Item 1. Business
Company Overview
The Registrant, Canal Capital Corporation ("Canal" or the "Company"), incorporated in the state of Delaware in 1964, commenced business operations through a predecessor in 1936.
Canal is engaged in two distinct businesses -- real estate and stockyard operations.
Real Estate Operations - Canal's real estate properties are located in Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska and Sioux Falls, South Dakota. The properties consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. Its principal real estate operating revenues are derived from lease income from land and structures leased to various commercial and retail enterprises, rental income from its Exchange Buildings, and proceeds from the sale of real estate properties. In addition to selling what was excess stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate. See "Real Estate Operations".
Stockyard Operations - As a result of an August 1, 1999 asset purchase agreement, Canal now operates two central public stockyards located in St. Joseph, Missouri and Sioux Falls, South Dakota (collectively the "Stockyards"). Public stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading, and price discovery. The Company's principal stockyard revenues are derived from a per head charge ("yardage charge") imposed on all livestock consigned for sale at the stockyards and the sale of feed and bedding. See "Stockyard Operations".
Real Estate Operations
General - Canal is involved in the management, development or sale of its real estate properties located in five Midwest states. Real estate operations, resulted in operating income of $0.4 million, while contributing $1.2 million to Canal's revenues for fiscal 2004. During fiscal 2004, Canal sold approximately 14 acres of land located in two states (Iowa-4 acres and Missouri-10 acres) for $0.3 million generating operating income of $0.1 million.
As of October 31, 2004, there are approximately 59 acres of undeveloped land owned by Canal located in five Midwest states (see ITEM 2) . Canal is continuing the program, which it started several years ago, to develop or sell this property. Additionally, Canal will continue to aggressively pursue additional tenants for its Exchange Buildings and undeveloped properties in fiscal 2005.
Risk - Real estate activities in general may involve various degrees of risk, such as competition for tenants, general market conditions and interest rates. Furthermore, there can be no assurance that Canal will be successful in the development, lease or sale of its real estate properties.
Competition - Canal competes in the area of real estate development with other regional developers, some of which are substantially larger and have significantly greater financial resources than Canal. To a certain extent, Canal's real estate revenues are dependent on the ability of the stockyard operations and the various meat packers located adjacent to Canal's properties to successfully compete in their respective businesses.
Stockyard Operations
General - Through an asset repurchase agreement, Canal commenced stockyard operations August 1, 1999 in Sioux City Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota.
In March 2002, Canal permanently closed its stockyard operations in Sioux City, Iowa. The Sioux City stockyard operations generated operating losses of $0, $0, and $75,000 for the three years ended October 31, 2004,
2003 and 2002, respectively. The stockyard facility was dismantled with the equipment, fixtures and materials going either to Canal's remaining two stockyards or sold at a public sale held at the Sioux City location in April 2002. Canal has been engaged in extended negotiations to sell this property to a real estate developer whose intention is to convert the property into a retail shopping center. Canal will continue to pursue the sale of this property to this developer as well as exploring any other opportunities to develop or sell this property in fiscal 2005.
Public stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading, and price discovery. The livestock handled by the Company's stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers.
Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending upon the type of animal, the extent of services provided by the stockyard, and local competition. Yardage revenues are not directly dependent upon market prices, but rather are a function of the volume of livestock handled. In general, stockyard livestock volume is dependent upon conditions affecting livestock production and upon the market agencies and independent commission sales people which operate at the stockyards. Stockyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market.
Virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies and independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which account for approximately 50% of its livestock volume annually.
Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2005. Further, Canal tries to balance its dependence on market agencies and independent commission sales people in various ways, including: developing solicitation operations of its own; direct public relations; advertising and personal solicitation of producers on behalf of the stockyards; providing additional services at the stockyards to attract sellers and buyers; and providing incentives to market agencies and independent commission sales people for increased business.
Stockyard operations resulted in operating income of approximately $0.3 million while contributing approximately $3.0 million to Canal's revenues for fiscal 2004.
Risk - Stockyard activities face a variety of risks and uncertainties related to the safeguarding of the national food supply which are beyond our control. Public confidence in the government's efforts to safeguard the food supply is essential for the success of our stockyard operations. An outbreak of a disease such as bovine spongiform encephalopathy (BSE) better known as Mad Cow Disease could have a devastating impact on stockyard operations. For the company's part we strictly follow all USDA regulations to ensure to the extent we can the safety of the food supply. Furthermore, stockyard activities in general may involve various degrees of risk, such as competition from other regional stockyards and sale barns, general market conditions and to a lesser extent interest rates.
Competition - Canal competes in the area of public stockyards with other regional public stockyards and sale barns, some of which are substantially larger and have greater financial resources than Canal. To a certain extent, Canal's stockyard revenues are dependent on the ability of the market agencies and independent commission sales people at each of Canal's stockyard locations to compete within the region.
Art Inventory Held for Sale
Canal is in the process of selling, in an orderly manner, its remaining art inventory. This will be accomplished primarily through direct sales, consignment arrangements with various independent art dealers and through sale at public art auctions.
Canal established its art operations in the late 1980's by acquiring for resale a significant inventory of antiquities primarily from the ancient Mediterranean cultures coupled with the purchase of approximately fifty paintings by Jules Olitski, a world renowned artist of contemporary paintings.
Canal sells its art primarily through three sources, direct sales, consignment to independent art dealers and at public art auctions. In the case of consignment sales through independent art dealers, Canal consigns its pieces at specific prices. In the case of public art auctions, the Company primarily consigns its art pieces to the two largest auction houses for their spring and fall art auctions and Canal sets a minimum acceptable price on the pieces consigned.
In fiscal 2004, Canal sold 34 pieces of contemporary art totaling $463,000 which sales generated a net gain of approximately $166,000. Antiquities and contemporary art represented 46% ($189,122) and 54% ($224,078) and 27% ($189,122) and 73% ($520,549) of total art inventory at October 31, 2004 and 2003, respectively.
Risk & Competition - Selling art in general involves various degrees of risk. Canal's success in selling its art inventory is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. Canal competes in the sale of its art inventory with investment groups and other dealers, most of whom are substantially larger and have greater financial resources and staff than Canal.
Employees - At October 31, 2004, Canal had approximately 75 employees.
Executive Officers - At October 31, 2004 Canal's Executive Officers were:
Held Name Age Since Title ---- --- ----- -----
Asher B. Edelman 65 1991 Chairman of the Board
Michael E. Schultz 68 1991 President and Chief Executive Officer
Reginald Schauder 55 1989 Vice President, Chief Financial Officer, Treasurer and Secretary
Risk Factors - In addition to other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered when evaluating our Company and our business. Investing in our common stock involves a high degree of risk, and you should be able to bear the complete loss of your investment. The risk and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risk and uncertainties actually occur, our future operating results and financial condition could be harmed and the market price of our common stock could decline.
Risk Related to Our Business - The Company's risk and uncertainties related to our financial condition and our business include a variety of factors that are beyond our control. Such factors include, without limitation: overall economic conditions; public confidence in the government's ability to safeguard the food supply from infectious diseases; competition for tenants in the agribusiness; the ability of the Company's tenants to compete in their respective businesses; the effect of fluctuations in supply, demand, international monetary conditions and inflation on the Company's art inventories; securities risks associated with collections of antiquities and art; and the effect of fluctuations in interest rates and inflation on the Company's indebtedness.
ITEM 2.
ITEM 2. Properties
Canal's real estate properties located in five Midwest states are primarily associated with its current and former stockyards operations. Each property consists, for the most part, of land and structures leased to third parties (meat packing facilities, rail car repair shops, lumber yards and various other commercial and retail businesses) an Exchange Building (commercial office space), as well as vacant land available for development or resale. In addition to selling what was excess stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate. As landlord, Canal's management responsibilities include leasing, billing, repairs and maintenance and overseeing the day to day operations of its properties. Canal's properties at October 31, 2004 include:
New York Headquarters - In June 2004, Canal entered into a three year lease for approximately 1,000 square feet of office space in Hauppauge, New York.
Leased Held for Year Total Exchange Stkyds to Third Develop- Location Acquired Site(2) Bldgs. Opertns(1) Parties ment (3) -------- -------- ------- -------- ----------- -------- -------- St. Joseph, MO 1942 49 0 30 0 19 S. St. Paul, MN 1937 25 5 0 10 10 Sioux City, IA 1937 48 0 0 18 30 Omaha, NE 1976 11 0 0 11 0 Sioux Falls, SD 1937 31 1 30 0 0 --- -- --- --- --- Total 164 6 60 39 59 --- -- --- --- ---
The following schedule shows the average occupancy rate and average rental rate at each of Canal's Exchange Buildings:
2004 2003 ---------------------- ----------------------- Occupancy Average(4) Occupancy Average(4) Location Rate Rental Rate Rate Rental Rate - -------- --------- ----------- --------- ---------- S. St. Paul, MN(5) 74% $12.00 74% $12.00
Sioux Falls, SD 90% $ 7.00 90% $ 7.00
NOTES
(1) Canal now operates two central public stockyards.
(2) For information with respect to mortgages and pledges see Note 7.
(3) For information related to property held for development see Note 2(c).
(4) Per square foot.
(5) Canal sold this Exchange Building in November 2004 (see Note 31).
ITEM 3.
ITEM 3. Legal Proceedings
Canal and its subsidiaries are from time to time involved in litigation incidental to their normal business activities, none of which, in the opinion of management, will have a material adverse effect on the consolidated financial condition and operations of the Company.
Canal was not a party to any ongoing litigation at October 31, 2004. The following litigation was settled during fiscal 2004:
WHGA Fifth Avenue Investors, LP v. Canal Capital Corporation etal
On March 4, 2004, WHGA Fifth Avenue Investors, LP (the "Landlord") commenced an action against Canal Capital Corporation and its two co-tenants (the "Tenants") of its New York City commercial office space. The Landlord is seeking the eviction of the Tenants as well as judgement for unpaid back and holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation agreement with the landlord requiring the tenants to pay two months rent (approximately $85,000), forfeit the entire security deposit and vacate the leased premises as of May 31, 2004 in exchange for a release from all future obligations under the lease. All requirements of the stipulation agreement have been met.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to our stockholders during the fourth quarter of the fiscal year ended October 31, 2004.
PART II
ITEM 5.
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters
Market Information
Canal's stock is traded over-the-counter through the "pink sheets". The high and low price ranges of Canal's common stock for the eight quarters ended October 31, 2004 as reported on the "pink sheets" were:
Fiscal 2004 Fiscal 2003 ------------------- ------------------ Quarter Ended High Low High Low - ------------- ------ ------ ------ ------
January 31 ................. $ 0.10 -- $ 0.05 $ 0.20 -- $ 0.11
April 30 ................... $ 0.10 -- $ 0.05 $ 0.16 -- $ 0.14
July 31 .................... $ 0.10 -- $ 0.05 $ 0.20 -- $ 0.16
October 31 ................. $ 0.10 -- $ 0.05 $ 0.20 -- $ 0.16
Dividend Policy and Holders
There were no cash dividends paid during fiscal 2004 or 2003. Canal is subject to restrictions on the payment of cash dividends under certain debt agreements. As of January 15, 2005, Canal had approximately 1,500 holders of record of its common stock, par value $.01 per share.
ITEM 6.
ITEM 6. Selected Financial Data (continued..)
NOTES:
(1) The revenue decrease was due primarily to a $0.4 million decrease in stockyard revenues coupled with a $0.2 million decrease in sales of real estate.
(2) The revenue decrease was due primarily to a $0.4 million decrease in sales of real estate coupled with $0.1 million decreases in both stockyard and real estate operating revenues.
(3) The revenue increase was due primarily to a $0.4 million increase in sales of real estate which was offset to a certain extent by a $0.2 million decrease in stockyard revenues.
(4) The revenue decrease was due primarily to a $0.3 million decrease in sales of real estate.
(5) The revenue decrease was due primarily to a $4.1 million decrease in sales of real estate coupled with the elimination of $0.6 million ground lease income, which decreases were offset to a certain extent by a $3.1 million increase in revenues from stockyard operations (represents a full year operation in fiscal 2000 as compared to three months in fiscal 1999).
(6) For discussion of material uncertainties and commitments, see Notes 9 and 17 to the Consolidated Financial Statement.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the more detailed business information and consolidated financial statements and related notes that appear elsewhere in this report and in the documents that we incorporate by reference into this report. This report may contain certain "forward- looking" information within the meaning of the Private Securities Litigation Reform Act of 1995. This information involves risks and uncertainties. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk factors".
Company Overview
The Registrant, Canal Capital Corporation ("Canal" or the "Company"), incorporated in the state of Delaware in 1964, commenced business operations through a predecessor in 1936.
Canal is engaged in two distinct businesses -- real estate and stockyard operations.
Real Estate Operations - Canal's real estate properties are located in Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska and Sioux Falls, South Dakota. The properties consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. Its principal real estate operating revenues are derived from lease income from land and structures leased to various commercial and retail enterprises, rental income from its Exchange Buildings, and proceeds from the sale of real estate properties. In addition to selling what was excess stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate. See "Real Estate Operations".
Stockyard Operations - As a result of an August 1, 1999 asset purchase agreement, Canal now operates two central public stockyards located in St. Joseph, Missouri and Sioux Falls, South Dakota (collectively the "Stockyards"). Public stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading, and price discovery. The Company's principal stockyard revenues are derived from a per head charge ("yardage charge") imposed on all livestock consigned for sale at the stockyards and the sale of feed and bedding. See "Stockyard Operations".
Real Estate Operations
General - Canal is involved in the management, development or sale of its real estate properties located in five Midwest states. Real estate operations, resulted in operating income of $0.4 million, while contributing $1.2 million to Canal's revenues for fiscal 2004. During fiscal 2004, Canal sold approximately 14 acres of land located in two states (Iowa-4 acres and Missouri-10 acres) for $0.3 million generating operating income of $0.1 million.
As of October 31, 2004, there are approximately 59 acres of undeveloped land owned by Canal located in five Midwest states (see ITEM 2) . Canal is continuing the program, which it started several years ago, to develop or sell this property. Additionally, Canal will continue to aggressively pursue additional tenants for its Exchange Buildings and undeveloped properties in fiscal 2005.
Risk - Real estate activities in general may involve various degrees of risk, such as competition for tenants, general market conditions and interest rates. Furthermore, there can be no assurance that Canal will be successful in the development, lease or sale of its real estate properties.
Competition - Canal competes in the area of real estate development with other regional developers, some of which are substantially larger and have significantly greater financial resources than Canal. To a certain extent, Canal's real estate revenues are dependent on the ability of the stockyard operations and the various meat packers located adjacent to Canal's properties to successfully compete in their respective businesses.
Stockyard Operations
General - Through an asset repurchase agreement, Canal commenced stockyard operations August 1, 1999 in Sioux City Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota.
In March 2002, Canal permanently closed its stockyard operations in Sioux City, Iowa. The Sioux City stockyard operations generated operating losses of $0, $0, and $75,000 for the three years ended October 31, 2004, 2003 and 2002, respectively. The stockyard facility was dismantled with the equipment, fixtures and materials going either to Canal's remaining two stockyards or sold at a public sale held at the Sioux City location in April 2002. Canal has been engaged in extended negotiations to sell this property to a real estate developer whose intention is to convert the property into a retail shopping center. Canal will continue to pursue the sale of this property to this developer as well as exploring any other opportunities to develop or sell this property in fiscal 2005.
Public stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading, and price discovery. The livestock handled by the
Company's stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers.
Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending upon the type of animal, the extent of services provided by the stockyard, and local competition. Yardage revenues are not directly dependent upon market prices, but rather are a function of the volume of livestock handled. In general, stockyard livestock volume is dependent upon conditions affecting livestock production and upon the market agencies and independent commission sales people which operate at the stockyards. Stockyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market.
Virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies and independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which account for approximately 50% of its livestock volume annually.
Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2005. Further, Canal tries to balance its dependence on market agencies and independent commission sales people in various ways, including: developing solicitation operations of its own; direct public relations; advertising and personal solicitation of producers on behalf of the stockyards; providing additional services at the stockyards to attract sellers and buyers; and providing incentives to market agencies and independent commission sales people for increased business.
Stockyard operations resulted in operating income of approximately $0.3 million while contributing approximately $3.0 million to Canal's revenues for fiscal 2004.
Risk - Stockyard activities face a variety of risks and uncertainties related to the safeguarding of the national food supply which are beyond our control. Public confidence in the government's efforts to safeguard the food supply is essential for the success of our stockyard operations. An outbreak of a disease such as bovine spongiform encephalopathy (BSE) better known as Mad Cow Disease could have a devastating impact on stockyard operations. For the company's part we strictly follow all USDA regulations to ensure to the
extent we can the safety of the food supply. Furthermore, stockyard activities in general may involve various degrees of risk, such as competition from other regional stockyards and sale barns, general market conditions and to a lesser extent interest rates.
Competition - Canal competes in the area of public stockyards with other regional public stockyards and sale barns, some of which are substantially larger and have greater financial resources than Canal. To a certain extent, Canal's stockyard revenues are dependent on the ability of the market agencies and independent commission sales people at each of Canal's stockyard locations to compete within the region.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. We continually evaluate our estimates, including those related to revenue recognition, bad debts, income taxes, fixed assets, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies impact our most difficult, subjective and complex judgments used in the preparation of our consolidated financial statements, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. For a further discussion of these and other accounting policies, please see Note 2 of the Notes to Consolidated Financial Statements included elsewhere in this Annual Report.
Revenue Recognition -- Lease and rental revenues are recognized ratably over the period covered. All real estate leases are accounted for as operating leases. Revenues from real estate sales are recognized generally when title to the property passes. Revenues from stockyard operations which consist primarily of yardage fees (a standard per head charge for each animal sold through the stockyards) and sale of feed and bedding are recognized at the time the service is rendered or the feed and bedding are delivered.
Art Inventory Held for Sale -- The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. Canal has had varying percentages of its art inventory appraised by independent appraisers in previous years. For fiscal 2004 the net realizable value of Canals remaining art inventory has been estimated by management based in part on the Company's history of art sales in the current and previous years and in part on the results of the independent appraisals done in previous years.
Properties and Related Depreciation -- Properties are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the properties. Such lives are estimated from 35 to 40 years for buildings and from 5 to 20 years for improvements and equipment.
Property held for Development or Resale -- Property held for development or resale consist of approximately 59 acres located in the Midwest of undeveloped land not currently utilized for corporate purposes nor included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value.
Long-Lived Assets -- The Company reviews the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the assets to the estimated future cash flows expected to result from the use of the asset. The measurement of the loss, if any, will be calculated as the amount by which the carrying amount of the asset exceeds the fair value of the asset. (See Note 19).
Results of Operations
The following tables set forth certain items in our statement of operations for the periods indicated:
Fiscal Year Ended October 31, ----------------------------- 2004 2003 2002 ---- ---- ---- (In Thousands) Revenues:
Real Estate Revenue $ 1,228 $ 1,373 $ 1,852 Stockyard Revenue 2,971 3,387 3,561 ------- ------- ------- Total Revenue 4,199 4,760 5,413 ------- ------- -------
Costs and Expenses:
Real Estate Expenses 814 1,131 1,109 Stockyard Expenses 2,634 2,802 3,023 General and Administrative Expenses 1,062 1,079 1,135 ------- ------- ------- Total Costs and Expenses 4,510 5,012 5,267 ------- ------- -------
(Loss) Income from Operations (311) (252) 146
Other Income 158 25 674 Other Expenses (424) (310) (394) ------- ------- ------- Net (Loss) Income $ (577) $ (537) $ 426 ======= ======= =======
While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in eight of the last ten years and is obligated to continue making substantial annual contributions to its defined benefit pension plan. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Note 1). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Canal recognized a net loss of $0.6 million for 2004 as compared to the 2003 net loss of $0.5 million and the 2002 net income of $0.4 million. After recognition of preferred stock dividend payments (paid in additional shares of preferred stock for each of fiscal 2004, 2003 and 2002) of $49,000 in 2004, $158,000 in 2003 and $116,000 in 2002, the results attributable to common stockholders were a net loss of $0.6 million in 2004, a net loss of $0.6 million in 2003 and net income of $0.3 million in 2002. Canal's 2004 net loss of $0.6 was due primarily to a $0.3 million decrease in income from stockyard operations (due for the most part to the uncertainty of the national beef market after the discovery in late December 2003 of the first U.S. case of bovine spongiform encephalopathy (BSE) better known as "Mad Cow Disease") coupled with a $0.1 million increase in other expenses (primarily comprised of one time writeoffs taken in connection with the early lease termination of Canal's New York office space). Canal's 2003 net loss of $0.7 is due primarily to a $0.5 million decrease in income from real estate operations (consisting of a $0.3 million decrease in gains on sales of real estate; a $0.1 decrease in rental income and a $0.1 million increase in real estate operating expenses); a $0.3 million decrease in other income and a $0.2 million decrease in income from art sales.
Canal's revenues from continuing operations consist of revenues from its real estate and stockyard operations. Revenues in 2004 decreased by $0.6 million to $4.2 million as compared with 2003 revenues which had decreased by $0.6 million to $4.8 million as compared with 2002 revenues of $5.4 million. The fiscal 2004 decrease in revenues is due primarily to a $0.4 million decrease in stockyard revenues due to the uncertainty of the national beef market in 2004 due to the discovery in late December 2003 of the first U.S. case of Mad Cow Disease, coupled with a $0.2 million in sales of real estate. The fiscal 2003 decrease in revenues is due primarily to a $0.4 million decrease in sales of real estate coupled with $0.1 million decreases in both stockyard and real estate operating revenues.
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 2004 AND 2003
Real Estate Revenues
Real estate revenues for 2004 of $1.2 million accounted for 29.2% of the 2004 revenues as compared to revenues of $1.4 million or 28.8% for 2003. Real estate revenues are comprised of sale of real estate (22.4% and 31.2%),
rentals and other lease income from the rental of vacant land and certain structures (43.8% and 37.0%), rental income from commercial office space in its Exchange Buildings (33.8% and 31.8%), and other income (0.0% and 0.0%) for 2004 and 2003, respectively. The 2004 decrease is due primarily to the $0.2 million decrease in sales of real estate. The percentage variations in the year to year comparisons are due primarily to the decrease in real estate sales for fiscal 2004.
Real Estate Expenses
Real estate expenses for 2004 of $0.8 million decreased by $0.3 million (28.0%) from $1.1 million in 2003. Real estate expenses are comprised of cost of real estate sold (21.1% and 24.6%), labor, operating and maintenance (38.7% and 36.0%), depreciation and amortization (16.4% and 12.8%), taxes other than income taxes (18.4% and 22.0%),, and general and administrative and other expenses (5.4% and 4.6%) for 2004 and 2003, respectively. The percentage variations in year to year comparisons is due primarily to the decrease in the cost of real estate sold in fiscal 2004 coupled with the decrease in taxes other than income taxes which is a result of a fiscal 2003 catchup accrual for back real estate taxes relating to the Sioux City, Iowa property.
Stockyard Revenues
Stockyard revenues for 2004 of $3.0 million accounted for 70.8% of the 2004 revenues as compared to revenues of $3.4 million or 71.2% for 2003. Stockyard revenues are comprised of yard handling and auction (90.7% and 89.5%), feed and bedding income (5.0% and 5.5%), rental income (0.1% and 0.1%) and other income (4.2% and 4.9%) for 2004 and 2003, respectively. The 2004 decrease is due primarily to the uncertainty of the 2004 national beef market due to the discovery in late December 2003 of the first U.S. case of Mad Cow Disease. There were no significant percentage variations in the year to year comparisons.
Stockyard Expenses
Stockyard expenses for 2004 of $2.6 million decreased by $0.2 million (6.0%) from $2.8 million in 2003. Stockyard expenses are comprised of labor and related costs (48.9% and 47.4%), operating and maintenance (27.9% and 27.0%), feed and bedding expense (4.5% and 5.7%), depreciation and amortization (0.9% and 0.7%), taxes other than income taxes (6.2% and 6.2%) and general and administrative expenses (11.6% and 13.0%) for 2004 and 2003, respectively. The 2004 decrease is due primarily to across the board decreases consistent with the revenue reductions in fiscal 2004. There were no significant percentage variations in the year to year comparisons.
General and Administrative
General and administrative expenses for 2004 of $1.1 million decreased slightly from $1.1 million in 2003. The major components of general and administrative expenses are officers salaries (44.2% and 43.9%),pension expense (22.4% and 19.5%), insurance expense (9.9% and 10.2%), office salaries (6.4% and 8.2%), travel expense (2.9% and 3.0%), rent expense (1.9% and 1.6%) and legal fees (1.6% and 0.8%) for 2004 and 2003, respectively. The percentage increase in rent reflects Canal's entering into a three year lease for new office space in Hauppauge, New York commencing in the second quarter of fiscal 2004. The percentage decrease in office salaries reflects the reduction of one employee in the New York office staff. The other percentage variations are consistent with the overall reduction in general and administrative expenses for fiscal 2004.
Interest Expense
Interest expense for 2004 of $0.3 million increased slightly (1.4%) from $0.3 million in 2003. The 2004 increase is due primarily to accrued interest on certain payments which are overdue to Canal's pension plan. Interest rates on Canal's variable rate mortgage notes averaged 10.00% in 2004 and 2003. At October 31, 2004 the outstanding balance of these notes was $2,767,000.
Interest and Other Income
Interest and other income of $13,000 for 2004 decreased $12,000 from $25,000 in fiscal 2003. Interest and other income is primarily comprised of dividend and interest income.
Income from Art Sales
In fiscal 2004, Canal recognized income from art sales of $139,000 as compared to a loss of $8,000 for fiscal 2003. The 2004 increase reflects the overall increase in sales of art during 2004 as compared to 2003. Art revenues are comprised of the proceeds from the sale of antiquities and contemporary art. In fiscal 2004, Canal sold thirty four pieces of contemporary art generating gross proceeds of $463,000 as compared to fiscal 2003 sales of three pieces of contemporary art generating gross proceeds of $173,000. Art expenses are comprised of the cost of inventory sold and selling, general and administrative expenses. In fiscal 2004, Canal incurred cost of inventory sold of $296,000 (net of a valuation allowance of $836,000) as well as selling, general and administrative expenses of $28,000 as compared to fiscal 2003 cost of inventory sold of $121,000 (net of a valuation allowance of $341,000) and selling, general and administrative expenses of $63,000 (which amount included the write off of 11 pieces of antiquity art with a book value of approximately $42,000 net of a valuation allowance of $68,000). It is the Company's policy to use the adjusted carrying value for sales, thereby reducing the valuation reserve proportionately as the inventory is sold.
Realized Income (Loss) on Investments
In fiscal 2003, Canal determined that the decline in the market value of its investments available for sale were permanent. Accordingly, as of October 31, 2003, Canal has written off this investment entirely. This resulted in Canal's recognizing realized losses of approximately $7,000 and $14,000 in fiscal 2003 and 2002, respectively. Canal did, however, sell all of its remaining investments during fiscal 2004 for approximately $5,000, which amount was recognized as income for the year ended October 31, 2004.
Other Expense
Other expense of $140,000 for 2004 increased $125,000 from $15,000 in fiscal 2003. The 2004 other expenses are comprised primarily of one time writeoffs taken in connection with the early lease termination on Canal's New York City office space ($87,000) coupled with a total reserve taken against the receivable owed to Canal by an affiliated entity for certain executive secretarial services rendered ($40,000). Other expenses are primarily related to the administration of the company's pension plans.
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 2003 AND 2002
Real Estate Revenues
Real estate revenues for 2003 of $1.4 million accounted for 28.8% of the 2003 revenues as compared to revenues of $1.9 million or 34.2% for 2002. Real estate revenues are comprised of sale of real estate (31.2% and 44.2%), rental income from commercial office space in its Exchange Buildings (31.8% and 26.3%), rentals and other lease income from the rental of vacant land and certain structures (37.0% and 29.5%) and other income (0.0% and 0.0%) for 2003 and 2002, respectively. The 2003 decrease is due primarily to the $0.4 million decrease in sales of real estate. The percentage variations in the year to year comparisons are due primarily to the decrease in real estate sales for fiscal 2003.
Real Estate Expenses
Real estate expenses for 2003 of $1.1 million were essentially unchanged from $1.1 million in 2002. Real estate expenses are comprised of labor, operating and maintenance (36.0% and 40.4%), depreciation and amortization (12.8% and 12.0%), taxes other than income taxes (22.0% and 10.7%), cost of real estate sold (24.6% and 32.8%),and general and administrative and other expenses (4.6% and 4.1%) for 2003 and 2002, respectively. The percentage variations in year to year comparisons is due primarily to the decrease in the cost of real estate sold in fiscal 2003 coupled with the increase in taxes other than income taxes which reflects a catchup accrual for back real estate taxes relating to the Sioux City, Iowa property.
Stockyard Revenues
Stockyard revenues for 2003 of $3.4 million accounted for 71.2% of the 2003 revenues as compared to revenues of $3.6 million or 65.8% for 2002. Stockyard revenues are comprised of yard handling and auction (89.5% and 89.4%), feed and bedding income (5.5% and 5.6%), rental income (0.1% and 0.1%) and other income (4.9% and 4.9%) for 2003 and 2002, respectively. The 2003 decrease is due primarily to softer than anticipated results from the Sioux Falls Stockyards in fiscal 2003. There were no significant percentage variations in the year to year comparisons.
Stockyard Expenses
Stockyard expenses for 2003 of $2.8 million decreased by $0.2 million (7.3%) from $3.0 million in 2002. Stockyard expenses are comprised of labor and related costs (47.4% and 47.6%), operating and maintenance (27.0% and 27.5%), feed and bedding expense (5.7% and 5.3%), depreciation and amortization (0.7% and 0.8%), taxes other than income taxes (6.2% and 7.2%) and general and administrative expenses (13.0% and 11.6%) for 2003 and 2002, respectively. The 2003 decrease is due primarily to across the board decreases consistent with the revenue reductions in fiscal 2003. There were no significant percentage variations in the year to year comparisons.
General and Administrative
General and administrative expenses for 2003 of $1.1 million were essentially unchanged from $1.1 million in 2002. The major components of general and administrative expenses are officers salaries (43.9% and 40.4%), rent (1.6% and 4.9%), legal and professional fees (0.8% and 2.8%), insurance (10.2% and 14.1%) and office salaries (8.2% and 6.6%) for 2003 and 2002, respectively. The percentage decrease in rent reflects Canal's subletting a significant portion of its New York office space commencing in the fourth quarter of fiscal 2002. The percentage decrease in legal and professional fees is due to a sharp decrease in legal fees which were associated with the fiscal 2001 Pine Valley lawsuit. The percentage decrease in insurance reflects a reduction in insurance coverage during fiscal 2003. The percentage increase in office salaries reflects a severance accrual for an employee terminated in the fourth quarter of fiscal 2003.
Interest and Other Income
Interest and other income of $25,000 for 2003 decreased $442,000 from $467,000 in fiscal 2002. The 2002 interest and other income included approximately $350,000 received by Canal as a demutalization compensation payment from an insurance company, from which, Canal had purchased annuity contracts in the early 1980's for certain of its retired stockyard employees. Interest and other income is primarily comprised of dividend and interest income.
Interest Expense
Interest expense for 2003 of $0.3 million increased slightly (5.0%) from $0.3 million in 2002. The 2003 increase is due primarily to a modest increase in the outstanding debt incurred in the final quarter of fiscal 2003 coupled with accrued interest on certain payments which are overdue to Canal's pension plan. Interest rates on Canal's variable rate mortgage notes averaged 10.00% in 2003 and 2002. At October 31, 2003 the outstanding balance of these notes was $2,767,000.
(Loss) Income from Art Sales
In fiscal 2003, Canal recognized a net loss from art sales of $8,000 as compared to a net gain of $207,000 for fiscal 2002. The 2003 decrease reflects the overall decrease in sales of art during 2003 as compared to 2002. Art revenues are comprised of the proceeds from the sale of antiquities and contemporary art. In fiscal 2003, Canal sold three pieces of contemporary art generating gross proceeds of $173,000 as compared to fiscal 2002 sales of two pieces of antiquity art generating gross proceeds of $540,000. Art expenses are comprised of the cost of inventory sold and selling, general and administrative expenses. In fiscal 2003, Canal incurred cost of inventory sold of $121,000 (net of a valuation allowance of $341,000) as well as selling, general and administrative expenses of $63,000 (which amount included the write off of 11 pieces of antiquity art with a book value of approximately $42,000 net of a valuation allowance of $68,000) as compared to fiscal 2002 cost of inventory sold of $311,000 (net of a valuation allowance of $509,000) and selling, general and administrative expenses of $22,000. It is the Company's policy to use the adjusted carrying value for sales, thereby reducing the valuation reserve proportionately as the inventory is sold.
Realized Loss on Investments
At October 31, 2003, Canal determined that the decline in the market value of its investments available for sale was permanent. Accordingly, as of October 31, 2003, Canal has written off this investment entirely. This has resulted in Canal's recognizing realized losses of approximately $7,000 and $14,000 in fiscal 2003 and 2002, respectively. Further, Canal had recognized a realized loss of approximately $47,000 on this investment in fiscal 2001.
Other Expense
Other expense of $15,000 for 2003 decreased $98,000 (86.8%)from $113,000 in fiscal 2002. Other expenses are primarily related to the administration of the company's pension plans.
Related Party Transactions
Interest Expense Related Party - At October 31, 2004, all of Canal's Long-Term Debt is held by the company's Chief Executive Officer and members of his family. These notes pay interest at a rate of 10% per annum and come due May 15, 2006. Canal has incurred interest expense on these notes of $284,000, $280,000 and $267,000 for the years ended October 31, 2004, 2003 and 2002, respectively. At various times during fiscal 2004 certain holders of these notes agreed to defer interest payments due totaling approximately $70,000 as of October 31, 2004. This deferred interest liability will accrue additional interest at a rate of 10% per annum, and will be repaid as funds become available in fiscal 2005. The deferred interest liability is included in accounts payable and accrued expenses at year end. As of October 31, 2004, the balance due under these notes was $2,767,000 all of which is classified as long-term debt related party.
Lease Commitments - On March 4, 2004, WHGA Fifth Avenue Investors, LP (the "Landlord") commenced an action against Canal Capital Corporation and its two co-tenants (the "Tenants") of its New York City commercial office space. The Landlord is seeking the eviction of the Tenants as well as judgement for unpaid back and holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation agreement with the landlord requiring the tenants to pay two months rent (approximately $85,000), forfeit the entire security deposit and vacate the leased premises as of May 31, 2004 in exchange for a release from all future obligations under the lease. All requirements of the stipulation agreement have been met. This resulted in Canal taking a one time writeoff of approximately $87,000 as of October 31, 2004.
In June 2004 Canal entered into a three year lease for approximately 1,000 square feet of office space in Hauppauge, New York at a monthly rental of approximately $1,400.
Contractual Payments due by Period (in 000's) Obligations - ----------- Total Less than 1 to 3 3 to 5 More than 1 year years years 5 years ----- --------- ------ ------ ---------
Long-term debt $ 2,767 $ 0 $ 2,767 $ 0 $ 0
Operating leases $ 43 $ 17 $ 26 $ 0 $ 0
Liquidity and Capital Resources
While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in eight of the last ten years and is obligated to continue making substantial annual contributions to its defined benefit pension plan. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Note 1). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company's variable rate mortgage notes (originally issued in 1998 and amended several times since then) are due May 15, 2006 and are held entirely by the Company's Chief Executive Officer and members of his family. These notes carry interest at the rate of ten percent per annum. These notes, among other things, prohibit Canal from becoming an investment company as defined by the Investment Company Act of 1940; require Canal to maintain minimum net worth; restricts Canal's ability to pay cash dividends or repurchase stock and require principal prepayments to be made only out of the proceeds from the sale of certain assets. As of October 31, 2004, the balance due under these notes was $2,767,000, all of which is classified as long-term debt-related party.
Cash and cash equivalents of $86,000 at October 31, 2004 increased $72,000 or 507.1% from $14,000 at October 31, 2003. Net cash used by operations in fiscal 2004 was $0.2 million. Substantially all of the 2004 net proceeds from the sale of real estate and art of $0.7 million was used in operations and to meet the company's long-term pension liability.
At October 31, 2004 the Company's current assets exceed current liabilities by approximately $0.1 million (which was a positive change of $0.2 million) as compared to October 31, 2003 when the Company's current liabilities exceeded current assets by $0.3 million, which represented an increase of $0.2 million from 2002. The fiscal 2004 change in the Company's liquidity is due primarily to the increases in cash, accounts receivable. Both the increases in cash and accounts receivable are due to the sale of ten Olitski paintings for $205,000 ($75,000 cash and $130,000 due over a 60 day period) in late October 2004. The proceeds from this sale were used in early fiscal 2005 to repay certain expenses which had been deferred in fiscal 2004. The only required principal repayments under Canal's debt agreements for fiscal 2004 will be from the proceeds (if any) of the sale of certain assets.
As discussed above, Canal's cash flow position has been under significant strain for the past several years. Canal continues to closely monitor and reduce where possible its operating expenses and plans to continue its program to develop or sell the property it holds for development or resale as well as to reduce the level of its art inventories to enhance current cash flows. Management believes that its income from operations combined with its cost cutting program and planned reduction of its art
inventory will enable it to finance its current business activities. There can, however, be no assurance that Canal will be able to effectuate its planned art inventory reductions or that its income from operations combined with its cost cutting program in itself will be sufficient to fund operating cash requirements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain quarterly financial data for the eight quarters ended October 31, 2004. This quarterly information is unaudited, has been prepared on the same basis as the annual financial statements, and, our opinion, reflects all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the information for periods presented.
QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 2004 2004 2004 2004 -------- --------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES $ 1,154 $ 1,220 $ 842 $ 983 ======== ========= ======== ======= NET INCOME (LOSS) ($41) ($82) ($169) ($285) ======== ========= ======== ======= NET INCOME (LOSS) PER COMMON SHARE:
- BASIC ($0.02) ($0.02) ($0.03) ($0.07) ======== ========= ======== ======= - DILUTED ($0.02) ($0.02) ($0.03) ($0.07) ======== ========= ======== ======= WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC & DILUTED 4,327 4,327 4,327 4,327 ======== ========= ======== =======
QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 2003 2003 2003 2003 -------- --------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES $ 1,458 $ 1,391 $ 825 $ 1,086 ======== ========= ======== ======= NET INCOME (LOSS) $ 186 $ 3 ($227) ($499) ======== ========= ======== ======= NET INCOME (LOSS) PER COMMON SHARE:
- BASIC $ 0.03 ($0.01) ($0.06) ($0.13) ======== ========= ======== ======= - DILUTED $ 0.03 ($0.01) ($0.06) ($0.13) ======== ========= ======== ======= WEIGHTED AVERAGE NUMBER OF SHARES:
- BASIC & DILUTED 4,327 4,327 4,327 4,327 ======== ========= ======== =======
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Securities and Exchange Commission's rule related to market risk disclosure requires that we describe and quantify our potential losses from market risk sensitive instruments attributable to reasonably possible market changes. Market risk sensitive instruments include all financial or commodity instruments and other financial instruments (such as investments and debt) that are sensitive to future changes in interest rates, currency exchange rates, commodity prices or other market factors. We are not exposed to market risks from changes in foreign currency exchange rates or commodity prices. We do not hold derivative financial instruments nor do we hold securities for trading or speculative purposes. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate changes.
At October 31, 2004, the following long-term debt-related party financial instruments are sensitive to changes in interest rates by expected maturity dates:
As of Fixed rate Average Fair October 31, ($ US) Interest Rate Value ----------- ------ ------------- -----
2005 $ 0 N/A 2006 2,767 10% 2007 0 N/A 2008 0 N/A 2009 0 N/A Thereafter 0 N/A -------
Total $ 2,767 N/A (A) ------- -------
(A) Long-term debt related party (See Note 6): it is not practicable to estimate the fair value of the related party debt (See Note 18).
ITEM 8.
ITEM 8. Financial Statements and Supplemental Data
The financial statements filed as part of this Annual Report are identified in the Index to Consolidated Financial Statements on page hereto and are set forth on pages through included in Item 15(A) of the report.
ITEM 9.
ITEM 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A.
ITEM 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15 (e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this Annual Report. Based on such evaluation, such officers have concluded that, as of such date, our disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to Canal Capital Corporation (and its consolidated subsidiaries) required to be included in our reports filed or submitted under the Exchange Act.
Changes in Internal Control over Financial Reporting. There were no significant changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information
None.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Registrant
The company's Board of Directors is comprised of three non-independent directors. As such, the creation of numerous independent committees is not feasible. However, the Board of Directors has designated an Executive Committee consisting of Messrs. Edelman and Schultz. The Board of Directors has delegated to the Executive Committee general authority with respect to most matters that would otherwise be considered by the full Board. During fiscal 2004 the Board of Directors held one meeting, and the Executive Committee held three meetings, all of which were attended by both Mr. Edelman and Mr. Schultz. On November 4, 2004, Mr. Gerald N. Agranoff resigned as a Director of Canal's Board of Directors. There were no disagreements between Mr. Agranoff and Canal at the time of his resignation.
The following information with respect to the principal occupation or employment of each director and executive officer and the name and principal business of the Company or other organization in which such occupation or employment is carried on, and in regard to other affiliations and business experience during the past five years, has been furnished to the Company by the respective directors.
Asher B. Edelman, age 65, has been Chairman of the Board since September 1991 and prior thereto Vice Chairman of the Board and Chairman of the Executive Committee since February, 1985. Mr. Edelman was a Director, Vice- Chairman of the Board, and Chairman of the Executive Committee of The CattleSale Company formerly known as Dynacore Holdings Corporation, ("CattleSale") from March 1985 to December 2003.
Michael E. Schultz, age 68, has been President and Chief Executive Officer since September 1991 and a Director since 1985; and had been a partner in the law firm of Ehrenkranz, Ehrenkranz & Schultz until December 31, 1994.
Gerald N. Agranoff, age 58, has been a Director since 1984. As discussed above, Mr. Agranoff resigned from the Board in November 2004. Mr. Agranoff is currently a Director of CattleSale, Bull Run Corporation and Petrosearch Energy Corp.. Mr. Agranoff has also been the General Counsel to Edelman Securities Company L.P. and Plaza Securities Company for more than five years.
Reginald Schauder, age 55, has been Vice President, Chief Financial Officer and Treasurer since January 1989 and assumed responsibility as Secretary of the Company in September 1995.
There are no family relationships between any of the aforementioned executive officers of the Registrant and such executive officers were elected to serve for a term of one year or until the election and qualification of their respective successors.
ITEM 11.
ITEM 11. Executive Compensation
The following table summarizes the compensation of the Company's Chief Executive Officer and the other two executive officers of the Company whose salary for fiscal 2004 exceeded $100,000.
SUMMARY COMPENSATION TABLE - Annual Compensation
Name and Principal Position Year Salary - ------------------ ---- ----------
Michael E. Schultz 2004 $ 175,000 President and Chief 2003 $ 175,000 Executive Officer 2002 $ 175,000
Asher B. Edelman 2004 $ 175,000 Chairman of the Board 2003 $ 175,000 and Executive Committee 2002 $ 175,000
Reginald Schauder 2004 $ 115,000 Vice President, Chief 2003 $ 115,000 Financial Officer 2002 $ 108,700 Treasurer and Secretary
In order to help ease the stress on the Company's cash flow, Messrs. Edelman and Schultz each agreed to defer receipt for $55,000 of their annual salaries effective June 1, 2001. Additionally, effective November 1, 2002 Mr. Schauder agreed to defer receipt for $6,300 of his annual salary. These amounts are accrued by the Company with payments made from time to time as cash becomes available to the Company. At October 31, 2004, the total liability under these agreements was approximately $219,000. Additionally, Mr. Schultz has deferred interest and other reimbursable expenses in the amount of approximately $78,000 as of October 31, 2004.
The Company pays certain expenses related to Mr. Edelman's European offices as well as his travel expenses between Europe and the U.S. These expenses totaled $0, $18,000 and $41,000 for fiscal years 2004, 2003 and 2002, respectively.
Retirement Plans - The Canal Capital Corporation Retirement Plan (the "Retirement Plan") provides benefits to eligible employees of the Company and its subsidiaries and affiliates. Directors who are not employees are not eligible to participate in the Retirement Plan. The Retirement Plan is administered by the Company. All Company contributions under the Retirement Plan were deposited with an insurance company and invested in a group annuity contract through May 30, 1985. Thereafter, all Company contributions have been held in trust under a Trust Agreement between the Company and the Executive Committee of the Board of Directors, as trustee. Contributions to the Retirement Plan are determined on an actuarial basis, without individual allocation.
In October 1991, each of three executive officers of the Company voluntarily withdrew from participation in the Retirement Plan. As a result of prior service, Messrs. Edelman and Schauder have deferred annual accumulated benefits of approximately $1,300 and $600, respectively, as of October 31, 2004. Mr. Schultz has no benefit under the Retirement Plan. For further information on the Retirement Plan see Note 9.
COMPENSATION OF DIRECTORS
Fees and Expenses; Other Benefits
Directors who are not officers of the Company do not receive cash compensation for service as Directors. Directors are reimbursed for expenses incurred in attending Board and Committee meetings, including those for travel, food and lodging.
Stock Options for Directors
The Company maintains an option plan for the benefit of directors of the Company -- the 1985 Directors' Stock Option Plan (the "1985 Plan"), which was approved by the stockholders of the Company on March 12, 1986. Pursuant to the 1985 Plan, a maximum of 264,000 shares of common stock, $0.01 par value per share, of the Company have been reserved for issuance to directors and members of the Executive Committee of the Company and its subsidiaries.
Options granted under the 1985 Plan are non-qualified stock options and have an exercise price equal to 100% of fair market value of the shares on the date of grant. The options may be exercised no earlier than one year from the date of grant and no later than ten years after the date of grant. Under the 1985 Plan, options covering 22,000 shares are automatically granted to each new director upon the effective date of his election to office and options covering 5,500 shares are automatically granted to each new member of the Executive Committee upon the effective date of his appointment to office.
During the 2004 fiscal year, no options under the 1985 plan were granted and no options previously granted were exercised. At October 31, 2004, there were no options outstanding under the 1985 Plan.
Compensation Committee - Interlocks and Insider Participation
The Board of Directors (comprised of Asher B. Edelman, Chairman of the Board and Chairman of the Executive Committee, Michael E. Schultz, President and Chief Executive Officer and Gerald N. Agranoff) determines the compensation of the Chief Executive Officer and the Company's other executive officers and administers the Company's 1984 Stock Option Plan and 1985 Stock Option Plan for Directors. On November 4, 2004, Mr. Gerald N. Agranoff resigned as a Director of Canal's Board of Directors. There were no disagreements between Mr. Agranoff and Canal at the time of his resignation.
In connection with the Company's investment activities, the Executive Committee of the Board of Directors, through Mr. Edelman, has the authority to invest funds of the Company in securities of other companies. In the past, the Company had been invested in the securities of other companies in which Mr. Edelman, other directors of the Company or their affiliates were directors or officers, or in which one or more of such persons may also have invested. Since November 1, 1993, such companies included The CattleSale Company (formerly known as Dynacore Holdings Corporation). The Company has filed with the SEC Schedules 13D jointly with Plaza, Mr. Edelman, Edelman Management, Edelman Limited Partnership, certain investment partnerships of which Mr. Edelman is sole or controlling general partner, certain of the companies referred to in the preceding sentence and other persons, indicating that the filing parties constitute groups for purposes of such filings with respect to the acquisition of securities in the companies referred to in the preceding sentence. At October 31, 2004, the Company had no such investments.
ITEM 12.
ITEM 12. Securities Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
To the knowledge of the Company, the only beneficial owners of 5% or more of the voting stock of the Company (other than those listed below under "Securities Owned by Management") as of January 15, 2005 were:
SECURITIES BENEFICIALLY OWNED
No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock ---- ------------------------ -----------------
Asher B. Edelman 1,909,605 (c) 44.13
Michael E. Schultz 58,835 (c) 1.36
William G. Walters 234,440 (b) 5.42
(a) Under applicable regulations of the Securities and Exchange Commission (the "SEC"), a person who has or shares the power to direct the voting or disposition of stock is considered a "beneficial owner". Each individual referred to in the above table has the sole power to direct the voting and disposition of the shares shown.
(b) The number reported herein for Mr. Walters includes 117,220 shares owned by Mr. Walters, 117,220 shares owned by Whale Securities Co., L.P., of which Mr. Walters is Chief Executive Officer. Mr. Walters has sole power to vote and dispose of the shares described herein.
(c) For additional information about beneficial ownership see "Securities Owned by Management" below.
SECURITIES OWNED BY MANAGEMENT
The following table sets forth certain information as of January 15, 2005, with respect to the beneficial ownership of the Company's Common Stock with respect to all persons who are directors, each of the executives named in the Executive Compensation Table and by all directors and officers as of the most practical date. Unless otherwise indicated, the percentage of stock owned constitutes less than one percent of the outstanding Common Stock and the beneficial ownership for each person consists of sole voting and sole investment power.
No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock ---- ------------------------ -----------------
Gerald Agranoff 0 0.00
Asher B. Edelman 1,909,605 (b)(c) 44.13
Reginald Schauder 100 (d) 0.01
Michael E. Schultz 58,835 (e)(f) 1.36 ---------
All Directors and Officers as a group (4 persons) 1,968,540 45.50 =========
(a) Under applicable regulations of the Securities and Exchange Commission (the "SEC"), a person who has or shares the power to direct the voting or disposition of stock is considered a "beneficial owner". Each director and officer referred to in the above table has the sole power to direct the voting and disposition of the shares shown, except as otherwise set forth in footnotes (c), (d) and (f) below.
(b) The number reported herein for Mr. Edelman includes 31,300 shares held in Mr. Edelman's retirement plan, 1,017,220 shares owned by A.B. Edelman Limited Partnership ("Edelman Limited Partnership"), of which Mr. Edelman is the sole general partner, 590,186 shares of common stock owned by the Edelman Family Partnership, L.P. ("Edelman Family Partnership"), of which Mr. Edelman is the general partner, 43,830 shares of common stock owned by Edelman Value Partners, L.P. ("Value Partners"), of which Mr. Edelman is the sole stockholder of the general partner, 26,620 shares of common stock held by Canal Capital Corporation Retirement Plan ("Canal Retirement Plan"), of which Mr. Edelman serves as a trustee, 8,400 shares owned by Aile Blanche, Inc., of which Mr. Edelman is the sole stockholder and 3,399 shares owned by Felicitas Partners, L.P. ("Felicitas"), the general partner of which is Citas Partners ("Citas") of which Mr. Edelman is the controlling general partner. Edelman Limited Partnership has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the sole general partner of Edelman Limited Partnership. Edelman Family Partnership has the
sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the general partner. Value Partners has shared power to vote and dispose of the shares owned by it. The power to dispose of such shares is exercisable by A. B. Edelman Management Company, Inc., a corporation controlled by Mr. Edelman as the sole stockholder. Canal Retirement Plan has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as trustee. Aile Blanche, Inc. has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as President. Felicitas has the sole power to vote and dispose of the shares owned by it, which power is exercisable by Mr. Edelman as the controlling general partner of Citas. Additionally, the number reported herein for Mr. Edelman includes 188,650 shares of common stock held in three Uniform Gifts to Minors Act accounts for the benefit of Mr. Edelman's children of which Mr. Edelman is the custodian.
(c) The number reported herein for Mr. Edelman excludes 242,000 shares of common stock owned by Mr. Edelman's mother and 11,100 shares of common stock held in a trust for Mr. Edelman's son, as to which Mr. Edelman expressly disclaims beneficial ownership.
(d) Represents 100 shares owned directly.
(e) Represents 58,835 shares owned directly.
(f) The number reported herein for Mr. Schultz excludes 26,620 shares of common stock held by the Canal Capital Corporation Retirement Plan of which Mr. Schultz serves as a trustee, as to which Mr. Schultz expressly disclaims beneficial ownership.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
See: Item 11 "Compensation Committee Interlocks and Insider Participation"
ITEM 14.
ITEM 14. Principal Accounting Fees and Services
The following fees were billed to us by Todman & Co., CPAs, PC during fiscal 2004 and 2003:
2004 2003 ---- ---- Audit fees $ 55,000 $ 55,000 Tax fees 0 0 All other fees 3,000 3,000 -------- -------- $ 58,000 $ 58,000 ======== ========
Audit-related fees include statutory audits and Sarbanes-Oxley related consultation. Other fees primarily consist of routine advisory services.
The Board of Directors of Canal has determined that Todman & Co., CPAs, PC provision of non-audit services is compatible with maintaining the independence of Todman & Co., CPAs PC.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements and Notes
See accompanying index to consolidated financial statements.
2. Schedules and Supplementary Note
None
3. Exhibits
See accompanying index to exhibits.
(b) 1. Reports on Form 8-K
On November 10, 2004 Canal filed a Form 8-K relating to:
Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.
On November 4, 2004, Mr. Gerald N. Agranoff resigned as a Director of the Registrant's Board of Directors. There were no disagreements between Mr. Agranoff and the Registrant.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS
Item 15(a)(3). Exhibits -
The following exhibits required by Item 601 of Regulations S-K are filed as part of this report. For convenience of reference, the exhibits are listed according to the numbers appearing in Table I to Item 601 of Regulation S-K. Each exhibit which is incorporated by reference and the document in which such exhibit was originally filed are indicated in parentheses immediately following the description of such exhibit.
Exhibit No.
3(a) Restated Certificate of Incorporation (filed as Exhibit 3(a) to the Registrant's Registration Statement on Form 10 filed with the Securities and Exchange Commission on May 3, 1984 (the "Form 10") and incorporated herein by reference).
3(b) Bylaws (filed as Exhibit 3(b) to the Registrant's Registration Statement on Form 10 and incorporated herein by reference).
3(c) Certificate of Amendment of the Restated Certificate of Incorporation dated September 22, 1988 (filed as Exhibit 3(c) to the Registrant's Form 10-K filed January 29, 1989 and incorporated herein by reference).
10(a) 1984 Stock Option Plan (1) (see Exhibit A included in the Registrant's Proxy Statement dated January 31, 1985, relating to the annual meeting of stockholders held March 18, 1985, which exhibit is incorporated herein by reference).
10(b) Form of Incentive Stock Option Agreement (filed as Exhibit 10(b) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference).
10(c) 1985 Directors' Stock Option Plan (1) (See Exhibit A included in the Registrant's Proxy Statement dated January 31, 1986, relating to the annual meeting of stockholders held March 12, 1986, which exhibit is incorporated herein by reference).
10(d) Form of Directors' Stock Option Agreement (filed as Exhibit 10(ab) to the Registrant's Form 10-K filed January 29, 1986 and incorporated herein by reference).
10(e) Stock Pledge and Security Agreement dated January 8, 1998 by and between Canal Capital Corporation, SY Trading Corporation and CCC Lending Corporation (filed as Exhibit 10 (ai) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference).
CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED
Exhibit No.
10(f) Security Agreement dated January 8, 1998 by and between Canal Capital Corporation, Canal Galleries Corporation, Canal Arts Corporation and CCC Lending Corporation (filed as Exhibit 10 (an) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference).
10(g) $1,000,000 Promissory Note dated January 8, 1998 by and between Michael E. Schultz and Canal Capital Corporation (filed as Exhibit 10 (ao) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference).
10(h) $242,000 Promissory Note dated January 8, 1998 by and between Michael E. Schultz Defined Benefit Trust and Canal Capital Corporation (filed as Exhibit 10 (ap) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference).
10(i) $229,000 Promissory Note dated January 8, 1998 by and between Lora K. Schultz and Canal Capital Corporation (filed as Exhibit 10 (aq) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference).
10(j) $186,000 Promissory Note dated January 8, 1998 by and between Roger A. Schultz Pension Plan and Canal Capital Corporation (filed as Exhibit 10 (ar) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference).
10(k) $143,000 Promissory Note dated January 8, 1998 by and between Richard A. Schultz and Canal Capital Corporation (filed as Exhibit 10 (as) to the Registrant's Form 10-K filed January 30, 1998 and incorporated herein by reference).
22 Subsidiaries of the registrant.
31 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
INVESTOR INFORMATION
Annual Meeting Corporate Headquarters
The Annual Meeting of Shareholders 490 Wheeler Road, Suite 272 of Canal Capital Corporation will Hauppauge, NY 11788 be held in our offices at 490 Wheeler Road, Suite 272, Hauppauge, NY, 11788 on a date to be announced.
Stock Certificates
The Board of Directors of Canal Inquiries regarding change of Capital Corporation urges all name or address, or to replace shareholders to vote their shares lost certificates should be made in person or by proxy and thus directly to American Stock participate in the decisions that Transfer and Trust Co., 59 Maiden will be made at the annual meeting. Lane, New York, NY 10007 or telephone (718) 921-8200
Stock Listing
Canal Capital Corporation common stock Auditors is traded on the over-the-counter market through the "pink sheets". Todman & Co., CPAs, P.C. 120 Broadway New York, NY 10271
Investment Analyst Inquiries General Counsel
Analyst inquiries are welcome. Proskauer Rose LLP 1585 Broadway Phone or write: Michael E. Schultz, New York, NY 10036 President at (631) 234-0140 (212) 969-3000
FORM 10-K -- ITEM 15(a)(1) and (2) CANAL CAPITAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
The following documents are filed as part of this report:
(a) 1. Financial Statements --
Report of Independent Registered Public Accounting Firm ....................................................
Consolidated Balance Sheets as of October 31, 2004 and 2003 ................................................
Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended October 31, 2004, 2003 and 2002 ...........................................
Consolidated Statements of Stockholders' Equity for the years ended October 31, 2004, 2003 and 2002 ..............
Consolidated Statements of Cash Flows for the years ended October 31, 2004, 2003 and 2002 ..............
Notes to Consolidated Financial Statements ..................
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of Canal Capital Corporation:
We have audited the accompanying consolidated balance sheets of Canal Capital Corporation (a Delaware corporation) and Subsidiaries (the "Company") as of October 31, 2004 and 2003, and the related consolidated statements of operations and comprehensive (loss) income, stockholders' equity, and cash flows for each of the three years in the period ended October 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) . Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Canal Capital Corporation and Subsidiaries at October 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2004, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations in eight of the last ten years and is obligated to continue making substantial annual contributions to its defined benefit pension plan. All of these matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
/s/ Todman & Co., CPAs,P.C. --------------------------- New York, New York TODMAN & CO., CPAs, P.C. January 20, 2005 Certified Public Accountants (N.Y.)
CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Continued ...
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 2004, 2003, AND 2002
COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT
BALANCE, NOVEMBER 1, 2001 5,313,794 $53,138 4,998,446 $49,984 NET INCOME 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 649,547 6,496 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 -------------------- ---------------------
BALANCE, OCTOBER 31, 2002 5,313,794 $53,138 5,647,993 $56,480 NET INCOME 0 0 0 0 PREFERRED STOCK REPURCHASE 0 0 (992,255) (9,922) PREFERRED STOCK DIVIDEND 0 0 788,241 7,882 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 -------------------- ---------------------
BALANCE, OCTOBER 31, 2003 5,313,794 $53,138 5,443,979 $54,440 NET (LOSS) 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 754,388 7,544 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 -------------------- --------------------- BALANCE, OCTOBER 31, 2004 5,313,794 $53,138 6,198,367 $61,984 ==================== =====================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENT
CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTE: IN FISCAL 2004, 2003 AND 2002,$ 49,472, $ 157,730 AND $116,480, RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE ISSUANCE OF 754,388, 788,241 AND 649,547, RESPECTIVELY, OF SHARES OF PREFERRED STOCK.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Canal Capital Corporation ("Canal"), incorporated in the state of Delaware in 1964, commenced business operations through a predecessor in 1936.
Canal is engaged in two distinct businesses - real estate and stockyard operations.
Real Estate Operations - Canal's real estate properties are located in Sioux City, Iowa, South St Paul, Minnesota, St Joseph, Missouri, Omaha, Nebraska and Sioux Falls, South Dakota. The properties consist, for the most part, of Exchange Buildings (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. Its principal real estate operating revenues are derived from lease income from land and structures leased to various commercial and retail enterprises, rental income from its Exchange Buildings, and proceeds from the sale of real estate properties. In addition to selling what was excess stockyard property, the company entertains any offers to purchase, develop and restructure real estate lots surrounding its existing operating lease properties, stockyard operating properties and properties held for development or resale in order to enhance the value of the existing properties and surrounding real estate.
Stockyard Operations - Through an asset repurchase agreement, Canal commenced stockyard operations August 1, 1999 in Sioux City Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota.
In March 2002, Canal permanently closed its stockyard operations in Sioux City, Iowa. The Sioux City stockyard operations generated operating losses of $0, $0, and $75,000 for the three years ended October 31, 2004, 2003 and 2002, respectively. The stockyard facility was dismantled with the equipment, fixtures and materials going either to Canal's remaining two stockyards or sold at a public sale held at the Sioux City location in April 2002. Canal has been engaged in extended negotiations to sell this property to a real estate developer whose intention is to convert the property into a retail shopping center. Canal will continue to pursue the sale of this property to this developer as well as exploring any other opportunities to develop or sell this property in fiscal 2005.
Public stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading, and price discovery. The livestock handled by the Company's stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers.
Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending upon the type of animal, the extent of services provided by the stockyard, and local competition. Yardage revenues are not directly dependent upon market prices, but rather are a function of the volume of livestock handled. In general, stockyard livestock volume is dependent upon conditions affecting livestock production and upon the market agencies and independent commission sales people which operate at the stockyards. Stockyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market.
Virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies and independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which account for approximately 50% of its livestock volume annually.
Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2005. Further, Canal tries to balance its dependence on market agencies and independent commission sales people in various ways, including: developing solicitation operations of its own; direct public relations; advertising and personal solicitation of producers on behalf of the stockyards; providing additional services at the stockyards to attract sellers and buyers; and providing incentives to market agencies and independent commission sales people for increased business.
General - While the Company is currently operating as a going concern, certain significant factors raise substantial doubt about the Company's ability to continue as a going concern. The Company has suffered recurring losses from operations in eight of the last ten years, is obligated to continue making substantial annual contributions to its defined benefit pension plan. The financial statements do not include any adjustments that might result from the resolution of these uncertainties. Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Canal continues to closely monitor and reduce where possible its operating expenses and plans to continue its program to develop or sell the property it holds for development or resale as well as to reduce the level of its art inventories to enhance current cash flows. Management believes that its income from operations combined with its cost cutting program and planned reduction of its art inventory will enable it to finance its current business activities. There can, however, be no assurance that Canal will be able to effectuate its planned art inventory reductions or that its income from operations combined with its cost cutting program in itself will be sufficient to fund operating cash requirements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) Principles of Consolidation -- The consolidated financial statements include the accounts of Canal Capital Corporation ("Canal") and its wholly- owned subsidiaries ("the Company"). All material intercompany balances and transactions have been eliminated in consolidation.
B) Investments Available for Sale -- Canal had an investment in a company in which it, together with other affiliated entities, comprised a reporting group for regulatory purposes. It is important to note that it was the group (as defined) that could exercise influence over this company, not Canal. Accordingly, this investment did not qualify for consolidation as a method of reporting. Certain of Canal's officers and directors also served as officers and/or directors of this company. This investment (in which Canal's ownership interest was approximately 1%) was carried at market value and the realized gains or losses, if any, were recognized in operating results.
Investments in Joint Ventures -- Investments in which ownership interest range from 20% to 50% or less owned joint ventures are accounted for under the equity method. These joint ventures are not, in the aggregate, material in relation to the financial position or results of operations of Canal. The carrying amount of such investments was $111,000 and $111,000 at both October 31, 2004 and 2003, and is included in other assets. The operating results of joint ventures accounted for on the equity method, for fiscal year 2004, 2003 and 2002 were not material to financial statement presentation and were therefore included in other income from real estate operations.
C) Deferred Leasing and Financing Costs -- Costs incurred in obtaining new leases and long-term financing are deferred and amortized over the terms of the related leases or debt agreements, as applicable.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
D) Properties and Related Depreciation -- Properties are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the properties. Such lives are estimated from 35 to 40 years for buildings and from 5 to 20 years for improvements and equipment.
Property held for Development or Resale -- Property held for development or resale consist of approximately 59 acres located in the midwest of undeveloped land not currently utilized for corporate purposes nor included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value.
Long-Lived Assets - The Company reviews the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the assets to the estimated future cash flows expected to result from the use of the asset. The measurement of the loss, if any, will be calculated as the amount by which the carrying amount of the asset exceeds the fair value of the asset. (See Note 19).
E) Expenditures for maintenance and repairs are charged to operations as incurred. Significant renewals and betterments are capitalized. When properties are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is reflected in current income.
F) Art Inventory Held for Sale - Inventory of art is valued at the lower of cost, including direct acquisition and restoration expenses, or net realizable value on a specific identification basis. The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. Canal has had varying percentages of its art inventory appraised by independent appraisers in previous years. For fiscal 2004 the net realizable value of Canals remaining art inventory has been estimated by management based in part on the Company's history of art sales in the current and previous years and in part on the results of the independent appraisals done in previous years. However, because of the nature of art inventory, such determination is very subjective and, therefore, the estimated values could differ significantly from the amount ultimately realized.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
G) Income Taxes -- Canal and its subsidiaries file a consolidated Federal income tax return. The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities.
H) Stockyard Inventory - Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
I) Accounting Estimates -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
J) Revenue Recognition -- Lease and rental revenues are recognized ratably over the period covered. All real estate leases are accounted for as operating leases. Revenues from real estate sales are recognized generally when title to the property passes. Revenues from stockyard operations which consist primarily of yardage fees (a standard per head charge for each animal sold through the stockyards) and sale of feed and bedding are recognized at the time the service is rendered or the feed and bedding are delivered.
Other Income (Expense) Items -- Art sales are recognized using the specific identification method, when the piece is shipped to the purchaser. Art owned by Canal which is on consignment, joint venture, or being examined in contemplation of sale is not removed from inventory and not recorded as a sale until notice of sale or acceptance has been received. The sale of investments available for sale, if any, are recognized, on a specific identification method, on a trade date basis.
K) Statements of Cash Flows -- The company considers all short-term investments with a maturity of three months or less to be cash equivalents. Cash equivalents primarily include bank, broker and time deposits with an original maturity of less than three months. These investments are carried at cost, which approximates market value. Canal made federal and state income tax payments of $7,000, $17,000 and $13,000 and interest payments of $284,000, $280,000 and $267,000 in 2004, 2003 and 2002, respectively.
L) Comprehensive Income -- The Company's only adjustments for each classification of the comprehensive income was for minimum pension liability.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
M) Earnings (Loss) Per Share -- Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common shares by the weighted average of common shares outstanding during the period. Diluted earnings (loss) per share adjusts basic earnings (loss) per share for the effects of convertible securities, stock options and other potentially dilutive financial instruments, only in the period in which such effect is dilutive. There were no dilutive securities in any of the periods presented herein. The shares issuable upon the exercise of stock options are excluded from the calculation of net income (loss) per share as their effect would be antidilutive.
N) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year presentation.
O) Recent Accounting Pronouncements -- In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit and Disposal Activities. SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under EITF issue 94-3, a liability for an exit cost is recognized at the date of an entity's commitment to an exit plan. Under SFAS No. 146, the liabilities associated with an exit or disposal activity will be measured at fair value and recognized when the liability is incurred and meets the definition of a liability in the FASB's conceptual framework. This statement is effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. The provisions of SFAS No. 150 are effective for all financial instruments created or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on our consolidated financial statements.
In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities, and interpretation of Accounting Research Bulletin No. 51 ("FIN 46"). FIN 46 requires the consolidation of variable interest entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently, entities are generally consolidated by an enterprise that has a controlling financial interest through ownership of a majority of the voting interest in the entity. The adoption of FIN 46 did not have a material impact on our consolidated financial statements.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. INVESTMENTS AVAILABLE FOR SALE
At October 31, the investments available for sale consisted of the following: ($ 000's Omitted)
2004 2003 ---- ---- Aggregate market value..................... $ 0 $ 0 --- --- Aggregate carrying value................... $ 0 $ 0 --- ---
In fiscal 2003, Canal determined that the decline in the market value of its investments available for sale were permanent. Accordingly, as of October 31, 2003, Canal had written off this investment entirely. This write off resulted in Canal's recognizing realized losses of approximately $7,000 and $14,000 in fiscal 2003 and 2002, respectively. Canal did, however, sell all of its remaining investments during fiscal 2004 for approximately $5,000, which amount was recognized as income for the year ended October 31, 2004.
4. STOCKYARD OPERATIONS
Through an asset repurchase agreement, Canal commenced stockyard operations August 1, 1999 in Sioux City Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota.
In March 2002, Canal permanently closed its stockyard operations in Sioux City, Iowa. The Sioux City stockyard operations generated operating losses of $0, $0, and $75,000 for the three years ended October 31, 2004, 2003 and 2002, respectively. The stockyard facility was dismantled with the equipment, fixtures and materials going either to Canal's remaining two stockyards or sold at a public sale held at the Sioux City location in April 2002. Canal has been engaged in extended negotiations to sell this property to a real estate developer whose intention is to convert the property into a retail shopping center. Canal will continue to pursue the sale of this property to this developer as well as exploring any other opportunities to develop or sell this property in fiscal 2005.
Public stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading, and price discovery. The livestock handled by the Company's stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending upon the type of animal, the extent of services provided by the stockyard, and local competition. Yardage revenues are not directly dependent upon market prices, but rather are a function of the volume of livestock handled. In general, stockyard livestock volume is dependent upon conditions affecting livestock production and upon the market agencies and independent commission sales people which operate at the stockyards. Stockyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market.
Virtually all of the volume at Canal's Sioux Falls stockyards is handled through market agencies and independent commission sales people, while the St. Joseph stockyards has solicitation operations of its own which account for approximately 50% of its livestock volume annually.
Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2005. Further, Canal tries to balance its dependence on market agencies and independent commission sales people in various ways, including: developing solicitation operations of its own; direct public relations; advertising and personal solicitation of producers on behalf of the stockyards; providing additional services at the stockyards to attract sellers and buyers; and providing incentives to market agencies and independent commission sales people for increased business.
Stockyard operations resulted in operating income of approximately $0.3 million while contributing approximately $3.0 million to Canal's revenues for fiscal 2004. Finally, Canal maintains an inventory of feed and bedding which is comprised primarily of hay, corn and straw. The value of this inventory was $10,000 and $11,000 at October 31, 2004 and 2003, respectively.
5. BORROWINGS
The Company's variable rate mortgage notes (originally issued in 1998 and amended several times since then) are due May 15, 2006 and are held entirely by the Company's Chief Executive Officer and members of his family. These notes carry interest at the rate of ten percent per annum. These notes, among other things, prohibit Canal from becoming an investment company as defined by the Investment Company Act of 1940; require Canal to maintain minimum net worth; restricts Canal's ability to pay cash dividends or repurchase stock and require principal prepayments to be made only out of the
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
proceeds from the sale of certain assets. As of October 31, 2004, the balance due under these notes was $2,767,000, all of which is classified as long-term debt-related party.
At October 31, 2004, substantially all of Canal's real properties, the stock of certain subsidiaries, the investments and a substantial portion of its art inventories are pledged as collateral for the following obligations:
October 31, -------------------- ($ 000's Omitted) 2004 2003 - ----------------- ---- ---- Variable rate mortgage notes due May 15, 2006 - related party (see Note 16)..... $ 2,767 $ 2,667 Other Note ...................................... 0 0 ------- -------- Total ........................................... 2,767 2,667 Less -- current maturities ...................... 0 0 ------- -------- Long-term debt $ 2,767 $ 2,667 ------- --------
6. INCOME TAXES
Significant components of the Company's deferred asset/(liability) as of October 31, 2004, 2003 and 2002 include differences in depreciation methods, deferred rent, inventory valuation allowance and net operating loss carryforward ($ 000's Omitted):
2004 2003 2002 ---- ---- ----
Total Gross Deferred Tax assets $ 4,415 $ 3,893 $ 3,503 Less - Valuation Allowance (4,415) (3,893) (3,503) -------- -------- -------- Net Deferred Tax Assets $ 0 $ 0 $ 0 -------- -------- --------
Total Gross Deferred Tax Liability $ 0 $ 0 $ 0 -------- -------- --------
Net Deferred Tax Asset (Liability) $ 0 $ 0 $ 0 -------- -------- --------
Actual income tax (benefit) expense differs from the "expected" tax expense computed by applying the U.S. federal corporate tax rate of 35% to income(loss) before income taxes as follows (& 000's Omitted):
2004 2003 2002 ---- ---- ----
Computed Expected Tax (Benefit)Expense $ (202) $ (188) $ 149 Change in Valuation Allowance 522 390 81 Inventory Valuation Differences (293) (144) (178) Other (27) (58) (52) ------ ------ ------ $ 0 $ 0 $ 0 ------ ------ ------
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
At October 31, 2004, the Company has net operating loss carryforwards of approximately $12,613,000 that expire through 2018 and a net capital loss carryforward of approximately $1,446,000 that expires October 31, 2007. For financial statement purposes, a valuation allowance has been provided to offset the net deferred tax assets due to the cumulative operating losses and capital losses incurred during recent years. Such allowance increased by approximately $522,000, $390,000 and $81,000 during the years ended October 31, 2004, 2003 and 2002, respectively. The valuation allowance will be reduced when and if, in the opinion of management, significant positive evidence exists which indicates that it is more likely than not that the Company will be able to realize its deferred tax assets.
7. PENSION PLANS
Canal has a defined benefit pension plan covering substantially all of its salaried employees (the "Plan"). The benefits are based on years of service and the employee's compensation earned each year. The Company's funding policy is to contribute the amount that can be deducted for federal income tax purposes. Accordingly, the Company has made contributions of approximately $237,000 for fiscal 2004, $0 for fiscal 2003 and $149,000 for fiscal 2002. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Assets of the plan were invested in U.S. Government securities, common stocks and antiquities.
Assumptions used in computing the 2004, 2003 and 2002 pension cost were:
2004 2003 2002 ---- ---- ---- Discount rate ......................... 6.25% 6.25% 7.00% Rate of increase in compensation level ................................. 5.50% 5.50% 5.50% Expected long-term rate of return on assets ............................. 9.00% 9.00% 9.00%
Net periodic pension cost for plan years ended October 31, 2004, 2003 and 2002 included the following components:
Plan Year ($ 000's Omitted) 2004 2003 2002 ----------------- ---- ---- ----
Service costs - benefits earned during the period ............................ $ 15 $ 12 $ 12 Interest cost on projected benefit obligation ............................ 108 114 120 Net (Return) loss on assets ............. 169 137 94 Net amortization and deferral ........... (54) (54) (54) ----- ----- ----- Net period pension cost ................. $ 238 $ 209 $ 172 ----- ----- -----
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated balance sheets at October 31, 2004 and 2003.
Plan Year --------- ($ 000's Omitted) 2004 2003 ----------------- ---- ----
Change in benefit obligation Benefit obligation at beginning of year $ 1,818 $ 1,770 Service cost 15 12 Interest cost 108 114 Plan participants' contributions 0 0 Amendments 0 0 Actuarial gain 55 49 Benefits paid (91) (127) ------- ------- Benefit obligation at end of year $ 1,905 $ 1,818 ------- -------
Change in plan assets Fair value of plan assets at beginning of year $ 872 $ 904 Actual return on plan assets 77 91 Employer contribution 145 72 Plan participants' contributions 0 0 Plan expenses (72) (68) Benefits paid (91) (127) ------- ------- Fair value of plan assets at end of year $ 931 $ 872 ------- -------
(1) The vast majority of the projected benefit obligation is related to the Company's former stockyard employees.
8. ART INVENTORY HELD FOR SALE
Canal is in the process of selling, in an orderly manner, its remaining art inventory. This will be accomplished primarily through direct sales, consignment arrangements with various independent art dealers and through sale at public art auctions. The Company's ability to dispose of its art inventory is dependent primarily on general economic conditions and the competitiveness of the art market itself. Accordingly, there can be no assurance that Canal will be successful in selling its art inventory.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In fiscal 2004, Canal sold 34 pieces of contemporary art. Canal's art operations have generated income of approximately $139,000, a loss of $8,000 and income of $207,000 on revenues of approximately $463,000, $173,000 and $540,000 for the years ended October 31, 2004, 2003 and 2002, respectively.
Antiquities and contemporary art represented 46% ($189,122) and 54% ($224,078) and 27% ($189,122) and 73% ($520,549) of total art inventory at October 31, 2004 and 2003, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski.
The Company classified its art inventory for the two years ended October 31, 2004 and 2003 as follows ($ 000's Omitted):
Current Portion Non-Current Portion Total --------------- ------------------- ---------------- 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ----
Antiquities $ 496 $ 407 $ 0 $ 89 $ 496 $ 496 Contemporary 855 1,000 0 988 855 1,988 Val. Allow. (938) (1,157) 0 (617) (938) (1,774) ------ ------ ------- ------ ------- -------
Net Value $ 413 $ 250 $ 0 $ 460 $ 413 $ 710 ------ ------ ------- ------ ------- -------
The Company's valuation allowance for the three years ended October 31, 2004, 2003 and 2002 is as follows:
Bal. Start Bal. End of Period Deductions of Period --------- ---------- --------- Year ended October 31, 2004 Deducted from art inventories: Reserve for valuation allowance $ 1,774 $ (836) $ 938
Year ended October 31, 2003 Deducted from art inventories: Reserve for valuation allowance $ 2,184 $ (410) $ 1,774
Year ended October 31, 2002 Deducted from art inventories: Reserve for valuation allowance $ 2,692 $ (508) $ 2,184
The amount recorded as the current portion of art inventory represents management's estimate of the inventory expected to be sold during the next twelve months. The Company recorded a valuation allowance against the current portion of its inventory to reduce it to its estimated net realizable value based on the history of losses sustained on inventory items sold in the current and previous years. In fiscal 2004 Canal applied against sales $836,450 of the valuation allowance against its art inventory, thereby, decreasing the total valuation allowance to $938,300 as of October 31, 2004 as compared to $1,774,750 and $2,183,650 at October 31, 2003 and 2002, respectively.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. LEASE COMMITMENTS
On March 4, 2004, WHGA Fifth Avenue Investors, LP (the "Landlord") commenced an action against Canal Capital Corporation and its two co-tenants (the "Tenants") of its New York City commercial office space. The Landlord is seeking the eviction of the Tenants as well as judgement for unpaid back and holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation agreement with the landlord requiring the tenants to pay two months rent (approximately $85,000), forfeit the entire security deposit and vacate the leased premises as of May 31, 2004 in exchange for a release from all future obligations under the lease. All requirements of the stipulation agreement have been met.
In June 2004 Canal entered into a three year lease for approximately 1,000 square feet of office space in Hauppauge, New York at a monthly rental of approximately $1,400.
Canal's future minimum payments for the next five years required under operating leases that have initial or remaining noncancellable terms in excess of one year as of October 31, 2004 are $17,000, $17,000, $9,000, $0 and $0 in fiscal 2005, 2006, 2007, 2008, and 2009, respectively. There are no commitments extending past five years.
Net rent expense under these and other operating leases was $20,000, $55,000 and $90,000 for the years ended October 31, 2004, 2003 and 2002.
10. IMPAIRMENT LOSS ON LONG-LIVED ASSETS
The Company reviews the values of its long-lived assets annually. There was no impairment in the value of Canal's long-lived assets to be recorded as of October 31, 2004, 2003 and 2002.
11. STOCK OPTION PLAN
Under Canal's 1984 Employee and 1985 Directors Stock Option Plans, $550,000 and 264,000 shares, respectively, of Canal's common stock have been reserved for option grants. The purchase price of shares subject to each option granted, under the Employee and Directors Plans, will not be less than 85% and 100%, respectively, of their fair market value at the date of grant. Options granted under both plans are exercisable for 10 years from the date of grant, but no option will be exercisable earlier than one year from the date of grant. Under the Employee Plan, stock appreciation rights may be granted in connection with stock options, either at the time of grant of the
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
options or at any time thereafter. No stock appreciation rights have been granted under this plan. At October 31, 2004, there were no exercisable options outstanding under these plans.
Transactions under these plans are summarized as follows:
Shares Option Price Range ------ ------------------
Balance outstanding October 31, 2002.... 5,500 $0.125-$0.125 Options granted ........................ 0 - - Options expired ........................ (5,500) $0.125-$0.125 ------ -------------
Balance outstanding October 31, 2003.... 0 N/A - N/A ------ -------------
Balance outstanding October 31, 2004.... 0 N/A - N/A ------- --------------
The Company applies APB Opinion 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for the years ended October 31, 2004, 2003 and 2002. Had compensation cost been determined on the basis of SFAS No. 123, the proforma effect on the Company's net income and earnings per share for the years ended October 31, 2004, 2003 and 2002 would have been deminimus.
12. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID
During each of the fiscal years ended October 31, 2004, 2003 and 2002, the Company had 0, 0 and 5,500 options outstanding. The options were not included in the computation of diluted earnings (loss) per share because the effect of exercisable price conversion would be antidilutive. There were no dividends declared on common stock during the years ended October 31, 2004, 2003 and 2002. Dividends declared on preferred stock during the years ended October 31, 2004, 2003 and 2002 were approximately $49,000, $158,000 and $116,000.
Basic earnings (loss) per share are computed by dividing earnings (loss) available to common stockholders by the weighted average number of common share outstanding during the period. Diluted earnings (loss) per share reflect per share amounts that would have resulted if dilutive potential common stock had been reported in the financial statements.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Basic and diluted earnings (losses) available to common stockholders at October 31, 2004, 2003 and 2002 were:
For the Year Ended October 31, 2004 ----------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- ---------
Net (loss) $ (577,000)
Less preferred stock dividends (49,000) -----------
(Loss) available to common stock- holders-diluted earnings per share $ (626,000) 4,327,000 $(0.15) =========== ========= =======
For the Year Ended October 31, 2003 --------------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- ---------
Net (loss) (537,000)
Less preferred stock dividends (158,000) -----------
(Loss) available to common stock- holders-diluted earnings per share $ (695,000) 4,327,000 $(0.16) =========== ========= =======
For the Year Ended October 31, 2002 --------------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- --------- Net income $ 426,000
Less preferred stock dividends (116,000) -----------
Income available to common stock- holders-diluted earnings per share $ 310,000 4,327,000 $ 0.07 =========== ========= =======
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. PREFERRED STOCK ISSUANCE
On October 15, 1986 Canal exchanged 986,865 shares of its $1.30 Exchangeable Preferred Stock ("the Preferred Stock") for a like amount of its outstanding common stock. Since the exchange, the Company has issued an additional 6,203,757 shares in the form of stock dividends and in October 2003 the Company, repurchased for retirement, 992,225 shares (from an affiliate) at $0.10 per share resulting in a total outstanding at October 31, 2004 of 6,198,367. All of the Preferred Stock has a par value of $0.01 per share and a liquidation preference of $10 per share. The Preferred Stock is subject to optional redemption, in exchange for Canal's 13% Subordinated Notes, by Canal, in whole or in part at any time on or after September 30, 1988 at the redemption price of $10 per share. Dividends on the Preferred Stock accrue at an annual rate of $1.30 per share and are cumulative. Dividends are payable quarterly in cash or in Preferred Stock at Canal's option. Payment commenced December 31, 1986. To date, sixty of the seventy- two quarterly payments have been paid in additional stock resulting in the issuance of 6,203,757 shares recorded at their fair value at the time of issuance.
Canal is restricted from paying cash dividends by certain of its debt agreements (See Note 5). The last cash dividend paid on Canal's preferred stock was in September 1989. The quarterly dividends payable September 30, 2004 and December 31, 2004 were passed by the Board of Directors. It is the Company's intention to pay its next dividend on the preferred stock on June 30, 2005 at which time a one year dividend will have accumulated. The dividend planned for June 30, 2005 will also be paid in additional stock.
Whenever quarterly dividends payable on the Preferred Stock are in arrears in the aggregate amount at least equal to six full quarterly dividends (which need not be consecutive), the number of directors constituting the Board of Directors of Canal shall be increased by two and the holders of the Preferred Stock shall have, in addition to the rights set forth above, the special right, voting separately as a single class, to elect two directors of Canal to fill such newly created directorships at the next succeeding annual meeting of shareholders (and at each succeeding annual meeting of shareholders thereafter until such cumulative dividends have been paid in full).
VOTING RIGHTS - The holders of the Preferred Stock shall not have any voting rights except that the following actions must be approved by holders of 66 2/3% of the shares of Preferred Stock, voting as a class: (I) any amendment to the Certificate of Incorporation of Canal which would materially alter the relative rights and preferences of the Preferred Stock so as to adversely affect the holders thereof; and (ii) issuance of securities of any class of Canal's capital stock ranking prior (as to dividends or upon liquidation, dissolution or winding up) to the Preferred Stock. The holders of the Preferred Stock shall be entitled to specific enforcement of the foregoing covenants and to injunctive relief against any violation thereof.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. PENSION VALUATION RESERVE
The Pension Valuation Reserve represents the excess of additional minimum pension liability required under the provisions of SFAS No. 87 over the unrecognized prior service costs of former stockyard employees. Such excess arose due to the decline in the market value of pension assets available for pension benefits of former employees, which benefits were frozen at the time the stockyard operations were sold in 1989. The additional minimum pension liability will be expensed as actuarial computations of annual pension cost (made in accordance with SFAS No. 87) recognize the deficiency that exists.
15. FINANCIAL INFORMATION FOR BUSINESS SEGMENTS
Canal is engaged in two distinct businesses - the management and further development of its agribusiness related real estate operations and stockyard operations.
The following summary presents segment information relating to these lines of business except for the respective revenues, operating income and the reconciliation of operating income with pre-tax income which information is presented on Canal's income statement.
October 31, --------------------------- ($ 000's Omitted) 2004 2003 2002 ----------------- ----- ---- ---- Identifiable assets: Real estate ....................... $ 3,665 $ 3,871 $ 4,007 Stockyard operations .............. 1,392 1,440 1,448 Corporate ......................... 624 931 1,058 -------- -------- ------- $ 5,681 $ 6,142 $ 6,513 -------- -------- -------
($ 000's Omitted) 2004 2003 2002 ----------------- ---- ---- ---- Capital expenditures: Real estate ....................... $ 8 $ 171 $ 214 Stockyard operations .............. 30 32 29 Corporate ......................... 0 8 4 ----- ----- ----- $ 38 $ 211 $ 247 ----- ----- -----
Income from real estate operations includes gains (losses) on sales of real estate of $0.1 million, $0.2 million and $0.4 million in 2004, 2003 and 2002, respectively. Included in corporate identifiable assets is approximately $0.1 million and $0.2 million of art inventory in galleries or on consignment abroad as of October 31, 2004 and 2003, respectively.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. Related Party Transactions
Interest Expense Related Party - At October 31, 2004, all of Canal's Long-Term Debt is held by the company's Chief Executive Officer and members of his family. These notes pay interest at a rate of 10% per annum and come due May 15, 2006. Canal has incurred interest expense on these notes of $284,000, $280,000 and $267,000 for the years ended October 31, 2004, 2003 and 2002, respectively. At various times during fiscal 2004 certain holders of these notes agreed to defer interest payments due totaling approximately $70,000 as of October 31, 2004. This deferred interest liability will accrue additional interest at a rate of 10% per annum, and will be repaid as funds become available in fiscal 2005. The deferred interest liability is included in accounts payable and accrued expenses at year end. As of October 31, 2004, the balance due under these notes was $2,767,000 all of which is classified as long-term debt related party.
Lease Commitments - On March 4, 2004, WHGA Fifth Avenue Investors, LP (the "Landlord") commenced an action against Canal Capital Corporation and its two co-tenants (the "Tenants") of its New York City commercial office space. The Landlord is seeking the eviction of the Tenants as well as judgement for unpaid back and holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation agreement with the landlord requiring the tenants to pay two months rent (approximately $85,000), forfeit the entire security deposit and vacate the leased premises as of May 31, 2004 in exchange for a release from all future obligations under the lease. All requirements of the stipulation agreement have been met. This resulted in Canal taking a one time writeoff of approximately $87,000 as of October 31, 2004.
In June 2004 Canal entered into a three year lease for approximately 1,000 square feet of office space in Hauppauge, New York at a monthly rental of approximately $1,400.
17. LITIGATION
On March 4, 2004, WHGA Fifth Avenue Investors, LP (the "Landlord") commenced an action against Canal Capital Corporation and its two co-tenants (the "Tenants") of its New York City commercial office space. The Landlord is seeking the eviction of the Tenants as well as judgement for unpaid back and holdover rental amounts of approximately $175,000.
Subsequent to year end Canal and its co-tenants entered into a stipulation agreement with the landlord requiring the tenants to pay two months rent (approximately $85,000), forfeit the entire security deposit and vacate the leased premises as of May 31, 2004 in exchange for a release from all future obligations under the lease. All requirements of the stipulation agreement have been met.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. Restricted Cash - Transit Insurance
Due to significant proposed increases in the premiums for transit insurance, management decided to initiate a plan of self insurance commencing November 1, 2002. Transit insurance covers livestock for the period that they are physically at the stockyards and under the care of stockyard personnel. This self insurance program is funded by a per head charge on all livestock received at the stockyard. The October 31, 2004 balance in restricted cash- transit insurance of approximately $50,000 represents the excess of per head fees charged over actual payments made for livestock that was injured or died while at the stockyards.
19. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instruments (all of which are held for non- trading purposes) for which it is practicable to estimate that value.
October 31, 2004 2003 ------------------- -------------------- ($ 000's Omitted) ----------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------ -------- ------ Cash and cash equivalents $ 86 $ 86 $ 14 $ 14 ------- ------ ------ ------
Long-Term Debt - Related Party 2,767 (b) 2,767 (b) ------- ------ ------ ------
a) Cash and cash equivalents: The carrying amount approximates fair market value because of the short maturities of such instruments.
b) Long-Term Debt Related Party (see Note 5): It is not practicable to estimate the fair value of the related party debt.
20. Minimum Future Rentals on Operating Leases
Minimum future rentals consist primarily of rental income from leased land and structures, Exchange Building rents (commercial office space) and other rental activities, all of which are accounted for as operating leases. The estimated minimum future rentals on operating leases are $600,000, $625,000, $650,000, $675,000 and $700,000 for fiscal years 2005, 2006, 2007, 2008 and 2009, respectively.
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
21. Property on Operating Leases
Property on operating leases consist of approximately 39 acres of land located in Omaha, Nebraska; S. St. Paul, Minnesota; Sioux City, Iowa as well as furniture and equipment used in the Hauppauge, New York office. Land and structures leased to third parties include vacant land, exchange buildings (commercial office space), meat packing facilities, railcar repair shops, lumber yards and various other commercial and retail businesses.
A schedule of the Company's property on operating leases at October 31, 2004 is as follows (000's omitted):
Capitalized Cost ---------------- Subsequent to ---------------- Carrying Initial Cost Acquisition Date -------- ----------------- ---------------- Accum. Value Bldgs. & Bldgs. & ------ -------- Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/04 - ----------------- ---- --------- ---- --------- ------ -------- New York office Various leasehold $ 0 $ 8 $ 0 $ 0 $ (3) $ 5 improvements
11 acres of land in Omaha, NE 1,200 21 0 0 (6) 1,215 Acquired in 1976
10 acres of land in S. St. Paul, MN 125 2,127 0 8 (1,168) 1,092 Acquired in 1937
18 acres of land in Sioux City, IA 403 0 0 0 0 403 ------ ------ --- ----- ------- ------ Acquired in 1937 $1,728 $2,156 $ 0 $ 8 $(1,177) $2,715 ====== ====== === ===== ======= ======
A schedule of the Company's reconciliation of property on operating leases carried for the three years ended October 31, 2004, 2003 and 2002 is as follows (000's omitted):
2004 2003 2002 ---- ---- ----
Balance at beginning of year $2,874 $3,337 $3,302 Acquisitions 0 0 0 Improvements 8 179 218 Cost of property sold (167) (142) (183) Reclassification to property held for development or resale 0 (500) 0 ------ ------ ------ Balance at end of year $2,715 $2,874 $3,337 ------ ------ ------
(1) Substantially all of Canal's real property is pledged as collateral for its debt obligations (see Note 5).
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
22. Property used in Stockyard Operations
Property used in stockyard operations consist of approximately 60 acres of land located in St. Joseph, Missouri and Sioux Falls, South Dakota. The Company's stockyards provide all services and facilities required to operate an independent market for the sale of livestock. Stockyard facilities include exchange buildings (commercial office space), auction arenas, scale houses, veterinary facilities, barns, livestock pens and loading docks.
A schedule of the Company's property used in stockyard operations at October 31, 2004 is as follows (000's omitted):
Capitalized Cost ---------------- Subsequent to ---------------- Carrying Initial Cost Acquisition Date -------- ------------ ---------------- Accum. Value Bldgs. & Bldgs. & ------ -------- Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/04 - ----------------- ---- --------- ---- --------- ------ --------
30 acres of land in St. Joseph, MO $ 902 $ 200 $ 0 $ 0 $ (118) $ 984 Acquired in 1942
30 acres of land in Sioux Falls, SD 100 64 0 25 (31) 158 ------ ----- ---- ----- ------ ------ Acquired in 1937
$1,102 $ 264 $ 0 $ 25 $ (149) $1,142 ====== ===== ==== ===== ====== ======
A schedule of the Company's reconciliation of property used in stockyard operations carried for the three years ended October 31, 2004, 2003 and 2002 is as follows (000's omitted):
2004 2003 2002 ---- ---- ----
Balance at beginning of year $1,136 $1,176 $1,281 Acquisitions 0 40 0 Improvements 25 32 29 Cost of property sold (19) (112) (134) ------ ------ ------ Balance at end of year $1,142 $1,136 $1,176 ------ ------ ------
(1) Substantially all of Canal's real property is pledged as collateral for its debt obligations (see Note 5).
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
23. Property Held for Development or Resale
Property held for development or resale consist of approximately 59 acres of land located in the midwest of undeveloped land not currently utilized for corporate purposes and not included in any of the present operating leases. The Company constantly evaluates proposals received for the purchase, leasing or development of this asset. The land is valued at cost which does not exceed the net realizable value.
A schedule of the Company's property held for development or resale at October 31, 2004 is as follows (000's omitted):
Capitalized Cost ---------------- Subsequent to ---------------- Carrying Initial Cost Acquisition Date -------- ------------ ---------------- Accum. Value Bldgs. & Bldgs. & ------ -------- Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/04 - ----------------- ---- --------- ---- --------- ------ --------
19 acres of land in St. Joseph, MO $ 75 N/A N/A $ (28) N/A $ 47 Acquired in 1942
10 acres of land in S. St. Paul, MN 144 N/A N/A 0 N/A 144 Acquired in 1937
30 acres of land in Sioux City, IA 681 N/A N/A (55) N/A 626 ---- --- --- ---- --- --- Acquired in 1937 $900 $ 0 $ 0 $ (83) $ 0 $817 ==== === === ===== === ====
A schedule of the Company's reconciliation of property held for development or resale carried for the three years ended October 31, 2004, 2003 and 2002 is as follows (000's omitted):
2004 2003 2002 ---- ---- ----
Balance at beginning of year $ 900 $ 518 $ 620 Acquisitions 0 0 0 Improvements 0 0 0 Cost of property sold (83) (118) (102) Reclassification from property on operating leases 0 500 0 ----- ----- -----
Balance at end of year $ 817 $ 900 $ 518 ----- ----- -----
(1) Substantially all of Canal's real property is pledged as collateral for its debt obligations (see Note 5).
CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
24. Subsequent Events
On November 1, 2004, Canal sold its South St. Paul, Minnesota Exchange Building on a Contract for Deed for $1,750,000. Canal will receive interest payments only in the amount of $60,000 per year for the next three years. The balance on the note of $1,750,000 is due October 31, 2007. The sale resulted in a first quarter gain of approximately $850,000.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of January, 2005.
CANAL CAPITAL CORPORATION
By: /s/ Michael E. Schultz ---------------------------- Michael E. Schultz President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
President and Chief /s/ Michael E. Schultz Executive Officer and Director - ---------------------- (Principal Executive Officer) January 28, 2005 Michael E. Schultz
Vice President-Finance Secretary and Treasurer /s/ Reginald Schauder (Principal Financial and - ---------------------- Accounting Officer) January 28, 2005 Reginald Schauder
/s/ Asher B. Edelman Chairman of the Board - ---------------------- and Director January 28, 2005 Asher B. Edelman
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