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, 2002
|_| 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 2-9666
CANAL CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0102492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
717 Fifth Avenue
New York, New York 10022
(Address of principal executive offices) (Zip Code)
(212) 826-6040
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) or the Act:
Common Stock,$.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |X| No |_|
The aggregate market value of the voting stock held by non-affiliates of
the registrant at January 15, 2003, was approximately $86,000. The number of
shares of Common Stock, $.01 par value, outstanding at January 15, 2003 was
4,326,929.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. Business........................................................... 1
ITEM 2 Properties......................................................... 8
ITEM 3. Legal Proceedings.................................................. 9
ITEM 4. Submission of Matters to a Vote of Stockholders.................... 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 7A. Quantitative and Qualitative Disclosures About
Market Risk........................................................ 22
ITEM 8. Financial Statements and Supplementary Data........................ 22
ITEM 9. Changes and Disagreements with Accountants on
Accounting and Financial Disclosure................................ 22
PART III
ITEM 10. Directors and Executive Officers of the Registrant................. 23
ITEM 11. Executive Compensation............................................. 24
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management..................................................... 27
ITEM 13. Certain Relationships and Related Transactions..................... 29
ITEM 14. Controls and Procedures............................................ 29
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................................ 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................. F-1
SIGNATURES................................................................. S-1
CERTIFICATIONS............................................................. S-2
i
PART I
This Form 10-K includes "forward-looking statements". The words "may,"
"will," "should," "continue," "future," "potential," "believe," "expect,"
"anticipate," "project," "plan," "intend," "seek," "estimate" and similar
expressions identify forward-looking statements. We caution you that any
forward-looking statements made by us are not guarantees of future performance
and that a variety of factors, including those discussed below, could cause our
actual results and experience to differ materially from the anticipated results
or other expectations expressed in our forward-looking statements. Please see
"Certain Risk Factors" below for detailed information about the uncertainties
and other factors that may cause actual results to materially differ from the
views stated in such forward-looking statements. All forward-looking statements
and risk factors included in this Form 10-K are made as of the date hereof,
based on information available to us as of the date hereof, and we assume no
obligation to update any forward-looking statement or risk factors.
Item 1. Business
General Description of Business
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 stockyard
operations.
Real Estate Operations - Canal's real estate properties located in five
Midwest states are primarily associated with its current and former agribusiness
related operations. Each property is adjacent to a stockyards operation (two of
which are operated by the company) and consist, for the most part, of an
Exchange Building (commercial office space), land and structures leased to third
parties (meat packing facilities, rail car repair shops, truck stops, lumber
yards and various other commercial and retail businesses) as well as vacant land
available for development or resale. Its principal real estate operating
revenues are derived from rental income from its Exchange Buildings, lease
income from land and structures leased to various commercial and retail
enterprises and proceeds from the sale of real estate properties. Canal has
continued its program of development or sale of what was excess stockyard
property. See "Real Estate Operations".
1
Stockyard Operations - As a result of an August 1, 1999 asset purchase
agreement, Canal now operates two central public stockyards located in St.
Joseph, Missouri and Sioux Falls, South Dakota (collectively the "Stockyards").
Public stockyards act much like a securities exchange, providing markets for all
categories of livestock and fulfilling the economic functions of assembly,
grading, and price discovery. The Company's principal stockyard revenues are
derived from a per head charge ("yardage charge") imposed on all livestock and
the sale of feed and bedding. See "Stockyard Operations".
Our Business
Real Estate Operations
General
Real estate operations, which relate primarily to Canal's current and
former agribusiness operations, resulted in operating income of $0.7 million,
while contributing $1.9 million to Canal's revenues for fiscal 2002. Canal is
involved in the management, development or sale of its agribusiness related real
estate properties at its current and former stockyard locations.
During fiscal 2002, Canal sold approximately 94 acres of land located in
five states (Iowa-1 acre, Minnesota-3 acres, Missouri-6 acres, South Dakota-2
acres and North Dakota-82 acres) for $0.8 million generating operating income of
$0.5 million. The sale of 82 acres of land in North Dakota represented all of
Canal's holdings in this state.
During fiscal 2002, Canal experienced moderate success in increasing
rental income from its real estate properties. Canal will continue to
aggressively pursue additional tenants for its Exchange Buildings and
undeveloped properties in fiscal 2003.
As of October 31, 2002, there are approximately 113 acres of undeveloped
land owned by Canal adjacent to its current and former stockyards. Canal is
continuing the program, which it started several years ago, to develop or sell
this property.
Former Agribusiness Operations
In connection with the 1989 sale of its stockyard operations, Canal
entered into a master lease (the "Lease") with the purchaser covering
approximately 139 acres of land and certain facilities used by the stockyard
operations. The Lease was a 10 year lease, renewable at the purchaser's option
for an additional ten year period, with annual rentals of $750,000 per year for
the first year escalating to $1.0 million per year for the fourth through the
tenth years.
2
In September, 1998 Canal sold a 60 acre parcel of land to the City of
Omaha, Nebraska. This sale included the 17 acres of land leased to the
stockyards operator. In April 1999, Canal sold to the stockyard operator the 31
acres located in South St. Paul, Minnesota which was subject to the Lease.
Finally, in August 1999 Canal bought the operating assets of the remaining three
stockyards subject to the Lease from the operator. All the obligations of the
lessor under the Lease terminated as of October 31, 1999.
Risk
Real estate activities in general may involve various degrees of risk,
such as competition for tenants, general market conditions and interest rates.
Furthermore, there can be no assurance that Canal will be successful in the
development, lease or sale of its agribusiness related real estate properties.
Competition
Canal competes in the area of agribusiness related real estate development
with other regional developers, some of which are substantially larger and have
significantly greater financial resources than Canal. To a certain extent,
Canal's agribusiness revenues are dependent on the ability of the stockyard
operations purchaser and the various meat packers with whom Canal has yardage
agreements to successfully compete in their respective businesses.
Stockyard Operations
General
On August 1, 1999, Canal purchased the operating assets of three public
stockyards (formerly subject to the Master Lease between the Company and United
Market Services - See "Former Agribusiness Operations") located in Sioux City
Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota.
In March 2002, Canal permanently closed its stockyard operations in Sioux
City, Iowa. The Sioux City stockyard operations generated operating losses of
$75,000, $118,000, and $124,000 for the three years ended October 31, 2002, 2001
and 2000, respectively. The stockyard facility was dismantled with the
equipment, fixtures and materials going either to Canal's remaining two
stockyards or sold at a public sale held at the Sioux City location in April
2002. Canal has been engaged in extended negotiations to sell this property to a
real estate developer whose intention is to convert the property into a retail
shopping center. Canal will continue to pursue the sale of this property to this
developer as well as exploring any other opportunities to develop or sell this
property in fiscal 2003.
3
Public stockyards act much like a securities exchange, providing markets
for all categories of livestock and fulfilling the economic functions of
assembly, grading, and price discovery. The livestock handled by the Company's
stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the
stockyard facilities at two different stages, either as feeder livestock or
slaughter livestock. The Company's stockyards provide all services and
facilities required to operate an independent market for the sale of livestock,
including veterinary facilities, auction arenas, auctioneers, weigh masters and
scales, feed and bedding, and security personnel. In addition, the stockyards
provide other services including pure bred and other specialty sales for
producer organizations. The Company promotes its stockyard business through
public relations efforts, advertising, and personal solicitation of producers.
Actual marketing transactions at a stockyard are managed for livestock
producers by market agencies and independent commission sales people to which
the livestock are consigned for sale. These market agencies (some of which are
owned and operated by the Company) and independent sales people receive
commissions from the seller upon settlement of a transaction and the stockyard
receives a yardage fee on all livestock using the facility which is paid within
twenty-four hours of the sale. Yardage fees vary depending upon the type of
animal, the extent of services provided by the stockyard, and local competition.
Yardage revenues are not directly dependent upon market prices, but rather are a
function of the volume of livestock handled. In general, stockyard livestock
volume is dependent upon conditions affecting livestock production and upon the
market agencies and independent commission sales people which operate at the
stockyards. Stockyard operations are seasonal, with greater volume generally
experienced during the first and fourth quarters of each fiscal year, during
which periods livestock is generally brought to market.
Virtually all of the volume at Canal's Sioux Falls stockyards is handled
through market agencies and independent commission sales people, while the St.
Joseph stockyards has solicitation operations of its own which account for
approximately 50% of its livestock volume annually.
Canal intends to continue its soliciting efforts at its St. Joseph
stockyards in fiscal 2003. Further, Canal tries to balance its dependence on
market agencies and independent commission sales people in various ways,
including: developing solicitation operations of its own; direct public
relations; advertising and personal solicitation of producers on behalf of the
stockyards; providing additional services at the stockyards to attract sellers
and buyers; and providing incentives to market agencies and independent
commission sales people for increased business.
Stockyard operations resulted in operating income of approximately $0.5
million while contributing approximately $3.6 million to Canal's revenues for
fiscal 2002.
4
Risk
Stockyard activities in general may involve various degrees of risk, such
as competition from other regional stockyards and sale barns, general market
conditions and to a lesser extent interest rates.
Competition
Canal competes in the area of public stockyards with other regional public
stockyards and sale barns, some of which are substantially larger and have
greater financial resources than Canal. To a certain extent, Canal's stockyard
revenues are dependent on the ability of the market agencies and independent
commission sales people at each of Canal's stockyard locations to compete within
the region.
Art Inventory Held for Sale
Canal has not purchased inventory in several years nor does it currently
have any intention of purchasing additional art inventory in the foreseeable
future. It is the Company's intention to liquidate, in an orderly manner, its
art inventory.
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
$600,000 at October 31, 2002. The representation agreement expired December 1,
1994 and Canal now operates independently in the marketing of its contemporary
art inventory.
Canal will sell 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.
5
Antiquities and contemporary art represented 26% ($230,639) and 74%
($641,749) and 46% ($541,990) and 54% ($641,749) of total art inventory at
October 31, 2002 and 2001, respectively.
In fiscal 2002, Canal sold antiquities totaling $540,000 which sales
generated a net gain of approximately $207,000.
Risk
Selling art in general involves various degrees of risk. Canal's success
in selling its art inventory 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. Further,
there are security risks associated with collections of antiquities and art,
including problems of security in their storage, transportation and exhibition.
Canal carries insurance to cover such risks.
Competition
Canal competes in the sale of its art inventory with investment groups and
other dealers, most of whom are substantially larger and have greater financial
resources and staff than Canal. There may be a number of dealers offering
similar pieces of art for sale or auction at the same time as Canal, thereby
exerting a downward pressure on prices.
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 1%) is carried
at market value.
On May 3, 2000 the company Canal has invested in filed for reorganization
under Chapter 11 of the Bankruptcy Code and subsequently emerged in December,
2000. This action, in combination with other factors, has resulted in Canal's
determination that the steady decline in market value of its investment in this
company is permanent, and accordingly, recognized realized losses on investments
in marketable securities of $13,987, $47,249 and $466,917 in fiscal 2002, 2001
and 2000, respectively.
6
Employees
At December 31, 2002, Canal had approximately 75 employees.
Risk Factors
In addition to other information in this Form 10-K and any documents
incorporated by reference to this Form 10-K, the following risk factors should
be carefully considered when evaluating our Company and our business. Investing
in our common stock involves a high degree of risk, and you should be able to
bear the complete loss of your investment. We also caution you that this Form
10-K includes forward-looking statements that are based on management's beliefs
and assumptions and on information currently available to management. Future
events and circumstances and our actual results could differ materially from
those projected in any forward-looking statements. The risk and uncertainties
described below are not the only ones we face. Additionally, risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations. If any of the risk and uncertainties
actually occur, our future operating results and financial condition could be
harmed and the market price of our common stock could decline.
The Company's risk and uncertainties related to our financial condition
and our business include a variety of factors that are beyond our 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
inventories; securities risks associated with collections of antiquities and
art; and the effect of fluctuations in interest rates and inflation on the
Company's indebtedness.
7
ITEM 2. Properties
Canal's real estate properties located in five Midwest states are
primarily associated with its current and former agribusiness related
operations. Each property is adjacent to a stockyard operation (two of which are
operated by the company) and consist, for the most part, of an Exchange Building
(commercial office space), land and structures leased to third parties (meat
packing facilities, rail car repair shops, truck stops, lumber yards and various
other commercial and retail businesses) as well as vacant land available for
development or resale. As landlord, Canal's management responsibilities include
leasing, billing, repairs and maintenance and overseeing the day to day
operations of its properties. Canal's properties at October 31, 2002 include:
Leased Held for
Year Total Exchange Stkyds to Third Develop-
Location Acquired Site(2) Bldgs. Opertns(1) Parties ment(3)
- -------- -------- ------- -------- ---------- -------- --------
St. Joseph, MO 1942 92 2 21 0 69
S. St. Paul, MN 1937 26 5 0 10 11
Sioux City, IA 1937 52 0 0 19 33
Omaha, NE 1976 11 0 0 11 0
Sioux Falls, SD 1937 31 1 30 0 0
--- -- --- --- ---
Total 212 8 51 40 113
--- -- --- --- ---
The following schedule shows the average occupancy rate and average rental rate
at each of Canal's three Exchange Buildings:
2002 2001
---------------------- -----------------------
Occupancy Average(4) Occupancy Average(4)
Location Rate Rental Rate Rate Rental Rate
- -------- ---- ----------- ---- -----------
St. Joseph, MO 75% $ 4.75 75% $ 4.75
S. St. Paul, MN 74% $12.00 60% $12.00
Sioux Falls, SD 90% $ 7.00 90% $ 7.00
NOTES
(1) As a result of an August 1, 1999 asset purchase agreement, Canal now
operates two central public stockyards.
(2) For information with respect to mortgages and pledges see Note 7.
(3) For information related to this see Note 2(c).
(4) Per square foot.
8
ITEM 3. Legal Proceedings
Canal and its subsidiaries are from time to time involved in litigation
incidental to their normal business activities, none of which, in the opinion of
management, will have a material adverse effect on the consolidated financial
condition and operations of the Company. Canal or its subsidiaries are party to
the following litigation:
Canal Capital Corporation v. Valley Pride Pack, Inc.
Canal commenced an action in U.S. District Court in Minnesota on September
23, 1997, as the assignee of United Market Services Company, against Valley
Pride Pack, Inc. (formerly Pine Valley Meats, Inc. and referred to herein as
"Pine Valley") to recover unpaid livestock fees and charges (estimated to be as
much as $1,000,000) due from Pine Valley under a 1936 Agreement between the
predecessors of Pine Valley and Canal.
On December 20, 2000, the U.S. District Court in Minnesota ruled in
Canal's favor granting its motion for summary judgment, thereby establishing
Pine Valley's liability to Canal for unpaid livestock fees. Additionally, the
court denied all of Pine Valley's assorted defenses and counter claims clearing
this matter to go to trial. On February 7, 2001, a Special Verdict was entered
in favor of Canal resulting in a total award (including pre- judgment interest
and court costs) to Canal of approximately $189,000.
On October 15, 2001, Pine Valley filed a voluntary Chapter 11 bankruptcy
petition with the court. This action makes the collectability of Canal's award
uncertain. For financial statement purposes as of October 31, 2002, Canal has
fully reserved the Pine Valley receivable.
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
Market Information
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, 2002 as reported on the "pink sheets" were:
Fiscal 2002 Fiscal 2001
---------------- ----------------
Quarter Ended High Low High Low
- ------------- ---- --- ---- ---
October 31 ................. $ 1/16 -- $ 1/20 $ 1/8 -- $ 1/16
July 31 .................... 1/10 -- 1/16 1/16 -- 1/16
April 30 ................... 1/10 -- 1/16 1/16 -- 1/16
January 31 ................. 1/9 -- 1/16 1/8 -- 1/16
Dividend Policy and Holders
There were no cash dividends paid during fiscal 2002 or 2001. Canal is
subject to restrictions on the payment of cash dividends under certain debt
agreements. As of January 15, 2003, 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 SELECTED FINANCIAL DATA HAVE BEEN DERIVED FROM OUR
CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE BEEN AUDITED BY TODMAN & CO., CPAs,
P.C., INDEPENDENT AUDITORS. THE INFORMATION SET FORTH BELOW IS NOT NECESSARILY
INDICATIVE OF THE RESULTS OF FUTURE OPERATIONS AND SHOULD BE READ IN CONJUNCTION
WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS" INCLUDED IN ITEM 7 OF OUR ANNUAL REPORT ON FORM 10-K.
(000'S OMITTED, EXCEPT PER SHARE DATA)
YEARS ENDED OCTOBER 31, 2002 2001 2000 1999 1998
--------------------------------------------------------
OPERATING DATA:
REVENUES FROM CONTINUING OPERATIONS $5,413(1) $5,262(2) $5,768(3) $7.584(4) $4.457(5)
NET INCOME (LOSS) $426 ($773) ($922) $1,285 ($1,413)
INCOME (LOSS) PER SHARE:
BASIC $0.07 ($0.25) ($0.27) $0.24 ($0.37)
DILUTED $0.07 ($0.25) ($0.27) $0.24 ($0.37)
CASH DIVIDENDS PAID $0.00 $0.00 $0.00 $0.00 $0.00
WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC 4,327 4,327 4,327 4,327 4,327
- DILUTED 4,327 4,327 4,327 4,327 4,327
AT OCTOBER 31, 2002 2001 2000 1999 1998
------------------------------------------
BALANCE SHEET DATA:
CURRENT ASSETS $ 636 $ 602 $1,569 $1,661 $1,197
PROPERTY ON OPERATING LEASES, NET 3,337 3,302 3,098 3,088 5,861
PROPERTY USED AS STOCKYARDS 1,176 1,281 1,237 1,248 0
ART INVENTORY NON-CURRENT 622 934 697 735 949
OTHER ASSETS 742 859 860 1,202 1,500
------------------------------------------
TOTAL ASSETS $6,513 $6,978 $7,461 $7,934 $9,507
------------------------------------------
CURRENT LIABILITIES $1,867 $2,548 $2,215 $1,965 $2,186
LONG-TERM DEBT 2,667 2,667 2,522 2,612 5,167
STOCKHOLDERS' EQUITY 1,979 1,763 2,724 3,357 2,154
------------------------------------------
TOTAL LIAB. & STOCKHOLDERS'EQUITY (6) $6,513 $6,978 $7,461 $7,934 $9,507
------------------------------------------
COMMON SHARES OUTSTANDING AT YEAR-END 4,327 4,327 4,327 4,327 4,327
11
ITEM 6. Selected Financial Data (continued..)
NOTES:
(1) The revenue increase was due primarily to a $0.4 million increase in sales
of real estate which was offset to a certain extent by a $0.2 million
decrease in stockyard revenues.
(2) The revenue decrease was due primarily to a $0.3 million decrease in sales
of real estate.
(3) The revenue decrease was due primarily to a $4.1 million decrease in sales
of real estate coupled with the elimination of $0.6 million ground lease
income, which decreases were offset to a certain extent by a $3.1 million
increase in revenues from stockyard operations (represents a full year
operation in fiscal 2000 as compared to three months in fiscal 1999).
(4) The revenue increase was due primarily to a $3.4 million increase in sales
of real estate coupled with the $1 million of revenue from the new
stockyard operations.
(5) The revenue decrease was due primarily to a $1.1 million decrease in sales
of real estate.
(6) For discussion of material uncertainties and commitments, see Notes 12 and
17 to the Consolidated Financial Statement.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes thereto included elsewhere in this report.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
We may from time to time make written or oral forward-looking statements,
including those contained in the following section. These forward-looking
statements involve risks and uncertainties and actual results could differ
materially from those discussed in the forward-looking statements. For this
purpose, any statements contained in this section that are not statements of
historical fact may be deemed to be forward-looking statements. Factors which
may effect our results include, but are not limited to, our ability to expand
our customer base, our ability to develop additional and leverage our existing
distribution channels for our products and solutions, dependance on strategic
and channel partners including their ability to distribute our products and meet
or renew their financial commitments, our ability to address international
markets, the effectiveness of our sales and marketing activities, the acceptance
of our products in the market place, the timing and scope of deployments of our
products by customers, fluctuations in customer sales cycles, customers' ability
to obtain additional funding, the emergence of new competitors in the
marketplace, our ability to compete successfully against established competitors
with greater resources, the uncertainty of future governmental regulation, our
ability to manage growth, and obtain additional funds, general economic
conditions and other risks discussed in this report and in our other filings
with the Securities and Exchange Commission. All forward- looking statements and
risk factors included in this document are made as of the date hereof, based on
information available to us as of the date thereof, and we assume no obligation
to update any forward-looking statement or risk factors.
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 eight of the last ten years and is obligated to continue making
substantial annual contributions to its defined benefit pension plan. The
financial statements do not include any adjustments that might result from the
resolution of these uncertainties (See Note 1). 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.
13
Canal recognized net income of $0.4 million for 2002 as compared to the
2001 net loss of $0.8 million and the 2000 net loss of $0.9 million. After
recognition of preferred stock dividend payments (paid in additional shares of
preferred stock for each of fiscal 2002, 2001 and 2000) of $116,000 in 2002,
$302,000 in 2001 and $266,000 in 2000, the results attributable to common
stockholders were net income of $0.3 million in 2002, a net loss of $1.1 million
in 2001 and a net loss of $1.3 million in 2000. Canal's 2002 net income of $0.4
million is due primarily to a $0.2 million increase in gains on sales of real
estate coupled with a $0.3 million increase in other income (included in Canal's
2002 other income is approximately $350,000 received by Canal as a
demutualization compensation payment from an insurance company, from which,
Canal had purchased annuity contracts in the early 1980's for certain of its
retired stockyard employees). Canal's 2001 net loss of $0.8 million is due
primarily to softer than anticipated results from both the real estate and
stockyard operations. This was the result in part to the severity of the weather
in the Midwest this past winter. The severe winter weather increased operating
costs in the real estate operations (i.e. utility costs, snow removal, etc.) and
significantly restricted the ability of producers to move livestock to our
markets.
Canal's revenues from continuing operations consist of revenues from its
real estate operations, stockyard operations. Revenues in 2002 increased by $0.2
million to $5.4 million as compared with 2001 revenues which had decreased by
$0.5 million to $5.2 million from 2000 revenues of $5.7 million. The fiscal 2002
increase in revenues is due primarily to a $0.4 million increase in sales of
real estate which was offset to a certain extent by a $0.2 million decrease in
stockyard revenues. The fiscal 2001 decrease in revenues is due primarily to a
$0.3 million decrease in sales of real estate coupled with a $0.3 million
decrease in stockyard operating revenues primarily caused by the severity of the
weather conditions experienced throughout the Midwest this past winter.
Liquidity and Capital Resources
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 eight of the last ten years and is obligated to continue making
substantial annual contributions to its defined benefit pension plan. The
financial statements do not include any adjustments that might result from the
resolution of these uncertainties (See Note 1). 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.
14
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001. 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 notes carried interest at the highest
of four variable rates, determined on a quarterly basis. These notes, among
other things, prohibit Canal from becoming an investment company as defined by
the Investment Company Act of 1940; require Canal to maintain minimum net worth;
restrict Canal's ability to pay cash dividends or repurchase stock; require
principal prepayments to be made only out of the proceeds from the sale of
certain assets, and required the accrual of additional interest (to be paid at
maturity) of approximately three percent per annum.
On July 29, 1999 the above notes were amended to extend the maturity date
to May 15, 2003; to fix the interest rate at 10% per annum; to agree that the
additional interest due to the holders of the notes shall become current and be
treated as principal due under the notes; and to have certain of the holders
loan the Company $525,000 in additional financing, the proceeds of which was
used to repay in full certain of the holders of the notes. As a result, the
notes are now held in total by the Company's Chief Executive Officer and members
of his family.
On January 10, 2000, the above notes were further amended to have the
noteholders loan the Company $1,725,000 in additional financing, the proceeds of
which was used to repay in full all of the Company's outstanding non related
party long-term debt.
On October 8, 2002, the above notes were amended to extend the maturity
date to May 15, 2006. As of October 31, 2002, the balance due under these notes
was $2,667,000, all of which is classified as long-term debt-related party.
Cash and cash equivalents of $139,000 at October 31, 2002 increased
$125,000 or 893.0% from $14,000 at October 31, 2001. Net cash used by operations
in fiscal 2002 was $0.4 million. Substantially all of the 2002 net proceeds from
the sale of real estate of $0.8 million was used to reduce outstanding accounts
payable and accrued expenses.
During fiscal 2002 Canal decreased the balance of its current liabilities
by a total of $0.7 million.
At October 31, 2002 the Company's current liabilities exceed current
assets by $1.2 million (which was a decrease of $0.7 million) as compared to
October 31, 2001 when the Company's current liabilities exceeded current assets
by $1.9 million, which represented an increase of $1.3 million from 2000. The
fiscal 2002 change in the Company's liquidity is due primarily to the decreases
in outstanding accounts payable and accrued expenses which were paid down by
Canal with the proceeds of sales of real estate. The only required principal
repayments under Canal's debt agreements for fiscal 2003 will be from the
proceeds (if any) of the sale of certain assets.
15
As discussed above, Canal's cash flow position has been under significant
strain for the past several years. Canal continues to closely monitor and reduce
where possible its operating 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.
2002 COMPARED TO 2001
Stockyard Revenues
Stockyard revenues for 2002 of $3.6 million accounted for 65.8% of the
2002 revenues as compared to revenues of $3.8 million or 72.4% for 2001.
Stockyard revenues are comprised of yard handling and auction (89.4% and 88.5%),
feed and bedding income (5.6% and 6.6%), rental income (0.1% and 0.1%) and other
income (4.9% and 4.8%) for 2002 and 2001, respectively. The 2002 decrease is due
primarily to the closing of the Sioux City Stockyards in March 2002. There were
no significant percentage variations in the year to year comparisons.
Stockyard Expenses
Stockyard expenses for 2002 of $3.0 million decreased by $0.4 million
(11.6%) from $3.4 million in 2001. Stockyard expenses are comprised of labor and
related costs (47.6% and 45.1%), operating and maintenance (27.5% and 26.0%),
feed and bedding expense (5.3% and 5.6%), depreciation and amortization (0.8%
and 0.8%), taxes other than income taxes (7.2% and 7.2%) and general and
administrative expenses (11.6% and 15.3%) for 2002 and 2001, respectively. As
discussed above, the 2002 decrease is due primarily to the closing of the Sioux
City Stockyards in March 2002. There were no significant percentage variations
in the year to year comparisons.
Real Estate Revenues
Real estate revenues for 2002 of $1.9 million accounted for 34.2% of the
2002 revenues as compared to revenues of $1.4 million or 27.6% for 2001. Real
estate revenues are comprised of sale of real estate (44.2% and 29.5%), rental
income from commercial office space in its Exchange Buildings (26.3% and 29.8%),
rentals and other lease income from the rental of vacant land and certain
structures (29.5% and 40.6%) and other income (0.0% and 0.1%) for 2002 and 2001,
respectively. The 2002 increase is due primarily to the $0.4 million increase in
sales of real estate. The percentage variations in the year to year comparisons
are due primarily to the increase in real estate sales for fiscal 2002.
16
Real Estate Expenses
Real estate expenses for 2002 of $1.1 million increased by $0.1 million
(10.0%) from $1.0 million in 2001. Real estate expenses are comprised of labor,
operating and maintenance (40.4% and 42.8%), depreciation and amortization
(12.0% and 12.8%), taxes other than income taxes (10.7% and 15.2%), cost of real
estate sold (32.8% and 16.6%),and general and administrative and other expenses
(4.1% and 12.6%) for 2002 and 2001, respectively. The 2002 increase in real
estate expenses is due primarily to the $0.2 million increase in cost of real
estate sold in fiscal 2002. The percentage variations in year to year
comparisons is also due primarily to the increase in the cost of real estate
sold in fiscal 2002.
General and Administrative
General and administrative expenses for 2002 of $1.1 million decreased
$0.2 million (10.9%) from $1.3 million in 2001. The major components of general
and administrative expenses are officers salaries (40.4% and 36.0%), rent (4.9%
and 7.1%), legal and professional fees (2.8% and 15.0%), insurance (14.1% and
8.6%) and office salaries (6.6% and 8.4%) for 2002 and 2001, respectively. The
percentage decrease in rent reflects Canal's subletting a significant portion of
its New York office space commencing in the fourth quarter of fiscal 2002. The
percentage decrease in legal and professional fees is due to a sharp decrease in
legal fees which were associated with the fiscal 2001 Pine Valley lawsuit. The
percentage increase in insurance reflects an increase in the cost of worker's
compensation coverage for the stockyard employees. The percentage decrease in
office salaries reflects staff reductions in the third quarter of fiscal 2001.
Interest and Other Income
Interest and other income of $467,000 for 2002 increased $336,000 from
$131,000 in fiscal 2001. The 2002 interest and other income includes
approximately $350,000 received by Canal as a demutalization compensation
payment from an insurance company, from which, Canal had purchased annuity
contracts in the early 1980's for certain of its retired stockyard employees.
The balance of interest and other income is comprised of dividend and interest
income.
Interest Expense
Interest expense for 2002 of $0.3 million increased slightly (3.8%) from
$0.3 million in 2001. The 2002 increase is due primarily to a modest increase in
the outstanding debt incurred in the final quarter of fiscal 2001. Interest
rates on Canal's variable rate mortgage notes averaged 10.00% in 2002 and 2001.
At October 31, 2002 the outstanding balance of these notes was $2,667,000.
17
Income (Loss) from Art Sales
In fiscal 2002, Canal recognized a net gain from art sales of $207,000 as
compared to a net loss of $19,000 for fiscal 2001. The 2002 increase reflects
the overall increase in sales of art during 2002 as compared to 2001. Art
revenues are comprised of the proceeds from the sale of antiquities and
contemporary art. In fiscal 2002, Canal sold two pieces of antiquity art
generating gross proceeds of $540,000 as compared to fiscal 2001 sales of one
piece of contemporary art generating gross proceeds of $24,000. Art expenses are
comprised of the cost of inventory sold and selling, general and administrative
expenses. In fiscal 2002, Canal incurred cost of inventory sold of $311,000 (net
of a valuation allowance of $509,000) as well as selling, general and
administrative expenses of $22,000 as compared to fiscal 2001 cost of inventory
sold of $13,000 (net of a valuation allowance of $36,000) and selling, general
and administrative expenses of $30,000. It is the Company's policy to use the
adjusted carrying value for sales, thereby reducing the valuation reserve
proportionately as the inventory is sold.
Realized Loss on Investments
At October 31, 2002, Canal determined that the decline in the market value
of its investments available for sale was permanent, and accordingly, recognized
a realized loss of approximately $14,000 in fiscal 2002. Further, Canal had
recognized a realized loss of approximately $47,000 on this investment in fiscal
2001.
Other Expense
Other expense of $113,000 for 2002 decreased $10,000 (8.1%)from $123,000
in fiscal 2001.
2001 COMPARED TO 2000
Stockyard Revenues
Stockyard revenues for 2001 of $3.8 million accounted for 72.4% of the
2001 revenues as compared to revenues of $4.1 million or 71.0% for 2000.
Stockyard revenues are comprised of yard handling and auction (88.5% and 88.4%),
feed and bedding income (6.6% and 6.5%), rental income (0.1% and 0.1%) and other
income (4.8% and 5.0%) for 2001 and 2000, respectively. The 2001 decrease is due
primarily to the severity of the weather in the Midwest this past winter which
significantly restricted the ability of producers to move livestock to our
markets. There were no significant percentage variations in the year to year
comparisons.
18
Stockyard Expenses
Stockyard expenses for 2001 of $3.4 million decreased by $0.1 million
(2.7%) from $3.5 million in 2000. Stockyard expenses are comprised of labor and
related costs (45.1% and 48.4%), operating and maintenance (26.0% and 23.6%),
feed and bedding expense (5.6% and 5.7%), depreciation and amortization (0.8%
and 0.5%), taxes other than income taxes (7.2% and 7.4%) and general and
administrative expenses (15.3% and 14.4%) for 2001 and 2000, respectively. The
2001 decrease is due primarily to the decrease in the volume of livestock
handled in 2001 due to the severity of the weather in the Midwest this past
winter. There were no significant percentage variations in the year to year
comparisons.
Real Estate Revenues
Real estate revenues for 2001 of $1.4 million accounted for 27.4% of the
2001 revenues as compared to revenues of $1.7 million or 28.7% for 2000. Real
estate revenues are comprised of sale of real estate (29.5% and 41.3%), rental
income from commercial office space in its Exchange Buildings (29.8% and 25.0%),
rentals and other lease income from the rental of vacant land and certain
structures (40.6% and 33.7%) and other income (0.1% and 0.0%) for 2001 and 2000,
respectively. The 2001 decrease is due primarily to the $0.3 million decrease in
sales of real estate offset to a certain extent by modest increases in Exchange
Building and outside real estate rental income. The percentage variations in the
year to year comparisons are due primarily to the decrease in real estate sales
for fiscal 2001.
Real Estate Expenses
Real estate expenses for 2001 of $1.0 million decreased by $0.2 million
(14.0%) from $1.2 million in 2000. Real estate expenses are comprised of labor,
operating and maintenance (42.8% and 36.6%), depreciation and amortization
(12.8% and 9.4%), taxes other than income taxes (15.2% and 11.8%), cost of real
estate sold (16.6% and 34.8%),and general and administrative and other expenses
(12.6% and 7.4%) for 2001 and 2000, respectively. The 2001 decrease in real
estate expenses is due primarily to the $0.2 million decrease in cost of real
estate sold in fiscal 2001. The percentage variations in year to year
comparisons is also due primarily to the decrease in the cost of real estate
sold in fiscal 2001.
General and Administrative
General and administrative expenses for 2001 of $1.3 million decreased
slightly (3.3%) from $1.3 million in 2000. The major components of general and
administrative expenses are officers salaries (36.0% and 34.5%), rent (7.1% and
6.8%), legal and professional fees (15.0% and 9.4%), insurance (8.6% and 15.2%)
and office salaries (8.4% and 9.2%) for 2001 and 2000,
19
respectively. The percentage increase in legal and professional fees is due to a
sharp increase in legal fees associated with the Pine Valley lawsuit. The
percentage decrease in insurance reflects a decrease in coverage purchased. The
percentage decrease in office salaries reflects staff reductions in fiscal 2001.
Interest and Other Income
Interest and other income of $131,000 for 2001 decreased $9,000 (6.4%)
from $140,000 in fiscal 2000. Interest and other income amounts are comprised
primarily of dividend and interest income.
Interest Expense
Interest expense for 2001 of $0.3 million increased slightly (0.6%) from
$0.3 million in 2000. The 2001 increase is due primarily to a modest increase in
the outstanding debt. Interest rates on Canal's variable rate mortgage notes
averaged 10.00% in 2001 as compared to averages of 10.00% and 11.00% in fiscal
2000 and 1999, respectively. At October 31, 2001 the outstanding balance of
these notes was $2,667,000.
Income (Loss) from Art Sales
In fiscal 2001, Canal recognized a net loss from art sales of $19,000 as
compared to a net loss of $16,000 for fiscal 2000. Art revenues are comprised of
the proceeds from the sale of antiquities and contemporary art. In fiscal 2001,
Canal sold one piece of contemporary art generating gross proceeds of $24,000 as
compared to fiscal 2000 sales of two pieces of contemporary art generating gross
proceeds of $51,000. Art expenses are comprised of the cost of inventory sold
and selling, general and administrative expenses. In fiscal 2001, Canal incurred
cost of inventory sold of $13,000 (net of a valuation allowance of $36,000) as
well as selling, general and administrative expenses of $30,000 as compared to
fiscal 2000 cost of inventory sold of $38,000 (net of a valuation allowance of
$51,000) and selling, general and administrative expenses of $29,000.
Realized Loss on Investments
At October 31, 2001, Canal determined that the decline in the market value
of its investments available for sale was permanent, and accordingly, recognized
a realized loss of approximately $47,000 in fiscal 2001. Further, Canal had
recognized a realized loss of approximately $467,000 on this investment in
fiscal 2000.
Other Expense
Other expense of $170,000 for 2001 decreased $9,000 (5.3%)from $179,000 in
fiscal 2000.
20
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the
eight quarters ended October 31, 2002. This quarterly information is unaudited,
has been prepared on the same basis as the annual financial statements, and, our
opinion, reflects all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the information for periods presented.
(000'S OMITTED, EXCEPT PER SHARE DATA)
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
2002 2002 2002 2002
REVENUES $1,439 $1,434 $1,283 $1,257
======= ======= ======= =======
NET INCOME (LOSS) $377 ($29) $83 ($5)
======= ======= ======= =======
NET INCOME (LOSS)
PER COMMON SHARE:
- BASIC $0.07 ($0.02) $0.04 ($0.01)
======= ======= ======= =======
- DILUTED $0.07 ($0.02) $0.04 ($0.01)
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC 4,327 4,327 4,327 4,327
======= ======= ======= =======
- DILUTED 4,327 4,327 4,327 4,327
======= ======= ======= =======
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
2001 2001 2001 2001
REVENUES $1,547 $1,300 $1,019 $1,387
======= ======= ======= =======
NET INCOME (LOSS) $115 ($140) ($237) ($511)
======= ======= ======= =======
NET INCOME (LOSS)
PER COMMON SHARE:
- BASIC $0.01 ($0.05) ($0.07) ($0.11)
======= ======= ======= =======
- DILUTED $0.01 ($0.05) ($0.07) ($0.11)
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC 4,327 4,327 4,327 4,327
======= ======= ======= =======
- DILUTED 4,327 4,327 4,327 4,327
======= ======= ======= =======
21
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Securities and Exchange Commission's rule related to market risk
disclosure requires that we describe and quantify our potential losses from
market risk sensitive instruments attributable to reasonably possible market
changes. Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments (such as investments and debt) that
are sensitive to future changes in interest rates, currency exchange rates,
commodity prices or other market factors. We are not exposed to market risks
from changes in foreign currency, exchange rates or commodity prices. We do not
hold derivative financial instruments nor do we hold securities for trading or
speculative purposes. Under our current policies, we do not use interest rate
derivative instruments to manage our exposure to interest rate changes.
ITEM 8. Financial Statements and Supplemental Data
The financial statements filed as part of this annual report on Form 10-K
are identified in the Index to Consolidated Financial Statements on page F-1
hereto and are set forth on pages F-2 through F-31 included in Item 15(A) of the
report.
ITEM 9. Disagreements on Accounting and Financial Disclosure
None.
22
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The Board of Directors has designated an Executive Committee consisting of
Messrs. Edelman and Schultz. The Board of Directors has delegated to the
Executive Committee general authority with respect to most matters that would
otherwise be considered by the full Board. During fiscal 2002 the Board of
Directors held one meeting, and the Executive Committee held four meetings, all
of which were attended by both Mr. Edelman and Mr. Schultz.
The following information with respect to the principal occupation or
employment of each director and executive officer and the name and principal
business of the Company or other organization in which such occupation or
employment is carried on, and in regard to other affiliations and business
experience during the past five years, has been furnished to the Company by the
respective directors.
Asher B. Edelman, age 63, 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 Dynacore Holdings Corporation,
formerly known as Datapoint Corporation ("Dynacore") since March 1985 and has
been Dynacore'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 66, 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 56, has been a Director since 1984. Mr. Agranoff
is currently Vice President, General Counsel and Corporate Secretary of Dynacore
and has been a Director of Dynacore 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 53, has been Vice President, Chief Financial
Officer and Treasurer since January 1989 and assumed responsibility as Secretary
of the Company in September 1995. Mr. Schauder was corporate controller from
July 1985 to January 1989.
23
There are no family relationships between any of the aforementioned
executive officers of the Registrant and such executive officers were elected to
serve for a term of one year or until the election and qualification of their
respective successors.
ITEM 11. Executive Compensation
The following table summarizes the compensation of the Company's Chief
Executive Officer and the other two executive officers of the Company whose
salary for fiscal 2002 exceeded $100,000.
SUMMARY COMPENSATION TABLE - Annual Compensation
Name and Principal
Position Year Salary
- ------------------ ---- ---------
Michael E. Schultz 2002 $ 175,000
President and Chief 2001 $ 175,000
Executive Officer 2000 $ 175,000
Asher B. Edelman 2002 $ 175,000
Chairman of the Board 2001 $ 175,000
and Executive Committee 2000 $ 175,000
Reginald Schauder 2002 $ 108,700
Vice President, Chief 2001 $ 108,700
Financial Officer 2000 $ 108,700
Treasurer and Secretary
In order to help ease the stress on the Company's cash flow, Messrs.
Edelman and Schultz each agreed to defer $55,000 of their salaries effective
June 1, 2001. These amounts will be accrued by the Company until such time as
the Company can make the payments. At October 31, 2002, the total liability
under this agreement was approximately $28,000.
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 $41,000, $24,000 and $36,000 for fiscal years 2002, 2001 and
2000, respectively.
Retirement Plans
The Canal Capital Corporation Retirement Plan (the "Retirement Plan")
provides benefits to eligible employees of the Company and its subsidiaries and
affiliates. Directors who are not employees are not eligible to participate in
the Retirement Plan. The Retirement Plan is administered by the Company. All
Company contributions under the Retirement Plan were deposited with an insurance
company and invested in a group annuity contract through May 30, 1985.
Thereafter, all Company contributions have been held
24
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, 2002.
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 5,500* $ -0-
Asher B. Edelman 0 $ -0-
Reginald Schauder 0 $ -0-
* All options were exercisable at October 31, 2002.
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 and expired (unexercised) in December 2001. Directors are reimbursed for
expenses incurred in attending Board and Committee meetings, including those for
travel, food and lodging.
Stock Options for Directors
The Company maintains an option plan for the benefit of directors of the
Company -- the 1985 Directors' Stock Option Plan (the "1985 Plan"), which was
approved by the stockholders of the Company on March 12, 1986. Pursuant to the
1985 Plan, a maximum of 264,000 shares of common stock, $0.01 par value per
share, of the Company have been reserved for issuance to directors and members
of the Executive Committee of the Company and its subsidiaries.
25
Options granted under the 1985 Plan are non-qualified stock options and
have an exercise price equal to 100% of fair market value of the shares on the
date of grant. The options may be exercised no earlier than one year from the
date of grant and no later than ten years after the date of grant. Under the
1985 Plan, options covering 22,000 shares are automatically granted to each new
director upon the effective date of his election to office and options covering
5,500 shares are automatically granted to each new member of the Executive
Committee upon the effective date of his appointment to office. In addition, the
1985 Plan was amended on December 18, 1991 to provide an automatic grant of
options covering 25,000 shares to each current and new director who is not an
employee of the Company including Mr. Agranoff (which options expired in
December 2001). The 1985 Plan is administered by the Board of Directors of the
Company.
During the 2002 fiscal year, no options under the 1985 plan were granted
and no options previously granted were exercised. At October 31, 2001, options
covering an aggregate of 5,500 shares were outstanding under the 1985 Plan and
were held by a member of the Executive Committee. The exercise price per share
of all outstanding options under the 1985 Plan is $0.13. The expiration date for
outstanding options under the 1985 Plan is January 2003.
Compensation Committee - Interlocks and Insider Participation
The Board of Directors (comprised of Asher B. Edelman, Chairman of the
Board and Chairman of the Executive Committee, Michael E. Schultz, President and
Chief Executive Officer and Gerald N. Agranoff) determines the compensation of
the Chief Executive Officer and the Company's other executive officers and
administers the Company's 1984 Stock Option Plan and 1985 Stock Option Plan for
Directors.
In connection with the Company's investment activities, the Executive
Committee of the Board of Directors, through Mr. Edelman, has the authority to
invest funds of the Company in securities of other companies. Certain funds of
the Company have been invested in the securities of other companies in which Mr.
Edelman, other directors of the Company or their affiliates are directors or
officers, or in which one or more of such persons may also have invested. Since
November 1, 1993, such companies included Dynacore Holdings Corporation
(formerly known as Datapoint Corporation). The Company has filed with the SEC
Schedules 13D jointly with Plaza, Mr. Edelman, Edelman Management, Edelman
Limited Partnership, certain investment partnerships of which Mr. Edelman is
sole or controlling general partner, certain of the companies referred to in the
preceding sentence and other persons, indicating that the filing parties
constitute groups for purposes of such filings with respect to the acquisition
of securities in the companies referred to in the preceding sentence.
26
ITEM 12. Securities Ownership of Certain Beneficial Owners and Management
To the knowledge of the Company, the only beneficial owners of 5% or more
of the voting stock of the Company (other than those listed below under
"Securities Owned by Management") as of January 15, 2003 were:
SECURITIES BENEFICIALLY OWNED
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
---- ---------------------- ----------------
Asher B. Edelman 2,323,355 (c) 53.70
Michael E. Schultz 64,335 (c) 1.49
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.
SECURITIES OWNED BY MANAGEMENT
The following table sets forth certain information as of January 15, 2003,
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.
27
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
---- ---------------------- ----------------
Gerald Agranoff 0 0.00
Asher B. Edelman 2,323,355 (b)(c) 53.70
Reginald Schauder 100 (d) 0.01
Michael E. Schultz 64,335 (e)(f) 1.49
---------
All Directors and Officers
as a group (4 persons) 2,387,790 55.11
=========
(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) The number reported herein for Mr. Edelman includes 31,300 shares held
in Mr. Edelman's retirement plan, 1,017,220 shares owned by A.B. Edelman Limited
Partnership ("Edelman Limited Partnership"), of which Mr. Edelman is the sole
general partner, 590,186 shares of common stock owned by the Edelman Family
Partnership, L.P. ("Edelman Family Partnership"), of which Mr. Edelman is the
general partner, 413,750 shares of common stock owned by the Edelman Value Fund
Ltd. (the "Fund") of which Mr. Edelman is the investment manager, 43,830 shares
of common stock owned by Edelman Value Partners, L.P. ("Value Partners"), of
which Mr. Edelman is the sole stockholder of the general partner, 26,620 shares
of common stock held by Canal Capital Corporation Retirement Plan ("Canal
Retirement Plan"), of which Mr. Edelman serves as a trustee, 8,400 shares owned
by Aile Blanche, Inc., of which Mr. Edelman is the sole stockholder and 3,399
shares owned by Felicitas Partners, L.P. ("Felicitas"), the general partner of
which is Citas Partners ("Citas") of which Mr. Edelman is the controlling
general partner. Edelman Limited Partnership has the sole power to vote and
dispose of the shares owned by it, which power is exercisable by Mr. Edelman as
the sole general partner of Edelman Limited Partnership. Edelman Family
Partnership has the sole power to vote and dispose of the shares owned by it,
which power is exercisable by Mr. Edelman as the general partner. Mr. Edelman as
the investment manager of the Fund directs the voting and disposition of the
Fund's securities. Value Partners has shared power to vote and dispose of the
shares owned by it. The power to dispose of such shares is exercisable by A. B.
Edelman Management Company, Inc., a corporation controlled by Mr. Edelman as the
sole stockholder. Canal Retirement Plan has the sole power to vote and dispose
of the shares owned by it, which power is exercisable by Mr. Edelman as trustee.
28
Aile Blanche, Inc. has the sole power to vote and dispose of the shares owned by
it, which power is exercisable by Mr. Edelman as President. Felicitas has the
sole power to vote and dispose of the shares owned by it, which power is
exercisable by Mr. Edelman as the controlling general partner of Citas.
Additionally, the number reported herein for Mr. Edelman includes 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.
(c) The number reported herein for Mr. Edelman excludes 242,000 shares of
common stock owned by Mr. Edelman's mother and 11,100 shares of common stock
held in a trust for Mr. Edelman's son, as to which Mr. Edelman expressly
disclaims beneficial ownership.
(d) Represents 100 shares owned directly.
(e) Includes 58,835 shares owned directly and 5,500 shares subject to
options which are presently exercisable.
(f) The number reported herein for Mr. Schultz excludes 26,620 shares of
common stock held by the Canal Capital Corporation Retirement Plan of which Mr.
Schultz serves as a trustee, as to which Mr. Schultz expressly disclaims
beneficial ownership.
ITEM 13. Certain Relationships and Related Transactions
See: Item 11 "Compensation Committee Interlocks and Insider
Participation"
Item 14. Controls and Procedures
Our management, which includes our Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13(a)-14(c) promulgated
under the Securities Exchange Act of 1934) as of October 31, 2002 ("the
Evaluation Date") within 90 days prior to the filing date of this report. Based
upon that evaluation our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective for timely
gathering, analyzing and disclosing the information we are required to disclose
in our reports filed under the Securities Exchange Act of 1934, as amended.
There have been no significant changes made in our internal controls or other
factors that could significantly effect our internal controls subsequent to the
Evaluation Date.
29
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements and Notes
See accompanying index to consolidated financial statements.
2. Schedules and Supplementary Note
None
3. Exhibits
See accompanying index to exhibits.
(b) 1. Reports on Form 8-K
The Company filed a Form 8-K on August 5, 2002 in which the
Company announced that it had entered into an amended letter
of intent with AEI Environmental, Inc. to extend the time
frame for negotiations of the Company's purchase of certain
business interests owned by AEI that are involved in the sale
of livestock on the internet.
Further, on December 3, 2002 the Company filed a Form 8-K
announcing the termination of negotiations with AEI.
30
FORM 10-K - ITEM 15(a)(3)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
(a) 3. Exhibits -
The following exhibits required by Item 601 of Regulations S-K are filed
as part of this report. For convenience of reference, the exhibits are listed
according to the numbers appearing in Table I to Item 601 of Regulation S-K.
Each exhibit which is incorporated by reference and the document in which such
exhibit was originally filed are indicated in parentheses immediately following
the description of such exhibit.
Exhibit No.
- -----------
3(a) Restated Certificate of Incorporation (filed as Exhibit 3(a)
to the Registrant's Registration Statement on Form 10 filed
with the Securities and Exchange Commission on May 3, 1984
(the "Form 10") and incorporated herein by reference).
3(b) Bylaws (filed as Exhibit 3(b) to the Registrant's Registration
Statement on Form 10 and incorporated herein by reference).
3(c) Certificate of Amendment of the Restated Certificate of
Incorporation dated September 22, 1988 (filed as Exhibit 3(c)
to the Registrant's Form 10-K filed January 29, 1989 and
incorporated herein by reference).
10(a) 1984 Stock Option Plan (1) (see Exhibit A included in the
Registrant's Proxy Statement dated January 31, 1985, relating
to the annual meeting of stockholders held March 18, 1985,
which exhibit is incorporated herein by reference).
10(b) Form of Incentive Stock Option Agreement (filed as Exhibit
10(b) to the Registrant's Form 10-K filed January 31, 1986 and
incorporated herein by reference).
10(c) Form of Nonstatutory Stock Option Agreement (filed as Exhibit
10(c) to the Registrant's Form 10-K filed January 31, 1986 and
incorporated herein by reference).
10(d) 1985 Directors' Stock Option Plan (1) (See Exhibit A included
in the Registrant's Proxy Statement dated January 31, 1986,
relating to the annual meeting of stockholders held March 12,
1986, which exhibit is incorporated herein by reference).
31
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
- -----------
10(e) Form of Directors' Stock Option Agreement (filed as Exhibit
10(ab) to the Registrant's Form 10-K filed January 29, 1986
and incorporated herein by reference).
10(f) 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(g) Stock Pledge and Security Agreement dated January 8, 1998 by
and between Canal Capital Corporation, SY Trading Corporation
and CCC Lending Corporation (filed as Exhibit 10 (ai) to the
Registrant's Form 10-K filed January 30, 1998 and incorporated
herein by reference).
10(h) Security Agreement dated January 8, 1998 by and between Canal
Capital Corporation, Canal Galleries Corporation, Canal Arts
Corporation and CCC Lending Corporation (filed as Exhibit 10
(an) to the Registrant's Form 10-K filed January 30, 1998 and
incorporated herein by reference).
10(i) $1,000,000 Promissory Note dated January 8, 1998 by and
between Michael E. Schultz and Canal Capital Corporation
(filed as Exhibit 10 (ao) to the Registrant's Form 10-K filed
January 30, 1998 and incorporated herein by reference).
10(j) $242,000 Promissory Note dated January 8, 1998 by and between
Michael E. Schultz Defined Benefit Trust and Canal Capital
Corporation (filed as Exhibit 10 (ap) to the Registrant's Form
10-K filed January 30, 1998 and incorporated herein by
reference).
10(k) $229,000 Promissory Note dated January 8, 1998 by and between
Lora K. Schultz and Canal Capital Corporation (filed as
Exhibit 10 (aq) to the Registrant's Form 10-K filed January
30, 1998 and incorporated herein by reference).
32
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
- -----------
10(l) $186,000 Promissory Note dated January 8, 1998 by and between
Roger A. Schultz Pension Plan and Canal Capital Corporation
(filed as Exhibit 10 (ar) to the Registrant's Form 10-K filed
January 30, 1998 and incorporated herein by reference).
10(m) $143,000 Promissory Note dated January 8, 1998 by and between
Richard A. Schultz and Canal Capital Corporation (filed as
Exhibit 10 (as) to the Registrant's Form 10-K filed January
30, 1998 and incorporated herein by reference).
22 Subsidiaries of the registrant.
SUBSIDIARIES IDENTIFICATION #
------------ ----------------
SY Trading Corp. 13-3244066
Omaha Livestock Market, Inc. 47-0582031
Union Stockyards Co. of Fargo 45-0205040
Sioux Falls Stockyards Company 46-0189565
Canal Galleries Corporation 13-3492920
Canal Arts Corporation 13-3492921
DIVISIONS
---------
Canal Capital Corporation 51-0102492
St. Joseph Stockyards
St. Paul Union Stockyards
Sioux City Stockyards
Note: All subsidiaries are 100% owned
33
INVESTOR INFORMATION
Annual Meeting Corporate Headquarters
The Annual Meeting of Shareholders 7l7 Fifth Avenue 15th floor
of Canal Capital Corporation will New York, NY 10022
be held in our offices at 717
Fifth Avenue, 15th floor, New York,
NY, on a date to be announced.
Stock Certificates
The Board of Directors of Canal Inquiries regarding change of
Capital Corporation urges all name or address, or to replace
shareholders to vote their shares lost certificates should be made
in person or by proxy and thus directly to American Stock
participate in the decisions that Transfer and Trust Co., 59 Maiden
will be made at the annual meeting. Lane, New York, NY 10007 or
telephone (718) 921-8200
Stock Listing
Canal Capital Corporation common stock Auditors
is traded on the over-the-counter
market through the "pink sheets".
Todman & Co., CPAs, P.C.
120 Broadway
New York, NY 10271
Investment Analyst Inquiries General Counsel
Analyst inquiries are welcome. Proskauer Rose LLP
1585 Broadway
Phone or write: Michael E. Schultz, New York, NY 10036
President at (212) 826-6040 (212) 969-3000
34
FORM 10-K -- ITEM 15(a)(1) and (2)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
The following documents are filed as part of this report:
(a) 1. Financial Statements --
Independent Auditors Report....................................... F-2
Consolidated Balance Sheets October 31, 2002 and 2001............. F-3
Consolidated Statements of Operations and Comprehensive
Income (Loss) for the years ended October 31, 2002,
2001 and 2000.................................................. F-5
Consolidated Statements of Changes in Stockholders'
Equity for the years ended October 31, 2002, 2001
and 2000....................................................... F-7
Consolidated Statements of Cash Flows for the
years ended October 31, 2002, 2001 and 2000.................... F-8
Notes to Consolidated Financial Statements........................ F-9
F-1
INDEPENDENT AUDITORS REPORT
To the Stockholders of Canal Capital Corporation:
We have audited the accompanying consolidated balance sheets of Canal
Capital Corporation (a Delaware corporation) and Subsidiaries (the "Company") as
of October 31, 2002 and 2001, and the related consolidated statements of
operations and comprehensive income (loss), changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended October 31,
2002. 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 audits in accordance with auditing standards generally
accepted in the United States. 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 audits provide 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, 2002 and 2001, and the results of their
operations and cash flows for each of the years in the three-year period ended
October 31, 2002, in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
in eight of the last ten years and is obligated to continue making substantial
annual contributions to its defined benefit pension plan. All of these matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 1. The 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., CPAs,P.C.
---------------------------
New York, New York TODMAN & CO., CPAs, P.C.
December 23, 2002 Certified Public Accountants (N.Y.)
F-2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2002 AND 2001
2002 2001
---- ----
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 139,057 $ 13,680
NOTES AND ACCOUNTS RECEIVABLE, NET 125,227 127,771
ART INVENTORY, NET OF A VALUATION ALLOWANCE
OF $ 1,325,000 AND $1,750,000 AT
OCTOBER 31, 2002 AND 2001, RESPECTIVELY 250,000 250,000
STOCKYARDS INVENTORY 13,017 16,213
INVESTMENTS 7,405 21,392
PREPAID EXPENSES 100,799 172,625
---------- ----------
TOTAL CURRENT ASSETS 635,505 601,681
---------- ----------
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 1,058,219
AND $ 1,300,727 AT OCTOBER 31, 2002
AND 2001, RESPECTIVELY 3,336,744 3,302,073
---------- ----------
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $ 285,223
AND $ 44,340 AT OCTOBER 31, 2002 AND
2001, RESPECTIVELY 1,176,027 1,281,476
---------- ----------
ART INVENTORY NON-CURRENT, NET OF A
VALUATION ALLOWANCE OF $ 858,650
AND $ 942,150 AT OCTOBER 31, 2002 AND
2001, RESPECTIVELY 622,388 933,739
---------- ----------
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 517,939 620,416
DEFERRED LEASING AND FINANCING COSTS 13,366 28,118
DEPOSITS AND OTHER 210,902 210,902
---------- ----------
742,207 859,436
---------- ----------
$6,512,871 $6,978,405
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2002 AND 2001
2002 2001
---- ----
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 1,856,671 $ 2,538,229
INCOME TAXES PAYABLE 9,892 9,857
------------ ------------
TOTAL CURRENT LIABILITIES 1,866,563 2,548,086
------------ ------------
LONG-TERM DEBT, RELATED PARTY 2,667,000 2,667,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,647,993 AND
4,998,446 SHARES ISSUED AND OUTSTANDING AT
OCTOBER 31, 2002 AND 2001, RESPECTIVELY AND
AGGREGATE LIQUIDATION PREFERENCE OF $10.00
PER SHARE FOR $ 56,479,930 AND $ 49,984,460
AT OCTOBER 31, 2002 AND 2001, RESPECTIVELY 56,480 49,984
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED & 4,326,929 SHARES OUTSTANDING
AT OCTOBER 31, 2002 AND 2001, RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 27,958,498 27,848,561
ACCUMULATED DEFICIT (12,709,864) (13,019,374)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
PENSION VALUATION RESERVE (2,375,399) (2,165,445)
------------ ------------
1,979,308 1,763,319
------------ ------------
$ 6,512,871 $ 6,978,405
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 818,671 $ 426,240 $ 684,516
EXCHANGE BUILDING RENT 486,678 430,175 414,891
OUTSIDE REAL ESTATE RENT 546,151 586,219 558,029
OTHER INCOME 0 1,000 250
----------- ----------- -----------
1,851,500 1,443,634 1,657,686
----------- ----------- -----------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 363,374 166,108 404,928
LABOR, OPERATING AND MAINTENANCE 447,790 427,566 424,917
DEPRECIATION AND AMORTIZATION 132,676 127,859 108,751
TAXES OTHER THAN INCOME TAXES 119,200 151,700 136,400
GENERAL AND ADMINISTRATIVE 45,903 126,123 86,342
----------- ----------- -----------
1,108,943 999,356 1,161,338
----------- ----------- -----------
INCOME FROM REAL ESTATE OPERATIONS 742,557 444,278 496,348
----------- ----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION 3,181,874 3,358,554 3,588,697
FEED AND BEDDING INCOME 198,128 249,154 262,717
RENTAL INCOME 5,298 4,521 3,788
OTHER INCOME 176,000 182,248 204,081
----------- ----------- -----------
3,561,300 3,794,477 4,059,283
----------- ----------- -----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 1,437,778 1,542,324 1,703,285
OTHER OPERATING AND MAINTENANCE 832,552 889,037 829,880
FEED AND BEDDING EXPENSE 162,865 192,513 199,328
DEPRECIATION AND AMORTIZATION 24,352 26,891 15,958
TAXES OTHER THAN INCOME TAXES 216,031 246,760 261,322
GENERAL AND ADMINISTRATIVE 349,391 523,133 507,223
----------- ----------- -----------
3,022,969 3,420,658 3,516,996
----------- ----------- -----------
INCOME FROM STOCKYARD OPERATIONS 538,331 373,819 542,287
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (1,134,994) (1,274,529) (1,317,829)
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 145,894 (456,432) (279,194)
----------- ----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
Continued ...
2002 2001 2000
---- ---- ----
OTHER INCOME (EXPENSE):
INTEREST AND OTHER INCOME 467,341 130,737 139,703
INTEREST EXPENSE 0 0 (43,676)
INTEREST EXPENSE-RELATED PARTY (266,700) (257,022) (213,188)
INCOME (LOSS) FROM ART SALES 206,669 (19,351) (15,638)
REALIZED LOSS ON INVESTMENTS (13,987) (47,249) (466,917)
OTHER EXPENSE (113,227) (123,230) (179,000)
----------- ----------- -----------
280,096 (316,115) (778,716)
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY GAIN 425,990 (772,547) (1,057,910)
PROVISION FOR INCOME TAXES 0 0 0
----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 425,990 (772,547) (1,057,910)
EXTRAORDINARY GAIN ON EARLY RETIREMENT
OF DEBT 0 0 136,328
----------- ----------- -----------
NET INCOME (LOSS) 425,990 (772,547) (921,582)
OTHER COMPREHENSIVE INCOME (LOSS):
MINIMUM PENSION LIABILITY ADJUSTMENT (209,954) (195,824) (66,445)
UNREALIZED (LOSS) ON INVESTMENTS
AVAILABLE FOR SALE 0 0 0
----------- ----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 216,036 $ (968,371) $ (998,027)
=========== =========== ===========
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN
PER COMMON SHARE:
- BASIC $ 0.07 $ (0.25) $ (0.24)
- DILUTED $ 0.07 $ (0.25) $ (0.24)
EXTRAORDINARY GAIN ON EARLY RETIREMENT
OF DEBT PER COMMON SHARE:
- BASIC $ -- $ -- $ 0.03
- DILUTED $ -- $ -- $ 0.03
NET INCOME (LOSS) PER COMMON SHARE:
- BASIC $ 0.07 $ (0.25) $ (0.27)
- DILUTED $ 0.07 $ (0.25) $ (0.27)
WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC 4,326,929 4,326,929 4,326,929
- DILUTED 4,326,929 4,326,929 4,326,929
SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2002, 2001, AND 2000
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, NOVEMBER 1, 1999 5,313,794 $53,138 3,879,258 $38,793
NET (LOSS) 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 528,356 5,283
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
---------------------- ----------------------
BALANCE, OCTOBER 31, 2000 5,313,794 $53,138 4,407,614 $44,076
NET (LOSS) 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 590,832 5,908
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
---------------------- ----------------------
BALANCE, OCTOBER 31, 2001 5,313,794 $53,138 4,998,446 $49,984
NET INCOME 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 649,547 6,496
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
---------------------- ----------------------
BALANCE, OCTOBER 31, 2002 5,313,794 $53,138 5,647,993 $56,480
====================== ======================
ADDITIONAL TREASURY
PAID-IN ACCUMULATED COMPREHENSIVE STOCK,
CAPITAL DEFICIT (LOSS)INCOME AT COST
BALANCE, NOVEMBER 1, 1999 $ 27,274,159 ($10,758,188) ($ 2,246,901) ($11,003,545)
NET (LOSS) 0 (921,582) 0 0
PREFERRED STOCK DIVIDEND 270,894 (265,537) 0 0
MINIMUM PEN. LIAB. ADJ 0 0 (66,445) 0
TRANSFER OF UNREALIZED
(LOSS) ON INVESTMENT TO
A REALIZED (LOSS) 0 0 343,725 0
------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2000 $ 27,545,053 ($11,945,307) ($ 1,969,621) ($11,003,545)
NET (LOSS) 0 (772,547) 0 0
PREFERRED STOCK DIVIDEND 303,508 (301,520) 0 0
MINIMUM PEN. LIAB. ADJ 0 0 (195,824) 0
------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2001 $ 27,848,561 ($13,019,374) ($ 2,165,445) ($11,003,545)
NET INCOME 0 425,990 0 0
PREFERRED STOCK DIVIDEND 109,937 (116,480) 0 0
MINIMUM PEN. LIAB. ADJ 0 0 (209,954) 0
------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2002 $ 27,958,498 ($12,709,864) ($ 2,375,399) ($11,003,545)
============ ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2002, 2001 AND 2000
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 425,990 $ (772,547) $ (921,582)
----------- ----------- -----------
ADJUSTMENTS TO RECONCILE NET INCOME
(LOSS) TO NET CASH (USED) BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 170,352 183,576 151,808
GAIN ON SALES OF REAL ESTATE (455,297) (260,132) (279,588)
VALUATION RESERVE - ART INVENTORY (508,500) (35,800) (50,750)
REALIZED LOSS ON INVESTMENTS 13,987 47,249 466,917
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET 2,544 608,617 (415,323)
ART INVENTORY, NET 311,351 (22,882) (12,500)
PREPAID EXPENSES AND OTHER, NET 275,115 (254,745) 21,420
PAYABLES AND ACCRUED EXPENSES, NET (681,523) 332,983 325,384
----------- ----------- -----------
NET CASH (USED) BY OPERATING ACTIVITIES (445,981) (173,681) (714,214)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 818,671 426,240 684,516
CAPITAL EXPENDITURES (247,313) (471,148) (134,514)
----------- ----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 571,358 (44,908) 550,002
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 0 145,000 1,775,000
REPAYMENT OF SHORT-TERM BORROWINGS 0 0 (75,000)
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS 0 0 (1,864,710)
----------- ----------- -----------
NET CASH (USED) BY FINANCING ACTIVITIES 0 145,000 (164,710)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 125,377 (73,589) (328,922)
CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 13,680 87,269 416,191
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 139,057 $ 13,680 $ 87,269
=========== =========== ===========
NOTE: IN FISCAL 2002, 2001 AND 2000,$ 116,480, $ 301,520 AND $ 265,537,
RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE ISSUANCE
OF 649,547, 590,832 AND 528,356, 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. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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 and further
development of its agribusiness related real estate properties located in the
midwest and stockyard operations.
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 eight of the last ten years and is obligated to continue making
substantial annual contributions to its defined benefit pension plan. The
financial statements do not include any adjustments that might result from the
resolution of these uncertainties. Additionally, the accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Canal continues to closely monitor and reduce where possible its operating
expenses and plans to continue to reduce the level of its art inventories to
enhance current cash flows. Management believes that its income from operations
combined with its cost cutting program and planned reduction of its art
inventory will enable it to finance its current business activities. There can,
however, be no assurance that Canal will be able to effectuate its planned art
inventory reductions or that its income from operations combined with its cost
cutting program in itself will be sufficient to fund operating cash
requirements.
F-9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Principles of Consolidation -- The consolidated financial statements
include the accounts of Canal Capital Corporation ("Canal") and its wholly-
owned subsidiaries ("the Company"). All material intercompany balances and
transactions have been eliminated in consolidation.
B) Investments Available for Sale -- Canal has an investment in a company
in which it, together with other affiliated entities, comprise a reporting group
for regulatory purposes. It is important to note that it is the group (as
defined) that can exercise influence over this company, not Canal. Accordingly,
this investment does not qualify for consolidation as a method of reporting.
Certain of Canal's officers and directors also serve as officers and/or
directors of this company. This investment (in which Canal's ownership interest
is approximately 1%) 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 (see Note 3).
Investments in Joint Ventures -- Investments in which ownership interest
range from 20% to 50% or less owned joint ventures are accounted for under the
equity method. These joint ventures are not, in the aggregate, material in
relation to the financial position or results of operations of Canal. The
carrying amount of such investments was $101,000 at both October 31, 2002 and
2001, and is included in other assets. The operating results of joint ventures
accounted for on the equity method, for fiscal year 2002, 2001 and 2000 were not
material to financial statement presentation and were therefore included in
other income from real estate operations.
C) Deferred Leasing and Financing Costs -- Costs incurred in obtaining new
leases and long-term financing are deferred and amortized over the terms of the
related leases or debt agreements, as applicable.
D) Properties and Related Depreciation -- Properties are stated at cost
less accumulated depreciation. Depreciation is provided on the straight-line
method over the estimated useful lives of the properties. Such lives are
estimated from 35 to 40 years for buildings and from 5 to 20 years for
improvements and equipment.
Property held for Development or Resale -- Property held for development
or resale consist of approximately 113 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
Long-Lived Assets - The Company reviews the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the assets to the estimated
future cash flows expected to result from the use of the asset. The measurement
of the loss, if any, will be calculated as the amount by which the carrying
amount of the asset exceeds the fair value of the asset. (See Note 19).
E) Expenditures for maintenance and repairs are charged to operations as
incurred. Significant renewals and betterments are capitalized. When properties
are sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is reflected in current
income.
F) Art Inventory Held for Sale - 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 22% and 53% of the inventory value at October 31, 2002 and 2001,
respectively. The remaining 78% and 47% at October 31, 2002 and 2001,
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 7). Antiquities and
contemporary art represented 26% ($230,639) and 74% ($641,749) and 46%
($541,990) and 54% ($641,749) of total art inventory at October 31, 2002 and
2001, respectively. Substantially all of the contemporary art inventory held for
resale is comprised of the work of Jules Olitski.
G) Stockyard Inventory - Inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
H) Accounting Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
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
I) Revenue Recognition -- Lease and rental revenues are recognized ratably
over the period covered. All real estate leases are accounted for as operating
leases. Revenues from real estate sales are recognized generally when title to
the property passes. Revenues from stockyard operations which consist primarily
of yardage fees and sale of feed and bedding are recognized at the time the
service is rendered or the feed and bedding are delivered. Revenues from art
sales are recognized using the specific identification method, when the piece is
shipped to the purchaser. Art owned by Canal which is on consignment, joint
venture, or being examined in contemplation of sale is not removed from
inventory and not recorded as a sale until notice of sale or acceptance has been
received. Revenues from the sale of investments available for sale, if any, are
recognized, on a specific identification method, on a trade date basis.
J) Income Taxes -- Canal and its subsidiaries file a consolidated Federal
income tax return. The Company accounts for income taxes under the liability
method. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities.
K) 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
$13,000, $25,000 and $27,000 and interest payments of $267,000, $257,000 and
$257,000 in 2002, 2001 and 2000, respectively.
L) Comprehensive Income -- The Company's only adjustments for each
classification of the comprehensive income was for minimum pension liability.
M) Earnings (Loss) Per Share -- Basic earnings (loss) per share is
computed by dividing the net income (loss) applicable to common shares by the
weighted average of common shares outstanding during the period. Diluted
earnings (loss) per share adjusts basic earnings (loss) per share for the
effects of convertible securities, stock options and other potentially dilutive
financial instruments, only in the period in which such effect is dilutive.
There were no dilutive securities in any of the periods presented herein.
The shares issuable upon the exercise of stock options are excluded from
the calculation of net income (loss) per share as their effect would be
antidilutive.
N) Reclassification -- Certain prior year amounts have been reclassified
to conform to the current year presentation.
F-12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENTS AVAILABLE FOR SALE
At October 31, the investments available for sale consisted of the
following: ($ 000's Omitted)
2002 2001
---- ----
Aggregate market value..................... $ 7 $ 21
---- ----
Aggregate carrying value................... $ 7 $ 21
---- ----
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 1%) is carried
at market value and any unrealized gains or losses are reflected in Stockholders
Equity. The realized gains or losses, if any, are recognized in operating
results.
On May 3, 2000 this company filed for reorganization under Chapter 11 of
the Bankruptcy Code and subsequently emerged in December 2000. This action, in
combination with other factors, has resulted in Canal's determination that the
decline in market value of its investment in this company is permanent, and
accordingly, recognized a realized loss on investments in marketable securities
of approximately $14,000, $47,000 and $467,000 in fiscal 2002, 2001 and 2000,
respectively.
4. STOCKYARD OPERATIONS SALE AND SUBSEQUENT REPURCHASE
On October 31, 1989 Canal sold most of its stockyards assets to a group
formed by a former Executive Vice President and Director of the Company. Not
included in the sale was certain land and some facilities previously used by the
stockyard operations. Canal entered into a master lease (the "Lease") with the
purchaser covering approximately 139 acres of land and certain facilities used
by the stockyard operations. The Lease was a 10 year lease, renewable at the
purchaser's option for an additional ten year period, with annual rentals of
$750,000 per year for the first year escalating to $1.0 million per year for the
fourth through the tenth years.
In September, 1998 Canal sold a 60 acre parcel of land to the City of
Omaha, Nebraska. This sale included the seventeen acres of land leased to the
stockyards operator. As part of this transaction, Canal received the stockyards
rental payments under the Lease through October 31, 1999 at which time the
operator moved the stockyards to a new location. In April 1999, Canal sold to
the stockyard operator the 31 acres located in South St. Paul,
F-13
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Minnesota which was subject to the Lease. Finally, in August 1999 Canal bought
the operating assets of the remaining three stockyards subject to the Lease from
the operator. The August transaction released the operator from any further
obligations under the Lease.
Canal commenced stockyard operations August 1, 1999 in Sioux City, Iowa,
St. Joseph, Missouri and Sioux Falls, South Dakota. Stockyards act much like a
securities exchange, providing markets for all categories of livestock and
fulfilling the economic functions of assembly, grading and price discovery. The
livestock handled by the stockyards include cattle, hogs and sheep. Cattle and
hogs may come through the stockyard facilities at two different stages, either
as feeder livestock or slaughter livestock. The Company's stockyards provide all
services and facilities required to operate an independent market for the sale
of livestock, including veterinary facilities, auction arenas, auctioneers,
weigh masters and scales, feed and bedding, and security personnel. In addition,
the stockyards provide other services including pure bred and other specialty
sales for producer organizations. The Company promotes its stockyard business
through public relations efforts, advertising, and personal solicitation of
producers.
In March 2002, Canal permanently closed its stockyard operations in Sioux
City, Iowa. The Sioux City stockyard operations generated operating losses of
$75,000, $118,000 and $124,000 for the three years ended October 31, 2002, 2001
and 2000, respectively. The stockyard facility was dismantled with the
equipment, fixtures and materials going either to Canal's remaining two
stockyards or sold at a public sale held at the Sioux city location in April
2002. Canal has been engaged in extended negotiations to sell this property to a
real estate developer whose intention is to convert the property into a retail
shopping center. Canal will continue to pursue the sale of this property to this
developer as well as exploring any opportunities to develop or sell this
property in fiscal 2003.
Actual marketing transactions at a stockyard are managed for livestock
producers by market agencies and independent commission sales people to which
the livestock are consigned for sale. These market agencies (some of which are
owned and operated by the Company) and independent sales people receive
commissions from the seller upon settlement of a transaction and the stockyard
receives a yardage fee on all livestock using the facility which is paid within
twenty-four hours of the sale. Yardage fees vary depending on the type of
animal, the extent of services provided by the stockyard, and local competition.
Yardage revenues are not directly dependent upon market prices, but rather are a
function of the volume of livestock handled. In general, stockyard livestock
volume is dependent upon conditions affecting livestock production and upon the
market agencies and independent commission sales people which operate at the
stockyards. Stockyard operations are seasonal, with greater volume generally
experienced during the first and fourth quarters of each fiscal year, during
which periods livestock is generally brought to market.
F-14
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As discussed above, virtually all of the volume at Canal's Sioux Falls
stockyards is handled through market agencies or independent commission sales
people, while the St. Joseph stockyards has solicitation operations of its own
which accounts for approximately 50% of its livestock volume annually. Canal
intends to continue its soliciting efforts at its St. Joseph stockyards in
fiscal 2003. Further, Canal tries to balance its dependence on market agencies
and independent commission sales people in various ways, including developing
solicitation operations of its own; direct public relations advertising and
personal solicitation of producers on behalf of the stockyards; providing
additional services at the stockyards to attract sellers and buyers; and
providing incentives to market agencies and independent commission sales people
for increased business.
Canal maintains an inventory of feed and bedding which is comprised
primarily of hay, corn and straw. The value of this inventory was $13,000 and
$16,000 at October 31, 2002 and 2001, respectively.
5. BORROWINGS
At October 31, 2002, substantially all of Canal's real properties, the
stock of certain subsidiaries, the investments and a substantial portion of its
art inventories are pledged as collateral for the following obligations:
October 31,
---------------------
($ 000's Omitted) 2002 2001
- ----------------- ---- ----
Variable rate mortgage notes due
May 15, 2006 - related party ................... $2,667 $2,667
Other Note ....................................... 0 0
------ ------
Total ............................................ 2,667 2,667
Less -- current maturities ....................... 0 0
------ ------
Long-term debt $2,667 $2,667
------ ------
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001. 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. These notes carried 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 required the accrual of additional interest (to
be paid at maturity) of approximately three percent per annum.
F-15
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
On July 29, 1999 the above Notes were amended to extend the maturity date
to May 15, 2003; to fix the interest rate at 10% per annum; to agree that the
additional interest due to the holders of the notes shall become current and be
treated as principal due under the notes; and to have certain of the holders
loan the Company $525,000 in additional financing, the proceeds of which was
used to repay in full certain of the other holders of the notes. As a result,
the notes are now held in total by the Company's Chief Executive Officer and
members of his family.
On January 10, 2000, the above Notes were further amended to have holders
loan the Company $1,725,000 in additional financing, the proceeds of which was
used to repay in full all of the Company's outstanding non related party
long-term debt. On October 8, 2002, the above notes were amended to extend the
maturity date to May 15, 2006. As of October 31, 2002 the balance due under
these notes was $2,667,000 all of which is classified as long-term debt-related
party.
The scheduled maturities and sinking fund requirements of long-term debt
during the next five years are $2,667,000 due May 15, 2006.
6. INCOME TAXES
Significant components of the Company's deferred asset/(liability) as of
October 31, 2002, 2001 and 2000 include differences in depreciation methods,
deferred rent, inventory valuation allowance and net operating loss carryforward
($ 000's Omitted):
2002 2001 2000
---- ---- ----
Total Gross Deferred Tax assets $ 3,503 $ 3,422 $ 3,186
Less - Valuation Allowance (3,503) (3,422) (3,186)
------- ------- -------
Net Deferred Tax Assets $ 0 $ 0 $ 0
------- ------- -------
Total Gross Deferred Tax Liability $ 0 $ 0 $ 0
------- ------- -------
Net Deferred Tax Asset (Liability) $ 0 $ 0 $ 0
------- ------- -------
Actual income tax (benefit) expense differs from the "expected" tax
expense computed by applying the U.S. federal corporate tax rate of 35% to
income(loss) before income taxes as follows (& 000's Omitted):
2002 2001 2000
---- ---- ----
Computed Expected Tax Expense(Benefit) $ 149 $(270) $(323)
Change in Valuation Allowance 81 236 318
Inventory Valuation Differences (178) (13) (18)
Other (52) 47 23
----- ----- -----
$ 0 $ 0 $ 0
----- ----- -----
F-16
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At October 31, 2002, the Company has net operating loss carryforwards of
approximately $10,009,000 that expire through 2016 and a net capital loss
carryforward of approximately $1,596,000 that expires October 31, 2007. For
financial statement purposes, a valuation allowance has been provided to offset
the net deferred tax assets due to the cumulative operating losses and capital
losses incurred during recent years. Such allowance increased (decreased) by
approximately $81,000, $236,000 and $318,000 during the years ended October 31,
2002, 2001 and 2000, respectively. The valuation allowance will be reduced when
and if, in the opinion of management, significant positive evidence exists which
indicates that it is more likely than not that the Company will be able to
realize its deferred tax assets.
7. 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 has made contributions of approximately $149,000 for
fiscal 2002, $123,000 for fiscal 2001 and $317,000 for fiscal 2000.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future. Assets
of the plan were invested in U.S. Government securities, common stocks and
antiquities.
Assumptions used in computing the 2002, 2001 and 2000 pension cost were:
2002 2001 2000
---- ---- ----
Discount rate .......................... 7.00% 7.00% 8.00%
Rate of increase in compensation
level ................................. 5.50% 5.50% 6.50%
Expected long-term rate of return
on assets ............................. 9.00% 9.00% 10.00%
Net periodic pension cost for plan years ended October 31, 2002, 2001 and
2000 included the following components:
Plan Year
($ 000's Omitted) 2002 2001 2000
----------------- ---- ---- ----
Service costs - benefits earned during
the period ............................. $ 12 $ 10 $ 10
Interest cost on projected benefit
obligation ............................. 120 111 109
Net (Return) loss on assets ............. 94 46 26
Net amortization and deferral ........... (54) (54) (54)
----- ----- -----
Net period pension cost ................. $ 172 $ 113 $ 91
----- ----- -----
F-17
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated balance sheets at October 31, 2002 and
2001.
Plan Year
---------------
($ 000's Omitted) 2002 2001
----------------- ---- ----
Actuarial present value of benefit
obligations:
Accumulated benefit obligation, including
vested benefits of $1,597 and $1,437 in
2002 and 2001, respectively ................. $ 1,597 $ 1,437
Additional benefit due to assumed future
compensation levels ......................... 173 160
------- -------
Projected benefit obligation (1) ............. 1,770 1,597
------- -------
Plan assets at fair value .................... 904 848
------- -------
Projected benefit obligation in excess
of plan assets .............................. 866 749
Unrecognized net obligation .................. 0 25
Unrecognized net loss ........................ (2,411) (2,227)
Valuation reserve to recognize accrued pension
costs in the consolidated balance sheets .... 2,375 2,165
------- -------
Accrued pension cost included among accrued
expenses in the consolidated balance sheets . $ 830 $ 712
------- -------
(1) The vast majority of the projected benefit obligation is related to
the Company's former stockyard employees.
8. ART INVENTORY HELD FOR SALE
Due to general economic conditions and the softness of the art markets,
Canal has not purchased inventory in several years nor does it currently have
any intention of purchasing additional art inventory in the foreseeable future.
It is the Company's intention to liquidate, in an orderly manner, its art
inventory. Management estimates it may take approximately five years to dispose
of its current art inventory. The Company's ability to dispose of its art
inventory is dependent primarily on general economic conditions and the
competitiveness of the art market itself. Accordingly, there can be no assurance
that Canal will be successful in disposing of its art inventory within the time
frame discussed above.
Antiquities and contemporary art represented 26% ($230,639) and 74%
($641,749) and 46% ($541,990) and 54% ($641,749) of total art inventory at
October 31, 2002 and 2001, respectively. Substantially all of the contemporary
art inventory held for resale is comprised of the work of Jules Olitski.
F-18
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company classified its art inventory for the two years ended October
31, 2002 and 2001 as follows ($ 000's Omitted):
Current Portion Non-Current Portion Total
--------------- ------------------- -------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Antiquities $ 575 $ 1,000 $ 31 $ 426 $ 606 $ 1,426
Contemporary 1,000 1,000 1,450 1,450 2,450 2,450
Valuation
Allowance (1,325) (1,750) (859) (942) (2,184) (2,692)
------- ------- ------- ------- ------- -------
Net Value $ 250 $ 250 $ 622 $ 934 $ 872 $ 1,184
------- ------- ------- ------- ------- -------
The Company's valuation allowance for the three years ended October 31,
2002, 2001 and 2000 is as follows:
Balance at Balance
Beginning at End of
of Period Deductions Period
---------- ---------- ---------
Year ended October 31, 2002
Deducted from art inventories:
Reserve for valuation allowance $2,692 $ (508) $2,184
Year ended October 31, 2001
Deducted from art inventories:
Reserve for valuation allowance $2,728 $ (36) $2,692
Year ended October 31, 2000
Deducted from art inventories:
Reserve for valuation allowance $2,779 $ (51) $2,728
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. In fiscal 2002 Canal applied against sales $508,500 of the
valuation allowance against its art inventory, thereby, decreasing the total
valuation allowance to $2,183,650 as of October 31, 2002 as compared to
$2,962,150 and $2,727,950 at October 31, 2001 and 2000, respectively.
F-19
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.
Canal has its art inventory appraised by independent appraisers annually. The
2002 appraisal covered approximately 22% 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 78% of the inventory was estimated by
management based in part on the Company's history of losses sustained on art
sales in the current and previous years and in part on the results of the
independent appraisals done.
Canal's art operations have generated operating income of approximately
$207,000 and operating losses of $19,000 and $16,000 on revenues of
approximately $540,000, $24,000 and $52,000 for the years ended October 31,
2002, 2001 and 2000, respectively.
The Company had approximately $175,000 and $1,012,000 of art inventory (at
original cost) on consignment with third party dealers at October 31, 2002 and
2001, respectively.
9. LEASE COMMITMENTS
In February 1999 Canal, together with two other related entities, amended
its lease for commercial office space in New York City, which space serves as
its headquarters operations. The new lease is for a period of 128 months
expiring in October 2009. Canal's portion of the new space is approximately
1,000 square feet and Canal is responsible for 25% of the lease expense. Each of
the three entities that are parties to this lease are jointly and severally
responsible for the payments required under the lease.
The following is a schedule of Canal's portion of future minimum payments
required under operating leases that have initial or remaining noncancellable
terms in excess of one year as of October 31, 2002:
Year ended October 31, ($ 000's Omitted)
---------------------- -----------------
2003 $102,000
2004 104,000
2005 104,000
2006 104,000
2007 104,000
Thereafter 199,000
--------
$717,000
========
F-20
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Rent expense under these and other operating leases for the years ended
October 31, 2002, 2001 and 2000 were as follows:
($ 000's Omitted) 2002 2001 2000
----------------- ---- ---- ----
Minimum rentals ................. $ 97 $ 90 $ 90
Less: sublease rentals ........... (42) 0 0
---- ---- ----
$ 55 $ 90 $ 90
---- ---- ----
In June 2002, Canal sublet for a one year period substantially all of its
New York office space at a rate of $7,000 per month. The lease is for a period
of one year with a one year renewal option. If the tenant exercises the option,
then Canal's rent expense for fiscal 2003 will be approximately $10,000.
10. IMPAIRMENT LOSS ON LONG-LIVED ASSETS
The Company reviews the values of its long-lived assets annually. There
was no impairment in the value of Canal's long-lived assets to be recorded as of
October 31, 2002, 2001 and 2000.
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, 2002 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, 2002,
there were 5,500 exercisable options outstanding under these plans.
F-21
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Transactions under these plans are summarized as follows:
Shares Option Price Range
-------- ------------------
Balance outstanding October 31, 2000.... 308,500 $0.125-$0.810
Options granted ........................ 0 - -
Options expired ........................ (278,000) $0.125-$0.810
------- -------------
Balance outstanding October 31, 2001.... 30,500 $0.125-$0.250
Options granted 0 - -
Options expired (25,000) $0.125-$0.250
------- -------------
Balance outstanding October 31, 2002.... 5,500 $0.125-$0.125
------- -------------
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, 2002, 2001 and 2000.
In October, 1995, the Financial Accounting Standards Board issued
Statement (SFAS) No. 123, Accounting for Stock Based Compensation, which becomes
effective for transactions entered into in fiscal years beginning after December
15, 1995. This statement permits an entity to apply the fair value based method
to stock options awarded during 1995 and thereafter in order to measure the
compensation cost at the grant date and recognize it over its vesting period.
This statement also allows an entity to continue to measure compensation costs
for these plans pursuant to APB Opinion 25. Entities electing to remain with the
accounting treatment under APB Opinion 25 must make proforma disclosures of net
income and earnings per share to include the effects of all awards granted in
fiscal years beginning after December 31, 1994, as if the fair value based
method of accounting pursuant to SFAS No. 123 has been applied.
The Company adopted the disclosure requirements for this statement
effective for the year ending October 31, 1996, while continuing to measure
compensation cost using APB 25. Had compensation cost been determined on the
basis of SFAS No. 123, the proforma effect on the Company's net income and
earnings per share for the years ended October 31, 2002, 2001 and 2000 would
have been deminimus.
F-22
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID
During each of the fiscal years ended October 31, 2002, 2001 and 2000, the
Company had 5,500, 30,500 and 308,500 options outstanding. The options were not
included in the computation of diluted earnings (loss) per share because the
effect of exercisable price conversion would be antidilutive. There were no
dividends declared on common stock during the years ended October 31, 2002, 2001
and 2000. Dividends declared on preferred stock during the years ended October
31, 2002, 2001 and 2000 were approximately $116,000, $302,000 and $266,000.
Basic earnings (loss) per share are computed by dividing earnings (loss)
available to common stockholders by the weighted average number of common share
outstanding during the period. Diluted earnings (loss) per share reflect per
share amounts that would have resulted if dilutive potential common stock had
been reported in the financial statements.
Basic and diluted earnings (losses) available to common stockholders at
October 31, 2002, 2001 and 2000 were:
For the Year Ended October 31, 2002
-----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 426,000
Less preferred stock dividends (116,000)
---------
Income available to common stock-
holders-basic earnings per share 310,000 4,327,000 $ 0.07
=========
Effect of dilutive securities:
Options (antidilutive) N/A N/A
--------- ---------
Income available to common stock-
holders-diluted earnings per share $ 310,000 4,327,000 $ 0.07
========= ========= =========
F-23
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
For the Year Ended October 31, 2001
-----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net (loss) (773,000)
Less preferred stock dividends (302,000)
-----------
(Loss) available to common stock-
holders-basic earnings per share (1,075,000) 4,327,000 $ (0.25)
=========
Effect of dilutive securities:
Options (antidilutive) N/A N/A
----------- ---------
(Loss) available to common stock-
holders-diluted earnings per share $(1,075,000) 4,327,000 $ (0.25)
=========== ========= =========
For the Year Ended October 31, 2000
-----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net (loss) $ (922,000)
Less preferred stock dividends (266,000)
-----------
(Loss) available to common stock-
holders-basic earnings per share (1,188,000) 4,327,000 $ (0.27)
=========
Effect of dilutive securities:
Options (antidilutive) N/A N/A
----------- ---------
(Loss) available to common stock-
holders-diluted earnings per share $(1,188,000) 4,327,000 $ (0.27)
=========== ========= =========
F-24
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 4,661,128 shares in the form of stock dividends for a total
outstanding at October 31, 2002 of 5,647,993. 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, fifty-two of the sixty-four
quarterly payments have been paid in additional stock resulting in the issuance
of 4,661,128 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, 2002 and
December 31, 2002 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, 2003 at
which time a one year dividend will have accumulated. The dividend planned for
June 30, 2003 will also be paid in additional stock.
VOTING RIGHTS - The holders of the Preferred Stock shall not have any
voting rights except that the following actions must be approved by holders of
66 2/3% of the shares of Preferred Stock, voting as a class: (I) any amendment
to the Certificate of Incorporation of Canal which would materially alter the
relative rights and preferences of the Preferred Stock so as to adversely affect
the holders thereof; and (ii) issuance of securities of any class of Canal's
capital stock ranking prior (as to dividends or upon liquidation, dissolution or
winding up) to the Preferred Stock. The holders of the Preferred Stock shall be
entitled to specific enforcement of the foregoing covenants and to injunctive
relief against any violation thereof.
Whenever quarterly dividends payable on the Preferred Stock are in arrears
in the aggregate amount at least equal to six full quarterly dividends (which
need not be consecutive), the number of directors constituting the Board of
Directors of Canal shall be increased by two and the holders of the Preferred
Stock shall have, in addition to the rights set forth above, the special right,
voting separately as a single class, to elect two directors of Canal to fill
such newly created directorships at the next succeeding annual meeting of
shareholders (and at each succeeding annual meeting of shareholders thereafter
until such cumulative dividends have been paid in full).
F-25
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. PENSION VALUATION RESERVE
The Pension 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 additional minimum pension liability
will be expensed as actuarial computations of annual pension cost (made in
accordance with SFAS No. 87) recognize the deficiency that exists.
15. FINANCIAL INFORMATION FOR BUSINESS SEGMENTS
Canal is engaged in two distinct businesses - the management and further
development of its agribusiness related real estate operations and stockyard
operations.
The following summary presents segment information relating to these lines
of business except for the respective revenues, operating income and the
reconciliation of operating income with pre-tax income which information is
presented on Canal's income statement.
October 31,
------------------------------
($ 000's Omitted) 2002 2001 2000
----------------- ---- ---- ----
Identifiable assets:
Real estate .................. $4,007 $4,092 $4,458
Stockyard operations ......... 1,448 1,497 1,500
Corporate ................. 1,058 1,389 1,503
------ ------ ------
$6,513 $6,978 $7,461
------ ------ ------
($ 000's Omitted) 2002 2001 2000
----------------- ---- ---- ----
Capital expenditures:
Real estate .................. $ 214 $ 393 $ 120
Stockyard operations ......... 29 70 6
Corporate ................. 4 8 9
------ ------ ------
$ 247 $ 471 $ 135
------ ------ ------
Income from real estate operations includes gains (losses) on sales of
real estate of $0.4 million, $0.4 million and $0.3 million in 2002, 2001 and
2000, respectively. Included in corporate identifiable assets is approximately
$0.2 million and $1.0 million of art inventory in galleries or on consignment
abroad as of October 31, 2002 and 2001, respectively.
F-26
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. Canal or its subsidiaries are party to the following
litigations:
Canal Capital Corporation v. Valley Pride Pack, Inc.
Canal commenced an action in U.S. District Court in Minnesota on September
23, 1997, as the assignee of United Market Services Company, against Valley
Pride Pack, Inc. (formerly Pine Valley Meats, Inc. and referred to herein as
"Pine Valley") to recover unpaid livestock fees and charges (estimated to be as
much as $1,000,000) due from Pine Valley under a 1936 Agreement between the
predecessors of Pine Valley and Canal.
On December 20, 2000, the U.S. District Court in Minnesota ruled in
Canal's favor granting its motion for summary judgment, thereby establishing
Pine Valley's liability to Canal for unpaid livestock fees. Additionally, the
court denied all of Pine Valley's assorted defenses and counter claims clearing
this matter to go to trial. On February 7, 2001, a Special Verdict was entered
in favor of Canal resulting in a total award (including pre- judgment interest
and court costs) to Canal of approximately $189,000.
On October 15, 2001, Pine Valley filed a voluntary Chapter 11 bankruptcy
petition with the court. This action makes the collectability of Canal's award
uncertain. For financial statements purposes as of October 31, 2002, Canal has
fully reserved the Pine Valley receivable.
F-27
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. PROPERTY ON OPERATING LEASES AND USED IN STOCKYARD OPERATIONS
The following schedule provides an analysis of the Company's investment in
property on operating leases and stockyard operations by location as of October
31, 2002:
($ 000's Omitted) Accumulated
Location Land Improvements Depreciation Value
- -------- ---- ------------ ------------ -----
Operating leases:
S. St. Paul, MN $ 125 $ 1,968 $ (910) $ 1,183
Sioux City, IA 917 0 0 917
Omaha, NE 1,200 10 (3) 1,207
Corporate Office 0 175 (145) 30
------- ------- ------- -------
2,242 2,153 (1,058) 3,337
------- ------- ------- -------
Stkyd Operations:
St. Joseph, MO $ 862 $ 435 $ (266) $ 1,031
Sioux Falls, SD 100 64 (19) 145
------- ------- ------- -------
962 499 (285) 1,176
------- ------- ------- -------
$ 3,204 $ 2,652 $(1,343) $ 4,513
======= ======= ======= =======
The following is a schedule by years of minimum future rentals on
operating leases as of October 31, 2002:
($ 000's Omitted)
Year Ending Rental
October 31, Income (1)
----------- ----------
2003 $ 1,100
2004 1,150
2005 1,200
2006 1,250
2007 1,300
-------
$ 6,000
=======
(1) Consists of rental income from Exchange Building (commercial office
space), lease income from land and structures and other rental income. All
real estate leases are accounted for as operating leases.
F-28
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments (all of which are held for non- trading
purposes) for which it is practicable to estimate that value.
October 31,
2002 2001
------------------- -------------------
($ 000's Omitted)
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and
cash equivalents $ 139 $ 139 $ 14 $ 14
------ ------ ------ ------
Current Portion of Long-
Term Debt 0 0 0 0
------ ------ ------ ------
Long-Term Debt 0 0 0 0
------ ------ ------ ------
Long-Term Debt - Related
Party 2,667 (d) 2,667 (d)
------ ------ ------ ------
a) Cash and cash equivalents: The carrying amount approximates fair market
value because of the short maturities of such instruments.
b) Long-Term Debt (See Note 6): 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.
c) Long-Term Debt Related Party (see Note 6): It is not practicable to
estimate the fair value of the related party debt.
F-29
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. Property Held for Development or Resale
Property held for development or resale consist of approximately 113 acres
of land located in the midwest of undeveloped land not currently utilized for
corporate purposes and not included in any of the present operating leases. The
Company constantly evaluates proposals received for the purchase, leasing or
development of this asset. The land is valued at cost which does not exceed the
net realizable value.
A schedule of the Company's property held for development or resale at
October 31, 2002 is as follows (000's omitted):
Capitalized Cost
Subsequent to
Initial Cost Acquisition Date
----------------- ----------------- Carrying
Bldgs. & Bldgs. & Accum. Value
Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/02
- ----------------- ---- --------- ---- --------- ----- --------
69 acres of land
in St. Joseph, MO $179 N/A N/A N/A N/A $179
Acquired in 1942
11 acres of land
in S. St. Paul, MN 158 N/A N/A N/A N/A 158
Acquired in 1937
9 acres of land
in Sioux City, IA 181 N/A N/A N/A N/A 181
---- ---- ---- ---- ---- ----
Acquired in 1937
$518 $ 0 $ 0 $ 0 $ 0 $518
==== ==== ==== ==== ==== ====
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations (see Note 6).
F-30
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
A schedule of the Company's reconciliation of property held for
development or resale carried for the three years ended October 31, 2002, 2001
and 2000 is as follows (000's omitted):
2002 2001 2000
---- ---- ----
Balance at beginning of year $ 620 $ 648 $ 978
Acquisitions 0 0 0
Improvements 0 0 0
Cost of property sold (102) (28) (330)
Other 0 0 0
----- ----- -----
Balance at end of year $ 518 $ 620 $ 648
----- ----- -----
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations (see Note 6).
F-31
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 28th day of
January, 2003.
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
--------- ----- ----
/S/ Michael E. Schultz President and Chief January 28, 2003
- ---------------------- Executive Officer and Director
Michael E. Schultz (Principal Executive Officer)
/S/ Reginald Schauder Vice President-Finance January 28, 2003
- ---------------------- Secretary and Treasurer
Reginald Schauder (Principal Financial and
Accounting Officer)
/S/ Asher B. Edelman Chairman of the Board
- ---------------------- and Director January 28, 2003
Asher B. Edelman
/S/ Gerald N. Agranoff Director January 28, 2003
- ----------------------
Gerald N. Agranoff
S-1
CERTIFICATIONS
I, Michael E. Schultz, certify that:
1) I have reviewed this annual report on Form 10-K of Canal Capital
Corporation and subsidiaries;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light if the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report; and
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Dated: January 28, 2003
/S/ Michael E. Schultz
-----------------------
Chief Executive Officer
S-2
CERTIFICATIONS
I, Reginald Schauder, certify that:
1) I have reviewed this annual report on Form 10-K of Canal Capital
Corporation and subsidiaries;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements made, in light if the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report; and
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operation and cash flows of
the registrant as of, and for, the periods presented in this annual
report.
Dated: January 28, 2003
/S/ Reginald Schauder
-----------------------
Chief Financial Officer
S-3