FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the quarterly period ended APRIL 30, 2000
--------------
/__/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ---- to ----
Commission File No. 1-8709
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0102492
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 FIFTH AVENUE, NEW YORK, NY 10022
---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 826-6040
---------------
NONE
-------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO /__/
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practical date:
TITLE OF EACH CLASS Shares outstanding at May 31, 2000
------------------------------
Common stock, $0.01 par value 4,326,929
---------
(This document contains 31 pages)
<PAGE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
FORM 10-Q APRIL 30, 2000
INDEX
The following documents are filed as part of this report:
Accountants' Review Report .............................................. 3
Part I - Financial Information .......................................... 4
Consolidated Balance Sheets - April 30, 2000
and October 31, 1999 ............................................. 5
Statements of Consolidated Operations and
Comprehensive Income for the Six and Three
Month Periods ended April 30, 2000 and 1999....................... 7
Statements of Consolidated Changes in
Stockholders' Equity for the Six Month and
One Year Periods ended April 30, 2000 and
October 31, 1999 ................................................. 11
Statements of Consolidated Cash Flows for the
Six Month Periods ended April 30, 2000 and
1999 ............................................................. 12
Notes to Consolidated Financial Statements ......................... 13
Management's Discussion and Analysis of Financial
Condition ........................................................ 22
Capital Resources and Liquidity .................................... 27
Other Factors ...................................................... 28
Part II - Other Information ............................................. 29
Items 1 through 6 .................................................. 30
Signatures ......................................................... 31
2
<PAGE>
ACCOUNTANTS' REVIEW REPORT
To the Stockholders of Canal Capital Corporation:
We have reviewed the consolidated balance sheet of Canal Capital Corporation and
subsidiaries as of April 30, 2000, the related consolidated statements of
operations and comprehensive income for the six and three month periods ended
April 30, 2000 and the consolidated statements of changes in stockholders'
equity and cash flows for the six month period ended April 30, 2000. These
consolidated financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the consolidated financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered recurring losses from operations in seven of the last
ten years and is involved in various litigations. All of these matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
New York, N.Y. /S/ TODMAN & CO., CPA'S, P.C.
June 8, 2000 -----------------------------------
TODMAN & CO., CPA's, P.C.
Certified Public Accountants (N.Y.)
3
<PAGE>
PART II
FINANCIAL INFORMATION
4
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
(Unaudited) (Audited)
----------- ----------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 107,317 $ 416,191
NOTES AND ACCOUNTS RECEIVABLE, NET 227,146 321,065
ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
$ 1,500,000 AT BOTH APRIL 30, 2000 AND
OCTOBER 31, 1999 500,000 500,000
STOCKYARDS INVENTORY 18,983 13,189
INVESTMENTS 203,393 191,833
PREPAID EXPENSES 118,166 218,645
----------- -----------
TOTAL CURRENT ASSETS 1,175,005 1,660,923
----------- -----------
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $1,364,954
AND $ 1,307,638 AT APRIL 30, 2000 AND
OCTOBER 31, 1999, RESPECTIVELY 3,111,753 3,088,550
----------- -----------
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $10,076 AND
$2,500 AT APRIL 30, 2000 AND OCTOBER
31, 1999, RESPECTIVELY 1,241,438 1,247,500
----------- -----------
ART INVENTORY NON-CURRENT, NET OF A
VALUATION ALLOWANCE OF $ 1,227,950
AND $1,278,700 AT APRIL 30, 2000
AND OCTOBER 31, 1999, RESPECTIVELY 713,157 734,907
----------- -----------
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 977,695 977,695
DEFERRED LEASING AND FINANCING COSTS 15,323 16,337
DEPOSITS AND OTHER 232,648 207,973
----------- -----------
1,225,666 1,202,005
----------- -----------
$ 7,467,019 $ 7,933,885
=========== ===========
</TABLE>
5
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2000 AND OCTOBER 31, 1999
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
(Unaudited) (Audited)
----------- ----------
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT 0 75,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,489,094 1,879,611
INCOME TAXES PAYABLE 1,292 10,108
------------ -----------
TOTAL CURRENT LIABILITIES 1,490,386 1,964,719
------------ -----------
LONG-TERM DEBT, LESS CURRENT PORTION 0 1,778,710
LONG-TERM DEBT, RELATED PARTY 2,540,000 833,000
------------ -----------
2,540,000 2,611,710
------------ -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 3,900,758 AND
3,879,258 SHARES ISSUED AND OUTSTANDING
AT APRIL 30, 2000 AND OCTOBER 31, 1999,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $10 PER SHARE FOR $ 39,007,580
AND $38,792,580 AT APRIL 30, 2000 AND
OCTOBER 31, 1999, RESPECTIVELY 39,008 38,793
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND 4,326,929 SHARES OUTSTANDING
AT APRIL 30, 2000 AND OCTOBER 31, 1999,
RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 27,404,694 27,274,159
ACCUMULATED DEFICIT (10,821,321) (10,758,188)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
PENSION VALUATION RESERVE (1,903,176) (1,903,176)
UNREALIZED LOSS ON INVESTMENTS AVAILABLE
FOR SALE (332,165) (343,725)
------------ -----------
3,436,633 3,357,456
------------ -----------
$ 7,467,019 $ 7,933,885
============ ===========
</TABLE>
6
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
<S> <C> <C>
SALE OF REAL ESTATE $ 0 $ 3,145,000
RENTAL INCOME 497,014 520,005
GROUND LEASE INCOME 0 438,800
VOLUME BASED RENTAL INCOME 0 21,645
OTHER INCOME 75 5,408
----------- -----------
497,089 4,130,858
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 0 1,490,102
LABOR, OPERATING AND MAINTENANCE 234,828 205,053
DEPRECIATION AND AMORTIZATION 52,226 96,652
TAXES OTHER THAN INCOME TAXES 69,200 94,393
GENERAL AND ADMINISTRATIVE 42,688 38,540
----------- -----------
398,942 1,924,740
INCOME FROM REAL ESTATE OPERATIONS 98,147 2,206,118
----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 2,180,474 $ 0
FEED AND BEDDING INCOME 157,997 0
RENTAL INCOME 1,756 0
OTHER INCOME 122,917 0
----------- -----------
2,463,144 0
----------- -----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 907,979 0
OTHER OPERATING AND MAINTENANCE 460,015 0
FEED AND BEDDING EXPENSE 122,679 0
DEPRECIATION AND AMORTIZATION 7,576 0
TAXES OTHER THAN INCOME TAXES 138,542 0
GENERAL AND ADMINISTRATIVE 326,276 0
----------- -----------
1,963,067 0
----------- -----------
INCOME FROM STOCKYARD OPERATIONS 500,077 0
----------- -----------
</TABLE>
7
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
Continued ...
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
ART OPERATIONS:
ART REVENUES:
<S> <C> <C>
SALES 27,500 186,400
OTHER REVENUES 0 0
----------- -----------
27,500 186,400
----------- -----------
ART EXPENSES:
COST OF ART SOLD 72,500 839,246
VALUATION RESERVE (50,750) (621,300)
SELLING, GENERAL AND ADMINISTRATIVE 14,638 22,233
----------- -----------
36,388 240,179
----------- -----------
LOSS FROM ART OPERATIONS (8,888) (53,779)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE $ (541,916) $ (515,987)
----------- -----------
INCOME (LOSS) FROM OPERATIONS 47,420 1,636,352
----------- -----------
OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 138,963 9,504
INTEREST EXPENSE (43,676) (123,936)
INTEREST EXPENSE-RELATED PARTY (85,840) (188,000)
OTHER EXPENSE 0 0
----------- -----------
9,447 (302,432)
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES 56,867 1,333,920
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
----------- -----------
NET (LOSS) INCOME 56,867 1,333,920
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED GAIN ON INVESTMENTS
AVAILABLE FOR SALE 11,560 83,092
----------- -----------
COMPREHENSIVE (LOSS) INCOME $ 68,427 $ 1,417,012
=========== ===========
(LOSS) INCOME PER COMMON SHARE - BASIC
AND DILUTED $ (0.01) $ 0.31
============ ===========
AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 4,327,000 4,327,000
============ ===========
</TABLE>
8
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
<S> <C> <C>
SALE OF REAL ESTATE $ 0 $ 3,085,000
RENTAL INCOME 242,856 263,385
GROUND LEASE INCOME 0 207,800
VOLUME BASED RENTAL INCOME 0 0
OTHER INCOME 0 3,484
----------- -----------
242,856 3,559,669
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 0 1,449,205
LABOR, OPERATING AND MAINTENANCE 117,046 106,294
DEPRECIATION AND AMORTIZATION 26,407 44,361
TAXES OTHER THAN INCOME TAXES 34,200 46,800
GENERAL AND ADMINISTRATIVE 24,360 20,831
----------- -----------
202,013 1,667,491
INCOME FROM REAL ESTATE OPERATIONS 40,843 1,892,178
----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 1,026,207 $ 0
FEED AND BEDDING INCOME 72,135 0
RENTAL INCOME 360 0
OTHER INCOME 60,854 0
----------- -----------
1,159,556 0
----------- -----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 445,036 0
OTHER OPERATING AND MAINTENANCE 214,632 0
FEED AND BEDDING EXPENSE 58,217 0
DEPRECIATION AND AMORTIZATION 3,826 0
TAXES OTHER THAN INCOME TAXES 62,862 0
GENERAL AND ADMINISTRATIVE 146,749 0
----------- -----------
931,322 0
----------- -----------
INCOME FROM STOCKYARD OPERATIONS 228,234 0
----------- -----------
</TABLE>
9
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED APRIL 30, 2000 AND 1999
Continued ...
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
ART OPERATIONS:
ART REVENUES:
<S> <C> <C>
SALES 0 24,000
OTHER REVENUES 0 0
----------- -----------
0 24,000
----------- -----------
ART EXPENSES:
COST OF ART SOLD 0 125,594
VALUATION RESERVE 0 (88,000)
SELLING, GENERAL AND ADMINISTRATIVE 6,957 11,094
----------- -----------
6,957 48,688
----------- -----------
LOSS FROM ART OPERATIONS (6,957) (24,688)
----------- ------------
GENERAL AND ADMINISTRATIVE EXPENSE $ (274,572) $ (253,461)
----------- -----------
INCOME (LOSS) FROM OPERATIONS (12,452) 1,614,029
----------- -----------
OTHER INCOME (EXPENSE):
INTEREST & OTHER INCOME 4,879 3,530
INTEREST EXPENSE 0 (63,461)
INTEREST EXPENSE-RELATED PARTY (63,500) (80,000)
OTHER EXPENSE 0 0
----------- -----------
(58,621) (139,931)
(LOSS) INCOME BEFORE PROVISION FOR INCOME
TAXES (71,073) 1,474,098
PROVISION (BENEFIT) FOR INCOME TAXES 0 0
----------- -----------
NET (LOSS) INCOME (71,073) 1,474,098
OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED GAIN ON INVESTMENTS
AVAILABLE FOR SALE 0 140,894
----------- -----------
COMPREHENSIVE (LOSS) INCOME $ (71,073) $ 1,614,992
=========== ===========
(LOSS) INCOME PER COMMON SHARE - BASIC
AND DILUTED $ (0.03) $ 0.36
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 4,327,000 4,327,000
=========== ===========
</TABLE>
10
<PAGE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 1999 (AUDITED) AND
FOR THE SIX MONTHS ENDED APRIL 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
Number Number
of of Paid-in
Shares Amount Shares Amount Capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1998 5,313,794 $53,138 3,411,681 $34,117 $27,033,046
NET INCOME (LOSS) 0 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 467,577 4,676 241,113
MINIMUM PEN. LIAB. ADJUSTMENT 0 0 0 0 0
UNREALIZED GAIN ON INVESTMENTS 0 0 0 0 0
-------------------- --------------------- -----------
BALANCE, OCTOBER 31, 1999 5,313,794 53,138 3,879,258 38,793 27,274,159
NET INCOME (LOSS) 0 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 21,500 215 130,535
MINIMUM PEN. LIAB. ADJUSTMENT 0 0 0 0 0
UNREALIZED GAIN ON INVESTMENTS 0 0 0 0 0
-------------------- --------------------- ----------
BALANCE, APRIL 30, 2000 5,313,794 $53,138 3,900,758 $39,008 $27,404,694
==================== ===================== ============
</TABLE>
<TABLE>
<CAPTION>
Retained -Comprehensive (Loss) Income- Treasury
Earnings Valuation Unrealized Stock
Deficit Reserve Gain On Inv. At Cost
------- ------- ------------ -------
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1998 ($11,808,043) ($1,896,838) $ (257,383) ($11,003,545)
NET INCOME (LOSS) 1,285,004 0 0 0
PREFERRED STOCK DIVIDEND (235,149) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 (6,338) 0 0
UNREALIZED GAIN ON INV. 0 0 (86,342) 0
------------- ----------- ----------- ------------
BALANCE, OCTOBER 31, 1999 (10,758,188) ($1,903,176) (343,725) (11,003,545)
NET INCOME (LOSS) 56,867 0 0 0
PREFERRED STOCK DIVIDEND (120,000) 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
UNREALIZED GAIN ON INV. 0 0 11,560 0
------------ ------------ - ----------- ------------
BALANCE, APRIL 30, 2000 ($10,821,321) ($1,903,176) $ (332,165) ($11,003,545)
============ =========== =========== ============
</TABLE>
11
<PAGE>
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
NET INCOME (LOSS) $ 56,867 $ 1,333,920
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 65,254 104,802
GAIN ON SALES OF REAL ESTATE 0 (1,654,898)
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET 93,919 17,956
ART INVENTORY, NET 21,750 214,218
PREPAID EXPENSES AND OTHER, NET 81,411 (116,342)
PAYABLES AND ACCRUED EXPENSES, NET (399,333) (288,269)
----------- -----------
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (80,132) (388,613)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 0 3,145,000
PROCEEDS FROM SALE OF INVESTMENTS 0 0
CAPITAL EXPENDITURES (82,032) (54,285)
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES (82,032) 3,090,715
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 1,725,000 0
REPAYMENT OF CURRENT PORTION OF LONG-TERM (75,000) 0
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (1,796,710) (2,628,346)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (146,710) (2,628,346)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (308,874) 73,756
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 416,191 33,358
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 107,317 $ 107,114
=========== ===========
</TABLE>
NOTE: Canal made federal and state income tax payments of $11,000 and $20,000
and interest payments of $130,000 and $312,000 in the six month periods
ended April 30, 2000 and 1999, respectively.
12
<PAGE>
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
------------------------------------------
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------
SIX AND THREE MONTHS ENDED APRIL 30, 2000
-----------------------------------------
(UNAUDITED)
-----------
1. NATURE OF BUSINESS
Canal Capital Corporation ("Canal"), incorporated in the state of
Delaware in 1964, commenced business operations through a predecessor in 1936.
Canal was a wholly owned subsidiary of Canal-Randolph Corporation until June 1,
1984, when Canal-Randolph Corporation distributed to its stockholders all of the
outstanding shares of Canal's common stock, under a plan of complete
liquidation.
Canal is engaged in three distinct businesses - the management and
further development of its agribusiness related real estate properties located
in the Midwest, stockyard operations which are also located in the Midwest and
its art operations, consisting mainly of the acquisition of art for resale.
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses from
operations in seven of the last ten years and is involved in litigation with a
meat packer located in South St. Paul, Minnesota. The financial statements do
not include any adjustments that might result from the resolution of these
uncertainties. Additionally, the accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
Canal continues to closely monitor and reduce where possible its
overhead expenses and plans to continue to reduce the level of its art
inventories to enhance current cash flows. Management believes that its income
from operations combined with its cost cutting program and planned reduction of
its art inventory will enable it to finance its current business activities.
There can, however, be no assurance that Canal will be able to effectuate its
planned art inventory reductions or that its income from operations combined
with its cost cutting program in itself will be sufficient to fund operating
cash requirements.
13
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Principles of Consolidation - The consolidated financial statements
include the accounts of Canal Capital Corporation ("Canal") and its wholly-owned
subsidiaries (the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
B) Investments Available for Sale - Canal has an investment in a
company in which it, together with other affiliated entities, comprise a
reporting group for regulatory purposes. It is important to note that it is the
group (as defined) that can exercise influence over this company, not Canal.
Accordingly, this investment does not qualify for consolidation as a method of
reporting. Certain of Canal's officers and directors also serve as officers
and/or directors of this company. This investment (in which Canal's ownership
interest is approximately 2%) is carried at market value and the realized gains
or losses, if any, are recognized in operating results. Any unrealized gains or
losses are reflected in Stockholders' Equity.
C) Accounting Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
D) Comprehensive Income -- Effective for fiscal years beginning after
December 15, 1997, Statement of Accounting Standards No. 130 requires that
comprehensive income and its components, as defined in the statement, be
reported in a financial statement. The only adjustments for each classification
of the comprehensive income was for minimum pension liability and unrealized
(loss) gain on investments available for sale.
E) Reclassification -- Certain prior year amounts have been
reclassified to conform to the current year's presentation.
14
<PAGE>
3. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements included herein have been
prepared by Canal without audit. In the opinion of Management, the accompanying
unaudited financial statements of Canal contain all adjustments necessary to
present fairly its financial position as of April 30, 2000 and the results of
its operations and its cash flows for the six month period ended April 30, 2000.
All of the above referenced adjustments were of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These financial statements should be read in
conjunction with the consolidated financial statements for the three years ended
October 31, 1999 and the notes thereto which are contained in Canal's 1999
Annual Report on Form 10-K. The results of operations for the period presented
is not necessarily indicative of the results to be expected for the remainder of
fiscal 2000.
4. REAL ESTATE OPERATIONS
Canal's real estate properties located in six Midwest states are
primarily associated with its current and former agribusiness related
operations. Each property is adjacent to a stockyards operation (three of which
are operated by the company) and consist, for the most part, of an Exchange
Building (commercial office space), land and structures leased to third parties
(meat packing facilities, rail car repair shops, truck stops, lumber yards and
various other commercial and retail businesses) as well as vacant land available
for development or resale. Its principal real estate operating revenues are
derived from rental income from its Exchange Buildings, lease income from land
and structures leased to various commercial and retail enterprises and proceeds
from the sale of real estate properties.
Real estate operations resulted in operating income of $98,000 and
$41,000 for the six and three month periods ended April 30, 2000, respectively,
as compared to $2,206,000 and $1,892,000 for the same periods in fiscal 1999.
Additionally, real estate operations contributed $497,000 and $243,000 to
Canal's revenues for the six and three month periods ended April 30, 2000,
respectively, as compared to $4,131,000 and $3,560,000 for the same periods in
fiscal 1999.
As of April 30, 2000, there are approximately 250 acres of undeveloped
land owned by Canal adjacent to its stockyard properties. Canal is continuing
the program, which it started several years ago, to develop or sell this
property.
15
<PAGE>
5. STOCKYARD OPERATIONS
On August 1, 1999, Canal purchased the operating assets of three public
stockyards (formerly subject to the Master Lease between the Company and United
Market Services) located in Sioux City, Iowa, St. Joseph, Missouri and Sioux
Falls, South Dakota.
Public stockyards act much like a securities exchange, providing
markets for all categories of livestock and fulfilling the economic functions of
assembly, grading, and price discovery. The livestock handled by the Company's
stockyards include cattle, hogs and sheep. Cattle and hogs may come through the
stockyard facilities at different stages, either as feeder livestock or
slaughter livestock. The Company's stockyards provide all services and
facilities required to operate an independent market for the sale of livestock,
including veterinary facilities, auction arenas, auctioneer, weigh masters and
scales, feed and bedding, and security personnel. In addition, the stockyard
provide other services including pure bred and other specialty sales for
producer organizations. The Company promotes its stockyard business through
public relations efforts, advertising and personal solicitation or producers.
Stockyard operations resulted in operating income of $500,000 and
$228,000 while contributing $2,463,000 and $1,160,000 to Canal's revenues for
the six and three month periods ended April 30, 2000, respectively. As discussed
above Canal had no similar operations in fiscal 1999.
6. ART OPERATIONS
Canal established its art operations in October 1988 by acquiring a
significant inventory for resale of antiquities primarily from the ancient
Mediterranean cultures. In November 1989, Canal expanded its art operations by
entering into a cost and revenue sharing agreement with a New York City gallery
for the exclusive representation of Jules Olitski, a world renowned artist of
contemporary paintings. As part of this agreement Canal purchased a number of
Olitski paintings which it holds for resale with a book value of approximately
$650,000 at April 30, 2000. The representation agreement expired December 1,
1994 and Canal now operates independently in the marketing of its contemporary
art inventory.
Due to general economic conditions and the softness of the art markets,
Canal has not purchased inventory in several years. However, Canal continues its
marketing efforts to sell its existing art inventory through various consignment
agreements and at public auctions. Antiquities and contemporary art represented
45% ($542,758) and 55% ($670,399) and 44% ($542,758) and 56% ($692,149) of total
art inventory at April 30, 2000 and October 31, 1999, respectively.
Substantially all of the contemporary art inventory held for resale is comprised
of the work of Jules Olitski.
16
<PAGE>
Management estimates it may take two to five years to dispose of its
current art inventory. The Company's ability to dispose of its art inventory is
dependent at least in part, on general economic conditions, including supply,
demand, international monetary conditions and inflation. Additionally, the art
market itself is very competitive. Accordingly, there can be no assurance that
Canal will be successful in disposing of its art inventory within the time frame
discussed above.
Canal has its art inventory appraised by an independent appraiser
annually. The 1999 appraisal covered approximately 57% of the inventory value.
The appraised values estimate the current market value of each piece giving
consideration to Canal's practices of engaging in consignment, private and
public auction sales. The net realizable value of the remaining 43% of the
inventory was estimated by management based in part on operating history and in
part on the results of the independent appraisals done. In the first six months
of fiscal 2000 Canal applied against sales $51,000 of the valuation allowance
against its art inventory, thereby, decreasing the total valuation allowance to
$2,728,000 as of April 30, 2000. Additionally, in fiscal 1999 Canal applied
against sales $621,000 of the valuation allowance against its art inventory,
thereby, decreasing the total valuation allowance to $2,779,000 as of October
31, 1999.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual channels
used for disposal of its art inventory. The proceeds from these sales will be
used to reduce the Company's outstanding debt. If these sales are not made, the
Company has alternate means of raising cash such as sales of investments, sale
of real estate, raising of new capital and rescheduling of debt. Some of these
measures were successfully implemented in fiscal 1999.
Canal's art operations have generated operating losses of $9,000 and
$7,000 (net of decreases in the valuation allowance of $51,000 and $ zero for
the six and three month periods ended April 30, 2000, respectively) on revenues
of $28,000 and $ zero for the six and three months ended April 30, 2000,
respectively, as compared to operating losses of $54,000 and $25,000 (net of
decreases in the valuation allowance of $621,000 and $88,000 for the six and
three month periods ended April 30, 1999, respectively) on revenues of $186,000
and $24,000 for the same periods in fiscal 1999. Art sales have resulted
primarily through activities in conjunction with sales of antiquities. Canal's
management believes that through its consignment agreements as well as other
potential distribution outlets Canal will continue to deal in antiquities and
contemporary art.
Inventory on Consignment - The Company had approximately $650,000 and
$1,358,000 of art inventory on consignment with third party dealers at April 30,
2000 and October 31, 1999, respectively.
17
<PAGE>
7. PROPERTY AND EQUIPMENT
Included in property and equipment were the cost of buildings of
approximately $2.5 million at April 30, 2000 and October 31, 1999.
8. NOTES RECEIVABLE
Included in the notes and accounts receivable were the current portion
of notes from real estate sales in the amount of $82,000 and $158,000 at April
30, 2000 and October 31, 1999, respectively.
9. INVESTMENTS AVAILABLE FOR SALE
At April 30, 2000 the investments available for sale consisted of the
following:
<TABLE>
<CAPTION>
April 30, October 31,
($ 000's Omitted) 2000 1999
----------- -----------
<S> <C> <C>
Aggregate market value................. $ 203 $ 192
------ ------
Aggregate carrying value............... $ 203 $ 192
------ ------
</TABLE>
Canal has an investment in a company in which it, together with other
affiliated entities, comprises a reporting group for regulatory purposes. It is
important to note that it is the group (as defined) that can exercise influence
over this company, not Canal. Accordingly, this investment does not qualify for
consolidation as a method of reporting. Certain of Canal's officers and
directors also serve as officers and/or directors of this company. This
investment (in which Canal's ownership interest is approximately 2%) is carried
at market value and the realized gains or losses, if any, are recognized in
operating results. Any unrealized gains or losses are reflected in Stockholders
Equity. The realized gains or losses, if any, are recognized in operating
results.
For the six months ended April 30, 2000 Canal recognized an unrealized
gain on investments available for sale of $12,000. Additionally, in fiscal 1999
Canal recognized an unrealized loss on investments available for sale of $7,000,
both of which are shown in a separate component of Stockholders' Equity (see
Note 12).
18
<PAGE>
10. BORROWINGS
At April 30, 2000, substantially all of Canal's real properties, the
stock of certain subsidiaries, the investments and a substantial portion of its
art inventories are pledged as collateral to secure the following obligations:
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
----------- -----------
(Unaudited) (Audited)
(Thousands of Dollars)
<S> <C> <C>
Variable rate mortgage notes due
May 15, 2003 - related party............ $ 2,540 $ 833
11% mortgage note; original principal
amount $1,697; due April 1, 2011;
payable in monthly installments
(including interest) of $14.............. 0 1,153
9.5% mortgage note; original principal
amount $472; due November 1, 2012,
payable in monthly installments
(including interest) of $5............... 0 381
10 1/2% mortgage note (adjuste
periodically to prime plus 1 3/4%);
original principal amount $556 due
January 15, 2013; payable in monthly
installments (including interest) of $6.. 0 0
Other Note................................ 0 320
------- -------
Total .................................... 2,540 2,687
Less -- current maturities ............... 0 75
------- -------
Long-term debt ........................... $ 2,540 $ 2,612
------- -------
</TABLE>
19
<PAGE>
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay in
full the Company's variable rate mortgage notes due May 15, 1998 ($2,605,000),
its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes
which were due December 31, 1997 ($320,000) plus accrued interest thereon. The
purchasers of these notes included certain entities controlled by the Company's
Chairman, the Company's Chief Executive Officer and members of their families.
The variable rate mortgage notes issued have essentially the same terms and
conditions as the variable rate mortgage notes which were repaid. These notes
carry interest at the highest of four variable rates, determined on a quarterly
basis. These notes, among other things, prohibits Canal from becoming an
investment company as defined by the Investment Company Act of 1940; requires
Canal to maintain minimum net worth; restricts Canal's ability to pay cash
dividends or repurchase stock; requires principal prepayments to be made only
out of the proceeds from the sale of certain assets and requires the accrual of
additional interest (to be paid at maturity) of approximately three percent per
annum.
On July 29, 1999 the above Notes were amended to extend the maturity
date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that
the additional interest due to the holders of the notes shall become current and
be treated as principal due under the notes; and to have certain of the holders
loan the Company $525,000 in additional financing, the proceeds of which was
used to repay in full certain of the other holders of the notes. As a result,
the notes are now held in total by the Company's Chief Executive Officer and
members of his family.
On January 10, 2000, the above Notes were further amended to have
holders loan the Company $1,725,000 in additional financing, the proceeds of
which was used to repay in full all of the Company's outstanding non related
party long-term debt. As of April 30, 2000, the balance due under these notes
was $2,540,000 all of which is classified as long-term debt-related party.
11. VALUATION RESERVE
The valuation reserve represents the excess of the additional minimum
pension liability required under the provisions of SFAS No. 87 over the
unrecognized prior service costs of former stockyard employees. Such excess
arose due to the decline in the market value of pension assets available for the
pension benefits of the former employees, which benefits were frozen at the time
the stockyard operations were sold in 1989. The excess will effectively be
expensed over time as actuarial computations of annual pension cost (made in
accordance with SFAS No. 87) recognize the deficiency that exists.
20
<PAGE>
12. SUBSEQUENT EVENT
----------------
As discussed in Notes 1 and 9 to the financial statements, Canal has an
investment in a company in which it, together with other affiliated entities,
comprises a reporting group for regulatory purposes. Canal carries this
investment at its market value (any unrealized gains or losses are reflected in
Stockholders' Equity), which was approximately $203,000 at April 30, 2000. On
May 3, 2000 this company filed for reorganization under Chapter 11 of the
Bankruptcy Code. Since the announcement, the market value of this investment has
declined to approximately $65,000. Management is closely monitoring this
situation, however, it does not have sufficient information at this time to
determine if the decline in market value is other than temporary. Accordingly,
no further adjustment has been reflected in the financial statements.
21
<PAGE>
Management's Discussion and Analysis
------------------------------------
Of Results of Operations and Financial Condition
------------------------------------------------
For the Six and Three Months Ended April 30, 2000
-------------------------------------------------
RESULTS OF OPERATIONS - GENERAL
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses from
operations in seven of the last ten years and is involved in litigation with a
meat packer located in South St. Paul, Minnesota. The financial statements do
not include any adjustments that might result from the resolution of these
uncertainties. Additionally, the accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
2000 COMPARED TO 1999
Canal recognized net income of $57,000 for the six month period ended
April 30, 2000 as compared to net income of $1,334,000 for the same period in
fiscal 1999. After recognition of an unrealized gain on investments held for
sale of $12,000 for the six month period ended April 30, 2000 the Company
recognized comprehensive income of $68,000 for the six month period ended April
30, 2000 as compared to comprehensive income of $1,417,000 for the same period
in fiscal 1999. Further, after recognition of preferred stock dividend payments
of $120,000 for the six month period ended April 30, 2000, the Company
recognized a loss applicable to common stockholders of $52,000 ($0.01 per common
share) for the six month period ended April 30, 2000 as compared to net income
applicable to common stockholders of $1,321,000 ($0.31 per common share) for the
same period in fiscal 1999. Included in the 2000 results is other income of
approximately $134,000 comprised primarily of a discount earned on the early
retirement of the Company's non related party debt.
Canal's revenues from continuing operations consist of revenues from
its real estate, stockyards (fiscal 2000 only) and art operations. Due to
general economic conditions and more specifically a depressed national art
market, Canal's aggregate revenues from art sales and the prices at which sales
were made have significantly declined in recent years. Total revenues decreased
by $1,330,000 or 30.8% to $2,988,000 and by $2,181,000 to $1,402,000 or 60.9%
for the six and three month periods ended April 30, 2000, as compared to the
revenues for the same period in fiscal 1999. The fiscal 2000 decrease is due
primarily to a decrease in sales of real estate of approximately $3,100,000
which was offset to a certain extent by the inclusion of the Company's new
stockyard operations which contributed $2,463,000 (82.4%) to the fiscal 2000
year to date revenues. This new contribution to revenues was offset by a
decrease in ground lease income ($439,000) which the Company had received from
the former stockyard operator.
22
<PAGE>
REAL ESTATE REVENUES
Real estate revenues for the six months ended April 30, 2000 of $497,000
accounted for 16.6% of the first half revenues as compared to real estate
revenues of $4,131,000 or 95.7% for the same period in 1999. Real estate
revenues are comprised of rental income from Exchange Building (commercial
office space) rentals and other lease income from the rental of vacant land and
certain structures (100.0% and 12.6%), ground lease income (0.0% and 10.6%),
volume based rental income (0.0% and 0.5%) and sale of real estate and other
income (0.0% and 76.3%) for the six months ended April 30, 2000 and 1999,
respectively. The percentage variations in the year to year comparisons are due
primarily to the significant decrease in sales of real estate during fiscal 2000
and the Company's re-entry into the stockyard business which eliminated the
ground lease income received from the former stockyard operator. Additionally,
the January 1999 permanent closing of the Fargo meat packing plant eliminated
the volume based rental income which the Company had been receiving.
Real estate revenues for the three months ended April 30, 2000 of $243,000
accounted for 17.3% of the second quarter revenues as compared to real estate
revenues of $3,560,000 or 99.3% for the same period in 1999. Real estate
revenues are comprised of rental income from Exchange Building (commercial
office space) rentals and other lease income from the rental of vacant land and
certain structures (100.0% and 7.4%), ground lease income (0.0% and 5.8%),
volume based rental income (0.0% and 0.0%) and sale of real estate and other
income (0.0% and 86.8%) for the three months ended January 31, 2000 and 1999,
respectively. The percentage variations in the year to year comparisons are due
primarily to the significant decrease in sales of real estate during fiscal 2000
and to the Company's re-entry into the stockyard business which eliminated the
ground lease income received from the former stockyard operator. Additionally,
the January 1999 permanent closing of the Fargo meat packing plant eliminated
the volume based rental income which the Company had been receiving.
REAL ESTATE EXPENSES
Real estate expenses for the six months ended April 30, 2000 of $399,000
decreased by $1,526,000 (79.3%) from $1,925,000 for the same period in 1999.
Real estate expenses were comprised of labor, operating and maintenance (58.8%
and 10.7%), depreciation and amortization (13.1% and 5.0%), taxes other than
income taxes (17.4% and 4.9%), cost of real estate sold (0.0% and 77.4%) and
general and administrative expenses (10.7% and 2.0%) for the three months ended
April 30, 2000 and 1999, respectively. The percentage variations in year to year
comparisons are also due to the decreased real estate sales in fiscal 2000
combined with the changes in the nature of the Company's operations as discussed
above.
23
<PAGE>
Real estate expenses for the three months ended April 30, 2000 of $202,000
decreased by $1,465,000 (87.9%) from $1,667,000 for the same period in 1999.
Real estate expenses were comprised of labor, operating and maintenance (57.9%
and 6.4%), depreciation and amortization (13.1% and 2.7%), taxes other than
income taxes (16.9% and 2.8%), cost of real estate sold (0.0% and 86.8%) and
general and administrative expenses (12.1% and 1.3%) for the three months ended
April 30, 2000 and 1999, respectively. The percentage variations in year to year
comparisons are also due to the decreased real estate sales in fiscal 2000
combined with the changes in the nature of the Company's operations as discussed
above.
STOCKYARD OPERATIONS
On August 1, 1999, Canal purchased the operating assets of three public
stockyards (formerly subject to the Master Lease between the Company and United
Market Services) located in Sioux City, Iowa, St. Joseph, Missouri and Sioux
Falls, South Dakota. As discussed above, Canal had no similar operations in
fiscal 1999 for comparison purposes.
STOCKYARD REVENUES
Stockyard revenues for the six and three months ended April 30, 2000
were $2,463,000 and $1,160,000, respectively. Stockyard revenues are comprised
of yard handling and auction (88.5% and 88.5%), feed and bedding income (6.4%
and 6.2%), rental income (0.1% and 0.1%) and other income (5.0% and 5.2%) for
the six and three month periods ended April 30, 2000. There were no similar
operations in fiscal 1999.
STOCKYARD EXPENSES
Stockyard expenses for the six and three months ended April 30, 2000
were $1,963,000 and $931,000, respectively. Stockyard expenses are comprised of
labor and related costs (46.3% and 47.8%), other operating and maintenance
(23.4% and 23.1%), feed and bedding expense (6.2% and 6.3%), depreciation and
amortization (0.4% and 0.4%), taxes other than income taxes (7.1% and 6.6%) and
general and administrative (19.6% and 15.8%) for the six and three month periods
ended April 30, 2000. There were no similar operations in fiscal 1999.
ART OPERATIONS - GENERAL
Management estimates it may take two to five years to dispose of its current
art inventory. The Company's ability to dispose of its art inventory is
dependent at least in part, on general economic conditions, including supply,
demand, international monetary conditions and inflation. Additionally, the art
market itself is a very competitive market. Accordingly, there can be no
assurance that Canal will be successful in disposing of its art inventory within
the time frame discussed above.
24
<PAGE>
Canal has its art inventory appraised by an independent appraiser
annually. The fiscal 1999 appraisal covered approximately 57% of the inventory
value. The appraised values estimate the current market value of each piece
giving consideration to Canal's practices of engaging in consignment, private
and public auction sales. The net realizable value of the remaining 43% of the
inventory was estimated by management based in part on operating history and in
part on the results of the independent appraisals done. In the first three
months of fiscal 2000 Canal applied against sales $51,000 of the valuation
allowance against its art inventory, thereby, decreasing the total valuation
allowance to $2,728,000 as of April 30, 2000. Additionally, in fiscal 1999 Canal
applied against sales $621,000 of the valuation allowance against its art
inventory, thereby, decreasing the total valuation allowance to $2,779,000 as of
October 31, 1999.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual channels
used by the Company for disposal of its art inventory. The proceeds from these
sales are used to reduce the Company's outstanding debt and finance current
operations. If these sales are not made the Company has alternate means of
raising cash such as sales of investments, sale of real estate, raising of new
capital and further rescheduling of debt. Some of these measures were
successfully implemented in fiscal 1999.
ART REVENUES
Art revenues for the six months ended April 30, 2000 of $28,000
decreased $158,000 from $186,000 for the same period in 1999. Art revenues are
comprised of proceeds from the sale of antiquities and contemporary art (100.0%
and 100.0%) and commission income on sale of art owned by third parties (0.0%
and 0.0%) for the six month period ended April 30, 2000 and 1999, respectively.
The Company's art inventory was reduced through sales by $22,000 in the first
half of fiscal 2000.
Art revenues for the three months ended April 30, 2000 of $ zero
decreased $24,000 from $24,000 for the same period in 1999. Art revenues are
comprised of proceeds from the sale of antiquities and contemporary art (0.0%
and 100.0%) and commission income on sale of art owned by third parties (0.0%
and 0.0%) for the three month period ended April 30, 2000 and 1999,
respectively.
ART EXPENSES
Art expenses for the six months ended April 30, 2000 of $36,000
decreased by $204,000 from $240,000 for the same period in 1999. Art expenses
(net of a valuation allowance of $51,000 in fiscal 2000 and $621,000 in fiscal
1999) consisted of the cost of art sold (59.8% and 90.7%) and selling, general
and administrative expenses (40.2% and 9.3%) for the six month period ended
April 30, 2000 and 1999, respectively. It is the Company's policy to use the
adjusted carrying value for sales, thereby reducing the valuation reserve
proportionately as the inventory is sold.
25
<PAGE>
Art expenses for the three months ended April 30, 2000 of $7,000
decreased by $42,000 from $49,000 for the same period in 1999. Art expenses (net
of a valuation allowance of $ zero in fiscal 2000 and $88,000 in fiscal 1999)
consisted of the cost of art sold (10.0% and 77.2%) and selling, general and
administrative expenses (100.0% and 22.8%) for the three month period ended
April 30, 2000 and 1999, respectively. It is the Company's policy to use the
adjusted carrying value for sales, thereby reducing the valuation reserve
proportionately as the inventory is sold.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the six months ended April 30,
2000 of $542,000 increased $26,000 (5.0%) from $516,000 for the same period in
1999. The major components of general and administrative expenses are officers
salaries (41.5% and 41.8%), rent (8.3% and 5.7%), legal and professional fees
(6.8% and 7.0%), insurance (10.0% and 11.6%) and office salaries (11.0% and
10.8%) for the six month periods ended April 30, 2000 and 1999, respectively.
General and administrative expenses for the three months ended April
30, 2000 of $274,000 increased $21,000 (8.3%) from $253,000 for the same period
in 1999. The major components of general and administrative expenses are
officers salaries (41.8% and 42.5%), rent (8.3% and 1.9%), legal and
professional fees (6.7% and 7.1%), insurance (9.8% and 11.8%) and office
salaries (11.3% and 11.0%) for the three month period ended April 30, 2000 and
1999, respectively.
INTEREST AND OTHER INCOME
Interest and other income for the six months ended April 30, 2000
increased by $129,000 to $139,000 from $10,000 for the same period in 1999.
Included in the fiscal 2000 results is a $125,000 discount earned on the early
retirement of the Company's non related party debt. Interest and other income
for the three months ended April 30, 2000 increased by $1,000 to $5,000 from
$4,000 for the same period in 1999.
INTEREST EXPENSE
Interest expense for the six months ended April 30, 2000 decreased
58.5% to $130,000 as compared to $312,000 for the same period in 1999. Interest
expense for the three months ended April 30, 2000 decreased 55.7% to $64,000 as
compared to $143,000 for the same period in 1999. The fiscal 2000 decrease is
due primarily to a reduction in aggregate debt outstanding at April 30, 2000 as
compared to the same period in 1999. For the most part interest rates on Canal's
debt have remained unchanged for the past 12 months.
26
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses from
operations in seven of the last ten years and is involved in litigation with a
meat packer located in South St. Paul, Minnesota. The financial statements do
not include any adjustments that might result from the resolution of these
uncertainties. Additionally, the accompanying financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay in
full the Company's variable rate mortgage notes due May 15, 1998 ($2,605,000),
its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes
which were due December 31, 1997 ($320,000) plus accrued interest thereon. The
purchasers of these notes included certain entities controlled by the Company's
Chairman, the Company's Chief Executive Officer and members of their families.
The variable rate mortgage notes issued have essentially the same terms and
conditions as the variable rate mortgage notes which were repaid. These notes
carry interest at the highest of four variable rates, determined on a quarterly
basis. These notes, among other things, prohibits Canal from becoming an
investment company as defined by the Investment Company Act of 1940; requires
Canal to maintain minimum net worth; restricts Canal's ability to pay cash
dividends or repurchase stock; requires principal prepayments to be made only
out of the proceeds from the sale of certain assets and requires the accrual of
additional interest (to be paid at maturity) of approximately three percent per
annum.
On July 29, 1999 the above Notes were amended to extend the maturity
date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that
the additional interest due to the holders of the notes shall become current and
be treated as principal due under the notes; and to have certain of the holders
loan the Company $525,000 in additional financing, the proceeds of which was
used to repay in full certain of the other holders of the notes. As a result,
the notes are now held in total by the Company's Chief Executive Officer and
members of his family.
On January 10, 2000, the above Notes were further amended to have
holders loan the Company $1,725,000 in additional financing, the proceeds of
which was used to repay in full all of the Company's outstanding non related
party long-term debt. As of April 30, 2000, the balance due under these notes
was $2,540,000 all of which is classified as long-term debt related party.
27
<PAGE>
Cash and cash equivalents of $107,000 at April 30, 2000 decreased
$309,000 from $416,000 at October 31, 1999. Net cash used by operations so far
in fiscal 2000 was $82,000. Substantially all of the fiscal 2000 net proceeds
from related party loans and the proceeds from the sale of art was used to
reduce outstanding debt and accrued expenses. During fiscal 2000 Canal reduced
its long-term debt by $147,000.
At April 30, 2000 and October 31, 1999, the Company's current
liabilities exceeded current assets by $0.3 million. The only required principal
repayments under Canal's debt agreements for fiscal 2000 will be from the
proceeds (if any) of the sale of certain assets.
Canal continues to closely monitor and reduce where possible its
overhead expenses and plans to continue to reduce the level of its art
inventories to enhance current cash flows. Management believes that its income
from operations combined with its cost cutting program and planned reduction of
its art inventory will enable it to finance its current business activities.
There can, however, be no assurance that Canal will be able to effectuate its
planned art inventory reductions or that its income from operations combined
with its cost cutting program in itself will be sufficient to fund operating
cash requirements.
OTHER FACTORS
Some of the statements in this Form 10-Q, as well as statements by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and stockholders in the course of presentations about the
Company and conference calls following earning releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by the
forward-looking statements.
28
<PAGE>
PART II
OTHER INFORMATION
29
<PAGE>
ITEM 1: LEGAL PROCEEDINGS:
See Item 3 of Canal's October 31, 1999 Form 10-K.
ITEM 2 AND 3:
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
ITEM 5: OTHER INFORMATION:
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K:
(A) Not applicable.
(b) No reports on Form 8-K have been filed during the
quarter for which the report is filed.
30
<PAGE>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of
1934, the registrant had duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Canal Capital Corporation
-----------------------------
Registrant
/s/ Reginald Schauder
-----------------------------
Reginald Schauder
Vice President-Finance &
Chief Financial Officer
Date: June 13, 2000
31
