-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DSD6nFHuc2ut+ijSs1Yx4lllZ3OFfZeHpVIzCGX7WEfOEx5Vou/6btTgtoClHOO+ grQXmArePiVulZtj1pAIww== 0000101821-00-000004.txt : 20000203 0000101821-00-000004.hdr.sgml : 20000203 ACCESSION NUMBER: 0000101821-00-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000127 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CANAL CAPITAL CORP CENTRAL INDEX KEY: 0000101821 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 510102492 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 002-96666 FILM NUMBER: 514733 BUSINESS ADDRESS: STREET 1: 717 FIFTH AVE STREET 2: SUITE 407 CITY: NEW YORK STATE: NY ZIP: 10022 BUSINESS PHONE: 2128266040 MAIL ADDRESS: STREET 1: 717 FIFTH AVE STREET 2: SUITE 407 CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: UNITED STOCKYARDS CORP DATE OF NAME CHANGE: 19881027 10-K 1 10-K 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1999 TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-8709 CANAL CAPITAL CORPORATION (Exact name of registrant as specified in its charter) Delaware 51-0102492 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 717 Fifth Avenue New York, New York 10022 (Address of principal executive offices) (Zip Code) (212) 826-6040 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) or the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No The aggregate market value of the voting stock held by non-affiliates of the registrant at January 15, 2000, was approximately $166,000. The number of shares of Common Stock, $.01 par value, outstanding at January 15, 2000 was 4,326,929. CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX Description Page PART I ITEM 1. Business............................................ 1 ITEM 2 Properties.......................................... 8 ITEM 3. Legal Proceedings................................... 9 ITEM 4. Submission of Matters to a Vote of Stockholders..... 10 PART II ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters................................. 11 ITEM 6. Selected Financial Data............................. 12 ITEM 7. Management's Discussion and Analysis of the Results of Operations and Financial Condition....... 14 ITEM 8. Financial Statements and Supplementary Data......... 22 ITEM 9. Disagreements on Accounting and Financial Disclosure.......................................... 22 PART III ITEM 10. Directors and Executive Officers of the Registrant.. 23 ITEM 11. Executive Compensation.............................. 24 ITEM 12. Security Ownership of Certain Beneficial Owners and Management...................................... 27 ITEM 13. Certain Relationships and Related Transactions...... 29 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 30 i PART I Item 1. Business A. General 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 three distinct businesses -- the management and further development of its agribusiness related real estate properties, stockyard operations and art operations. Real Estate Operations - Canal's real estate properties located in six Midwest states are primarily associated with its current and former agribusiness related operations. Each property is adjacent to a stockyards operation (three of which are once again operated by the company) and consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, truck stops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. Its principal real estate operating revenues are derived from rental income from its Exchange Buildings, lease income f r om land and structures leased to various commercial and retail enterprises and proceeds from the sale of real estate properties. Canal has continued its program of development or sale of what was excess stockyard property. See "Real Estate Operations". Stockyard Operations - As a result of an August 1, 1999 asset purchase agreement, Canal now operates three central public stockyards located in Sioux City, Iowa, 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 f u lfilling 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 and the sale of feed and bedding. See Stockyard Operations . Art Operations - Canal's art dealing operations consist primarily of inventories held for resale of antiquities primarily from ancient Mediterranean cultures and contemporary art primarily of one artist. See "Art Operations". 1 B. Factors That May Affect Future Results This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The Company s actual results of operations and future financial condition may differ materially from those expressed in any such forward-looking statements as a result of many factors that may be beyond the Company s control. Such factors include, without limitation: overall economic conditions; 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 operations; the effects of forgery and counterfeiting on the Company s art operations; securities risks associated with collections of antiquities and art; and the effect of fluctuations in interest rates and inflation on the Company s indebtedness. These risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this Annual Report on Form 10-K, the words believes, estimates, plans, expects, and anticipates and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. C. Real Estate Operations General Real estate operations, which relate primarily to Canal's current and former agribusiness operations, resulted in operating income of $3.0 million, while contributing $6.4 million to Canal's revenues for fiscal 1999. Canal is involved in the management, development or sale of its agribusiness related real estate properties at its current and former stockyard locations. During fiscal 1999, Canal sold approximately 51 acres of land for $4.8 million generating operating income of $2.4 million. Included in the 1999 sales was a 31 acre parcel of land located in South St. Paul, Minnesota (covered by the Master Lease) which was sold to the stockyard operator and a 7 acre parcel of land also located in South St. Paul (which was formerly leased as a commercial truck stop) to a national truck retailer. During fiscal 1999, Canal continued to encounter difficulties in increasing the occupancy rate in its St. Paul, Minnesota Exchange Building. Despite our efforts, the occupancy of this building continues to hover at the 50% rate. We will continue to aggressively pursue replacement tenants for this building in fiscal 2000. 2 As of October 31, 1999, there are approximately 250 acres of undeveloped land owned by Canal adjacent to its current and former stockyards. During the second half of fiscal 1999 Canal changed building managers for this property and has made a number of improvements to the building which management believes will make it more competitive in its market. Canal is continuing the program, which it started several years ago, to develop or sell this property. Former Agribusiness Operations In connection with the 1989 sale of its stockyard operations, Canal entered into a master lease (the Lease ) with the purchaser covering approximately 139 acres of land and certain facilities used by the stockyard operations. The Lease was a 10 year lease, renewable at the purchaser's option for an additional ten year period, with annual rentals of $750,000 per year for the first year escalating to $1.0 million per year for the fourth through the tenth years and $1.0 million per year adjusted for CPI increases thereafter. In addition, Canal retained the right to receive income from certain volume based rental income leases with two meat packing companies located near the stockyards. As discussed below, all the obligations of the lessor and the meat packing companies under the Lease terminated as of October 31, 1999. In September, 1998 Canal sold a 60 acre parcel of land to the City of Omaha, Nebraska. This sale included the 17 acres of land leased to the stockyards operator. As part of this transaction, Canal received the stockyards rental payments under the Lease through October 31, 1999 at which time the operator moved the stockyards to a new location. In April 1999, Canal sold to the stockyard operator the 31 acres located in South St. Paul, Minnesota which was subject to the Lease. Finally, in August 1999 Canal bought the operating assets of the remaining three stockyards subject to the Lease from the operator. The August 1999 transaction released the operator from any further obligations under the Lease. As discussed above, as part of the 1989 agreement Canal retained the right to receive income from certain volume based rental income leases with two meat packing companies located near the stockyards in Sioux City, Iowa and Fargo, North Dakota. The Sioux City, Iowa lease was terminated and the property sold to the meat packer in fiscal 1996. In March 1999 Canal entered into a Settlement Agreement and Mutual Release (the Settlement ) with Federal Beef Processors, Inc. ( Federal ) the operator of the meat packing plant in Fargo, North Dakota. Under the terms of the Settlement the packing plant lease was terminated, all litigation between the parties was dismissed with prejudice and fee title to the improvements on the leased property reverted to Canal. For further information about this lease and associated litigation (see - Item 3 Legal Proceedings and Note 17). The March 1999 Settlement terminated all remaining rights Canal had to receive volume based rental income under the Lease. 3 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 agribusiness related real estate properties. Competition Canal competes in the area of agribusiness related 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 agribusiness revenues are dependent on the ability of the stockyard operations purchaser and the various meat packers with whom Canal has yardage agreements to successfully compete in their respective businesses. D. Stockyard Operations General On August 1, 1999, Canal purchased the operating assets of three public stockyards (formerly subject to the Master Lease between the Company and United Market Services - See Former Agribusiness Operations ) located in Sioux City Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota. Public stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading, and price discovery. The livestock handled by the Company s stockyards include cattle, hogs, and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company s stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers. Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending upon the type of animal, the extent of services provided 4 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. S t o c kyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market. As discussed above, virtually all of the volume at Canal s Sioux City and Sioux Falls stockyards is handled through market agencies and independent commission sales people, while the St. Joseph stockyard has solicitation operations of its own which accounts for approximately half of its livestock volume annually. Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2000 and develop similar operations at its Sioux City stockyards which has experienced severe reductions in volume in recent years. 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. E. Art Operations General Canal established its art operations in October 1988 by acquiring a significant inventory for resale of antiquities primarily from the ancient Mediterranean cultures. In November 1989, Canal expanded its art operations by entering into a cost and revenue sharing agreement with a New York City gallery for the exclusive representation of Jules Olitski, a world renowned artist of contemporary paintings. As part of this agreement Canal purchased a number of Olitski paintings which it holds for resale with a book value of approximately $308,000 at October 31, 1999. The representation agreement expired December 1, 1994 and Canal now operates independently in the marketing of its contemporary art inventory. Due to general economic conditions and the softness of the art markets, Canal has not purchased inventory in several years. However, Canal continues its marketing efforts to sell its existing art inventory through various 5 c o n s ignment agreements and at public auctions. Antiquities and contemporary art represented 44% ($542,758) and 56% ($692,149) and 49% ($713,862) and 51% ($735,263) of total art inventory at October 31, 1999 and 1998, respectively. Canal sells its art primarily through two sources, in galleries and at art auctions. In the case of sales in galleries, the Company has consignment arrangements with various art galleries in the United States. In these arrangements Canal consigns its pieces at specific prices to the gallery. In the case of auctions, the Company primarily consigns its art pieces to the two largest auction houses for their spring and fall art auctions. The Company assigns a minimum acceptable price on the pieces consigned. The auction house negotiates a commission on the sale of major pieces. The pieces can be withdrawn at any time before or during the auction. There are no significant differences between the prices obtained in galleries and those obtained at auction. Art operations resulted in an operating loss of approximately $76,000 while contributing approximately $186,000 to Canal's revenues for fiscal 1999. Risk Dealing in art in general involves various degrees of risk. There can be no assurance that the operations will be profitable. The success of a program of this nature is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. There can be no assurance that Canal will be able to sell its art inventory at a price greater than or equal to its acquisition costs or be able to turn over its art inventory at a desirable rate. In addition, forgery and counterfeiting are risks inherent in the art industry. However, Canal and its associates, through their experience and certain precautionary measures taken in the purchasing process, are confident that this risk has been minimized. Moreover, there are security risks associated with collections of antiquities and art, including problems of security in their storage, transportation and exhibition. Canal has procured insurance to cover such risks. Competition Canal competes in its art operations with investment groups and other dealers, some of whom are substantially larger and have greater financial resources and staff than Canal. There may be a number of institutions and private collectors and dealers who may attempt to acquire the same pieces of art at the same time as Canal, particularly at auction. Similarly, there may be a number of dealers offering similar pieces of art, thereby exerting a downward pressure on prices. 6 F. Investments Available for Sale Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal s officers and directors also serve as officer and/or directors of this company. This investment (in which Canal s ownership interest is approximately 2%) is carried at market value and any unrealized gains or losses are reflected in Stockholders Equity. The realized gains or losses, if any, are recognized in operating results. G. Employees At December 31, 1999, Canal had 94 employees. 7 ITEM 2. Properties Canal's real estate properties located in six Midwest states are primarily associated with its current and former agribusiness related operations. Each property is adjacent to a stockyard operation (three of which are once again operated by the company) and consist, for the most part, of an Exchange Building (commercial office space), land and structures leased to third parties (meat packing facilities, rail car repair shops, truck stops, lumber yards and various other commercial and retail businesses) as well as vacant land available for development or resale. 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, 1999 include: Leased Held for Year Total Exchange Stkyds to Third Develop- Location Acquired Site(2) Bldgs. Opertns(1) Parties ment (3) St. Joseph, MO 1942 137 2 37 0 98 West Fargo, ND 1937 81 2 0 0 79 S. St. Paul, MN 1937 80 5 0 13 62 Sioux City, IA 1937 53 2 24 17 10 Omaha, NE 1976 11 0 0 11 0 Sioux Falls, SD 1937 33 0 31 1 1 Total 395 11 92 42 250 The following schedule shows the average occupancy rate and average rental rate at each of Canal's four Exchange Buildings: 1999 1998 Occupancy Average(5) Occupancy Average(5) Location Rate Rental Rate Rate Rental Rate St. Joseph, MO 75% $ 4.75 75% $ 4.75 West Fargo, ND(4) N/A N/A N/A N/A S. St. Paul, MN 50% $12.29 50% $12.29 Sioux City, IA(6) N/A $ N/A N/A N/A NOTES (1) As a result of an August 1, 1999 asset purchase agreement, Canal now operates three central public stockyards. (2) For information with respect to mortgages and pledges see Note 7. (3) For information related to this see Note 2(c). (4) Canal has closed this building and is offering it for sale. (5) Per square foot. (6) Building closed in fiscal 1998 due to fire damage. 8 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 or its subsidiaries are party to the following litigation: Canal Capital Corporation v. Valley Pride Pack, Inc. Canal commenced an action in U.S. District Court in Minnesota on September 23, 1997, as the assignee of United Market Services Company, against Valley Pride Pack, Inc. (formerly Pine Valley Meats, Inc. and referred to herein as Pine Valley ) to recover unpaid livestock fees and charges (estimated to be as much as $1,000,000) due from Pine Valley under a 1936 Agreement between the predecessors of Pine Valley and Canal. Upon Pine Valley s motion, the Court entered an order dated February 23, 1998 granting summary judgment and dismissing Canal s complaint. Canal appealed the dismissal to the U.S. District Court of Appeals for the Eighth Circuit, which reversed the dismissal and reinstated Canal s complaint. On April 9, 1999, Pine Valley served an answer and counterclaim in which it denied any liability for livestock fees and alleged that the 1936 Agreement violates Section 1 of the Sherman Antitrust Act and the Minnesota Antitrust Law. Pine Valley alleges any livestock fee obligation under the 1936 Agreement constitutes an illegal tying arrangement whereby Canal s predecessor attempted to tie the purchase of land for the operation of the meat packing plant to the purchase of cattle at the stockyards by assessing yardage fees on all cattle purchased for slaughter at the packing plant even if the stockyards provides no services with respect to the cattle. Pine Valley seeks as relief a declaratory judgment that the 1936 Agreement is unenforceable, an injunction preventing Canal from enforcing the fee provisions of the 1936 Agreement, and treble damages for the alleged violation by Canal and its predecessor of the federal and state antitrust laws, together with attorneys fees. Pine Valley has not specified a dollar amount of the alleged antitrust damages which it has stated is the amount paid by Pine Valley in livestock fees. The case is still in the discovery state and we are not in a position to express any opinion as to the ultimate outcome of the matter. 9 Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo Federal Beef Processors, Inc. ( Federal Beef ) operated a meat packing plant on leased premises owned by United Stockyards Company of Fargo ( Union ), a wholly-owned subsidiary of Canal Capital Corporation, located in Fargo, North Dakota. A lawsuit was brought in 1995 by Federal Beef for damages claimed to be suffered as a result of Union s alleged failure to provide adequate maintenance and cleaning services for livestock pens used by Federal Beef under a yardage agreement with Union. That lawsuit was settled in April of 1999. Under the terms of the settlement agreement, the lease relating to the packing plant was terminated; Federal Beef vacated the premises; Federal Beef was required to remove all fixtures, equipment and personal property situated on the premises by July 31, 1999 and Union agreed to reimburse Federal for 50 percent of expenses relating to the premises for the period March through July 1999, up to a maximum of $15,000. ITEM 4. Submission of Matters to a Vote of Shareholders None. 10 PART II ITEM 5. Market for the Registrant's Common Stock and Related Stock Matters 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, 1999 as reported on the "pink sheets" were: Fiscal 1999 Fiscal 1998 Quarter Ended High Low High Low October 31 ................. $ 1/4 -- $ 1/8 $ 1/4 -- $ 3/16 July 31 .................... 1/4 -- 1/8 1/4 -- 3/16 April 30 ................... 1/4 -- 1/8 1/4 -- 3/16 January 31 ................. 1/4 -- 1/8 1/4 -- 3/16 There were no cash dividends paid during fiscal 1999 or 1998. Canal is subject to restrictions on the payment of cash dividends under certain debt agreements. As of January 20, 2000, Canal had approximately 1,500 holders of record of its common stock, par value $.01 per share. 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA THE FOLLOWING DATA HAVE BEEN DERIVED FROM CONSOLIDATED FINANCIAL STATEMENTS THAT HAVE BEEN AUDITED BY TODMAN & CO., CPAs, P.C., INDEPENDENT ACCOUNTANTS. THE INFORMATION SET FORTH BELOW IS NOT NECESSARILY INDICATIVE OF THE RESULTS OF FUTURE OPERATIONS AND SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. (000'S OMITTED, EXCEPT PER SHARE DATA) YEARS ENDED OCTOBER 31, 1999 1998 1997 1996 1995 OPERATING DATA: REVENUES FROM CONTINUING OPERATIONS $7,584(1) $4,457(2) $5,311(3) $9,049(4) $4,854(5) NET (LOSS) INCOME $1,285 ($1,413) ($1,001) $ 842(6) $(1,518)(7) (LOSS) INCOME PER SHARE: BASIC $0.24 ($0.37) ($0.27) $ 0.16 $(0.40) DILUTED $0.24 ($0.37) ($0.27) $ 0.16 $(0.40) CASH DIVIDENDS PAID $0.00 $0.00 $ 0.00 $0.00 $0.00 WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,327 4,352 - DILUTED(9) 4,327 4,327 5,327 5,327 5,352 AT OCTOBER 31, 1999 1998 1997 1996 1995 BALANCE SHEET DATA: CURRENT ASSETS $1,661 $1,197 $2,151 $2,015 $1,443 PROPERTY ON OPERATING LEASES, NET 4,336 5,861 5,323 7,106 8,385 ART INVENTORY NON-CURRENT 735 949 2,311 3,089 4,901 OTHER ASSETS 1,202 1,500 3,175 3,279 3,474 TOTAL ASSETS $ 7,934 $ 9,507 $12,960 $15,489 $18,203 CURRENT LIABILITIES $1,965 $2,186 $2,068 $ 3,426 $ 2,710 LONG-TERM DEBT 2,612 5,167 6,050 6,980 11,379 STOCKHOLDERS' EQUITY 3,357 2,154 4,842 5,083 4,114 TOTAL LIAB. & STOCKHOLDERS'EQUITY $ 7,934 $ 9,507 $12,960 $15,489 $18,203 COMMON SHARES OUTSTANDING AT YEAR-END 4,327 4,327 4,327 4,327 4,327 12 ITEM 6. Selected Financial Data (continued..) NOTES: (1) The revenue increase was due primarily to a $3.4 million increase in sales of real estate coupled with the $1 million of revenue from the new stockyard operations. (2) The revenue decrease was due primarily to a $1.1 million decrease in sales of real estate. (3) The revenue decrease was due primarily to a $2.7 million decrease in sales of real estate. (4) The revenue increase was due primarily to a $4.4 million increase in sales of real estate which was attributable to the Sioux City, Iowa lease termination and property sale. (5) The revenue decrease is due primarily to a decrease of $2.1 million in real estate sales and the absence of a $1.5 million judgment reversal taken in fiscal 1994. (6) Includes a $3.8 million gain on the sale of real estate offset by a $1.7 million loss from art operations which included a $1.5 million increase in the art inventory valuation allowance. (7) Includes the absence of a judgment reversal of $1.5 million in 1994 against the Company, a $0.5 million increase in the art inventory valuation reserve, absence of $0.3 million gain on sale of investments, a $0.2 million increase in interest expense partially offset by a $0.6 million gain on real estate sales. (8) For discussion of material uncertainties and commitments, see Notes 12 and 17 to the Consolidated Financial Statement. (9) Weighted average number of diluted shares have been calculated to give effect to certain convertible notes issued in March 1994. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - 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 seven of the last ten years and is involved in litigation with a meat packer located in South St. Paul, Minnesota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1 and 17). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Canal recognized net income of $1.3 million for 1999 as compared to the 1998 net loss of $1.4 million and the 1997 net loss of $1.0 million. After recognition of preferred stock dividend payments (paid in additional shares of preferred stock for each of fiscal 1999, 1998 and 1997) of $235,000 in 1999, $200,000 in 1998 and $182,000 in 1997, the results attributable to common stockholders were net income of $1.0 million in 1999, a net loss of $1.6 in 1998 and a net loss of $1.2 million in 1997. Canal s 1999 net income of $1.3 million is due primarily to a $1.9 million increase in its gain on sales of real estate (due to a $3.4 million increase in real estate sales) in the current year. This was offset to a certain extent by a $0.8 million decrease in Canal s real estate operations rental income, which was the result of Canal s sale of certain income producing property including the Omaha, Nebraska property in September 1998 and the 31 acres leased for stockyard operations located in South St. Paul, Minnesota in April 1999. Canal s 1998 net loss of $1.4 million was due primarily to a $1.2 million loss on its art operations and a $0.3 million reduction in its gain on sales of real estate in fiscal 1998. These were offset by moderate decreases in both interest and general and administrative expenses. Canal's revenues from continuing operations consist of revenues from its real estate operations, stockyard operations (fiscal 1999 only) and art operations. Due to general economic conditions and more specifically a depressed national art market, Canal's aggregate revenues from art sales and the prices at which sales were made have significantly declined in recent years. Revenues in 1999 increased by $3.1 million to $7.6 million as compared with 1998 revenues which had decreased by $0.8 million to $4.5 million from 1997 revenues of $5.3 million. As discussed above, the 1999 increase is due primarily to the $3.4 million increase in sales of real estate; the inclusion (fiscal 1999 only) of revenues from Canal s newly acquired stockyard operations of $1.0 million, which were offset by a $0.8 million decrease in rental income from real estate operations. The 1998 decrease is due primarily to a $1.1 million decrease in sales of real estate offset by a gain on insurance proceeds of $0.4 million related to a fire in Sioux City, Iowa. 14 Capital Resources and Liquidity 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 seven of the last ten years and is involved in litigation with a meat packer located in South St. Paul, Minnesota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1 and 17). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001, the proceeds of which were used to repay in full the Company s variable rate mortgage notes due May 15, 1998 ($2,605,000), its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes which were due December 31, 1997 ($320,000) plus accrued interest thereon. The purchasers of these notes included certain entities controlled by the Company s Chairman, the Company s Chief Executive Officer and members of their families. The variable rate mortgage notes issued have essentially the same terms and conditions as the variable rate mortgage notes which were repaid. The notes carry interest at the highest of four variable rates, determined on a quarterly basis. These notes, among other things, prohibit Canal from becoming an investment company as defined by the Investment Company Act of 1940; require Canal to maintain minimum net worth; restrict Canal s ability to pay cash dividends or repurchase stock; require principal prepayments to be made only out of the proceeds from the sale of certain assets, and require the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. At October 31, 1998 the Company was in technical default of this mortgage note agreement as it relates to minimum net worth. The Company received a waiver of this default from the noteholders. On July 29, the above notes were amended to extend the maturity date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that the additional due to the holders of the notes shall become current and be treated as principal due under the notes; and to have certain of the holders loan the Company $525,000 in additional financing, the proceeds of which was used to repay in full certain of the holders of the notes. As a result, the notes are now held in total by the Company s Chief Executive Officer and members of his family. As of October 31, 1999, the balance due under these notes was $833,000, all of which is classified as long-term debt-related party. On January 10, 2000, the above notes were further amended to have the noteholders loan the Company $1,725,000 in additional financing, the proceeds of which was used to repay in full all of the Company s outstanding non related party long-term debt. 15 Cash and cash equivalents of $416,000 at October 31, 1999 increased $382,000 or 1,124% from $34,000 at October 31, 1998. Net cash used by operations in fiscal 1999 was $2.1 million. Substantially all of the 1999 net proceeds from the sale of real estate of $4.8 million and the proceeds from the sale of art of $0.2 million less the cash used in operations was used to reduce outstanding debt and accrued expenses. During 1999 Canal reduced its variable rate mortgage notes by $2.0 million and other long-term debt by $0.6 million for a net 1999 debt reduction of $2.6 million. At October 31, 1999 the Company s current liabilities exceed current assets by $0.3 million (which was a decrease of $0.7 million) as compared to October 31, 1998 when the Company's current liabilities exceeded current assets by $1.0 million, which represented an increase of $1.1 million from 1997. The 1999 improvement in the Company s liquidity is due primarily to strong real estate sales experienced during the year. The proceeds from these sales not only allowed Canal to significantly pay down its long-term debt, but also provided the Company with the ability to increase its cash position by $0.4 million while reducing its current liabilities by $0.2 million. The only required principal repayments under Canal's debt agreements for fiscal 2000 (after giving consideration to the January 10, 2000 refinancing - see Note 6) will be from the proceeds (if any) of the sale of certain assets. Canal continues to closely monitor and reduce where possible its overhead expenses and plans to continue 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. 1999 COMPARED TO 1998 Real Estate Revenues Real estate revenues for 1999 of $6.4 million accounted for 84.9% of the 1999 revenues as compared to revenues of $4.2 million or 95.1% for 1998. Real estate revenues are comprised of rental income from Exchange Building (commercial office space) rentals and other lease income from the rental of vacant land and certain structures (15.8% and 32.5%), Ground lease income (9.2% and 21.8%), volume based rental income (0.3% and 3.0%) and sale of real estate and other income (74.7% and 42.7%) for 1999 and 1998, respectively. The 1999 increase is due primarily to the $3.4 million increase in sales of 16 real estate, offset by the combined $0.8 million decrease in rental ($0.4) ground lease ($0.3) and volume based ($0.1) income. The decrease in rental income of $0.4 million is due primarily to Canal s September 1998 sale of its Omaha, Nebraska property. The decrease in ground lease income of $0.3 million is due to the April 1999 sale of the South St. Paul, Minnesota stockyard property combined with Canal s August 1, 1999 purchase of the stockyard assets in Sioux City, Iowa; St. Joseph, Missouri and Sioux Falls, South Dakota, thereby terminating the ground lease. The decrease in volume based rental income of $0.1 million is due to the permanent closing of this plant by its operator in January, 1999. The percentage variations in the year to year comparisons are due to the significant increase in real estate sales for fiscal 1999. Real Estate Expenses Real estate expenses for 1999 of $3.5 million increased by $1.0 million (41.7%) from $2.5 million in 1998. Real estate expenses are comprised of labor, operating and maintenance (14.3% and 36.2%), depreciation and amortization (4.4% and 8.8%), taxes other than income taxes (9.0% and 9.9%), cost of real estate sold (69.9% and 41.5%),and general and administrative and other expenses (2.4% and 3.6%) for 1999 and 1998, respectively. The 1999 increase in real estate expenses is due primarily to the $1.4 million increase in cost of real estate sold offset by the combined $0.4 million decrease in other real estate expenses which resulted primarily from Canal s September 1999 sale of the Omaha, Nebraska property. The percentage variations in year to year comparisons is due primarily to the increase in the cost of real estate sold for fiscal 1999. Art Operations Management estimates it may take approximately five years to dispose of its current art inventory. The Company's ability to dispose of its art inventory is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. Additionally, the art market itself is a very competitive market. Accordingly, there can be no assurance that Canal will be successful in disposing of its art inventory within the time frame discussed above. Canal has its art inventory appraised by independent appraisers annually. The 1999 appraisal covered approximately 57% of the inventory value. The appraised values estimate the current market value of each piece giving consideration to Canal's practices of engaging in consignment, private and public auction sales. The net realizable value of the remaining 43% of the inventory was estimated by management based in part on the Company s history of losses sustained on art sales in the current and previous years 17 and in part on the results of the independent appraisals done. In fiscal 1999 Canal applied against sales $621,300 of the valuation allowance against its art inventory, thereby, decreasing the total valuation allowance to $2,778,700 as of October 31, 1999 as compared to $3,400,000 and $2,850,000 at October 31, 1998 and 1997, respectively. The valuation allowance represents management's best estimate of the loss that will be incurred by the Company in the normal course of business. The estimate is predicated on past history and the information that was available at the time that the financial statements were prepared. The provision contemplates the loss that could result if the level of sale anticipated was achieved. The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. The price at which pieces are consigned is usually in line with appraisals and above the cost of the piece. The amount classified as current represents management's best estimate of the minimum amount of inventory that will be sold in this market. Management believes that the provision discussed above has effectively reduced inventory to its estimated net realizable value. The Company will continually monitor the market for its art inventory and will make adjustments to the carrying value of its art inventory as such adjustments become necessary. The Company's plan to sell inventory at auction is contemplated in the normal course of business. Auction in this context is one of the usual channels used for disposal of its art inventory. The proceeds from these sales are used to reduce the Company's outstanding debt and finance current operations. If these sales are not made the Company has alternate means of raising cash such as sales of real estate, sales of investments available for sale, raising of new capital and further restructuring of debt. Some of these measures were successfully implemented in fiscal 1999. Art Revenues Art revenues for 1999 of $186,000 decreased $35,000 or 15.6% from $221,000 in 1998. Art revenues are comprised of proceeds from the sale of antiquities and contemporary art (100.0% and 100.0%) and commission income on sale of art owned by third parties (0.0% and 0.0%) for 1999 and 1998, respectively. The Company's art inventory was reduced through sales by $0.8 million and $0.4 in fiscal years 1999 and 1998, respectively. Art Expenses Art expenses for 1999 of $0.3 million decreased by $1.1 million (81.3%) from $1.4 million in 1998. Art expenses (excluding valuation allowances) consisted of the cost of art sold (95.1% and 95.3%) and selling, general and 18 administrative expenses (4.9% and 4.7%) for 1999 and 1998, respectively. Included in art expenses is a $0.6 million reduction and a $0.6 million increase in the valuation allowance against the Company's art inventory (see Note 9 to the Consolidated Financial Statements) for fiscal years 1999 and 1998, respectively. General and Administrative General and administrative expenses for 1999 of $1.3 million increased $0.1 million (5.3%) from $1.2 million in 1998. The major components of general and administrative expenses are officers salaries (33.6% and 35.4%), rent (8.2% and 7.8%), legal and professional fees (3.4% and 9.9%), insurance (10.6% and 12.9%) and office salaries (8.7% and 9.2%) for 1999 and 1998, respectively. The percentage increase in legal and professional fees is due to a sharp increase in legal fees associated with the Pine Valley lawsuit. The percentage increase in rent reflects the increase in rent expense for Canal s New York office space. The percentage decreases in officers salaries, insurance and office salaries is a result of the aggregate increase in total general and administrative expenses for fiscal 1999. Interest and Other Income Interest and other income of $150,000 for 1999 increased $2,000 (1.8%) from $148,000 in fiscal 1998. Interest and other income amounts are comprised primarily of dividend and interest income. Interest Expense Interest expense for 1999 of $0.5 million decreased by $0.3 million (41.7%) from $0.8 million in 1998. The 1999 decrease is due primarily to the aggregate reduction in the outstanding debt. Interest rates on Canal's variable rate mortgage notes averaged 11.00% in 1999 as compared to an average of 12.00% in both 1998 and 1997. At October 31, 1999 the outstanding balance of these notes was $833,000. Other Expense Other expense of $139,000 for 1999 was unchanged from fiscal 1998. 19 1998 COMPARED TO 1997 Real Estate Revenues Real estate revenues for 1998 of $4.2 million accounted for 95.1% of the 1998 revenues as compared to revenues of $5.2 million or 97.8% for 1997. Real estate revenues are comprised of rental income from Exchange Building (commercial office space) rentals and other lease income from the rental of vacant land and certain structures (32.5% and 30.6%), Ground lease income (21.8% and 17.8%), volume based rental income (3.0% and 2.1%) and sale of real estate and other income (42.7% and 49.5%) for 1998 and 1997, respectively. The 1998 decrease is due primarily to the $1.1 million decrease in sales of real estate. The percentage variations in the year to year comparisons are due to the significant decrease in real estate sales for fiscal 1998. Real Estate Expenses Real estate expenses for 1998 of $2.5 million decreased by $0.9 million (25.8%) from $3.3 million in 1997. Real estate expenses are comprised of labor, operating and maintenance (36.2% and 25.2%), depreciation and amortization (8.8% and 10.4%), taxes other than income taxes (9.9% and 7.8%), cost of real estate sold (41.5% and 27.1%),and general and administrative and other expenses (3.6% and 29.5%) for 1998 and 1997, respectively. The 1998 decrease in real estate expenses is due primarily to the $0.9 million write down in value in 1997 of the Omaha property. The decrease in general and administrative and other expenses also reflects the elimination of the 1997 $0.9 million write down in value of the Omaha property. The percentage variations in year to year comparisons is due to the decrease in the cost of real estate sold for fiscal 1998. Art Operations Management estimates it may take approximately five years to dispose of its current art inventory. The Company's ability to dispose of its art inventory is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. Additionally, the art market itself is a very competitive market. Accordingly, there can be no assurance that Canal will be successful in disposing of its art inventory within the time frame discussed above. Canal has its art inventory appraised by independent appraisers annually. The 1998 appraisal covered approximately 50% of the inventory value. The appraised values estimate the current market value of each piece giving consideration to Canal's practices of engaging in consignment, private and public auction sales. The net realizable value of the remaining 50% of the inventory was estimated by management based in part on the Company s 20 history of losses sustained on art sales in the current and previous years and in part on the results of the independent appraisals done. In fiscal 1998 Canal recognized an additional $550,000 valuation allowance against its art inventory, thereby, increasing the total valuation allowance to $3,400,000 as of October 31, 1998 as compared to $2,850,000 and $2,500,000 at October 31, 1997 and 1996, respectively. The valuation allowance represents management's best estimate of the loss that will be incurred by the Company in the normal course of business. The estimate is predicated on past history and the information that was available at the time that the financial statements were prepared. The provision contemplates the loss that could result if the level of sale anticipated was achieved. The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. The price at which pieces are consigned is usually in line with appraisals and above the cost of the piece. The amount classified as current represents management's best estimate of the minimum amount of inventory that will be sold in this market. Management believes that the provision discussed above has effectively reduced inventory to its estimated net realizable value. The Company will continually monitor the market for its art inventory and will make adjustments to the carrying value of its art inventory as such adjustments become necessary. The Company's plan to sell inventory at auction is contemplated in the normal course of business. Auction in this context is one of the usual channels used for disposal of its art inventory. The proceeds from these sales are used to reduce the Company's outstanding debt and finance current operations. If these sales are not made the Company has alternate means of raising cash such as sales of real estate, sales of investments available for sale, raising of new capital and further restructuring of debt. Some of these measures were successfully implemented in fiscal 1998. Art Revenues Art revenues for 1998 of $221,000 increased $104,000 or 88.2% from $117,000 in 1997. Art revenues are comprised of proceeds from the sale of antiquities and contemporary art (100.0% and 97.5%) and commission income on sale of art owned by third parties (0.0% and 2.5%) for 1998 and 1997, respectively. The Company's art inventory was reduced through sales by $0.8 million and $0.4 in fiscal years 1998 and 1997, respectively. Art Expenses Art expenses for 1998 of $1.4 million increased by $0.6 million (69.9%) from $0.8 million in 1997. Art expenses (excluding valuation allowances) 21 consisted of the cost of art sold (95.3% and 90.7%) and selling, general and administrative expenses (4.7% and 9.3%) for 1998 and 1997, respectively. Included in art expenses is a $0.6 million and a $0.4 million valuation allowance against the Company's art inventory (see Note 9 to the Consolidated Financial Statements) for fiscal years 1998 and 1997, respectively. General and Administrative General and administrative expenses for 1998 of $1.2 million decreased $0.1 million (3.1%) from $1.3 million in 1997. The major components of general and administrative expenses are officers salaries (35.4% and 34.3%), rent (7.8% and 8.9%), legal and professional fees (9.9% and 10.0%), insurance (12.9% and 11.9%) and office salaries (9.2% and 10.0%) for 1998 and 1997, respectively. The percentage increases in officers salaries, legal and professional fees and insurance is a result of the aggregate decrease in total general and administrative expenses. Interest and Other Income Interest and other income of $148,000 for 1998 decreased $89,000 (37.5%) from $236,000 in fiscal 1997. Interest and other income amounts are comprised primarily of dividend and interest income. Interest Expense Interest expense for 1998 of $0.8 million decreased by $0.2 million (16.4%) from $1.0 million in 1997. The 1998 decrease is due primarily to the aggregate reduction in the outstanding debt. Interest rates on Canal's variable rate mortgage notes averaged 12.00% in 1998 as compared to an average of 12.00% in 1997 and an average of 11.94% in 1996. At October 31, 1998 the outstanding balance of these notes was $2,846,000. Other Expense Other expense of $139,000 for 1998 decreased $61,000 (30.3%) from $200,000 in fiscal 1997. ITEM 8. Financial Statements and Supplemental Data The response to this item is included in Item 14(A) of the report. ITEM 9. Disagreements on Accounting and Financial Disclosure None. 22 PART III ITEM 10. Directors and Executive Officers of the Registrant 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 1999 the Board of Directors held one meeting, and the Executive Committee held four meetings, all of which were attended by both Mr. Edelman and Mr. Schultz. 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 60, 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 has been a Director, Chairman of the Board, and Chairman of the Executive Committee of Datapoint Corporation ("Datapoint") since March 1985 and has been Datapoint s Chief Executive Officer since February 1993. Mr. Edelman has served as General Partner of Asco Partners, a general partner of Edelman Securities Company L.P. (formerly Arbitrage Securities Company) since June 1984 and is a General Partner and Manager of various investment partnerships and funds. Michael E. Schultz, age 63, 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 53, has been a Director since 1984. Mr. Agranoff is currently Vice President, General Counsel and Corporate Secretary of Datapoint and has been a Director of Datapoint since 1991. Mr. Agranoff has been a General Partner of Edelman Securities Company L.P. (formerly Arbitrage Securities Company) and Plaza Securities Company for more than five years. Mr. Agranoff is a director of Bull Run Corporation, Atlantic Gulf Communities and The American Energy Group, Ltd.. 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 50, has been Vice President, Chief Financial Officer and Treasurer since January 1989 and assumed responsibility as Secretary of the Company in September 1995. Mr. Schauder was corporate controller from July 1985 to January 1989. 23 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. 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 1999 exceeded $100,000. SUMMARY COMPENSATION TABLE - Annual Compensation Name and Principal Position Year Salary Michael E. Schultz 1999 $ 165,000 President and Chief 1998 $ 165,000 Executive Officer 1997 $ 165,000 Asher B. Edelman 1999 $ 165,000 Chairman of the Board 1998 $ 165,000 and Executive Committee 1997 $ 165,000 Reginald Schauder 1999 $ 101,200 Vice President, Chief 1998 $ 101,200 Financial Officer 1997 $ 101,200 Treasurer and Secretary 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 $53,000, $42,000 and $52,000 for fiscal years 1999, 1998 and 1997, 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. 24 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, 1999. Mr. Schultz has no benefit under the Retirement Plan. For further information on the Retirement Plan see Note 9. Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option Value Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Name Options at Fiscal Year End At Fiscal Year End Michael E. Schultz 255,500* $ -0- Asher B. Edelman 20,000* $ -0- Reginald Schauder 15,500* $ -0- * All options were exercisable at October 31, 1999. 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. Mr. Agranoff was granted 25,000 options of the Company under the 1985 Directors Stock Option Plan, as amended, in lieu of an annual retainer and per meeting fees. The options were granted December 1991. 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. 25 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. In addition, the 1985 Plan was amended on December 18, 1991 to provide an automatic grant of options covering 25,000 shares to each current and new director who is not an employee of the Company including Mr. Agranoff. The 1985 Plan is administered by the Board of Directors of the Company. During the 1999 fiscal year, no options under the 1985 plan were granted and no options previously granted were exercised. At October 31, 1999, options covering an aggregate of 30,500 shares were outstanding under the 1985 Plan and were held by members of the Board of Directors and Executive Committee. The exercise price per share of all outstanding options under the 1985 Plan ranges from $0.13 to $0.25. The expiration dates for outstanding options under the 1985 Plan range from December 2001 to January 2003. 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. 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. Certain funds of the Company have been invested in the securities of other companies in which Mr. Edelman, other directors of the Company or their affiliates are directors or officers, or in which one or more of such persons may also have invested. Since November 1, 1993, such companies included Datapoint 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. 26 ITEM 12. Securities Ownership of Certain Beneficial Owners and Management 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, 2000 were: SECURITIES BENEFICIALLY OWNED No. of Common Shares Percent of Class Name Beneficially owned (a) of Common Stock Asher B. Edelman 2,477,015 (c) 56.98 Michael E. Schultz 314,335 (c) 6.86 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. 27 SECURITIES OWNED BY MANAGEMENT The following table sets forth certain information as of January 15, 2000, 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 25,000 (b) 0.57 Asher B. Edelman 2,477,015 (c)(d) 56.98 Reginald Schauder 15,600 (e) 0.36 Michael E. Schultz 314,335 (f)(g) 6.86 All Directors and Officers as a group (4 persons) 2,831,950 60.99 (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) Includes 25,000 shares subject to options which are presently exercisable. (c) The number reported herein for Mr. Edelman includes 31,300 shares held in Mr. Edelman's retirement plan, 20,000 shares subject to options granted to Mr. Edelman which are presently exercisable, 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, 411,750 shares of common stock owned by the Edelman Value Fund Ltd. (the Fund ) of which Mr. Edelman is the investment manager, 38,830 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 28 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. Mr. Edelman as the investment manager of the Fund directs the voting and disposition of the Fund s securities. 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 137,750 shares of common stock owned by Mr. Edelman's wife, 2,900 shares held in his wife's retirement plan and 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. (d) The number reported herein for Mr. Edelman excludes 232,500 shares of common stock owned by Mr. Edelman s mother, 39,865 shares of common stock owned by Mr. Edelman's former wife and 29,510 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's former wife is the custodian, as to which Mr. Edelman expressly disclaims beneficial ownership. (e) Includes 100 shares owned directly and 15,500 shares subject to options which are presently exercisable. (f) Includes 58,835 shares owned directly and 255,500 shares subject to options which are presently exercisable. (g) 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 expresses disclaims beneficial ownership. ITEM 13. Certain Relationships and Related Transactions See: "Compensation Committee Interlocks and Insider Participation" 29 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) 1. Financial Statements and Notes See accompanying index to consolidated financial statements. (a) 2. Schedules and Supplementary Note None (a) 3. Exhibits See accompanying index to exhibits. (b) Reports on Form 8-K During the quarter ended October 31, 1999 the Company filed no reports on Form 8-K. 30 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 26th day of January, 2000. 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 Michael E. Schultz (Principal Executive Officer) January 26, 2000 Vice President-Finance Secretary and Treasurer /S/ Reginald Schauder (Principal Financial and Reginald Schauder Accounting Officer) January 26, 2000 /S/ Asher B. Edelman Chairman of the Board Asher B. Edelman and Director January 26, 2000 /S/ Gerald N. Agranoff Gerald N. Agranoff Director January 26, 2000 31 FORM 10-K -- ITEM 14(a)(1) and (2) CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following documents are filed as part of this report: (a) 1. Financial Statements -- Independent Accountants Report.......................... F-2 Consolidated Balance Sheets October 31, 1999 and 1998... F-3 Consolidated Statements of Operations and Comprehensive Income for the years ended October 31, 1999, 1998 and 1997............................................. F-5 Consolidated Statements of Changes in Stockholders' Equity for the years ended October 31, 1999, 1998 and 1997............................................. F-7 Consolidated Statements of Cash Flows for the years ended October 31, 1999, 1998 and 1997.......... F-8 Notes to Consolidated Financial Statements.............. F-9 F-1 INDEPENDENT ACCOUNTANTS REPORT To the Stockholders of Canal Capital Corporation: We have audited the accompanying consolidated balance sheets of Canal Capital Corporation (a Delaware corporation) and Subsidiaries as of October 31, 1999 and 1998 and the related consolidated statements of operations & comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three year period ended October 31, 1999. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Canal Capital Corporation and Subsidiaries as of October 31, 1999 and 1998, and the results of their operations and cash flows for each of the years in the three year period ended October 31, 1999, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 17 to the financial statements, the Company has suffered recurring losses from operations in seven of the last ten years and is involved in various litigations. 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 Notes 1 and 17. 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., CPA s,P.C. New York, N.Y. TODMAN & CO., CPAs, P.C. January 13, 2000 Certified Public Accountants (N.Y.) F-2 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1999 AND 1998 1999 1998 ASSETS CURRENT ASSETS: CASH AND CASH EQUIVALENTS $416,191 $ 33,538 NOTES AND ACCOUNTS RECEIVABLE, NET 321,065 211,070 ART INVENTORY, NET OF A VALUATION ALLOWANCE OF $ 1,500,000 AT BOTH OCTOBER 31, 1999 AND 1998 500,000 500,000 STOCKYARDS INVENTORY 13,189 0 INVESTMENTS 191,833 278,175 PREPAID EXPENSES 218,645 173,938 TOTAL CURRENT ASSETS 1,660,923 1,196,721 NON-CURRENT ASSETS: PROPERTY ON OPERATING LEASES, NET OF ACCUMULATED DEPRECIATION OF $ 1,307,638 AND $ 1,671,222 FOR 1999 AND 1998, RESPECTIVELY 3,088,550 5,861,064 PROPERTY USED IN STOCKYARD OPERATIONS, NET OF ACCUMULATED DEPRECIATION OF $ 2,500 AND $ ZERO FOR 1999 AND 1998, RESPECTIVELY 1,247,500 0 ART INVENTORY NON-CURRENT, NET OF A VALUATION ALLOWANCE OF $ 1,278,700 AND $1,900,000 AT OCTOBER 31, 1999 AND 1998, RESPECTIVELY 734,907 949,125 OTHER ASSETS: PROPERTY HELD FOR DEVELOPMENT OR RESALE 977,695 1,318,095 DEFERRED LEASING AND FINANCING COSTS 16,337 12,866 DEPOSITS AND OTHER 207,973 169,578 1,202,005 1,500,539 $ 7,933,885 $ 9,507,449 ============ =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, 1999 AND 1998 1999 1998 LIABILITIES & STOCKHOLDERS' EQUITY CURRENT LIABILITIES: CURRENT PORTION OF LONG-TERM DEBT $ 75,000 $ 110,000 ACCOUNTS PAYABLE AND ACCRUED EXPENSES 1,879,611 2,061,210 INCOME TAXES PAYABLE 10,108 14,314 TOTAL CURRENT LIABILITIES 1,964,719 2,185,524 LONG-TERM DEBT, LESS CURRENT PORTION 1,778,710 2,321,433 LONG-TERM DEBT, RELATED PARTY 833,000 2,846,000 2,611,710 5,167,433 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: PREFERRED STOCK, $0.01 PAR VALUE: 5,000,000 SHARES AUTHORIZED; 3,879,258 AND 3,411,681 SHARES ISSUED AND OUTSTANDING AT OCTOBER 31, 1999 AND 1998, RESPECTIVELY AND AGGREGATE LIQUIDATION PREFERENCE OF $10.00 PER SHARE FOR $ 38,787,560 AND $ 34,116,810 AT OCTOBER 31, 1999 AND 1998, RESPECTIVELY 38,793 34,117 COMMON STOCK, $0.01 PAR VALUE: 10,000,000 SHARES AUTHORIZED; 5,313,794 SHARES ISSUED & 4,326,929 SHARES OUTSTANDING AT OCTOBER 31, 1999 AND 1998, RESPECTIVELY 53,138 53,138 ADDITIONAL PAID-IN CAPITAL 27,274,159 27,033,046 ACCUMULATED DEFICIT (10,758,188) (11,808,043) 986,865 SHARES OF COMMON STOCK HELD IN TREASURY, AT COST (11,003,545) (11,003,545) COMPREHENSIVE INCOME: PENSION VALUATION RESERVE (1,903,176) (1,896,838) UNREALIZED GAIN ON INVESTMENTS AVAILABLE FOR SALE (343,725) (257,383) 3,357,456 2,154,492 $ 7,933,885 $ 9,507,449 ============ =========== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 1999 1998 1997 REAL ESTATE OPERATIONS: REAL ESTATE REVENUES: SALE OF REAL ESTATE $4,794,570 $1,434,439 $2,496,943 RENTAL INCOME 1,014,925 1,376,714 1,591,005 GROUND LEASE INCOME 592,011 924,000 924,000 VOLUME BASED RENTAL INCOME 21,645 125,617 110,414 OTHER INCOME 16,364 375,000 71,109 6,439,515 4,235,770 5,193,471 REAL ESTATE EXPENSES: COST OF REAL ESTATE SOLD 2,435,630 1,019,509 896,698 LABOR, OPERATING AND MAINTENANCE 499,143 891,809 833,181 DEPRECIATION AND AMORTIZATION 153,430 216,572 343,741 TAXES OTHER THAN INCOME TAXES 313,743 240,415 256,800 PROVISION FOR LITIGATION SETTLEMENT 0 0 (60,359) WRITE DOWN OF REAL ESTATE PROPERTY 0 0 936,689 GENERAL AND ADMINISTRATIVE 81,051 89,352 104,606 3,482,997 2,457,657 3,311,356 INCOME FROM REAL ESTATE OPERATIONS 2,956,518 1,778,113 1,882,115 STOCKYARD OPERATIONS: STOCKYARD REVENUES: YARD HANDLING AND AUCTION $ 851,014 $ 0 $ 0 FEED AND BEDDING INCOME 64,388 0 0 RENTAL INCOME 758 0 0 OTHER INCOME 41,587 0 0 957,747 0 0 STOCKYARD EXPENSES: LABOR AND RELATED COSTS 402,658 0 0 OTHER OPERATING AND MAINTENANCE 197,625 0 0 FEED AND BEDDING EXPENSE 50,215 0 0 DEPRECIATION AND AMORTIZATION 2,500 0 0 TAXES OTHER THAN INCOME TAXES 57,533 0 0 GENERAL AND ADMINISTRATIVE 106,428 0 0 816,959 0 0 INCOME FROM STOCKYARD OPERATIONS 140,788 0 0 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 Continued ... 1999 1998 1997 ART OPERATIONS: ART REVENUES: SALES $ 186,400 $ 220,800 $ 114,350 OTHER REVENUES 0 0 2,982 186,400 220,800 117,332 ART EXPENSES: COST OF ART SOLD 839,986 814,936 432,286 VALUATION RESERVE (621,300) 550,000 350,000 SELLING, GENERAL AND ADMINISTRATIVE 43,736 39,920 44,541 262,422 1,404,856 826,827 LOSS FROM ART OPERATIONS (76,022) (1,184,056) (709,495) GENERAL AND ADMINISTRATIVE EXPENSE (1,283,021) (1,218,239) (1,256,854) INCOME (LOSS) FROM OPERATIONS 1,738,263 (624,182) (84,234) OTHER INCOME (EXPENSE): INTEREST AND OTHER INCOME 150,385 147,744 236,470 INTEREST EXPENSE (227,685) (333,424) (804,719) INTEREST EXPENSE- RELATED PARTY (237,451) (464,300) (149,000) OTHER EXPENSE (138,508) (139,308) (200,000) (453,259) (789,288) (917,249) INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 1,285,004 (1,413,470) (1,001,483) PROVISION FOR INCOME TAXES 0 0 0 NET INCOME (LOSS) 1,285,004 (1,413,470) (1,001,483) OTHER COMPREHENSIVE INCOME (LOSS): MINIMUM PENSION LIABILITY ADJUSTMENT (6,338) (411,197) 134,055 UNREALIZED (LOSS) GAIN ON INVESTMENTS AVAILABLE FOR SALE (86,342) (873,183) 615,800 COMPREHENSIVE INCOME (LOSS) $1,192,324 $(2,697,850) $ (251,628) INCOME (LOSS) PER COMMON SHARE: - BASIC $ 0.24 $ (0.37) $ (0.27) - DILUTED $ 0.24 $ (0.37) $ (0.27) WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,326,929 4,326,929 4,326,929 - DILUTED 4,326,929 4,326,929 5,326,929 SEE NOTE TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 CANAL CAPITAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED OCTOBER 31, 1999, 1998, AND 1997 COMMON STOCK PREFERRED STOCK NUMBER NUMBER OF OF SHARES AMOUNT SHARES AMOUNT BALANCE, NOV 1,1996 5,313,794 $53,138 2,703,299 $27,033 NET INCOME 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 294,601 2,946 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 -------------------- --------------------- BALANCE, OCT 31,1997 5,313,794 $53,138 2,997,900 $29,979 NET INCOME 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 413,781 4,138 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 UNREALIZED LOSS ON INVEST. 0 0 0 0 -------------------- --------------------- BALANCE, OCT 31,1998 5,313,794 $53,138 3,411,681 $34,117 NET LOSS 0 0 0 0 PREFERRED STOCK DIVIDEND 0 0 467,577 4,676 MINIMUM PEN. LIAB. ADJ. 0 0 0 0 UNREALIZED LOSS ON INVEST. 0 0 0 0 -------------------- --------------------- BALANCE, OCT 31,1999 5,313,794 $53,138 3,879,258 $38,793 ==================== ===================== ADDITIONAL TREASURY PAID-IN ACCUMULATED COMPREHENSIVE STOCK, CAPITAL DEFICIT (LOSS)INCOME AT COST BAL,NOV 1,1996 $26,636,939 ($9,010,999) ($1,619,696) ($11,003,545) NET INCOME 0 (1,001,483) 0 0 PREFD STOCK DIV 189,354 (181,853) 0 0 MIN PEN LIAB ADJ. 0 0 134,055 0 UNREALIZED GAIN ON INVEST. 0 0 615,800 0 --------------- -------------- ------------ ------------ BAL,OCT 31,1997$26,828,293 ($10,194,335) ($ 869,841) ($11,003,545) NET INCOME 0 (1,413,470) 0 0 PREFD STOCK DIV 206,753 (200,238) 0 0 MIN PEN LIAB ADJ. 0 0 (411,197) 0 UNREALIZED LOSS ON INVEST. 0 0 (873,183) 0 -------------- -------------- ------------ ------------ BAL,OCT 31,1998$27,033,046 ($11,808,043) ($2,154,221) ($11,003,545) NET INCOME 0 1,285,004 0 0 PREFD STOCK DIV 241,113 (235,149) 0 0 MIN PEN LIAB ADJ. 0 0 (6,338) 0 UNREALIZED LOSS ON INVEST. 0 0 (86,342) 0 -------------- -------------- ------------ ------------ BAL,OCT 31,1999$27,274,159 ($10,758,188) ($2,246,901) ($11,003,545) =============== ============== ============== ============= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 CANAL CAPITAL CORPORATION & SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997 1999 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME (LOSS) $1,285,004 ($1,413,470) ($1,001,483) ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES: CREDIT FOR LITIGATION SETTLEMENT 0 0 (60,359) DEPRECIATION AND AMORT. 174,127 265,659 419,897 GAIN ON SALES OF REAL ESTATE (2,358,940) (414,930) (1,600,245) VALUATION RESERVE ON ART INVENTORY (621,300) 550,000 350,000 CHANGES IN ASSETS AND LIABILITIES: NOTES AND ACCOUNTS RECEIVABLES, NET (109,995) 60,821 23,311 ART INVENTORY, NET (407,082) 811,732 428,231 PREPAID EXPENSES AND OTHER, NET 91,032 (503,286) 826,419 PAYABLES AND ACCRUED EXPENSES, NET (185,805) 105,566 (892,611) NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (2,132,959) (537,908) (1,506,840) CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF REAL ESTATE 4,794,570 1,434,439 2,496,943 CAPITAL EXPENDITURES (213,235) (60,155) (47,237) NET CASH PROVIDED BY INVESTING ACTIVITIES 4,581,335 1,374,284 2,449,706 CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM LONG-TERM DEBT-RELATED PARTIES 525,000 3,740,000 0 REPAYMENT OF SHORT-TERM BORROWINGS 0 0 (466,000) REPAYMENT OF LONG-TERM DEBT OBLIGATIONS (2,590,723) (4,571,063) (929,273) NET CASH USED BY FINANCING ACTIVITIES (2,065,723) (831,063) (1,395,273) DECREASE IN RESTRICTED CASH AND CASH EQUIVALENTS 0 0 470,000 NET INCREASE IN CASH AND CASH EQUIVALENTS 382,653 5,313 17,593 CASH AND CASH EQUIVALENTS AT BEGN OF YEAR 33,538 28,225 10,632 CASH AND CASH EQUIVALENTS AT END OF YEAR $416,191 $ 33,538 $ 28,225 ============ ============ ============ NOTE: IN FISCAL 1999, 1998 AND 1997,$ 235,149, $ 200,238 AND $ 181,853, RESPECTIVELY, OF PREFERRED STOCK DIVIDENDS WERE PAID THROUGH THE ISSUANCE OF 467,577, 413,781 AND 294,601 , RESPECTIVELY, OF SHARES OF PREFERRED STOCK. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-8 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Canal Capital Corporation ("Canal"), incorporated in the state of Delaware in 1964, commenced business operations through a predecessor in 1936. Canal was a wholly-owned subsidiary of Canal-Randolph Corporation until June 1, 1984, when Canal-Randolph Corporation distributed to its stockholders all of the outstanding shares of Canal's common stock, under a plan of complete liquidation. Canal is engaged in three distinct businesses - the management and further development of its agribusiness related real estate properties located in the midwest, stockyard operations and art operations, consisting mainly of the acquisition of art for resale. 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 seven of the last ten years and is involved in litigation with a meat packer located in South St. Paul, Minnesota. The financial statements do not include any adjustments that might result from the resolution of these uncertainties (See Notes 1 and 17). Additionally, the accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Canal continues to closely monitor and reduce where possible its overhead expenses and plans to continue 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. F-9 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal s officers and directors also serve as officers and/or directors of this company. This investment (in which Canal s ownership interest is approximately 2%) is carried at market value and the realized gains or losses, if any, are recognized in operating results. Any unrealized gains or losses are reflected in Stockholders Equity. 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 $101,000 at both October 31, 1999 and 1998, and is included in other assets. The operating results of joint ventures accounted for on the equity method, for fiscal year 1999, 1998 and 1997 were not material to financial statement presentation and were therefore included in other income from real estate operations. C) Deferred Leasing and Financing Costs -- Costs incurred in obtaining new leases and long-term financing are deferred and amortized over the terms of the related leases or debt agreements, as applicable. D) Properties and Related Depreciation -- Properties are stated at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of the properties. Such lives are estimated from 35 to 40 years for buildings and from 5 to 20 years for improvements and equipment. Property held for Development or Resale -- Property held for development or resale consist of approximately 250 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. F-10 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Impairment of Long-Lived Assets The Company adopted Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-Lived Assets and For Long-Lived Assets to be Disposed of ( SFAS No. 121") as of November 1, 1996. SFAS No. 121 prescribes that an impairment loss is recognized in the event that facts and circumstances indicate that the carrying amount of an asset may not be recoverable and an estimate of future undiscounted cash flows is less than the carrying amount of the asset. Assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. An impairment loss is recognized whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. (See Note 20). 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 - Inventory of art is valued at the lower of cost, including direct acquisition and restoration expenses, or net realizable value on a specific identification basis. Net realizable value is determined in part by independent appraisal. Independent appraisals covered approximately 57% and 50% of the inventory value at October 31, 1999 and 1998, respectively. The remaining 43% and 50% at October 31, 1999 and 1998, respectively was estimated by management based in part on the independent appraisals done. However, because of the nature of art inventory, such determination is very subjective and, therefore, the estimated values could differ significantly from the amount ultimately realized. The cost of art is generally specified on the purchase invoice. When individual art is purchased as part of a group or collection of art, cost is allocated to individual pieces by management using the information available to it. A significant portion of the art inventory remains in inventory longer than a year. Consequently, for financial statement purposes, Canal has classified a portion of its inventory as non-current assets (see Note 8). Antiquities and contemporary art represented 44% ($542,758) and 56% ($692,149) and 49% ($713,862) and 51% ($735,263) of total art inventory at October 31, 1999 and 1998, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. Stockyard Inventory - Inventory is stated at the lower of cost or market. Cost is determined using the first-in, first-out method. F-11 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED G) Accounting Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles 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. H) 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 and sale of feed and bedding are recognized at the time the service is rendered or the feed and bedding are delivered. Revenues from 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. Revenues from the sale of investments available for sale, if any, are recognized, on a specific identification method, on a trade date basis. I) Income Taxes -- Canal and its subsidiaries file a consolidated Federal income tax return. The Company accounts for income taxes under the liability method in accordance with the FASB Statement No. 109. Deferred income taxes, if any, are provided for temporary differences between financial reporting and taxable basis of assets and liabilities. J) Statements of Cash Flows -- The company considers all short-term investments with a maturity of three months or less to be cash equivalents. Cash equivalents primarily include bank, broker and time deposits with an original maturity of less than three months. These investments are carried at cost, which approximates market value. Canal made federal and state income tax payments of $20,000, $30,000 and $40,000 and interest payments of $465,000, $798,000 and $954,000 in 1999, 1998 and 1997, respectively. K) Comprehensive Income -- Effective for fiscal years beginning after December 15, 1997, Statement of Financial Accounting Standards No. 130 requires that comprehensive income and its components, as defined in the statement, be reported in a financial statement. The Company elected early adoption of SFAS No. 130 as of October 31, 1997. The only adjustments for each classification of the comprehensive income was for minimum pension liability and unrealized (loss) gain on investments available for sale. L) Earnings Per Share -- In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128 Earnings Per Share, which requires companies to present basic earnings per share (EPS) and diluted earnings per share, instead of the primary and F-12 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED fully diluted EPS that is currently required. The new standard requires additional information disclosure, and also makes certain modifications to the currently applicable EPS calculations defined in Accounting Principles Board No. 15. The new standard was required to be adopted by all public companies for reporting periods ending after December 15, 1997, and requires restatement of EPS for all prior periods reported. The Company adopted SFAS No. 128, for the years ended October 31, 1997 and 1996, respectively. M) Reclassification -- Certain prior year amounts have been reclassified to conform to the current year's presentation. 3. NOTES AND ACCOUNTS RECEIVABLE Included in notes and accounts receivable at October 31, 1999 and 1998 were the current portion of notes receivable in the amount of $158,000 and $15,000, respectively, which were generated by real estate and other sales. Notes and accounts receivable is shown net of a provision for doubtful accounts in the amount of $0 for both fiscal 1999 and 1998, respectively. 4. INVESTMENTS AVAILABLE FOR SALE At October 31, the investments available for sale consisted of the following: ($ 000's Omitted) 1999 1998 Aggregate market value..................... $ 192 $278 Aggregate carrying value................... $ 192 $278 Canal has an investment in a company in which it, together with other affiliated entities, comprise a reporting group for regulatory purposes. It is important to note that it is the group (as defined) that can exercise influence over this company, not Canal. Accordingly, this investment does not qualify for consolidation as a method of reporting. Certain of Canal s officers and directors also serve as officers and/or directors of this company. This investment (in which Canal s ownership interest is approximately 2%) is carried at market value and any unrealized gains or losses are reflected in Stockholders Equity. The realized gains or losses, if any, are recognized in operating results. Canal recognized unrealized losses on investments of $86,000 and $873,000 for the years ended October 31, 1999 and 1998, respectively, which are shown as a separate component of Stockholders Equity. F-13 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. STOCKYARD OPERATIONS SALE AND SUBSEQUENT REPURCHASE On October 31, 1989 Canal sold most of its stockyards assets to a group formed by a former Executive Vice President and Director of the Company. Not included in the sale was certain land and some facilities previously used by the stockyard operations. Canal entered into a master lease (the Lease ) with the purchaser covering approximately 139 acres of land and certain facilities used by the stockyard operations. The Lease was a 10 year lease, renewable at the purchaser s option for an additional ten year period, with annual rentals of $750,000 per year for the first year escalating to $1.0 million per year for the fourth through the tenth years and $1.0 million per year adjusted for CPI increases thereafter. In addition, Canal retained the right to receive income from certain volume based rental income leases with two meat packing companies located near the stockyards. The income from both the ground lease and the volume based rental leases are included in Canal's operating results as Real Estate operations. In September, 1998 Canal sold a 60 acre parcel of land to the City of Omaha, Nebraska. This sale included the seventeen acres of land leased to the stockyards operator. As part of this transaction, Canal received the stockyards rental payments under the Lease through October 31, 1999 at which time the operator moved the stockyards to a new location. In April 1999, Canal sold to the stockyard operator the 31 acres located in South St. Paul, Minnesota which was subject to the Lease. Finally, in August 1999 Canal bought the operating assets of the remaining three stockyards subject to the Lease from the operator. The August transaction released the operator from any further obligations under the Lease. The income from the stockyard operations for the period August 1, 1999 through October 31, 1999 are reflected in Canal s income statements as Stockyard Operations. As discussed above, as part of the 1989 agreement, Canal retained the right to receive income from certain volume based rental income leases with two meat packing companies located near the stockyards in Sioux City, Iowa and Fargo, North Dakota. The Sioux City, Iowa lease was terminated and the property sold to the meat packer in fiscal 1996. In March 1999 Canal entered into a Settlement Agreement and Mutual Release (the Settlement ) with Federal Beef Processors, Inc. ( Federal ) the operator of the meat packing plant in Fargo, North Dakota. Under the terms of the Settlement the packing plant lease was terminated, all litigation between the parties was dismissed with prejudice and fee title to the improvements on the leased property reverted to Canal. For further information about this lease and associated litigation (see - Item 3 Legal Proceedings and Note 17). The March 1999 Settlement terminated all remaining rights Canal had to receive volume based rental income under the Lease. F-14 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Revenues from the volume based rental agreements for the three years ended October 31, 1999, 1998 and 1997 were $22,000, $126,000 and $110,000, respectively, all of which arose from the Fargo, North Dakota lease. Canal commenced stockyard operations August 1, 1999 in Sioux City, Iowa, St. Joseph, Missouri and Sioux Falls, South Dakota. Stockyards act much like a securities exchange, providing markets for all categories of livestock and fulfilling the economic functions of assembly, grading and price discovery. The livestock handled by the stockyards include cattle, hogs and sheep. Cattle and hogs may come through the stockyard facilities at two different stages, either as feeder livestock or slaughter livestock. The Company s stockyards provide all services and facilities required to operate an independent market for the sale of livestock, including veterinary facilities, auction arenas, auctioneers, weigh masters and scales, feed and bedding, and security personnel. In addition, the stockyards provide other services including pure bred and other specialty sales for producer organizations. The Company promotes its stockyard business through public relations efforts, advertising, and personal solicitation of producers. Canal maintains an inventory of feed and bedding which is comprised primarily of hay, corn and straw. The value of this inventory at October 31, 1999 was $13,000. Actual marketing transactions at a stockyard are managed for livestock producers by market agencies and independent commission sales people to which the livestock are consigned for sale. These market agencies (some of which are owned and operated by the Company) and independent sales people receive commissions from the seller upon settlement of a transaction and the stockyard receives a yardage fee on all livestock using the facility which is paid within twenty-four hours of the sale. Yardage fees vary depending on the type of animal, the extent of services provided by the stockyard, and local competition. Yardage revenues are not directly dependent upon market prices, but rather are a function of the volume of livestock handled. In general, stockyard livestock volume is dependent upon conditions affecting livestock production and upon the market agencies and independent commission sales people which operate at the stockyards. Stockyard operations are seasonal, with greater volume generally experienced during the first and fourth quarters of each fiscal year, during which periods livestock is generally brought to market. As discussed above, virtually all of the volume at Canal s Sioux City and Sioux Falls stockyards is handled through market agencies or independent commission sales people, while the St. Joseph stockyard has solicitation operations of its own which accounts for approximately half of its livestock volume annually. F-15 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Canal intends to continue its soliciting efforts at its St. Joseph stockyards in fiscal 2000 and develop similar operations at its Sioux City stockyards which has experienced severe reductions in volume in recent years. 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. 6. BORROWINGS At October 31, 1999, 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) 1999 1998 Variable rate mortgage notes due May 15, 2003 - related party ................ $ 833 $ 0 Variable rate mortgage notes due May 15, 2001 - related party ................ 0 2,846 11% mortgage note; original principal amount $1,697; due April 1, 2011; payable in monthly installments (including interest) of $17....... 1,153 1,210 9.5% mortgage note; original principal amount $472; due November 1, 2012; payable in monthly installments (including interest) of $4........ 381 393 10 1/2% mortgage note (adjusted periodically to prime plus 1 3/4%); original principal amount $556 due January 15, 2013; payable in monthly installments (including interest) of $6........ 0 466 Other Note ...................................... 320 362 Total ........................................... 2,687 5,277 Less -- current maturities ...................... 75 110 Long-term debt $ 2,612 $ 5,167 F-16 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED On January 8, 1998, the Company issued $3,700,000 of variable rate mortgage notes due May 15, 2001, the proceeds of which were used to repay in full the Company s variable rate mortgage notes due May 15, 1998 ($2,605,000), its variable rate mortgage notes due September 15, 1998 ($700,000) and two notes which were due December 31, 1997 ($320,000) plus accrued interest thereon. The purchasers of these notes included certain entities controlled by the Company s Chairman, the Company s Chief 2Executive Officer and members of their families. The variable rate mortgage notes issued have essentially the same terms and conditions as the variable rate mortgage notes which were repaid. These notes carry interest at the highest of four variable rates, determined on a quarterly basis. These notes, among other things, prohibits Canal from becoming an investment company as defined by the Investment Company Act of 1940; requires Canal to maintain minimum net worth; restricts Canal s ability to pay cash dividends or repurchase stock; requires principal prepayments to be made only out of the proceeds from the sale of certain assets, and requires the accrual of additional interest (to be paid at maturity) of approximately three percent per annum. At October 31, 1998 the Company was in technical default of this mortgage note agreement as it relates to minimum net worth. The Company received a waiver of this default from the note holders. On July 29, 1999 the above Notes were amended to extend the maturity date to May 15, 2003; to fix the interest rate at 10% per annum; to agree that the additional interest due to the holders of the notes shall become current and be treated as principal due under the notes; and to have certain of the holders loan the Company $525,000 in additional financing, the proceeds of which was used to repay in full certain of the other holders of the notes. As a result, the notes are now held in total by the Company s Chief Executive Officer and members of his family. As of October 31, 1999 the balance due under these notes was $833,000 all of which is classified as long-term debt-related party. On January 10, 2000, the above Notes were further amended to have holders loan the Company $1,725,000 in additional financing, the proceeds of which was used to repay in full all of the Company s outstanding non related party long-term debt. On December 1, 1997 the Company issued a $325,000 promissory note due December 1, 2001 as the result of a settlement agreement with the buyer of a parcel of land located in Portland, Oregon which Canal sold in 1988. The note carries interest at the prime rate (8.5% at October 31, 1998) adjusted semi-annually and requires principal and interest payments in each of the first four years (based on a 30 year amortization schedule) commencing December 1, 1997. The balance is payable in full on December 1, 2001. The balance outstanding on this note at October 31, 1999 was $320,000. As discussed above, this note was repaid in full on January 10, 2000. F-17 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The scheduled maturities and sinking fund requirements of long-term debt during the next five years are as follows ($ 000's Omitted): Year Ending Amount 2000 $ 75 2001 & 2002 0 2003 2,612 2004 & Thereafter 0 $ 2,687 7. INCOME TAXES Significant components of the Company s deferred asset/(liability) as of October 31, 1999, 1998 and 1997 include property and equipment due to differences in depreciation, deferred rent, inventory valuation allowance and net operating loss carryforward ($ 000's Omitted): 1999 1998 1997 Total Gross Deferred Tax assets $ 2,868 $ 3,153 $ 2,911 Less - Valuation Allowance (2,868) (3,153) (2,911) 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 expense (benefit) 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): 1999 1998 1997 Computed Expected Tax Expense(Benefit) $ 450 $ (495) $ (350) Change in Valuation Allowance (285) 242 443 Other (165) 253 (93) $ 0 $ 0 $ 0 At October 31, 1999, the Company has net operating loss carryforwards of approximately $8,193,000 that expire through 2013. For financial statement purposes, a valuation allowance has been provided to offset the net deferred tax assets due to the cumulative operating losses incurred during recent years. Such allowance (decreased) increased by approximately $(285,000), $242,000 and $443,000 during the years ended October 31, 1999, 1998 and 1997,respectivly. 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. F-18 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. 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 will make a contribution of approximately $243,000 for fiscal 1999 and has made contributions of approximately $150,000 for fiscal 1998 and $162,000 for fiscal 1997. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Assets of the plan were invested in U.S. Government securities, common stocks and antiquities. Assumptions used in computing the 1999, 1998 and 1997 pension cost were: 1999 1998 1997 Discount rate ........................... 7.75% 7.00% 7.25% Rate of increase in compensation level ................................. 6.25% 5.50% 5.75% Expected long-term rate of return on assets ............................. 10.00% 10.00% 10.00% Net periodic pension cost for plan years ended October 31, 1999, 1998 and 1997 included the following components: Plan Year ($ 000's Omitted) 1999 1998 1997 Service costs - benefits earned during the period ............................ $ 10 $ 9 $ 8 Interest cost on projected benefit obligation ............................ 100 101 106 (Return) loss on assets .............. 13 359 (250) Net amortization and deferral ........... (51) (408) 193 Net period pension cost ................. $ 72 $ 61 $ 57 F-19 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, 1999 and 1998. Plan Year ($ 000's Omitted) 1999 1998 Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $1,395 and $1,449 in 1999 and 1998, respectively ............. $ 1,395 $ 1,449 Additional benefit due to assumed future compensation levels ......................... 27 26 Projected benefit obligation (1) .............. 1,422 1,475 Plan assets at fair value ..................... 703 707 Projected benefit obligation in excess of plan assets .............................. 719 768 Unrecognized net obligation ................... 76 101 Unrecognized net loss ......................... (1,994) (2,024) Valuation reserve to recognize accrued pension costs in the consolidated balance sheets .... 1,891 1,897 Accrued pension cost included among accrued expenses in the consolidated balance sheets.. $ 692 $ 742 (1) The vast majority of the projected benefit obligation is related to the Company's former stockyard employees. 9. ART OPERATIONS Canal's art dealing operations consist primarily of inventories held for resale of antiquities primarily from ancient Mediterranean cultures and contemporary art primarily of one artist. Canal carries on its art dealing operations through various consignment agreements relating to its antiquities and contemporary art inventories. Canal established its art operations in October 1988 by acquiring a significant inventory for resale of antiquities primarily from the ancient Mediterranean cultures. In November 1989, Canal expanded its art operations by entering into a cost and revenue sharing agreement with a New York City gallery for the exclusive representation of Jules Olitski, a world renowned F-20 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED artist of contemporary paintings. As part of this agreement Canal purchased a number of Olitski paintings which it holds for resale with a book value of approximately $308,000 at October 31, 1999. The representation agreement expired December 1, 1994 and Canal now operates independently in the marketing of its contemporary art inventory. Due to general economic conditions and the softness of the art markets, Canal has not purchased inventory in several years. However, Canal continues its marketing efforts to sell its existing art inventory through various consignment agreements and at public auctions. Antiquities and contemporary art represented 44% ($542,758) and 56% ($692,149) and 49% ($713,862) and 51% ($735,263) of total art inventory at October 31, 1999 and 1998, respectively. Substantially all of the contemporary art inventory held for resale is comprised of the work of Jules Olitski. Management estimates it may take approximately five years to dispose of its current art inventory. The Company's ability to dispose of its art inventory is dependent at least in part, on general economic conditions, including supply, demand, international monetary conditions and inflation. Additionally, the art market itself is very competitive. Accordingly, there can be no assurance that Canal will be successful in disposing of its art inventory within the time frame discussed above. Canal has its art inventory appraised by independent appraisers annually. The 1999 appraisal covered approximately 57% of the inventory value. The appraised values estimate the current market value of each piece giving consideration to Canal's practices of engaging in consignment, private and public auction sales. The net realizable value of the remaining 43% of the inventory was estimated by management based in part on the Company s history of losses sustained on art sales in the current and previous years and in part on the results of the independent appraisals done. In fiscal 1999 Canal applied against sales $621,300 of the valuation allowance against its art inventory, thereby, decreasing the total valuation allowance to $2,778,700 as of October 31, 1999 as compared to $3,400,000 and $2,850,000 at October 31, 1998 and 1997, respectively. The nature of art makes it difficult to determine a replacement value. The most compelling evidence of a value in most cases is an independent appraisal. The price at which pieces are consigned is usually in line with appraisals and above the cost of the piece. The amount classified as current represents management's best estimate of the amount of inventory that will be sold in this market. Management believes that the provision discussed above F-21 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED has effectively reduced inventory to its estimated net realizable value. Canal will continue to closely monitor the market for its art inventory and will make adjustments to the carrying value of its inventory as such adjustments become necessary. The Company's plan to sell inventory at auction is contemplated in the normal course of business. Auction in this context is one of the usual channels used for disposal of its art inventory. The proceeds from these sales are used to reduce the Company's outstanding debt and finance current operations. If these sales are not made, the Company has alternate means of raising cash such as sales of investments, sale of real estate, raising of new capital and further rescheduling of debt. Some of these measures were successfully implemented in fiscal 1999. Canal's art operations have generated operating losses of approximately $76,000, $1,184,000 and $709,000 on revenues of approximately $186,000, $221,000 and $117,000 for the years ended October 31, 1999, 1998 and 1997, respectively. Art sales have resulted primarily through activities in conjunction with sales of antiquities. Canal's management believes that through its consignment agreements as well as other potential distribution outlets Canal will continue the orderly reduction of its antiquities and contemporary art. The Company had approximately $1,358,000 and $2,140,000 of art inventory on consignment with third party dealers at October 31, 1999 and 1998, respectively. ART INVENTORY - The Company classified its art inventory for the two years ended October 31, 1999 and 1998 as follows ($ 000's Omitted): Current Portion Non-Current Portion Total 1999 1998 1999 1998 1999 1998 Antiquities $1,000 $1,000 $ 428 $1,114 $ 1,428 $ 2,114 Contemporary 1,000 1,000 1,586 1,735 2,586 2,735 Valuation Allowance (1,500) (1,500) (1,279) (1,900) ( 2,779) (3,400) Net Value $ 500 $ 500 $ 735 $ 949 $ 1,235 $ 1,449 F-22 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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. Art sales for the three years ended October 31, 1999, 1998, and 1997 were as follows: ($ 000's Omitted) 1999 1998 1997 Antiquities $ 186 $ 221 $ 77 Contemporary 0 0 40 $ 186 $ 221 $ 117 10. LEASE COMMITMENTS In February 1999 Canal, together with two other related entities, amended its lease for commercial office space in New York City, which space serves as its headquarters operations. The new lease is for a period of 128 months expiring in October 2009. Canal s portion of the new space is approximately 1,000 square feet and Canal is responsible for 25% of the lease expense. Each of the three entities that are parties to this lease are jointly and severally responsible for the payments required under the lease. The following is a schedule of Canal s portion of future minimum payments required under operating leases that have initial or remaining noncancellable terms in excess of one year as of October 31, 1999: Year ended October 31, ($ 000's Omitted) 2000 $ 84,000 2001 84,000 2002 84,000 2003 84,000 2004 84,000 Thereafter 420,000 $840,000 Rent expense under these and other operating leases for the years ended October 31, 1999, 1998 and 1997 were as follows: ($ 000's Omitted) 1999 1998 1997 Minimum rentals ................... $ 84 $ 26 $ 159 Less: sublease rentals ........... 0 (10) (47) $ 84 $ 16 $ 112 F-23 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. IMPAIRMENT LOSS ON LONG-LIVED ASSETS The Company adopted Statement of Financial Accounting Standards No. 121 Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of ( SFAS No. 121") as of November 1, 1996. The Company recognized an impairment loss of $0.9 million in fiscal 1997 on the write-down of its Omaha, Nebraska property. This was the result of the Company entering into two agreements to sell a substantial portion of its holdings in Omaha, Nebraska for approximately $1.0 million in November 1997. As a result, the anticipated undiscounted future cash flow of this group of assets exceeded their carrying values as of October 31, 1997 requiring an impairment loss in long-lived assets to be recognized in fiscal 1997. There was no similar loss to be recognized in fiscal 1999 or 1998. 12. 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. At October 31, 1999 the purchase price of shares subject to each option granted equaled 100% of the fair market value on the date of grant. Options granted under both plans are exercisable for 10 years from the date of grant, but no option will be exercisable earlier than one year from the date of grant. Under the Employee Plan, stock appreciation rights may be granted in connection with stock options, either at the time of grant of the options or at any time thereafter. No stock appreciation rights have been granted under this plan. At October 31, 1999, there were 319,000 exercisable options outstanding under these plans. Transactions under these plans are summarized as follows: Shares Option Price Range Balance outstanding October 31, 1997.... 323,000 $0.125-$5.375 Options granted ........................ 0 - - Options expired ........................ 0 $ - - Balance outstanding October 31, 1998.... 323,000 $0.125-$5.375 Options granted 0 - - Options expired 4,000 $5.375-$5.375 Balance outstanding October 31, 1999.... 319,000 $0.125-$2.250 F-24 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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, 1999, 1998 and 1997. In October, 1995, the Financial Accounting Standards Board issued Statement (SFAS) No. 123, Accounting for Stock Based Compensation, which becomes effective for transactions entered into in fiscal years beginning after December 15, 1995. This statement permits an entity to apply the fair value based method to stock options awarded during 1995 and thereafter in order to measure the compensation cost at the grant date and recognize it over its vesting period. This statement also allows an entity to continue to measure compensation costs for these plans pursuant to APB Opinion 25. Entities electing to remain with the accounting treatment under APB Opinion 25 must make proforma disclosures of net income and earnings per share to include the effects of all awards granted in fiscal years beginning after December 31, 1994, as if the fair value based method of accounting pursuant to SFAS No. 123 has been applied. The Company adopted the disclosure requirements for this statement effective for the year ending October 31, 1996, while continuing to measure compensation cost using APB 25. 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, 1999 and 1998 would have been deminimus. 13. EARNINGS (LOSS) PER COMMON SHARE AND DIVIDENDS PAID During each of the fiscal years ended October 31, 1999, 1998 and 1997, the Company had 319,000, 323,000 and 323,000 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, 1999, 1998 and 1997. Dividends declared on preferred stock during the years ended October 31, 1999, 1998 and 1997 were approximately $235,000, $200,000 and $182,000. 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. F-25 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Basic and diluted earnings (losses) available to common stockholders at October 31, 1999, 1998 and 1997 were: For the Year Ended October 31, 1999 Income Shares Per-share (Numerator) (Denominator) Amount Net income $ 1,285,000 Less preferred stock dividends (235,000) Income available to common stock- holders-basic earnings per share 1,050,000 4,327,000 $ 0.24 Effect of dilutive securities: Options (antidilutive) N/A N/A Income available to common stock- holders-diluted earnings per share $ 1,050,000 4,327,000 $ 0.24 For the Year Ended October 31, 1998 Income Shares Per-share (Numerator) (Denominator) Amount Net loss (1,413,000) Less preferred stock dividends (200,000) Loss available to common stock- holders-basic earnings per share (1,613,000) 4,327,000 $ (0.37) Effect of dilutive securities: Options (antidilutive) N/A N/A Loss available to common stock- holders-diluted earnings per share $(1,613,000) 4,327,000 $ (0.37) F-26 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED For the Year Ended October 31, 1997 Income Shares Per-share (Numerator) (Denominator) Amount Net loss $(1,001,000) Less preferred stock dividends (182,000) Loss available to common stock- holders-basic earnings per share (1,183,000) 4,327,000 $(0.27) Effect of dilutive securities: Options (antidilutive) - - 7% convertible note 13,000 1,000,000 Loss available to common stock- holders-diluted earnings per share $(1,170,000) 5,327,000 $(0.27) 14. 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 2,892,393 shares in the form of stock dividends for a total outstanding at October 31, 1999 of 3,879,258. 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, forty of the fifty-two quarterly payments have been paid in additional stock resulting in the issuance of 2,892,393 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 6). The last cash dividend paid on Canal's preferred stock was in September 1989. The quarterly dividends payable September 30, F-27 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1999 and December 31, 1999 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, 2000 at which time a one year dividend will have accumulated. The dividend planned for June 30, 2000 will also be paid in additional stock. 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. 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). 15. VALUATION RESERVE The 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 excess will be expensed as actuarial computations of annual pension cost (made in accordance with SFAS No. 87) recognize the deficiency that exists. F-28 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. FINANCIAL INFORMATION FOR BUSINESS SEGMENTS Canal is engaged in three distinct businesses - the management and further development of its agribusiness related real estate operations, stockyard operation and its art 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) 1999 1998 1997 Identifiable assets: Art ............................... $ 1,249 $ 1,463 $ 2,818 Real estate ....................... 4,339 7,490 8,630 Stockyard operations .............. 1,613 0 0 Corporate ......................... 733 554 1,512 $ 7,934 $ 9,507 $ 12,960 ($ 000's Omitted) 1998 1997 1996 Capital expenditures: Art ............................... $ 0 $ 0 $ 0 Real estate ....................... 14 46 41 Stockyard operations .............. 150 0 0 Corporate ......................... 25 14 6 $ 189 $ 60 $ 47 Income from real estate operations includes gains (losses) on sales of real estate of $2.4 million, $0.3 million and $1.6 million in 1999, 1998 and 1997, respectively. Art identifiable assets include approximately $1.4 million and $2.1 million of art inventory in galleries or on consignment abroad as of October 31, 1999 and 1998, respectively. 17. LITIGATION Canal and its subsidiaries are from time to time involved in litigation incidental to their normal business activities, none of which, in the opinion of management, will have a material adverse effect on the consolidated financial condition of the Company. Canal or its subsidiaries are party to the following litigations: F-29 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED Canal Capital Corporation v. Valley Pride Pack, Inc. Canal commenced an action in U.S. District Court in Minnesota on September 23, 1997, as the assignee of United Market Services Company, against Valley Pride Pack, Inc. (formerly Pine Valley Meats, Inc. and referred to herein as Pine Valley ) to recover unpaid livestock fees and charges (estimated to be as much as $1,000,000) due from Pine Valley under a 1936 Agreement between the predecessors of Pine Valley and Canal. Upon Pine Valley s motion, the Court entered an order dated February 23, 1998 granting summary judgment and dismissing Canal s complaint. Canal appealed the dismissal to the U.S. District Court of Appeals for the Eighth Circuit, which reversed the dismissal and reinstated Canal s complaint. On April 9, 1999, Pine Valley served an answer and counterclaim in which it denied any liability for livestock fees and alleged that the 1936 Agreement violates Section 1 of the Sherman Antitrust Act and the Minnesota Antitrust Law. Pine Valley alleges any livestock fee obligation under the 1936 Agreement constitutes an illegal tying arrangement whereby Canal s predecessor attempted to tie the purchase of land for the operation of the meat packing plant to the purchase of cattle at the stockyards by assessing yardage fees on all cattle purchased for slaughter at the packing plant even if the stockyards provides no services with respect to the cattle. Pine Valley seeks as relief a declaratory judgment that the 1936 Agreement is unenforceable, an injunction preventing Canal from enforcing the fee provisions of the 1936 Agreement and treble damages for the alleged violation by Canal and its predecessor of the federal and state antitrust laws, together with attorneys fees. Pine Valley has not specified a dollar amount of the alleged antitrust damages which it has stated is the amount paid by Pine Valley in livestock fees. The case is still in the discovery state and we are not in a position to express any opinion as to the ultimate outcome of the matter. Federal Beef Processors, Inc. v. Union Stockyards Company of Fargo Federal Beef Processors, Inc. ( Federal Beef ) operated a meat packing plant on leased premises owned by United Stockyards Company of Fargo ( Union ), a wholly owned subsidiary of Canal Capital Corporation, located in Fargo, North Dakota. A lawsuit was brought in 1995 by Federal Beef for damages claimed to be suffered as a result of Union s alleged failure to provide adequate maintenance and cleaning services for livestock pens used by Federal Beef under a yardage agreement with Union. That lawsuit was settled in April of 1999. Under the terms of the settlement agreement, the lease relating to the packing plant was terminated; Federal Beef vacated the premises; Federal Beef was required to remove all fixtures, equipment and personal property situated on the premises by July 31, 1999 and Union agreed to reimburse Federal for 50 percent of expenses relating to the premises for the period March through July 1999, up to a maximum of $15,000. F-30 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 19. PROPERTY ON OPERATING LEASES AND USED IN STOCKYARD OPERATIONS The following schedule provides an analysis of the Company's investment in property on operating leases and stockyard operations by location as of October 31, 1999: ($ 000's Omitted) Accumulated Location Land Improvements Depreciation Value Operating leases: St. Joseph, MO $ 362 $ 304 $ (198) $ 468 West Fargo, ND 3 292 (237) 58 S. St. Paul, MN 152 1,499 (758) 893 Sioux City, IA 417 0 0 417 Omaha, NE 1,200 0 0 1,200 Sioux Falls, SD 8 6 (6) 8 Corporate Office 0 154 (109) 45 2,142 2,255 (1,308) 3,089 Stkyd Operations: St. Joseph, MO $ 500 $ 50 $ (1) $ 549 Sioux City, IA 500 50 (1) 549 Sioux Falls, SD 100 50 (1) 149 1,100 150 (3) 1,247 $ 3,242 $ 2,405 $ (1,311) $ 4,336 The following is a schedule by years of minimum future rentals on operating leases as of October 31, 1999: (5) ($ 000's Omitted) Volume Year Ending Rental Ground Based October 31, Income (1) Lease(2) Income(2) Total 2000 $ 1,000 $ 0 $ 0 $ 1,000 2001 1,100 0 0 1,100 2002 1,200 0 0 1,200 2003 1,300 0 0 1,300 2004 1,400 0 0 1,400 $ 6,000 $ 0 $ 0 $ 6,000 (1) Consists of rental income from Exchange Building (commercial office space), lease income from land and structures and other rental income. All real estate leases are accounted for as operating leases. (2) As discussed more fully in Note 4, the ground lease and the associated rights to receive certain volume based rental income from meat packing companies located near the stockyards terminated in fiscal 1999. F-31 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 20. 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, 1999 1998 ($ 000's Omitted) Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents $ 416 $ 416 $ 34 $ 34 Current Portion of Long- Term Debt 75 75 110 110 Long-Term Debt 1,779 1,779 2,321 2,321 Long-Term Debt - Related Party 833 (d) 2,846 (d) a) Cash and cash equivalents: The carrying amount approximates fair market value because of the short maturities of such instruments. b) Accrued Litigation: The carrying amount approximates the fair value. c) Long-Term Debt (See Note 5): The fair value of the Company s long- term debt, including the current portion thereof, is estimated based on the quoted market price for the same or similar issues. d) Long-Term Debt Related Party (see Note 5): It is not practicable to estimate the fair value of the related party debt. 21. Year 2000 Compliance The financial impact to the Company has not been and is not anticipated to be material to its financial position or results of operations in any given year. F-32 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 22. Property Held for Development or Resale Property held for development or resale consist of approximately 250 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, 1999 is as follows (000's omitted): Capitalized Cost Subsequent to Initial Cost Acquisition Date Carrying Bldgs. & Bldgs. & Accum. Value Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/99 98 acres of land in St. Joseph, MO $248 N/A N/A N/A N/A $248 Acquired in 1942 79 acres of land in W. Fargo, ND 5 N/A N/A N/A N/A 5 Acquired in 1937 62 acres of land in S. St. Paul, MN 521 N/A N/A N/A N/A 521 Acquired in 1937 10 acres of land in Sioux City, IA 202 N/A N/A N/A N/A 202 Acquired in 1937 1 acre of land in Sioux Falls, SD 2 N/A N/A N/A N/A 2 Acquired in 1937 $978 $ 0 $ 0 $ 0 $ 0 $978 (1) Substantially all of Canal s real property is pledged as collateral for its debt obligations (see Note 6). F-33 CANAL CAPITAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED A schedule of the Company s property held for development or resale at October 31, 1998 is as follows (000's omitted): Capitalized Cost Subsequent to Initial Cost Acquisition Date Carrying Bldgs. & Bldgs. & Accum. Value Description (1) Land Imprvmts. Land Imprvmts. Depr. 10/31/99 98 acres of land in St. Joseph, MO $248 N/A N/A N/A N/A $248 Acquired in 1942 62 acres of land in W. Fargo, ND 5 N/A N/A N/A N/A 5 Acquired in 1937 62 acres of land in S. St. Paul, MN 738 N/A N/A N/A N/A 738 Acquired in 1937 14 acres of land in Sioux City, IA 325 N/A N/A N/A N/A 325 Acquired in 1937 1 acre of land in Sioux Falls, SD 2 N/A N/A N/A N/A 2 Acquired in 1937 $1,328 $ 0 $ 0 $ 0 $ 0 $1,328 (1) Substantially all of Canal s real property is pledged as collateral for its debt obligations (see Note 6). F-34 CANAL CAPITAL CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 23. QUARTERLY INFORMATION (UNAUDITED) FINANCIAL INFORMATION FOR THE INTERIM PERIODS FISCAL 1999 AND 1998 IS PRESENTED BELOW: (000'S OMITTED, EXCEPT PER SHARE DATA) QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 1999 1999 1999 1999 REVENUES $734 $3,584 $821 $2,445 ========= ========= ========= ========= NET (LOSS) INCOME ($140) $1,474 $ 73 ($122) ========= ========= ========= ========= NET (LOSS) INCOME PER COMMON SHARE: - BASIC ($0.04) $0.33 $0.00 ($0.04) ========= ========= ========= ========= - DILUTED ($0.04) $0.33 $0.00 ($0.04) ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,327 ========= ========= ========= ========= - DILUTED 4,327 4,327 4,327 4,327 ========= ========= ========= ========= (000'S OMITTED, EXCEPT PER SHARE DATA) QUARTER ENDED JAN. 31, APRIL 30, JULY 31, OCT. 31, 1998 1998 1998 1998 REVENUES $803 $911 $1,268 $1,475 ========= ========= ========= ========= NET (LOSS) INCOME ($326) ($103) $296 ($1,282) ========= ========= ========= ========= NET (LOSS) INCOME PER COMMON SHARE: - BASIC ($0.09) ($0.03) $0.06 ($0.31) ========= ========= ========= ========= - DILUTED ($0.09) ($0.03) $0.06 ($0.31) ========= ========= ========= ========= WEIGHTED AVERAGE NUMBER OF SHARES: - BASIC 4,327 4,327 4,327 4,327 ========= ========= ========= ========= - DILUTED 4,327 4,327 4,327 4,327 ========= ========= ========= ========= F-35 INVESTOR INFORMATION Annual Meeting Corporate Headquarters The Annual Meeting of Shareholders 7l7 Fifth Avenue 15th floor of Canal Capital Corporation will New York, NY 10022 be held in our offices at 717 Fifth Avenue, 15th floor, New York, NY, 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., 40 Wall will be made at the annual meeting. Street, New York, NY 10005 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 (212) 826-6040 (212) 969-3000 ii EX-27 2
5 12-MOS OCT-31-1999 OCT-31-1999 416,191 191,833 321,065 0 513,189 1,660,923 5,646,188 1,310,138 7,933,885 1,964,719 0 0 38,793 53,138 3,265,525 7,933,885 0 7,583,885 0 4,550,501 1,283,021 0 465,136 1,285,004 0 1,285,004 0 1,285,004 0 1,285,004 0.24 0.24
EX-99 3 INDEX TO EXHIBITS Exhibit No. 22 Subsidiaries of the Registrant. CANAL CAPITAL CORPORATION 717 FIFTH AVENUE NEW YORK, NY 10022 SUBSIDIARIES IDENTIFICATION # SY Trading Corp. 13-3244066 Omaha Livestock Market, Inc. 47-0582031 Union Stockyards Co. of Fargo 45-0205040 Sioux Falls Stockyards Company 46-0189565 Wheeling Industrial Corporation 36-2545924 Canal Galleries Corporation 13-3492920 Canal Arts Corporation 13-3492921 DIVISIONS Canal Capital Corporation (parent) 51-0102492 St. Joseph Stockyards St. Paul Union Stockyards Sioux City Stockyards Note: All subsidiaries are 100% owned FORM 10-K - ITEM 14(a)(3) CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS (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) Form of Nonstatutory Stock Option Agreement (filed as Exhibit 10(c) to the Registrant's Form 10-K filed January 31, 1986 and incorporated herein by reference). 10(d) 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). E-1 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(e) 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(f) Master Ground Lease, dated October 27, 1989 by and between USK Acquisition Corporation, Canal Capital Corporation, Omaha Livestock Market, Inc. and Sioux Falls Stock Yards Company (filed as Exhibit 10(am) to the Registrant's Form 8-K filed November 9, 1989 and incorporated herein by reference). 10(g) Agreement of Lease dated January 14, 1994 by and between The Equitable Life Assurance Society of the United States, Intelogic Trace Incorporated, Datapoint Corporation and Canal Capital Corporation (filed as Exhibit 10 (bp) to the Registrant's Form 10-K filed January 27, 1995 and incorporated herein by reference). 10(h) General Release dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation (filed as Exhibit 10 (by) to the Registrant s Form 10-K filed January 24, 1997 and incorporated herein by reference). 10(i) $325,000 Promissory Note dated December 19, 1996 by and between Waste Management Disposal Services of Oregon, Inc. and Canal Capital Corporation (filed as Exhibit 10 (bz) to the Registrant s Form 10-K filed January 24, 1997 and incorporated herein by reference). 10(j) 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). 10(k) Note Exchange and Loan Agreement dated January 8, 1998 by and between Canal Capital Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust (filed as Exhibit 10 (aj) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). E-2 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(l) Collateral Agency Agreement dated January 8, 1998 by and between Canal Capital Corporation, CCC Lending Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust (filed as Exhibit 10 (ak) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(m) Assignment Agreement dated January 8, 1998 by and between Deltec Asset Management Corporation, Hanseatic Corporation, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust (filed as Exhibit 10 (al) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(n) Assignment Agreement dated January 8, 1998 by and b e t ween Guaranty Reassurance Company, Michael E. Schultz, Michael E. Schultz Defined Benefit Trust, Lora K. Schultz, Roger A. Schultz, Roger A. Schultz Pension Plan, Richard A. Schultz, Edelman Value Partners, L.P., Edelman Value Fund, LTD, Maria Regina Mayall Edelman and SES Trust (filed as Exhibit 10 (am) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(o) 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(p) $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(q) $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). E-3 CANAL CAPITAL CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS, CONTINUED Exhibit No. 10(r) $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(s) $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(t) $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). 10(u) $350,000 Promissory Note dated January 8, 1998 by and between Edelman Value Partners, L.P. and Canal Capital C o r p o ration (filed as Exhibit 10 (at) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(v) $550,000 Promissory Note dated January 8, 1998 by and between Edelman Value Fund, LTD and Canal Capital C o r p o ration (filed as Exhibit 10 (au) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(w) $300,000 Promissory Note dated January 8, 1998 by and between Maria Regina Mayall Edelman and Canal Capital C o r p o ration (filed as Exhibit 10 (av) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(x) $200,000 Promissory Note dated January 8, 1998 by and between SES Trust and Canal Capital Corporation (filed as Exhibit 10 (aw) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 10(y) $500,000 Promissory Note dated January 8, 1998 by and between Roger A. Schultz and Canal Capital Corporation (filed as Exhibit 10 (ax) to the Registrant s Form 10-K filed January 30, 1998 and incorporated herein by reference). 22 Subsidiaries of the registrant. E-4 -----END PRIVACY-ENHANCED MESSAGE-----