SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2008
|_| TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 002-96666
CANAL CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0102492
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
490 WHEELER ROAD SUITE 185 HAUPPAUGE, NY 11788
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (631) 234-0140
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes |X| No |_|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |_| Non-accelerated filer |X|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The number of shares of Common Stock, $.01 par value, outstanding at
August 31, 2008 was 4,326,929.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
FORM 10-Q JULY 31, 2008
INDEX
The following documents are filed as part of this report:
Part I - Financial Information ............................................ 3
Item I. Condensed Financial Statements:
Consolidated Balance Sheets - July 31, 2008
and October 31, 2007 ............................................... 4
Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Nine Month
Periods ended July 31, 2008 and 2007 ............................... 6
Consolidated Statements of Changes in Stockholders'
Equity for the One Year and Nine Month Periods
ended October 31, 2007 and July 31, 2008 ........................... 10
Consolidated Statements of Cash Flows for the
Nine Month Periods ended July 31, 2008 and 2007 .................... 11
Notes to Consolidated Financial Statements ........................... 13
Item II. Management's Discussion and Analysis of Financial Condition ...... 29
Liquidity and Capital Resources ...................................... 38
Other Factors ........................................................ 40
Item III. Quantitative and Qualitative Disclosures About Market Risk ...... 40
Item IV. Controls and Procedures ......................................... 41
Part II Other Information ............................................... 42
Items 1 through 6 .................................................... 43
Signatures and Certifications ........................................ 44
2
PART I
FINANCIAL INFORMATION
3
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2008 AND OCTOBER 31, 2007
JULY 31, OCTOBER 31,
2008 2007
(UNAUDITED) (AUDITED)
------------- -------------
ASSETS:
CURRENT ASSETS:
CASH AND CASH EQUIVALENTS $ 16,414 $ 27,925
MORTGAGE NOTE RECEIVABLE 0 1,600,000
NOTES AND ACCOUNTS RECEIVABLE, NET OF AN
ALLOWANCE FOR DOUBTFUL ACCOUNTS OF $ZERO AT
BOTH JULY 31, 2008 AND OCTOBER 31, 2007, 147,142 75,879
ART INVENTORY, NET OF A VALUATION ALLOWANCE
OF $396,522 AT JULY 31, 2008 AND
OCTOBER 31, 2007 100,000 100,000
STOCKYARDS INVENTORY 23,901 16,761
PREPAID EXPENSES 33,375 28,839
------------- -------------
TOTAL CURRENT ASSETS 320,832 1,849,404
------------- -------------
NON-CURRENT ASSETS:
PROPERTY ON OPERATING LEASES, NET OF
ACCUMULATED DEPRECIATION OF $422,449
AND $405,799 AT JULY 31, 2008 AND
OCTOBER 31, 2007, RESPECTIVELY 1,651,357 1,741,007
------------- -------------
PROPERTY USED IN STOCKYARD OPERATIONS, NET OF
ACCUMULATED DEPRECIATION OF $225,733 AND
$210,872 AT JULY 31, 2008 AND OCTOBER
31, 2007, RESPECTIVELY 1,099,975 1,079,843
------------- -------------
OTHER ASSETS:
PROPERTY HELD FOR DEVELOPMENT OR RESALE 91,510 91,510
RESTRICTED CASH - TRANSIT INSURANCE 32,232 44,952
DEPOSITS AND OTHER ASSETS 2,700 2,700
------------- -------------
126,442 139,162
------------- -------------
$ 3,198,606 $ 4,809,416
============= =============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
4
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 2008 AND OCTOBER 31, 2007
JULY 31,2008 OCTOBER 31,2007
(UNAUDITED) (AUDITED)
------------ ---------------
LIABILITIES & STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 212,247 $ 269,105
PENSION PLAN PAYABLE 0 94,677
SALARIES AND INTEREST PAYABLE - OFFICERS 0 223,916
ACCRUED PROFESSIONAL FEES 91,229 110,000
INCOME TAXES PAYABLE 10,000 10,000
------------ ------------
TOTAL CURRENT LIABILITIES 313,476 707,698
------------ ------------
NON-CURRENT LIABILITIES:
LONG-TERM PENSION LIABILITY 320,140 320,140
REAL ESTATE TAXES PAYABLE 91,550 108,982
------------ ------------
TOTAL NON-CURRENT LIABILITIES 411,690 429,122
------------ ------------
LONG-TERM DEBT, RELATED PARTY 1,122,000 2,687,000
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $0.01 PAR VALUE:
10,000,000 SHARES AUTHORIZED; 9,102,655
SHARES ISSUED AND OUTSTANDING AT JULY 31,
2008 AND OCTOBER 31, 2007, RESPECTIVELY AND
AGGREGATE LIQUIDATION PREFERENCE OF $10 PER
SHARE FOR $ 91,026,550 AT JULY 31, 2008
AND OCTOBER 31, 2007, RESPECTIVELY 91,027 91,027
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, 2008 AND OCTOBER 31,
2007, RESPECTIVELY 53,138 53,138
ADDITIONAL PAID-IN CAPITAL 28,403,341 28,322,341
ACCUMULATED DEFICIT (14,789,259) (14,885,103)
986,865 SHARES OF COMMON STOCK
HELD IN TREASURY, AT COST (11,003,545) (11,003,545)
COMPREHENSIVE INCOME:
PENSION VALUATION RESERVE (1,403,262) (1,592,262)
------------ ------------
1,351,440 985,596
------------ ------------
$ 3,198,606 $ 4,809,416
============ ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
5
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED JULY 31, 2008 AND 2007
2008 2007
(UNAUDITED) (UNAUDITED)
----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 1,956,697 $ 2,105,961
FEED AND BEDDING INCOME 150,811 146,033
RENTAL & OTHER INCOME 123,738 122,401
----------- -----------
2,231,246 2,374,395
----------- -----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 1,074,354 1,052,785
OTHER OPERATING AND MAINTENANCE 640,092 584,272
FEED AND BEDDING EXPENSE 139,123 132,285
DEPRECIATION AND AMORTIZATION 14,863 14,863
TAXES OTHER THAN INCOME TAXES 128,921 131,235
GENERAL AND ADMINISTRATIVE 286,159 278,952
----------- -----------
2,283,512 2,194,392
----------- -----------
(LOSS) INCOME FROM STOCKYARD OPERATIONS (52,266) 180,003
----------- -----------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE 1,190,000 75,000
OUTSIDE REAL ESTATE RENT 359,461 369,495
EXCHANGE BUILDING RENTAL INCOME 24,353 23,152
----------- -----------
1,573,814 467,647
----------- -----------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 277,367 56,711
LABOR, OPERATING AND MAINTENANCE 58,639 59,815
DEPRECIATION AND AMORTIZATION 16,650 16,650
TAXES OTHER THAN INCOME TAXES 16,200 19,800
GENERAL AND ADMINISTRATIVE 33,140 31,800
----------- -----------
401,996 184,776
----------- -----------
INCOME FROM REAL ESTATE OPERATIONS 1,171,818 282,871
----------- -----------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
6
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED JULY 31, 2008 AND 2007
Continued ...
2008 2007
(UNAUDITED) (UNAUDITED)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (819,849) (818,763)
----------- -----------
INCOME (LOSS) FROM OPERATIONS 299,703 (355,889)
----------- -----------
OTHER (EXPENSE) INCOME:
INTEREST & OTHER INCOME 26,784 54,000
INTEREST EXPENSE (146,043) (201,818)
ART SALES AND OPERATIONS (3,600) 23,343
LOSS ON SALE OF INVESTMENT 0 (86,020)
----------- -----------
(122,859) (210,495)
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 176,844 (566,384)
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET INCOME (LOSS) 176,844 (566,384)
OTHER COMPREHENSIVE INCOME:
MINIMUM PENSION LIABILITY ADJUSTMENT 189,000 189,000
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 365,844 $ (377,384)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED $ 0.02 $ (0.15)
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 4,326,929 4,326,929
=========== ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
7
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED JULY 31, 2008 AND 2007
2008 2007
(UNAUDITED) (UNAUDITED)
----------- -----------
STOCKYARD OPERATIONS:
STOCKYARD REVENUES:
YARD HANDLING AND AUCTION $ 430,368 $ 452,538
FEED AND BEDDING INCOME 39,744 32,810
RENTAL & OTHER INCOME 35,606 40,395
----------- -----------
505,718 525,743
----------- -----------
STOCKYARD EXPENSES:
LABOR AND RELATED COSTS 340,629 309,360
OTHER OPERATING AND MAINTENANCE 195,104 177,697
FEED AND BEDDING EXPENSE 35,583 30,991
DEPRECIATION AND AMORTIZATION 4,954 4,954
TAXES OTHER THAN INCOME TAXES 41,558 41,265
GENERAL AND ADMINISTRATIVE 65,049 63,654
----------- -----------
682,877 627,921
----------- -----------
LOSS FROM STOCKYARD OPERATIONS (177,159) (102,178)
----------- -----------
REAL ESTATE OPERATIONS:
REAL ESTATE REVENUES:
SALE OF REAL ESTATE 990,000 0
OUTSIDE REAL ESTATE RENT 112,173 123,175
EXCHANGE BUILDING RENTAL INCOME 7,718 7,717
----------- -----------
1,109,891 130,892
----------- -----------
REAL ESTATE EXPENSES:
COST OF REAL ESTATE SOLD 204,800 0
LABOR, OPERATING AND MAINTENANCE 20,668 18,973
DEPRECIATION AND AMORTIZATION 5,550 5,550
TAXES OTHER THAN INCOME TAXES 5,400 6,600
GENERAL AND ADMINISTRATIVE 11,100 10,600
----------- -----------
247,518 41,723
----------- -----------
INCOME FROM REAL ESTATE OPERATIONS 862,373 89,169
----------- -----------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
8
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED JULY 31, 2008 AND 2007
Continued ...
2008 2007
(UNAUDITED) (UNAUDITED)
----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSE (268,489) (269,576)
----------- -----------
IMCOME (LOSS) FROM OPERATIONS 416,725 (282,585)
----------- -----------
OTHER (EXPENSE) INCOME:
INTEREST & OTHER INCOME 0 18,000
INTEREST EXPENSE (40,202) (67,176)
ART SALES AND OPERATIONS (1,200) (4,250)
OTHER EXPENSE 0 0
----------- -----------
(41,402) (53,426)
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 375,323 (336,011)
PROVISION FOR INCOME TAXES 0 0
----------- -----------
NET INCOME (LOSS) 375,323 (336,011)
OTHER COMPREHENSIVE INCOME:
MINIMUM PENSION LIABILITY ADJUSTMENT 63,000 63,000
----------- -----------
COMPREHENSIVE INCOME (LOSS) $ 438,323 $ (273,011)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
BASIC AND DILUTED $ 0.08 $ (0.06)
=========== ===========
AVERAGE SHARES OUTSTANDING - BASIC
AND DILUTED 4,326,929 4,326,929
=========== ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
9
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED OCTOBER 31, 2007 (AUDITED) AND
FOR THE NINE MONTHS ENDED JULY 31, 2008 (UNAUDITED)
COMMON STOCK PREFERRED STOCK
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
BALANCE, OCTOBER 31, 2006 5,313,794 $ 53,138 8,014,137 $ 80,141
NET LOSS 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 1,088,518 10,886
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
----------------------- -----------------------
BALANCE, OCTOBER 31, 2007 5,313,794 $ 53,138 9,102,655 $ 91,027
NET INCOME 0 0 0 0
PREFERRED STOCK DIVIDEND 0 0 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 0 0
----------------------- -----------------------
BALANCE, JULY 31, 2008 5,313,794 $ 53,138 9,102,655 $ 91,027
======================= =======================
ADDITIONAL TREASURY
PAID-IN ACCUMULATED COMPREHENSIVE STOCK,
CAPITAL DEFICIT LOSS AT COST
BALANCE, OCTOBER 31, 2006 $ 28,224,358 ($13,811,198) ($1,812,231) ($11,003,545)
NET LOSS 0 (948,210) 0 0
PREFERRED STOCK DIVIDEND 97,983 (104,717) 0 0
DISTRIBUTION 0 (20,978) 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 219,969 0
------------ ------------ ------------ ------------
BALANCE, OCTOBER 31, 2007 $ 28,322,341 ($14,885,103) ($1,592,262) ($11,003,545)
NET INCOME 0 176,844 0 0
PREFERRED STOCK DIVIDEND 81,000 (81,000) 0 0
MINIMUM PEN. LIAB. ADJ. 0 0 189,000 0
------------ ------------ ------------ ------------
BALANCE, JULY 31, 2008 $ 28,403,341 ($14,789,259) ($1,403,262) ($11,003,545)
============ ============ ============ ============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
10
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2008 AND 2007
JULY 2008 JULY 2007
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) $ 176,844 $ (566,384)
----------- -----------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 31,513 31,513
GAIN ON SALES OF REAL ESTATE (912,633) (18,289)
GAIN ON ART SALES (NET OF RESERVE) 0 (35,600)
LOSS ON SALE OF INVESTMENT 0 86,020
MINIMUM PENSION LIABILITY ADJUSTMENT 189,000 189,000
PREFERRED STOCK ISSUED IN LIEU OF
OFFICER COMPENSATION 0 4,150
DECREASE (INCREASE) IN ASSETS:
MORTGAGE NOTE RECEIVABLE - PROCEEDS 1,600,000 50,000
NOTES AND ACCOUNTS RECEIVABLE (71,263) 60,029
STOCKYARDS INVENTORY (7,140) (12,171)
PREPAID EXPENSES (4,536) (46,575)
RESTRICTED CASH - TRANSIT INSURANCE 12,720 (2,878)
INCREASE (DECREASE) IN LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (56,858) (25,156)
PENSION PLAN PAYABLE (94,677) (35,059)
SALARIES AND INTEREST PAYABLE - OFFICERS (223,916) 158,502
ACCRUED PROFESSIONAL FEES (18,771) (15,814)
COMMERCIAL RENT TAX PAYABLE 0 (61,500)
REAL ESTATE TAXES PAYABLE (17,432) 53,825
----------- -----------
TOTAL ADJUSTMENTS 426,007 379,997
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 602,851 (186,387)
----------- -----------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
11
CANAL CAPITAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2008 AND 2007
Continued ...
JULY 2008 JULY 2007
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF REAL ESTATE 1,190,000 75,000
POOCEEDS FROM SALE OF ART 0 58,500
PROCEEDS FROM SALE OF INVESTMENT 0 25,000
COSTS RELATING TO SALES OF REAL ESTATE (204,367) (10,234)
CAPITAL EXPENDITURES (34,995) 0
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 950,638 148,266
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENT OF LONG-TERM DEBT OBLIGATION (1,565,000) 0
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (1,565,000) 0
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (11,511) (38,121)
CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 27,925 38,121
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 16,414 $ 0
=========== ===========
JULY 31,
--------
2008 2007
---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
CASH PAID DURING THE YEAR FOR:
INTEREST $ 146,083 $ 201,818
=========== ===========
INCOME TAXES $ 0 $ 8,000
=========== ===========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
PREFERRED STOCK DIVIDENDS $ 81,000 $ 83,717
=========== ===========
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
12
CANAL CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JULY 31, 2008
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.
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 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.
Canal is engaged in two distinct businesses - stockyard operations and
real estate.
Stockyard Operations - Through an August 1, 1999 asset repurchase
agreement, Canal now operates two central public stockyards located in St.
Joseph, Missouri and Sioux Falls, South Dakota.
13
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 services facilities, auction arenas, auctioneers, weigh
masters and scales, feed and bedding, and security personnel. In addition, the
stockyards provide other services including pure bred and other specialty sales
for producer organizations. The Company promotes its stockyard business through
public relations efforts, advertising, and personal solicitation of producers.
Actual marketing transactions at a stockyard are managed for livestock
producers by market agencies and independent commission sales people to which
the livestock are consigned for sale. These market agencies (some of which are
owned and operated by the Company) and independent sales people receive
commissions from the seller upon settlement of a transaction and the stockyard
receives a yardage fee on all livestock using the facility which is paid within
twenty-four hours of the sale. Yardage fees vary depending upon the type of
animal, the extent of services provided by the stockyard, and local competition.
Yardage revenues are not directly dependent upon market prices, but rather are a
function of the volume of livestock handled. In general, stockyard livestock
volume is dependent upon conditions affecting livestock production and upon the
market agencies and independent commission sales people which operate at the
stockyards. Stockyard operations are seasonal, with greater volume generally
experienced during the first and fourth quarters of each fiscal year, during
which periods livestock is generally brought to market.
Virtually all of the volume at Canal's Sioux Falls stockyards is handled
through market agencies and independent commission sales people, while the St.
Joseph stockyards has solicitation operations of its own which account for
approximately 50% of its livestock volume annually.
Canal intends to continue its soliciting efforts at its St. Joseph
stockyards in fiscal 2008. 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.
14
Canal maintains an inventory of feed and bedding which is comprised
primarily of hay, corn and straw. The value of this inventory was $24,000 and
$17,000 at July 31, 2008 and October 31, 2007, respectively.
Stockyard operations resulted in an operating loss of $52,000 and
operating income of $180,000 for the nine month periods ended July 31, 2008 and
2007, respectively. Additionally, stockyard operations contributed $2,231,000
and $2,374,000 to Canal's revenues for the nine month periods ended July 31,
2008 and 2007, respectively.
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 (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 Building, 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.
Real estate operations resulted in operating income of $1,172,000 and
$283,000 for the nine month periods ended July 31, 2008 and 2007, respectively.
Included in the 2008 real estate operating income is a $913,000 gain on the sale
of two properties consisting of approximately 8 acres of land and the associated
improvements located in South Saint Paul, Minnesota. Included in the 2007 real
estate operating income is a $18,000 gain on the sale of approximately 2 acres
of vacant land located in Sioux City, Iowa. Additionally, real estate operations
contributed $1,574,000 and $468,000 to Canal's revenues for the nine month
periods ended July 31, 2008 and 2007, respectively.
As of July 31, 2008, there are approximately 18 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.
15
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) Investment in Joint Ventures -- Investment in which ownership interest
range from 20% to 50% or less owned joint venture are accounted for under the
equity method. The joint venture is not, in the aggregate, material in relation
to the financial position or results of operations of Canal. The carrying amount
of such investment was $111,000 at January 31,2007 and was included in other
assets. During the 2007 fiscal year the Company sold its investment back to the
Joint Venture at the Company's original purchase price of $25,000 and recorded a
loss of approximately $86,000 on the sale. The operating results of joint
ventures accounted for on the equity method, for fiscal year 2007 was not
material to financial statement presentation and were therefore included in
other income from real estate operations.
C) 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 18 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.
16
D) 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.
E) 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. The net realizable value of
Canals remaining art inventory has been estimated by management based in part on
the Company's history of art sales in the current and previous years and in part
on the results of the independent appraisals done in previous years. However,
because of the nature of art inventory, such determination is very subjective
and, therefore, the estimated values could differ significantly from the amount
ultimately realized.
F) 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.
G) Stockyard Inventory - Inventory is stated at the lower of cost or
market. Cost is determined using the first-in, first-out method.
H) Accounting Estimates -- The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
I) Revenue Recognition -- Lease and rental revenues are recognized ratably
over the period covered. All real estate leases are accounted for as operating
leases. Revenues from real estate sales are recognized generally when title to
the property passes. Revenues from stockyard operations which consist primarily
of yardage fees (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.
17
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.
J) 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
$0 and $8,000 and interest payments of $146,000 and $202,000 for the nine month
period ended July 31, 2008 and 2007, respectively.
K) Comprehensive Income (Loss) -- The Company's only adjustments for each
classification of the comprehensive income was for minimum pension liability.
L) 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.
M) Recent Accounting Pronouncements -- In September 2006, the FASB issued
SFAS No. 157, "Fair Value Measurements," which is effective for fiscal years
beginning after November 15, 2007. The Statement defines fair value, establishes
a frame work for measuring fair value in accordance with Generally Accepted
Accounting Principles, and expands disclosures about fair value measurements.
The Statement codifies the definition of fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The standard
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing the asset or liability and
establishes
18
a fair value hierarchy that prioritizes the information used to develop those
assumptions. The Company is currently assessing the potential impacts of
implementing this standard, yet believes it will not have any material impact on
the Company's Financial Statements.
In September 2006, the SEC staff issued Staff Accounting Bulletin (SAB)
Topic 1M (SAB 108), "Financial Statements - Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements," which is effective for the 2007 year. SAB 108 provides guidance on
how prior year misstatements should be taken into consideration when quantifying
misstatements in current year financial statements for the purpose of
determining whether the financial statements are materially misstated. Under
this guidance, companies should take into account both the effect of a
misstatement on the current year balance sheet as well as the impact upon the
current year income statement in assessing the materiality of a current year
misstatement. Once a current year misstatement has been quantified, the guidance
in SAB Topic 1M, "Financial Statements - Materiality," (SAB 99) should be
applied to determine whether the misstatement is material. The implementation of
SAB 108 did not have any impact on the Company's financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48),
"Accounting for Uncertainty in Income Taxes." FIN 48 prescribes detailed
guidance for the financial statement recognition, measurement and disclosure of
uncertain tax positions recognized in an enterprise's financial statements in
accordance with FASB Statement No. 109, "Accounting for Income Taxes." The
Company is required to apply the provisions of this interpretation beginning on
November 1, 2007. The provisions of FIN 48 will be applied to all existing
uncertain income tax provisions on the effective date. Upon the implementation
of FIN 48, the cumulative effect of applying the provisions of this
Interpretation will be reported as an adjustment to the opening balance of
retained earnings. The Company has determined that the implementation of this
standard did not have a material impact on the Company's Financial Statements.
3. INTERIM FINANCIAL STATEMENTS
The interim consolidated financial statements included herein have been
prepared by Canal and in the opinion of Management, contain all adjustments
necessary to present fairly its financial position as of July 31, 2008 and the
results of its operations and its cash flows for the nine month period ended
July 31, 2008. All of the above referenced
19
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, 2007 and the notes
thereto which are contained in Canal's 2007 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 2008.
4. MORTGAGE NOTE RECEIVABLE
On November 1, 2004 Canal sold its Exchange Building and the associated
five acres of land located in South Saint Paul, Minnesota on a contract for deed
for $1,750,000, generating operating income of approximately $850,000. Canal
issued a mortgage note for the full sales price, which note carries interest at
a rate of 4.12% per annum, payable in equal monthly installments. The mortgage
note was due and payable in full on October 31, 2007.
In March, 2007 Canal received a $50,000 payment on this note as the result
of the mortgagee having sold a small piece (0.1 acres of land) of the underlying
collateral. On October 31, 2007 Canal received a $100,000 payment on this note,
at which time Canal extended the due date to December 17, 2007 at an interest
rate of 10% per annum. On December 17, 2007 Canal received a $1,400,000 payment
on this note and issued a 90 day note for the balance due of $200,000 at an
interest rate of 12% per annum. This note was paid in full in March 2008.
5. STOCK OPTION PLAN
Under Canal's 1984 Employee and 1985 Directors Stock Option Plans,
$550,000 and 264,000 shares, respectively, of Canal's common stock have been
reserved for option grants. The purchase price of shares subject to each option
granted, under the Employee and Directors Plans, will not be less than 85% and
100%, respectively, of their fair market value at the date of grant. Options
granted under both plans are exercisable for 10 years from the date of grant,
but no option will be exercisable earlier than one year from the date of grant.
Under the Employee Plan, stock appreciation rights may be granted in connection
with stock options, either at the time of grant of the options or at any time
thereafter. No stock appreciation rights have been granted under this plan.
There were no exercisable options outstanding under either of these plans at
July 31, 2008 or 2007.
20
6. BORROWINGS
The Company's variable rate mortgage notes (originally issued in 1998) are
due May 15, 2009 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. The Company is in the process of negotiating a three year
extension of these notes and anticipates this will be achieved prior to
year end. Accordingly, as of July 31, 2008, the balance due under these
notes was $1,122,000, all of which is classified as long-term debt-related
party.
At July 31, 2008, substantially all of Canal's real properties, the stock
of certain subsidiaries, the investments and a substantial portion of its art
inventories are pledged as collateral for the following obligations:
July 31, October 31,
($ 000's Omitted) 2008 2007
----------------- ---- ----
Variable rate mortgage notes due
May 15, 2009 - related party ..................... $ 1,122 $ 2,687
Less -- current maturities ......................... 0 0
-------- --------
Long-term debt ..................................... $ 1,122 $ 2,687
-------- --------
The following table summarizes the Company's commitments as of July 31,
2008 to make future payments under its debt agreements and other contractual
obligations (in 000's):
More
Less Than 1 - 3 3 - 5 Than
Total 1 year Years Years 5 Yrs.
------ ------ ------ ------ ------
Pension Plan Liability (a) $ 320 $ 0 $ 232 $ 88 $ 0
Mortgage Notes Payable (b) 1,122 0 1,122 0 0
------ ------ ------ ------ ------
$1,442 $ 0 $1,354 $ 88 $ 0
------ ------ ------ ------ ------
(a) See Note 16.
(b) The mortgage notes are due May 15, 2009 and are held entirely by the
Company's Chief Executive Officer and members of his family. These
notes carry annual interest of 10% and are collateralized by
substantially all of Canal's property, the stock of certain
subsidiaries and its art inventories.
21
7. RESTRICTED CASH - TRANSIT INSURANCE
Transit insurance covers livestock for the period that they are in transit
to and 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 $32,000 and $45,000 at July 31, 2008 and October 31, 2007,
respectively, represents the excess of per head fees charged over actual
payments made for livestock that was injured or died while at the stockyards.
8. INCOME TAXES
At July 31, 2008, the Company has net operating loss carryforwards of
approximately $11,000,000 that expire through 2027. For financial statement
purposes, a valuation allowance has been provided to offset the net deferred tax
assets due to the cumulative net operating losses incurred during recent years.
The valuation allowance will be reduced when and if, in the opinion of
management, significant positive evidence exists which indicates that it is more
likely than not that the Company will be able to realize its deferred tax
assets.
9. 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. Canal had no sales of art in the first
nine months of fiscal 2008 as compared to the sale of one piece of contemporary
art in fiscal 2007. Canal's art operations have generated an operating loss and
operating income of approximately $4,000 and $27,000 in the nine month periods
ended July 31, 2008 and 2007, respectively.
Antiquities art represented 100% ($100,000) of total art inventory at both
July 31, 2008 and October 31, 2007.
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 2007 Canal recognized a $89,122 valuation allowance against its
remaining art inventory to reflect management's estimate of the inventories net
realizable value at October 31, 2007.
22
10. PROPERTY ON OPERATING LEASES
Property on operating leases consist of approximately 30 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 July 31, 2008
is as follows (000's omitted):
Current Year
(Retirements
Historical Cost Additions
-------------------- ------------------- Carrying
Bldgs. & Bldgs. & Accum. Value
Description (1) Land Imprvmts. Land Imprvmts. Depr. 07/31/08
--------------- ---- --------- ---- --------- ----- --------
New York office
Leasehold assets $ 0 $ 8 $ 0 $ 0 $ (8) $ 0
9 acres of land
in Omaha, NE 1,150 21 0 0 (14) 1,157
Acquired in 1976
3 acres of land
in S. St. Paul, MN 83 485 (73) 0 (401) 94
Acquired in 1937
18 acres of land
in Sioux City, IA 400 0 0 0 0 400
Acquired in 1937 ------- ------- ------- ------- ------- -------
$ 1,633 $ 514 $ (73) $ 0 $ (423) $ 1,651
======= ======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property on operating leases
carried for the nine months ended July 31, 2008 and the year ended October 31,
2007 is as follows (000's omitted):
July 31, October 31,
2008 2007
---- ----
Balance at beginning of year $ 1,741 $ 1,763
Acquisitions and Improvements 0 0
Cost of property sold (73) 0
Depreciation (17) (22)
Reclassifications 0 0
------- -------
Balance at end of the period $ 1,651 $ 1,741
------- -------
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations.
23
11. PROPERTY USED IN STOCKYARD OPERATIONS
Property used in stockyard operations consist of approximately 60 acres of
land located in St. Joseph, Missouri and Sioux Falls, South Dakota. The
Company's stockyards provide all services and facilities required to operate an
independent market for the sale of livestock. Stockyard facilities include
exchange buildings (commercial office space), auction arenas, scale houses,
veterinary facilities, barns, livestock pens and loading docks.
A schedule of the Company's property used in stockyard operations at July
31, 2008 is as follows (000's omitted):
Current Year
(Retirements)
Historical Cost Additions
------------------ ------------------- Carrying
Bldgs. & Bldgs. & Accum. Value
Description (1) Land Imprvmts. Land Imprvmts. Depr. 07/31/08
--------------- ---- --------- ---- --------- ----- --------
30 acres of land
in St. Joseph, MO $ 902 $ 200 $ 0 $ 35 $ (162) $ 975
Acquired in 1942
30 acres of land
in Sioux Falls, SD 100 89 0 0 (64) 125
Acquired in 1937 ------- ------- ------- ------- ------- -------
$ 1,002 $ 289 $ 0 $ 35 $ (226) $ 1,100
======= ======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property used in stockyard
operations carried for the nine months ended July 31, 2008 and the year ended
October 31, 2007 is as follows (000's omitted):
July 31, October 31,
2008 2007
---- ----
Balance at beginning of year $ 1,080 $ 1,100
Acquisitions and Improvements 35 0
Cost of property sold 0 0
Depreciation (15) (20)
------- -------
Balance at end of the period $ 1,100 $ 1,080
------- -------
(1) Substantially all of Canal's real property is pledged as collateral for its
debt obligations.
24
12. PROPERTY HELD FOR DEVELOPMENT OR RESALE
Property held for development or resale consist of approximately 18 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, 2008 is as follows (000's omitted):
Current Year
(Retirements)
Historical Cost Additions
--------------- ------------ Carrying
Bldgs. & Bldgs. & Accum. Value
Description (1) Land Imprvmts. Land Imprvmts. Depr. 07/31/08
--------------- ---- --------- ---- --------- ----- --------
16 acres of land
in St. Joseph, MO $ 39 N/A $ 0 N/A N/A $ 39
Acquired in 1942
2 acres of land
in Sioux City, IA 53 N/A $ 0 N/A N/A 53
Acquired in 1937 ------- ------- ------- ------- ------- -------
$ 92 $ 0 $ 0 $ 0 $ 0 $ 92
======= ======= ======= ======= ======= =======
A schedule of the Company's reconciliation of property held for
development or resale carried for the nine months ended July 31, 2008 and the
year ended October 31, 2007 is as follows (000's omitted):
July 31, October 31,
2008 2007
---- ----
Balance at beginning of year $ 92 $ 149
Acquisitions and Improvements 0 0
Cost of property sold 0 (57)
Reclassification of property 0 0
-------- --------
Balance at end of the period $ 92 $ 92
-------- --------
(1) Substantially all of Canal's real property is pledged as collateral for
its debt obligations.
25
13. 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
$1,800. This lease expires May 31, 2010.
Canal's future minimum payments for the next five years required under
operating leases that have initial or remaining noncancellable terms in excess
of one year as of July 31, 2008 are $16,000, $24,000 and $18,000 in fiscal 2008,
2009 and 2010, respectively. There are no commitments extending past five years.
Net rent expense under these and other operating leases was $17,000 and $14,000
for the nine month periods ended July 31, 2008 and 2007, respectively.
14. IMPAIRMENT LOSS ON LONG-LIVED ASSETS
The Company reviews the values of its long-lived assets annually. There
was no impairment in the value of Canal's long-lived assets to be recorded as of
July 31, 2008 and October 31, 2007.
15. MINIMUM FUTURE RENTALS ON OPERATING LEASES
Minimum future rentals consist primarily of rental income from leased land
and structures, Exchange Building rents (commercial office space) and other
rental activities, all of which are accounted for as operating leases. The
estimated minimum future rentals on operating leases are $450,000, $475,000,
$500,000, $525,000 and $550,000 for fiscal years 2008, 2009, 2010, 2011 and
2012, respectively.
16. RELATED PARTY TRANSACTIONS
Interest Expense Related Party - At July 31, 2008, all of Canal's
Long-Term Debt is held by the company's Chief Executive Officer and members of
his family. These notes pay interest at a rate of 10% per annum and come due May
15, 2009. Canal has incurred interest expense on these notes of $146,000 and
$202,000 and for the nine month periods ended July 31, 2008 and 2007,
respectively. At various times during fiscal 2008 and 2007 certain holders of
these notes have agreed to defer interest payments due them to help Canal with
its cash flow. All deferred interest liability for fiscal 2008 and 2007 plus
accrued interest at a rate of 10% per annum, has been repaid as funds became
available. As of July 31, 2008, the balance due under these notes was $1,122,000
all of which is classified as long-term debt related party.
26
17. PENSION VALUATION RESERVE
The Pension Valuation Reserve represents the excess of additional minimum
pension liability required under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 132(R) 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.
132(R)) recognize the deficiency that exists.
The components of net periodic benefit cost are as follows:
Nine Months Ended
7/31/08 7/31/07
---------------------
Service cost 4,000 4,300
Interest cost 75,000 75,200
Expected return on plan assets (80,000) (80,300)
Amortization of prior service cost 0 0
Recognized net actuarial loss 202,000 201,800
-------- --------
Net periodic benefit cost 201,000 201,000
======== ========
For the nine months ended July 31, 2008 amounts have been estimated, actual
amounts will be based on the discount rate and assets available at year end.
The Company has made its fiscal 2008 required contribution of approximately
$95,000 into its pension plan.
27
18. 401(k) Plan
The Company has a defined contribution 401(k) plan covering substantially
all of its full time stockyard employees. The plan provides for employee
contributions and 401(k) matching contributions of up to 2 1/2% of the
employee's annual salary by the Company. The Company made 401(k) matching
contributions of approximately $15,000 for each of the nine month periods ended
July 31, 2008 and 2007.
19. 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 and operations of the Company. Canal was not a party to any ongoing
litigation at July 31, 2008.
The following situation did arise in fiscal 2005:
Environmental Protection Agency - Special Notice Letter for Investigation,
Portland, Oregon Property
In 1989, the Company sold its 48 acre Portland, Oregon stockyard to Oregon
Waste Systems, Inc. On September 29, 2003, the United States Environmental
Agency (EPA) placed a 4.2 acre portion of that property on the National
Priorities List pursuant to the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA), commonly known as the Superfund Act. In
a letter from the EPA dated June 27, 2005 the Company, along with approximately
13 other parties, including the current owner and operator of the site, was
notified that it might be liable to perform or pay for the remediation of
environmental contamination found on and around the site. Since the receipt of
the letter, the Company has been in periodic communications with the other
parties who received a similar letter with respect to what action, collectively
or individually, should be taken in response to the EPA assertion of liability.
The Company believes that the remediation of contamination of the site is
properly the responsibility of other parties that have occupied and used it for
waste recycling purposes since 1961, although under CERCLA the EPA is able to
assert joint and several liability against all parties who ever owned or
operated the site or generated or transported wastes to it. This investigation
is in its preliminary stages and the Company intends to vigorously defend any
liability for remediation. At July 31, 2008, the liability for remediation, if
any, is not estimatable and therefore no accrual has been recorded in the
financial statements.
28
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION FOR THE NINE MONTHS ENDED JULY 31, 2008
You should read the following discussion together with the more detailed
business information and consolidated financial statements and related notes
that appear elsewhere in this report and in the documents that we incorporate by
reference into this report. This report may contain certain "forward-looking"
information within the meaning of the Private Securities Litigation Reform Act
of 1995. This information involves risks and uncertainties. Our actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Risk factors".
Company Overview
The Registrant, Canal Capital Corporation ("Canal" or the "Company"),
incorporated in the state of Delaware in 1964, commenced business operations
through a predecessor in 1936.
Canal is engaged in two distinct businesses -- 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 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 - Canal's real estate properties are located in
Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska
and Sioux Falls, South Dakota. The properties consist, for the most part, of an
Exchange Building (commercial office space), land and structures leased to third
parties (meat packing facilities, rail car repair shops, lumber yards and
various other commercial and retail businesses) as well as vacant land available
for development or resale. Its principal real estate operating revenues are
derived from lease income from land and structures leased to various commercial
and retail enterprises, rental income from its Exchange Building, and proceeds
from the sale of real estate properties. In addition to selling what was excess
29
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
General - Through an August 1, 1999 asset repurchase agreement, Canal now
operates two central public stockyards located in St. Joseph, Missouri and Sioux
Falls, South Dakota.
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.
30
Virtually all of the volume at Canal's Sioux Falls stockyards is handled
through market agencies and independent commission sales people, while the St.
Joseph stockyards has solicitation operations of its own which account for
approximately 50% of its livestock volume annually.
Canal intends to continue its soliciting efforts at its St. Joseph
stockyards in fiscal 2008. 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 an operating loss of approximately $0.1
million while contributing approximately $2.2 million to Canal's revenues for
the first nine months of fiscal 2008.
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.
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 $1.2 million, while contributing $1.6 million to
Canal's revenues for the nine months ended July 31, 2008. In the first nine
months of fiscal 2008, Canal sold 2 properties consisting of approximately 8
acres of land with the associated improvements located in South Saint Paul,
Minnesota for $1,190,000, generating operating income of $913,000.
31
As of July 31, 2008, there are approximately 18 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 Building and undeveloped properties in fiscal 2008.
Risk - Real estate activities in general may involve various degrees of
risk, such as the ability to collect receivables, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States. These
generally accepted accounting principles require management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of net sales and expenses during the
reporting period. We continually evaluate our estimates, including those related
to revenue recognition, bad debts, income taxes, fixed assets, restructuring,
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the facts
and circumstances. Actual results may differ from these estimates under
different assumptions or conditions.
Management believes the following critical accounting policies impact our
most difficult, subjective and complex judgments used in the preparation of our
consolidated financial statements, often as a result of the need to make
estimates about the effect of matters that are inherently uncertain. For a
further discussion of these and other accounting policies, please see Note 2 of
the Notes to Consolidated Financial Statements included elsewhere in this
Quarterly Report.
32
Revenue Recognition -- Lease and rental revenues are recognized ratably
over the period covered. All real estate leases are accounted for as operating
leases. Revenues from real estate sales are recognized generally when title to
the property passes. Revenues from stockyard operations which consist primarily
of yardage fees (a standard per head charge for each animal sold through the
stockyards) and sale of feed and bedding are recognized at the time the service
is rendered or the feed and bedding are delivered.
Art Inventory Held for Sale -- The nature of art makes it difficult to
determine a replacement value. The most compelling evidence of a value in most
cases is an independent appraisal. Canal has had varying percentages of its art
inventory appraised by independent appraisers in previous years. For fiscal 2008
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.
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 18 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.
33
Results of Operations
The following tables set forth certain items in our statement of
operations for the periods indicated:
Nine Months Ended July 31,
--------------------------
2008 2007
---- ----
(In Thousands)
Revenues:
Stockyard Revenue $ 2,231 $ 2,374
Real Estate Revenue 1,574 468
--------- ---------
Total Revenue 3,805 2,842
--------- ---------
Costs and Expenses:
Stockyard Expenses 2,283 2,194
Real Estate Expenses 402 185
General and Administrative Expenses 820 819
--------- ---------
Total Costs and Expenses 3,505 3,198
--------- ---------
Income from Operations 300 (356)
Other Income 27 77
Other Expenses (150) (287)
--------- ---------
Net Loss $ 177 $ (566)
--------- ---------
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 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 $177,000 in the first nine
months of fiscal 2008 as compared to a net loss of $566,000 for the same period
in fiscal 2007. After recognition of preferred stock dividend payments (paid in
additional shares of preferred stock for each of fiscal 2008, and 2007) of
$81,000 and $84,000 in 2008 and 2007, respectively, the results attributable to
common stockholders were net income of $96,000 in 2008 and a net loss of
$650,000 in 2007.
34
Canal's revenues from continuing operations consist of revenues from its
stockyard and real estate operations. Revenues for the first nine months of
fiscal 2008 increased by $963,000 to $3,805,000 as compared with 2007 revenues
of $2,842,000. The fiscal 2008 increase in revenues is due primarily to a
$1,115,000 increase in sales of real estate off set to a certain extent by a
$143,000 decrease in stockyard revenues due to the loss of two commission firms
at our Sioux Falls, South Dakota location.
COMPARISON OF FISCAL PERIODS ENDED JULY 31, 2008 AND 2007
Stockyard Revenues
Stockyard revenues for the nine months ended July 31, 2008 of $2,231,000
accounted for 58.6% of the fiscal 2008 revenues as compared to stockyard
revenues of $2,374,000 or 83.5% for the same period in fiscal 2007. The 2008
decrease in stockyard revenues was due primarily to the severity of the weather
experienced in the mid-west this past winter. Stockyard revenues are comprised
of yard handling and auction (87.7% and 88.7%), feed and bedding income (6.8%
and 6.2%) and rental and other income (5.5% and 5.1%) for the nine month periods
ended July 31, 2008 and 2007, respectively. The 2008 decrease in the stockyard
revenues as a percent of total revenues, is due primarily to the $1,115,000
increase in sales of real estate in the first nine months of fiscal 2008.
Stockyard revenues for the three months ended July 31, 2008 of $506,000
accounted for 31.3% of the fiscal 2008 revenues as compared to stockyard
revenues of $576,000 or 80.1% for the same period in fiscal 2007. The 2008
decrease in stockyard revenues was due primarily to the severity of the weather
experienced in the mid-west this past winter. Stockyard revenues are comprised
of yard handling and auction (85.1% and 86.1%), feed and bedding income (7.9%
and 6.2%) and rental and other income (7.0% and 7.7%) for the three month
periods ended July 31, 2008 and 2007, respectively. The 2008 decrease in the
stockyard revenues as a percent of total revenues, is due primarily to the
$990,000 increase in sales of real estate in the third fiscal quarter of 2008.
Stockyard Expenses
Stockyard expenses for the nine months ended July 31, 2008 of $2,283,000
increased by $89,000 (4.1%) from stockyard expenses of $2,194,000 for the same
period in fiscal 2007. Stockyard expenses are comprised of labor and related
costs (47.0% and 48.0%), other operating and maintenance (28.0% and 26.6%), feed
and bedding expense (6.1% and 6.0%), depreciation and amortization (0.7% and
0.7%), taxes other than income taxes (5.6% and 6.0%) and general and
administrative expense (12.6% and 12.7%) for the nine month periods ended July
31, 2008 and 2007, respectively. There were no significant percentage variations
in the year to year comparisons.
35
Stockyard expenses for the three months ended July 31, 2008 of $506,000
decreased by $20,000 (3.8%) from stockyard expenses of $526,000 for the same
period in fiscal 2007. Stockyard expenses are comprised of labor and related
costs (49.9% and 49.3%), other operating and maintenance (28.6% and 28.3%), feed
and bedding expense (5.2% and 4.9%), depreciation and amortization (0.8% and
0.8%), taxes other than income taxes (6.1% and 6.6%) and general and
administrative expense (9.4% and 10.1%) for the three month periods ended July
31, 2008 and 2007, respectively. 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, 2008 of $1,574,000
accounted for 41.4% of the fiscal 2008 revenues as compared to real estate
revenues of $468,000 or 16.5% for the same period in fiscal 2007. The fiscal
2008 increase in real estate revenues is due primarily to the $1,115,000
increase in sales of real estate in the first nine months of fiscal 2008. Real
estate revenues are comprised of sale of real estate (75.6% and 16.0%), rentals
and other lease income from the rental of vacant land and certain structures
(22.8% and 79.0%) and rental income from commercial office space in its Exchange
Buildings (1.5% and 5.0%) for the nine months ended July 31, 2008 and 2007,
respectively. The percentage variations in the year to year comparisons are due
to the increase in sales of real estate in the first nine months of fiscal 2008.
Real estate revenues for the three months ended July 31, 2008 of
$1,110,000 accounted for 68.7% of the fiscal 2008 revenues as compared to real
estate revenues of $131,000 or 19.9% for the same period in fiscal 2007. Real
estate revenues are comprised of sale of real estate (89.2% and 0.0%), rentals
and other lease income from the rental of vacant land and certain structures
(10.1% and 94.1%) and rental income from commercial office space in its Exchange
Buildings (0.7% and 5.9%) for the three months ended July 31, 2008 and 2007,
respectively. The percentage variations in the year to year comparisons are due
to the increase in sales of real estate in the third quarter of fiscal 2008.
Real Estate Expenses
Real estate expenses for the nine months ended July 31, 2008 of $402,000
increased by $217,000 (117.6%) from real estate expenses of $185,000 for the
same period in fiscal 2007. The increase in real estate expenses is consistent
with the 2008 increase in real estate revenues. Real estate expenses are
comprised of the cost of real estate sold (69.0% and 30.7%), labor, operating
and maintenance (14.6% and 32.4%),
36
depreciation and amortization (4.1% and 9.0%), taxes other than income taxes
(4.0% and 10.7%) and general and administrative expenses (8.3% and 17.2%) for
the nine months ended July 31, 2008 and 2007, respectively. The percentage
variations in the year to year comparisons are consistent with the increase in
the cost of real estate sold in the first nine months of fiscal 2008.
Real estate expenses for the three months ended July 31, 2008 of $248,000
increased by $206,000 (493.2%) from real estate expenses of $42,000 for the same
period in fiscal 2007. The increase in real estate expenses is consistent with
the 2008 increase in real estate revenues. Real estate expenses are comprised of
the cost of real estate sold (82.7% and 0.0%), labor, operating and maintenance
(8.4% and 45.5%), depreciation and amortization (2.2% and 13.3%), taxes other
than income taxes (2.2% and 15.8%) and general and administrative expenses (4.5%
and 25.4%) for the three months ended July 31, 2008 and 2007, respectively. The
percentage variations in the year to year comparisons are consistent with the
increase in the cost of real estate sold in the third fiscal quarter of 2008.
General and Administrative
General and administrative expenses for the nine months ended July 31,
2008 of $820,000 increased by $1,000 (1.3%) as compared to $819,000 for the same
period in fiscal 2007. The major components of general and administrative
expenses are officers salaries (43.4% and 43.9%), pension expense (23.1% and
23.1%), insurance expense (6.6% and 4.6%), office salaries (8.6% and 8.6%),
travel expense (3.7% and 2.7%), rent (2.1% and 1.7%) and professional fees (2.6%
and 4.8%) for the nine month periods ended July 31, 2008 and 2007, respectively.
There are no significant percentage variations in the year to year comparisons.
General and administrative expenses for the three months ended July 31,
2008 of $268,000 decreased by $1,000 (0.4%) as compared to $269,000 for the same
period in fiscal 2007. The major components of general and administrative
expenses are officers salaries (44.1% and 45.5%), pension expense (23.5% and
23.4%), insurance expense (6.7% and 4.7%), office salaries (8.8% and 8.7%),
travel expense (3.9% and 3.9%), rent (2.1% and 1.9%) and professional fees (2.7%
and 4.9%) for the three month periods ended July 31, 2008 and 2007,
respectively. There are no significant percentage variations in the year to year
comparisons.
37
Interest and Other Income
Interest and other income for the nine months ended July 31, 2008 of
$27,000 decreased by $27,000 (50.4%) from $54,000 for the same period in fiscal
2007. Interest and other income is comprised primarily of interest income on the
$1,600,000 note receivable associated with the fiscal 2005 sale of the company's
South St. Paul, Minnesota Exchange Building. As more fully described in note 4
the terms of this mortgage note were amended, including an increase of the rate
of interest to 12% per annum. The 2008 decrease in interest and other income is
due primarily to the principal reduction of this mortgage note receivable, which
was repaid in full in March, 2008.
Interest Expense
Interest expense for the nine months ended July 31, 2008 of $146,000
decreased by $56,000 (27.6%) from $202,000 for the same period in fiscal 2007.
The 2008 decrease is due primarily to Canal's $1,565,000 partial repayment of
this debt in fiscal 2008. The principal balances outstanding at July 31, 2008
and October 31, 2007 was $1,122,000 and $2,687,000, respectively. The interest
rate (10%) on Canal's variable rate mortgage notes has remained unchanged for
the past 12 months.
(Expense) Income from Art Sales
Other expense from art sales for the nine months ended July 31, 2008 was
$4,000, while the same period in fiscal 2007 generated income from art sales of
$23,000. Canal had no art sales in the first nine months of fiscal 2008 as
compared to the sale of one piece of contemporary art in the same period of
fiscal 2007. Art revenues, if any, are comprised of the proceeds from the sale
of antiquities and contemporary art. Art expenses are comprised of the cost of
inventory sold and selling, general and administrative expenses. Canal incurred
selling, general and administrative expenses of $4,000 and $12,000 for the nine
month periods ended July 31, 2008 and 2007, 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 and is obligated to continue making substantial annual
38
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.
The Company's variable rate mortgage notes (originally issued in 1998 and
amended several times since then) are due May 15, 2009 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 this is defined by
the Investment Company Act of 1940;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. The Company is in the
process of negotiating a three year extension of these notes and anticipates
this will be achieved prior to year end. Accordingly, as of July 31, 2008, the
balance due under these notes was $1,122,000, all of which is classified as
long-term debt-related party.
Cash and cash equivalents of $16,000 at July 31, 2008 decreased $12,000 or
41.2% from $28,000 at October 31, 2007. Net cash provided by operations in
fiscal 2008 was $603,000. Substantially all of the 2008 net proceeds from the
mortgage note receivable and the sales of real estate of $2,790,000 was used in
operations or to reduce debt. During fiscal 2008 Canal decreased the balance of
its liabilities by a total of $1,977,000.
At July 31, 2008 the Company's current assets exceed current liabilities
slightly which was a decrease of $1.1 million as compared to October 31, 2007
when the Company's current assets exceeded current liabilities by $1.1 million.
The only required principal repayments under Canal's debt agreements for fiscal
2008 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.
39
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.
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, 2008, 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, 2008, 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
---------- ---------- ------------- -----
2007 $ 0 N/A
2008 0 N/A
2009 1,122 10%
2010 0 N/A
2011 0 N/A
Thereafter 0 N/A
-------
Total $ 1,122 N/A (A)
------- -------
(A) Long-term debt related party: it is not practicable to estimate the fair
value of the related party debt.
40
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 July 31, 2008 ("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.
41
PART II
OTHER INFORMATION
42
Item 1: Legal Proceedings:
Also see Item 3 of Canal's October 31, 2007 Form 10-K.
Canal and its subsidiaries are from time to time involved in litigation
incidental to their normal business activities, none of which, in the opinion of
management, will have a material adverse effect on the consolidated financial
condition and operations of the Company. Canal was not a party to any ongoing
litigation at July 31, 2008.
The following situation did arise in fiscal 2005:
Environmental Protection Agency - Special Notice Letter for Investigation,
Portland, Oregon Property
In 1989, the Company sold its 48 acre Portland, Oregon stockyard to Oregon
Waste Systems, Inc. On September 29, 2003, the United States Environmental
Agency (EPA) placed a 4.2 acre portion of that property on the National
Priorities List pursuant to the Comprehensive Environmental Response
Compensation and Liability Act (CERCLA), commonly known as the Superfund Act. In
a letter from the EPA dated June 27, 2005 the Company, along with approximately
13 other parties, including the current owner and operator of the site, was
notified that it might be liable to perform or pay for the remediation of
environmental contamination found on and around the site. Since the receipt of
the letter, the Company has been in periodic communications with the other
parties who received a similar letter with respect to what action, collectively
or individually, should be taken in response to the EPA assertion of liability.
The Company believes that the remediation of contamination of the site is
properly the responsibility of other parties that have occupied and used it for
waste recycling purposes since 1961, although under CERCLA the EPA is able to
assert joint and several liability against all parties who ever owned or
operated the site or generated or transported wastes to it. This investigation
is in its preliminary stages and the Company intends to vigorously defend any
liability for remediation. At July 31, 2008, the liability for remediation, if
any, is not estimatable and therefore no accrual has been recorded in the
financial statements.
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.
(B) None
43
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 12th day of
September, 2008.
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 12, 2008
Michael E. Schultz
Vice President-Finance
/S/ Reginald Schauder Secretary and Treasurer
--------------------- (Principal Financial and
Reginald Schauder Accounting Officer) September 12, 2008
/S/ Asher B. Edelman Chairman of the Board
---------------------- and Director September 12, 2008
Asher B. Edelman
44