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 JULY 31, 2004
|_| 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 AUGUST 31, 2004
----------------------------- 4,326,929
Common stock, $0.01 par value
(This document contains 42 pages)
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
FORM 10-Q JULY 31, 2004
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 - July 31, 2004
and October 31, 2003 ............................................... 5
Statements of Consolidated Operations and
Comprehensive (Loss) Income for the Nine and Three
Month Periods ended July 31, 2004 and 2003 ......................... 7
Statements of Consolidated Changes in
Stockholders' Equity for the Nine Month and
One Year Periods ended July 31, 2004 and
October 31, 2003 ................................................... 11
Statements of Consolidated Cash Flows for the
Nine Month Periods ended July 31, 2004 and
2003 ............................................................... 12
Notes to Consolidated Financial Statements ........................... 13
Item II. Management's Discussion and Analysis of
Financial Condition ............................................. 26
Liquidity and Capital Resources ...................................... 32
Other Factors ........................................................ 33
Item III. Quantitative and Qualitative Disclosures
About Market Risk .................................................... 34
Item IV. Controls and Procedures .......................................... 34
Part II - Other Information ............................................... 35
Items 1 through 6 .................................................... 36
Signatures and Certifications ........................................ 37
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 July 31, 2004, the related consolidated statements of
operations and comprehensive (loss) income for the nine and three month period
ended July 31, 2004 and the consolidated statements of changes in stockholders'
equity and cash flows for the nine month period ended July 31, 2004. 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.
September 13, 2004 -----------------------------
TODMAN & CO., CPA's,P.C.
Certified Public Accountants (N.Y.)
3
PART I
FINANCIAL INFORMATION
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2004 AND OCTOBER 31, 2003
JULY 31, OCTOBER 31,
2004 2003
(UNAUDITED) (AUDITED)
----------- ----------
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 8,115 $ 14,191
NOTES AND ACCOUNTS RECEIVABLE, NET OF AN
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $ZERO AT
BOTH JULY 31, 2004 AND OCTOBER 31, 2003, 99,549 131,836
ART INVENTORY, NET OF A VALUATION ALLOWANCE OF
$1,157,400 AND $1,157,400 AT JULY 31,
2004 AND OCTOBER 31, 2003, RESPECTIVELY 250,000 250,000
STOCKYARDS INVENTORY 16,719 11,412
PREPAID EXPENSES 43,197 69,168
---------- ----------
TOTAL CURRENT ASSETS 417,580 476,607
---------- ----------
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $1,142,198
AND $1,199,723 AT JULY 31, 2004 AND
OCTOBER 31, 2003, RESPECTIVELY 2,749,535 2,874,457
---------- ----------
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $145,449 AND
$130,041 AT JULY 31, 2004 AND OCTOBER
31, 2003, RESPECTIVELY 1,120,648 1,136,056
---------- ----------
ART INVENTORY NON-CURRENT, NET OF A
VALUATION ALLOWANCE OF $170,550
AND $617,350 AT JULY 31, 2004
AND OCTOBER 31, 2003, RESPECTIVELY 301,450 459,671
---------- ----------
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 844,735 899,679
RESTRICTED CASH - TRANSIT INSURANCE 77,536 58,729
DEFERRED LEASING AND FINANCING COSTS 13,277 16,006
DEPOSITS AND OTHER 120,220 221,031
---------- ----------
1,055,768 1,195,445
---------- ----------
$5,644,981 $6,142,236
========== ==========
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2004 AND OCTOBER 31, 2003
JULY 31, OCTOBER 31,
2004 2003
(UNAUDITED) (AUDITED)
------------ ------------
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 743,369 $ 755,110
INCOME TAXES PAYABLE 2,931 10,000
------------ ------------
TOTAL CURRENT LIABILITIES 746,300 765,110
------------ ------------
NON-CURRENT LIABILITIES:
LONG-TERM PENSION LIABILITY 671,450 907,573
REAL ESTATE TAXES PAYABLE 349,223 300,000
------------ ------------
TOTAL NON-CURRENT LIABILITIES 1,020,673 1,207,573
------------ ------------
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
5,443,979 SHARES ISSUED AND OUTSTANDING
AT JULY 31, 2004 AND OCTOBER 31, 2003,
RESPECTIVELY AND AGGREGATE LIQUIDATION
PREFERENCE OF $10 PER SHARE FOR $ 61,983,670
AND $54,439,790 AT JULY 31, 2004 AND
OCTOBER 31, 2003, RESPECTIVELY 61,984 54,440
COMMON STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 5,313,794
SHARES ISSUED AND 4,326,929 SHARES OUT-
STANDING AT JULY 31, 2004 AND OCTOBER 31,
2003, RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 28,038,409 28,018,997
ACCUMULATED DEFICIT (13,723,435) (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 (2,315,543) (2,315,543)
------------ ------------
1,111,008 1,402,553
------------ ------------
$ 5,644,981 $ 6,142,236
============ ============
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND 2003
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $2,074,813 $2,326,171
FEED AND BEDDING INCOME 117,215 145,577
RENTAL INCOME 3,226 2,525
OTHER INCOME 90,766 125,281
---------- ----------
2,286,020 2,599,454
---------- ----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 980,023 1,014,304
OTHER OPERATING AND MAINTENANCE 564,750 529,500
FEED AND BEDDING EXPENSE 94,661 123,655
DEPRECIATION AND AMORTIZATION 15,408 15,797
TAXES OTHER THAN INCOME TAXES 126,612 131,878
GENERAL AND ADMINISTRATIVE 240,626 283,155
---------- ----------
2,022,080 2,098,289
---------- ----------
INCOME FROM STOCKYARD OPERATIONS 263,940 501,165
---------- ----------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE 207,896 369,500
EXCHANGE BUILDING RENTAL INCOME 311,084 330,535
OUTSIDE REAL ESTATE RENT 410,721 374,798
OTHER INCOME 500 130
---------- ----------
930,201 1,074,963
---------- ----------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 123,678 243,389
LABOR, OPERATING AND MAINTENANCE 237,543 317,800
DEPRECIATION AND AMORTIZATION 99,252 93,645
TAXES OTHER THAN INCOME TAXES 112,500 111,600
GENERAL AND ADMINISTRATIVE 37,171 38,133
---------- ----------
610,144 804,567
---------- ----------
INCOME FROM REAL ESTATE OPERATIONS 320,057 270,396
---------- ----------
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND 2003
Continued ...
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (622,732) (635,934)
----------- -----------
(LOSS) INCOME FROM OPERATIONS (38,735) 135,627
----------- -----------
OTHER (EXPENSE) INCOME:
INTEREST & OTHER INCOME 41 133
INTEREST EXPENSE (207,683) (200,022)
INCOME FROM ART SALES 77,197 26,269
REALIZED GAIN ON INVESTMENTS 4,404 0
OTHER EXPENSE (126,753) 0
----------- -----------
(252,794) (173,620)
----------- -----------
(LOSS) BEFORE PROVISION FOR
INCOME TAXES (291,529) (37,993)
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET (LOSS) (291,529) (37,993)
OTHER COMPREHENSIVE (LOSS) INCOME:
MINIMUM PENSION LIABILITY ADJUSTMENT 0 0
----------- -----------
COMPREHENSIVE (LOSS) $ (291,529) $ (37,993)
=========== ===========
(LOSS) PER COMMON SHARE - BASIC
AND DILUTED $ (0.07) $ (0.03)
=========== ===========
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 JULY 31, 2004 AND 2003
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 479,158 $ 524,435
FEED AND BEDDING INCOME 29,016 34,227
RENTAL INCOME 890 657
OTHER INCOME 22,034 39,079
--------- ---------
531,098 598,398
--------- ---------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 302,966 324,383
OTHER OPERATING AND MAINTENANCE 164,590 152,399
FEED AND BEDDING EXPENSE 23,610 28,979
DEPRECIATION AND AMORTIZATION 5,136 5,266
TAXES OTHER THAN INCOME TAXES 39,662 40,729
GENERAL AND ADMINISTRATIVE 51,263 60,036
--------- ---------
587,227 611,792
--------- ---------
(LOSS) FROM STOCKYARD OPERATIONS (56,129) (13,394)
--------- ---------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE 74,991 0
EXCHANGE BUILDING RENTAL INCOME 104,304 101,054
OUTSIDE REAL ESTATE RENT 131,816 125,322
OTHER INCOME 0 0
--------- ---------
311,111 226,376
--------- ---------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 54,864 0
LABOR, OPERATING AND MAINTENANCE 75,013 84,917
DEPRECIATION AND AMORTIZATION 33,751 30,331
TAXES OTHER THAN INCOME TAXES 37,500 37,200
GENERAL AND ADMINISTRATIVE 10,645 13,910
--------- ---------
211,773 166,358
--------- ---------
INCOME FROM REAL ESTATE OPERATIONS 99,338 60,018
--------- ---------
9
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JULY 31, 2004 AND 2003
Continued ...
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (200,630) (205,397)
----------- -----------
(LOSS) FROM OPERATIONS (157,421) (158,773)
----------- -----------
OTHER (EXPENSE) INCOME:
INTEREST & OTHER INCOME 4 5
INTEREST EXPENSE (69,175) (66,672)
INCOME (LOSS) FROM ART SALES 78,387 (1,297)
REALIZED GAIN ON INVESTMENTS 4,404 0
OTHER EXPENSE (25,456) 0
----------- -----------
(11,836) (67,964)
----------- -----------
(LOSS) BEFORE PROVISION FOR
INCOME TAXES (169,257) (226,737)
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET (LOSS) (169,257) (226,737)
OTHER COMPREHENSIVE (LOSS) INCOME:
MINIMUM PENSION LIABILITY ADJUSTMENT 0 0
----------- -----------
COMPREHENSIVE (LOSS) $ (169,257) $ (226,737)
=========== ===========
(LOSS) PER COMMON SHARE - BASIC
AND DILUTED $ (0.03) $ (0.06)
=========== ===========
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, 2003 (AUDITED) AND
FOR THE NINE MONTHS ENDED JULY 31, 2004 (UNAUDITED)
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, OCTOBER 31, 2002 5,313,794 $53,138 5,647,993 $ 56,480
NET (LOSS) 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 REPURCHASE 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 754,388 7,544
MINIMUM PEN. LIAB. ADJ 0 0 0 0
---------------------- -------------------------
BALANCE, JULY 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, 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 (291,529) 0 0
PREFERRED STOCK REPURCHASE 0 0 0 0
PREFERRED STOCK DIVIDEND 19,412 (26,972) 0 0
MINIMUM PEN. LIAB. ADJ 0 0 0 0
------------ ------------ ----------- ------------
BALANCE, JULY 31, 2004 $ 28,038,409 ($13,723,435) ($2,315,543) ($11,003,545)
============ ============ =========== ============
11
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2004 AND 2003
(UNAUDITED)
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET (LOSS) $(291,529) $ (37,993)
--------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH (USED) PROVIDED
BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 118,312 118,964
GAIN ON SALES OF REAL ESTATE (84,218) (126,111)
VALUATION RESERVE ART INVENTORY (446,800) (179,000)
CHANGES IN ASSETS AND LIABILITIES:
NOTES AND ACCOUNTS RECEIVABLES, NET 32,287 71,655
ART INVENTORY, NET 158,221 63,500
PREPAID EXPENSES AND OTHER, NET 255,525 20,825
PAYABLES AND ACCRUED EXPENSES, NET (205,710) (369,978)
--------- ---------
NET CASH (USED) BY OPERATING
ACTIVITIES (463,912) (438,138)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 207,896 369,500
PROCEEDS FROM SALES OF ART 257,600 102,500
CAPITAL EXPENDITURES (7,660) (169,280)
--------- ---------
NET CASH PROVIDED BY INVESTING
ACTIVITIES 457,836 302,720
--------- ---------
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) IN CASH AND CASH
EQUIVALENTS (6,076) (135,418)
CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 14,191 139,057
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 8,115 $ 3,639
========= =========
NOTE: CANAL MADE FEDERAL AND STATE INCOME TAX PAYMENTS OF $7,000 AND $18,000 AND
INTEREST PAYMENTS OF $208,000 AND $200,000 IN THE NINE MONTH PERIODS ENDED
JULY 31, 2004 AND 2003, RESPECTIVELY.
12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2004
(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
13
account for approximately 50% of its livestock volume annually. Canal intends to
continue its soliciting efforts at its St. Joseph stockyards in fiscal 2004.
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 located in five
Midwest states are primarily associated with its current and former agribusiness
related operations. Each property is adjacent to a stockyards operation (two of
which are operated by the company) and consist, for the most part, of an
Exchange Building (commercial office space), land and structures leased to third
parties (meat packing facilities, rail car repair shops, truck stops, lumber
yards and various other commercial and retail businesses) as well as vacant land
available for development or resale. Its principal real estate operating
revenues are derived from rental income from its Exchange Buildings, lease
income from land and structures leased to various commercial and retail
enterprises and proceeds from the sale of real estate properties. 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.
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 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 July 31,
2004 and October 31, 2003, and is included in other assets. The operating
results of joint ventures accounted for on the equity method, for the nine month
periods ended July 31, 2004 and 2003 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 68 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.
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.
15
F) Art Inventory Held for Sale - Inventory of art is valued at the lower
of cost, including direct acquisition and restoration expenses, or net
realizable value on a specific identification basis. Net realizable value is
determined in part by independent appraisal. Independent appraisals covered
approximately 31% and 22% of the inventory value at October 31, 2003 and 2002,
respectively. The remaining 69% and 78% at October 31, 2003 and 2002,
respectively was estimated by management based in part on the independent
appraisals done. However, because of the nature of art inventory, such
determination is very subjective and, therefore, the estimated values could
differ significantly from the amount ultimately realized.
The cost of art is generally specified on the purchase invoice. When
individual art is purchased as part of a group or collection of art, cost is
allocated to individual pieces by management using the information available to
it. A significant portion of the art inventory remains in inventory longer than
one year. Consequently, for financial statement purposes, Canal has classified a
portion of its inventory as non-current assets. Antiquities and contemporary art
represented 34% ($189,122) and 66% ($362,328) and 27% ($189,122) and 73%
($520,549) of total art inventory at July 31, 2004 and October 31, 2004,
respectively. All of the contemporary art inventory held for resale is comprised
of the work of Jules Olitski.
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.
16
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 and $18,000 and interest payments of $208,000 and $200,000 for the nine
month periods ended July 31, 2004 and 2003, 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 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. We believe the adoption of SFAS
No. 146 will 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
17
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 will
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 will not
have a material impact on our consolidated financial statements.
3. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements included herein have been
prepared by Canal without audit. In the opinion of Management, the accompanying
unaudited financial statements of Canal contain all adjustments necessary to
present fairly its financial position as of July 31, 2004 and the results of its
operations and its cash flows for the nine month period ended July 31, 2004. 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,
2003 and the notes thereto which are contained in Canal's 2003 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 2004.
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.
18
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 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 2004. 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 $18,000 and
$11,000 at July 31, 2004 and October 31, 2003, respectively.
Stockyard operations resulted in operating income of $264,000 and $501,000
for the nine month periods ended July 31, 2004 and 2003, respectively.
Additionally, stockyard operations contributed $2,286,000 and $2,599,000 to
Canal's revenues for the nine month periods ended July 31, 2004 and 2003,
respectively.
19
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 $320,000 and
$270,000 for the nine month periods ended July 31, 2004 and 2003, respectively.
Additionally, real estate operations contributed $930,000 and $1,075,000 to
Canal's revenues for the nine month periods ended July 31, 2004 and 2003,
respectively.
As of July 31, 2004, there are approximately 68 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 has not purchased inventory in several years nor does it currently
have any intention of purchasing additional art inventory in the foreseeable
future. It is the Company's intention to liquidate, in an orderly manner, its
art inventory. Management estimates it may take approximately five years to
dispose of its current art inventory. The Company's ability to dispose of its
art inventory is dependent primarily on general economic conditions and the
competitiveness of the art market itself. Accordingly, there can be no assurance
that Canal will be successful in disposing of its art inventory within the time
frame discussed above.
Antiquities and contemporary art represented 34% ($189,122) and 66%
($362,328) and 27% ($189,122) and 73% ($520,549) of total art inventory at July
31, 2004 and 2003, 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
20
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 $446,800
of the valuation allowance against its art inventory, thereby, decreasing the
total valuation allowance to $1,327,950 as of July 31, 2004 as compared to
$1,774,750 at October 31, 2003.
The nature of art makes it difficult to determine a replacement value. The
most compelling evidence of a value in most cases is an independent appraisal.
Canal has its art inventory appraised by independent appraisers annually. The
2003 appraisal covered approximately 31% of the inventory value. The appraised
values estimate the current market value of each piece giving consideration to
Canal's practices of engaging in consignment, private and public auction sales.
The net realizable value of the remaining 69% of the inventory was estimated by
management based in part on the Company's history of losses sustained on art
sales in the current and previous years and in part on the results of the
independent appraisals done.
Canal's art sales generated income of $77,000 (net of a decrease in the
valuation allowance of $446,800) as compared to income of $26,000 (net of a
decrease in the valuation allowance of $179,000) for the nine month periods
ended July 31, 2004 and 2003, respectively.
The Company had approximately $250,000 of art inventory (at original cost)
on consignment with third party dealers at both July 31, 2004 and October 31,
2003.
7. LEASE COMMITMENTS
In June 2004, Canal entered into a lease for approximately 1,000 square
feet of office space in Hauppauge, New York, which space serves as its
headquarters operations. The new lease is for a period of 36 months expiring in
May 2007.
Former Lease Obligations - In February 1999 Canal, together with two other
related entities, amended its lease for commercial office space in New York
City, which space served as its headquarters operations. The new lease was for a
period of 128 months expiring in October 2009. Canal's portion of the new space
was approximately 1,000 square feet and Canal is responsible for 25% of the
lease expense. Each of the three entities that were parties to this lease were
jointly and severally responsible for the payments required under the lease. At
October 31, 2003, the security deposit relating to this lease was approximately
$260,000 of which Canal's representative share was approximately $122,000. At
April 30, 2004, Canal was current in its obligations under this lease. However,
the group as a whole was approximately $150,000 in arrears on the rental
payments.
In February 2004, the landlord served Canal and its co-tenants with a
Notice of Default and the resulting Notice of Termination of Lease effective
February 17, 2004. Additionally, in March 2004, the landlord filed a Holdover
Notice of Petition in the New York City Courts seeking eviction of
21
Canal and its co-tenants as well as judgment for unpaid back and holdover rental
amounts of approximately $175,000 (see Note 11). 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. As a result of the
early termination of this lease, Canal took a one time writeoff of approximately
$87,000 which is included in other expenses as of July 31, 2004.
8. BORROWINGS
At July 31, 2004, substantially all of Canal's real properties, the stock
of certain subsidiaries, the investments and a substantial portion of its art
inventories are pledged as collateral for the following obligations:
July 31, October 31,
($ 000's Omitted) 2004 2003
----------------- ---- ----
Variable rate mortgage notes due
May 15, 2006 - related party .................. $ 2,767 $ 2,767
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001. The purchasers of these notes included certain
entities controlled by the Company's Chairman, the Company's Chief Executive
Officer and members of their families. These notes carried interest at the
highest of four variable rates, determined on a quarterly basis. These notes,
among other things, prohibits Canal from becoming an investment company as
defined by the Investment Company Act of 1940; requires Canal to maintain
minimum net worth; restricts Canal's ability to pay cash dividends or repurchase
stock; requires principal prepayments to be made only out of the proceeds from
the sale of certain assets.
On July 29, 1999 the above Notes were amended to extend the maturity date
to May 15, 2003; to fix the interest rate at 10% per annum; and to have certain
of the holders loan the Company $525,000 in additional financing, the proceeds
of which was used to repay in full certain of the other holders of the notes. As
a result, the notes are now held in total by the Company's Chief Executive
Officer and members of his family.
On January 10, 2000, the above Notes were further amended to have holders
loan the Company $1,725,000 in additional financing, the proceeds of which was
used to repay in full all of the Company's outstanding non related party
long-term debt. On October 8, 2002, the above notes were amended to extend the
maturity date to May 15, 2006. The scheduled maturities and sinking fund
requirements of long-term debt during the next five years are $2,767,000 due May
15, 2006. As of July 31, 2004 the balance due under these notes was $2,767,000
all of which is classified as long-term debt-related party. As of July 31, 2004,
certain noteholders have agreed to defer approximately $25,000 of the interest
due under the notes, which amount has been accrued.
22
9. PROPERTY AND EQUIPMENT
A) Property on Operating Leases
Property on operating leases consist of approximately 38 acres of land
located in New York, New York; Omaha, Nebraska; S. St. Paul, Minnesota and Sioux
City, Iowa. Land and structures leased to third parties include vacant land,
exchange buildings (commercial office space), meat packing facilities, railcar
repair shops, truck stops, lumber yards and various other commercial and retail
businesses.
A schedule of the Company's property on operating leases at July 31, 2004
is as follows (000's omitted):
Carrying Carrying
Value Value
Description (1) 10/31/03 Additions Retirements Deprec. 7/31/04
--------------- -------- --------- ----------- ------- -------
Headquarters office
Various leasehold $ 28 $ 0 $ (16) $ (5) $ 7
improvements
11 acres of land
in Omaha, NE 1,217 0 0 (1) 1,216
Acquired in 1976
10 acres of land
in S. St. Paul, MN 1,213 7 0 (96) 1,124
Acquired in 1937
17 acres of land
in Sioux City, IA 416 0 (13) 0 403
Acquired in 1937 ------ ----- ----- ------ ------
$2,874 $ 7 $ (29) $ (102) $2,750
====== ===== ===== ====== ======
B) Property used in Stockyard Operations
Property used in stockyard operations consist of approximately 61 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.
23
A schedule of the Company's property on operating leases at July 31, 2004
is as follows (000's omitted):
Carrying Carrying
Value Value
Description (1) 10/31/03 Additions Retirements Deprec. 7/31/04
--------------- -------- --------- ----------- ------- -------
31 acres of land
in St. Joseph, MO $ 998 $ 0 $ 0 $ (10) $ 988
Acquired in 1942
30 acres of land
in Sioux Falls, SD 138 0 0 (5) 133
Acquired in 1937 ------- ------ ------ ----- -------
$ 1,136 $ 0 $ 0 $ (15) $ 1,121
======= ====== ====== ===== =======
C) Property Held for Development or Resale
Property held for development or resale consist of approximately 68 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
July 31, 2004 is as follows (000's omitted):
Carrying Carrying
Value Value
Description (1) 10/31/03 Additions Retirements Deprec. 7/31/04
--------------- -------- --------- ----------- ------- -------
28 acres of land
in St. Joseph, MO $ 75 $ 0 $ 0 $ 0 $ 75
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 681 0 (55) 0 626
Acquired in 1937 ------ ----- ------ ------ ------
$ 900 $ 0 $ (55) $ 0 $ 845
====== ===== ====== ====== ======
24
10. 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.
11. 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 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.
12. 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 $78,000 and $59,000 at July 31, 2004 and October 31, 2003,
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 NINE MONTHS ENDED JULY 31, 2004
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.
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.
26
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 its art inventory appraised by
independent appraisers annually. The 2003 appraisal covered approximately 31% of
the inventory value. The appraised values estimate the current market value of
each piece giving consideration to Canal's practices of engaging in consignment,
private and public auction sales. The net realizable value of the remaining 69%
of the inventory was estimated by management based in part on the Company's
history of losses sustained on art sales in the current and previous years and
in part on the results of the independent appraisals done.
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 68 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.
27
Results of Operations - General
The following tables set forth certain items in our statement of
operations for the periods indicated:
Nine Months Ended July 31,
--------------------------
2004 2003
---- ----
Revenues: (In Thousands)
Stockyard Revenues $ 2,286 $ 2,599
Real Estate Revenues 930 1,075
------- -------
Total Revenues 3,216 3,674
------- -------
Costs and Expenses:
Stockyard Expenses 2,022 2,098
Real Estate Expenses 610 804
General and Administrative Expenses 623 636
------- -------
Total Costs and Expenses 3,255 3,538
------- -------
(Loss)Income from Operations (39) 136
Other Income 82 26
Other Expenses (335) (200)
------- -------
Net (Loss) $ (292) $ (38)
======= =======
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.
Canal recognized a net loss of approximately $292,000 in the first nine
months of 2004 as compared to a net loss of $38,000 for the same period in
fiscal 2003. After recognition of preferred stock dividend payments (paid in
additional shares of preferred stock for each of fiscal 2004, and 2003) of
$27,000 in 2004 and $116,000 in 2003, the results attributable to common
stockholders were a net loss of $319,000 in 2004 and a net loss of $154,000 in
2003. Canal's 2004 net loss of $319,000 is due primarily to a $237,000 decrease
in income from stockyard operations due to a combination of the harsh winter
weather experienced throughout the Midwest and the discovery of a cow suffering
from BSE (Mad Cow Disease) in late December 2003, coupled with a $127,000
increase in other expenses associated primarily with the costs related to the
early termination of the lease on the Company's New York office space.
28
Canal's revenues from continuing operations consist of revenues from its
stockyard and real estate operations. Revenues in 2004 decreased by $458,000 to
$3,216,000 as compared with 2003 revenues of $3,674,000. The fiscal 2004
decrease in revenues is due primarily to a $313,000 decrease in stockyard
revenues due to a combination of the harsh winter weather experienced throughout
the Midwest and the discovery of a cow suffering from BSE (Mad Cow Disease) in
late December 2003 coupled with a $162,000 decrease in sales of real estate.
COMPARISON OF FISCAL PERIODS ENDED JULY 31, 2004 AND 2003
Stockyard Revenues
Stockyard revenues for the nine months ended July 31, 2004 of $2,286,000
accounted for 71.1% of the fiscal 2004 revenues as compared to stockyard
revenues of $2,599,000 or 70.7% for the same period in fiscal 2003. Stockyard
revenues are comprised of yard handling and auction (90.8% and 89.5%), feed and
bedding income (5.1% and 5.6%), rental income (0.1% and 0.1%) and other income
(4.0% and 4.8%) for the nine month periods ended July 31, 2004 and 2003,
respectively. The 2004 decrease in stockyard revenues was primarily due to a
combination of the harsh winter weather experienced throughout the Midwest and
the discovery of a cow suffering from BSE (Mad Cow Disease) in late December
2003. There were no significant percentage variations in the year to year
comparisons.
Stockyard revenues for the three months ended July 31, 2004 of $531,000
accounted for 63.1% of the fiscal 2004 revenues as compared to stockyard
revenues of $598,000 or 72.6% for the same period in fiscal 2003. Stockyard
revenues are comprised of yard handling and auction (90.2% and 87.6%), feed and
bedding income (5.5% and 5.7%), rental income (0.2% and 0.2%) and other income
(4.1% and 6.5%) for the three month periods ended July 31, 2004 and 2003,
respectively. There were no significant percentage variations in the year to
year comparisons.
Stockyard Expenses
Stockyard expenses for the nine months ended July 31, 2004 of $2,022,000
decreased by $76,000 (3.6%) from stockyard expenses of $2,098,000 for the same
period in fiscal 2003. Stockyard expenses are comprised of labor and related
costs (48.5% and 48.3%), other operating and maintenance (27.9% and 25.2%), feed
and bedding expense (4.7% and 5.9%), depreciation and amortization (0.8% and
0.8%), taxes other than income taxes (6.3% and 6.3%) and general and
administrative expense (11.8% and 13.5%) for the nine month periods ended July
31, 2004 and 2003, respectively. The 2004 decrease in stockyard expenses was
consistent with the decrease in stockyard revenues discussed above. There were
no significant percentage variations in the year to year comparisons.
29
Stockyard expenses for the three months ended July 31, 2004 of $587,000
decreased by $25,000 (4.0%) from stockyard expenses of $612,000 for the same
period in fiscal 2003. Stockyard expenses are comprised of labor and related
costs (51.6% and 53.0%), other operating and maintenance (28.0% and 24.9%), feed
and bedding expense (4.0% and 4.7%), depreciation and amortization (0.9% and
0.9%), taxes other than income taxes (6.8% and 6.7%) and general and
administrative expense (8.7% and 9.8%) for the three month periods ended July
31, 2004 and 2003, respectively. The 2004 decrease in stockyard expenses was
consistent with the decrease in stockyard revenues discussed above. There were
no significant percentage variations in the year to year comparisons.
Real Estate Revenues
Real estate revenues for the nine months ended July 31, 2004 of $930,000
accounted for 28.9% of the fiscal 2004 revenues as compared to real estate
revenues of $1,075,000 or 29.3% for the same period in fiscal 2003. Real estate
revenues are comprised of sale of real estate (22.3% and 34.4%), rental income
from commercial office space in its Exchange Buildings (33.4% and 30.7%),
rentals and other lease income from the rental of vacant land and certain
structures (44.2% and 34.8%) and other income (0.1% and 0.1%) for the nine
months ended July 31, 2004 and 2003, respectively. The percentage variations in
the year to year comparisons are due primarily to decreased sales of real estate
for fiscal 2004.
Real estate revenues for the three months ended July 31, 2004 of $311,000
accounted for 36.9% of the fiscal 2004 revenues as compared to real estate
revenues of $226,000 or 27.4% for the same period in fiscal 2003. Real estate
revenues are comprised of sale of real estate (24.1% and 0.0%), rental income
from commercial office space in its Exchange Buildings (33.5% and 44.6%),
rentals and other lease income from the rental of vacant land and certain
structures (42.4% and 55.4%) and other income (0.2% and 0.0%) for the three
months ended July 31, 2004 and 2003, respectively. The percentage variations in
the year to year comparisons are due primarily to increased sales of real estate
for fiscal 2004.
Real Estate Expenses
Real estate expenses for the nine months ended July 31, 2004 of $610,000
decreased by $194,000 (24.2%) from real estate expenses of $804,000 for the same
period in fiscal 2003. Real estate expenses are comprised of the cost of real
estate sold (20.3% and 30.3%), labor, operating and maintenance (38.9% and
39.5%), depreciation and amortization (16.3% and 11.6%), taxes other than income
taxes (18.4% and 13.9%) and general and administrative and other expenses (6.1%
and 4.7%) for the nine months ended July 31, 2004 and 2003, respectively. The
percentage variations in the year to year comparisons are due primarily to the
decreased cost of real estate sold for fiscal 2004.
30
Real estate expenses for the three months ended July 31, 2004 of $212,000
increased by $45,000 (27.3%) from real estate expenses of $166,000 for the same
period in fiscal 2003. Real estate expenses are comprised of the cost of real
estate sold (25.9% and 0.0%), labor, operating and maintenance (35.4% and
51.0%), depreciation and amortization (15.9% and 18.2%), taxes other than income
taxes (17.7% and 22.4%) and general and administrative and other expenses (5.1%
and 8.4%) for the three months ended July 31, 2004 and 2003, respectively. The
percentage variations in the year to year comparisons are due primarily to the
increased cost of real estate sold for fiscal 2004.
General and Administrative
General and administrative expenses for the nine months ended July 31,
2004 of $623,000 decreased by $13,000 (2.1%) from expenses of $636,000 for the
same period in fiscal 2003. The major components of general and administrative
expenses are officers salaries (56.0% and 54.8%), rent (2.6% and 2.5%), legal
and professional fees (2.0% and 1.0%), insurance (11.3% and 11.1%) and office
salaries (8.4% and 9.0%) for the nine month periods ended July 31, 2004 and
2003, respectively. There were no significant percentage variations in the year
to year comparisons.
General and administrative expenses for the three months ended July 31,
2004 of $201,000 decreased by $4,000 (2.3%) from expenses of $205,000 for the
same period in fiscal 2003. The major components of general and administrative
expenses are officers salaries (59.9% and 56.6%), rent (2.1% and 2.7%), legal
and professional fees (2.2% and 1.0%), insurance (12.1% and 11.5%) and office
salaries (5.4% and 9.3%) for the three month periods ended July 31, 2004 and
2003, respectively. There were no significant percentage variations in the year
to year comparisons.
Interest Expense
Interest expense for the nine months ended July 31, 2004 of $208,000
increased $8,000 (3.8%) from $200,000 for the same period in fiscal 2003. The
principal balances outstanding at July 31, 2004 and October 31, 2003 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. At
July 31, 2004 the outstanding balance of these notes was $2,767,000.
Additionally, as of July 31, 2004, certain noteholders have agreed to defer
approximately $25,000 of the interest due under the notes, which amount has been
accrued.
Other Expense
Other expenses for the nine months ended July 31, 2004 of $127,000 were
comprised of the one time write offs taken in connection with the early lease
termination on the company's New York office space coupled with a total reserve
taken against the monies owed Canal by a related entity for executive
secretarial services rendered in the past year.
31
Income from Art Sales
Other income from art sales for the nine months ended July 31, 2004 of
$77,000 increased by $51,000 from income of $26,000 for the same period in
fiscal 2003. Art revenues are comprised of the proceeds from the sale of
antiquities and contemporary art. Canal recognized gross sales of $258,000 and
$103,000 for the nine month periods ended July 31, 2004 and 2003, respectively.
Art expenses are comprised of the cost of inventory sold and selling, general
and administrative expenses. Canal incurred cost of inventory sold of $113,000
and $158,000 (net of a valuation allowance of $447,000 and $179,000) as well as
selling, general and administrative expenses of $22,000 and $13,000 for the nine
month periods ended July 31, 2004 and 2003, 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 recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
On January 8, 1998, the Company issued $3,700,000 of variable rate
mortgage notes due May 15, 2001. The purchasers of these notes included certain
entities controlled by the Company's Chairman, the Company's Chief Executive
Officer and members of their families. The notes carried interest at the highest
of four variable rates, determined on a quarterly basis. These notes, among
other things, prohibit Canal from becoming an investment company as defined by
the Investment Company Act of 1940; require Canal to maintain minimum net worth;
restrict Canal's ability to pay cash dividends or repurchase stock; require
principal prepayments to be made only out of the proceeds from the sale of
certain assets.
On July 29, 1999 the above notes were amended to extend the maturity date
to May 15, 2003; to fix the interest rate at 10% per annum; and to have certain
of the holders loan the Company $525,000 in additional financing, the proceeds
of which was used to repay in full certain of the holders of the notes. As a
result, the notes are now held in total by the Company's Chief Executive Officer
and members of his family.
32
On January 10, 2000, the above notes were further amended to have the
noteholders loan the Company $1,725,000 in additional financing, the proceeds of
which was used to repay in full all of the Company's outstanding non related
party long-term debt. On October 8, 2002, the above notes were amended to extend
the maturity date to May 15, 2006. As of July 31, 2004, the balance due under
these notes was $2,767,000, all of which is classified as long-term debt-related
party. Additionally, as of July 31, 2004, certain noteholders have agreed to
defer approximately $25,000 of the interest due under the notes, which amount
has been accrued.
Cash and cash equivalents of $8,000 at July 31, 2004 decreased $6,000 or
42.8% from $14,000 at October 31, 2003. Net cash used by operations in fiscal
2004 was $464,000. Substantially all of the 2004 net proceeds from the sales of
real estate and art of $466,000 was used in operations.
During fiscal 2004 Canal decreased the balance of its current liabilities
by a total of $19,000.
At July 31, 2004 the Company's current liabilities exceed current assets
by $0.3 million which was unchanged as compared to October 31, 2003. 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 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 different
from any future results, performance or achievements expressed or implied by the
forward-looking statements.
33
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 July
31, 2004, 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 July 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
July 31, ($ US) Interest Rate Value
-------- ---------- ------------- -----
2004 $ 0 N/A
2005 0 N/A
2006 2,767 10%
2007 0 N/A
2008 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, 2004 ("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.
34
PART II
OTHER INFORMATION
35
Item 1: Legal Proceedings:
See Item 3 of Canal's October 31, 2003 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 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 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.
36
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
September, 2004.
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) September 14, 2004
Michael E. Schultz
Vice President-Finance
Secretary and Treasurer
/S/ Reginald Schauder (Principal Financial and
----------------------- Accounting Officer) September 14, 2004
Reginald Schauder
/S/ Asher B. Edelman Chairman of the Board
----------------------- and Director September 14, 2004
Asher B. Edelman
/S/ Gerald N. Agranoff
-----------------------
Gerald N. Agranoff Director September 14, 2004
37