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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, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-8709
CANAL CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0102492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
717 Fifth Avenue
New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 826-6040
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) or the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. Yes X No
The aggregate market value of the voting stock held by nonaffiliates of
the registrant at January 15, 1997, was approximately $593,000. The number
of shares of Common Stock, $.01 par value, outstanding at January 15, 1997
was 4,326,929.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX
Description Page
PART I
ITEM 1. Business............................................ 1
ITEM 2 Properties.......................................... 6
ITEM 3. Legal Proceedings................................... 7
ITEM 4. Submission of Matters to a Vote of Stockholders..... 10
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters................................. 13
ITEM 6. Selected Financial Data............................. 14
ITEM 7. Management's Discussion and Analysis of the
Results of Operations and Financial Condition....... 16
ITEM 8. Financial Statements and Supplementary Data......... 26
ITEM 9. Disagreements on Accounting and Financial
Disclosure.......................................... 26
PART III
ITEM 10. Directors and Executive Officers of the Registrant.. 27
ITEM 11. Executive Compensation.............................. 28
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 32
ITEM 13. Certain Relationships and Related Transactions...... 34
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 35
i
PART I
Item 1. Business
A. General
The Registrant, Canal Capital Corporation ("Canal" or the "Company"),
incorporated in the state of Delaware in 1964, commenced business
operations through a predecessor in 1936.
Canal is engaged in two distinct businesses -- the management and
further development of its agribusiness related real estate properties and
its art operations.
Canal's real estate properties located in six midwest states are
primarily associated with its former agribusiness related operations. Each
property is adjacent to a stockyards operations (which operates on land
leased from the company) and consists of an Exchange Building (commercial
office space), land and structures leased to third parties (meat packing
facilities, rail car repair shops, truck stops, lumber yards and various
other commercial and retail businesses) as well as vacant land available
for development or resale. In connection with the 1989 sale of its
stockyards operations, Canal entered into a master lease (the "Lease") with
the purchaser covering approximately 139 acres of land and certain
facilities used by the stockyards operations. The Lease is a ten year
lease renewable at the purchaser's option for an additional ten year
period, with escalating annual rentals. In addition, Canal retained the
right to receive income from certain volume based rental income leases with
two meat packing companies located near the stockyards. See
"Agribusiness".
Its principal real estate operating revenues are derived from the
Lease, income from the volume based rental leases with meat packing
companies located near the stockyards, rental income from its five Exchange
Buildings
(commercial office space), lease income from land and structures leased to
various commercial and retail enterprises and proceeds from the sale of
real estate properties. Canal has continued its program of developing what
was excess stockyard property. See "Real Estate Operations".
Canal's art dealing operations consist primarily of inventories held
for resale of antiquities primarily from ancient Mediterranean cultures and
contemporary art primarily of one artist. See "Art Operations".
B. Factors That May Affect Future Results
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as
1
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.
C. Real Estate Operations
General
Real estate operations, which relate primarily to Canal's former
agribusiness operations, resulted in operating income of $5.2 million,
while contributing $8.9 million to Canal's revenues for fiscal 1996. Canal
is involved in the management, development or sale of its agribusiness
related real estate properties (as described above) at its former stockyard
locations, the lease of certain property underlying the stockyards
operations sold by Canal in 1989 and the revenue from various volume based
rental agreements with meat packing companies located near the stockyards.
In December 1996, Canal lost its largest tenant (State of Minnesota)
in its South St. Paul, Minnesota Exchange Building. This tenant
represented 50% (approximately $250,000) of the rental income from this
building. While Canal s agents are actively pursuing replacement for this
space, it could take an extended period of time to fully relet this space
which, in the interim, will effect Canal s cash flow.
As of October 31, 1996, there are approximately 321 acres of
undeveloped land owned by Canal adjacent to its former stockyards. Canal
is continuing the program, which it started several years ago, to develop
or sell this property.
Agribusiness
Under the Lease, Canal has net leased 139 acres of land as well as
certain stockyard facilities at five of its former stockyard locations to
the group which purchased the stockyard operations. This lease is a 10
year lease, renewable at the purchaser's option for an additional ten year
period,
2
with annual rentals of $750,000 per year for the first year escalating to
$1.0 million per year for the fourth through the tenth years and $1.0
million per year adjusted for CPI increases thereafter. Canal is entitled
to receive additional rent if the stockyard's livestock volume or cash flow
(as defined) exceeds certain levels.
The lessee under the Lease is currently experiencing financial
difficulties related primarily to a cattle feeding and financing business
the lessee entered into after purchasing Canal s stockyard operations.
While the payments under the Lease are current, the lessee is in default
under the terms of certain other leases it has with the Company for office
space at various locations. The cross default provisions of these leases
puts the lessee in technical default of the Lease. However, the Company is
working with the lessee and expects all arrears due to the Company to be
paid in the coming months. The Company has explored the availability of
alternative tenants for the stockyard properties covered by the Lease and
is confident that should the need arise there are adequate alternatives
available to the Company which will protect a substantial portion of the
revenue stream from the Lease.
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 a fifty year lease expiring in 2017 with John Morrell & Co.
("Morrell"). The lease called for Morrell to pay Canal a per head fee for
all hogs slaughtered at Morrell s plant that were not purchased at the
Sioux City stockyards. On September 30, 1996 Canal and Morrell entered
into a Mutual Release and Settlement Agreement, which terminated the Sioux
City lease and dismissed the pending lawsuit between the parties (see -
Item 3 Legal Proceedings and Note 15). Additionally, on October 1, 1996
Canal sold the Sioux City property (previously under lease) to Morrell.
The Fargo, North Dakota lease is also a fifty year lease expiring in 2028
with B&H Investment Company ("B&H"). This lease calls for B&H to pay Canal
a per head fee for all cattle slaughtered at B&H s plant that were not
purchased at the Fargo stockyards. For information on the revenues
generated by these leases see Note 3 to the Consolidated Financial
Statements. The Fargo, North Dakota lease is the subject of ongoing
litigation. For further information about this litigation (see - Item 3
Legal Proceedings and Note 15).
Risk
Real estate activities in general may involve various degrees of risk,
such as competition for tenants, general market conditions and interest
rates. Furthermore, there can be no assurance that Canal will be
successful in the development, lease or sale of its agribusiness related
real estate properties.
3
Competition
Canal competes in the area of agribusiness related real estate
development with other regional developers, some of which are substantially
larger and have significantly greater financial resources than Canal. To a
certain extent, Canal's agribusiness revenues are dependent on the ability
of the stockyard operations purchaser and the various meat packers with
whom Canal has yardage agreements to successfully compete in their
respective businesses.
D. Art Operations
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
valued at approximately $1,214,000. 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 64% ($2,311,825) and 36% ($1,277,263) and
54% ($2,923,332) and 46% ($2,477,263) of total art inventory at October 31,
1996 and 1995, 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 $1.7 million while
contributing $0.2 million to Canal's revenues for fiscal 1996. The 1996
loss includes a $1.5 million increase in the art inventory valuation
allowance.
4
Risk
Dealing in art in general involves various degrees of risk. There can
be no assurance that the operations will be profitable. The success of a
program of this nature is dependent at least in part, on general economic
conditions, including supply, demand, international monetary conditions and
inflation. There can be no assurance that Canal will be able to sell its
art
inventory at a price greater than or equal to its acquisition costs or be
able to turn over its art inventory at a desirable rate. In addition,
forgery and counterfeiting are risks inherent in the art industry.
However, Canal and its associates, through their experience and certain
precautionary
measures taken in the purchasing process, are confident that this risk has
been minimized. Moreover, there are security risks associated with
collections of antiquities and art, including problems of security in their
storage, transportation and exhibition. Canal has procured insurance to
cover such risks.
Competition
Canal competes in its art operations with investment groups and other
dealers, some of whom are substantially larger and have greater financial
resources and staff than Canal. There may be a number of institutions and
private collectors and dealers who may attempt to acquire the same pieces
of art at the same time as Canal, particularly at auction. Similarly,
there may be a number of dealers offering similar pieces of art, thereby
exerting a downward pressure on prices.
E. Securities Portfolio
General
Canal no longer engages in trading activities but has an investment in
a company in which it, together with other entities (some of which are
affiliates), comprise a group for regulatory purposes. This investment (in
which Canal's ownership interest is less than 4%) is considered long-term
in nature and is carried at market value.
Canal had an agreement with an investment advisor who is affiliated
with a director who is also a shareholder and the Chairman of Canal. The
investment advisor had discretionary authority over the securities trading
and investment activities of Canal. This agreement was canceled by mutual
consent of the parties on October 31, 1996.
F. Employees
At December 31, 1996, Canal had 7 employees.
5
ITEM 2. Properties
Canal's real estate properties located in six Midwest states are
primarily associated with its former agribusiness related operations. Each
property is adjacent to a stockyard operation (which operates on land
leased from the company) and consists 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, 1996 include:
Stockyard Leased Held for
Year Total Exchange Master to Third
Develop-
Location Acquired Site(2) Bldgs. Lease(1) Parties ment (3)
St. Joseph, MO 1942 127 2 37 3 85
West Fargo, ND 1937 66 13 0 17 36
S. St. Paul, MN 1937 210 6 30 55 119
Sioux City, IA 1937 96 2 24 25 45
Omaha, NE 1976 85 2 17 34 32
Sioux Falls, SD 1937 43 0 31 8 4
Total 627 25 139 142 321
The following schedule shows the average occupancy rate and average rental
rate at each of Canal's five Exchange Buildings:
1996 1995
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(6) 84% $14.48 98% $14.25
Sioux City, IA 63% $ 3.59 68% $ 3.40
Omaha, NE 56% $ 4.80 55% $ 4.73
NOTES
(1) Leased to the purchaser of Canal's stockyard operations.
(2) For information with respect to mortgages and pledges see Note 7.
(3) For information related to this see Note 2(c).
(4) Canal has closed this building and is offering it for sale.
(5) Per square foot.
(6) With the exception of the South St. Paul, Minnesota Exchange Building
none of the leases relating to the above Exchange Buildings represents
10% or more of rental income. As more fully discussed in Notes 17 and
20, in December 1996, Canal lost its largest tenant (State of
Minnesota) in its South St. Paul, Minnesota Exchange Building.
6
ITEM 3. Legal Proceedings
Canal and its subsidiaries are from time to time involved in
litigation incidental to their normal business activities, none of which,
in the opinion of management, will have a material adverse effect on the
consolidated financial condition and operations of the Company. In
addition, Canal or its subsidiaries are party to the following litigation:
Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo
This action involves Union Stockyards Company of Fargo ( Union ), a
wholly owned subsidiary of Canal. It is an action which involves claims
which are similar to some of the claims brought by B&H Investment Co.
( B&H ) against Union several years ago which was dismissed in 1994
following a decision by the Minnesota Court of Appeals in favor of Union.
The dispute involves a Lease Agreement relating to certain real estate
owned by Union and leased to Federal Beef Processors, Inc. ( Federal
Beef ). Federal Beef operates a meat packing plant on the leased premises,
and it is a related entity to B&H, which previously operated the packing
plant. By the terms of the Lease Agreement, Federal Beef s obligation to
pay additional rent is suspended during any period that Union fails to
provide adequate yardage service (under the terms of a separate Yardage
Agreement between the parties) that materially affects the business of
Federal Beef.
Federal Beef filed a Complaint on June 2, 1995 in the District Court
for Cass County, North Dakota, for damages claimed to be suffered as a
result of Union s alleged failure to provide adequate maintenance and
cleaning services for the livestock pens used by Federal Beef under the
Yardage Agreement. The damages sought by Federal Beef are in an
unspecified amount consisting of the additional rent paid by Federal Beef
during the time Union allegedly was in breach of the Lease Agreement and
the Yardage Agreement. As of June 1995, Federal Beef alleged it was
entitled to the return of additional rent in excess of $70,000. In
addition, Federal Beef seeks all direct and consequential damages allegedly
suffered by Federal Beef because of the claimed breach, including loss of
profits from animals allegedly damaged by reason of the condition of the
pens. Federal Beef subsequently filed an Amended Complaint in which it has
also sought a determination that it is entitled to exercise an option to
purchase the leased premises under the terms of the Lease Agreement for a
price measured by the unimproved value of the leased premises.
7
Union has filed an Answer and Complaint denying the allegations in the
Amended Complaint, seeking a determination that Federal Beef s claims are
frivolous, and asking for an award of Union s reasonable attorneys fees
and costs in connection with the defense of the action. In July 1995,
Union successfully defeated a motion by Federal Beef for an order which
would have allowed Federal Beef to deposit into Court all rent payments due
from Federal Beef to Union pending the outcome of the litigation. As a
result, Federal Beef has continued to make all rent payments due under the
Lease Agreement while reserving its alleged claims against Union.
Management does not believe that the revenues generated by this lease
will be materially affected in resolving this dispute.
John Morrell & Co. v. Canal Capital Corporation
On October 6, 1993, an action was commenced against Canal by John
Morrell & Co. ("plaintiff") in the District Court for Woodbury County,
State of Iowa. Plaintiff amended the action on November 30, 1993. The
lawsuit arose out of the alleged breach by Canal, as lessor, of a lease
agreement relating to certain real estate on which plaintiff operates a
meat packing plant in Sioux City, Iowa. Plaintiff alleged in the suit a
breach of the lease by Canal as a result of Canal's sale of the Sioux City
stockyard operation in 1989 and its failure to renegotiate the rental terms
of the lease. Plaintiff alleged that Canal was obligated, as lessor, to
provide animals from the Sioux City stockyards to meet plaintiff's needs in
operating the packing plant on the leased property. Plaintiff alleged
that, as a result of Canal's failure to provide sufficient animals to meet
plaintiff's needs, plaintiff was forced to obtain animals from sources
other than the stockyards at an additional cost and was forced to pay
additional rent under the lease agreement. Plaintiff sought relief in the
form of damages in an unspecified amount and a renegotiation of the rental
terms of the lease.
On September 30, 1996 Canal and Morrell entered into a Mutual Release
and Settlement Agreement which terminated the Sioux City lease and
dismissed the lawsuit between the parties. In consideration for the lease
termination Canal received $4.2 million from Morrell. Also, as part of the
settlement, on October 1, 1996 Canal sold the Sioux City property
(previously under lease) to Morrell for $0.3 million.
8
Former Portland Stockyard Property
In December 1988, the Company sold a parcel of real estate in
Multnomah County, Oregon and, in connection therewith, agreed to share the
costs of the correction of adverse environmental conditions on such
property with the buyer. Pursuant to the cost sharing agreement, $1.1
million of the sales price was placed in escrow to secure the Company's
performance of its cost sharing obligations, which were not limited to that
amount. Under the cost sharing agreement, the Company's obligation is to
pay 50% of the first $400,000 and 90% of the next $425,000 of costs and 95%
of all costs thereafter. The Company had objected to the buyer's
definition of costs which require sharing in connection with certain
demands of the buyer for release of funds from escrow and had stopped
payment of those funds from the escrow. This dispute was the subject of an
arbitration which was recently resolved in favor of the buyer. As a
result, those funds were released from escrow and the escrow has been
substantially depleted. At October 31, 1993, the Company accrued $400,000
representing management's estimate of its additional contingent liability
in this matter. This amount is included as a liability in accrued
litigation settlement at October 31, 1996.
On December 19, 1996, Canal entered into a settlement agreement with
the buyer which, among other things, required Canal to issue a promissory
note to the buyer in the principal amount of $325,000, payable over five
years and releases Canal from any further obligations under the cost
sharing agreement and any further remediation obligations. The five year
note accrues interest at prime and requires principal and interest payment
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.
Sioux City, Iowa - Demolition Notice
On October 25, 1994, Canal received a Placard Notice (the "Notice")
from the City of Sioux City, Iowa (the City ) ordering the demolition of
four structures located on Canal's property. The Notice claims that the
structures are delapidated, unsafe and must be demolished. While exact
costs are not available, Canal estimates demolition costs at $750,000 to
$1,000,000. Canal is currently negotiating with the City for the exchange
of the four structures covered by the Notice and approximately 16 acres of
land to the City if the city will assume full responsibility for the
required demolition. In the alternative, Canal has filed an appeal of this
Notice with City Inspection Services Manager and is awaiting a hearing
date. If this matter cannot be settled as described above, Canal will
pursue alternative means of challenging this Notice.
9
Pine Valley Meats, Inc. v. Canal Capital Corporation
On May 5, 1995 an action was commenced against Canal by Pine Valley
Meats, Inc. ( Plaintiff ) in the County Court for Dakota County, State of
Minnesota. The lawsuit arises out of the alleged breach by Canal of a
certain cattle walkway agreement (the walkway agreement ) relating to the
passage of cattle over land owned by Canal in South St. Paul, Minnesota.
Plaintiff contends that the walkway agreement is a permanent easement
thereby requiring Canal to maintain a cattle walkway for its use in
perpetuity. Canal s position is that the walkway agreement is in fact a
license and can be terminated at Canal s discretion. Canal did close the
cattle walkway for several weeks in April 1995.
In June 1995, plaintiff sought and won a temporary injunction
requiring Canal to continue to maintain the cattle walkway for plaintiff s
use until the rights of the parties can be determined at trial. Plaintiff
is seeking a permanent injunction determining that the walkway agreement
creates an easement as well as unspecified damages for lost profits when
the walkway was closed. On January 5, 1996, the Dakota County Court ruled
that the walkway agreement constituted a license only and denied the
plaintiff s request for a permanent injunction.
On May 30 and 31, 1996, damages in favor of the plaintiff in the
amount of $400,000 (including $50,000 in punitive damages) were awarded in
the County Court of Dakota County, State of Minnesota. Further damages for
costs, disbursements and interest in the amount of approximately $40,000
were awarded to plaintiff on September 26, 1996.
Canal filed a Notice of Appeal on October 8, 1996. Additionally, on
October 14, 1996 Canal posted a supersedeas bond with the court in the
agreed upon amount of $470,000 to stay any action on Pine Valley s part to
collect on the judgements. Additionally, on October 25, 1996 Canal filed
suit against Pine Valley seeking recovery of unpaid livestock fees owing
under the walkway agreement.
At October 31, 1996 Canal has an accrued litigation settlement in the
amount of $450,000 associated with this case which is reflected in the
financial statements as a current liability.
ITEM 4. Submission of Matters to a Vote of Shareholders
None.
10
Executive Officers of the Registrant
The following table sets forth the names, ages, business backgrounds
and areas of responsibility of the executive officers of the Registrant:
Positions and Other Current and Prior
Offices with Positions During the
Name Age the Registrant Past Five Years
Michael E. Schultz 60 President and Chief Attorney, partner in
Executive Officer Ehrenkranz, Ehrenkranz
since September 1991 & Schultz, law firm,
and a Director for until December 31,
more than five years. 1994. Executive Vice
President, Special Pro-
jects, Intelogic Trace,
Inc. until December 8,
1994.
Asher B. Edelman 57 Chairman of the Controlling General
Board since Partner, Plaza
September 1991 and Securities Company
Prior thereto For more than five
Vice Chairman years and of Asco
of the Board and Partners (the General
Chairman of the Partner of Arbitrage
Executive Committee Securities Company),
for more than five broker-dealer, for more
years. than five years;
President of A.B.
Edelman Management
Company, Inc. (the
General Partner of
Edelman Value Partners,
Inc.) for more than
five years. Chairman
of the Board of
Datapoint Corporation,
computer
manufacturing and
distribution, for
more than five years.
Chairman of the Board
of Intelogic Trace,
Inc.,computer and
telecommunications
equipment servicing,
until December 8, 1994.
11
Reginald Schauder 47 Vice President- Controller from
Finance, Secretary July 1985 to
and Treasurer since January 1989
January 1989.
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.
12
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stock Matters
On April 30, 1992 the Securities and Exchange Commission approved an
order granting the application of the New York Stock Exchange, Inc. for
removal of the Common Stock of Canal from listing and registration on the
Exchange under the Securities Exchange Act of 1934. Currently, 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, 1996 as reported on the "pink sheets" were:
Fiscal 1996 Fiscal 1995
Quarter Ended High Low High Low
October 31 ................. $ 1/4 -- $ 3/16 $ 3/16 -- $ 1/16
July 31 .................... 5/16 -- 3/16 3/16 -- 3/16
April 30 ................... 1/4 -- 3/16 1/4 -- 1/8
January 31 ................. 1/4 -- 1/16 1/2 -- 1/4
There were no cash dividends paid during fiscal 1996 or 1995. Canal
is subject to restrictions on the payment of cash dividends under certain
debt agreements. As of January 20, 1997, Canal had approximately 1,500
holders of record of its common stock, par value $.01 per share.
13
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.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31, 1996 1995 1994 1993 1992
OPERATING DATA:
REVENUES FROM
CONTINUING OPERATIONS $9,049 $4,854(5) $8,460(4)$4,535(3) $6,968(2)
NET INCOME/(LOSS) FROM
CONTINUING OPERATIONS $842($1,518)(9)$1,362(8)($2,160)(7)($4,674(6)
EXTRAORDINARY GAIN ON RETIREMENT
OF DEBT 0 0 0 366 857
PROVISION FOR
INCOME TAXES 0 0 0 0 0
NET INCOME/(LOSS) $842($1,518) $1,362 ($1,794) ($3,817)
EARNINGS (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
NET INCOME/(LOSS) BEFORE
EXTRAORDINARY ITEM $0.16 ($0.40) $0.23 ($0.52) ($1.10)
EXTRAORDINARY ITEM 0.00 0.00 0.08 0.08 0.20
NET INCOME/(LOSS) $0.16 ($0.40) $0.23 ($0.44) ($0.90)
EARNINGS (LOSS) PER COMMON SHARE
ASSUMING FULL DILUTION:
NET INCOME/(LOSS) BEFORE
EXTRAORDINARY ITEM $0.13 ($0.40) $0.20 ($0.52) ($1.10)
EXTRAORDINARY ITEM 0.00 0.00 0.00 0.08 0.20
NET INCOME/(LOSS) $0.13 ($0.40) $0.20 ($0.44) ($0.90)
CASH DIVIDENDS PAID $0.00 $0.00 $0.00 $0.00 $0.00
WEIGHTED AVERAGE NUMBER OF SHARES:
- PRIMARY 4,327 4,352 4,476 4,327 4,327
- FULLY DILUTED 5,327 5,352 5,170 4,933 4,933
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Continued ...)
(IN THOUSANDS)
AT OCTOBER 31, 1996 1995 1994 1993 1992
BALANCE SHEET DATA:
CURRENT ASSETS $2,015 $1,443 $1,416 $1,321 $3,110
PROPERTY ON OPERATING
LEASES, NET 7,106 8,385 8,708 9,784 10,494
ART INVENTORY NON-CURRENT 3,089 4,901 5,744 6,074 7,079
OTHER ASSETS 3,279 3,474 4,260 5,184 6,339
TOTAL ASSETS $15,489 $18,203 $20,128 $22,363 $27,022
CURRENT LIABILITIES $3,426 $2,710 $6,122 $15,015 $17,670
LONG-TERM DEBT 6,980 11,379 8,062 2,394 2,502
STOCKHOLDERS' EQUITY 5,083 4,114 5,944 4,954 6,850
TOTAL LIAB. &
STOCKHOLDERS'EQUITY $15,489 $18,203 $20,128 $22,363 $27,022
COMMON SHARES
OUTSTANDING AT YEAR-END 4,327 4,327 4,327 4,327 4,327
14(a)
ITEM 6. Selected Financial Data (continued..)
NOTES:
(1) For discussion of material uncertainties and commitments, see Notes 11
and 15 to the Consolidated Financial Statement.
(2) The revenue decrease is due primarily to a reduction in art sales
which was offset to a certain extent by increased real estate revenues
and the Company s cessation of its securities trading and investing.
(3) The revenue decrease is due primarily to a reduction in art sales.
(4) The revenue increase is due primarily to an increase of $2.3 million
in real estate sales and the reversal of a loss provision established
in fiscal 1992 in connection with a judgment against the Company.
(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 provisions of $400,000 (see Note 6) and $1.6 million for
litigation settlements (see Note 15).
(7) Includes an $873,000 write-off in connection with a lease termination
(see Note 11), a $400,000 provision for litigation settlement (see
Note 15) and a $300,000 valuation allowance to the art inventory (see
Note 10).
(8) Includes the reversal of a $1.5 million loss provision established in
fiscal 1992 in connection with a judgment against the Company, a $0.6
million gain on property sales and a $0.3 million gain on the sale of
investments offset by a $0.3 million loss on the write down of
investments and $0.2 million increase in the art inventory valuation
reserve.
(9) 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.
(10) Common and common equivalent shares have been calculated to give
effect to certain convertible notes issued in March 1994 (see Note 7).
(11) Certain prior amounts have been reclassified to conform to the current
year s presentation.
15
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
8continue as a going concern. The Company has suffered recurring losses
from operations in six of the last eight years, has a working capital
deficit at October 31, 1996 of approximately $1.4 million, is involved in
various litigations and on December 31, 1996 defaulted on its obligation to
repay a $500,000 note. A reserve has been provided in the amount of
$450,000 associated with the litigation in Minnesota. The financial
statements do not include any adjustments that might result from the
resolution of these uncertainties (See Notes 1, 7, 16 and 20). 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 $0.8 million for 1996 as compared to
the 1995 net loss of $1.5 million and the 1994 net income of $1.4 million.
After recognition of preferred stock dividend payments of $162,000 in 1996,
$193,000 in 1995 and $313,000 in 1994, the results attributable to common
stockholders were net income of $0.7 million in 1996, a net loss of $1.7 in
1995 and net income of $1.0 million in 1994.
Canal's revenues from continuing operations consist of revenues from
its real estate and art operations. Due to general economic conditions
and more specifically a depressed national art market, Canal's aggregate
revenues from art sales and the prices at which sales were made have
significantly declined in recent years. Revenues in 1996 increased by
$4.2 million to $9.0 million as compared with 1995 revenues which had
decreased by $3.6 million to $4.9 million from 1994 revenues of $8.5
million. The 1996 increase is due primarily to a $4.4 million increase in
sales of real estate which is attributable to the Sioux City, Iowa lease
termination and property sale to John Morrell & Co. The 1995 decrease is
due primarily to a $2.1 million reduction in real estate sales and the 1994
inclusion of the reversal of a $1.5 million loss provision established in
fiscal 1992 in connection with a judgment against a subsidiary of the
Company.
16
1996 vs. 1995
Canal s 1996 net income of $0.8 million was due primarily to a $3.0
million increase in income from real estate operations (due to increased
real estate sales) offset by a $1.7 million loss from art operations, which
included a $1.5 million increase in the art inventory valuation allowance.
The 1995 net loss of $1.5 million was due primarily to a $0.7 million loss
from art operations (which included a $0.5 million increase in the art
inventory valuation allowance), a $0.3 million write down of the Company s
investment, an increase in interest expense of approximately $0.3 million
due to rate increases and a $0.1 million increase in general and
administrative expenses associated primarily with increased legal fees.
Real Estate Revenues
Real estate revenues for 1996 of $8.9 million accounted for 97.8% of
the 1996 revenues as compared to revenues of $4.6 million or 94.6% for
1995. 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 (23.4% and 45.5%), Ground
lease income (10.6% and 21.2%), volume based rental income (7.4% and 15.9%)
and sale of
real estate and other income (58.6% and 17.4%) for 1996 and 1995,
respectively. The 1996 increase is due primarily to the $4.4 million
increase in sales of real estate. The percentage variations in the year to
year comparisons are due to the significant increase in real estate sales
for fiscal 1996.
Real Estate Expenses
Real estate expenses for 1996 of $3.6 million increased by $1.2
million (50.6%) from $2.4 million in 1995. Real estate expenses are
comprised of labor, operating and maintenance (26.7% and 40.9%),
depreciation and amortization (10.0% and 15.2%), taxes other than income
taxes (10.0% and 22.1%), cost of real estate sold (38.3% and 18.0%),
provision for litigation settlement (12.0% and 0.0%) and general and
administrative expenses (3.0% and 3.8%) for 1996 and 1995, respectively.
The 1996 increase in real estate expenses is due primarily to the $0.9
million increase in cost of real estate sales for fiscal 1996. The
percentage variations in year to year comparisons is also due to the
increase in the cost of real estate sold for fiscal 1996.
17
Art Operations
Management estimates it may take two to five years to dispose of its
current art inventory. The Company's ability to dispose of its art
inventory
is dependent at least in part, on general economic conditions, including
supply, demand, international monetary conditions and inflation.
Additionally, the art market itself is a very competitive market.
Accordingly, there can be no assurance that Canal will be successful in
disposing of its art inventory within the time frame discussed above.
Canal has its art inventory appraised by independent appraisers
annually. The 1996 appraisal covered approximately 66% 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 34% of the inventory was estimated by management based in part on
operating history and in part on the results of the independent appraisals
done. In fiscal 1996 Canal recognized a $1,500,000 valuation allowance
against its art inventory, thereby, increasing the total valuation
allowance to $2,500,000 as of October 31, 1996 as compared to $1,000,000
and $500,000 at October 31, 1995 and 1994, respectively. These estimates
were based in part on the Company's history of losses sustained on art
sales in the current and previous years.
The valuation allowance represents management's best estimate of the
loss that will be incurred by the Company in the normal course of business.
The estimate is predicated on past history and the information that was
available at the time that the financial statements were prepared. The
provision contemplates the loss that could result if the level of sale
anticipated was achieved.
The nature of art makes it difficult to determine a replacement value.
The most compelling evidence of a value in most cases is an independent
appraisal. The price at which pieces are consigned is usually in line with
appraisals and above the cost of the piece. The amount classified as
current represents management's best estimate of the minimum amount of
inventory that will be sold in this market. Management believes that the
provision discussed above has effectively reduced inventory to its
estimated net realizable value. The Company will continually monitor the
market for its product and will make adjustments to the value of its art
inventory as such adjustments become necessary.
18
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 1996. Because of the available
alternatives the Company does not anticipate any extraordinary losses
associated with the art inventory in fiscal 1997.
Art Revenues
Art revenues for 1996 of $195,000 decreased $65,000 or 24.9% from
$260,000 in 1995. Art revenues are comprised of proceeds from the sale of
antiquities and contemporary art (100.0% and 94.7%) and commission income
(primarily from the Salander-O'Reilly agreement) on sale of art owned by
third parties (0.0% and 5.3%) for 1996 and 1995, respectively. The
Company's art inventory was reduced through sales by $0.3 million and $0.4
in fiscal years 1996 and 1995, respectively.
Art Expenses
Art expenses for 1996 of $1.9 million increased by $0.9 million
(89.9%) from $1.0 million in 1995. Art expenses (excluding valuation
allowances) consisted of the cost of art sold (86.9% and 83.6%) and
selling, general and administrative expenses (13.1% and 16.4%) for 1996 and
1995, respectively. Included in art expenses is a $1.5 million and a $0.5
million valuation allowance against the Company's art inventory (see Note
10 to the Consolidated Financial Statements) for fiscal years 1996 and
1995, respectively.
General and Administrative
General and administrative expenses for 1996 of $1.3 million decreased
$0.1 million (2.3%) from $1.4 million in 1995. The major components of
general and administrative expenses are officers salaries (32.0% and
30.5%), rent (9.1% and 5.7%), legal and professional fees (9.4% and 17.1%),
insurance (11.3% and 11.4%) and office salaries (10.1% and 10.4%) for 1996
and 1995,
19
respectively. The percentage increases in officers salaries, insurance and
office salaries is a result of the aggregate decrease in total general and
administrative expenses as a result of the decrease in legal fees. The
percentage decrease in rent expense is due to Canal s New York office space
lease providing for four months without rent commencing February 1, 1996.
Gain (loss) on Mark-to-Market of Investments
Canal recognized a gain of $55,000 in fiscal 1996 as compared to a
loss of $286,000 in fiscal 1995 on the mark-to-market of its investments.
The 1995 loss included $114,000 to write down the Company s investment in
Intelogic Trace, Inc. to zero.
Interest and Other Income
Interest and other income for 1996 decreased 45.0% to $90,000. These
amounts are comprised primarily of dividend and interest income and to a
lesser extent the proceeds from the sale of non-essential assets.
Interest Expense
Interest expense remained stable at $1.5 million in 1996. Interest
rates on Canal's variable rate mortgage notes increased to an average of
11.94% in 1996 as compared to an average of 11.78% in 1995 and an average
of 9.1% in 1994. At October 31, 1996 Canal had reduced the outstanding
face value of these notes from the original $20.0 million to $4.0 million.
20
1995 vs. 1994
Canal's 1995 net loss of $1.5 million was due primarily to a $0.7
million loss from art operations (which included a $0.5 million increase in
the art inventory valuation reserve), a $0.3 million write down of the
Company s investments, an increase in interest expense of approximately
$0.3 million due to rate increases and a $0.1 million increase in general
and administrative expenses associated primarily with increased legal fees.
The 1994 results included the reversal of a $1.5 million loss provision
established in fiscal 1992 in connection with a judgment against a
subsidiary of the Company, a $0.6 million gain on the sale of real estate
and a $0.3 million gain on the sale of investments. These were offset by a
$0.3 million write down of the Company's investments and a $0.2 million
increase in the art inventory valuation reserve.
Real Estate Revenues
Real estate revenues for 1995 of $4.6 million accounted for 94.6% of
the 1995 revenues as compared to revenues of $8.3 million or 97.5% for
1994. 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 (45.5% and 25.7%), Ground
lease income (21.2% and 11.5%), volume based rental income (15.9% and 9.7%)
and sale of
real estate and other income (17.4% and 53.1%) for 1995 and 1994,
respectively. The 1995 decrease is due primarily to a $2.1 million
decrease in the sale of real estate and the inclusion in the 1994 revenues
of the reversal of a $1.5 million loss provision established in fiscal 1992
in connection with a judgment against a subsidiary of the Company.
Real Estate Expenses
Real estate expenses for 1995 of $2.4 million decreased by $1.8
million (43.3%) from $4.2 million in 1994. Real estate expenses are
comprised of labor, operating and maintenance (40.9% and 21.7%),
depreciation and amortization (15.2% and 9.9%), taxes other than income
taxes (22.1% and 12.2%), cost of real estate sold (18.0% and 54.2%) and
general and administrative expenses (3.8% and 2.0%) for 1995 and 1994,
respectively. The 1995 decrease in real estate expenses is due primarily
to the $2.1 million decrease in aggregate real estate sales for fiscal
1995. Additionally, the percentage swings in year to year comparisons is
due primarily to the $1.9 million decrease in the cost of real estate sold.
21
Art Operations
Canal has its art inventory appraised by independent appraisers
annually. The 1995 appraisal covered approximately 78% 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 22% of the inventory was estimated by management based in part on
operating history and in part on the results of the independent appraisals
done. In fiscal 1995 Canal recognized a $500,000 valuation allowance
against its art inventory, thereby, increasing the total valuation
allowance to $1,000,000 as of October 31, 1995 as compared to $500,000 and
$300,000 at October 31, 1994 and 1993, respectively. These estimates were
based in part on the Company's history of losses sustained on art sales in
the current and previous years.
Art Revenues
Art revenues for 1995 increased $53,000 or 25.5% from $207,000 in
1994. Art revenues are comprised of proceeds from the sale of antiquities
and contemporary art (94.7% and 100.0%) and commission income (primarily
from the Salander-O'Reilly agreement) on sale of art owned by third parties
(5.3% and 0.0%) for 1995 and 1994, respectively. The Company's art
inventory was reduced by $0.4 million and $0.3 in fiscal years 1995 and
1994, respectively.
Art Expenses
Art expenses for 1995 of $1.0 million increased by $0.5 million
(103.2%) from $0.5 million in 1994. Art expenses (excluding valuation
reserves) consisted of the cost of art sold (83.6% and 73.3%) and selling,
general and administrative expenses (16.4% and 26.7%) for 1995 and 1994,
respectively. Included in art expenses is a $0.5 million and a $0.2
million valuation allowance against the Company's art inventory (see Note
10 to the Consolidated Financial Statements) for fiscal years 1995 and
1994, respectively. The 1995 increase is due primarily to a $198,000
(94.6%) increase in the cost of art sold.
22
General and Administrative
General and administrative expenses for 1995 of $1.4 million increased
$0.1 million (9.1%) from $1.3 million in 1994. The major components of
general and administrative expenses are officers salaries (30.5% and
31.0%), rent (5.7% and 7.5%), legal and professional fees (17.1% and
11.9%), insurance (11.4% and 16.4%) and office salaries (10.4% and 9.0%)
for 1995 and
1994, respectively. The percentage decreases in officers salaries,
insurance and office salaries is a result of the aggregate increase in
total general and administrative expenses as a result of the increases in
legal fees. The
percentage increase in legal and professional fees reflect increased legal
expenses associated with the new lawsuit in Fargo, North Dakota (see Note
15 to the Consolidated Financial Statements).
Gain on Sale of Investments
Canal recognized gains on the sale of investments of $333,000 in
fiscal 1994. The proceeds from these sales of approximately $500,000 was
used to reduce the outstanding balance of short-term borrowings.
Gain (loss) on Mark-to-Market of Investments
Canal recognized losses of $286,000 and $344,000 on the mark-to-market
of investments in fiscal 1995 and 1994, respectively. The 1995 loss
includes $114,000 to write down the Company s investment in Intelogic
Trace, Inc. to zero.
Interest and Other Income
Interest and other income for 1995 decreased 9.2% to $164,000. These
amounts are comprised primarily of dividend and interest income and to a
lesser extent the proceeds from the sale of non-essential assets.
Interest Expense
Interest expense increased $0.2 million (15.6%) to $1.5 million in
1995. The increase reflects increases in the average interest rates
charged Canal which was offset to a certain extent by reductions in the
average balance of long-term debt outstanding. Interest rates on Canal's
variable rate mortgage notes increased to an average of 11.78% in 1995 as
compared to an average of 9.1% in 1994 and an average of 8.5% in 1993. At
October 31, 1995 Canal had reduced the outstanding face value of these
notes from the original $20.0 million to $7.6 million.
23
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 six of the last eight years, has a working capital
deficit at October 31, 1996 of approximately $1.4 million, is involved in
various litigations and on December 31, 1996 defaulted on its obligation to
repay a $500,000 note. A reserve has been provided in the amount of
$450,000 associated with the litigation in Minnesota. The financial
statements do not include any adjustments that might result from the
resolution of these uncertainties (See Notes 1, 7, 16 and 20). 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 May 22, 1985, Canal completed the sale of $20 million face value of
Variable Rate Mortgage Notes, due May 15, 1993. Canal has extended these
notes to May 15, 1998 under essentially the same terms and conditions. The
notes carry interest at the highest of four variable rates, determined on a
quarterly basis. The new agreement, 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 two, three and four percent per annum for the fiscal years
commencing May 15, 1995, 1996 and 1997, respectively. In consideration for
the new agreement, Canal agreed to pay a fee to the noteholders of 2% of
the principal amount outstanding as of May 15, 1995.
On September 20, 1995, the Company issued $1,032,000 of variable rate
mortgage notes due September 15, 1998, the proceeds of which were used to
repay in full the Company s secured credit line and a $650,000 note the
Company issued in 1993. The purchasers of these notes included an
investment partnership controlled by the Company s Chairman and the
Company s Chief Executive Officer and members of his family. The notes
issued have essentially the same terms and conditions as the notes
discussed above. 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
24
additional interest (to be paid at maturity) of two, three and four percent
per annum for the fiscal years commencing September 15, 1995, 1996 and
1997, respectively.
Cash and cash equivalents of $11,000 at October 31, 1996 decreased
$104,000 or 90.7% from $115,000 at October 31, 1995. Net cash used by
operations in fiscal 1996 was $0.8 million. Substantially all of the 1996
net proceeds from the sale of real estate of $5.2 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 1996 Canal reduced its variable rate mortgage notes by $3.7
million and other long-term debt by $0.2 million for a net 1996 debt
reduction of $3.9 million.
At October 31, 1996 the Company's current liabilities exceeded current
assets by $1.4 million, an increase of $0.1 million from 1995. The 1996
increase is due primarily to an increase in the current portion of long-
term debt. The only required principal repayments under Canal's debt
agreements for fiscal 1997 will be from the proceeds of the sale of certain
assets (if any), the $0.5 million note due December 31, 1996 (See Notes 7
and 20) and approximately $0.1 million on various fixed mortgages.
As discussed more fully in Note 3, the Company leases 139 acres of
land (at five locations) to a stockyard operator. This lease represents
approximately 25% of the Company's annual revenues. The lessee under the
Lease is currently experiencing financial difficulties related primarily to
a cattle feeding and financing business the lessee entered into after
purchasing Canal s stockyard operations. While the payments under the
Lease are current, the lessee is in default under the terms of certain
other leases it has with the Company for office space at various locations.
The cross default provisions of these leases puts the lessee in technical
default of the Lease. However, the Company is working with the lessee and
expects all arrears due to the Company to be paid in the coming months.
The Company has explored the availability of alternative tenants for the
stockyard properties covered by the Lease and is confident that should the
need arise there are adequate alternatives available to the Company which
will protect a substantial portion of the revenue stream from the Lease.
Management believes that the 1997 cash flow from operations combined
with the proceeds from the sales of real estate and art will be sufficient
to support its ongoing operations.
25
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.
26
PART III
ITEM 10. Directors and Executive Officers of the Registrant
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 57, 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; has been General Partner of
Plaza Securities Company, an investment partnership, since July 1979;
General Partner of Asco Partners, a general partner of Arbitrage Securities
Company, a broker/dealer, since July 1984; and General Partner of Arbitrage
Securities Company, from January 1977 until June 1984; President of A.B.
Edelman Management Company, Inc. (The General Partner of Edelman Value
Partners, Inc.) for more than five years. Mr. Edelman is a Director,
Chairman of the Board, and Chairman of the Executive Committee of Datapoint
Corporation ("Datapoint"). Mr. Edelman was a Director, Chairman of the
Board and Chairman of the Executive Committee of Intelogic Trace, Inc.
("Intelogic") until December 8, 1994.
Michael E. Schultz, age 60, has been President and Chief Executive
Officer since September 1991 and a Director since 1985; and has been a
partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz until December
31, 1994. He was Executive Vice President-Special Projects for Intelogic
since November 1992 and a Director since July, 1985 until December 8, 1994.
Gerald N. Agranoff, age 50, has been a Director since 1984, was
General Partner, Asco Partners (the General Partner of Arbitrage Securities
Company ("Arbitrage Securities") from July 1984 through December 1991; a
General Partner of Arbitrage Securities, a broker/dealer, and of Plaza
Securities Company ("Plaza"), an investment partnership for more than five
years; Vice President of A.B. Edelman Management Company, Inc. (the General
Partner of Edelman Value Partners, Inc.) For more than five years; Trustee,
Management Assistance Inc. Liquidating Trust ("Management Assistance
Trust") since February, 1986; General Counsel to Plaza and Arbitrage
Securities for more than five years; Director of Bull Run Corporation since
December 1990; General Counsel of Datapoint Corporation since October, 1994
and a Director since 1991; and was a Director of Intelogic from December,
1991 to December 8, 1994.
27
Reginald Schauder, age 47, 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.
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 1996 the Board of Directors held one meeting, and the Executive
Committee held five meetings, all of which were attended by both Mr.
Edelman and Mr. Schultz.
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 1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and Principal
Position Year Salary
Michael E. Schultz 1996 $ 165,000
President and Chief 1995 $ 162,500
Executive Officer 1994 $ 150,000
Asher B. Edelman 1996 $ 165,000
Chairman of the Board 1995 $ 162,500
and Executive Committee 1994 $ 150,000
Reginald Schauder 1996 $ 101,200
Vice President, Chief 1995 $ 92,000
Financial Officer 1994 $ 92,000
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 $68,000, $87,000 and $86,000 for fiscal years 1996, 1995
and 1994, respectively.
28
Aggregate Option Exercises in Last
Fiscal Year and Fiscal Year End Option Value
Value of
Unexercised
Number of Securities In-the-Money
Underlying Unexercised Options at
Name Options at Fiscal Year End Fiscal Year End
Michael E. Schultz 255,500* $ 25,000
Asher B. Edelman 20,000* $ -0-
Reginald Schauder 23,600* $ -0-
* All options were exercisable at October 31, 1996.
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.
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, 1996. Mr. Schultz has no benefit under the Retirement Plan.
For further information on the Retirement Plan see Note 9.
29
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.
Options granted under the 1985 Plan are nonqualified stock options and
have an exercise price equal to 100% of fair market value of the shares on
the date of grant. The options may be exercised no earlier than one year
from the date of grant and no later than ten years after the date of grant.
Under the 1985 Plan, options covering 22,000 shares are automatically
granted to each new director upon the effective date of his election to
office and options covering 5,500 shares are automatically granted to each
new member of the Executive Committee upon the effective date of his
appointment to office. In addition, the 1985 Plan was amended on December
18, 1991 to provide an automatic grant of options covering 25,000 shares to
each current and new director who is not an employee of the Company
including Mr. Agranoff. The 1985 Plan is administered by the Board of
Directors of the Company.
During the 1996 fiscal year, no options under the 1985 plan were
2granted and no options previously granted were exercised. At October 31,
1996, 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.
30
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. Canal had
an agreement with an investment advisor who is affiliated with a director
who is also a shareholder and the Chairman of Canal. The investment
advisor had discretionary authority over the securities trading and
investment activities of Canal. This agreement was canceled by mutual
consent of the parties on October 31, 1996.
Although Canal no longer engages in securities trading activities,
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, 1992, such companies
included Datapoint and Intelogic. 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.
31
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, 1997 were:
SECURITIES BENEFICIALLY OWNED
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
Asher B. Edelman 1,685,269 (c) 38.77
Michael E. Schultz 312,135 (c) 6.81
William G. Walters 1,234,440 (b) 23.17
(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 and an option for
1,000,000 shares held in Mr. Walters retirement plan. The shares in Mr.
Walters retirement plan are issuable upon conversion of a $150,000
(principal amount) 7% Convertible Note due December 31, 1996. The Company
did not repay this note on December 31, 1996 and therefore, deems the
convertible note outstanding at January 15, 1997 (see Note 20). 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.
32
SECURITIES OWNED BY MANAGEMENT
The following table sets forth certain information as of January 15,
1997, 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)
Asher B. Edelman 1,685,269 (c)(d) 38.77
Reginald Schauder 23,600 (e)
Michael E. Schultz 312,135 (f)(g) 6.81
All Directors and Officers
as a group (4 persons) 2,046,004 43.99
(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 20,000 shares
subject to options granted to Mr. Edelman which are presently exercisable,
8,400 shares owned by Aile Blanche, Inc., of which Mr. Edelman is the sole
stockholder, 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, 1,017,220 shares owned by A.B. Edelman
Limited Partnership ("Edelman Limited Partnership"), of which Mr. Edelman
is the sole general partner, 271,250 shares of common stock owned by the
Edelman
33
Value Fund Ltd. (the Fund ) of which Mr. Edelman is the investment manager
and 31,300 shares held in Mr. Edelman's retirement plan. 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.
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. Mr. Edelman as the
investment manager of the Fund directs the voting and disposition of the
Fund s securities. Additionally, the number reported herein for Mr.
Edelman includes 214,150 shares of common stock owned by Mr. Edelman's
wife, 2,900 shares held in his wife's retirement plan and 188,650 shares of
common stock held in three Uniform Gifts to Minors Act accounts for the
benefit of Mr. Edelman's children of which Mr. Edelman is the custodian.
(d) The number reported herein for Mr. Edelman excludes 26,620 shares
of common stock held by Canal Capital Corporation Retirement Plan of which
Mr. Edelman serves as a trustee, 37,865 shares of common stock owned by Mr.
Edelman's former wife, 140,110 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 and 590,186 shares of
common stock held in three trusts for the benefit of Mr. Edelman's
children, as to which Mr. Edelman expressly disclaims beneficial ownership.
(e) Includes 23,500 shares subject to options which are presently
exercisable.
(f) Includes 255,500 shares subject to option 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 and 590,186 shares of common stock
held in three trusts for the benefit of Mr. Edelman's children of which
Mr. Schultz serves as the trustee for each of the trusts.
ITEM 13. Certain Relationships and Related Transactions
See: "Compensation Committee Interlocks and Insider
Participation"
34
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, 1996 the Company filed
no reports on Form 8-K.
35
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
24th day of January, 1997.
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 24, 1997
Vice President-Finance
Secretary and Treasurer
/s/ Reginald Schauder (Principal Financial and
Reginald Schauder Accounting Officer) January 24, 1997
/s/ Asher B. Edelman Chairman of the Board
Asher B. Edelman and Director January 24, 1997
/s/ Gerald N. Agranoff
Gerald N. Agranoff Director January 24, 1997
36
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 Auditors Report............................. F-2
Consolidated Balance Sheets October 31, 1996 and 1995... F-3
Consolidated Statements of Operations for the years
ended October 31, 1996, 1995 and 1994................ F-5
Consolidated Statements of Cash Flows for the
years ended October 31, 1996, 1995 and 1994.......... F-7
Consolidated Statements of Changes in Stockholders'
Equity for the years ended October 31, 1996, 1995
and 1994............................................. F-8
Notes to Consolidated Financial Statements.............. F-9
F-1
INDEPENDENT AUDITORS 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, 1996 and 1995 and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
three year period ended October 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Canal Capital
Corporation and Subsidiaries as of October 31, 1996 and 1995, and the
results of their operations and cash flows for each of the years in the
three year period ended October 31, 1996, 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, 7,
16 and 20 to the financial statements, the Company has suffered recurring
losses from operations in six of the last eight years, has a working
capital deficiency at October 31, 1996, is involved in various litigations,
and on December 31, 1996 defaulted on its obligation to repay a $500,000
note. 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, 7, 16 and 20.
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.
New York, N.Y. TODMAN & CO., CPAS, P.C.
January 2 , 1997 Certified Public Accountants (N.Y.)
F-2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
1996 1995
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 10,632 $114,750
RESTRICTED CASH AND CASH EQUIVALENTS 470,000 0
NOTES AND ACCOUNTS RECEIVABLE, NET 295,202 241,778
ART INVENTORY (NET OF A VALUATION
ALLOWANCE OF $ 500,000 AT
OCTOBER 31, 1996 AND 1995,
RESPECTIVELY) 500,000 500,000
INVESTMENTS 535,558 480,091
PREPAID EXPENSES 203,238 106,600
TOTAL CURRENT ASSETS 2,014,630 1,443,219
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 5,753,088
AND $ 6,074,482 FOR 1996 AND 1995,
RESPECTIVELY 7,105,534 8,384,975
ART INVENTORY NON-CURRENT (NET OF
VALUATION ALLOWANCE OF $ 2,000,000
AND $ 500,000) AT OCTOBER 31, 1996 AND
1995, RESPECTIVELY 3,089,088 4,900,595
OTHER ASSETS:
PROPERTY HELD FOR
DEVELOPMENT OR RESALE 2,938,905 3,000,060
DEFERRED LEASING AND FINANCING COSTS 92,919 147,913
OTHER LONG-TERM NOTES RECEIVABLE 0 83,104
DEPOSITS AND OTHER 248,132 243,546
3,279,956 3,474,623
$15,489,208 $18,203,412
============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1996 AND 1995
1996 1995
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT-
RELATED PARTY $500,000 $0
CURRENT PORTION OF LONG-TERM DEBT 64,000 51,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,984,692 2,218,467
ACCRUED LITIGATION SETTLEMENT 850,000 400,000
INCOME TAXES PAYABLE 27,877 40,881
TOTAL CURRENT LIABILITIES 3,426,569 2,710,348
LONG-TERM DEBT, LESS CURRENT PORTION 6,130,769 9,846,967
LONG-TERM DEBT, RELATED PARTY 849,000 1,532,275
6,979,769 11,379,242
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 2,703,299 AND
2,358,542 SHARES ISSUED AND OUTSTANDING
AND AGGREGATE LIQUIDATION PREFERENCE OF
$ 27,032,990 AND $ 23,585,420 AT OCTOBER 31,
1996 AND 1995, RESPECTIVELY 27,033 23,585
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AT OCTOBER 31, 1996
AND 1995, RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 26,636,939 26,468,008
ACCUMULATED DEFICIT (9,010,999) (9,690,693)
LESS-VALUATION RESERVE (1,619,696) (1,736,671)
LESS-986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
5,082,870 4,113,822
$15,489,208 $18,203,412
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $5,170,872 $770,012 $2,861,194
RENTAL INCOME 2,072,593 2,090,068 2,125,030
GROUND LEASE INCOME 936,000 972,500 946,772
VOLUME BASED RENTAL INCOME 657,184 729,335 798,489
LITIGATION SETTLEMENT REVERSAL 0 0 1,500,000
OTHER INCOME 17,091 31,892 21,457
8,853,740 4,593,807 8,252,942
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 1,386,029 431,736 2,292,258
LABOR, OPERATING AND
MAINTENANCE 964,918 980,626 918,256
DEPRECIATION AND AMORTIZATION 359,263 364,594 418,227
TAXES OTHER THAN INCOME TAXES 360,000 530,202 517,200
PROVISION FOR
LITIGATION SETTLEMENT 434,918 0 0
GENERAL AND ADMINISTRATIVE 107,239 90,888 85,920
3,612,367 2,398,046 4,231,861
INCOME FROM REAL ESTATE
OPERATIONS 5,241,373 2,195,761 4,021,081
ART OPERATIONS:
ART REVENUES:
SALES 195,400 246,550 207,350
OTHER REVENUES 0 13,740 0
195,400 260,290 207,350
ART EXPENSES:
COST OF ART SOLD 326,399 407,557 209,461
VALUATION RESERVE 1,500,000 500,000 200,000
SELLING, GENERAL
AND ADMINISTRATIVE 49,010 79,803 76,458
1,875,409 987,360 485,919
LOSS FROM ART OPERATIONS (1,680,009) (727,070) (278,569)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
Continued ...
1996 1995 1994
GENERAL AND
ADMINISTRATIVE EXPENSE (1,348,179) (1,380,415) (1,265,793)
INCOME FROM OPERATIONS 2,213,185 88,276 2,476,719
OTHER INCOME (EXPENSE):
GAIN ON SALE OF INVESTMENTS 0 0 333,278
GAIN (LOSS) ON MARK-
TO-MARKET INVESTMENTS 55,467 (285,871) (343,529)
INTEREST & OTHER INCOME 90,352 164,209 180,791
INTEREST EXPENSE (1,494,271) (1,433,828) (1,111,928)
(23,000) (51,000) (173,000)
(1,371,452) (1,606,490) (1,114,388)
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES 841,733 (1,518,214) (1,362,331)
PROVISION FOR INCOME TAXES 0 0 0
NET INCOME (LOSS) $841,733 $(1,518,214) ($1,362,331)
EARNINGS (LOSS) PER COMMON SHARE:
- PRIMARY $0.16 $(0.40) $0.23
- FULLY DILUTED $0.13 $(0.40) $0.20
WEIGHTED AVERAGE NUMBER OF SHARES:
- PRIMARY 4,326,929 4,351,680 4,475,566
- FULLY DILUTED 5,326,929 5,351,680 5,169,896
SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $841,733 $(1,518,214) $1,362,331
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES:
PROVISION FOR LITIGATION
SETTLEMENT 434,918 0 (1,500,000)
DEPRECIATION AND AMORTIZATION 434,532 412,505 430,248
GAIN ON SALES OF REAL ESTATE (3,784,843) (338,276) (568,936)
GAIN FROM SALE INVESTMENTS 0 0 (333,278)
VALUATION RESERVE - ART
INVENTORY 1,500,000 500,000 200,000
(GAIN)LOSS ON MARK-TO-MARKET
INVESTMENTS (55,467) 285,871 343,529
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS
RECEIVABLES, NET (53,424) 351,045 (232,832)
ART INVENTORY, NET 311,507 343,537 329,342
PREPAID EXPENSES AND OTHER, NET (622,068) (540,079) (48,725)
PAYABLES AND ACCRUED EXPENSES, NET 203,221 690,964 (1,413,823)
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (789,891) 187,353 (1,432,144)
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES
OF REAL ESTATE 5,170,872 770,012 2,861,194
PROCEEDS FROM SALES OF INVESTMENTS 0 0 489,928
CAPITAL EXPENDITURES (128,626) (91,740) (97,440)
NET CASH PROVIDED BY
INVESTING ACTIVITIES 5,042,246 678,272 3,253,682
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 0 1,032,275 500,000
REPAYMENT OF SHORT-TERM BORROWINGS 0 (787,305) (1,729,000)
REPAYMENT OF LONG-TERM
DEBT OBLIGATIONS (3,886,473) (1,029,440) (582,693)
NET CASH USED BY
FINANCING ACTIVITIES (3,886,473) (784,470) (1,811,693)
(INCREASE) IN RESTRICTED CASH AND
CASH EQUIVALENTS (470,000) 0 0
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (104,118) 81,155 9,845
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 114,750 33,595 23,750
CASH AND CASH EQUIVALENTS
AT END OF YEAR $10,632 $114,750 $33,595
============ ============ ============
NOTE: IN FISCAL 1996, 1995 AND 1994,$ 162,039, $ 193,148 AND $ 313,556,
RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE
ISSUANCE OF 344,757, 303,348 AND 271,830 , RESPECTIVELY, OF SHARES OF
PREFERRED STOCK.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1996, 1995, AND 1994
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, NOVEMBER 1, 1993 5,313,794 $53,138 1,783,364 $17,834
NET INCOME 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 271,830 2,718
RESERVE 0 0 0 0
BALANCE, OCTOBER 31, 1994 5,313,794 $53,138 2,055,194 $20,552
NET INCOME 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 303,348 3,033
RESERVE 0 0 0 0
BALANCE, OCTOBER 31, 1995 5,313,794 $53,138 2,358,542 $23,585
NET LOSS 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 344,757 3,448
RESERVE 0 0 0 0
BALANCE, OCTOBER 31, 1996 5,313,794 $53,138 2,703,299 $27,033
ADDITIONAL TREASURY
PAID-IN ACCUMULATED VALUATION STOCK,
CAPITAL DEFICIT RESERVE AT COST
BALANCE, NOV 1, 1993 $25,930,799 ($9,028,106) ($1,015,535)($11,003,545)
NET INCOME 0 1,362,331 0 0
PREFERRED STOCK DIV. 331,547 (313,556) 0 0
RESERVE 0 0 (393,208) 0
BALANCE, OCT 31,1994 $26,262,346 ($7,979,331) ($1,408,743)($11,003,545)
NET INCOME 0 (1,518,214) 0 0
PREFERRED STOCK DIV. 205,662 (193,148) 0 0
RESERVE 0 0 (327,928) 0
BALANCE, OCT 31,1995 $26,468,008 ($9,690,693) ($1,736,671)($11,003,545)
NET INCOME 0 841,733 0 0
PREFERRED STOCK DIV. 168,931 (162,039) 0 0
RESERVE 0 0 116,975 0
BALANCE, OCT 31,1996 $26,636,939 ($9,010,999) ($1,619,696)($11,003,545)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Canal Capital Corporation ("Canal"), incorporated in the state of
Delaware in 1964, commenced business operations through a predecessor in
1936. Canal was a wholly-owned subsidiary of Canal-Randolph Corporation
until June 1, 1984, when Canal-Randolph Corporation distributed to its
stockholders all of the outstanding shares of Canal's common stock, under a
plan of complete liquidation.
Canal is engaged in two distinct businesses - the management of its
agribusiness related real estate properties located in the midwest and art
operations, consisting mainly of the acquisition of art for resale.
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses
from operations in six of the last eight years, has a working capital
deficit at October 31, 1996 of approximately $1.4 million, is involved in
various litigations and on December 31, 1996 defaulted on its obligation to
repay a $500,000 note. A reserve has been provided in the amount of
$450,000 associated with the litigation in Minnesota. The financial
statements do not include any adjustments that might result from the
resolution of these uncertainties (See Notes 1, 7, 16 and 20). 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.
In the past three years, Canal has made significant cuts in
expenditures, primarily in salaries and other overhead expenses and plans
to continue to reduce the level of its art inventories to enhance current
cash flows. Management believes that 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 cost
cutting program in itself will be sufficient to fund operating cash
requirements.
F-9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Principles of Consolidation -- The consolidated financial
statements include the accounts of Canal Capital Corporation ("Canal") and
its subsidiaries ( the Company ). Investments in which ownership interest
range from 20% to 50% or less owned joint ventures are accounted for under
the equity method. These joint ventures are not, in the aggregate,
material in relation to the financial position or results of operations of
Canal. The carrying amount of such investments was $150,000 at October 31,
1996 and 1995, and is included in other assets. The operating results of
joint ventures accounted for on the equity method, for fiscal year 1996,
1995 and 1994 were not material to financial statement presentation and
were therefore included in other income from real estate operations. All
significant intercompany balances and transactions have been eliminated in
consolidation.
B) Marketable Securities -- Due to Canal's desire to further expand
its other business lines and to reduce its level of debt outstanding, these
activities were severely curtailed during fiscal 1991. There were no such
activities in fiscal 1992 through 1996. Canal's program of trading and
investing in listed marketable securities, was conducted through a wholly-
owned subsidiary and were reflected at market value in its financial
statements. Realized and unrealized gains and losses on Canal's current
portfolio were recognized in operating results. Realized gains and losses
on sales of securities were determined on the first-in, first out method.
Investments -- Canal has an investment in a company in which it,
together with other affiliated entities, comprise a reporting group for
regulatory purposes. This investment is carried at market value and the
unrealized gain or loss is recognized in operating results. This holding
does not represent more than a 4% ownership by Canal in the respective
entity.
C) Properties and Related Depreciation -- Properties are stated at
cost less accumulated depreciation. Depreciation is provided on the
straight-line method over the estimated useful lives of the properties.
Such lives are estimated from 35 to 40 years for buildings and from 5 to 20
years for improvements and equipment.
F-10
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Property held for Development or Resale -- Property held for
development or resale consist of approximately 321 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.
D) Expenditures for maintenance and repairs are charged to operations
as incurred. Significant renewals and betterments are capitalized. When
properties are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any gain or loss
is reflected in current income.
E) Art Inventory - Inventory of art is valued at the lower of cost,
including direct acquisition and restoration expenses, or net realizable
value on a specific identification basis. Net realizable value is
determined in part by independent appraisal. Independent appraisals
covered approximately 66% and 78% of the inventory value at October 31,
1996 and 1995, respectively. The remaining 34% and 22% at October 31, 1996
and 1995, 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 10). Antiquities and contemporary art represented 64%
($2,311,825) and 36% ($1,277,263) and 54% ($2,923,332) and 46% ($2,477,263)
of total art inventory at October 31, 1996 and 1995, respectively.
Substantially all of the contemporary art inventory held for resale is
comprised of the work of Jules Olitski.
F-11
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
F) Deferred Leasing and Financing Costs -- Costs incurred in
obtaining new leases and long-term financing are deferred and amortized
over the terms of the related leases or debt agreements, as applicable.
G) Revenue Recognition -- Revenues from art sales are recognized
using the specific identification method, when the piece is shipped to the
purchaser. Art owned by Canal which is on consignment, joint venture, or
being examined in contemplation of sale is not removed from inventory and
not recorded as a sale until notice of sale or acceptance has been
received. Lease and rental revenues are recognized ratably over the period
covered. All real estate leases are accounted for as operating leases.
Revenues from real estate sales are recognized generally when title to the
property passes. Revenues from the sale of investments, if any, are
recognized, on a specific identification method, on a trade date basis and
unrealized gains or losses on Canal's investments are recognized in the
period of occurrence.
H) Income Taxes -- Canal and its subsidiaries file a consolidated
Federal income tax return. Deferred income taxes, if any, are provided for
temporary differences between financial reporting and taxable basis of
assets and liabilities.
I) 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 $38,000, $47,000 and $55,000 and interest payments
of $1,297,000, $1,485,000 and $1,285,000 in 1996, 1995 and 1994,
respectively.
J) Reclassification -- Certain prior year amounts have been
reclassified to conform to the current year's presentation.
F-12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
K) 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.
3. STOCKYARD OPERATIONS SALE
On October 31, 1989, Canal sold most of its stockyards assets to a
group formed by a former Executive Vice President and Director of the
Company. Not included in the sale was certain land and some facilities
previously used by the stockyards operations. Canal entered into a master
lease (the "Lease") with the purchaser covering this land and facilities
at five locations. The lease is a ten year lease, renewable at the
purchaser s option for an additional ten years, with annual rentals of
$750,000 per year for the first year escalating to $1 million per year
for the fourth through the tenth years and $1 million adjusted for CPI
increases thereafter. Canal could be entitled to receive additional
rent if the stockyards livestock value or cash flow (as defined) exceeds
certain levels. In addition, Canal retained the right to receive income
from certain volume based rental income agreements with various meat
packing companies located near the stockyards. The income from the ground
lease is included in Canal's operating results as Real Estate operations.
The lessee under the Lease is currently experiencing financial
difficulties related primarily to a cattle feeding and financing business
the lessee entered into after purchasing Canal s stockyard operations.
While the payments under the Lease are current, the lessee is in default
under the terms of certain other leases it has with the Company for office
space at various locations. The cross default provisions of these leases
puts the lessee in technical default of the Lease. However, the Company is
working with the lessee and expects all amounts due to the Company to be
paid in the
F-13
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
coming months. The Company has explored the availability of alternative
tenants for the stockyards covered by the Lease and is confident that
should the need arise there are adequate alternatives available to the
Company which will protect a substantial portion of the revenue stream from
the Lease.
Revenues from the volume based rental agreements for the three years
ended October 31, 1996 were:
(Thousands of Dollars) 1996 1995 1994
Sioux City, Iowa (1) $ 537 $ 629 $ 591
Fargo, North Dakota (2) 120 100 207
$ 657 $ 729 $ 798
(1) On September 20, 1996 Canal entered into a Mutual Release and
Settlement Agreement with the Sioux City, Iowa meat packer which
terminated the lease. Accordingly, the 1996 revenues are for
eleven months only and there will be no such revenues in fiscal
1997.
(2) Amount reflected for 1994 includes approximately $108,000 of
rents due from fiscal 1993 which were collected in fiscal 1994
as a result of litigation (see Note 15).
4. MARKETABLE SECURITIES
At October 31, 1996 and 1995, Canal held no marketable securities in
its current portfolio. Canal has not traded in marketable securities since
fiscal 1991 (see Note 5).
Commencing January 1, 1986, Canal paid investment advisory fees to a
securities broker-dealer which has discretionary authority over the
securities trading activities of Canal and which is affiliated with a
director who is also a shareholder and chairman of Canal. This agreement
was canceled by mutual consent of the parties on October 31, 1996.
F-14
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS
At October 31, the investments consisted of the following:
(Thousands of Dollars) 1996 1995
Aggregate market value..................... $ 535 $ 480
Aggregate carrying value................... $ 535 $ 480
Canal has investments in the equity securities of a company in which
other entities affiliated with Canal also have made investments and which
entities together comprise a group for regulatory reporting purposes. It
is important to note that it is the group (as defined) that can exercise
influence over these companies, not Canal. Accordingly, these situations
do not qualify for consolidation as a method of reporting. At October 31,
1996, 100% of the market value of Canal's investments was invested in
equity securities of this company in which such parties held 5% or more of
the outstanding equity securities of the issuer. Certain of Canal's
officers and directors also serve as officers and/or directors of this
company.
Canal recognized an unrealized gain on investments of $55,000 in
fiscal 1996. During fiscal 1995, Canal recognized a loss on write down of
investments of $286,000. Included in this amount was a $114,000 loss to
write down the carrying value of the company s investment in Intelogic
Trace, Inc. to zero reflecting managements estimate of its net realizable
value. Canal recognized a loss on write down of investments of $344,000 in
fiscal 1994.
6. NOTES AND ACCOUNTS RECEIVABLE
Included in notes and accounts receivable at October 31, 1996 and
1995, respectively, were the current portion of notes receivable in the
amount of $25,000 and $60,000 from real estate and other sales. Notes and
accounts receivable is shown net of a provision for doubtful accounts in
the amount of $12,000 and $0 for fiscal 1996 and 1995 respectively.
F-15
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. BORROWINGS
At October 31, 1996, substantially all of Canal's real properties, the
stock of certain subsidiaries, the investments and a substantial portion of
its antiquities inventories are pledged as collateral for the following
obligations:
October 31,
(Thousands of Dollars) 1996 1995
Variable rate mortgage notes
due May 15, 1998 ................................ $ 3,960 $ 7,635
Variable Rate Mortgage Notes
due September 15, 1998 - related party ......... 849 1,032
11% mortgage note; original principal amount
$1,697; due April 1, 2011; payable in monthly
installments (including interest) of $17....... 1,336 1,356
9.5% mortgage note; original principal amount
$472; due November 1, 2012; payable in monthly
installments (including interest) of $4........ 414 416
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........ 485 491
Other Note - related party....................... 500 500
Total ........................................... 7,544 11,430
Less -- current maturities ...................... 564 51
Long-term debt $ 6,980 $ 11,379
F-16
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On May 22, 1985, Canal completed the sale of $20 million face value of
Variable Rate Mortgage Notes, due May 15, 1993. As discussed more fully
below, Canal has extended these notes to May 15, 1998 under essentially the
same terms and conditions. The notes carry interest at the highest of four
variable rates, determined on a quarterly basis. At October 31, 1996, the
interest rate was 11.75%. This rate remained unchanged at November 15,
1996 and for the next successive 90-day period. The average interest rate
on these notes during 1995 was 11.94%.
The new agreement, among other things, prohibit 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
two, three and four percent per annum for the fiscal years commencing May
15, 1995, 1996 and 1997, respectively. In fiscal 1996, this agreement was
amended to provide for the forgiveness of all additional interest accrued
in the event that the Company meets on a timely basis all its obligations
under the Note, including the payment of all other principal and accrued
interest on or before May 15, 1998. In consideration for the new agreement,
Canal agreed to pay a fee to the noteholders of 2% of the principal amount
outstanding as of May 15, 1995.
On September 20, 1995, the Company issued $1,032,000 of variable rate
mortgage notes due September 15, 1998 to a group which includes an
investment partnership controlled by the Company s Chairman and the
Company s Chief Executive Officer and members of his family. The notes
issued have essentially the same terms and conditions as the notes
discussed above. These notes, among other things, prohibit 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 two, three and four percent per annum for the fiscal years
commencing September 15, 1995, 1996 and 1997, respectively.
In March 1994 the Company borrowed $500,000 from an individual. The
Company executed a $350,000 note due December 31, 1996 and a $150,000
convertible note also due December 31, 1996. The $150,000 note is
convertible at the holder s option into one million (1,000,000) shares of
the
F-17
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Company's common stock (see Note 20). The notes pay quarterly interest at
the rate of 7% per annum and are secured by 125,000 shares of Datapoint
Corporation common stock owned by the Company. The proceeds from this loan
were used by the Company to meet its obligations under its then secured
credit line.
The scheduled maturities and sinking fund requirements of long-term
debt during the next five years are as follows (thousands of dollars):
1997-$564; 1998-$4,873; 1999-$64;
2000-$64 2001-$64 Thereafter-$1,915
8. INCOME TAXES
Statement of Financial Accounting Standard No. 109 - Accounting for
income taxes, which establishes accounting and reporting standards for the
effects of income taxes that result from an enterprise's activities during
the current year and preceding years became effective for the Company for
its fiscal year ended October 31, 1994. Its implementation had no material
effect on the financial statements of the Company. Under FAS 109, the
utilization of the net operating loss carryforwards are not presented as
extraordinary items. For the years ended October 31, 1996 and 1994
approximately $250,000 and $760,000, respectively, of net operating loss
carryforwards have been utilized to eliminate the Company s taxable income.
In addition, the Company has carryforward losses which are available
to offset future federal and state taxable income. For federal income tax
reporting purposes, such losses expire as follows:
Year Ending Amount
2006 $3,633,545
2008 1,750,455
2010 1,969,952
$7,353,952
Deferred income tax assets as of October 31, 1996, 1995 and 1994, due
primarily to net operating losses, have been reduced to zero by valuation
reserves of approximately $2,700,000, $2,600,000 and $1,900,000,
respectively due to uncertainties concerning their realization.
F-18
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. 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 $164,000 for fiscal 1996 and has made contributions of
approximately $160,000 for fiscal 1995 and $150,000 for fiscal 1994.
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.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated balance sheets at October 31, 1996
and 1995.
Plan Year
(Thousands of Dollars) 1996 1995
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $1,451 and $1,521 in
1996 and 1995, respectively ............. $ 1,452 $ 1,526
Additional benefit due to assumed future
compensation levels ......................... 21 14
Projected benefit obligation (1) .............. 1,473 1,540
Plan assets at fair value ..................... 884 729
Projected benefit obligation in excess
of plan assets .............................. 588 811
Unrecognized net asset ........................ 152 177
Unrecognized net loss ......................... (1,792) (1,927)
Valuation reserve to recognize accrued pension
costs in the consolidated balance sheets .... 1,620 1,736
Accrued pension cost included among accrued
expenses in the consolidated balance sheets.. $ 568 $ 797
(1) The vast majority of the projected benefit obligation is related
to the Company's former stockyard employees.
F-19
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Net periodic pension cost for plan years ended October 31, 1996, 1995
and 1994 included the following components:
Plan Year
(Thousands of Dollars) 1996 1995 1994
Service costs - benefits earned during
the period ............................ $ 8 $ 6 $ 5
Interest cost on projected benefit
obligation ............................ 104 114 109
(Return) loss on assets .............. (95) 34 374
Net amortization and deferral ........... 35 (121) (465)
Net period pension cost ................. $ 52 $ 33 $ 23
Assumptions used in computing the 1996, 1995 and 1994 pension cost
were:
1996 1995 1994
Discount rate ........................... 7.75% 7.25% 8.50%
Rate of increase in compensation
level ................................. 6.25% 5.75% 7.00%
Expected long-term rate of return
on assets ............................. 10.00% 10.00% 10.00%
10. 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
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. 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 64% ($2,311,825) and 36% ($1,277,263) and
54% ($2,923,332) and 46% ($2,477,263) of total art inventory at October 31,
1996 and 1995, respectively. Substantially all of the contemporary art
inventory held for resale is comprised of the work of Jules Olitski.
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 s art dealing operations
are carried on through various consignment agreements relating to its
antiquities and contemporary art inventories.
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 1996 appraisal covered approximately 66% 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 34% of the inventory was estimated by management based in part on
operating history and in part on the results of the independent appraisals
done. In fiscal 1996 Canal recognized a $1,500,000 valuation allowance
against its art inventory, thereby, increasing the total valuation
allowance to $2,500,000 as of October 31, 1996 as compared to $1,000,000
and $500,000 at October 31, 1995 and 1994, respectively. These estimates
were based in part on the Company's history of losses sustained on art
sales in the current and previous years.
F-21
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The nature of art makes it difficult to determine a replacement value.
The most compelling evidence of a value in most cases is an independent
appraisal. The price at which pieces are consigned is usually in line with
appraisals and above the cost of the piece. The amount classified as
current represents management's best estimate of the amount of inventory
that will be sold in this market. Management believes that the provision
discussed above has effectively reduced inventory to its estimated net
realizable value.
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 1996. Because of the available
alternatives the Company does not anticipate any extraordinary losses
associated with the art inventory in fiscal 1997.
Canal's art operations have generated operating losses of $1.7
million, $0.7 million and $0.3 million on revenues of $0.2 million, $0.3
million and $0.2 million for the years ended October 31, 1996, 1995 and
1994, respectively. Art sales have resulted primarily through activities
in conjunction with sales of antiquities. Canal's management believes that
through its consignment agreements as well as other potential distribution
outlets Canal will continue to deal in antiquities and contemporary art.
The Company had $1,268,000 and $1,600,000 of art inventory on
consignment with third party dealers at October 31, 1996 and 1995,
respectively.
F-22
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ART INVENTORY - The Company classified its art inventory as follows:
(In 000's) Current Portion Non-Current Portion Total
1996 1995 1996 1995 1996 1995
Antiquities $ 900 $ 900 $ 2,212 $2,523 $ 3,112 $ 3,423
Contemporary 100 100 2,877 2,877 2,977 2,977
Valuation
Allowance (500) (500) (2,000) (500) ( 2,500) (1,000)
Net Value $ 500 $ 500 $ 3,089 $4,900 $ 3,589 $ 5,400
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, 1996, 1995, and 1994
were as follows:
(in 000's) 1996 1995 1994
Antiquities $ 195 $ 246 $ 207
Contemporary 0 14 0
$ 195 $ 260 $ 207
F-23
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. LEASE COMMITMENTS
Canal currently occupies 4,200 square feet of commercial office space
in New York City for its headquarters operation. This space is under a
five year lease expiring December 31, 1998.
The following is a schedule of future minimum payments required under
operating leases that have initial or remaining noncancellable terms in
excess of one year as of October 31, 1996:
Year ended October 31, (Thousands of Dollars)
1997 ........................................ 159
1998 ........................................ 159
1999 ........................................ 26
Minimum payments required ....................... 344
Rental income under subleases ................... 84
Net minimum payments required ................... $ 260
Rent expense under these and other operating leases for the years
ended October 31, 1996, 1995 and 1994 were as follows:
(Thousands of Dollars) 1996 1995 1994
Minimum rentals ................... $ 160 $ 116 $ 116
Less: sublease rentals ........... (39) (40) (33)
$ 121 $ 76 $ 83
F-24
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. STOCK OPTION PLAN
Under Canal's 1984 Employee and 1985 Directors Stock Option Plans,
$550,000 and 264,000 shares, respectively, of Canal's common stock have
been reserved for option grants. The purchase price of shares subject to
each option granted, under the Employee and Directors Plans, will not be
less than 85% and 100%, respectively, of their fair market value at the
date of grant. At October 31, 1996 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, 1996, there were
327,000 exercisable options outstanding under these plans.
Transactions under these plans are summarized as follows:
Shares Option Price Range
Balance outstanding October 31, 1994.... 399,600 $0.013-$8.625
Options granted ........................ 0 - -
Options expired ........................ (72,600) $4.890-$6.705
Balance outstanding October 31, 1995.... 327,000 $0.013-$8.625
Options granted 0 - -
Options expired 0 - -
Balance outstanding October 31, 1996.... 327,000 $0.013-$8.625
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, 1996, 1995 and 1994.
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.
F-25
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 intends to adopt the disclosure requirements for this
statement effective for the year ending October 31, 1996, if material,
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
year ended October 31, 1996 would have been deminimus.
13. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID
Primary earnings (loss) are computed by deducting preferred dividends
from net income (loss) in order to determine net income (loss) attributable
to common stockholders. This amount is then divided by the weighted
average number of common shares outstanding and common stock equivalents
arising from stock options. The weighted average number of common shares
outstanding for primary earnings per share is 4,326,926, 4,351,680 and
4,475,566 shares for each of the years ended October 31, 1996, 1995 and
1994, respectively.
Fully diluted earnings per share are computed by dividing net income
by the weighted average number of common shares outstanding during the year
after giving effect for common stock equivalents arising from stock options
and convertible debt assumed converted to common stock. The weighted
average number of common shares for full dilution is 5,326,929, 5,351,680
and 5,169,896 shares for each of the years ended October 31, 1996, 1995 and
1994, respectively.
There were no dividends declared on common stock during the years
ended October 31, 1996, 1995 and 1994. Dividends declared on preferred
stock during the years ended October 31, 1996, 1995 and 1994 were $162,039,
$193,148 and $303,556.
F-26
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. PREFERRED STOCK ISSUANCE
On October 15, 1986 Canal exchanged 986,865 shares of its $1.30
Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of
its outstanding common stock. Since the exchange, the Company has issued
an additional 1,716,434 shares in the form of stock dividends for a total
outstanding at October 31, 1996 of 2,703,299. All of the Preferred Stock
has a par value of $0.01 per share and a liquidation preference of $10 per
share. The Preferred Stock is subject to optional redemption, in exchange
for Canal's 13% Subordinated Notes, by Canal, in whole or in part at any
time on or after September 30, 1988 at the redemption price of $10 per
share. Dividends on the Preferred Stock accrue at an annual rate of $1.30
per share and are cumulative. Dividends are payable quarterly in cash or
in Preferred Stock at Canal's option. Payment commenced December 31, 1986.
To date, thirty of the forty quarterly payments have been paid in
additional stock resulting in the issuance of 1,716,434 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 7). The last
cash dividend paid on Canal's preferred stock was in September 1989.
Additionally, the December 31, 1996 preferred stock dividend will be paid
in additional stock.
VOTING RIGHTS - The holders of the Preferred Stock shall not have any
voting rights except as set forth in the following paragraphs.
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 or threatened
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
F-27
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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. FINANCIAL INFORMATION FOR BUSINESS SEGMENTS
As a result of the sale of the Stockyard Operations and curtailment of
the securities trading and investing program, Canal is engaged in two lines
of business: Art operations and real estate.
The following summary presents segment information relating to these
lines of business except for the respective revenues, operating income and
the reconciliation of operating income with pre-tax income which
information is presented on Canal's income statement.
October 31,
(Thousands of Dollars) 1996 1995 1994
Identifiable assets:
Art ............................... $ 3,833 $ 5,408 $ 6,286
Real estate ....................... 10,478 11,630 12,677
Corporate ......................... 1,178 1,165 1,165
$ 15,489 $ 18,203 $ 20,128
(Thousands of Dollars) 1996 1995 1994
Capital expenditures:
Art ............................... $ 0 $ 0 $ 0
Real estate ....................... 125 75 29
Corporate ......................... 4 17 68
$ 129 $ 92 $ 97
Income from real estate operations includes gains (losses) on sales of
real estate of $3.8 million, $0.3 million and $0.6 million in 1996, 1995
and 1994, respectively. Art identifiable assets include approximately $1.3
million and $1.6 million of art inventory in galleries or on consignment
abroad as of October 31, 1996 and 1995, respectively.
F-28
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. 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. In addition, Canal or its
subsidiaries are party to the following litigations:
Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo
This action involves Union Stockyards Company of Fargo ( Union ), a
wholly owned subsidiary of Canal. It is an action which involves claims
which are similar to some of the claims brought by B&H Investment Co.
( B&H ) against Union several years ago which was dismissed in 1994
following a decision by the Minnesota Court of Appeals in favor of Union.
The dispute involves a Lease Agreement relating to certain real estate
owned by Union and leased to Federal Beef Processors, Inc. ( Federal
Beef ). Federal Beef operates a meat packing plant on the leased premises,
and it is a related entity to B&H, which previously operated the packing
plant. By the terms of the Lease Agreement, Federal Beef s obligation to
pay additional rent is suspended during any period that Union fails to
provide adequate yardage service (under the terms of a separate Yardage
Agreement between the parties) that materially affects the business of
Federal Beef.
Federal Beef filed a Complaint on June 2, 1995 in the District Court
for Cass County, North Dakota, for damages claimed to be suffered as a
result of Union s alleged failure to provide adequate maintenance and
cleaning services for the livestock pens used by Federal Beef under the
Yardage Agreement. The damages sought by Federal Beef are in an
unspecified amount consisting of the additional rent paid by Federal Beef
during the time Union allegedly was in breach of the Lease Agreement and
the Yardage Agreement. As of June 1995, Federal Beef alleged it was
entitled to the return of additional rent in excess of $70,000. In
addition, Federal Beef seeks all direct and consequential damages allegedly
suffered by Federal Beef because of the claimed breach, including loss of
profits from animals allegedly damaged by reason of the condition of the
pens. Federal Beef subsequently filed an Amended Complaint in which it has
also sought a determination that it is entitled to exercise an option to
purchase the leased premises under the terms of the Lease Agreement for a
price measured by the unimproved value of the leased premises.
F-29
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Union has filed an Answer and Counterclaim denying the allegations in
the Amended Complaint, seeking a determination that Federal Beef s claims
are frivolous, and asking for an award of Union s reasonable attorneys
fees and costs in connection with the defense of the action. In July 1995,
Union successfully defeated a motion by Federal Beef for an order which
would have allowed Federal Beef to deposit into Court all rent payments due
from Federal Beef to Union pending the outcome of the litigation. As a
result, Federal Beef has continued to make all rent payments due under the
Lease Agreement while reserving its alleged claims against Union.
Management does not believe that the revenues generated by this lease
will be materially affected in resolving this dispute.
John Morrell & Co. v. Canal Capital Corporation
On October 6, 1993, an action was commenced against Canal by John
Morrell & Co. ("Plaintiff") in the District Court for Woodbury County,
State of Iowa. Plaintiff further amended the action on November 30, 1993.
The lawsuit arose out of the alleged breach by Canal, as lessor, of a lease
agreement relating to certain real estate on which Plaintiff operates a
meat packing plant in Sioux City, Iowa. Plaintiff alleged in the suit a
breach of the lease by Canal as a result of Canal's sale of the Sioux City
stockyard operation in 1989 and its failure to renegotiate the rental terms
of the lease. Plaintiff alleged that Canal was obligated as lessor to
provide animals from the Sioux City stockyards to meet plaintiff's needs in
operating the packing plant on the leased property. Plaintiff alleged
that, as a result of Canal's failure to provide sufficient animals to meet
plaintiff's needs, plaintiff was forced to obtain animals from sources
other than the stockyards at an additional cost and was forced to pay
additional rent under the lease agreement. Plaintiff sought relief in the
form of damages in an unspecified amount and a renegotiation of the rental
terms of the lease.
On September 30, 1996 Canal and Morrell entered into a Mutual Release
and Settlement Agreement which terminated the Sioux City lease and
dismissed the lawsuit between the parties. In consideration for the lease
termination Canal received $4.2 million from Morrell. Also, as part of the
settlement, on October 1, 1996 Canal sold the Sioux City property
(previously under lease) to Morrell for $0.3 million.
F-30
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Former Portland Stockyard Property
In December 1988 the Company sold a parcel of real estate in Multnomah
County, Oregon and in connection therewith, agreed to share the costs of
the correction of adverse environmental conditions on such property with
the buyer. Pursuant to the cost sharing agreement, $1.1 million of the
sales price was placed in escrow to secure the Company's performance of its
cost sharing obligations, which were not limited to that amount. Under the
cost sharing agreement, the Company's obligation is to pay 50% of the first
$400,000 and 90% of the next $425,000 of costs and 95% of all costs
thereafter. The Company had objected to the buyer's definition of costs
which require sharing in connection with certain demands of the buyer for
release of funds from escrow and had stopped payment of those funds from
the escrow. This dispute was the subject of an arbitration, which was
recently resolved in favor of the buyer. As a result, those funds were
released from escrow, and the escrow has been substantially depleted. At
October 31, 1993, the Company accrued $400,000 representing management's
estimate of its additional contingent liability in this matter. This
amount is included as a liability in accrued litigation settlement at
October 31, 1996.
On December 19, 1996, Canal entered into a settlement agreement with
the buyer which, among other things, required Canal to issue a promissory
note to the buyer in the principal amount of $325,000, payable over five
years and releases Canal from any further obligations under the cost
sharing agreement and any further remediation obligations. The five year
note accrues interest at prime and requires principal and interest payment
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.
Sioux City, Iowa - Demolition Notice
On October 25, 1994, Canal received a Placard Notice (the "Notice")
from the City of Sioux City, Iowa (the City ) ordering the demolition of
four structures located on Canal's property. The Notice claims that the
structures are dilapidated, unsafe and must be demolished. While exact
costs are not available, Canal estimates demolition costs at $750,000 to
$1,000,000. Canal is currently negotiating with the City for the exchange
of
F-31
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
the four structures covered by the Notice and approximately 16 acres of
land to the City if the City will assume full responsibility for the
required demolition. In the alternative, Canal has filed an appeal of the
Notice with City Inspection Services Manager and is awaiting a hearing
date. If this matter cannot be settled as described above, Canal will
pursue alternative means of challenging this Notice.
Pine Valley Meats, Inc. v. Canal Capital Corporation
On May 5, 1995 an action was commenced against Canal by Pine Valley
Meats, Inc. ( Plaintiff ) in the County Court for Dakota County, State of
Minnesota. The lawsuit arises out of the alleged breach by Canal of a
certain cattle walkway agreement (the walkway agreement ) relating to the
passage of cattle over land owned by Canal in South St. Paul, Minnesota.
Plaintiff contends that the walkway agreement is a permanent easement
thereby requiring Canal to maintain a cattle walkway for its use in
perpetuity. Canal s position is that the walkway agreement is in fact a
license and can be terminated at Canal s discretion. Canal did close the
cattle walkway for several weeks in April 1995.
In June 1995, plaintiff sought and won a temporary injunction
requiring Canal to continue to maintain the cattle walkway for plaintiff s
use until the rights of the parties can be determined at trial. Plaintiff
is seeking a permanent injunction determining that the walkway agreement
creates an easement and unspecified damages for lost profits when the
walkway was closed. On January 5, 1996, the Dakota County Court ruled that
the walkway agreement constituted a license only and denied the plaintiff s
request for a permanent injunction.
On May 30 and 31, 1996, damages in favor of the plaintiff in the
amount of $400,000 (including $50,000 in punitive damages) were awarded in
the County Court of Dakota County, State of Minnesota. Further damages for
costs, disbursements and interest in the amount of approximately $40,000
were awarded to plaintiff on August 16, 1996.
F-32
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Canal filed a Notice of Appeal on October 8, 1996. Additionally, on
October 14, 1996 Canal posted a supersedeas bond with the court in the
agreed upon amount of $470,000 to stay any action on Pine Valley s part to
collect on the judgements. Finally, on October 25, 1996 Canal filed suit
against Pine Valley seeking recovery of unpaid livestock fees owing under
the walkway agreement.
At October 31, 1996 Canal has an accrued litigation settlement in the
amount of $450,000 associated with this case which is reflected as a
current liability.
17. 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.
18. PROPERTY ON OPERATING LEASES
The following schedule provides an analysis of the Company's
investment in property on operating leases by location as of October 31,
1996:
(IN THOUSANDS)
Accumulated
Location Land Improvements Depreciation Value
St. Joseph, MO $ 869 $ 304 $ (167) $ 1,006
West Fargo, ND 3 292 (206) 89
S. St. Paul, MN 675 3,061 (667) 3,069
Sioux City, IA 451 3,005 (2,953) 503
Omaha, NE 1,437 2,384 (1,590) 2,231
Sioux Falls, SD 118 98 (74) 142
Corporate Office 0 161 (102) 59
$ 3,553 $ 9,305 $ (5,759) $ 7,099
F-33
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following is a schedule by years of minimum future rentals on
operating leases as of October 31, 1996: (5)
(IN THOUSANDS)
Volume
Year Ending Rental Ground Based
October 31, Income (1) Lease(2) Income(3) Total
1997 $ 1,700 $ 924 $ 0 $ 2,624
1998 1,800 924 0 2,724
1999 1,900 924 0 2,824
2000 (4) 2,000 0 0 2,000
2001 2,100 0 0 2,100
$ 9,500 $ 2,772 $ 0 $ 12,272
(1) Consists of rental income from Exchange Building (commercial office
space), lease income from vacant land and structures and other rental
income. In December 1996, Canal lost its largest tenant (State of Minne
sota)
in its South St. Paul, Minnesota Exchange Building. This tenant
represented 50% (approximately $250,000) of the rental income from this
building. While Canal s agents are actively pursuing replacement for this
space, it could take an extended period of time to fully relet this space
which, in the interim, will effect Canal s cash flow.
(2) Ground Lease covers approximately 139 acres leased to the purchaser
of Canal's former stockyard operations.
(3) Excludes any estimate of volume based income from the Fargo, ND lease
due to the uncertainty of these future revenues. However, Canal s
volume based income from this lease has averaged $100,000 annually for
the past five years.
(4) The stockyard ground lease has a ten year renewal option (adjusted for
CPI increases) which can be exercised November 1, 1999 on essentially
the same terms that currently exist. Canal anticipates that the option
will be exercised.
(5) All real estate leases are accounted for as operating leases.
F-34
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued a Statement of
Financial Accounting Standards 121 Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of (the Statement )
which, when adopted could have a material impact on the results of
operations and financial position of the Company in the year of adoption.
The application of this Statement, which will be effective for fiscal years
beginning after December 15, 1995, and requires the Company to carry real
estate projects no longer under development, at the lower of cost or fair
value less cost to sell. If the sum of the expected future net cash flow
(undiscounted and without interest charges) is less than the carrying
amount of undeveloped projects, an impairment loss would be recognized.
The Company, consistent with existing generally accepted accounting
principles, currently states the majority of its land and land under
development at the lower of cost or net realizable value. The Company has
not quantified the effect on the financial statements.
Other pronouncements issued by the Financial Accounting Standards
Board with future effective dates are either not applicable or not material
to the consolidated financial statements of the Company.
20. Subsequent Events
On December 31, 1996 the Company defaulted on its obligation to repay
a $500,000 note. Canal is currently negotiating with the noteholder to
extend the term of the note, under substantially the same terms, for a
period of one year. While management believes that an agreement to extend
this note will be executed by the noteholder, there is no assurance that
this will occur. Absent such an agreement, the noteholder could hold the
Company in default and demand immediate payment of the outstanding balance.
In which case, the Company may not have the available cash to meet this
obligation (see Note 7).
In December 1996, the Company lost its largest tenant (State of
Minnesota) in South St. Paul, Minnesota Exchange Building. This tenant
represented 50% (approximately $250,000) of the rental income from the
building. While the Company s agents are actively pursuing replacement
tenants for this space, it could take an extended period of time to fully
relet this space which, in the interim, will effect the Company s cash
flow.
F-35
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
21. 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.
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 13): 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 13): It is not practicable
to estimate the fair value of the related party debt.
October 31,
1996 1995
(Thousands of dollars)
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash, restricted cash
and cash equivalents $ 481 $ 481 $ 115 $ 115
Accrued Litigation 850 850 400 400
Current Portion of Long-
Term Debt - related party 500 (d) - -
Current Portion of Long-
Term Debt 64 64 51 51
Long-Term Debt 6,131 6,131 9,847 9,847
Long-Term Debt - Related
Party 849 (d) 1,532 (d)
F-36
CANAL CAPITAL CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. QUARTERLY INFORMATION (UNAUDITED)
FINANCIAL INFORMATION FOR THE INTERIM PERIODS FISCAL 1996 AND 1995 IS
PRESENTED BELOW:
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT.31,
1996 1996 1996 1996
REVENUES $1,557 $940 $1,051 $5,501
NET INCOME (LOSS) ($4) ($223) ($599) $1,668
NET INCOME (LOSS)
PER COMMON SHARE:
- PRIMARY ($0.01) ($0.06) ($0.15) $0.38
- FULLY DILUTED ($0.01) ($0.06) ($0.15) $0.31
WEIGHTED AVERAGE NUMBER
OF SHARES:
- PRIMARY 4,327 4,327 4,327 4,327
- FULLY DILUTED 5,327 5,327 5,327 5,327
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
1995 1995 1995 1995
REVENUES $1,143 $987 $1,707 $1,017
NET INCOME (LOSS) ($62) ($109) ($136) ($1,211)
NET INCOME (LOSS)
PER COMMON SHARE
- PRIMARY ($0.03) ($0.03) ($0.04) ($0.30)
- FULLY DILUTED ($0.03) ($0.03) ($0.04) ($0.30)
WEIGHTED AVERAGE NUMBER
OF SHARES:
- PRIMARY 4,327 4,327 4,327 4,327
- FULLY DILUTED 5,327 5,327 5,327 5,327
F-37
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).
4(a) Form of Variable Rate Mortgage Note (filed as Exhibit 4(a)
to the Registrant's Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on May 15, 1985
(the "Form S-1") and incorporated herein by reference).
4(b) Form of Indenture, dated as of April 1, 1985, between United
Stockyards Corporation and Manufacturers Hanover Trust
Company, as Trustee (filed as Exhibit 4(b) to the Form S-1
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).
E-1
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
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) Canal-Randolph Corporation ("CRC") Agreement of Lease, dated
August 30, 1978, between CRC and the Registrant filed as
Exhibit 10(a) to the Registrant's Form 10 and incorporated
herein by reference).
10(e) Rent Escalation Letters, dated February 1, 1982, June 21,
1982 and April 4, 1983, from Canal-Randolph Associates to
the Company (filed as Exhibit 10(b) to the Registrant's Form
10 and incorporated herein by reference).
10(f) Lease Agreement, dated March 1, 1984, between Stockyards
Development Corporation and the Company, as a lessor and
Triad Corporation, as lessee (filed as Exhibit 10(c) to the
Registrant's Form 10 and incorporated herein by reference).
10(g) Supplemental Lease Agreement, dated March 1, 1984, between
Stockyards Development Corporation and the Company and Triad
Corporation (filed as Exhibit 10(d) to the Registrant's Form
10 and incorporated herein by reference).
10(h) Lease, dated November 30, 1967, by and between Sioux City
Stock Yards, a division of the Company ("Sioux City Stock
Yards"), and Armour and Company ("Armour") (filed as Exhibit
10(e) to the Registrant's form 10 and incorporated herein by
reference).
10(I) Amendment to Lease, dated as of June 4, 1977, by and between
the Company and Armour (filed as Exhibit 10(f) to the
Registrant's Form 10 and incorporated herein by reference).
E-2
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(j) Lease amendment and Easement Grant, dated as of April 1,
1968, by and between Sioux City Stockyards and Armour (filed
as Exhibit 10(g) to the Registrant's Form 10 and
incorporated herein by reference).
10(k) Assignment and Acceptance with Consent, dated as of July 31,
1980, between Armour and Iowa Meat Processing Company ("Iowa
Meat") (filed as Exhibit 10(h) to the Registrant's Form 10
and incorporated herein by reference).
10(l) Processing Company consent to Assignment and Acceptance,
dated as of August 14, 1980, of the Company (filed as
Exhibit 10(I) to the Registrant's Form 10 and incorporated
herein by reference).
10(m) Agreement, dated April 25, 1964, by and between Sioux City
Stock Yards and Floyd Valley Packing Company ("Floyd
Valley") (filed as Exhibit 10(j) to the Registrant's Form 1
and incorporated herein by reference).
10(n) Supplemental Agreement, dated November 24, 1964, by and
between Sioux City Stock Yards and Floyd Valley (filed as
Exhibit 10(k) to the Registrant's Form 10 and incorporated
herein by reference).
10(o) Letter, dated August 14, 1989, from the Company to John
Morrell & Co. (filed as Exhibit 10(1) to the Registrant's
Form 10 and incorporated herein by reference).
10(p) Agreement, dated as of December 31, 1979, by and between the
Company and Weinstein International Corp. (filed as Exhibit
10(m) to the Registrant's Form 10 and incorporated herein by
reference).
E-3
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(q) Indenture of Lease, dated September 14, 1973, by and between
Indiana Farm Bureau Cooperative Association, Inc. and
Indianapolis Stockyards Corporation (filed as Exhibit 10(n)
to the Registrant's Form 10 and incorporated herein by
reference).
10(r) Indenture, dated July 31, 1936, by and between Plankinton
Packing Company ("Plankinton") and Milwaukee Stock Yards
Company ("Milwaukee Stock Yards") (filed as Exhibit 10(o) to
the Registrant's Form 10 and incorporated herein by
reference).
10(s) Indenture, dated July 31, 1936, by and between Plankinton
and Milwaukee Stock Yards Company (filed as Exhibit 10(p) to
the Registrant's Form 10 and incorporated herein by
reference).
10(t) Agreement, dated June 11, 1964, by and between P&L Company
and the Company (filed as Exhibit 10(g) to the Registrant's
Form 10 and incorporated herein by reference).
10(u) Agreement, dated August 28, 1978, by and between Peck
Enterprises, Inc. and the Company (filed as Exhibit 10(r) to
the Registrant's Form 10 and incorporated by reference).
10(v) Letter, dated July 11, 1980, of Milwaukee Stock Yards (filed
as Exhibit 10(s) to the Registrant's Form 10 and
incorporated herein by reference).
10(w) Mortgage and Indenture of Trust, dated as of November 1,
1972, by and between the City of Sioux City, Iowa and the
Northwestern National City Bank of Minneapolis, as Trustee
(filed as Exhibit 10(t) to the Registrant's Form 10 and
incorporated herein by reference).
E-4
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(x) Lease Agreement, dated as of November 1, 1972, between the
City of Sioux City, Iowa and the Company (filed as Exhibit
10(u) to the Registrant's Form 10 and incorporated herein by
reference).
10(y) Revolving Credit and Security Agreement, dated as of October
29, 1985, between the Company, Drovers First American Bank
of South St. Paul and Marine Midland Bank, N.A. (filed as
Exhibit 10(y) to the Registrant's Form 10 filed January 29,
1986 and incorporated herein by reference).
10(z) Lease Agreement, dated as of March 17, 1985, between the
Company and Atlantic Richfield Company (filed as Exhibit
10(z) to the Registrant's Form 10-K filed January 29, 1986
and incorporated herein by reference).
10(aa) 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).
10(ab) 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(ac) Amendment to Lease, dated as of December 5, 1986, by and
between Stockyards Development Corporation and the Company
and Stockyards 85 Partnership (filed as Exhibit 10(ac) to
the Registrant's Form 10-K filed January 29, 1987, and
incorporated herein by reference).
10(ad) Agreement for Investment Advisory and Financial Management
Services, dated January 2, 1986, by and between the Company
and Arbitrage Securities Company (filed as Exhibit 10(ad) to
the Registrant's Form 10-K filed January 29, 1987, and
incorporated herein by reference).
E-5
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(ae) Lease, dated May 1, 1954, by and between the Sioux Falls
Stockyards Company and Messrs. Herman R., Robert Q., Dwight
D., and John W. Sutherland (filed as Exhibit 10(ae) to the
Registrant's Form 10-K filed January 29, 1987, and
incorporated herein by reference).
10(af) Lease, dated September 1, 1954 by and between the Sioux
Falls Stockyards Company and Messrs. Herman R., Robert Q.,
Dwight D., and John W. Sutherland (filed as Exhibit 10(af)
to the Registrant's Form 10-K filed January 29, 1987, and
incorporated herein by reference).
10(ag) Amendment to Lease, dated as of December 17, 1982 by and
between the Sioux Falls Stockyards Company and Sutherland
Lumber and Material Co. and Sutherland's Home Improvement
Co., Inc. (filed as Exhibit 10(ag) to the Registrant's Form
10-K filed January 29, 1987, and incorporated herein by
reference).
10(ah) Real Estate Purchase Agreement, dated September 17, 1988 by
and between the Company and the American National Bank and
Trust Company (filed as Exhibit 10(ah) to the Registrant's
Form 8-K filed October 24, 1988 and incorporated herein by
reference).
10(ai) Assignment of Agreement for Investment Advisory and
Financial Management Services dated January 2, 1986, Exhibit
number 10(ad) to A.B. Edelman Management Company (filed as
Exhibit 10(ai) to the Registrant's Form 10-K filed January
29, 1989 and incorporated herein by reference).
10(aj) Agreement for Antiquities Venture dated October 26, 1988, by
and between the Company and Edward H. Merrin Gallery (filed
as Exhibit 10(aj) to the Registrant's Form 10-K filed
January 29, 1989 and incorporated herein by reference).
E-6
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(ak) Purchase Agreement, dated October 31, 1989 by and between
USK Acquisition Corporation, Canal Capital Corporation,
Omaha Livestock Market, Inc., Sioux Falls Stock Yards
Company and Indianapolis Stockyards Corporation (filed as
Exhibit 10(ak) to the Registrant's Form 8-K filed November
9, 1989 and incorporated herein by reference).
10(al) Letter Agreement dated October 31, 1989 to USK Acquisition
Corporation from Canal Capital Corporation, Omaha Livestock
Market, Inc., Sioux Falls Stock Yards Company and
Indianapolis Stockyards Corporation (filed as Exhibit 10(al)
to the Registrant's Form 8-K filed November 9, 1989 and
incorporated herein by reference).
10(am) 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(an) Escrow Agreement dated October 31, 1989 between USK
Acquisition Corporation, Canal Capital Corporation, Omaha
Livestock Market, Inc., Sioux Falls Stockyards Company,
Indianapolis Stockyards Corporation, Norwest Bank South
Dakota, N.A. and Lawyers Title Insurance Corporation, as
Escrow Agent (filed as Exhibit 10(an) to the Registrant's
Form 8-K filed November 9, 1989 and incorporated herein by
reference).
10(ao) Sublease Agreement, dated January 3, 1990 by and between
Canal Capital Corporation and Gruntal & Co. (filed as
Exhibit 10(ao) to the Registrant's Form 10-K filed January
15, 1990 and incorporated herein by reference).
E-7
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(ap) Sublease Agreement, dated January 11, 1990 by and between
Canal Capital Corporation and Global Leasing Services (filed
as Exhibit 10(ap) to the Registrant's Form 10-K filed
January 25, 1990 and incorporated herein by reference).
10(aq) Agreement for contemporary art venture (with respect to
Jules Olitski), dated November 22, 1989 by and between Canal
Capital Corporation and Salander-O'Reilly Contemporary, Inc.
(filed as Exhibit 10(aq) to the Registrant's Form 10-K filed
January 25, 1990 and incorporated herein by reference).
10(ar) Amendment to the Agreement for Antiquities Venture dated
April 11, 1990 by and between Edward H. Merrin Gallery and
Canal Capital Corporation (filed as Exhibit 10(ar) to the
Registrant's Form 10-K filed January 22, 1991 and
incorporated herein by reference).
10(as) Amendment to the Revolving Credit Agreement dated May 31,
1990 by and between Cooperative Centrale Raiffersen-
Boerenleenbank B.A. (Rabobank Nederland) and Canal Capital
Corporation (filed as Exhibit 10(as) to the Registrant's
Form 10-K filed January 22, 1991 and incorporated herein by
reference).
10(at) Security Agreement dated May 31, 1990 by and between
Cooperative Centrale Raiffersen-Boerenleenbank B.A.
(Rabobank Nederland) and Canal Capital Corporation (filed as
Exhibit 10(at) to the Registrant's Form 10-K filed January
22, 1991 and incorporated herein by reference).
10(au) Release and Agreement dated December 12, 1990 by and between
Meritor Savings Bank, Continental American Life Insurance
Company and Canal Capital Corporation (filed as Exhibit
10(au) to the Registrant's Form 10-K filed January 22, 1991
and incorporated herein by reference).
E-8
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(av) Amendment and Waiver to the Revolving Credit Agreement dated
July 31, 1991 by and between Cooperative Centrale
Raiffersen-Boerenleenbank B.A. (Rabobank Nederland) and
Canal Capital Corporation (filed as Exhibit 10(av) to the
Registrant's Form 10-K filed January 17, 1992 and
incorporated herein by reference).
10(aw) Amendment to the Agreement for Antiquities Venture dated
July 1, 1991 by and between The Merrin Group, Inc. and Canal
Arts Corporation (filed as Exhibit 10(aw) to the
Registrant's Form 10-K filed January 27, 1992 and
incorporated herein by reference).
10(ax) Amendment and Restated Credit Agreement dated March 31, 1993
by and between Cooperative Centrale Raiffersen-
Boerenleenbank B.A. (Rabobank Nederland) and Canal Capital
Corporation (filed as Exhibit 10(ax) to the Registrant's
Form 10-K filed January 28, 1994 and incorporated herein by
reference).
10(ay) Amendment to Security Agreement dated March 31, 1993 by and
between Cooperative Centrale Raiffersen-Boerenleenbank B.A.
(Rabobank Nederland) and Canal Capital Corporation (filed as
Exhibit 10 (ay) to the Registrant's Form 10-K filed January
28, 1994 and incorporated herein by reference).
10(az) Amendment to Security Agreement dated March 31, 1993 by and
between Cooperative Centrale Raiffersen-Boerenleenbank
(Rabobank Nederland) and Canal Arts Corporation (filed as
Exhibit 10 (az) to the Registrant's Form 10-K filed January
28, 1994 and incorporated herein by reference).
10(ba) Amendment to Security Agreement dated March 31, 1993 by and
between Cooperative Centrale Raiffersen-Boerenleenbank
(Rabobank Nederland) and Canal Arts Corporation (filed as
Exhibit 10 (ba) to the Registrant's Form 10-K filed January
28, 1994 and incorporated herein by reference).
E-9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(bb) Note Exchange Agreement dated May 15, 1993 by and between
Hanseatic Corporation, Guaranty Reassurance Company and
Canal Capital Corporation (filed as Exhibit 10 (bb) to the
Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
10(bc) Amended and Restated $3,000,000 Variable Rate Mortgage Note
Due May 15, 1996 by and between Guaranty Reassurance Company
and Canal Capital Corporation (filed as Exhibit 10 (bc) to
the Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
10(bd) Amended and Restated $5,800,000 Variable Rate Mortgage Note
Due May 15, 1996 by and between Deltec Asset Management
Corporation and Canal Capital Corporation (filed as Exhibit
10 (bd) to the Registrant's Form 10-K filed January 27, 1995
and incorporated herein by reference).
10(be) Security Agreement dated May 15, 1993 by and between
Hanseatic Corporation, Guaranty Reassurance Company, Canal
Arts Corporation and Canal Capital Corporation (filed as
Exhibit 10 (be) to the Registrant's Form 10-K filed January
27, 1995 and incorporated herein by reference).
10(bf) Collateral Agency Agreement dated May 15, 1993 by and
between Hanseatic Corporation, Guaranty Reassurance Company
and Canal Capital Corporation (filed as Exhibit 10 (bf) to
the Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
10(bg) Assignment of Mortgage - Minnesota dated May 15, 1993 by and
between Chemical Bank, Hanseatic Corporation and Guaranty
Reassurance Company (filed as Exhibit 10 (bg) to the
Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
E-10
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(bh) First Amendment to Mortgage - Minnesota dated May 15, 1993
by and between Hanseatic Corporation, Guaranty Reassurance
Company and Canal Capital Corporation (filed as Exhibit 10
(bh) to the Registrant's Form 10-K filed January 27, 1995
and incorporated herein by reference).
10(bi) Assignment of Mortgage - Iowa dated May 15, 1993 by and
between Chemical Bank, Hanseatic Corporation and Guaranty
Reassurance Company (filed as Exhibit 10 (bi) to the
Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
10(bj) First Amendment to Mortgage - Iowa dated May 15, 1993 by and
between Hanseatic Corporation, Guaranty Reassurance Company
and Canal Capital Corporation (filed as Exhibit 10 (bj) to
the Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
10(bk) Assignment of Mortgage - South Dakota dated May 15, 1993 by
and between Chemical Bank, Hanseatic Corporation and
Guaranty Reassurance Company (filed as Exhibit 10 (bk) to
the Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
10(bl) First Amendment to Mortgage - South Dakota dated May 15,
1993 by and between Hanseatic Corporation, Guaranty
Reassurance Company, Sioux Falls Stockyards Company and
Canal Capital Corporation (filed as Exhibit 10 (bl) to the
Registrant's Form 10-K filed January 27, 1995 and
incorporated herein by reference).
10(bm) $350,000 Promissory Note dated March 25, 1994 by and between
Cowen & Company Custodian F/B/O William G. Walters,
Individual Retirement Account and Canal Capital Corporation
(filed as Exhibit 10 (bm) to the Registrant's Form 10-K
filed January 27, 1995 and incorporated herein by
reference).
E-11
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(bn) $150,000 Convertible Promissory Note dated March 25, 1994 by
and between Cowen & Company Custodian F/B/O William G.
Walters, Individual Retirement Account and Canal Capital
Corporation (filed as Exhibit 10 (bn) to the Registrant's
Form 10-K filed January 27, 1995 and incorporated herein by
reference).
10(bo) Stock Pledge and Security Agreement dated March 28, 1994 by
and between Cowen & Company Custodian F/B/O William G.
Walters, Individual Retirement Account, Tenzer, Greenblatt,
Fallon & Kaplan and Canal Capital Corporation (filed as
Exhibit 10 (bo) to the Registrant's Form 10-K filed January
27, 1995 and incorporated herein by reference).
10(bp) 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(bq) First Amendment to Amended and Restated Variable Rate
Mortgage Note due May 15, 1998 dated May 15, 1995 by and
between Deltec Asset Management Corporation and Canal
Capital Corporation (filed as Exhibit 10 (bq) to the
Registrant s Form 10-K filed January 25, 1996 and
incorporated herein by reference).
10(br) First Amendment to Amended and Restated Variable Rate
Mortgage Note due May 15, 1998 dated May 15, 1995 by and
between Guaranty Reassurance Corporation and Canal Capital
Corporation
(filed as Exhibit 10 (br) to the Registrant s Form 10-K
filed January 25, 1996 and incorporated herein by
reference).
10(bs) Note Exchange Agreement dated September 15, 1995 by and
between Michael E. Schultz Defined Benefit Trust, Edelman
Value Partners, L.P., Lora K. Schultz, SES Trust, Roger A.
Schultz Pension Plan and Canal Capital Corporation (filed as
Exhibit 10 (bs) to the Registrant s Form 10-K filed January
25, 1996 and incorporated herein by reference).
E-12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(bt) $150,000 Promissory Note dated September 15, 1995 by and
between Michael E. Schultz Defined Benefit Trust and Canal
Capital Corporation (filed as Exhibit 10 (bt) to the
Registrant s Form 10-K filed January 25, 1996 and
incorporated herein by reference).
10(bu) $150,000 Promissory Note dated September 15, 1995 by and
between Edelman Value Partners, L.P. and Canal Capital
Corporation (filed as Exhibit 10 (bu) to the Registrant s
Form 10-K filed January 25, 1996 and incorporated herein by
reference).
10(bv) $182,275 Promissory Note dated September 15, 1995 by and
between Lora K. Schultz and Canal Capital Corporation (filed
as Exhibit 10 (bv) to the Registrant s Form 10-K filed
January 25, 1996 and incorporated herein by reference).
10(bw) $300,000 Promissory Note dated September 15, 1995 by and
between SES Trust and Canal Capital Corporation (filed as
Exhibit 10 (bw) to the Registrant s Form 10-K filed January
25, 1996 and incorporated herein by reference).
10(bx) $250,000 Promissory Note dated September 15, 1995 by and
between Roger A. Schultz Pension Plan and Canal Capital
Corporation (filed as Exhibit 10 (bx) to the Registrant s
Form 10-K filed January 25, 1996 and incorporated herein by
reference).
10(by) General Release dated December 19, 1996 by and between Waste
Management Disposal Services of Oregon, Inc. and Canal
Capital Corporation.
10(bz) $325,000 Promissory Note dated December 19, 1996 by and
between Waste Management Disposal Services of Oregon, Inc.
and Canal Capital Corporation.
E-13
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
10(ca) Mutual Release and Settlement Agreement dated September 30,
1996 by and between John Morrell & Co. and Canal Capital
Corporation.
11 Statement re: computation of per share earnings. This
exhibit has not been included because such computation can
be clearly determined from the consolidated financial
statements included as part of this report on Form 10-K.
21 Subsidiaries of the Registrant.
E-14
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
INVESTOR INFORMATION
Annual Meeting Corporate Headquarters
The Annual Meeting of Shareholders 7l7 Fifth Avenue
of Canal Capital Corporation will New York, NY 10022
be held in our offices at 717
Fifth Avenue, 4th floor, New York,
NY, on a date to be announced.
Stock Certificates
The Board of Directors of Canal Inquiries regarding change of
Capital Corporation urges all name or address, or to replace
shareholders to vote their shares lost certificates should be made
in person or by proxy and thus directly to American Stock
participate in the decisions that Transfer and Trust Co., 40 Wall
will be made at the annual meeting. Street, New York, NY 10005 or
telephone (718) 921-8200
Stock Listing Auditors
Canal Capital Corporation common stock Todman & Co., CPAs, P.C.
is traded on the over-the-counter 120 Broadway
market through the "pink sheets". New York, NY 10271
Investment Analyst Inquiries General Counsel
Analyst inquiries are welcome. Proskauer Rose Goetz
& Mendelsohn, LLP
1585 Broadway
Phone or write: Michael E. Schultz, New York, NY 10036
President at (212) 826-6040 (212) 969-3000
iii