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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, 1997
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, 1998, was approximately $572,000. The number
of shares of Common Stock, $.01 par value, outstanding at January 15, 1998
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..... 9
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters................................. 10
ITEM 6. Selected Financial Data............................. 11
ITEM 7. Management's Discussion and Analysis of the
Results of Operations and Financial Condition....... 13
ITEM 8. Financial Statements and Supplementary Data......... 21
ITEM 9. Disagreements on Accounting and Financial
Disclosure.......................................... 21
PART III
ITEM 10. Directors and Executive Officers of the Registrant.. 22
ITEM 11. Executive Compensation.............................. 23
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management...................................... 26
ITEM 13. Certain Relationships and Related Transactions...... 28
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 29
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 (five of which operate on
land leased from the company) and consist, for the most part, of an
Exchange Building (commercial office space), land and structures leased to
third parties (meat packing facilities, rail car repair shops, truck stops,
lumber yards and various other commercial and retail businesses) as well as
vacant land available for development or resale. 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".
1
B. Factors That May Affect Future Results
This Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended. The Company s actual results of operations and future
financial condition may differ materially from those expressed in any such
forward-looking statements as a result of many factors that may be beyond
the Company s control. Such factors include, without limitation: overall
economic conditions; competition for tenants in the agribusiness; the
ability of the Company s tenants to compete in their respective businesses;
the effect of fluctuations in supply, demand, international monetary
conditions and inflation on the Company s art operations; the effects of
forgery and counterfeiting on the Company s art operations; securities
risks associated with collections of antiquities and art; and the effect of
fluctuations in interest rates and inflation on the Company s indebtedness.
These risks and uncertainties are beyond the ability of the Company to
control, and in many cases, the Company cannot predict the risks and
uncertainties that could cause its actual results to differ materially from
those indicated by the forward-looking statements. When used in this
Annual Report on Form 10-K, the words believes, estimates, plans,
expects, and anticipates and similar expressions as they relate to the
Company or its management are intended to identify forward-looking
statements.
C. Real Estate Operations
General
Real estate operations, which relate primarily to Canal's former
agribusiness operations, resulted in operating income of $1.9 million,
while contributing $5.2 million to Canal's revenues for fiscal 1997. 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 a volume based rental
agreement with a meat packing company located near the Fargo, North Dakota
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 tenants
for this space, it is taking an extended period of time to relet this
space.
2
As of October 31, 1997, there are approximately 271 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,
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 has
renegotiated this lease as it relates to the Omaha, Nebraska property, and
accordingly, Canal s fiscal 1997 revenue from this lease was $924,000.
Canal is entitled to receive additional rent if the stockyard's livestock
volume or cash flow (as defined) exceeds certain levels.
Canal retained the right to receive income from certain volume based
rental income leases with two meat packing companies located near the
stockyards in Sioux City, Iowa and Fargo, North Dakota. The Sioux City,
Iowa lease was terminated and the property sold to the meat packer in
fiscal 1996. The Fargo, North Dakota lease is 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 this lease 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 16).
Risk
Real estate activities in general may involve various degrees of risk,
such as competition for tenants, general market conditions and interest
rates. Furthermore, there can be no assurance that Canal will be
successful in the development, lease or sale of its agribusiness related
real estate properties.
Competition
Canal competes in the area of agribusiness related real estate
development with other regional developers, some of which are substantially
larger and have significantly greater financial resources than Canal. To a
3
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
General
Canal established its art operations in October 1988 by acquiring a
significant inventory for resale of antiquities primarily from the ancient
Mediterranean cultures. In November 1989, Canal expanded its art
operations by entering into a cost and revenue sharing agreement with a New
York City gallery for the exclusive representation of Jules Olitski, a
world renowned artist of contemporary paintings. As part of this agreement
Canal purchased
a number of Olitski paintings which it holds for resale with a book value
of approximately $1,000,000 at October 31, 1997. 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 63% ($1,775,594) and 37% ($1,035,263) and
64% ($2,311,825) and 36% ($1,277,263) of total art inventory at October 31,
1997 and 1996, respectively.
Canal sells its art primarily through two sources, in galleries and at
art auctions. In the case of sales in galleries, the Company has
consignment arrangements with various art galleries in the United States.
In these arrangements Canal consigns its pieces at specific prices to the
gallery. In the case of auctions, the Company primarily consigns its art
pieces to the two largest auction houses for their spring and fall art
auctions. The Company assigns a minimum acceptable price on the pieces
consigned. The auction house negotiates a commission on the sale of major
pieces. The pieces can be withdrawn at any time before or during the
auction. There are no significant differences between the prices obtained
in galleries and those obtained at auction.
Art operations resulted in an operating loss of approximately $700,000
while contributing approximately $115,000 to Canal's revenues for fiscal
1997. The 1997 loss includes a $350,000 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. Investments Available for Sale
Canal has an investment in a company in which it, together with other
affiliated entities, comprise a reporting group for regulatory purposes.
It is important to note that it is the group (as defined) that can exercise
influence over this company, not Canal. Accordingly, this investment does
not qualify for consolidation as a method of reporting. Certain of Canal s
officers and directors also serve as officer and/or directors of this
company. This investment (in which Canal s ownership interest is
approximately 2%) is carried at market value and the realized gains or
losses, if any, are recognized in operating results. Any unrealized gains
or losses are reflected in Stockholders Equity.
F. Employees
At December 31, 1997, 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 (five of which operate on
land leased from the company) and consist, for the most part, of an
Exchange Building (commercial office space), land and structures leased to
third parties (meat packing facilities, rail car repair shops, truck stops,
lumber yards and various other commercial and retail businesses) as well as
vacant land available for development or resale. As landlord, Canal's
m a n a gement responsibilities include leasing, billing, repairs and
maintenance and overseeing the day to day operations of its properties.
Canal's properties at October 31, 1997 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 137 2 37 0 98
West Fargo, ND 1937 81 2 0 17 62
S. St. Paul, MN 1937 119 5 30 21 63
Sioux City, IA 1937 64 2 24 24 14
Omaha, NE 1976 85 2 17 34 32
Sioux Falls, SD 1937 37 0 31 4 2
Total 523 13 139 100 271
The following schedule shows the average occupancy rate and average rental
rate at each of Canal's five Exchange Buildings:
1997 1996
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) 46% $12.29 84% $14.48
Sioux City, IA 46% $ 4.14 63% $ 3.59
Omaha, NE 51% $ 4.80 56% $ 4.80
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) None of the leases relating to the above Exchange Buildings represents
10% or more of rental income.
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.
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.
8
Canal filed a Notice of Appeal on October 8, 1996. On September 18,
1997, the Minnesota Court of Appeals affirmed in part and reversed in part
the judgement in favor of Pine Valley and Canal paid Pine Valley damages
and interest of $388,000 in final settlement of this suit.
Canal Capital Corporation v. Valley Pride Pack, Inc.
Canal commenced an action in U.S. District Court in Minnesota on
October 25, 1996, as the assignee of United Market Services Company,
against Valley Pride Pack, Inc. (formerly known as Pine Valley Meats, Inc.
and referred to herein as Pine Valley ) for the unpaid livestock fees and
charges due under the 1936 Agreement between the predecessors of Pine
Valley and Canal. Pine Valley filed a motion to dismiss Canal s complaint
on the grounds that the complaint was barred on principles of issue
preclusion and the Rooker-Feldman doctrine, or, that the action should be
stayed pending the appeal before the Minnesota Court of Appeals in a state
court suit involving the same parties. Canal agreed to dismiss the action
without prejudice to its right to reinstitute the action following the
Minnesota Court of Appeals decision. On September 18, 1997, the Minnesota
Court of Appeals affirmed in part and reversed in part a judgement against
Canal and Canal paid Pine Valley damages and interest of $388,000 in
connection with the state court suit. On September 23, 1997, Canal
reinstituted its lawsuit in federal court against Pine Valley for the
recovery of livestock fees. Pine Valley has since brought a motion to
dismiss this second federal court lawsuit on the same grounds as its motion
to dismiss the first federal court lawsuit. There has been no claim
asserted by Pine Valley against Canal in this second federal court lawsuit.
ITEM 4. Submission of Matters to a Vote of Shareholders
None.
9
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stock Matters
Canal's stock is traded over-the-counter through the "pink sheets". The
high and low price ranges of Canal's common stock for the eight quarters
ended October 31, 1997 as reported on the "pink sheets" were:
Fiscal 1997 Fiscal 1996
Quarter Ended High Low High Low
October 31 ................. $ 1/4 -- $ 5/16 $ 1/4 -- $ 3/16
July 31 .................... 1/4 -- 5/16 5/16 -- 3/16
April 30 ................... 1/4 -- 5/16 1/4 -- 3/16
January 31 ................. 1/4 -- 5/16 1/4 -- 1/16
There were no cash dividends paid during fiscal 1997 or 1996. Canal
is subject to restrictions on the payment of cash dividends under certain
debt agreements. As of January 20, 1998, Canal had approximately 1,500
holders of record of its common stock, par value $.01 per share.
10
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
THE FOLLOWING DATA HAVE BEEN DERIVED FROM CONSOLIDATED FINANCIAL
STATEMENTS THAT HAVE BEEN AUDITED BY TODMAN & CO., CPAs, P.C., INDEPENDENT
ACCOUNTANTS. THE INFORMATION SET FORTH BELOW IS NOT NECESSARILY INDICATIVE
OF THE RESULTS OF FUTURE OPERATIONS AND SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS ANNUAL REPORT ON FORM 10-K.
(000'S OMITTED, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31, 1997 1996 1995 1994 1993
OPERATING DATA:
REVENUES FROM CONTINUING
OPERATIONS $5,311 $9,049(2) $4,854(5) $8,460(4) $4,535(3)
NET(LOSS)INCOME FROM
CONTINUING OPERATIONS ($1,001) $ 842(6) $1,518(9) $1,362(8) ($2,160)(7)
EXTRAORDINARY GAIN
ON RETIREMENT OF DEBT 0 0 0 0 366
PROVISION FOR INCOME TAXES 0 0 0 0 0
NET(LOSS)INCOME ($1,001) $ 842 ($1,518) $1,362 ($1,794)
BASIC (LOSS)INCOME PER SHARE:
NET(LOSS)INCOME BEFORE
EXTRAORDINARY ITEM ($0.27) $0.16 ($0.40) $0.23 ($0.52)
EXTRAORDINARY ITEM 0.00 0.00 0.00 0.00 0.08
NET(LOSS)INCOME ($0.27) $0.16 ($0.40) $0.23 ($0.44)
DILUTED (LOSS)INCOME PER SHARE:
NET(LOSS)INCOME BEFORE
EXTRAORDINARY ITEM ($0.27) $0.13 ($0.40) $0.20 ($0.52)
EXTRAORDINARY ITEM 0.00 0.00 0.00 0.00 0.08
NET(LOSS)INCOME ($0.27) $0.13 ($0.40) $0.20 ($0.44)
CASH DIVIDENDS PAID $0.00 $0.00 $0.00 $0.00 $0.00
WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC 4,327 4,327 4,352 4,476 4,327
- DILUTED 5,327 5,327 5,352 5,170 4,933
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA (Continued ...)
(000'S OMITTED)
AT OCTOBER 31, 1997 1996 1995 1994 1993
BALANCE SHEET DATA:
CURRENT ASSETS $2,151 $2,015 $1,443 $1,416 $1,321
PROPERTY ON OPERATING
LEASES, NET 5,323 7,106 8,385 8,708 9,784
ART INVENTORY NON-CURRENT 2,311 3,089 4,901 5,744 6,074
OTHER ASSETS 3,175 3,279 3,474 4,260 5,184
TOTAL ASSETS $12,960 $15,489 $18,203 $20,128 $22,363
CURRENT LIABILITIES $2,068 $3,426 $2,710 $ 6,122 $15,015
LONG-TERM DEBT 6,050 6,980 11,379 8,062 2,394
STOCKHOLDERS' EQUITY 4,842 5,083 4,114 5,944 4,954
TOTAL LIAB. &
STOCKHOLDERS'EQUITY $12,960 $15,489 $18,203 $20,128 $22,363
COMMON SHARES OUTSTANDING
AT YEAR-END 4,327 4,327 4,327 4,327 4,327
11(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 increase was due primarily to a $4.4 million increase in
sales of real estate which was attributable to the Sioux City, Iowa
lease termination and property sale.
(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 a $3.8 million gain on the sale of real estate offset by a
$1.7 million loss from art operations which included a $1.5 million
increase in the art inventory valuation allowance.
(7) Includes an $873,000 write-off in connection with a lease termination,
a $400,000 provision for litigation settlement and a $300,000
valuation allowance to the art inventory.
(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.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations - General
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses
from operations in seven of the last nine years and is involved in
litigation with a major tenant in Fargo, North Dakota. The financial
statements do not include any adjustments that might result from the
resolution of these uncertainties (See Notes 1, 6 and 16). Additionally,
the accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Canal recognized a net loss of $1.0 million for 1997 as compared to
the 1996 net income of $0.8 million and the 1995 net loss of $1.5 million.
After recognition of preferred stock dividend payments of $182,000 in 1997,
$162,000 in 1996 and $193,000 in 1995, the results attributable to common
stockholders were a net loss of $1.2 million in 1997, net income of $0.7 in
1996 and a net loss of $1.7 million in 1995. Canal s 1997 net loss of $1.0
million was due primarily to a $3.4 million decrease in income from real
estate operations (due to a $2.7 million reduction in real estate sales and
a $0.9 million write-down in value of certain property located in Omaha,
Nebraska) offset by a $1.0 million reduction in the loss from art
operations, a $0.1 million increase in other income and a $0.6 million
decrease in interest expense. The 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.
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 1997 decreased by
$3.7 million to $5.3 million as compared with 1996 revenues which had
increased by $4.2 million to $9.0 million from 1995 revenues of $4.9
million. The 1997 decrease is due primarily to a $2.7 million decrease in
sales of real estate. The 1996 increase was due primarily to a $4.4 million
increase in real estate sales.
13
Capital Resources and Liquidity
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses
from operations in seven of the last nine years and is involved in
litigation with a major tenant in Fargo, North Dakota. The financial
statements do not include any adjustments that might result from the
resolution of these uncertainties (See Notes 1, 6 and 16). Additionally,
the accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay
in full the Company s variable rate mortgage notes due May 15, 1998
($2,605,000), its variable rate mortgage notes due September 15, 1998
($700,000) and two notes which were due December 31, 1997 ($320,000) plus
accrued interest thereon. The purchasers of these notes included certain
entities controlled by the Company s Chairman, the Company s Chief
Executive Officer and members of their families. The variable rate
mortgage notes issued have essentially the same terms and conditions as the
variable rate mortgage notes which were repaid. The notes carry interest
at the highest of four variable rates, determined on a quarterly basis.
These notes, among other things, prohibits Canal from becoming an
investment company as defined by the Investment Company Act of 1940;
requires Canal to maintain minimum net worth; restricts Canal s ability to
pay cash dividends or repurchase stock; requires principal prepayments to
be made only out of the proceeds from the sale of certain assets, and
requires the accrual of additional interest (to be paid at maturity) of
approximately three percent per annum. As a result of the refinancing all
of the debt that was repaid on January 8, 1998 was classified as long term
debt-related party at October 31, 1997.
Cash and cash equivalents of $28,000 at October 31, 1997 increased
$17,000 or 165.5% from $11,000 at October 31, 1996. Net cash used by
operations in fiscal 1997 was $1.5 million. Substantially all of the 1997
net proceeds from the sale of real estate of $2.5 million and the proceeds
from the sale of art of $0.1 million less the cash used in operations was
used to reduce outstanding debt and accrued expenses.
During 1997 Canal reduced its variable rate mortgage notes by $1.5
million and other long-term debt by $0.1 million for a net 1997 debt
reduction of $1.6 million.
14
At October 31, 1997 the Company s current assets exceed current
liabilities by $0.1 million as compared to October 31, 1996 when the
Company's current liabilities exceeded current assets by $1.4 million,
which represented an increase of $0.1 million from 1995. The 1997 increase
is due primarily to a decrease in the current portion of long-term debt.
The only required principal repayments under Canal's debt agreements for
fiscal 1998 will be from the proceeds of the sale of certain assets (if
any), and approximately $0.1 million on various fixed mortgages.
Canal continues to closely monitor and reduce where possible its
overhead expenses and plans to continue to reduce the level of its art
inventories to enhance current cash flows. Management believes that its
income from operations combined with its cost cutting program and planned
reduction of its art inventory will enable it to finance its current
business activities. There can, however, be no assurance that Canal will
be able to effectuate its planned art inventory reductions or that its
income from operations combined with its cost cutting program in itself
will be sufficient to fund operating cash requirements.
1997 COMPARED TO 1996
Real Estate Revenues
Real estate revenues for 1997 of $5.2 million accounted for 97.8% of
the 1997 revenues as compared to revenues of $8.9 million or 97.8% for
1996. 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 (30.6% and 23.4%), Ground
lease income (17.8% and 10.6%), volume based rental income (2.1% and 7.4%)
and sale of real estate and other income (49.5% and 58.6%) for 1997 and
1996, respectively. The 1997 decrease is due primarily to the $2.7 million
decrease in sales of real estate and the $0.9 million write down in value
of the Omaha property. The percentage variations in the year to year
comparisons are due to the significant decrease in real estate sales for
fiscal 1997.
Real Estate Expenses
Real estate expenses for 1997 of $3.3 million decreased by $0.3
million (8.3%) from $3.6 million in 1996. Real estate expenses are
comprised of labor, operating and maintenance (25.2% and 26.7%),
depreciation and amortization (10.4% and 10.0%), taxes other than
income taxes (7.8% and
15
10.0%), cost of real estate sold (27.1% and 38.3%), provision for
litigation settlement (0.0% and 12.0%) and general and administrative and
other expenses (29.5% and 3.0%) for 1997 and 1996, respectively. The 1997
decrease in real estate expenses is due primarily to the $0.05 million
reduction in cost of real estate sold, a $0.4 million reduction in the
provision for litigation
settlement offset by the $0.9 million write down in value of the Omaha
property. The increase in general and administrative and other expenses
reflects the 1997 $0.9 million write down in value of the Omaha property.
The percentage variations in year to year comparisons is also due to the
decrease in the cost of real estate sold for fiscal 1997.
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 1997 appraisal covered approximately 49% 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 51% 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
1997 Canal recognized a $350,000 valuation allowance against its art
inventory, thereby, increasing the total valuation allowance to $2,850,000
as of October 31, 1997 as compared to $2,500,000 and $1,000,000 at October
31, 1996 and 1995, 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.
16
The nature of art makes it difficult to determine a replacement value.
The most compelling evidence of a value in most cases is an independent
appraisal. The price at which pieces are consigned is usually in line with
appraisals and above the cost of the piece. The amount classified as
current represents management's best estimate of the minimum amount of
inventory that will be sold in this market. Management believes that the
provision discussed above has effectively reduced inventory to its
estimated net realizable value. The Company will continually monitor the
market for its art inventory and will make adjustments to the carrying
value of its art inventory as such adjustments become necessary.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual
channels used for disposal of its art inventory. The proceeds from these
sales are used to reduce the Company's outstanding debt and finance current
operations. If these sales are not made the Company has alternate means of
raising cash such as sales of real estate, sales of investments available
for sale, raising of new capital and further restructuring of debt. Some
of these measures were successfully implemented in fiscal 1997.
Art Revenues
Art revenues for 1997 of $117,000 decreased $78,000 or 40.0% from
$195,000 in 1996. Art revenues are comprised of proceeds from the sale of
antiquities and contemporary art (97.5% and 100.0%) and commission income
on sale of art owned by third parties (2.5% and 0.0%) for 1997 and 1996,
respectively. The Company's art inventory was reduced through sales by
$0.4 million and $0.3 in fiscal years 1997 and 1996, respectively.
Art Expenses
Art expenses for 1997 of $0.08 million decreased by $1.1 million
(55.9%) from $1.9 million in 1996. Art expenses (excluding valuation
allowances) consisted of the cost of art sold (90.7% and 86.9%) and
selling, general and administrative expenses (9.3% and 13.1%) for 1997 and
1996, respectively. Included in art expenses is a $0.4 million and a $1.5
million valuation allowance against the Company's art inventory (see Note
10 to the Consolidated Financial Statements) for fiscal years 1997 and
1996, respectively.
17
General and Administrative
General and administrative expenses for 1997 of $1.3 million decreased
$0.1 million (6.8%) from $1.3 million in 1996. The major components of
general and administrative expenses are officers salaries (34.3% and
32.0%), rent (8.9% and 9.1%), legal and professional fees (10.0% and 9.4%),
insurance (11.9% and 11.3%) and office salaries (10.0% and 10.1%) for 1997
and 1996,
respectively. The percentage increases in officers salaries, legal and
professional fees and insurance is a result of the aggregate decrease in
total general and administrative expenses.
Interest and Other Income
Interest and other income of $236,000 for 1997 increased $91,000
(62.2%) from $145,000 in fiscal 1996. The 1997 amounts are comprised
primarily of dividend income, interest income and other income.
Interest Expense
Interest expense for 1997 of $1.0 million decreased by $0.6 million
(37.1%) from $1.5 million in 1996. The 1997 decrease is due primarily to
the aggregate reduction in the outstanding debt. Interest rates on Canal's
variable rate mortgage notes increased to an average of 12.00% in 1997 as
compared to an average of 11.94% in 1996 and an average of 11.78% in
1995. At October 31, 1996 Canal had reduced the outstanding face value of
these notes from the original $20.0 million to $2.7 million.
Other Expense
In fiscal 1997 and 1995 Canal incurred other expenses of approximately
$200,000 and $286,000, respectively. The 1997 expense was associated with
the settlement of a state tax audit while the 1995 expense was due
primarily to the write down of Canal s investments.
1996 COMPARED TO 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.
18
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.
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)
19
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,
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.
Interest and Other Income
Interest and other income of $146,000 for fiscal 1996 decreased
$18,000 (11.2%) from $164,000 in fiscal 1995. 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
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.
21
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Board of Directors has designated an Executive Committee
consisting of Messrs. Edelman and Schultz. The Board of Directors has
delegated to the Executive Committee general authority with respect to most
matters that would otherwise be considered by the full Board. During
fiscal 1997 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.
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 58, has been Chairman of the Board since
September 1991 and prior thereto Vice Chairman of the Board and Chairman of
the Executive Committee since February, 1985. Mr. Edelman has been a
Director, Chairman of the Board, and Chairman of the Executive Committee of
Datapoint Corporation ("Datapoint") since March 1985 and has been
Datapoint s Chief Executive Officer since February 1993. Mr. Edelman has
served as General Partner of Asco Partners, a general partner of Edelman
Securities Company L.P. (formerly Arbitrage Securities Company) since June
1984 and is a General Partner and Manager of various investment
partnerships and funds.
Michael E. Schultz, age 61, has been President and Chief Executive
Officer since September 1991 and a Director since 1985; and had been a
partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz until December
31, 1994.
Gerald N. Agranoff, age 51, has been a Director since 1984. Mr.
Agranoff is currently Vice President, General Counsel and Corporate
Secretary of Datapoint and has been a Director of Datapoint since 1991.
Mr. Agranoff has been a General Partner of Edelman Securities Company L.P.
(formerly Arbitrage Securities Company) and Plaza Securities Company for
more than five years. Mr. Agranoff is a director of Bull Run Corporation,
Atlantic Gulf Communities and The American Energy Group, Ltd.. Mr.
Agranoff has also been the General Counsel to Edelman Securities Company
L.P. and Plaza Securities Company for more than five years.
Reginald Schauder, age 48, has been Vice President, Chief Financial
Officer and Treasurer since January 1989 and assumed responsibility as
22
Secretary of the Company in September 1995. Mr. Schauder was corporate
controller from July 1985 to 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.
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 1997 exceeded $100,000.
SUMMARY COMPENSATION TABLE - Annual Compensation
Name and Principal
Position Year Salary
Michael E. Schultz 1997 $ 165,000
President and Chief 1996 $ 165,000
Executive Officer 1995 $ 162,500
Asher B. Edelman 1997 $ 165,000
Chairman of the Board 1996 $ 165,000
and Executive Committee 1995 $ 162,500
Reginald Schauder 1997 $ 101,200
Vice President, Chief 1996 $ 101,200
Financial Officer 1995 $ 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 $52,000, $68,000 and $87,000 for fiscal years 1997, 1996
and 1995, respectively.
Retirement Plans
The Canal Capital Corporation Retirement Plan (the "Retirement Plan")
provides benefits to eligible employees of the Company and its subsidiaries
and affiliates. Directors who are not employees are not eligible to
participate in the Retirement Plan. The Retirement Plan is administered by
23
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, 1997. Mr. Schultz has no benefit under the Retirement Plan.
For further information on the Retirement Plan see Note 9.
Aggregate Option Exercises in Last
Fiscal Year and Fiscal Year End Option Value
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Name Options at Fiscal Year End At Fiscal Year End
Michael E. Schultz 255,500* $ 8,000
Asher B. Edelman 20,000* $ -0-
Reginald Schauder 19,600* $ -0-
* All options were exercisable at October 31, 1997.
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.
24
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 1997 fiscal year, no options under the 1985 plan were
granted and no options previously granted were exercised. At October 31,
1997, options covering an aggregate of 30,500 shares were outstanding under
the 1985 Plan and were held by members of the Board of Directors and
Executive Committee. The exercise price per share of all outstanding
options under the 1985 Plan ranges from $0.13 to $0.25. The expiration
dates for outstanding options under the 1985 Plan range from December 2001
to January 2003.
Compensation Committee - Interlocks and Insider Participation
The Board of Directors (comprised of Asher B. Edelman, Chairman of the
Board and Chairman of the Executive Committee, Michael E. Schultz,
President and Chief Executive Officer), and Gerald N. Agranoff determines
the compensation of the Chief Executive Officer and the Company's other
executive
officers and administers the Company's 1984 Stock Option Plan and 1985
Stock Option Plan for Directors.
In connection with the Company's investment activities, the Executive
Committee of the Board of Directors, through Mr. Edelman, has the authority
to invest funds of the Company in securities of other companies. Certain
funds of the Company have been invested in the securities of other
companies in which Mr. Edelman, other directors of the Company or their
affiliates are
25
directors or officers, or in which one or more of such persons may also
have invested. Since November 1, 1993, such companies included Datapoint
Corporation. The Company has filed with the SEC Schedules 13D jointly with
Plaza, Mr. Edelman, Edelman Management, Edelman Limited Partnership,
certain investment partnerships of which Mr. Edelman is sole or controlling
general partner, certain of the companies referred to in the preceding
sentence and other persons, indicating that the filing parties constitute
groups for purposes of such filings with respect to the acquisition of
securities in the companies referred to in the preceding sentence.
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, 1998 were:
SECURITIES BENEFICIALLY OWNED
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
Asher B. Edelman 1,769,269 (c) 40.70
Michael E. Schultz 312,135 (c) 6.81
William G. Walters 234,440 (b) 5.42
(a) Under applicable regulations of the Securities and Exchange
Commission (the "SEC"), a person who has or shares the power to direct the
voting or disposition of stock is considered a "beneficial owner". Each
individual referred to in the above table has the sole power to direct the
voting and disposition of the shares shown.
(b) The number reported herein for Mr. Walters includes 117,220
shares owned by Mr. Walters, 117,220 shares owned by Whale Securities Co.,
L.P., of which Mr. Walters is Chief Executive Officer. Mr. Walters has
sole power to vote and dispose of the shares described herein.
(c) For additional information about beneficial ownership see
"Securities Owned by Management" below.
26
SECURITIES OWNED BY MANAGEMENT
The following table sets forth certain information as of January 15,
1998, with respect to the beneficial ownership of the Company's Common
Stock with respect to all persons who are directors, each of the executives
named in the Executive Compensation Table and by all directors and officers
as of the most practical date. Unless otherwise indicated, the percentage
of stock owned constitutes less than one percent of the outstanding Common
Stock and the beneficial ownership for each person consists of sole voting
and sole
investment power.
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
Gerald Agranoff 25,000 (b) 0.57
Asher B. Edelman 1,769,269 (c)(d) 40.70
Reginald Schauder 19,600 (e) 0.45
Michael E. Schultz 312,135 (f)(g) 6.81
All Directors and Officers
as a group (4 persons) 2,126,004 48.53
(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, 355,250 shares of common stock owned by the
Edelman
27
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 142,150 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, 39,865 shares of common stock owned by Mr.
Edelman's former wife, 22,510 shares of common stock held in three Uniform
Gifts to Minors Act accounts for the benefit of Mr. Edelman's children, of
which Mr. Edelman's former wife is the custodian 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 19,500 shares subject to options which are presently
exercisable.
(f) Includes 255,500 shares subject to options which are presently
exercisable.
(g) The number reported herein for Mr. Schultz excludes 26,620 shares
of common stock held by the Canal Capital Corporation Retirement Plan of
which Mr. Schultz serves as a trustee 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"
28
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, 1997 the Company filed
no reports on Form 8-K.
29
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
30th day of January, 1998.
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 30, 1998
Vice President-Finance
Secretary and Treasurer
/S/ Reginald Schauder (Principal Financial and
Reginald Schauder Accounting Officer) January 30, 1998
/S/ Asher B. Edelman Chairman of the Board
Asher B. Edelman and Director January 30, 1998
/S/ Gerald N. Agranoff
Gerald N. Agranoff Director January 30,
1998
30
FORM 10-K -- ITEM 14(a)(1) and (2)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
The following documents are filed as part of this report:
(a) 1. Financial Statements --
Independent Accountants Report.......................... F-2
Consolidated Balance Sheets October 31, 1997 and 1996... F-3
Consolidated Statements of Operations and Comprehensive
Income for the years ended October 31, 1997, 1996
and 1995............................................. F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended October 31, 1997, 1996
and 1995............................................. F-7
Consolidated Statements of Cash Flows for the
years ended October 31, 1997, 1996 and 1995.......... F-8
Notes to Consolidated Financial Statements.............. F-9
F-1
INDEPENDENT ACCOUNTANTS REPORT
To the Stockholders of Canal Capital Corporation:
We have audited the accompanying consolidated balance sheets of Canal
Capital Corporation (a Delaware corporation) and Subsidiaries as of October
31, 1997 and 1996 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, 1997. 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, 1997 and 1996, and the
results of their operations and cash flows for each of the years in the
three year period ended October 31, 1997, 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, 6
and 16 to the financial statements, the Company has suffered recurring
losses from operations in seven of the last nine years and is involved in
various litigations. All of these matters raise substantial doubt about
the company s ability to continue as a going concern. Management's plans
in regard to these matters are also described in Notes 1, 6 and 16.
The accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
/S/ Todman & Co., CPA s,P.C.
New York, N.Y.
TODMAN & CO., CPAs, P.C.
January 9 , 1998
Certified Public Accountants (N.Y.)
F-2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
1997 1996
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 28,225 $ 10,632
RESTRICTED CASH AND CASH EQUIVALENTS 0 470,000
NOTES AND ACCOUNTS RECEIVABLE, NET 271,891 295,202
ART INVENTORY (NET OF A VALUATION
ALLOWANCE OF $ 500,000 AT
OCTOBER 31, 1997 AND 1996,
RESPECTIVELY) 500,000 500,000
INVESTMENTS 1,151,358 535,558
PREPAID EXPENSES 199,888 203,238
TOTAL CURRENT ASSETS 2,151,362 2,014,630
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 2,407,533
AND $ 5,753,088 FOR 1997 AND 1996,
RESPECTIVELY 5,323,177 7,105,534
ART INVENTORY NON-CURRENT (NET OF
VALUATION ALLOWANCE OF $ 2,350,000
AND $2,000,000) AT OCTOBER 31,
1997 AND 1996, RESPECTIVELY 2,310,857 3,089,088
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT
OR RESALE 2,843,305 2,938,905
DEFERRED LEASING AND FINANCING COSTS 39,655 92,919
DEPOSITS AND OTHER 291,787 248,132
3,174,747 3,279,956
$12,960,143 $15,489,208
============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
LIABILITIES & STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
CURRENT PORTION OF LONG-TERM DEBT-
RELATED PARTY $ 0 $500,000
CURRENT PORTION OF LONG-TERM DEBT 98,000 64,000
ACCOUNTS PAYABLE AND ACCRUED
EXPENSES 1,871,963 1,984,692
ACCRUED LITIGATION SETTLEMENT 0 850,000
INCOME TAXES PAYABLE 97,995 27,877
TOTAL CURRENT LIABILITIES 2,067,958 3,426,569
LONG-TERM DEBT, LESS CURRENT PORTION 2,375,496 6,130,769
LONG-TERM DEBT, RELATED PARTY 3,675,000 849,000
6,050,496 6,979,769
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
5,000,000 SHARES AUTHORIZED; 2,997,900 AND
2,703,299 SHARES ISSUED AND OUTSTANDING
AND AGGREGATE LIQUIDATION PREFERENCE OF
$ 29,979,000 AND $ 27,032,990 AT OCTOBER 31,
1997 AND 1996, RESPECTIVELY 29,979 27,033
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AT OCTOBER 31, 1997
AND 1996, RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 26,826,293 26,636,939
ACCUMULATED DEFICIT (10,194,335) (9,010,999)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
PENSION VALUATION RESERVE (1,485,641) (1,619,696)
UNREALIZED GAIN ON INVESTMENTS
AVAILABLE FOR SALE 615,800 0
4,841,689 5,082,870
$12,960,143 $15,489,208
============ ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $2,496,943 $5,170,872 $ 770,012
RENTAL INCOME 1,591,005 2,072,593 2,090,068
GROUND LEASE INCOME 924,000 936,000 972,500
VOLUME BASED RENTAL INCOME 110,414 657,184 729,335
OTHER INCOME 71,109 17,091 31,892
5,193,471 8,853,740 4,593,807
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 896,698 1,386,029 431,736
LABOR, OPERATING AND MAINTENANCE 833,181 964,918 980,626
DEPRECIATION AND AMORTIZATION 343,741 359,263 364,594
TAXES OTHER THAN INCOME TAXES 256,800 360,000 530,202
PROVISION FOR LITIGATION
SETTLEMENT (60,359) 434,918 0
WRITE DOWN OF REAL ESTATE
PROPERTY 936,689 0 0
GENERAL AND ADMINISTRATIVE 104,606 107,239 90,888
3,311,356 3,612,367 2,398,046
INCOME FROM REAL ESTATE
OPERATIONS 1,882,115 5,241,373 2,195,761
ART OPERATIONS:
ART REVENUES:
SALES 114,350 195,400 246,550
OTHER REVENUES 2,982 0 13,740
117,332 195,400 260,290
ART EXPENSES:
COST OF ART SOLD 432,286 326,399 407,557
VALUATION RESERVE 350,000 1,500,000 500,000
SELLING, GENERAL AND
ADMINISTRATIVE 44,541 49,010 79,803
826,827 1,875,409 987,360
LOSS FROM ART OPERATIONS (709,495) (1,680,009) (727,070)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
Continued ...
1997 1996 1995
GENERAL AND ADMINISTRATIVE
EXPENSE (1,256,854) (1,348,179) (1,380,415)
(LOSS) INCOME FROM OPERATIONS (84,234) 2,213,185 88,276
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME 236,470 145,819 164,209
INTEREST EXPENSE (804,719) (1,494,271) (1,433,828)
INTEREST EXPENSE-RELATED
PARTY (149,000) (23,000) (51,000)
OTHER EXPENSE (200,000) 0 (285,871)
(917,249) (1,371,452) (1,606,490)
(LOSS) INCOME BEFORE PROVISION FOR INCOME
TAXES (1,001,483) 841,733 (1,518,214)
PROVISION FOR INCOME TAXES 0 0 0
NET (LOSS) INCOME ($1,001,483) $ 841,733 ($1,518,214)
OTHER COMPREHENSIVE (LOSS) INCOME:
MINIMUM PENSION LIABILITY
ADJUSTMENT 134,055 116,975 (327,928)
UNREALIZED GAIN ON INVESTMENTS
AVAILABLE FOR SALE 615,800 0 0
COMPREHENSIVE (LOSS) INCOME ($251,628) $ 958,708 ($1,846,142)
(LOSS) INCOME PER COMMON SHARE:
- BASIC ($0.27) $ 0.16 ($0.40)
- DILUTED ($0.27) $ 0.13 ($0.40)
WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC 4,326,929 4,326,929 4,351,680
- DILUTED 5,326,929 5,326,929 5,351,680
SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 1997, 1996, AND 1995
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, NOVEMBER 1, 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
-------------------- ---------------------
BALANCE, OCTOBER 31, 1995 5,313,794 $53,138 2,358,542 $23,585
NET INCOME 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 344,757 3,448
-------------------- ---------------------
BALANCE, OCTOBER 31, 1996 5,313,794 $53,138 2,703,299 $27,033
NET LOSS 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 294,601 2,946
-------------------- ---------------------
BALANCE, OCTOBER 31, 1997 5,313,794 $53,138 2,997,900 $29,979
==================== =====================
ADDITIONAL TREASURY
PAID-IN ACCUMULATED COMPREHENSIVE STOCK,
CAPITAL DEFICIT (LOSS)INCOME AT COST
BALANCE, NOV. 1,
1994 $26,262,346 ($7,979,331) ($1,408,74 ($11,003,545)
NET INCOME 0 (1,518,214) 0 0
PREFERRED STOCK
DIVIDEND 205,662 (193,148) 0 0
MINIMUM PEN.
LIAB. ADJ. 0 0 (327,928) 0
UNREALIZED GAIN
ON INVEST. 0 0 0 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
DIVIDEND 168,931 (162,039) 0 0
MINIMUM PEN.
LIAB. ADJ. 0 0 116,975 0
UNREALIZED GAIN
ON INVEST. 0 0 0 0
--------------- -------------- ----------------
BALANCE, OCT. 31,
1996 $26,636,939 ($9,010,999) ($1,619,696) ($11,003,545)
NET INCOME 0 (1,001,483) 0 0
PREFERRED STOCK
DIVIDEND 189,354 (181,853) 0 0
MINIMUM PEN.
LIAB. ADJ. 0 0 134,055 0
UNREALIZED GAIN
ON INVEST. 0 0 615,800 0
--------------- -------------- ------------ -------------
BALANCE, OCT. 31,
1997 $26,826,293 ($10,194,335) ($ 869,841) ($11,003,545)
============== ============== ================ ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING
ACTIVITIES:
NET INCOME (LOSS) ($1,001,483) $ 841,733 ($1,518,214)
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES:
(CREDIT)PROV. FOR LITIGATION
SETTLEMENT (60,359) 434,918 0
DEPRECIATION AND
AMOR4TIZATION 419,897 434,532 412,505
GAIN ON SALES OF
REAL ESTATE (1,600,245) (3,784,843) (338,276)
VALUATION RESERVE -
ART INVENTORY 350,000 1,500,000 500,000
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS
RECEIVABLES, NET 23,311 (53,424) 351,045
ART INVENTORY, NET 428,231 311,507 343,537
PREPAID EXPENSES AND
OTHER, NET 826,419 (677,535) (254,208)
PAYABLES AND ACCRUED
EXPENSES, NET (892,611) 203,221 690,964
NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES (1,506,840) (789,891) 187,353
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF
REAL ESTATE 2,496,943 5,170,872 770,012
CAPITAL EXPENDITURES (47,237) (128,626) (91,740)
NET CASH PROVIDED BY
INVESTING ACTIVITIES 2,449,706 5,042,246 678,272
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM
DEBT-RELATED PARTIES 0 0 1,032,275
REPAYMENT OF SHORT-TERM
BORROWINGS (466,000) 0 (787,305)
REPAYMENT OF LONG-TERM
DEBT OBLIGATIONS (929,273) (3,886,473) (1,029,440)
NET CASH USED BY
FINANCING ACTIVITIES (1,395,273) (3,886,473) (784,470)
DECREASE (INCREASE) IN
RESTRICTED CASH AND
CASH EQUIVALENTS 470,000 (470,000) 0
NET INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS 17,593 (104,118) 81,155
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 10,632 114,750 33,595
CASH AND CASH EQUIVALENTS
AT END OF YEAR $28,225 $ 10,632 $114,750
============ ========== ==============
NOTE: IN FISCAL 1997, 1996 AND 1995,$ 181,183, $ 162,039 AND $ 193,148,
RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE
ISSUANCE OF 294,611, 344,757 AND 303,348 , RESPECTIVELY, OF SHARES OF
PREFERRED STOCK.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-8
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Canal Capital Corporation ("Canal"), incorporated in the state of
Delaware in 1964, commenced business operations through a predecessor in
1936. Canal was a wholly-owned subsidiary of Canal-Randolph Corporation
until June 1, 1984, when Canal-Randolph Corporation distributed to its
stockholders all of the outstanding shares of Canal's common stock, under a
plan of complete liquidation.
Canal is engaged in 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 seven of the last nine years and is involved in
litigation with a major tenant in Fargo, North Dakota. The financial
statements do not include any adjustments that might result from the
resolution of these uncertainties (See Notes 1, 6 and 16). Additionally,
the accompanying financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Canal continues to closely monitor and reduce where possible its
overhead expenses and plans to continue to reduce the level of its art
inventories to enhance current cash flows. Management believes that its
income from operations combined with its cost cutting program and planned
reduction of its art inventory will enable it to finance its current
business activities. There can, however, be no assurance that Canal will
be able to effectuate its planned art inventory reductions or that its
income from operations combined with its cost cutting program in itself
will be sufficient to fund operating cash requirements.
F-9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Principles of Consolidation -- The consolidated financial
statements include the accounts of Canal Capital Corporation ("Canal") and
its 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 $208,000 and $150,000
at October 31, 1997 and 1996, respectively, and is included in other
assets. The operating results of joint ventures accounted for on the
equity method, for fiscal year 1997, 1996 and 1995 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) Investments Available for Sale -- Canal has an investment in a
company in which it, together with other affiliated entities, comprise a
reporting group for regulatory purposes. It is important to note that it
is the group (as defined) that can exercise influence over this company,
not Canal. Accordingly, this investment does not qualify for consolidation
as a method of reporting. Certain of Canal s officers and directors also
serve as officers and/or directors of this company. This investment (in
which Canal s ownership interest is approximately 2%) is carried at market
value and the realized gains or losses, if any, are recognized in operating
results. Any unrealized gains or losses are reflected in Stockholders
Equity.
C) Properties and Related Depreciation -- Properties are stated at
cost less accumulated depreciation. Depreciation is provided on the
straight-line method over the estimated useful lives of the properties.
Such lives are estimated from 35 to 40 years for buildings and from 5 to 20
years for improvements and equipment.
Property held for Development or Resale -- Property held for
development or resale consist of approximately 271 acres located in the
midwest of undeveloped land not currently utilized for corporate purposes
nor included in any of the present operating leases. The Company
constantly evaluates proposals received for the purchase, leasing or
development of this asset. The land is valued at cost which does not
exceed the net realizable value.
F-10
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 49% and 66% of the inventory value at October 31,
1997 and 1996, respectively. The remaining 51% and 34% at October 31, 1997
and 1996, 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 63%
($1,775,594) and 37% ($1,035,263) and 64% ($2,311,825) and 36% ($1,277,263)
of total art inventory at October 31, 1997 and 1996, respectively.
Substantially all of the contemporary art inventory held for resale is
comprised of the work of Jules Olitski.
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) 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.
F-11
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
H) 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 available for sale,
if any, are recognized, on a specific identification method, on a trade
date basis.
I) Income Taxes -- Canal and its subsidiaries file a consolidated
Federal income tax return. Deferred income taxes, if any, are provided for
temporary differences between financial reporting and taxable basis of
assets and liabilities.
J) Statements of Cash Flows -- The company considers all short-term
investments with a maturity of three months or less to be cash equivalents.
Cash equivalents primarily include bank, broker and time deposits with an
original maturity of less than three months. These investments are carried
at cost, which approximates market value. Canal made federal and state
income tax payments of $40,000, $38,000 and $47,000 and interest payments
of $954,000, $1,297,000 and $1,485,000 in 1997, 1996 and 1995,
respectively.
K) Earnings Per Share -- In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 128 Earnings Per Share, which will require companies to present basic
earnings per share (EPS) and diluted earnings per share, instead of the
primary and fully diluted EPS that is currently required. The new standard
requires additional information disclosure, and also makes certain
modifications to the currently applicable EPS calculations defined in
Accounting Principles Board No. 15. The new standard is required to be
adopted by all public companies for reporting periods ending after December
15, 1997, and will require restatement of EPS for all prior periods
reported. The Company decided on earlier adoption under the requirement of
SFAS No. 128, for the year ended October 31, 1997, 1996 and 1995.
L) Comprehensive Income -- Effective for fiscal years beginning after
December 15, 1997, Statement of Financial Accounting Standards No. 130
F-12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
requires that comprehensive income and its components, as defined in the
statement, be reported in a financial statement. SFAS No. 130 does not
require that comprehensive income and its components be reported in an
income statement.
The Company elected for early adoption of SFAS No. 130 and is
presenting its Consolidated Statement of Operations in a single step form
at October 31, 1997 and, accordingly, certain reclassifications of prior
year amounts have been made to conform to this presentation.
M) Reclassification -- Certain prior year amounts have been
reclassified to conform to the current year's presentation.
3. INVESTMENTS AVAILABLE FOR SALE
At October 31, the investments available for sale consisted of the
following:
($ 000's Omitted) 1997 1996
Aggregate market value..................... $1,151 $ 535
Aggregate carrying value................... $1,151 $ 535
Canal has an investment in a company in which it, together with other
affiliated entities, comprise a reporting group for regulatory purposes.
It is important to note that it is the group (as defined) that can exercise
influence over this company, not Canal. Accordingly, this investment does
not qualify for consolidation as a method of reporting. Certain of Canal s
officers and directors also serve as officers and/or directors of this
company. This investment (in which Canal s ownership interest is
approximately 2%) is carried at market value and the realized gains or
losses, if any, are recognized in operating results. Any unrealized gains
or losses are reflected in Stockholders Equity.
In fiscal 1997 Canal recognized an unrealized gain on investments of
$616,000 which is shown as a separate component of Stockholders Equity.
4. NOTES AND ACCOUNTS RECEIVABLE
Included in notes and accounts receivable at October 31, 1997 and 1996
were the current portion of notes receivable in the amount of $25,000 which
F-13
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
were generated by real estate and other sales. Notes and accounts
receivable is shown net of a provision for doubtful accounts in the amount
of $20,000 and $12,000 for fiscal 1997 and 1996, respectively.
5. 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
has renegotiated the lease as it relates to the Omaha, Nebraska property,
and accordingly, Canal s fiscal 1997 revenue from this lease was $924,000.
Canal could be entitled to receive additional rent if the stockyards
livestock value or cash flow (as defined) exceeds certain levels. In
addition, Canal retained the right to receive income from certain volume
based rental income agreements with various meat packing companies located
near the stockyards. The income from the ground lease is included in
Canal's operating results as Real Estate operations.
Revenues from the volume based rental agreements for the three years
ended October 31, 1997 were:
($ 000's Omitted) 1997 1996 1995
Sioux City, Iowa (1) $ 0 $ 537 $ 629
Fargo, North Dakota (2) 110 120 100
$ 110 $ 657 $ 729
(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 were no such revenues in fiscal
1997.
(2) Canal is involved in litigation with the operator under this
lease.(see Note 15).
F-14
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. BORROWINGS
At October 31, 1997, substantially all of Canal's real properties, the
stock of certain subsidiaries, the investments and a substantial portion of
its art inventories are pledged as collateral for the following
obligations:
October 31,
($ 000's Omitted) 1997 1996
Variable rate mortgage notes
due May 15, 1998 ................................ $ 2,655 $ 3,960
Variable Rate Mortgage Notes
due September 15, 1998 - related party ......... 700 849
11% mortgage note; original principal amount
$1,697; due April 1, 2011; payable in monthly
installments (including interest) of $17....... 1,266 1,336
9.5% mortgage note; original principal amount
$472; due November 1, 2012; payable in monthly
installments (including interest) of $4........ 405 414
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........ 477 485
Other Note - related party....................... 320 500
Other Note ...................................... 325 0
Total ........................................... 6,148 7,544
Less -- current maturities ...................... 98 564
Long-term debt $ 6,050 $ 6,980
F-15
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, 1997, the
interest rate was 12.00%. This rate remained unchanged at November 15,
1997 and for the next successive 90-day period. The average interest rate
on these notes during 1997 was 12.00%. 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.
The balance outstanding at October 31, 1997 of these notes was $2,655,000.
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. The balance
outstanding at October 31, 1997 of these notes was $700,000.
F-16
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
$150,000 convertible note also due December 31, 1996. Both these notes
were
subsequently extended to December 31, 1997. The $150,000 note is
convertible at the holder s option into one million (1,000,000) shares of
the Company's common stock. The notes pay quarterly interest at the prime
rate per annum (which was 8.5% at October 31, 1997) 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 balance outstanding at
October 31, 1997 of these notes was $320,000.
On December 1, 1997 the Company issued a $325,000 promissory note due
December 1, 2001 as the result of a settlement agreement with the buyer of
a parcel of land located in Portland, Oregon which Canal sold in 1988. The
note carries interest at the prime rate (8.5% at October 31, 1997) adjusted
semi-annually and requires principal and interest payments in each of the
first four years (based on a 30 year amortization schedule) commencing
December 1, 1997. The balance is payable in full on December 1, 2001.
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001, the proceeds of which were used to repay
in full the Company s variable rate mortgage notes due May 15, 1998
($2,605,000), its variable rate mortgage notes due September 15, 1998
($700,000) and two notes which were due December 31, 1997 ($320,000) plus
accrued interest thereon. The purchasers of these notes included certain
entities controlled by the Company s Chairman, the Company s Chief
Executive Officer and members of their families. The variable rate
mortgage notes issued have essentially the same terms and conditions as the
variable rate mortgage notes which were repaid. These notes carry interest
at the highest of four variable rates, determined on a quarterly basis.
These notes, among other things, prohibits Canal from becoming an
investment company as defined by the Investment Company Act of 1940;
requires Canal to maintain minimum net worth; restricts Canal s ability to
pay cash dividends or repurchase stock; requires principal prepayments to
be made only out of the proceeds from the sale of certain assets, and
requires the accrual of additional interest (to be paid at maturity) of
approximately three percent per annum. As a result of the refinancing all
of the debt that was repaid on January 8, 1998 was classified as long term
debt-related party at October 31, 1997.
F-17
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The scheduled maturities and sinking fund requirements of long-term
debt during the next five years are as follows ($ 000's Omitted):
Year Ending Amount
1998 $ 98
1999 100
2000 100
2001 3,800
2002 410
Thereafter 1,640
$ 6,148
7. 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 year ended October 31, 1994 approximately
$760,000 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 1,379,952
2011 283,972
$7,047,924
Deferred income tax assets as of October 31, 1997, 1996 and 1995, due
primarily to net operating losses, have been reduced to zero by valuation
reserves of approximately $1,200,000, $2,700,000 and $2,600,000,
respectively due to uncertainties concerning their realization.
F-18
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. PENSION PLANS
Canal has a defined benefit pension plan covering substantially all of
its salaried employees (the "Plan"). The benefits are based on years of
service and the employee's compensation earned each year. The Company's
funding policy is to contribute the amount that can be deducted for federal
income tax purposes. Accordingly, the Company will make a contribution of
approximately $162,000 for fiscal 1997 and has made contributions of
approximately $164,000 for fiscal 1996 and $160,000 for fiscal 1995.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
Assets of the plan were invested in U.S. Government securities, common
stocks and antiquities.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated balance sheets at October 31, 1997
and 1996.
Plan Year
($ 000's Omitted) 1997 1996
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $1,487 and $1,451 in
1997 and 1996, respectively ............. $ 1,490 $ 1,452
Additional benefit due to assumed future
compensation levels ......................... 25 21
Projected benefit obligation (1) .............. 1,515 1,473
Plan assets at fair value ..................... 1,105 884
Projected benefit obligation in excess
of plan assets .............................. 410 588
Unrecognized net asset ........................ 126 152
Unrecognized net loss ......................... (1,636) (1,792)
Valuation reserve to recognize accrued pension
costs in the consolidated balance sheets .... 1,486 1,620
Accrued pension cost included among accrued
expenses in the consolidated balance sheets.. $ 386 $ 568
(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, 1997, 1996
and 1995 included the following components:
Plan Year
($ 000's Omitted) 1997 1996 1995
Service costs - benefits earned during
the period ............................ $ 8 $ 8 $ 6
Interest cost on projected benefit
obligation ............................ 106 104 114
(Return) loss on assets .............. (250) (95) 34
Net amortization and deferral ........... 193 35 (121)
Net period pension cost ................. $ 57 $ 52 $ 33
Assumptions used in computing the 1997, 1996 and 1995 pension cost
were:
1997 1996 1995
Discount rate ........................... 7.25% 7.75% 7.25%
Rate of increase in compensation
level ................................. 5.75% 6.25%
5.75% Expected long-term rate of return
on assets ............................. 10.00% 10.00% 10.00%
9. ART OPERATIONS
Canal's art dealing operations consist primarily of inventories held
for resale of antiquities primarily from ancient Mediterranean cultures and
contemporary art primarily of one artist. Canal carries on its art dealing
operations through various consignment agreements relating to its
antiquities and contemporary art inventories.
F-20
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Canal established its art operations in October 1988 by acquiring a
significant inventory for resale of antiquities primarily from the ancient
Mediterranean cultures. In November 1989, Canal expanded its art
operations by entering into a cost and revenue sharing agreement with a New
York City gallery for the exclusive representation of Jules Olitski, a
world renowned
artist of contemporary paintings. As part of this agreement Canal
purchased a number of Olitski paintings which it holds for resale with a
book value of approximately $1,000,000 at October 31, 1997. 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 63% ($1,775,594) and 37% ($1,035,263) and
64% ($2,311,825) and 36% ($1,277,263) of total art inventory at October 31,
1997 and 1996, respectively. Substantially all of the contemporary art
inventory held for resale is comprised of the work of Jules Olitski.
Management estimates it may take two to five years to dispose of its
current art inventory. The Company's ability to dispose of its art
inventory is dependent at least in part, on general economic conditions,
including supply, demand, international monetary conditions and inflation.
Additionally, the art market itself is very competitive. Accordingly,
there can be no assurance that Canal will be successful in disposing of its
art inventory within the time frame discussed above.
Canal has its art inventory appraised by an independent appraiser
annually. The 1997 appraisal covered approximately 49% 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 51% 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 1997 Canal recognized a $350,000 valuation allowance
against its art inventory, thereby, increasing the total valuation
allowance to $2,850,000 as of October 31, 1997 as compared to $2,500,000
and $1,000,000 at October 31, 1996 and 1995, 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. Canal will continue to closely monitor the market for
its art inventory and will make adjustments to the carrying value of its
inventory as such adjustments become necessary.
The Company's plan to sell inventory at auction is contemplated in the
normal course of business. Auction in this context is one of the usual
channels used for disposal of its art inventory. The proceeds from these
sales are used to reduce the Company's outstanding debt and finance current
operations. If these sales are not made, the Company has alternate means
of raising cash such as sales of investments, sale of real estate, raising
of new capital and further rescheduling of debt. Some of these measures
were successfully implemented in fiscal 1997.
Canal's art operations have generated operating losses of
approximately $709,000, $1,680,000 and $727,000 on revenues of
approximately $117,000, $195,000 and $260,000 for the years ended October
31, 1997, 1996 and 1995, 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 approximately $1,683,000 and $1,268,000 of art
inventory on consignment with third party dealers at October 31, 1997 and
1996, respectively.
F-22
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
ART INVENTORY - The Company classified its art inventory for the two
years ended October 31, 1997 and 1996 as follows ($ 000's Omitted):
Current Portion Non-Current Portion Total
1997 1996 1997 1996 1997 1996
Antiquities $ 900 $ 900 $ 2,026 $2,212 $ 2,926 $ 3,112
Contemporary 100 100 2,635 2,877 2,735 2,977
Valuation
Allowance (500) (500) (2,350) (2,000) ( 2,850) (2,500)
Net Value $ 500 $ 500 $ 2,311 $3,089 $ 2,811 $ 3,589
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, 1997, 1996, and 1995
were as follows:
($ 000's Omitted) 1997 1996 1995
Antiquities $ 77 $ 195 $ 246
Contemporary 40 0 14
$ 117 $ 195 $ 260
F-23
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. 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, 1997:
Year ended October 31, ($ 000's Omitted)
1998 ........................................ $ 159
1999 ........................................ 26
Minimum payments required ....................... 185
Rental income under subleases ................... 74
Net minimum payments required ................... $ 111
Rent expense under these and other operating leases for the years
ended October 31, 1997, 1996 and 1995 were as follows:
($ 000's Omitted) 1997 1996 1995
Minimum rentals ................... $ 159 $ 160 $ 116
Less: sublease rentals ........... (47) (39) (40)
$ 112 $ 121 $ 76
F-24
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. 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, 1997 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, 1997, there were
323,000 exercisable options outstanding under these plans.
Transactions under these plans are summarized as follows:
Shares Option Price Range
Balance outstanding October 31, 1995.... 327,000 $0.125-$8.625
Options granted ........................ 0 - -
Options expired ........................ 0 $ - -
Balance outstanding October 31, 1996.... 327,000 $0.125-$8.625
Options granted 0 - -
Options expired (4,000) $8.625-$8.625
Balance outstanding October 31, 1997.... 323,000 $0.125-$5.375
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, 1997, 1996 and 1995.
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 adopted the disclosure requirements for this statement
effective for the year ending October 31, 1996, while continuing to
measure compensation cost using APB 25. Had compensation cost been
determined on the basis of SFAS No. 123, the proforma effect on the
Company s net income and earnings per share for the years ended October 31,
1997 and 1996 would have been deminimus.
12. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID
Basic earnings (loss) per share are computed by dividing earnings
(loss) available to common stockholders by the weighted average number of
common share outstanding during the period.
Diluted earnings (loss) per share reflect per share amounts that would
have resulted if dilutive potential common stock had been reported in the
financial statements.
For the Year Ended October 31, 1997
Income Shares Per-share
(Numerator) (Denominator) Amount
Net loss $(1,001,000)
Less preferred stock dividends (182,000)
Loss available to common stock-
holders-basic earnings per share (1,183,000) 4,327,000 $(0.27)
Effect of dilutive securities:
Options (antidilutive) - -
8.5% convertible note
(antidilutive) 13,000 1,000,000
Loss available to common stock-
holders-diluted earnings per share $(1,170,000) 5,327,000 $(0.27)
F-26
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended October 31, 1996
Income Shares Per-share
(Numerator) (Denominator) Amount
Net income $ 842,000
Less preferred stock dividends (162,000)
Income available to common stock-
holders-basic earnings per share 680,000 4,327,000 $ 0.16
Effect of dilutive securities:
Options (antidilutive) - -
7% convertible note
(antidilutive) 11,000 1,000,000
Net income available to common stock-
holders-diluted earnings per share $ 691,000 5,327,000 $ 0.13
For the Year Ended October 31, 1995
Income Shares Per share
(Numerator) (Denominator) Amount
Net loss $(1,518,000)
Less preferred stock dividends (193,000)
Loss available to common stock-
holders-basic earnings per share (1,711,000) 4,327,000 $(0.40)
Effect of dilutive securities:
Options (antidilutive) - -
7% convertible note 11,000 1,000,000
Loss available to common stock-
holders-diluted earnings per share $(1,700,000) 5,327,000 $(0.40)
F-27
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
During the fiscal years ended October 31, 1997, 1996 and 1995, the
Company had 323,000, 327,000 and 327,000 options outstanding, respectively.
The options were not included in the computation of diluted earnings (loss)
per share because the effect of exercisable price conversion would be
antidilutive.
There were no dividends declared on common stock during the years
ended October 31, 1997, 1996 and 1995. Dividends declared on preferred
stock during the years ended October 31, 1997, 1996 and 1995 were
approximately $182,000, $162,000 and $193,000.
13. 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 1,991,035 shares in the form of stock dividends for a total
outstanding at October 31, 1997 of 2,977,900. 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-two of the forty-four quarterly payments have been paid in
additional stock resulting in the issuance of 1,991,035 shares recorded at
their fair value at the time of issuance.
Canal is restricted from paying cash dividends by certain of its debt
agreements (See Note 6). The last cash dividend paid on Canal's preferred
stock was in September 1989. The quarterly dividends payable September 30,
1997 and December 31, 1997 were passed by the Board of Directors. It is
the Company s intention to pay its next dividend on the preferred stock on
June 30, 1998 at which time a one year dividend will have accumulated. The
dividend planned for June 30, 1998 will also be paid in additional stock.
F-28
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 thereof.
Whenever quarterly dividends payable on the Preferred Stock are in
arrears in the aggregate amount at least equal to six full quarterly
dividends (which need not be consecutive), the number of directors
constituting the Board of Directors of Canal shall be increased by two and
the holders of the Preferred Stock shall have, in addition to the rights
set forth above, the special right, voting separately as a single class, to
elect two directors of Canal to fill such newly created directorships at
the next succeeding annual meeting of shareholders (and at each succeeding
annual meeting of shareholders thereafter until such cumulative dividends
have been paid in full).
14. VALUATION RESERVE
The Valuation Reserve represents the excess of additional minimum
pension liability required under the provisions of SFAS No. 87 over the
unrecognized prior service costs of former stockyard employees. Such
excess arose due to the decline in the market value of pension assets
available for pension benefits of former employees, which benefits were
frozen at the time the stockyard operations were sold in 1989. The excess
will be expensed as actuarial computations of annual pension cost (made in
accordance with SFAS No. 87) recognize the deficiency that exists.
F-29
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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,
($ 000's Omitted) 1997 1996 1995
Identifiable assets:
Art ............................... $ 2,818 $ 3,833 $ 5,408
Real estate ....................... 8,630 10,478 11,630
Corporate ......................... 1,512 1,178 1,165
$ 12,960 $ 15,489 $ 18,203
($ 000's Omitted) 1997 1996 1995
Capital expenditures:
Art ............................... $ 0 $ 0 $ 0
Real estate ....................... 41 125 75
Corporate ......................... 6 4 17
$ 47 $ 129 $ 92
Income from real estate operations includes gains (losses) on sales of
real estate of $1.6 million, $3.8 million and $0.3 million in 1997, 1996
and 1995, respectively. Art identifiable assets include approximately $1.0
million and $1.3 million of art inventory in galleries or on consignment
abroad as of October 31, 1997 and 1996, respectively.
F-30
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-31
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.
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. On September 18,
1997, the Minnesota Court of Appeals affirmed in part and reversed in part
the judgement in favor of Pine Valley and Canal paid Pine Valley damages
and interest of $388,000 in final settlement of this suit.
Canal Capital Corporation v. Valley Pride Pack, Inc.
Canal commenced an action in the U.S. District Court in Minnesota on
October 25, 1996, as the assignee of United Market Services Company against
Valley Pride Pack, Inc. (formerly known as Pine Valley Meats, Inc. and
referred to herein as Pine Valley ) for the unpaid livestock fees and
charges due under the 1936 Agreement between the predecessors of Pine
Valley and Canal. Pine Valley filed a motion to dismiss Canal s complaint
on the grounds that the complaint was barred on principles of issue
preclusion and the Rooker-Feldman doctrine, or, that the action should be
stayed pending the appeal before the Minnesota Court of Appeals in a state
court suit involving the same parties. Canal agreed to dismiss the action
without prejudice to its right to reinstitute the action following the
Minnesota Court of Appeals decision. On September 18, 1997, the Minnesota
Court of Appeals affirmed in part and reversed in part a judgement against
Canal and Canal paid Pine Valley damages and interest of $388,000 in
connection with the state court suit. On September 23, 1997, Canal
reinstituted its lawsuit in federal court against Pine Valley for the
recovery of livestock fees. Pine Valley has since brought a motion to
dismiss this second federal court lawsuit on the same grounds as its motion
to dismiss the first federal court lawsuit. There has been no claim
asserted by Pine Valley against Canal in this second federal court lawsuit.
17. 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 became 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
F-33
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
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,
1997:
($ 000's Omitted)
Accumulated
Location Land Improvements Depreciation Value
St. Joseph, MO $ 862 $ 304 $ (178) $ 988
West Fargo, ND 2 292 (216) 78
S. St. Paul, MN 663 2,769 (847) 2,585
Sioux City, IA 446 1,009 (964) 491
Omaha, NE 1,000 0 0 1,000
Sioux Falls, SD 118 98 (77) 142
Corporate Office 0 168 (126) 42
$ 3,091 $ 4,640 $ (2,408) $ 5,323
F-34
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, 1997: (5)
($ 000's Omitted)
Volume
Year Ending Rental Ground Based
October 31, Income (1) Lease(2) Income(3) Total
1998 $ 1,800 $ 924 $ 0 $ 2,724
1999 1,900 924 0 2,824
2000 2,000 0 0 2,000
2001 (4) 2,100 0 0 2,100
2002 2,200 0 0 2,200
$10,000 $ 1,848 $ 0 $ 11,848
(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
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 is taking an extended period of time to
relet this space.
(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 $100,000 annually for
the past five years.
(4) The stockyard ground lease has a ten year renewal option (adjusted for
CPI increases) which can be exercised November 1, 1999 on essentially
the same terms that currently exist. Canal anticipates that the option
will be exercised.
(5) All real estate leases are accounted for as operating leases.
F-35
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments (all of which are held for
non-trading purposes) for which it is practicable to estimate that value.
a) Cash and cash equivalents: The carrying amount approximates fair
market value because of the short maturities of such instruments.
b) Accrued Litigation: The carrying amount approximates the fair
value.
c) Long-Term Debt (See Note 13): The fair value of the Company s
long- term debt, including the current portion thereof, is estimated based
on the quoted market price for the same or similar issues.
d) Long-Term Debt Related Party (see Note 13): It is not practicable
to estimate the fair value of the related party debt.
October 31,
1997 1996
($ 000's Omitted)
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash, restricted cash
and cash equivalents $ 28 $ 28 $ 481 $ 481
Accrued Litigation 0 0 850 850
Current Portion of Long-
Term Debt - related party 0 (d) 500 (d)
Current Portion of Long-
Term Debt 98 98 64 64
Long-Term Debt 2,375 2,375 6,131 6,131
Long-Term Debt - Related
Party 3,675 (d) 849 (d)
F-36
CANAL CAPITAL CORPORATION & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. QUARTERLY INFORMATION (UNAUDITED)
FINANCIAL INFORMATION FOR THE INTERIM PERIODS FISCAL 1997 AND 1996 IS
PRESENTED BELOW:
(000'S OMITTED, EXCEPT PER SHARE DATA)
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
1997 1997 1997 1997
REVENUES $1,000 $2,640 $ 887 $ 784
========= ========= ========= =========
NET (LOSS) INCOME ($197) $927 ($98) ($1,633)
========= ========= ========= =========
NET (LOSS) INCOME
PER COMMON SHARE:
- BASIC ($0.06) $0.20 ($0.03) ($0.39)
========= ========= ========= =========
- DILUTED ($0.06) $0.17 ($0.03) ($0.39)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC 4,327 4,327 4,327 4,327
======== ========= ========= =========
- DILUTED 5,327 5,327 5,327 5,327
========= ========= ========= =========
(000'S OMITTED, 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 (LOSS) INCOME ($4) ($223) ($599) $1,668
========= ========= ========= =========
NET (LOSS) INCOME
PER COMMON SHARE:
- BASIC ($0.01) ($0.06) ($0.15) $0.38
========= ========= ========= =========
- DILUTED ($0.01) ($0.06) ($0.15) $0.31
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC 4,327 4,327 4,327 4,327
======== ========= ======== ========
- 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).
10(a) 1984 Stock Option Plan (1) (see Exhibit A included in the
Registrant's Proxy Statement dated January 31, 1985,
relating to the annual meeting of stockholders held March
18, 1985, which exhibit is incorporated herein by
reference).
10(b) Form of Incentive Stock Option Agreement (filed as Exhibit
10(b) to the Registrant's Form 10-K filed January 31, 1986
and incorporated herein by reference).
10(c) Form of Nonstatutory Stock Option Agreement (filed as
Exhibit 10(c) to the Registrant's Form 10-K filed January
31, 1986 and incorporated herein by reference).
E-1
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(d) 1985 Directors' Stock Option Plan (1) (See Exhibit A
included in the Registrant's Proxy Statement dated January
31, 1986, relating to the annual meeting of stockholders
held March 12, 1986, which exhibit is incorporated herein by
reference).
10(e) Form of Directors' Stock Option Agreement (filed as Exhibit
10(ab) to the Registrant's Form 10-K filed January 29, 1986
and incorporated herein by reference).
10(f) 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).
10(g) 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(h) 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(i) 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(j) 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).
E-2
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(k) 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(l) 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(m) 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(n) 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).
10(o) 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(p) 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).
E-3
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(q) 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(r) 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(s) 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(t) $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).
10(u) $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(v) 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).
E-4
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(w) 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(x) 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(y) 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
byreference).
10(z) 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).
10(aa) $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(ab) $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).
E-5
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(ac) $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(ad) $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(ae) $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(af) General Release dated December 19, 1996 by and between Waste
Management Disposal Services of Oregon, Inc. and Canal
Capital Corporation (filed as Exhibit 10 (by) to the
Registrant s Form 10-K filed January 24, 1997 and
incorporated herein by reference).
10(ag) $325,000 Promissory Note dated December 19, 1996 by and
between Waste Management Disposal Services of Oregon, Inc.
and Canal Capital Corporation (filed as Exhibit 10 (bz) to
the Registrant s Form 10-K filed January 24, 1997 and
incorporated herein by reference).
10(ah) Mutual Release and Settlement Agreement dated September 30,
1996 by and between John Morrell & Co. and Canal Capital
Corporation (filed as Exhibit 10 (ca) to the Registrant s
Form 10-K filed January 24, 1997 and incorporated herein by
reference).
E-6
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
Canal Capital Corporation common stock Auditors
is traded on the over-the-counter
market through the "pink sheets".
Todman & Co., CPAs, P.C.
120 Broadway
New York, NY 10271
Investment Analyst Inquiries General Counsel
Analyst inquiries are welcome. Proskauer Rose Goetz
& Mendelsohn, LLP
1585 Broadway
Phone or write: Michael E. Schultz, New York, NY 10036
President at (212) 826-6040 (212) 969-3000
iii