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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
For the quarterly period ended April 30, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ____________ to ____________
Commission File No. 002-96666
Canal Capital Corporation and Subsidiaries
(Exact name of registrant as specified in its charter)
Delaware 51-0102492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
490 Wheeler Road, Hauppauge, NY 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (631) 234-0140
717 Fifth Avenue, New York, NY
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months or for such shorter period that the registrant was
required to file such reports, and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO |_|
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practical date:
Title of each class Shares outstanding at May 31, 2005
Common stock, $0.01 par value 4,326,929
(This document contains 45 pages)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
FORM 10-Q APRIL 30, 2005
INDEX
The following documents are filed as part of this report:
Accountants' Review Report ................................................. 3
Part I - Financial Information ............................................. 4
Item I. Condensed Financial Statements:
Consolidated Balance Sheets - April 30, 2005
and October 31, 2004 ................................................ 5
Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Six and Three
Month Periods ended April 30, 2005 and 2004.......................... 7
Consolidated Statements of Changes in
Stockholders' Equity for the One Year and
Six Month Periods ended October 31, 2004 and
April 30, 2005 ...................................................... 11
Consolidated Statements of Cash Flows for the
Six Month Periods ended April 30, 2005 and
2004 ................................................................ 12
Notes to Consolidated Financial Statements ............................ 13
Item II. Management's Discussion and Analysis of
Financial Condition .............................................. 26
Liquidity and Capital Resources ....................................... 35
Other Factors ......................................................... 36
Item III. Quantitative and Qualitative Disclosures
About Market Risk ................................................ 37
Item IV. Controls and Procedures .......................................... 37
Part II - Other Information ................................................ 38
Items 1 through 6 ..................................................... 39
Signatures and Certifications ......................................... 40
2
ACCOUNTANTS' REVIEW REPORT
To the Stockholders of Canal Capital Corporation:
We have reviewed the consolidated balance sheet of Canal Capital Corporation and
subsidiaries as of April 30, 2005, the related consolidated statements of
operations and comprehensive income (loss) for the three and six month periods
ended April 30, 2005 and the consolidated statements of changes in stockholders'
equity and cash flows for the six month period ended April 30, 2005. These
consolidated financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the consolidated financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements for them to be in conformity
with generally accepted accounting principles.
The financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the financial statements,
the Company has suffered recurring losses from operations in 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.
New York, N.Y. /S/ Todman & Co., CPA's,P.C.
June 9, 2005 ----------------------------
TODMAN & CO., CPA's,P.C.
Certified Public Accountants (N.Y.)
3
PART I
FINANCIAL INFORMATION
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2005 AND OCTOBER 31, 2004
APRIL 30, OCTOBER 31,
2005 2004
(UNAUDITED) (AUDITED)
----------- -----------
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 0 $ 86,158
NOTES AND ACCOUNTS RECEIVABLE, NET OF AN
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $ZERO AT
BOTH APRIL 30, 2005 AND OCTOBER 31, 2004, 138,972 281,533
ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
$913,900 AND $938,300 AT APRIL 30, 2005
AND OCTOBER 31, 2004, RESPECTIVELY 375,900 413,200
STOCKYARDS INVENTORY 6,829 10,122
PREPAID EXPENSES 76,629 32,985
----------- -----------
TOTAL CURRENT ASSETS 598,330 823,998
----------- -----------
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $346,848
AND $1,176,248 AT APRIL 30, 2005 AND
OCTOBER 31, 2004, RESPECTIVELY 1,853,139 2,715,485
----------- -----------
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $158,982 AND
$148,508 AT APRIL 30, 2005 AND OCTOBER
31, 2004, RESPECTIVELY 1,131,731 1,142,205
----------- -----------
LONG-TERM MORTGAGE NOTE RECEIVABLE 1,750,000 0
----------- -----------
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 817,435 817,435
RESTRICTED CASH - TRANSIT INSURANCE 53,544 50,000
DEFERRED LEASING AND FINANCING COSTS 0 12,075
DEPOSITS AND OTHER 113,720 120,220
----------- -----------
984,699 999,730
----------- -----------
$ 6,317,899 $ 5,681,418
=========== ===========
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
APRIL 30, 2005 AND OCTOBER 31, 2004
APRIL 30, OCTOBER 31,
2005 2004
(UNAUDITED) (AUDITED)
------------ ------------
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 500,987 $ 770,564
INCOME TAXES PAYABLE 5,000 10,000
------------ ------------
TOTAL CURRENT LIABILITIES 505,987 780,564
------------ ------------
NON-CURRENT LIABILITIES:
LONG-TERM PENSION LIABILITY 934,976 934,976
REAL ESTATE TAXES PAYABLE 324,340 308,116
------------ ------------
TOTAL NON-CURRENT LIABILITIES 1,259,316 1,243,092
------------ ------------
LONG-TERM DEBT, RELATED PARTY 2,767,000 2,767,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 6,198,367 AND
6,198,367 SHARES ISSUED AND OUTSTANDING
AT APRIL 30, 2005 AND OCTOBER 31, 2004,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $10 PER SHARE FOR $ 61,983,670
AND $61,983,670 AT APRIL 30, 2005 AND
OCTOBER 31, 2004, RESPECTIVELY 61,984 61,984
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND 4,326,929 SHARES OUT-
STANDING AT APRIL 30, 2005 AND OCTOBER 31,
2004, RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 28,090,908 28,060,908
ACCUMULATED DEFICIT (13,166,800) (14,031,634)
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) (2,250,089)
------------ ------------
1,785,596 890,762
------------ ------------
$ 6,317,899 $ 5,681,418
============ ============
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED APRIL 30, 2005 AND 2004
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 1,647,455 $ 1,595,655
FEED AND BEDDING INCOME 90,526 88,199
RENTAL INCOME 1,685 2,336
OTHER INCOME 59,566 68,732
----------- -----------
1,799,232 1,754,922
----------- -----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 743,917 677,057
OTHER OPERATING AND MAINTENANCE 355,245 400,160
FEED AND BEDDING EXPENSE 68,865 71,051
DEPRECIATION AND AMORTIZATION 10,473 10,272
TAXES OTHER THAN INCOME TAXES 84,891 86,950
GENERAL AND ADMINISTRATIVE 179,903 189,363
----------- -----------
1,443,294 1,434,853
----------- -----------
INCOME FROM STOCKYARD OPERATIONS 355,938 320,069
----------- -----------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE 1,750,000 132,905
EXCHANGE BUILDING RENTAL INCOME 15,302 206,780
OUTSIDE REAL ESTATE RENT 269,233 278,905
OTHER INCOME 0 500
----------- -----------
2,034,535 619,090
----------- -----------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 900,255 68,814
LABOR, OPERATING AND MAINTENANCE 37,983 162,530
DEPRECIATION AND AMORTIZATION 11,100 65,501
TAXES OTHER THAN INCOME TAXES 36,000 75,000
GENERAL AND ADMINISTRATIVE 13,000 26,526
----------- -----------
998,338 398,371
----------- -----------
INCOME FROM REAL ESTATE OPERATIONS 1,036,197 220,719
----------- -----------
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED APRIL 30, 2005 AND 2004
Continued ...
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (409,238) (422,102)
----------- -----------
INCOME FROM OPERATIONS 982,897 118,686
----------- -----------
OTHER (EXPENSE) INCOME:
INTEREST & OTHER INCOME 36,000 37
INTEREST EXPENSE (141,312) (138,508)
INCOME FROM ART SALES 17,249 (1,109)
OTHER EXPENSE 0 (101,297)
----------- -----------
(88,063) (240,958)
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 894,834 (122,272)
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET INCOME (LOSS) 894,834 (122,272)
----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS):
MINIMUM PENSION LIABILITY ADJUSTMENT 0 0
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 894,834 $ (122,272)
=========== ===========
INCOME (LOSS) PER COMMON SHARE - BASIC
AND DILUTED $ 0.20 $ (0.04)
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 4,327,000 4,327,000
=========== ===========
8
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND 2004
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 754,481 $ 807,960
FEED AND BEDDING INCOME 42,770 45,047
RENTAL INCOME 650 835
OTHER INCOME 29,253 36,018
---------- ----------
827,154 889,860
---------- ----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 367,670 334,105
OTHER OPERATING AND MAINTENANCE 172,741 201,898
FEED AND BEDDING EXPENSE 31,800 36,408
DEPRECIATION AND AMORTIZATION 5,236 5,136
TAXES OTHER THAN INCOME TAXES 42,221 43,822
GENERAL AND ADMINISTRATIVE 86,412 97,613
---------- ----------
706,080 718,982
---------- ----------
INCOME FROM STOCKYARD OPERATIONS 121,074 170,878
---------- ----------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE 0 74,032
EXCHANGE BUILDING RENTAL INCOME 7,631 104,455
OUTSIDE REAL ESTATE RENT 136,916 151,304
OTHER INCOME 0 500
---------- ----------
144,547 330,291
---------- ----------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 0 30,432
LABOR, OPERATING AND MAINTENANCE 19,147 74,153
DEPRECIATION AND AMORTIZATION 5,550 32,951
TAXES OTHER THAN INCOME TAXES 18,000 37,500
GENERAL AND ADMINISTRATIVE 6,500 13,532
---------- ----------
49,197 188,568
---------- ----------
INCOME FROM REAL ESTATE OPERATIONS 95,350 141,723
---------- ----------
9
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED APRIL 30, 2005 AND 2004
Continued ...
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (202,133) (217,885)
----------- -----------
INCOME FROM OPERATIONS 14,291 94,716
----------- -----------
OTHER (EXPENSE) INCOME:
INTEREST & OTHER INCOME 18,000 21
INTEREST EXPENSE (70,256) (69,175)
INCOME FROM ART SALES (4,739) (5,792)
OTHER EXPENSE 0 (101,297)
----------- -----------
(56,995) (176,243)
----------- -----------
(LOSS) BEFORE PROVISION FOR
INCOME TAXES (42,704) (81,527)
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET (LOSS) (42,704) (81,527)
OTHER COMPREHENSIVE INCOME (LOSS):
MINIMUM PENSION LIABILITY ADJUSTMENT 0 0
----------- -----------
COMPREHENSIVE (LOSS) $ (42,704) $ (81,527)
=========== ===========
(LOSS) PER COMMON SHARE - BASIC
AND DILUTED $ (0.01) $ (0.02)
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 4,327,000 4,327,000
=========== ===========
10
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 2004 (AUDITED) AND
FOR THE SIX MONTHS ENDED APRIL 30, 2005 (UNAUDITED)
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
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
NET INCOME 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 0 0
MINIMUM PEN. LIAB. ADJ 0 0 0 0
--------------------- ---------------------
BALANCE, APRIL 30, 2005 5,313,794 $53,138 6,198,367 $61,984
===================== =====================
ADDITIONAL TREASURY
PAID-IN ACCUMULATED COMPREHENSIVE STOCK,
CAPITAL DEFICIT (LOSS)INCOME AT COST
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)
NET INCOME 0 894,834 0 0
PREFERRED STOCK DIVIDEND 30,000 (30,000) 0 0
MINIMUM PEN. LIAB. ADJ 0 0 0 0
----------- ------------ ----------- ------------
BALANCE, APRIL 30, 2005 $28,090,908 ($13,166,800) ($2,250,089) ($11,003,545)
=========== ============ =========== ============
11
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED APRIL 30, 2005 AND 2004
(UNAUDITED)
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 894,834 $ (122,272)
---------- ----------
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 24,574 84,900
GAIN ON SALES OF REAL ESTATE (849,745) (64,091)
GAIN ON ART SALES (NET OF RESERVE) (17,249) (27,700)
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET 142,561 41,374
ART INVENTORY, NET 37,300 9,833
PREPAID EXPENSES AND OTHER, NET (124,180) (34,534)
PAYABLES AND ACCRUED EXPENSES, NET (258,353) (27,797)
---------- ----------
NET CASH (USED) BY OPERATING
ACTIVITIES (150,258) (140,287)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 0 132,905
PROCEEDS FROM SALES OF ART 64,100 20,000
CAPITAL EXPENDITURES 0 (7,660)
---------- ----------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 64,100 145,245
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM LONG-TERM DEBT-RELATED
PARTIES 0 0
REPAYMENT OF SHORT-TERM BORROWINGS 0 0
REPAYMENT OF LONG-TERM DEBT OBLIGATIONS 0 0
---------- ----------
NET CASH (USED) BY FINANCING ACTIVITIES 0 0
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (86,158) 4,958
CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 86,158 14,191
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 0 $ 19,149
========== ==========
NOTE: CANAL MADE FEDERAL AND STATE INCOME TAX PAYMENTS OF $5,000 AND $7,000 AND
INTEREST PAYMENTS OF $141,000 AND $139,000 IN THE SIX MONTH PERIODS ENDED
APRIL 30, 2005 AND 2004, RESPECTIVELY.
12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED APRIL 30, 2005
(UNAUDITED)
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 - stockyard and 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 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.
13
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.
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.
General - While the Company is currently operating as a going concern,
certain significant factors raise substantial doubt about the Company's ability
to continue as a going concern. The Company has suffered recurring losses from
operations in eight of the last ten years and is obligated to continue making
substantial annual contributions to its defined benefit pension plan. The
financial statements do not include any adjustments that might result from the
resolution of these uncertainties. Additionally, the accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Canal continues to closely monitor and reduce where possible its operating
expenses and plans to continue 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.
14
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 -- During fiscal 2004, 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 at both APRIL 30, 2005 and
October 31, 2004, and is included in other assets. The operating results of
joint ventures accounted for on the equity method, for the six month periods
ended April 30, 2005 and 2004 were not material to financial statement
presentation and were therefore included in other income from real estate
operations.
C) Deferred Leasing and Financing Costs -- Costs incurred in obtaining new
leases and long-term financing are deferred and amortized over the terms of the
related leases or debt agreements, as applicable.
D) Properties and Related Depreciation -- Properties are stated at cost
less accumulated depreciation. Depreciation is provided on the straight-line
method over the estimated useful lives of the properties. Such lives are
estimated from 35 to 40 years for buildings and from 5 to 20 years for
improvements and equipment.
Property held for Development or Resale -- Property held for development
or resale consist of approximately 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
15
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.
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 prior to
fiscal 2004. For fiscal 2005 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.
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
16
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
$5,000 and $7,000 and interest payments of $141,000 and $139,000 for the six
month periods ended April 30, 2005 and 2004, respectively.
L) Comprehensive Income -- The Company's only adjustments for each
classification of the comprehensive income was for minimum pension liability.
M) Earnings (Loss) Per Share -- Basic earnings (loss) per share is
computed by dividing the net income (loss) applicable to common shares by the
weighted average of common shares outstanding during the period. Diluted
earnings (loss) per share adjusts basic earnings (loss) per share for the
effects of convertible securities, stock options and other potentially dilutive
financial instruments, only in the period in which such effect is dilutive.
There were no dilutive securities in any of the periods presented herein. The
shares issuable upon the exercise of stock options are excluded from the
calculation of net income (loss) per share as their effect would be
antidilutive.
N) Reclassification -- Certain prior year amounts have been reclassified
to conform to the current year presentation.
O) Recent Accounting Pronouncements -- 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.
We will adopt FIN 46 as of January 31, 2004. The adoption of FIN 46 did not have
a material impact on our consolidated financial statements.
17
3. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements included herein have been
prepared by Canal and reviewed by our independent accountants. In the opinion of
Management, the accompanying unaudited financial statements of Canal contain all
adjustments necessary to present fairly its financial position as of April 30,
2005 and the results of its operations and its cash flows for the six month
period ended April 30, 2005. All of the above referenced adjustments were of a
normal recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These financial statements
should be read in conjunction with the consolidated financial statements for the
three years ended October 31, 2004 and the notes thereto which are contained in
Canal's 2004 Annual Report on Form 10-K. The results of operations for the
period presented is not necessarily indicative of the results to be expected for
the remainder of fiscal 2005.
4. 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 livestock handled by the stockyards include cattle, hogs and sheep. Cattle
and hogs may come through the stockyard facilities at two different stages,
either as feeder livestock or slaughter livestock. The Company's stockyards
provide all services and facilities required to operate an independent market
for the sale of livestock, including veterinary facilities, auction arenas,
auctioneers, weigh masters and scales, feed and bedding, and security personnel.
In addition, the stockyards provide other services including pure bred and other
specialty sales for producer organizations. The Company promotes its stockyard
business through public relations efforts, advertising, and personal
solicitation of producers.
Actual marketing transactions at a stockyard are managed for livestock
producers by market agencies and independent commission sales people to which
the livestock are consigned for sale. These market agencies (some of which are
owned and operated by the Company) and independent sales people receive
commissions from the seller upon settlement of a transaction and the stockyard
receives a yardage fee on all livestock using the facility which is paid within
twenty-four hours of the sale. Yardage fees vary depending on the type of
animal, the extent of services provided by the stockyard, and local competition.
Yardage revenues are not directly dependent upon market prices, but rather are a
function of the volume of livestock handled. In general, stockyard livestock
volume is dependent upon conditions affecting livestock production and upon the
market agencies and independent commission sales people which operate at the
stockyards. Stockyard operations are
18
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.
As discussed above, virtually all of the volume at Canal's Sioux Falls
stockyards is handled through market agencies or independent commission sales
people, while the St. Joseph stockyards has solicitation operations of its own
which accounts for approximately 50% of its livestock volume annually. Canal
intends to continue its soliciting efforts at its St. Joseph stockyards in
fiscal 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.
Canal maintains an inventory of feed and bedding which is comprised
primarily of hay, corn and straw. The value of this inventory was $7,000 and
$10,000 at April 30, 2005 and October 31, 2004, respectively.
Stockyard operations resulted in operating income of $356,000 and $320,000
for the six month periods ended April 30, 2005 and 2004, respectively.
Additionally, stockyard operations contributed $1,799,000 and $1,755,000 to
Canal's revenues for the six month periods ended April 30, 2005 and 2004,
respectively.
5. REAL ESTATE OPERATIONS
Canal's real estate properties located in five Midwest states are
primarily associated with its current and former agribusiness related
operations. Each property is adjacent to a stockyards operation (two of which
are operated by the Company) and consist, for the most part, of an Exchange
Building (commercial office space), land and structures leased to third parties
(meat packing facilities, railcar 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 rental income from its Exchange Buildings, lease income from land and
structures leased to various commercial and retail enterprises and proceeds from
the sale of real estate properties.
Real estate operations resulted in operating income of $1,036,000 and
$221,000 for the six month periods ended April 30, 2005 and 2004, respectively.
Included in the 2005 income is a $850,000 gain on the sale of the company's
South St. Paul, Minnesota Exchange Building and the associated five acres of
land. Additionally, real estate operations contributed $2,035,000 and $619,000
to Canal's revenues for the six month periods ended April 30, 2005 and 2004,
respectively.
19
As of April 30, 2005, there are approximately 59 acres of undeveloped land
owned by Canal adjacent to its stockyard 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.
6. 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.
In fiscal 2005, Canal sold 3 pieces of contemporary art. Canal's art
operations have generated income of approximately $17,000, and a loss of $1,000
on gross sales of approximately $64,000 and $20,000 for the six month periods
ended April 30, 2005 and 2004, respectively.
Antiquities and contemporary art represented 50% ($189,122) and 50%
($186,778) and 46% ($189,122) and 54% ($224,078) of total art inventory at April
30, 2005 and October 31, 2004, respectively. All of the contemporary art
inventory held for resale is comprised of the work of Jules Olitski.
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 2005 Canal applied against sales $24,400 of the
valuation allowance against its art inventory, thereby, decreasing the total
valuation allowance to $913,900 as of April 30, 2005 as compared to $938,300 at
October 31, 2004.
The Company had approximately $250,000 of art inventory (at original cost)
on consignment with third party dealers at both April 30, 2005 and October 31,
2004.
7. LEASE COMMITMENTS
In June 2004, Canal entered into a lease for approximately 1,000 square
feet of office space in Hauppauge, New York, at a monthly rental of
approximately $1,400, which space serves as its headquarters operations.
20
Former Lease Obligations - 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 was seeking the eviction of the Tenants as well as judgement for
unpaid back and holdover rental amounts of approximately $175,000.
In April 2004 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.
8. 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 proceeds from the sale of
certain assets. As of April 30, 2005, the balance due under these notes was
$2,767,000, all of which is classified as long-term debt-related party.
At April 30, 2005, substantially all of Canal's real properties, the stock
of certain subsidiaries, the investments and a substantial portion of its art
inventories are pledged as collateral for the following obligations:
April 30, October 31,
($ 000's Omitted) 2005 2004
- ----------------- ---- ----
Variable rate mortgage notes due
May 15, 2006 - related party $ 2,767 $ 2,767
------- -------
9. Income Taxes
At October 31, 2004, the company had net operating loss carryforwards of
approximately $12,613,000 that expire through 2018. For financial statement
purposes, a valuation allowance has been provided to offset the net deferred tax
assets due to the cumulative operating losses incurred during recent years. The
valuation allowance at October 31, 2004 is $4,415,000 and 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.
21
10. PROPERTY AND EQUIPMENT
A) Property on Operating Leases
Property on operating leases consist of approximately 34 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 April 30, 2005
is as follows (000's omitted):
Carrying Carrying
Value Value
Description (1) 10/31/04 Additions Retirements Deprec. 4/30/05
- --------------- -------- --------- ----------- ------- -------
Headquarters office
Various leasehold $ 5 $ 0 $ 0 $ (3) $ 2
improvements
11 acres of land
in Omaha, NE 1,215 0 0 (1) 1,214
Acquired in 1976
5 acres of land
in S. St. Paul, MN 1,092 0 (848) (10) 234
Acquired in 1937
18 acres of land
in Sioux City, IA 403 0 0 0 403
------- ------- ------- ------- -------
Acquired in 1937
$ 2,715 $ 0 $ (848) $ (14) $ 1,853
======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property on operating leases
carried for the fiscal years 2005, 2004 and 2003 is as follows (000's omitted):
2005 2004 2003
---- ---- ----
Balance at beginning of year $ 2,715 $ 2,874 $ 3,337
Acquisitions 0 0 0
Improvements 0 8 179
Cost of property sold & depreciation (862) (167) (142)
Reclassification to property held
for development or resale 0 0 (500)
------- ------- -------
Balance at end of year $ 1,853 $ 2,715 $ 2,874
------- ------- -------
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations (see Note 8).
22
B) 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 on operating leases at April 30, 2005
is as follows (000's omitted):
Carrying Carrying
Value Value
Description (1) 10/31/04 Additions Retirements Deprec. 4/30/05
- --------------- -------- --------- ----------- ------- -------
30 acres of land
in St. Joseph, MO $ 984 $ 0 $ 0 $ (6) $ 978
Acquired in 1942
30 acres of land
in Sioux Falls, SD 158 0 0 (5) 153
------- ------- ------- ------- -------
Acquired in 1937
$ 1,142 $ 0 $ 0 $ (11) $ 1,131
======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property used in stockyard
operations carried for fiscal years 2005, 2004 and 2003 is as follows (000's
omitted):
2005 2004 2003
---- ---- ----
Balance at beginning of year $ 1,142 $ 1,136 $ 1,176
Acquisitions 0 0 40
Improvements 0 25 32
Cost of property sold & depreciation (11) (19) (112)
------- ------- -------
Balance at end of year $ 1,131 $ 1,142 $ 1,136
------- ------- -------
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations (see Note 8).
23
C) 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
April 30, 2005 is as follows (000's omitted):
Carrying Carrying
Value Value
Description (1) 10/31/04 Additions Retirements Deprec. 4/30/05
- --------------- -------- --------- ----------- ------- -------
19 acres of land
in St. Joseph, MO $ 47 $ 0 $ 0 $ 0 $ 47
Acquired in 1942
10 acres of land
in S. St. Paul, MN 144 0 0 0 144
Acquired in 1937
30 acres of land
in Sioux City, IA 626 0 0 0 626
------ ------ ------ ------ ------
Acquired in 1937
$ 817 $ 0 $ 0 $ 0 $ 817
====== ====== ====== ====== ======
A schedule of the Company's reconciliation of property held for
development or resale carried for fiscal years 2005, 2004 and 2003 is as follows
(000's omitted):
2005 2004 2003
---- ---- ----
Balance at beginning of year $ 817 $ 900 $ 518
Acquisitions 0 0 0
Improvements 0 0 0
Cost of property sold 0 (83) (118)
Reclassification from property
on operating leases 0 0 500
------ ------ ------
Balance at end of year $ 817 $ 817 $ 900
------ ------ ------
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations (see Note 8).
24
11. 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.
12. LITIGATION
Canal and its subsidiaries are from time to time involved in litigation
incidental to their normal business activities, none of which, in the opinion of
management, will have a material adverse effect on the consolidated financial
condition of the Company. Canal or its subsidiaries are party to the following
litigations:
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 was
seeking the eviction of the Tenants as well as judgement for unpaid back and
holdover rental amounts of approximately $175,000.
In April 2004 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.
13. 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 restricted cash - transit insurance balances of
approximately $54,000 and $50,000 at April 30, 2005 and October 31, 2004,
respectively, represents the excess of per head fees charged over actual
payments made for livestock that was injured or died while at the stockyards.
25
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE SIX MONTHS ENDED APRIL 30, 2005
The following discussion should be read in conjunction with our financial
statements and notes thereto included elsewhere in this report.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
We may from time to time make written or oral forward-looking statements,
including those contained in the following section. These forward-looking
statements involve risks and uncertainties and actual results could differ
materially from those discussed in the forward-looking statements. For this
purpose, any statements contained in this section that are not statements of
historical fact may be deemed to be forward-looking statements. Factors which
may effect our results include, but are not limited to, our ability to expand
our customer base, our ability to develop additional and leverage our existing
distribution channels for our products and solutions, dependance on strategic
and channel partners including their ability to distribute our products and meet
or renew their financial commitments, our ability to address international
markets, the effectiveness of our sales and marketing activities, the acceptance
of our products in the market place, the timing and scope of deployments of our
products by customers, fluctuations in customer sales cycles, customers' ability
to obtain additional funding, the emergence of new competitors in the
marketplace, our ability to compete successfully against established competitors
with greater resources, the uncertainty of future governmental regulation, our
ability to manage growth, and obtain additional funds, general economic
conditions and other risks discussed in this report and in our other filings
with the Securities and Exchange Commission. All forward- looking statements and
risk factors included in this document are made as of the date hereof, based on
information available to us as of the date thereof, and we assume no obligation
to update any forward-looking statement or risk factors.
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,
26
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".
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 $1.0 million, while contributing $2.0 million to
Canal's revenues for the first six months of fiscal 2005. In the first quarter
of fiscal 2005, Canal sold its Exchange Building and the associated five acres
of land located in South Saint Paul, Minnesota on a contract for deed for $1.8
million, generating operating income of $0.9 million.
As of April 30, 2005, there are approximately 59 acres of undeveloped land
owned by Canal located in five Midwest states. 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.
27
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.
Canal permanently closed its stockyard operations in Sioux City, Iowa in
March 2002. 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. The property is a 30
acre parcel located in the downtown area of Sioux City. 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 is
continuing 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.
28
Canal is continuing 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 $0.4
million while contributing approximately $1.8 million to Canal's revenues for
the first six months of fiscal 2005.
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.
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
29
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 -- 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
2005 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.
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.
30
Results of Operations - General
The following tables set forth certain items in our statement of
operations for the periods indicated:
Six Months Ended April 30,
--------------------------
2005 2004
---- ----
(In Thousands)
Revenues:
Stockyard Revenues $ 1,799 $ 1,755
Real Estate Revenues 2,034 619
------- -------
Total Revenues 3,833 2,374
------- -------
Costs and Expenses:
Stockyard Expenses 1,443 1,435
Real Estate Expenses 998 398
General and Administrative Expenses 409 422
------- -------
Total Costs and Expenses 2,850 2,255
------- -------
Income from Operations 983 119
Other Income 53 0
Other Expenses (141) (241)
------- -------
Net Income (Loss) $ 895 $ (122)
======= =======
While the Company is currently operating as a going concern, certain
significant factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company has suffered recurring losses from
operations in eight of the last ten years and is obligated to continue making
substantial annual contributions to its defined benefit pension plan. The
financial statements do not include any adjustments that might result from the
resolution of these uncertainties. Additionally, the accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Canal recognized net income of approximately $985,000 in the first six
months of 2005 as compared to a net loss of $122,000 for the same period in
fiscal 2004. After recognition of preferred stock dividend payments (paid in
additional shares of preferred stock for each of fiscal 2005, and 2004) of
$30,000 in 2005 and $45,000 in 2004, the results attributable to common
stockholders were net income of $865,000 in 2005 and a net loss of $167,000 in
2004. Canal's 2005 net income of $895,000 is due primarily to a $850,000 gain on
the sale of the Company's South Saint Paul, Minnesota Exchange Building and the
associated five acres of land. This property was sold on a contract for deed
payable in October 2007.
31
Canal's revenues from continuing operations consist of revenues from its
stockyard and real estate operations. Revenues in 2005 increased by $1,459,000
to $3,833,000 as compared with 2004 revenues of $2,374,000. The fiscal 2005
increase in revenues is due primarily to a $1,750,000 sale of the Company's
South Saint Paul, Minnesota Exchange Building and the associated five acres of
land. This property was sold on a contract for deed payable in October 2007.
COMPARISON OF FISCAL PERIODS ENDED APRIL 30, 2005 AND 2004
Stockyard Revenues
Stockyard revenues for the six months ended April 30, 2005 of $1,799,000
accounted for 46.9% of the fiscal 2005 revenues as compared to stockyard
revenues of $1,755,000 or 73.9% for the same period in fiscal 2004. The 2005
decrease in the stockyard revenues as a percent of total revenues, is due to the
significant increase in sales of real estate for fiscal 2005. Stockyard revenues
are comprised of yard handling and auction (91.6% and 90.9%), feed and bedding
income (5.0% and 5.1%), rental income (0.1% and 0.1%) and other income (3.3% and
3.9%) for the six month periods ended April 30, 2005 and 2004, respectively.
There were no significant percentage variations in the year to year comparisons.
Stockyard revenues for the three months ended April 30, 2005 of $827,000
accounted for 85.1% of the fiscal 2005 revenues as compared to stockyard
revenues of $890,000 or 72.9% for the same period in fiscal 2004. The 2005
increase in the stockyard revenues as a percent of total revenues, is due
primarily to the significant reduction in exchange building rental income as a
result of the Company's sale of its South Saint Paul, Minnesota Exchange
Building in the first quarter of fiscal 2005. Stockyard revenues are comprised
of yard handling and auction (91.2% and 90.8%), feed and bedding income (5.2%
and 5.1%), rental income (0.1% and 0.1%) and other income (3.5% and 4.0%) for
the three month periods ended April 30, 2005 and 2004, respectively. There were
no significant percentage variations in the year to year comparisons.
Stockyard Expenses
Stockyard expenses for the six months ended April 30, 2005 of $1,443,000
increased by $8,000 (5.9%) from stockyard expenses of $1,435,000 for the same
period in fiscal 2004. Stockyard expenses are comprised of labor and related
costs (51.5% and 47.2%), other operating and maintenance (24.6% and 27.9%), feed
and bedding expense (4.8% and 5.0%), depreciation and amortization (0.7% and
0.7%), taxes other than income taxes (5.9% and 6.1%) and general and
administrative expense (12.5% and 13.1%) for the six month periods ended April
30, 2005 and 2004, respectively. The 2005 increase in stockyard expenses was
consistent with the increase in stockyard revenues. There were no significant
percentage variations in the year to year comparisons.
32
Stockyard expenses for the three months ended April 30, 2005 of $706,000
decreased by $13,000 (1.8%) from stockyard expenses of $719,000 for the same
period in fiscal 2004. Stockyard expenses are comprised of labor and related
costs (52.1% and 46.5%), other operating and maintenance (24.5% and 28.1%), feed
and bedding expense (4.5% and 5.1%), depreciation and amortization (0.7% and
0.7%), taxes other than income taxes (6.0% and 6.1%) and general and
administrative expense (12.2% and 13.5%) for the three month periods ended April
30, 2005 and 2004, respectively. The 2005 decrease in stockyard expenses was
consistent with the decrease in stockyard revenues. There were no significant
percentage variations in the year to year comparisons.
Real Estate Revenues
Real estate revenues for the six months ended April 30, 2005 of $2,035,000
accounted for 53.1% of the fiscal 2005 revenues as compared to real estate
revenues of $619,000 or 26.1% for the same period in fiscal 2004. The fiscal
2005 increase in real estate revenues is due primarily to a $1,750,000 sale of
the Company's South Saint Paul, Minnesota Exchange Building and the associated
five acres of land. This property was sold on a contract for deed payable in
October 2007. Real estate revenues are comprised of sale of real estate (86.0%
and 21.5%), rental income from commercial office space in its Exchange Buildings
(0.8% and 33.4%), rentals and other lease income from the rental of vacant land
and certain structures (13.2% and 45.1%) and other income (0.0% and 0.0%) for
the six months ended April 30, 2005 and 2004, respectively. The sharp decrease
(92.6%) in Exchange Building Rental Income is also due to the property sale
discussed above. The percentage variations in the year to year comparisons are
due primarily to increased sales of real estate for fiscal 2005.
Real estate revenues for the three months ended April 30, 2005 of $145,000
accounted for 14.9% of the fiscal 2005 revenues as compared to real estate
revenues of $330,000 or 27.1% for the same period in fiscal 2004. The fiscal
2005 decrease in real estate revenues is due primarily to the sale of the
Company's South Saint Paul, Minnesota Exchange Building in the first quarter of
fiscal 2005. Real estate revenues are comprised of sale of real estate (0.0% and
22.4%), rental income from commercial office space in its Exchange Buildings
(5.3% and 31.6%), rentals and other lease income from the rental of vacant land
and certain structures (94.7% and 45.8%) and other income (0.0% and 0.2%) for
the three months ended April 30, 2005 and 2004, respectively. The sharp decrease
(92.7%) in Exchange Building Rental Income is also due to the property sale
discussed above. The increase in rentals and other lease income from the rental
of vacant land and certain structures as a percentage of total revenues is due
primarily to the sharp decrease in Exchange Building Rental Income.
33
Real Estate Expenses
Real estate expenses for the six months ended April 30, 2005 of $998,000
increased by $600,000 (150.6%) from real estate expenses of $398,000 for the
same period in fiscal 2004. The sharp increase in real estate expenses is due to
the property sale discussed above. Real estate expenses are comprised of the
cost of real estate sold (90.2% and 17.3%), labor, operating and maintenance
(3.8% and 40.8%), depreciation and amortization (1.1% and 16.4%), taxes other
than income taxes (3.6% and 18.8%) and general and administrative expenses (1.3%
and 6.7%) for the six months ended April 30, 2005 and 2004, respectively. The
percentage variations in the year to year comparisons are due primarily to the
increased cost of real estate sold for fiscal 2005.
Real estate expenses for the three months ended April 30, 2005 of $49,000
decreased by $140,000 (73.9%) from real estate expenses of $189,000 for the same
period in fiscal 2004. The sharp decrease in real estate expenses is due to the
2005 decrease in cost of real estate sold, coupled with the decreases in
operating expenses associated with the first quarter property sale discussed
above. Real estate expenses are comprised of the cost of real estate sold (0.0%
and 16.1%), labor, operating and maintenance (38.9% and 39.3%), depreciation and
amortization (11.3% and 17.5%), taxes other than income taxes (36.6% and 19.9%)
and general and administrative expenses (13.2% and 7.2%) for the three months
ended April 30, 2005 and 2004, respectively. The percentage variations in the
year to year comparisons are due primarily to the decrease in the cost of real
estate sold as well as the decreases in operating expenses associated with the
first quarter property sale discussed above.
General and Administrative
General and administrative expenses for the six months ended April 30,
2005 of $409,000 decreased by $13,000 (3.0%) from expenses of $422,000 for the
same period in fiscal 2004. The major components of general and administrative
expenses are officers salaries (56.8% and 55.1%), insurance expense (10.0% and
11.2%), office salaries (11.6% and 8.8%), travel expense (4.1% and 4.0%), rent
(2.0% and 2.3%) and professional fees (1.3% and 2.0%) for the six month periods
ended April 30, 2005 and 2004, respectively. There were no significant
percentage variations in the year to year comparisons.
General and administrative expenses for the three months ended April 30,
2005 of $202,000 decreased by $16,000 (7.2%) from expenses of $218,000 for the
same period in fiscal 2004. The major components of general and administrative
expenses are officers salaries (57.5% and 53.4%), insurance expense (10.2% and
10.8%), office salaries (12.0% and 8.1%), travel expense (3.3% and 3.6%), rent
(2.0% and 4.3%) and professional fees (2.2% and 2.1%) for the three month
periods ended April 30, 2005 and 2004, respectively. There were no significant
percentage variations in the year to year comparisons.
34
Interest and Other Income
Interest and other income for the six months ended April 30, 2005 of
$36,000 increased $36,000 (100.0%) from $0 for the same period in fiscal 2004.
Interest and other income is comprised primarily of interest income on the
$1,750,000 note receivable associated with the first quarter sale of the
company's South St. Paul, Minnesota Exchange Building. This property was sold on
a contract for deed payable in October 2007. There was no similar income in
fiscal 2004.
Interest Expense
Interest expense for the six months ended April 30, 2005 of $141,000
increased $2,000 (2.0%) from $139,000 for the same period in fiscal 2004. The
principal balances outstanding at April 30, 2005 and October 31, 2004 were
$2,767,000 and $2,767,000, respectively. The interest rate (10%) on Canal's
variable rate mortgage notes has remained unchanged for the past 12 months. The
slight increase in the 2005 interest expense reflects Canal's repayment
(including additional accrued interest on the unpaid balance due) of a portion
of the interest deferred by certain noteholders to help ease the cash flow
strain experienced by Canal in fiscal 2004.
Income from Art Sales
Other income from art sales for the six months ended April 30, 2005 of
$17,000 increased by $18,000 from a loss of $1,000 for the same period in fiscal
2004. Art revenues are comprised of the proceeds from the sale of antiquities
and contemporary art. Canal recognized gross sales of $64,000 and $20,000 for
the six month periods ended April 30, 2005 and 2004, respectively. Art expenses
are comprised of the cost of inventory sold and selling, general and
administrative expenses. Canal incurred cost of inventory sold of $37,000 and
$38,000 (net of a valuation allowance of $24,000 and $28,000) as well as
selling, general and administrative expenses of $10,000 and $12,000 for the six
month periods ended April 30, 2005 and 2004, respectively. It is the Company's
policy to use the adjusted carrying value for sales, thereby reducing the
valuation reserve proportionately as the inventory is sold.
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. Additionally, the accompanying financial
statements do not include any adjustments relating to the
35
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 April 30, 2005, 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 $0 at April 30, 2005 decreased $86,000 or
100.0% from $86,000 at October 31, 2004. Net cash used by operations in fiscal
2005 was $150,000. Substantially all of the 2005 net proceeds from the sales of
real estate and art of $64,000 was used in operations. During fiscal 2005 Canal
decreased the balance of its current liabilities by a total of $275,000.
At April 30, 2005 the Company's current assets exceed current liabilities
by $0.1 million which was unchanged as compared to October 31, 2004. The only
required principal repayments under Canal's debt agreements for fiscal 2005 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 inventory will enable it to
finance its current business activities. There can, however, be no assurance
that Canal will be able to effectuate its planned art inventory reductions or
that its income from operations combined with its cost cutting program in itself
will be sufficient to fund operating cash requirements.
Other Factors
Some of the statements in this Form 10-Q, as well as statements by the
Company in periodic press releases, oral statements made by the Company's
officials to analysts and stockholders in the course of presentations about the
Company and conference calls following earning releases, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involved known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially
36
different from any future results, performance or achievements expressed or
implied by the forward-looking statements.
ITEM III. 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. As of
April 30, 2005, 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 April 30, 2005, 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
April 30, ($ 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: it is not practicable to estimate the
fair value of the related party debt.
ITEM IV. Controls and Procedures
Our management, which includes our Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13(a)-14(c) promulgated
under the Securities Exchange Act of 1934) as of April 30, 2005 ("the Evaluation
Date") within 45 days prior to the filing date of this report. Based upon that
evaluation our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective for timely gathering,
analyzing and disclosing the information we are required to disclose in our
reports filed under the Securities Exchange Act of 1934, as amended. There have
been no significant changes made in our internal controls or other factors that
could significantly effect our internal controls subsequent to the Evaluation
Date.
37
PART II
OTHER INFORMATION
38
Item 1: Legal Proceedings:
See Item 3 of Canal's October 31, 2004 Form 10-K.
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 was
seeking the eviction of the Tenants as well as judgement for unpaid back and
holdover rental amounts of approximately $175,000.
In April 2004 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 2 and 3:
Not applicable.
Item 4: Submission of Matters to a Vote of Security Holders:
None.
Item 5: Other Information:
None.
Item 6: Exhibits and Reports on Form 8-K:
(A) Not applicable.
39
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 14th day of
June, 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
--------- ----- ----
/S/ Michael E. Schultz President and Chief
- ---------------------- Executive Officer and Director
Michael E. Schultz (Principal Executive Officer) June 14, 2005
/S/ Reginald Schauder Vice President-Finance
- ---------------------- Secretary and Treasurer
Reginald Schauder (Principal Financial and
Accounting Officer) June 14, 2005
/S/ Asher B. Edelman Chairman of the Board
- ---------------------- and Director June 14, 2005
Asher B. Edelman
40