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