporation, Michael E.
Schultz, Michael E. Schultz Defined Benefit Trust, Lora
K. Schultz, Roger A. Schultz, Roger A. Schultz Pension
Plan, Richard A. Schultz, Edelman Value Partners, L.P.,
Edelman Value Fund, LTD, Maria Regina Mayall Edelman and
SES Trust (filed as Exhibit 10 (aj) to the Registrant s
Form 10-K filed January 30, 1998 and incorporated herein
by reference).
E-2
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(l) Collateral Agency Agreement dated January 8, 1998 by and
between Canal Capital Corporation, CCC Lending
Corporation, Michael E. Schultz, Michael E. Schultz
Defined Benefit Trust, Lora K. Schultz, Roger A.
Schultz, Roger A. Schultz Pension Plan, Richard A.
Schultz, Edelman Value Partners, L.P., Edelman Value
Fund, LTD, Maria Regina Mayall Edelman and SES Trust
(filed as Exhibit 10 (ak) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
10(m) Assignment Agreement dated January 8, 1998 by and
between Deltec Asset Management Corporation, Hanseatic
Corporation, Michael E. Schultz, Michael E. Schultz
Defined Benefit Trust, Lora K. Schultz, Roger A.
Schultz, Roger A. Schultz Pension Plan, Richard A.
Schultz, Edelman Value Partners, L.P., Edelman Value
Fund, LTD, Maria Regina Mayall Edelman and SES Trust
(filed as Exhibit 10 (al) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
10(n) Assignment Agreement dated January 8, 1998 by and
b e t ween Guaranty Reassurance Company, Michael E.
Schultz, Michael E. Schultz Defined Benefit Trust, Lora
K. Schultz, Roger A. Schultz, Roger A. Schultz Pension
Plan, Richard A. Schultz, Edelman Value Partners, L.P.,
Edelman Value Fund, LTD, Maria Regina Mayall Edelman and
SES Trust (filed as Exhibit 10 (am) to the Registrant s
Form 10-K filed January 30, 1998 and incorporated herein
by reference).
10(o) Security Agreement dated January 8, 1998 by and between
Canal Capital Corporation, Canal Galleries Corporation,
Canal Arts Corporation and CCC Lending Corporation
(filed as Exhibit 10 (an) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
10(p) $1,000,000 Promissory Note dated January 8, 1998 by and
between Michael E. Schultz and Canal Capital Corporation
(filed as Exhibit 10 (ao) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
10(q) $242,000 Promissory Note dated January 8, 1998 by and
between Michael E. Schultz Defined Benefit Trust and
Canal Capital Corporation (filed as Exhibit 10 (ap) to
the Registrant s Form 10-K filed January 30, 1998 and
incorporated herein by reference).
E-3
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(r) $229,000 Promissory Note dated January 8, 1998 by and
between Lora K. Schultz and Canal Capital Corporation
(filed as Exhibit 10 (aq) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
10(s) $186,000 Promissory Note dated January 8, 1998 by and
between Roger A. Schultz Pension Plan and Canal Capital
Corporation
(filed as Exhibit 10 (ar) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by reference).
10(t) $143,000 Promissory Note dated January 8, 1998 by and
between Richard A. Schultz and Canal Capital Corporation
(filed as Exhibit 10 (as) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
10(u) $350,000 Promissory Note dated January 8, 1998 by and
between Edelman Value Partners, L.P. and Canal Capital
C o r p o ration (filed as Exhibit 10 (at) to the
Registrant s Form 10-K filed January 30, 1998 and
incorporated herein by reference).
10(v) $550,000 Promissory Note dated January 8, 1998 by and
between Edelman Value Fund, LTD and Canal Capital
C o r p o ration (filed as Exhibit 10 (au) to the
Registrant s Form 10-K filed January 30, 1998 and
incorporated herein by reference).
10(w) $300,000 Promissory Note dated January 8, 1998 by and
between Maria Regina Mayall Edelman and Canal Capital
C o r p o ration (filed as Exhibit 10 (av) to the
Registrant s Form 10-K filed January 30, 1998 and
incorporated herein by reference).
10(x) $200,000 Promissory Note dated January 8, 1998 by and
between SES Trust and Canal Capital Corporation (filed
as Exhibit 10 (aw) to the Registrant s Form 10-K filed
January 30, 1998 and incorporated herein by reference).
10(y) $500,000 Promissory Note dated January 8, 1998 by and
between Roger A. Schultz and Canal Capital Corporation
(filed as Exhibit 10 (ax) to the Registrant s Form 10-K
filed January 30, 1998 and incorporated herein by
reference).
22 Subsidiaries of the registrant.
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