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, 2004
|_| 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 002-96666
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)
490 WHEELER ROAD SUITE 272
HAUPPAGUE, New York 11788
(Address of principal executive offices) (Zip Code)
(631) 234-0140
(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, 2005, was approximately $127,000. The number of
shares of Common Stock, $.01 par value, outstanding at January 15, 2005 was
4,326,929.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
2004 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page
----
ITEM 1. Business............................................. 1
ITEM 2 Properties........................................... 6
ITEM 3. Legal Proceedings.................................... 7
ITEM 4. Submission of Matters to a Vote of Security Holders.. 7
PART II
ITEM 5. Market for Registrant's Common Stock and Related
Stockholder Matters.................................. 8
ITEM 6. Selected Consolidated Financial Data................. 9
ITEM 7. Management's Discussion and Analysis of the
Results of Operations and Financial Condition........ 11
ITEM 7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 23
ITEM 8. Financial Statements and Supplementary Data.......... 23
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 23
ITEM 9A. Controls and Procedures.............................. 24
ITEM 9B. Other Information.................................... 24
PART III
ITEM 10. Directors and Executive Officers of the Registrant.. 27
ITEM 11. Executive Compensation.............................. 28
ITEM 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ..... 30
ITEM 13. Certain Relationships and Related Transactions...... 32
ITEM 14. Principal Accounting Fees and Services ............. 32
PART IV
ITEM 15. Exhibits, Financial Statement Schedules and
Reports on Form 8-K................................. 33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................... F-1
SIGNATURES......................................................... S-1
EXHIBITS........................................................... E-1
i
PART I
This Annual Report on 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
"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 Annual Report on 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.
Canal Capital Corporation's fiscal year ends on October 31, of each
calendar year. Each reference to a fiscal year in this Annual Report on Form 10K
refers to the fiscal year ending October 31, of the calendar year indicated.
Unless the context requires otherwise, references to "we", "us", "our", "Canal
Capital Corporation" and the "company" refer to Canal Capital Corporation and
its subsidiaries.
Item 1. Business
Company Overview
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 -- real estate and stockyard
operations.
Real Estate Operations - Canal's real estate properties are located in
Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska
and Sioux Falls, South Dakota. The properties 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, 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 lease income from land and structures leased to various commercial
and retail enterprises, rental income from its Exchange Buildings, and proceeds
from the sale of real estate properties. In addition to selling what was excess
stockyard property, the company entertains any offers to purchase, develop and
restructure real estate lots surrounding its existing operating lease
properties, stockyard operating properties and properties held for development
or resale in order to enhance the value of the existing properties and
surrounding real estate. 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
consigned for sale at the stockyards and the sale of feed and bedding. See
"Stockyard Operations".
Real Estate Operations
General - Canal is involved in the management, development or sale of its
real estate properties located in five Midwest states. Real estate operations,
resulted in operating income of $0.4 million, while contributing $1.2 million to
Canal's revenues for fiscal 2004. During fiscal 2004, Canal sold approximately
14 acres of land located in two states (Iowa-4 acres and Missouri-10 acres) for
$0.3 million generating operating income of $0.1 million.
As of October 31, 2004, there are approximately 59 acres of undeveloped
land owned by Canal located in five Midwest states (see ITEM 2) . Canal is
continuing the program, which it started several years ago, to develop or sell
this property. Additionally, Canal will continue to aggressively pursue
additional tenants for its Exchange Buildings and undeveloped properties in
fiscal 2005.
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 real estate properties.
Competition - Canal competes in the area of 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 real estate revenues are dependent on the ability of the stockyard
operations and the various meat packers located adjacent to Canal's properties
to successfully compete in their respective businesses.
Stockyard Operations
General - Through an asset repurchase agreement, Canal commenced stockyard
operations August 1, 1999 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
$0, $0, and $75,000 for the three years ended October 31, 2004,
2
2003 and 2002, 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 2005.
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 2005. 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.
3
Stockyard operations resulted in operating income of approximately $0.3
million while contributing approximately $3.0 million to Canal's revenues for
fiscal 2004.
Risk - Stockyard activities face a variety of risks and uncertainties
related to the safeguarding of the national food supply which are beyond our
control. Public confidence in the government's efforts to safeguard the food
supply is essential for the success of our stockyard operations. An outbreak of
a disease such as bovine spongiform encephalopathy (BSE) better known as Mad Cow
Disease could have a devastating impact on stockyard operations. For the
company's part we strictly follow all USDA regulations to ensure to the extent
we can the safety of the food supply. Furthermore, 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 is in the process of selling, in an orderly manner, its remaining
art inventory. This will be accomplished primarily through direct sales,
consignment arrangements with various independent art dealers and through sale
at public art auctions.
Canal established its art operations in the late 1980's by acquiring for
resale a significant inventory of antiquities primarily from the ancient
Mediterranean cultures coupled with the purchase of approximately fifty
paintings by Jules Olitski, a world renowned artist of contemporary paintings.
Canal sells its art primarily through three sources, direct sales,
consignment to independent art dealers and at public art auctions. In the case
of consignment sales through independent art dealers, Canal consigns its pieces
at specific prices. In the case of public art auctions, the Company primarily
consigns its art pieces to the two largest auction houses for their spring and
fall art auctions and Canal sets a minimum acceptable price on the pieces
consigned.
In fiscal 2004, Canal sold 34 pieces of contemporary art totaling $463,000
which sales generated a net gain of approximately $166,000. Antiquities and
contemporary art represented 46% ($189,122) and 54% ($224,078) and 27%
($189,122) and 73% ($520,549) of total art inventory at October 31, 2004 and
2003, respectively.
4
Risk & Competition - 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. 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.
Employees - At October 31, 2004, Canal had approximately 75 employees.
Executive Officers - At October 31, 2004 Canal's Executive Officers were:
Held
Name Age Since Title
---- --- ----- -----
Asher B. Edelman 65 1991 Chairman of the Board
Michael E. Schultz 68 1991 President and Chief
Executive Officer
Reginald Schauder 55 1989 Vice President, Chief
Financial Officer,
Treasurer and Secretary
Risk Factors - In addition to other information in this Annual Report on
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. The risk and uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of the
following 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.
Risk Related to Our Business - 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; public confidence in the government's ability to safeguard
the food supply from infectious diseases; 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.
5
ITEM 2. Properties
Canal's real estate properties located in five Midwest states are
primarily associated with its current and former stockyards operations. Each
property consists, for the most part, of land and structures leased to third
parties (meat packing facilities, rail car repair shops, lumber yards and
various other commercial and retail businesses) an Exchange Building (commercial
office space), as well as vacant land available for development or resale. In
addition to selling what was excess stockyard property, the company entertains
any offers to purchase, develop and restructure real estate lots surrounding its
existing operating lease properties, stockyard operating properties and
properties held for development or resale in order to enhance the value of the
existing properties and surrounding real estate. 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, 2004 include:
New York Headquarters - In June 2004, Canal entered into a three year
lease for approximately 1,000 square feet of office space in Hauppauge, New
York.
Leased Held for
Year Total Exchange Stkyds to Third Develop-
Location Acquired Site(2) Bldgs. Opertns(1) Parties ment (3)
-------- -------- ------- -------- ----------- -------- --------
St. Joseph, MO 1942 49 0 30 0 19
S. St. Paul, MN 1937 25 5 0 10 10
Sioux City, IA 1937 48 0 0 18 30
Omaha, NE 1976 11 0 0 11 0
Sioux Falls, SD 1937 31 1 30 0 0
--- -- --- --- ---
Total 164 6 60 39 59
--- -- --- --- ---
The following schedule shows the average occupancy rate and average rental
rate at each of Canal's Exchange Buildings:
2004 2003
---------------------- -----------------------
Occupancy Average(4) Occupancy Average(4)
Location Rate Rental Rate Rate Rental Rate
- -------- --------- ----------- --------- ----------
S. St. Paul, MN(5) 74% $12.00 74% $12.00
Sioux Falls, SD 90% $ 7.00 90% $ 7.00
NOTES
(1) Canal now operates two central public stockyards.
(2) For information with respect to mortgages and pledges see Note 7.
(3) For information related to property held for development see Note 2(c).
(4) Per square foot.
(5) Canal sold this Exchange Building in November 2004 (see Note 31).
6
ITEM 3. Legal Proceedings
Canal and its subsidiaries are from time to time involved in litigation
incidental to their normal business activities, none of which, in the
opinion of management, will have a material adverse effect on the
consolidated financial condition and operations of the Company.
Canal was not a party to any ongoing litigation at October 31, 2004. The
following litigation was settled during fiscal 2004:
WHGA Fifth Avenue Investors, LP v. Canal Capital Corporation etal
On March 4, 2004, WHGA Fifth Avenue Investors, LP (the "Landlord")
commenced an action against Canal Capital Corporation and its two
co-tenants (the "Tenants") of its New York City commercial office space.
The Landlord is seeking the eviction of the Tenants as well as judgement
for unpaid back and holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation
agreement with the landlord requiring the tenants to pay two months rent
(approximately $85,000), forfeit the entire security deposit and vacate
the leased premises as of May 31, 2004 in exchange for a release from all
future obligations under the lease. All requirements of the stipulation
agreement have been met.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our stockholders during the fourth quarter of
the fiscal year ended October 31, 2004.
7
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder 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, 2004 as reported on the "pink sheets" were:
Fiscal 2004 Fiscal 2003
------------------- ------------------
Quarter Ended High Low High Low
- ------------- ------ ------ ------ ------
January 31 ................. $ 0.10 -- $ 0.05 $ 0.20 -- $ 0.11
April 30 ................... $ 0.10 -- $ 0.05 $ 0.16 -- $ 0.14
July 31 .................... $ 0.10 -- $ 0.05 $ 0.20 -- $ 0.16
October 31 ................. $ 0.10 -- $ 0.05 $ 0.20 -- $ 0.16
Dividend Policy and Holders
There were no cash dividends paid during fiscal 2004 or 2003. Canal is
subject to restrictions on the payment of cash dividends under certain debt
agreements. As of January 15, 2005, Canal had approximately 1,500 holders of
record of its common stock, par value $.01 per share.
8
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.
YEARS ENDED OCTOBER 31,
-----------------------
STATEMENT OF OPERATIONS DATA 2004 2003 2002 2001 2000
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES FROM CONTINUING OPERATIONS $ 4,199(1) $ 4,760(2) $5,413(3) $ 5,238(4) $ 5,768(5)
NET (LOSS) INCOME ($577) ($537) $ 426 ($773) ($922)
(LOSS) INCOME PER SHARE:
BASIC ($0.15) ($0.16) $ 0.07 ($0.25) ($0.27)
DILUTED ($0.15) ($0.16) $ 0.07 ($0.25) ($0.27)
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
OCTOBER 31,
-----------
2004 2003 2002 2001 2000
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
CURRENT ASSETS $ 824 $ 477 $ 636 $ 602 $ 1,569
PROPERTY ON OPERATING LEASES, NET 2,715 2,874 3,337 3,302 3,098
PROPERTY USED AS STOCKYARDS 1,142 1,136 1,176 1,281 1,237
ART INVENTORY NON-CURRENT 0 460 622 934 697
OTHER ASSETS 1,000 1,195 742 859 860
-------------------------------------------------------------
TOTAL ASSETS $ 5,681 $ 6,142 $6,513 $ 6,978 $ 7,461
-------------------------------------------------------------
CURRENT LIABILITIES $ 780 $ 765 $ 585 $ 1,345 $ 1,168
NON-CURRENT LIABILITIES 1,243 1,208 1,282 1,203 1,047
LONG-TERM DEBT 2,767 2,767 2,667 2,667 2,522
STOCKHOLDERS' EQUITY 891 1,402 1,979 1,763 2,724
-------------------------------------------------------------
TOTAL LIAB. & STOCKHOLDERS'EQUITY (6) $ 5,681 $ 6,142 $6,513 $ 6,978 $ 7,461
-------------------------------------------------------------
COMMON SHARES OUTSTANDING AT YEAR-END 4,327 4,327 4,327 4,327 4,327
9
ITEM 6. Selected Financial Data (continued..)
NOTES:
(1) The revenue decrease was due primarily to a $0.4 million decrease in
stockyard revenues coupled with a $0.2 million decrease in sales of real
estate.
(2) The revenue decrease was due primarily to a $0.4 million decrease in sales
of real estate coupled with $0.1 million decreases in both stockyard and
real estate operating revenues.
(3) 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.
(4) The revenue decrease was due primarily to a $0.3 million decrease in sales
of real estate.
(5) 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).
(6) For discussion of material uncertainties and commitments, see Notes 9
and 17 to the Consolidated Financial Statement.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion together with the more detailed
business information and consolidated financial statements and related notes
that appear elsewhere in this report and in the documents that we incorporate by
reference into this report. This report may contain certain "forward- looking"
information within the meaning of the Private Securities Litigation Reform Act
of 1995. This information involves risks and uncertainties. Our actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk factors".
Company Overview
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 -- real estate and stockyard
operations.
Real Estate Operations - Canal's real estate properties are located in
Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska
and Sioux Falls, South Dakota. The properties 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, 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 lease income from land and structures leased to various commercial
and retail enterprises, rental income from its Exchange Buildings, and proceeds
from the sale of real estate properties. In addition to selling what was excess
stockyard property, the company entertains any offers to purchase, develop and
restructure real estate lots surrounding its existing operating lease
properties, stockyard operating properties and properties held for development
or resale in order to enhance the value of the existing properties and
surrounding real estate. See "Real Estate Operations".
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
consigned for sale at the stockyards and the sale of feed and bedding. See
"Stockyard Operations".
11
Real Estate Operations
General - Canal is involved in the management, development or sale of its
real estate properties located in five Midwest states. Real estate operations,
resulted in operating income of $0.4 million, while contributing $1.2 million to
Canal's revenues for fiscal 2004. During fiscal 2004, Canal sold approximately
14 acres of land located in two states (Iowa-4 acres and Missouri-10 acres) for
$0.3 million generating operating income of $0.1 million.
As of October 31, 2004, there are approximately 59 acres of undeveloped
land owned by Canal located in five Midwest states (see ITEM 2) . Canal is
continuing the program, which it started several years ago, to develop or sell
this property. Additionally, Canal will continue to aggressively pursue
additional tenants for its Exchange Buildings and undeveloped properties in
fiscal 2005.
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 real estate properties.
Competition - Canal competes in the area of 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 real estate revenues are dependent on the ability of the stockyard
operations and the various meat packers located adjacent to Canal's properties
to successfully compete in their respective businesses.
Stockyard Operations
General - Through an asset repurchase agreement, Canal commenced stockyard
operations August 1, 1999 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
$0, $0, and $75,000 for the three years ended October 31, 2004, 2003 and 2002,
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 2005.
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
12
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 2005. 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 $0.3
million while contributing approximately $3.0 million to Canal's revenues for
fiscal 2004.
Risk - Stockyard activities face a variety of risks and uncertainties
related to the safeguarding of the national food supply which are beyond our
control. Public confidence in the government's efforts to safeguard the food
supply is essential for the success of our stockyard operations. An outbreak of
a disease such as bovine spongiform encephalopathy (BSE) better known as Mad Cow
Disease could have a devastating impact on stockyard operations. For the
company's part we strictly follow all USDA regulations to ensure to the
13
extent we can the safety of the food supply. Furthermore, 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.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. These
generally accepted accounting principles require 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 net sales and expenses during the
reporting period. We continually evaluate our estimates, including those related
to revenue recognition, bad debts, income taxes, fixed assets, restructuring,
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the facts
and circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
Management believes the following critical accounting policies impact our
most difficult, subjective and complex judgments used in the preparation of our
consolidated financial statements, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. For a
further discussion of these and other accounting policies, please see Note 2 of
the Notes to Consolidated Financial Statements included elsewhere in this Annual
Report.
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 (a standard per head charge for each animal sold through the
stockyards) and sale of feed and bedding are recognized at the time the service
is rendered or the feed and bedding are delivered.
Art Inventory Held for Sale -- 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 had varying percentages of its art
inventory appraised by independent appraisers in previous years. For fiscal 2004
the net realizable value of Canals remaining art inventory has been estimated by
management based in part on the Company's history of art sales in the current
and previous years and in part on the results of the independent appraisals done
in previous years.
14
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 59 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.
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).
Results of Operations
The following tables set forth certain items in our statement of
operations for the periods indicated:
Fiscal Year Ended October 31,
-----------------------------
2004 2003 2002
---- ---- ----
(In Thousands)
Revenues:
Real Estate Revenue $ 1,228 $ 1,373 $ 1,852
Stockyard Revenue 2,971 3,387 3,561
------- ------- -------
Total Revenue 4,199 4,760 5,413
------- ------- -------
Costs and Expenses:
Real Estate Expenses 814 1,131 1,109
Stockyard Expenses 2,634 2,802 3,023
General and Administrative Expenses 1,062 1,079 1,135
------- ------- -------
Total Costs and Expenses 4,510 5,012 5,267
------- ------- -------
(Loss) Income from Operations (311) (252) 146
Other Income 158 25 674
Other Expenses (424) (310) (394)
------- ------- -------
Net (Loss) Income $ (577) $ (537) $ 426
======= ======= =======
15
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.
Canal recognized a net loss of $0.6 million for 2004 as compared to the
2003 net loss of $0.5 million and the 2002 net income of $0.4 million. After
recognition of preferred stock dividend payments (paid in additional shares of
preferred stock for each of fiscal 2004, 2003 and 2002) of $49,000 in 2004,
$158,000 in 2003 and $116,000 in 2002, the results attributable to common
stockholders were a net loss of $0.6 million in 2004, a net loss of $0.6 million
in 2003 and net income of $0.3 million in 2002. Canal's 2004 net loss of $0.6
was due primarily to a $0.3 million decrease in income from stockyard operations
(due for the most part to the uncertainty of the national beef market after the
discovery in late December 2003 of the first U.S. case of bovine spongiform
encephalopathy (BSE) better known as "Mad Cow Disease") coupled with a $0.1
million increase in other expenses (primarily comprised of one time writeoffs
taken in connection with the early lease termination of Canal's New York office
space). Canal's 2003 net loss of $0.7 is due primarily to a $0.5 million
decrease in income from real estate operations (consisting of a $0.3 million
decrease in gains on sales of real estate; a $0.1 decrease in rental income and
a $0.1 million increase in real estate operating expenses); a $0.3 million
decrease in other income and a $0.2 million decrease in income from art sales.
Canal's revenues from continuing operations consist of revenues from its
real estate and stockyard operations. Revenues in 2004 decreased by $0.6 million
to $4.2 million as compared with 2003 revenues which had decreased by $0.6
million to $4.8 million as compared with 2002 revenues of $5.4 million. The
fiscal 2004 decrease in revenues is due primarily to a $0.4 million decrease in
stockyard revenues due to the uncertainty of the national beef market in 2004
due to the discovery in late December 2003 of the first U.S. case of Mad Cow
Disease, coupled with a $0.2 million in sales of real estate. The fiscal 2003
decrease in revenues is due primarily to a $0.4 million decrease in sales of
real estate coupled with $0.1 million decreases in both stockyard and real
estate operating revenues.
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 2004 AND 2003
Real Estate Revenues
Real estate revenues for 2004 of $1.2 million accounted for 29.2% of the
2004 revenues as compared to revenues of $1.4 million or 28.8% for 2003. Real
estate revenues are comprised of sale of real estate (22.4% and 31.2%),
16
rentals and other lease income from the rental of vacant land and certain
structures (43.8% and 37.0%), rental income from commercial office space in
its Exchange Buildings (33.8% and 31.8%), and other income (0.0% and 0.0%)
for 2004 and 2003, respectively. The 2004 decrease is due primarily to the
$0.2 million decrease in sales of real estate. The percentage variations in
the year to year comparisons are due primarily to the decrease in real estate
sales for fiscal 2004.
Real Estate Expenses
Real estate expenses for 2004 of $0.8 million decreased by $0.3 million
(28.0%) from $1.1 million in 2003. Real estate expenses are comprised of cost of
real estate sold (21.1% and 24.6%), labor, operating and maintenance (38.7% and
36.0%), depreciation and amortization (16.4% and 12.8%), taxes other than income
taxes (18.4% and 22.0%),, and general and administrative and other expenses
(5.4% and 4.6%) for 2004 and 2003, respectively. The percentage variations in
year to year comparisons is due primarily to the decrease in the cost of real
estate sold in fiscal 2004 coupled with the decrease in taxes other than income
taxes which is a result of a fiscal 2003 catchup accrual for back real estate
taxes relating to the Sioux City, Iowa property.
Stockyard Revenues
Stockyard revenues for 2004 of $3.0 million accounted for 70.8% of the
2004 revenues as compared to revenues of $3.4 million or 71.2% for 2003.
Stockyard revenues are comprised of yard handling and auction (90.7% and 89.5%),
feed and bedding income (5.0% and 5.5%), rental income (0.1% and 0.1%) and other
income (4.2% and 4.9%) for 2004 and 2003, respectively. The 2004 decrease is due
primarily to the uncertainty of the 2004 national beef market due to the
discovery in late December 2003 of the first U.S. case of Mad Cow Disease. There
were no significant percentage variations in the year to year comparisons.
Stockyard Expenses
Stockyard expenses for 2004 of $2.6 million decreased by $0.2 million
(6.0%) from $2.8 million in 2003. Stockyard expenses are comprised of labor and
related costs (48.9% and 47.4%), operating and maintenance (27.9% and 27.0%),
feed and bedding expense (4.5% and 5.7%), depreciation and amortization (0.9%
and 0.7%), taxes other than income taxes (6.2% and 6.2%) and general and
administrative expenses (11.6% and 13.0%) for 2004 and 2003, respectively. The
2004 decrease is due primarily to across the board decreases consistent with the
revenue reductions in fiscal 2004. There were no significant percentage
variations in the year to year comparisons.
17
General and Administrative
General and administrative expenses for 2004 of $1.1 million decreased
slightly from $1.1 million in 2003. The major components of general and
administrative expenses are officers salaries (44.2% and 43.9%),pension expense
(22.4% and 19.5%), insurance expense (9.9% and 10.2%), office salaries (6.4% and
8.2%), travel expense (2.9% and 3.0%), rent expense (1.9% and 1.6%) and legal
fees (1.6% and 0.8%) for 2004 and 2003, respectively. The percentage increase in
rent reflects Canal's entering into a three year lease for new office space in
Hauppauge, New York commencing in the second quarter of fiscal 2004. The
percentage decrease in office salaries reflects the reduction of one employee in
the New York office staff. The other percentage variations are consistent with
the overall reduction in general and administrative expenses for fiscal 2004.
Interest Expense
Interest expense for 2004 of $0.3 million increased slightly (1.4%) from
$0.3 million in 2003. The 2004 increase is due primarily to accrued interest on
certain payments which are overdue to Canal's pension plan. Interest rates on
Canal's variable rate mortgage notes averaged 10.00% in 2004 and 2003. At
October 31, 2004 the outstanding balance of these notes was $2,767,000.
Interest and Other Income
Interest and other income of $13,000 for 2004 decreased $12,000 from
$25,000 in fiscal 2003. Interest and other income is primarily comprised of
dividend and interest income.
Income from Art Sales
In fiscal 2004, Canal recognized income from art sales of $139,000 as
compared to a loss of $8,000 for fiscal 2003. The 2004 increase reflects the
overall increase in sales of art during 2004 as compared to 2003. Art revenues
are comprised of the proceeds from the sale of antiquities and contemporary art.
In fiscal 2004, Canal sold thirty four pieces of contemporary art generating
gross proceeds of $463,000 as compared to fiscal 2003 sales of three pieces of
contemporary art generating gross proceeds of $173,000. Art expenses are
comprised of the cost of inventory sold and selling, general and administrative
expenses. In fiscal 2004, Canal incurred cost of inventory sold of $296,000 (net
of a valuation allowance of $836,000) as well as selling, general and
administrative expenses of $28,000 as compared to fiscal 2003 cost of inventory
sold of $121,000 (net of a valuation allowance of $341,000) and selling, general
and administrative expenses of $63,000 (which amount included the write off of
11 pieces of antiquity art with a book value of approximately $42,000 net of a
valuation allowance of $68,000). 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.
18
Realized Income (Loss) on Investments
In fiscal 2003, Canal determined that the decline in the market value of
its investments available for sale were permanent. Accordingly, as of October
31, 2003, Canal has written off this investment entirely. This resulted in
Canal's recognizing realized losses of approximately $7,000 and $14,000 in
fiscal 2003 and 2002, respectively. Canal did, however, sell all of its
remaining investments during fiscal 2004 for approximately $5,000, which amount
was recognized as income for the year ended October 31, 2004.
Other Expense
Other expense of $140,000 for 2004 increased $125,000 from $15,000 in
fiscal 2003. The 2004 other expenses are comprised primarily of one time
writeoffs taken in connection with the early lease termination on Canal's New
York City office space ($87,000) coupled with a total reserve taken against the
receivable owed to Canal by an affiliated entity for certain executive
secretarial services rendered ($40,000). Other expenses are primarily related to
the administration of the company's pension plans.
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 2003 AND 2002
Real Estate Revenues
Real estate revenues for 2003 of $1.4 million accounted for 28.8% of the
2003 revenues as compared to revenues of $1.9 million or 34.2% for 2002. Real
estate revenues are comprised of sale of real estate (31.2% and 44.2%), rental
income from commercial office space in its Exchange Buildings (31.8% and 26.3%),
rentals and other lease income from the rental of vacant land and certain
structures (37.0% and 29.5%) and other income (0.0% and 0.0%) for 2003 and 2002,
respectively. The 2003 decrease is due primarily to the $0.4 million decrease in
sales of real estate. The percentage variations in the year to year comparisons
are due primarily to the decrease in real estate sales for fiscal 2003.
Real Estate Expenses
Real estate expenses for 2003 of $1.1 million were essentially unchanged
from $1.1 million in 2002. Real estate expenses are comprised of labor,
operating and maintenance (36.0% and 40.4%), depreciation and amortization
(12.8% and 12.0%), taxes other than income taxes (22.0% and 10.7%), cost of real
estate sold (24.6% and 32.8%),and general and administrative and other expenses
(4.6% and 4.1%) for 2003 and 2002, respectively. The percentage variations in
year to year comparisons is due primarily to the decrease in the cost of real
estate sold in fiscal 2003 coupled with the increase in taxes other than income
taxes which reflects a catchup accrual for back real estate taxes relating to
the Sioux City, Iowa property.
19
Stockyard Revenues
Stockyard revenues for 2003 of $3.4 million accounted for 71.2% of the
2003 revenues as compared to revenues of $3.6 million or 65.8% for 2002.
Stockyard revenues are comprised of yard handling and auction (89.5% and 89.4%),
feed and bedding income (5.5% and 5.6%), rental income (0.1% and 0.1%) and other
income (4.9% and 4.9%) for 2003 and 2002, respectively. The 2003 decrease is due
primarily to softer than anticipated results from the Sioux Falls Stockyards in
fiscal 2003. There were no significant percentage variations in the year to year
comparisons.
Stockyard Expenses
Stockyard expenses for 2003 of $2.8 million decreased by $0.2 million
(7.3%) from $3.0 million in 2002. Stockyard expenses are comprised of labor and
related costs (47.4% and 47.6%), operating and maintenance (27.0% and 27.5%),
feed and bedding expense (5.7% and 5.3%), depreciation and amortization (0.7%
and 0.8%), taxes other than income taxes (6.2% and 7.2%) and general and
administrative expenses (13.0% and 11.6%) for 2003 and 2002, respectively. The
2003 decrease is due primarily to across the board decreases consistent with the
revenue reductions in fiscal 2003. There were no significant percentage
variations in the year to year comparisons.
General and Administrative
General and administrative expenses for 2003 of $1.1 million were
essentially unchanged from $1.1 million in 2002. The major components of general
and administrative expenses are officers salaries (43.9% and 40.4%), rent (1.6%
and 4.9%), legal and professional fees (0.8% and 2.8%), insurance (10.2% and
14.1%) and office salaries (8.2% and 6.6%) for 2003 and 2002, 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 decrease in insurance reflects a reduction in insurance coverage
during fiscal 2003. The percentage increase in office salaries reflects a
severance accrual for an employee terminated in the fourth quarter of fiscal
2003.
Interest and Other Income
Interest and other income of $25,000 for 2003 decreased $442,000 from
$467,000 in fiscal 2002. The 2002 interest and other income included
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.
Interest and other income is primarily comprised of dividend and interest
income.
20
Interest Expense
Interest expense for 2003 of $0.3 million increased slightly (5.0%) from
$0.3 million in 2002. The 2003 increase is due primarily to a modest increase in
the outstanding debt incurred in the final quarter of fiscal 2003 coupled with
accrued interest on certain payments which are overdue to Canal's pension plan.
Interest rates on Canal's variable rate mortgage notes averaged 10.00% in 2003
and 2002. At October 31, 2003 the outstanding balance of these notes was
$2,767,000.
(Loss) Income from Art Sales
In fiscal 2003, Canal recognized a net loss from art sales of $8,000 as
compared to a net gain of $207,000 for fiscal 2002. The 2003 decrease reflects
the overall decrease in sales of art during 2003 as compared to 2002. Art
revenues are comprised of the proceeds from the sale of antiquities and
contemporary art. In fiscal 2003, Canal sold three pieces of contemporary art
generating gross proceeds of $173,000 as compared to fiscal 2002 sales of two
pieces of antiquity art generating gross proceeds of $540,000. Art expenses are
comprised of the cost of inventory sold and selling, general and administrative
expenses. In fiscal 2003, Canal incurred cost of inventory sold of $121,000 (net
of a valuation allowance of $341,000) as well as selling, general and
administrative expenses of $63,000 (which amount included the write off of 11
pieces of antiquity art with a book value of approximately $42,000 net of a
valuation allowance of $68,000) as compared to fiscal 2002 cost of inventory
sold of $311,000 (net of a valuation allowance of $509,000) and selling, general
and administrative expenses of $22,000. 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, 2003, Canal determined that the decline in the market value
of its investments available for sale was permanent. Accordingly, as of October
31, 2003, Canal has written off this investment entirely. This has resulted in
Canal's recognizing realized losses of approximately $7,000 and $14,000 in
fiscal 2003 and 2002, respectively. Further, Canal had recognized a realized
loss of approximately $47,000 on this investment in fiscal 2001.
Other Expense
Other expense of $15,000 for 2003 decreased $98,000 (86.8%)from $113,000
in fiscal 2002. Other expenses are primarily related to the administration of
the company's pension plans.
21
Related Party Transactions
Interest Expense Related Party - At October 31, 2004, all of Canal's
Long-Term Debt is held by the company's Chief Executive Officer and members of
his family. These notes pay interest at a rate of 10% per annum and come due May
15, 2006. Canal has incurred interest expense on these notes of $284,000,
$280,000 and $267,000 for the years ended October 31, 2004, 2003 and 2002,
respectively. At various times during fiscal 2004 certain holders of these notes
agreed to defer interest payments due totaling approximately $70,000 as of
October 31, 2004. This deferred interest liability will accrue additional
interest at a rate of 10% per annum, and will be repaid as funds become
available in fiscal 2005. The deferred interest liability is included in
accounts payable and accrued expenses at year end. As of October 31, 2004, the
balance due under these notes was $2,767,000 all of which is classified as
long-term debt related party.
Lease Commitments - On March 4, 2004, WHGA Fifth Avenue Investors, LP (the
"Landlord") commenced an action against Canal Capital Corporation and its two
co-tenants (the "Tenants") of its New York City commercial office space. The
Landlord is seeking the eviction of the Tenants as well as judgement for unpaid
back and holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation
agreement with the landlord requiring the tenants to pay two months rent
(approximately $85,000), forfeit the entire security deposit and vacate the
leased premises as of May 31, 2004 in exchange for a release from all future
obligations under the lease. All requirements of the stipulation agreement have
been met. This resulted in Canal taking a one time writeoff of approximately
$87,000 as of October 31, 2004.
In June 2004 Canal entered into a three year lease for approximately 1,000
square feet of office space in Hauppauge, New York at a monthly rental of
approximately $1,400.
Contractual Payments due by Period (in 000's)
Obligations
- -----------
Total Less than 1 to 3 3 to 5 More than
1 year years years 5 years
----- --------- ------ ------ ---------
Long-term debt $ 2,767 $ 0 $ 2,767 $ 0 $ 0
Operating leases $ 43 $ 17 $ 26 $ 0 $ 0
22
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.
The Company's variable rate mortgage notes (originally issued in 1998 and
amended several times since then) are due May 15, 2006 and are held entirely by
the Company's Chief Executive Officer and members of his family. These notes
carry interest at the rate of ten percent per annum. 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;
restricts Canal's ability to pay cash dividends or repurchase stock and require
principal prepayments to be made only out of the proceeds from the sale of
certain assets. As of October 31, 2004, the balance due under these notes was
$2,767,000, all of which is classified as long-term debt-related party.
Cash and cash equivalents of $86,000 at October 31, 2004 increased $72,000
or 507.1% from $14,000 at October 31, 2003. Net cash used by operations in
fiscal 2004 was $0.2 million. Substantially all of the 2004 net proceeds from
the sale of real estate and art of $0.7 million was used in operations and to
meet the company's long-term pension liability.
At October 31, 2004 the Company's current assets exceed current
liabilities by approximately $0.1 million (which was a positive change of $0.2
million) as compared to October 31, 2003 when the Company's current liabilities
exceeded current assets by $0.3 million, which represented an increase of $0.2
million from 2002. The fiscal 2004 change in the Company's liquidity is due
primarily to the increases in cash, accounts receivable. Both the increases in
cash and accounts receivable are due to the sale of ten Olitski paintings for
$205,000 ($75,000 cash and $130,000 due over a 60 day period) in late October
2004. The proceeds from this sale were used in early fiscal 2005 to repay
certain expenses which had been deferred in fiscal 2004. The only required
principal repayments under Canal's debt agreements for fiscal 2004 will be from
the proceeds (if any) of the sale of certain assets.
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 its program to
develop or sell the property it holds for development or resale as well as 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
23
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.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the
eight quarters ended October 31, 2004. 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.
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
2004 2004 2004 2004
-------- --------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES $ 1,154 $ 1,220 $ 842 $ 983
======== ========= ======== =======
NET INCOME (LOSS) ($41) ($82) ($169) ($285)
======== ========= ======== =======
NET INCOME (LOSS)
PER COMMON SHARE:
- BASIC ($0.02) ($0.02) ($0.03) ($0.07)
======== ========= ======== =======
- DILUTED ($0.02) ($0.02) ($0.03) ($0.07)
======== ========= ======== =======
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC & DILUTED 4,327 4,327 4,327 4,327
======== ========= ======== =======
QUARTER ENDED
JAN. 31, APRIL 30, JULY 31, OCT. 31,
2003 2003 2003 2003
-------- --------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES $ 1,458 $ 1,391 $ 825 $ 1,086
======== ========= ======== =======
NET INCOME (LOSS) $ 186 $ 3 ($227) ($499)
======== ========= ======== =======
NET INCOME (LOSS)
PER COMMON SHARE:
- BASIC $ 0.03 ($0.01) ($0.06) ($0.13)
======== ========= ======== =======
- DILUTED $ 0.03 ($0.01) ($0.06) ($0.13)
======== ========= ======== =======
WEIGHTED AVERAGE NUMBER
OF SHARES:
- BASIC & DILUTED 4,327 4,327 4,327 4,327
======== ========= ======== =======
24
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Securities and Exchange Commission's rule related to market risk
disclosure requires that we describe and quantify our potential losses
from market risk sensitive instruments attributable to reasonably possible
market changes. Market risk sensitive instruments include all financial or
commodity instruments and other financial instruments (such as investments
and debt) that are sensitive to future changes in interest rates, currency
exchange rates, commodity prices or other market factors. We are not
exposed to market risks from changes in foreign currency exchange rates or
commodity prices. We do not hold derivative financial instruments nor do
we hold securities for trading or speculative purposes. Under our current
policies, we do not use interest rate derivative instruments to manage our
exposure to interest rate changes.
At October 31, 2004, the following long-term debt-related party financial
instruments are sensitive to changes in interest rates by expected
maturity dates:
As of Fixed rate Average Fair
October 31, ($ US) Interest Rate Value
----------- ------ ------------- -----
2005 $ 0 N/A
2006 2,767 10%
2007 0 N/A
2008 0 N/A
2009 0 N/A
Thereafter 0 N/A
-------
Total $ 2,767 N/A (A)
------- -------
(A) Long-term debt related party (See Note 6): it is not practicable to
estimate the fair value of the related party debt (See Note 18).
ITEM 8. Financial Statements and Supplemental Data
The financial statements filed as part of this Annual Report 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. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
25
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15 (e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this Annual Report.
Based on such evaluation, such officers have concluded that, as of such date,
our disclosure controls and procedures are effective in alerting them on a
timely basis to material information relating to Canal Capital Corporation (and
its consolidated subsidiaries) required to be included in our reports filed or
submitted under the Exchange Act.
Changes in Internal Control over Financial Reporting. There were no
significant changes in our internal control over financial reporting that have
materially affected or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. Other Information
None.
26
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The company's Board of Directors is comprised of three non-independent
directors. As such, the creation of numerous independent committees is not
feasible. However, 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 2004 the Board of
Directors held one meeting, and the Executive Committee held three meetings, all
of which were attended by both Mr. Edelman and Mr. Schultz. On November 4, 2004,
Mr. Gerald N. Agranoff resigned as a Director of Canal's Board of Directors.
There were no disagreements between Mr. Agranoff and Canal at the time of his
resignation.
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 65, 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 was a Director, Vice- Chairman of
the Board, and Chairman of the Executive Committee of The CattleSale Company
formerly known as Dynacore Holdings Corporation, ("CattleSale") from March 1985
to December 2003.
Michael E. Schultz, age 68, 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 58, has been a Director since 1984. As discussed
above, Mr. Agranoff resigned from the Board in November 2004. Mr. Agranoff is
currently a Director of CattleSale, Bull Run Corporation and Petrosearch Energy
Corp.. 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 55, has been Vice President, Chief Financial
Officer and Treasurer since January 1989 and assumed responsibility as Secretary
of the Company in September 1995.
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.
27
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 2004 exceeded $100,000.
SUMMARY COMPENSATION TABLE - Annual Compensation
Name and Principal
Position Year Salary
- ------------------ ---- ----------
Michael E. Schultz 2004 $ 175,000
President and Chief 2003 $ 175,000
Executive Officer 2002 $ 175,000
Asher B. Edelman 2004 $ 175,000
Chairman of the Board 2003 $ 175,000
and Executive Committee 2002 $ 175,000
Reginald Schauder 2004 $ 115,000
Vice President, Chief 2003 $ 115,000
Financial Officer 2002 $ 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 receipt for $55,000 of their annual
salaries effective June 1, 2001. Additionally, effective November 1, 2002 Mr.
Schauder agreed to defer receipt for $6,300 of his annual salary. These amounts
are accrued by the Company with payments made from time to time as cash becomes
available to the Company. At October 31, 2004, the total liability under these
agreements was approximately $219,000. Additionally, Mr. Schultz has deferred
interest and other reimbursable expenses in the amount of approximately $78,000
as of October 31, 2004.
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 $0, $18,000 and $41,000 for fiscal years 2004, 2003 and 2002,
respectively.
Retirement Plans - The Canal Capital Corporation Retirement Plan (the
"Retirement Plan") provides benefits to eligible employees of the Company and
its subsidiaries and affiliates. Directors who are not employees are not
eligible to participate in the Retirement Plan. The Retirement Plan is
administered by the Company. All Company contributions under the Retirement Plan
were deposited with an insurance company and invested in a group annuity
contract through May 30, 1985. Thereafter, all Company contributions have been
held in trust under a Trust Agreement between the Company and the Executive
Committee of the Board of Directors, as trustee. Contributions to the Retirement
Plan are determined on an actuarial basis, without individual allocation.
28
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, 2004.
Mr. Schultz has no benefit under the Retirement Plan. For further information on
the Retirement Plan see Note 9.
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. Directors are reimbursed for expenses
incurred in attending Board and Committee meetings, including those for travel,
food and lodging.
Stock Options for Directors
The Company maintains an option plan for the benefit of directors of the
Company -- the 1985 Directors' Stock Option Plan (the "1985 Plan"), which was
approved by the stockholders of the Company on March 12, 1986. Pursuant to the
1985 Plan, a maximum of 264,000 shares of common stock, $0.01 par value per
share, of the Company have been reserved for issuance to directors and members
of the Executive Committee of the Company and its subsidiaries.
Options granted under the 1985 Plan are 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.
During the 2004 fiscal year, no options under the 1985 plan were granted
and no options previously granted were exercised. At October 31, 2004, there
were no options outstanding under the 1985 Plan.
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. On November 4, 2004, Mr. Gerald N. Agranoff resigned as a Director of
Canal's Board of Directors. There were no disagreements between Mr. Agranoff and
Canal at the time of his resignation.
29
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. In the past, the
Company had been invested in the securities of other companies in which Mr.
Edelman, other directors of the Company or their affiliates were directors or
officers, or in which one or more of such persons may also have invested. Since
November 1, 1993, such companies included The CattleSale Company (formerly known
as Dynacore Holdings 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. At October
31, 2004, the Company had no such investments.
ITEM 12. Securities Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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, 2005 were:
SECURITIES BENEFICIALLY OWNED
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
---- ------------------------ -----------------
Asher B. Edelman 1,909,605 (c) 44.13
Michael E. Schultz 58,835 (c) 1.36
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.
30
SECURITIES OWNED BY MANAGEMENT
The following table sets forth certain information as of January 15, 2005,
with respect to the beneficial ownership of the Company's Common Stock with
respect to all persons who are directors, each of the executives named in the
Executive Compensation Table and by all directors and officers as of the most
practical date. Unless otherwise indicated, the percentage of stock owned
constitutes less than one percent of the outstanding Common Stock and the
beneficial ownership for each person consists of sole voting and sole investment
power.
No. of Common Shares Percent of Class
Name Beneficially owned (a) of Common Stock
---- ------------------------ -----------------
Gerald Agranoff 0 0.00
Asher B. Edelman 1,909,605 (b)(c) 44.13
Reginald Schauder 100 (d) 0.01
Michael E. Schultz 58,835 (e)(f) 1.36
---------
All Directors and Officers
as a group (4 persons) 1,968,540 45.50
=========
(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, 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
31
sole power to vote and dispose of the shares owned by it, which power is
exercisable by Mr. Edelman as the general partner. Value Partners has shared
power to vote and dispose of the shares owned by it. The power to dispose of
such shares is exercisable by A. B. Edelman Management Company, Inc., a
corporation controlled by Mr. Edelman as the sole stockholder. Canal
Retirement Plan has the sole power to vote and dispose of the shares owned by
it, which power is exercisable by Mr. Edelman as trustee. Aile Blanche, Inc.
has the sole power to vote and dispose of the shares owned by it, which power
is exercisable by Mr. Edelman as President. Felicitas has the sole power to
vote and dispose of the shares owned by it, which power is exercisable by Mr.
Edelman as the controlling general partner of Citas. Additionally, the
number reported herein for Mr. Edelman includes 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) Represents 58,835 shares owned directly.
(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. Principal Accounting Fees and Services
The following fees were billed to us by Todman & Co., CPAs, PC during
fiscal 2004 and 2003:
2004 2003
---- ----
Audit fees $ 55,000 $ 55,000
Tax fees 0 0
All other fees 3,000 3,000
-------- --------
$ 58,000 $ 58,000
======== ========
Audit-related fees include statutory audits and Sarbanes-Oxley related
consultation. Other fees primarily consist of routine advisory services.
The Board of Directors of Canal has determined that Todman & Co., CPAs, PC
provision of non-audit services is compatible with maintaining the
independence of Todman & Co., CPAs PC.
32
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
On November 10, 2004 Canal filed a Form 8-K relating to:
Item 5.02 Departure of Directors or Principal Officers;
Election of Directors; Appointment of Principal Officers.
On November 4, 2004, Mr. Gerald N. Agranoff resigned as a
Director of the Registrant's Board of Directors. There were
no disagreements between Mr. Agranoff and the Registrant.
33
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
Item 15(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) 1985 Directors' Stock Option Plan (1) (See Exhibit A included
in the Registrant's Proxy Statement dated January 31, 1986,
relating to the annual meeting of stockholders held March 12,
1986, which exhibit is incorporated herein by reference).
10(d) 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(e) 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).
34
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(f) 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(g) $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(h) $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(i) $229,000 Promissory Note dated January 8, 1998 by and between
Lora K. Schultz and Canal Capital Corporation (filed as
Exhibit 10 (aq) to the Registrant's Form 10-K filed January
30, 1998 and incorporated herein by reference).
10(j) $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(k) $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.
31 Certification Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
35
INVESTOR INFORMATION
Annual Meeting Corporate Headquarters
The Annual Meeting of Shareholders 490 Wheeler Road, Suite 272
of Canal Capital Corporation will Hauppauge, NY 11788
be held in our offices at 490
Wheeler Road, Suite 272, Hauppauge,
NY, 11788 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 (631) 234-0140 (212) 969-3000
36
FORM 10-K -- ITEM 15(a)(1) and (2)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
The following documents are filed as part of this report:
(a) 1. Financial Statements --
Report of Independent Registered Public Accounting
Firm .................................................... F-2
Consolidated Balance Sheets as of October 31, 2004
and 2003 ................................................ F-3
Consolidated Statements of Operations and Comprehensive
(Loss) Income for the years ended October 31, 2004,
2003 and 2002 ........................................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended October 31, 2004, 2003 and 2002 .............. F-7
Consolidated Statements of Cash Flows for the
years ended October 31, 2004, 2003 and 2002 .............. F-8
Notes to Consolidated Financial Statements .................. F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related consolidated statements of
operations and comprehensive (loss) income, stockholders' equity, and cash flows
for each of the three years in the period ended October 31, 2004. 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 the standards of the Public
Company Accounting Oversight Board (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 consolidated financial position of Canal Capital
Corporation and Subsidiaries at October 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended October 31, 2004, in conformity with U.S. generally accepted accounting
principles.
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.
January 20, 2005 Certified Public Accountants (N.Y.)
F-2
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31,
-----------------
2004 2003
---- ----
ASSETS
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 86,158 $ 14,191
NOTES AND ACCOUNTS RECEIVABLE, NET OF AN
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF
ZERO AT BOTH OCTOBER 31, 2004 AND 2003 281,533 131,836
ART INVENTORY, NET OF A VALUATION ALLOWANCE
OF $ 938,300 AND $1,157,400 AT OCTOBER
31, 2004 AND 2003, RESPECTIVELY 413,200 250,000
STOCKYARDS INVENTORY 10,122 11,412
PREPAID EXPENSES 32,985 69,168
---------- ----------
TOTAL CURRENT ASSETS 823,998 476,607
---------- ----------
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $ 1,176,248
AND $ 1,199,723 AT OCTOBER 31, 2004
AND 2003, RESPECTIVELY 2,715,485 2,874,457
---------- ----------
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $ 148,508
AND $ 130,041 AT OCTOBER 31, 2004 AND
2003, RESPECTIVELY 1,142,205 1,136,056
---------- ----------
ART INVENTORY NON-CURRENT, NET OF A VALUATION
ALLOWANCE OF $ 0 AND $ 617,350 AT
OCTOBER 31, 2004 AND 2003, RESPECTIVELY 0 459,671
---------- ----------
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 817,435 899,679
RESTRICTED CASH - TRANSIT INSURANCE 50,000 58,729
DEFERRED LEASING AND FINANCING COSTS 12,075 16,006
DEPOSITS AND OTHER 120,220 221,031
---------- ----------
999,730 1,195,445
---------- ----------
$5,681,418 $6,142,236
========== ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
October 31,
--------------------
2004 2003
---- ----
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND OTHER ACCRUED EXPENSES $ 770,564 $ 755,110
INCOME TAXES PAYABLE 10,000 10,000
------------ ------------
TOTAL CURRENT LIABILITIES 780,564 765,110
------------ ------------
NON-CURRENT LIABILITIES:
LONG-TERM PENSION LIABILITY 934,976 907,573
REAL ESTATE TAXES PAYABLE 308,116 300,000
------------ ------------
TOTAL NON-CURRENT LIABILITIES 1,243,092 1,207,573
------------ ------------
LONG-TERM DEBT, RELATED PARTY 2,767,000 2,767,000
------------ ------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 6,198,367 AND
5,443,979 SHARES ISSUED AND OUTSTANDING AT
OCTOBER 31, 2004 AND 2003, RESPECTIVELY AND
AGGREGATE LIQUIDATION PREFERENCE OF $10.00
PER SHARE FOR $ 61,983,670 AND $ 54,439,790
AT OCTOBER 31, 2004 AND 2003, RESPECTIVELY 61,984 54,440
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED & 4,326,929 SHARES OUTSTANDING
AT OCTOBER 31, 2004 AND 2003, RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 28,060,908 28,018,997
ACCUMULATED DEFICIT (14,031,634) (13,404,934)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
PENSION VALUATION RESERVE (2,250,089) (2,315,543)
------------ ------------
890,762 1,402,553
------------ ------------
$ 5,681,418 $ 6,142,236
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
October 31,
----------------------------------
2004 2003 2002
---- ---- ----
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE $ 275,094 $ 428,436 $ 818,671
OUTSIDE REAL ESTATE RENT 537,440 508,211 546,151
EXCHANGE BUILDING RENT 415,250 436,573 486,678
OTHER INCOME 500 130 0
----------- ----------- -----------
1,228,284 1,373,350 1,851,500
----------- ----------- -----------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 171,536 278,145 363,374
LABOR, OPERATING AND MAINTENANCE 314,560 406,650 447,790
DEPRECIATION AND AMORTIZATION 133,004 144,988 132,676
TAXES OTHER THAN INCOME TAXES 150,000 248,800 119,200
GENERAL AND ADMINISTRATIVE 44,617 52,253 45,903
----------- ----------- -----------
813,717 1,130,836 1,108,943
----------- ----------- -----------
INCOME FROM REAL ESTATE OPERATIONS 414,567 242,514 742,557
----------- ----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION 2,694,231 3,031,552 3,181,874
FEED AND BEDDING INCOME 148,339 186,130 198,128
RENTAL INCOME 3,931 3,399 5,298
OTHER INCOME 124,163 165,876 176,000
----------- ----------- -----------
2,970,664 3,386,957 3,561,300
----------- ----------- -----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 1,289,174 1,328,755 1,437,778
OTHER OPERATING AND MAINTENANCE 735,536 755,836 832,552
FEED AND BEDDING EXPENSE 119,403 158,939 162,865
DEPRECIATION AND AMORTIZATION 24,401 19,363 24,352
TAXES OTHER THAN INCOME TAXES 162,256 172,990 216,031
GENERAL AND ADMINISTRATIVE 303,390 366,358 349,391
----------- ----------- -----------
2,634,160 2,802,241 3,022,969
----------- ----------- -----------
INCOME FROM STOCKYARD OPERATIONS 336,504 584,716 538,331
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (1,061,582) (1,079,670) (1,134,994)
----------- ----------- -----------
(LOSS) INCOME FROM OPERATIONS (310,511) (252,440) 145,894
----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Continued ...
October 31,
----------------------------------
2004 2003 2002
---- ---- ----
OTHER (EXPENSES) INCOME:
INTEREST AND OTHER INCOME 13,073 25,207 467,341
INTEREST EXPENSE-RELATED PARTY (283,733) (279,814) (266,700)
INCOME (LOSS) FROM ART SALES 138,531 (7,987) 206,669
REALIZED INCOME (LOSS) ON INVESTMENTS 5,189 (7,405) (13,987)
OTHER EXPENSE (139,776) (14,902) (113,227)
----------- ----------- -----------
(266,716) (284,901) 280,096
----------- ----------- -----------
(LOSS) INCOME BEFORE PROVISION FOR
INCOME TAXES (577,227) (537,341) 425,990
PROVISION FOR INCOME TAXES 0 0 0
----------- ----------- -----------
NET (LOSS) INCOME (577,227) (537,341) 425,990
OTHER COMPREHENSIVE (LOSS) INCOME:
MINIMUM PENSION LIABILITY ADJUSTMENT 65,454 59,856 (209,954)
----------- ----------- -----------
COMPREHENSIVE (LOSS) INCOME $ (511,773) $ (477,485) $ 216,036
=========== =========== ===========
NET (LOSS) INCOME PER COMMON SHARE:
- BASIC $ (0.15) $ (0.16) $ 0.07
- DILUTED $ (0.15) $ (0.16) $ 0.07
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 ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2004, 2003, AND 2002
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, NOVEMBER 1, 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
NET INCOME 0 0 0 0
PREFERRED STOCK REPURCHASE 0 0 (992,255) (9,922)
PREFERRED STOCK DIVIDEND 0 0 788,241 7,882
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
-------------------- ---------------------
BALANCE, OCTOBER 31, 2003 5,313,794 $53,138 5,443,979 $54,440
NET (LOSS) 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 754,388 7,544
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
-------------------- ---------------------
BALANCE, OCTOBER 31, 2004 5,313,794 $53,138 6,198,367 $61,984
==================== =====================
ADDITIONAL TREASURY
PAID-IN ACCUMULATED COMPREHENSIVE STOCK,
CAPITAL DEFICIT (LOSS)INCOME AT COST
BALANCE, NOVEMBER 1, 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)
NET (LOSS) 0 (537,341) 0 0
PREFERRED STOCK REPURCHASE (89,303) 0 0 0
PREFERRED STOCK DIVIDEND 149,802 (157,729) 0 0
MINIMUM PEN. LIAB. ADJ 0 0 59,856 0
------------ ------------ ----------- ------------
BALANCE, OCTOBER 31, 2003 $ 28,018,997 ($13,404,934) ($2,315,543) ($11,003,545)
NET (LOSS) 0 (577,227) 0 0
PREFERRED STOCK DIVIDEND 41,911 (49,473) 0 0
MINIMUM PEN. LIAB. ADJ 0 0 65,454 0
------------ ------------ ----------- ------------
BALANCE, OCTOBER 31, 2004 $ 28,060,908 ($14,031,634) ($2,250,089) ($11,003,545)
============ ============ =========== ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENT
F-7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
October 31,
------------------------------
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) INCOME $(577,227) $(537,341) $ 425,990
--------- --------- ---------
ADJUSTMENTS TO RECONCILE NET (LOSS)
INCOME TO NET CASH (USED) BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 168,090 167,052 170,352
GAIN ON SALES OF REAL ESTATE (103,558) (150,291) (455,297)
REALIZED LOSS ON INVESTMENTS 0 7,405 13,987
REALIZED LOSS ON ART WRITE OFF 0 41,517 0
GAIN ON SIOUX CITY STOCKYARD AUCTION 0 0 (54,804)
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET (149,697) (6,609) 2,544
ART INVENTORY, NET 296,471 162,717 311,351
PREPAID EXPENSES AND OTHER, NET 150,031 (133,186) (292,888)
PAYABLES AND ACCRUED EXPENSES, NET 50,973 106,120 (681,523)
--------- --------- ---------
NET CASH (USED) BY OPERATING ACTIVITIES (164,917) (342,616) (560,288)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 275,094 428,436 818,671
PROCEEDS FROM SIOUX CITY STOCKYARD
AUCTION 0 0 114,307
CAPITAL EXPENDITURES (38,210) (211,460) (247,313)
--------- --------- ---------
NET CASH PROVIDED (USED) BY INVESTING
ACTIVITIES 236,884 216,976 685,665
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 0 100,000 0
PREFERRED STOCK REPURCHASE 0 (99,226) 0
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 0 774 0
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS 71,967 (124,866) 125,377
CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 14,191 139,057 13,680
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 86,158 $ 14,191 $ 139,057
========= ========= =========
NOTE: IN FISCAL 2004, 2003 AND 2002,$ 49,472, $ 157,730 AND $116,480,
RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE ISSUANCE
OF 754,388, 788,241 AND 649,547, RESPECTIVELY, OF SHARES OF PREFERRED
STOCK.
SEE ACCOMPANYING 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 is engaged in two distinct businesses - real estate and stockyard
operations.
Real Estate Operations - Canal's real estate properties are located in
Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska
and Sioux Falls, South Dakota. The properties consist, for the most part, of
Exchange Buildings (commercial office space), land and structures leased to
third parties (meat packing facilities, rail car repair shops, 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 lease income from land and structures leased to various commercial
and retail enterprises, rental income from its Exchange Buildings, and proceeds
from the sale of real estate properties. In addition to selling what was excess
stockyard property, the company entertains any offers to purchase, develop and
restructure real estate lots surrounding its existing operating lease
properties, stockyard operating properties and properties held for development
or resale in order to enhance the value of the existing properties and
surrounding real estate.
Stockyard Operations - Through an asset repurchase agreement, Canal
commenced stockyard operations August 1, 1999 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
$0, $0, and $75,000 for the three years ended October 31, 2004, 2003 and 2002,
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 2005.
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
F-9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 2005. 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.
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, 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.
F-10
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Canal continues to closely monitor and reduce where possible its operating
expenses and plans to continue its program to develop or sell the property it
holds for development or resale as well as 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.
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 had an investment in a company
in which it, together with other affiliated entities, comprised a reporting
group for regulatory purposes. It is important to note that it was the group (as
defined) that could exercise influence over this company, not Canal.
Accordingly, this investment did not qualify for consolidation as a method of
reporting. Certain of Canal's officers and directors also served as officers
and/or directors of this company. This investment (in which Canal's ownership
interest was approximately 1%) was carried at market value and the realized
gains or losses, if any, were recognized in operating results.
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 $111,000 and $111,000 at both
October 31, 2004 and 2003, and is included in other assets. The operating
results of joint ventures accounted for on the equity method, for fiscal year
2004, 2003 and 2002 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.
F-11
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 59 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.
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. 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 had varying
percentages of its art inventory appraised by independent appraisers in previous
years. For fiscal 2004 the net realizable value of Canals remaining art
inventory has been estimated by management based in part on the Company's
history of art sales in the current and previous years and in part on the
results of the independent appraisals done in previous years. 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.
F-12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
G) 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.
H) Stockyard Inventory - Inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
I) 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.
J) 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 (a standard per head charge for each animal sold through the
stockyards) and sale of feed and bedding are recognized at the time the service
is rendered or the feed and bedding are delivered.
Other Income (Expense) Items -- 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. The sale of investments
available for sale, if any, are recognized, on a specific identification method,
on a trade date basis.
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
$7,000, $17,000 and $13,000 and interest payments of $284,000, $280,000 and
$267,000 in 2004, 2003 and 2002, respectively.
L) Comprehensive Income -- The Company's only adjustments for each
classification of the comprehensive income was for minimum pension liability.
F-13
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
O) Recent Accounting Pronouncements -- In June 2002, the FASB issued SFAS
No. 146, Accounting for Costs Associated with Exit and Disposal Activities. SFAS
No. 146 nullifies Emerging Issues Task Force ("EITF") issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). Under EITF issue
94-3, a liability for an exit cost is recognized at the date of an entity's
commitment to an exit plan. Under SFAS No. 146, the liabilities associated with
an exit or disposal activity will be measured at fair value and recognized when
the liability is incurred and meets the definition of a liability in the FASB's
conceptual framework. This statement is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of SFAS No. 146 did
not have a material impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. The provisions of SFAS No. 150
are effective for all financial instruments created or modified after May 31,
2003, and otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a
material impact on our consolidated financial statements.
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, Consolidation of Variable Interest Entities, and
interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46
requires the consolidation of variable interest entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Currently, entities are
generally consolidated by an enterprise that has a controlling financial
interest through ownership of a majority of the voting interest in the entity.
The adoption of FIN 46 did not have a material impact on our consolidated
financial statements.
F-14
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)
2004 2003
---- ----
Aggregate market value..................... $ 0 $ 0
--- ---
Aggregate carrying value................... $ 0 $ 0
--- ---
In fiscal 2003, Canal determined that the decline in the market value of
its investments available for sale were permanent. Accordingly, as of October
31, 2003, Canal had written off this investment entirely. This write off
resulted in Canal's recognizing realized losses of approximately $7,000 and
$14,000 in fiscal 2003 and 2002, respectively. Canal did, however, sell all of
its remaining investments during fiscal 2004 for approximately $5,000, which
amount was recognized as income for the year ended October 31, 2004.
4. STOCKYARD OPERATIONS
Through an asset repurchase agreement, Canal commenced stockyard
operations August 1, 1999 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
$0, $0, and $75,000 for the three years ended October 31, 2004, 2003 and 2002,
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 2005.
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.
F-15
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 2005. 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 $0.3
million while contributing approximately $3.0 million to Canal's revenues for
fiscal 2004. Finally, Canal maintains an inventory of feed and bedding which is
comprised primarily of hay, corn and straw. The value of this inventory was
$10,000 and $11,000 at October 31, 2004 and 2003, respectively.
5. BORROWINGS
The Company's variable rate mortgage notes (originally issued in 1998 and
amended several times since then) are due May 15, 2006 and are held entirely by
the Company's Chief Executive Officer and members of his family. These notes
carry interest at the rate of ten percent per annum. 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;
restricts Canal's ability to pay cash dividends or repurchase stock and require
principal prepayments to be made only out of the
F-16
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
proceeds from the sale of certain assets. As of October 31, 2004, the balance
due under these notes was $2,767,000, all of which is classified as long-term
debt-related party.
At October 31, 2004, substantially all of Canal's real properties, the
stock of certain subsidiaries, the investments and a substantial portion of its
art inventories are pledged as collateral for the following obligations:
October 31,
--------------------
($ 000's Omitted) 2004 2003
- ----------------- ---- ----
Variable rate mortgage notes due
May 15, 2006 - related party (see Note 16)..... $ 2,767 $ 2,667
Other Note ...................................... 0 0
------- --------
Total ........................................... 2,767 2,667
Less -- current maturities ...................... 0 0
------- --------
Long-term debt $ 2,767 $ 2,667
------- --------
6. INCOME TAXES
Significant components of the Company's deferred asset/(liability) as of
October 31, 2004, 2003 and 2002 include differences in depreciation methods,
deferred rent, inventory valuation allowance and net operating loss carryforward
($ 000's Omitted):
2004 2003 2002
---- ---- ----
Total Gross Deferred Tax assets $ 4,415 $ 3,893 $ 3,503
Less - Valuation Allowance (4,415) (3,893) (3,503)
-------- -------- --------
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):
2004 2003 2002
---- ---- ----
Computed Expected Tax (Benefit)Expense $ (202) $ (188) $ 149
Change in Valuation Allowance 522 390 81
Inventory Valuation Differences (293) (144) (178)
Other (27) (58) (52)
------ ------ ------
$ 0 $ 0 $ 0
------ ------ ------
F-17
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At October 31, 2004, the Company has net operating loss carryforwards of
approximately $12,613,000 that expire through 2018 and a net capital loss
carryforward of approximately $1,446,000 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 by approximately
$522,000, $390,000 and $81,000 during the years ended October 31, 2004, 2003 and
2002, 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 $237,000 for
fiscal 2004, $0 for fiscal 2003 and $149,000 for fiscal 2002. Contributions are
intended to provide not only for benefits attributed to service to date, but
also for those expected to be earned in the future. Assets of the plan were
invested in U.S. Government securities, common stocks and antiquities.
Assumptions used in computing the 2004, 2003 and 2002 pension cost were:
2004 2003 2002
---- ---- ----
Discount rate ......................... 6.25% 6.25% 7.00%
Rate of increase in compensation
level ................................. 5.50% 5.50% 5.50%
Expected long-term rate of return
on assets ............................. 9.00% 9.00% 9.00%
Net periodic pension cost for plan years ended October 31, 2004, 2003 and
2002 included the following components:
Plan Year
($ 000's Omitted) 2004 2003 2002
----------------- ---- ---- ----
Service costs - benefits earned during
the period ............................ $ 15 $ 12 $ 12
Interest cost on projected benefit
obligation ............................ 108 114 120
Net (Return) loss on assets ............. 169 137 94
Net amortization and deferral ........... (54) (54) (54)
----- ----- -----
Net period pension cost ................. $ 238 $ 209 $ 172
----- ----- -----
F-18
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, 2004 and
2003.
Plan Year
---------
($ 000's Omitted) 2004 2003
----------------- ---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 1,818 $ 1,770
Service cost 15 12
Interest cost 108 114
Plan participants' contributions 0 0
Amendments 0 0
Actuarial gain 55 49
Benefits paid (91) (127)
------- -------
Benefit obligation at end of year $ 1,905 $ 1,818
------- -------
Change in plan assets
Fair value of plan assets at beginning of year $ 872 $ 904
Actual return on plan assets 77 91
Employer contribution 145 72
Plan participants' contributions 0 0
Plan expenses (72) (68)
Benefits paid (91) (127)
------- -------
Fair value of plan assets at end of year $ 931 $ 872
------- -------
(1) The vast majority of the projected benefit obligation is related
to the Company's former stockyard employees.
8. ART INVENTORY HELD FOR SALE
Canal is in the process of selling, in an orderly manner, its remaining
art inventory. This will be accomplished primarily through direct sales,
consignment arrangements with various independent art dealers and through sale
at public art auctions. 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 selling its art inventory.
F-19
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In fiscal 2004, Canal sold 34 pieces of contemporary art. Canal's art
operations have generated income of approximately $139,000, a loss of $8,000 and
income of $207,000 on revenues of approximately $463,000, $173,000 and $540,000
for the years ended October 31, 2004, 2003 and 2002, respectively.
Antiquities and contemporary art represented 46% ($189,122) and 54%
($224,078) and 27% ($189,122) and 73% ($520,549) of total art inventory at
October 31, 2004 and 2003, respectively. Substantially all of the contemporary
art inventory held for resale is comprised of the work of Jules Olitski.
The Company classified its art inventory for the two years ended October
31, 2004 and 2003 as follows ($ 000's Omitted):
Current Portion Non-Current Portion Total
--------------- ------------------- ----------------
2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
Antiquities $ 496 $ 407 $ 0 $ 89 $ 496 $ 496
Contemporary 855 1,000 0 988 855 1,988
Val. Allow. (938) (1,157) 0 (617) (938) (1,774)
------ ------ ------- ------ ------- -------
Net Value $ 413 $ 250 $ 0 $ 460 $ 413 $ 710
------ ------ ------- ------ ------- -------
The Company's valuation allowance for the three years ended October 31,
2004, 2003 and 2002 is as follows:
Bal. Start Bal. End
of Period Deductions of Period
--------- ---------- ---------
Year ended October 31, 2004
Deducted from art inventories:
Reserve for valuation allowance $ 1,774 $ (836) $ 938
Year ended October 31, 2003
Deducted from art inventories:
Reserve for valuation allowance $ 2,184 $ (410) $ 1,774
Year ended October 31, 2002
Deducted from art inventories:
Reserve for valuation allowance $ 2,692 $ (508) $ 2,184
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 2004 Canal applied against sales $836,450 of the
valuation allowance against its art inventory, thereby, decreasing the total
valuation allowance to $938,300 as of October 31, 2004 as compared to $1,774,750
and $2,183,650 at October 31, 2003 and 2002, respectively.
F-20
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. LEASE COMMITMENTS
On March 4, 2004, WHGA Fifth Avenue Investors, LP (the "Landlord")
commenced an action against Canal Capital Corporation and its two co-tenants
(the "Tenants") of its New York City commercial office space. The Landlord is
seeking the eviction of the Tenants as well as judgement for unpaid back and
holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation
agreement with the landlord requiring the tenants to pay two months rent
(approximately $85,000), forfeit the entire security deposit and vacate the
leased premises as of May 31, 2004 in exchange for a release from all future
obligations under the lease. All requirements of the stipulation agreement have
been met.
In June 2004 Canal entered into a three year lease for approximately 1,000
square feet of office space in Hauppauge, New York at a monthly rental of
approximately $1,400.
Canal's future minimum payments for the next five years required under
operating leases that have initial or remaining noncancellable terms in excess
of one year as of October 31, 2004 are $17,000, $17,000, $9,000, $0 and $0 in
fiscal 2005, 2006, 2007, 2008, and 2009, respectively. There are no commitments
extending past five years.
Net rent expense under these and other operating leases was $20,000,
$55,000 and $90,000 for the years ended October 31, 2004, 2003 and 2002.
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, 2004, 2003 and 2002.
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. 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
F-21
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
options or at any time thereafter. No stock appreciation rights have been
granted under this plan. At October 31, 2004, there were no exercisable options
outstanding under these plans.
Transactions under these plans are summarized as follows:
Shares Option Price Range
------ ------------------
Balance outstanding October 31, 2002.... 5,500 $0.125-$0.125
Options granted ........................ 0 - -
Options expired ........................ (5,500) $0.125-$0.125
------ -------------
Balance outstanding October 31, 2003.... 0 N/A - N/A
------ -------------
Balance outstanding October 31, 2004.... 0 N/A - N/A
------- --------------
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, 2004, 2003 and 2002. 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,
2004, 2003 and 2002 would have been deminimus.
12. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID
During each of the fiscal years ended October 31, 2004, 2003 and 2002, the
Company had 0, 0 and 5,500 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, 2004, 2003 and 2002.
Dividends declared on preferred stock during the years ended October 31, 2004,
2003 and 2002 were approximately $49,000, $158,000 and $116,000.
Basic earnings (loss) per share are computed by dividing earnings (loss)
available to common stockholders by the weighted average number of common share
outstanding during the period. Diluted earnings (loss) per share reflect per
share amounts that would have resulted if dilutive potential common stock had
been reported in the financial statements.
F-22
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Basic and diluted earnings (losses) available to common stockholders at
October 31, 2004, 2003 and 2002 were:
For the Year Ended October 31, 2004
-----------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net (loss) $ (577,000)
Less preferred stock dividends (49,000)
-----------
(Loss) available to common stock-
holders-diluted earnings per share $ (626,000) 4,327,000 $(0.15)
=========== ========= =======
For the Year Ended October 31, 2003
---------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net (loss) (537,000)
Less preferred stock dividends (158,000)
-----------
(Loss) available to common stock-
holders-diluted earnings per share $ (695,000) 4,327,000 $(0.16)
=========== ========= =======
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-diluted earnings per share $ 310,000 4,327,000 $ 0.07
=========== ========= =======
F-23
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 6,203,757 shares in the form of stock dividends and in October 2003
the Company, repurchased for retirement, 992,225 shares (from an affiliate) at
$0.10 per share resulting in a total outstanding at October 31, 2004 of
6,198,367. 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, sixty of the seventy- two quarterly payments have been paid in
additional stock resulting in the issuance of 6,203,757 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 5). The last cash dividend paid on Canal's preferred stock
was in September 1989. The quarterly dividends payable September 30, 2004 and
December 31, 2004 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, 2005 at
which time a one year dividend will have accumulated. The dividend planned for
June 30, 2005 will also be paid in additional stock.
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).
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.
F-24
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) 2004 2003 2002
----------------- ----- ---- ----
Identifiable assets:
Real estate ....................... $ 3,665 $ 3,871 $ 4,007
Stockyard operations .............. 1,392 1,440 1,448
Corporate ......................... 624 931 1,058
-------- -------- -------
$ 5,681 $ 6,142 $ 6,513
-------- -------- -------
($ 000's Omitted) 2004 2003 2002
----------------- ---- ---- ----
Capital expenditures:
Real estate ....................... $ 8 $ 171 $ 214
Stockyard operations .............. 30 32 29
Corporate ......................... 0 8 4
----- ----- -----
$ 38 $ 211 $ 247
----- ----- -----
Income from real estate operations includes gains (losses) on sales of
real estate of $0.1 million, $0.2 million and $0.4 million in 2004, 2003 and
2002, respectively. Included in corporate identifiable assets is approximately
$0.1 million and $0.2 million of art inventory in galleries or on consignment
abroad as of October 31, 2004 and 2003, respectively.
F-25
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. Related Party Transactions
Interest Expense Related Party - At October 31, 2004, all of Canal's
Long-Term Debt is held by the company's Chief Executive Officer and members of
his family. These notes pay interest at a rate of 10% per annum and come due May
15, 2006. Canal has incurred interest expense on these notes of $284,000,
$280,000 and $267,000 for the years ended October 31, 2004, 2003 and 2002,
respectively. At various times during fiscal 2004 certain holders of these notes
agreed to defer interest payments due totaling approximately $70,000 as of
October 31, 2004. This deferred interest liability will accrue additional
interest at a rate of 10% per annum, and will be repaid as funds become
available in fiscal 2005. The deferred interest liability is included in
accounts payable and accrued expenses at year end. As of October 31, 2004, the
balance due under these notes was $2,767,000 all of which is classified as
long-term debt related party.
Lease Commitments - On March 4, 2004, WHGA Fifth Avenue Investors, LP (the
"Landlord") commenced an action against Canal Capital Corporation and its two
co-tenants (the "Tenants") of its New York City commercial office space. The
Landlord is seeking the eviction of the Tenants as well as judgement for unpaid
back and holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation
agreement with the landlord requiring the tenants to pay two months rent
(approximately $85,000), forfeit the entire security deposit and vacate the
leased premises as of May 31, 2004 in exchange for a release from all future
obligations under the lease. All requirements of the stipulation agreement have
been met. This resulted in Canal taking a one time writeoff of approximately
$87,000 as of October 31, 2004.
In June 2004 Canal entered into a three year lease for approximately 1,000
square feet of office space in Hauppauge, New York at a monthly rental of
approximately $1,400.
17. LITIGATION
On March 4, 2004, WHGA Fifth Avenue Investors, LP (the "Landlord")
commenced an action against Canal Capital Corporation and its two co-tenants
(the "Tenants") of its New York City commercial office space. The Landlord is
seeking the eviction of the Tenants as well as judgement for unpaid back and
holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation
agreement with the landlord requiring the tenants to pay two months rent
(approximately $85,000), forfeit the entire security deposit and vacate the
leased premises as of May 31, 2004 in exchange for a release from all future
obligations under the lease. All requirements of the stipulation agreement have
been met.
F-26
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Restricted Cash - Transit Insurance
Due to significant proposed increases in the premiums for transit
insurance, management decided to initiate a plan of self insurance commencing
November 1, 2002. Transit insurance covers livestock for the period that they
are physically at the stockyards and under the care of stockyard personnel. This
self insurance program is funded by a per head charge on all livestock received
at the stockyard. The October 31, 2004 balance in restricted cash- transit
insurance of approximately $50,000 represents the excess of per head fees
charged over actual payments made for livestock that was injured or died while
at the stockyards.
19. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments (all of which are held for non- trading
purposes) for which it is practicable to estimate that value.
October 31,
2004 2003
------------------- --------------------
($ 000's Omitted)
-----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
Cash and
cash equivalents $ 86 $ 86 $ 14 $ 14
------- ------ ------ ------
Long-Term Debt - Related
Party 2,767 (b) 2,767 (b)
------- ------ ------ ------
a) Cash and cash equivalents: The carrying amount approximates fair
market value because of the short maturities of such instruments.
b) Long-Term Debt Related Party (see Note 5): It is not practicable to
estimate the fair value of the related party debt.
20. Minimum Future Rentals on Operating Leases
Minimum future rentals consist primarily of rental income from leased land
and structures, Exchange Building rents (commercial office space) and other
rental activities, all of which are accounted for as operating leases. The
estimated minimum future rentals on operating leases are $600,000, $625,000,
$650,000, $675,000 and $700,000 for fiscal years 2005, 2006, 2007, 2008 and
2009, respectively.
F-27
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
21. Property on Operating Leases
Property on operating leases consist of approximately 39 acres of land
located in Omaha, Nebraska; S. St. Paul, Minnesota; Sioux City, Iowa as well as
furniture and equipment used in the Hauppauge, New York office. Land and
structures leased to third parties include vacant land, exchange buildings
(commercial office space), meat packing facilities, railcar repair shops, lumber
yards and various other commercial and retail businesses.
A schedule of the Company's property on operating leases at October
31, 2004 is as follows (000's omitted):
Capitalized Cost
----------------
Subsequent to
---------------- Carrying
Initial Cost Acquisition Date --------
----------------- ---------------- Accum. Value
Bldgs. & Bldgs. & ------ --------
Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/04
- ----------------- ---- --------- ---- --------- ------ --------
New York office
Various leasehold $ 0 $ 8 $ 0 $ 0 $ (3) $ 5
improvements
11 acres of land
in Omaha, NE 1,200 21 0 0 (6) 1,215
Acquired in 1976
10 acres of land
in S. St. Paul, MN 125 2,127 0 8 (1,168) 1,092
Acquired in 1937
18 acres of land
in Sioux City, IA 403 0 0 0 0 403
------ ------ --- ----- ------- ------
Acquired in 1937
$1,728 $2,156 $ 0 $ 8 $(1,177) $2,715
====== ====== === ===== ======= ======
A schedule of the Company's reconciliation of property on operating leases
carried for the three years ended October 31, 2004, 2003 and 2002 is as follows
(000's omitted):
2004 2003 2002
---- ---- ----
Balance at beginning of year $2,874 $3,337 $3,302
Acquisitions 0 0 0
Improvements 8 179 218
Cost of property sold (167) (142) (183)
Reclassification to property held
for development or resale 0 (500) 0
------ ------ ------
Balance at end of year $2,715 $2,874 $3,337
------ ------ ------
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations (see Note 5).
F-28
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. Property used in Stockyard Operations
Property used in stockyard operations consist of approximately 60 acres of
land located in St. Joseph, Missouri and Sioux Falls, South Dakota. The
Company's stockyards provide all services and facilities required to operate an
independent market for the sale of livestock. Stockyard facilities include
exchange buildings (commercial office space), auction arenas, scale houses,
veterinary facilities, barns, livestock pens and loading docks.
A schedule of the Company's property used in stockyard operations at
October 31, 2004 is as follows (000's omitted):
Capitalized Cost
----------------
Subsequent to
---------------- Carrying
Initial Cost Acquisition Date --------
------------ ---------------- Accum. Value
Bldgs. & Bldgs. & ------ --------
Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/04
- ----------------- ---- --------- ---- --------- ------ --------
30 acres of land
in St. Joseph, MO $ 902 $ 200 $ 0 $ 0 $ (118) $ 984
Acquired in 1942
30 acres of land
in Sioux Falls, SD 100 64 0 25 (31) 158
------ ----- ---- ----- ------ ------
Acquired in 1937
$1,102 $ 264 $ 0 $ 25 $ (149) $1,142
====== ===== ==== ===== ====== ======
A schedule of the Company's reconciliation of property used in stockyard
operations carried for the three years ended October 31, 2004, 2003 and 2002 is
as follows (000's omitted):
2004 2003 2002
---- ---- ----
Balance at beginning of year $1,136 $1,176 $1,281
Acquisitions 0 40 0
Improvements 25 32 29
Cost of property sold (19) (112) (134)
------ ------ ------
Balance at end of year $1,142 $1,136 $1,176
------ ------ ------
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations (see Note 5).
F-29
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
23. Property Held for Development or Resale
Property held for development or resale consist of approximately 59 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, 2004 is as follows (000's omitted):
Capitalized Cost
----------------
Subsequent to
---------------- Carrying
Initial Cost Acquisition Date --------
------------ ---------------- Accum. Value
Bldgs. & Bldgs. & ------ --------
Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/04
- ----------------- ---- --------- ---- --------- ------ --------
19 acres of land
in St. Joseph, MO $ 75 N/A N/A $ (28) N/A $ 47
Acquired in 1942
10 acres of land
in S. St. Paul, MN 144 N/A N/A 0 N/A 144
Acquired in 1937
30 acres of land
in Sioux City, IA 681 N/A N/A (55) N/A 626
---- --- --- ---- --- ---
Acquired in 1937
$900 $ 0 $ 0 $ (83) $ 0 $817
==== === === ===== === ====
A schedule of the Company's reconciliation of property held for
development or resale carried for the three years ended October 31, 2004, 2003
and 2002 is as follows (000's omitted):
2004 2003 2002
---- ---- ----
Balance at beginning of year $ 900 $ 518 $ 620
Acquisitions 0 0 0
Improvements 0 0 0
Cost of property sold (83) (118) (102)
Reclassification from property
on operating leases 0 500 0
----- ----- -----
Balance at end of year $ 817 $ 900 $ 518
----- ----- -----
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations (see Note 5).
F-30
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
24. Subsequent Events
On November 1, 2004, Canal sold its South St. Paul, Minnesota Exchange
Building on a Contract for Deed for $1,750,000. Canal will receive interest
payments only in the amount of $60,000 per year for the next three years. The
balance on the note of $1,750,000 is due October 31, 2007. The sale resulted in
a first quarter gain of approximately $850,000.
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, 2005.
CANAL CAPITAL CORPORATION
By: /s/ Michael E. Schultz
----------------------------
Michael E. Schultz
President and Chief
Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
President and Chief
/s/ Michael E. Schultz Executive Officer and Director
- ---------------------- (Principal Executive Officer) January 28, 2005
Michael E. Schultz
Vice President-Finance
Secretary and Treasurer
/s/ Reginald Schauder (Principal Financial and
- ---------------------- Accounting Officer) January 28, 2005
Reginald Schauder
/s/ Asher B. Edelman Chairman of the Board
- ---------------------- and Director January 28, 2005
Asher B. Edelman
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